AutoNation, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2006
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number: 0-13107
AutoNation, Inc.
(Exact Name of Registrant as
Specified in its Charter)
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DELAWARE
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73-1105145
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(State or Other Jurisdiction
of
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(I.R.S. Employer
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Incorporation or
Organization)
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Identification No.)
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110 S.E. 6TH STREET,
FORT LAUDERDALE, FLORIDA
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33301
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(Address of Principal Executive
Offices)
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(Zip
Code)
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(954) 769-6000
(Registrants Telephone
Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, Par Value $.01 Per
Share
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The New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Act).
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2006, the aggregate market value of the
common stock of the registrant held by non-affiliates was
approximately $3.3 billion based on the closing price of
the common stock on The New York Stock Exchange on such date.
As of February 23, 2007, the registrant had
209,075,307 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Part III Portions of the Registrants Proxy Statement
relating to the 2007 Annual Meeting of Stockholders.
PART I
Introduction
AutoNation, Inc., through its subsidiaries, is the largest
automotive retailer in the United States. As of
December 31, 2006, we owned and operated 331 new vehicle
franchises from 257 stores located in major metropolitan
markets, predominantly in the Sunbelt region of the United
States. Our stores, which we believe are some of the most
recognizable and well-known in our key markets, sell 37
different brands of new vehicles. The core brands of vehicles
that we sell, representing more than 90% of the new vehicles
that we sold in 2006, are manufactured by Ford, General Motors,
DaimlerChrysler, Toyota, Nissan, Honda and BMW.
We operate in a single operating and reporting segment,
automotive retailing. We offer a diversified range of automotive
products and services, including new vehicles, used vehicles,
vehicle maintenance and repair services, vehicle parts, extended
service contracts, vehicle protection products and other
aftermarket products. We also arrange financing for vehicle
purchases through third-party finance sources. We believe that
the significant scale of our operations and the quality of our
managerial talent allow us to achieve efficiencies in our key
markets by, among other things, leveraging our market brands and
advertising, improving asset management, driving common
processes and increasing productivity across all of our stores.
We were incorporated in Delaware in 1991. Our common stock, par
value $.01 per share, is listed on The New York Stock
Exchange under the symbol AN. For information
concerning our financial condition, results of operations and
related financial data, you should review the
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the
Financial Statements and Supplementary Data sections
of this document. You also should review and consider the risks
relating to our business, operations, financial performance and
cash flows that we describe below under Risk Factors.
Availability
of Reports and Other Information
Our corporate website is http://corp.AutoNation.com. We make
available on this website, free of charge, access to our Annual
Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Proxy Statements on Schedule 14A and amendments to those
materials filed or furnished pursuant to Section 13(a) or
15(d) of the Securities and Exchange Act of 1934, as amended
(the Exchange Act), as soon as reasonably
practicable after we electronically submit such material to the
Securities and Exchange Commission (the Commission).
We also make available on our website copies of materials
regarding our corporate governance policies and practices,
including the AutoNation, Inc. Corporate Governance Guidelines,
our company-wide Code of Business Ethics, our Code of Ethics for
Senior Officers, our Code of Business Ethics for the Board of
Directors, and the charters relating to the committees of our
Board of Directors. You also may obtain a printed copy of the
foregoing materials by sending a written request to: Investor
Relations Department, AutoNation, Inc., 110 S.E.
6th Street,
Fort Lauderdale, Florida 33301. In addition, the
Commissions website is http://www.sec.gov. The Commission
makes available on this website, free of charge, reports, proxy
and information statements and other information regarding
issuers, such as us, that file electronically with the
Commission. Information on our website or the Commissions
website is not part of this document.
Business
Strategy
As a specialty retailer, our business model is focused on
developing and maintaining satisfied relationships with our
customers. The foundation of our business model is operational
excellence. We pursue the following strategies to achieve our
targeted level of operational excellence:
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Deliver a positive customer experience at our stores
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Leverage our significant scale to improve our operating
efficiency
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Increase our productivity
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Build a powerful brand in each of our local markets
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Our strategies are supported by our use of information
technology. We use the Internet to develop and acquire customer
leads and referrals. By pursuing our strategies and leveraging
information technology to enhance our customer relationships, we
hope to convince potential customers who live or work in our
markets that an educated vehicle buying decision cannot be made
without considering our stores.
A key component of our strategy is to maximize the return on
investment generated by the use of cash flow that our business
generates. We expect to use our cash flow to make capital
investments in our current business, to complete strategic
dealership acquisitions and to repurchase our common stock
pursuant to our Board-authorized share repurchase program. Our
capital allocation decisions will be based on such factors as
the expected rate of return on our investment, the market price
of our common stock, the potential impact on our capital
structure and our ability to complete strategic dealership
acquisitions that meet our return on investment target. We also
divest non-core stores from time to time in order to improve our
portfolio of stores and to generate sales proceeds that can be
reinvested at a higher expected rate of return.
Deliver
a Positive Customer Experience
Our goal is to deliver a positive customer experience at our
stores. Our efforts to improve our customers experience at
our stores include the following practices and initiatives in
key areas of our business:
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Improving Customer Service: The success
of our stores depends in significant part on our ability to
deliver positive experiences to our customers. We have developed
and implemented standardized customer-friendly sales and service
processes. We believe these processes improve the sales and
service experiences of our customers. We have developed and are
implementing across our stores a customer-friendly sales menu
designed to provide clear disclosure of purchase or lease
transaction terms. We emphasize the importance of customer
satisfaction to our key store personnel by basing a portion of
their compensation on the quality of customer service they
provide in connection with vehicle sales and service.
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Increasing Parts and Service Sales: Our
goal is that our customers will use us for all of their vehicle
service needs. Our key initiatives for our parts and service
business are focused on optimizing our processes, pricing and
promotion. We have implemented across all of our stores
standardized service processes and marketing communications,
which are designed to ensure that we offer our existing and
potential customers the complete range of vehicle maintenance
and repair services. We expect our service processes and
marketing communications to increase our customer-pay service
and parts business. As a result of our significant scale, we
believe we can communicate frequently and effectively with our
customers. Our efforts at optimizing our pricing are directed
toward maintaining competitive pricing for commonly performed
vehicle services and repairs for like-brand vehicles within each
of our markets.
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Increasing Finance, Insurance and Other Aftermarket
Product Sales: We continue to improve our
finance and insurance business by using our standardized best
common processes across our store network. Our customers are
presented with the AutoNation Pledge, which provides
clear disclosure relating to the finance and insurance sales
process. We believe the pledge improves our customers
shopping experience for finance and insurance products at our
stores. Additionally, our stores use our customer-friendly
finance and insurance menu, which is designed to ensure that we
offer our customers the complete range of finance, insurance,
protection and other aftermarket products in a transparent
manner. We offer our customers aftermarket products such as
extended warranty contracts, maintenance programs, theft
deterrent systems and various insurance products at competitive
rates and prices. We also continue to focus on optimizing the
mix of finance sources available for our customers
convenience.
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Leverage
Our Significant Scale
We leverage our scale as the largest automotive retailer in the
United States to further improve our cost structure by obtaining
significant cost savings in our business. The following
practices and initiatives reflect our commitment to leveraging
our scale and managing cost:
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Managing New Vehicle Inventories: We
manage our new vehicle inventories to optimize our stores
supply and mix of vehicle inventory. Through the use of our
web-based planning and tracking system, in
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markets where our stores have critical mass in a particular
brand, we view new vehicle inventories at those same brand
stores in the aggregate and coordinate vehicle ordering and
inventories across those stores. We continue to improve our
web-based planning and tracking system and new vehicle
purchasing strategy to enable us to better manage our new
vehicle inventory to achieve specific unit inventory targets. We
also target our new vehicle inventory purchasing to our core, or
most popular, model packages. We are focused on maintaining
appropriate inventory levels, which we believe is important in
light of the higher carrying costs associated with higher
interest rates. We believe our inventory management enables us
to (1) respond to customer requests better than smaller
independent retailers with more limited inventories and
(2) maximize the availability of the most desirable
products during seasonal peak periods of customer demand for
vehicles.
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Increasing Used Vehicle Sales and Managing Used Vehicle
Inventories: Each of our stores offers a
variety of used vehicles. We believe that we have access to
desirable used vehicle inventory and are in a position to
realize the benefits of vehicle manufacturer-supported certified
used vehicle programs, which we believe are improving
consumers attitudes toward used vehicles. We use a
web-based used vehicle inventory tool that enables our stores
within each of our markets to optimize their used vehicle
inventory supply, mix and pricing. We also are managing our used
vehicle inventory to enable us to offer our customers a wide
selection of desirable lower-cost vehicles, which are often in
high demand by consumers. Our used vehicle business strategy is
focused on (1) using our customized vehicle inventory
management system, which is our standardized approach to
pricing, inventory mix and used vehicle asset management based
on our established common processes, and (2) leveraging our
scale with comprehensive used vehicle marketing programs, such
as market-wide promotional events and standardized approaches to
advertising that we can implement more effectively than smaller
retailers because of our size.
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Managing Costs: We manage our business
and leverage our scale to reduce costs. We continue to focus on
developing national vendor relationships to standardize our
stores approach to purchasing certain equipment, supplies,
and services, and to improve our cost efficiencies. As an
example, we realize cost efficiencies with respect to
advertising and facilities maintenance that are generally not
available to smaller retailers.
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Increase
Productivity
The following are examples of key initiatives we have
implemented to increase productivity:
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Managing Employee Productivity and
Compensation: We continue to develop and
implement at our stores standardized compensation guidelines and
common element pay plans that take into account our sales
volume, customer satisfaction and gross margin objectives, the
vehicle brand and the size of the store. We continue to focus on
better aligning the compensation of our employees with the
performance of our stores to improve employee productivity,
reward and retain high-performing employees and to ensure
appropriate variability of our compensation expense.
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Using Information Technology: We are
leveraging information technology to enhance our customer
relationships and increase productivity. We use a web-based
customer relationship management tool across all of our stores.
We believe this tool enables us to promote and sell our vehicles
and other products more effectively by allowing us to better
understand our customer traffic flows and better manage our
showroom sales processes and customer relationships. We have
developed a company-wide customer database that contains
information on our stores existing and potential
customers. We believe our customer database enables us to
implement more effectively our vehicle sales and service
marketing programs. We expect our customer database and other
tools to empower us to implement our customer relationship
strategy more effectively and improve our productivity.
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Training Employees: One of our key
initiatives to improve our productivity is our customized
comprehensive training program for key store employees. We
believe that having well-trained personnel is an essential
requirement for implementing standardized operating practices
and policies across all of our stores. Our training program
educates our key store employees about their respective job
roles and responsibilities and our standardized common processes
in all of our areas of operation, including sales, finance and
insurance and parts and service. Our training program also
emphasizes the importance of conducting our
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operations, including our finance and insurance sales
operations, in accordance with applicable laws and regulations
and our policies and ethical standards. As part of our training
program, we conduct specialized training for certain of our
store employees in areas such as finance and insurance, fixed
operations and sales. We also require all of our employees, from
our senior management to our technicians, to participate in our
Business Ethics Program, which includes web-based interactive
training programs, live training workshops, written manuals and
videos on specific topics. We also launched the AutoNation
General Manager University in 2006 to prepare our future general
manager prospects to become well-rounded successful leaders of
our stores. We expect our comprehensive training program to
improve our productivity by ensuring that all of our employees
consistently execute our business strategy and manage our daily
operations in accordance with our common processes and policies,
applicable laws and regulations and our high standards of
business ethics.
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Build
Powerful Local-Market Brands
In many of our key markets where we have significant presence,
we are marketing our stores under a local retail brand. We
continue to position these local retail brands to communicate to
customers the key features that we believe differentiate our
stores in our branded markets from our competitors, such as the
large inventory available for customers, our extended evening
and weekend service hours and the competitive pricing we offer
for widely available services. We believe that by having our
stores within each local market speak with one voice to the
automobile-buying public, we can achieve marketing and
advertising cost savings and efficiencies that generally are not
available to many of our local competitors. We also believe that
we can create strong retail brand awareness in our markets.
We have fifteen local brands in our key markets, including
Maroone in South Florida; GO in Denver,
Colorado; AutoWay in Tampa, Florida;
Bankston in Dallas, Texas; Courtesy in
Orlando, Florida; Desert in Las Vegas, Nevada;
Team in Atlanta, Georgia; Mike Shad in
Jacksonville, Florida; Dobbs in Memphis, Tennessee;
Fox in Baltimore, Maryland; Mullinax in
Cleveland, Ohio; Appleway in Spokane, Washington;
Champion in South Texas; Power in
Southern California and Arizona; and AutoWest in
Northern California. The stores we operate under local retail
brands as of December 31, 2006 accounted for approximately
62% of our total revenue during fiscal 2006.
Operations
Each of our stores acquires new vehicles for retail sale either
directly from the applicable automotive manufacturer or
distributor or through dealer trades with other stores of the
same franchise. Accordingly, we depend in large part on the
automotive manufacturers and distributors to provide us with
high-quality vehicles that consumers desire and to supply us
with such vehicles at suitable quantities and prices and at the
right times. Our operations, particularly our sales of new
vehicles, are impacted by the sales incentive programs conducted
by the automotive manufacturers to spur consumer demand for
their vehicles. These sales incentive programs are often not
announced in advance and therefore can be difficult to plan for
when ordering inventory. We generally acquire used vehicles from
customer trade-ins, at the termination of leases and, to a
lesser extent, auctions and other sources. We generally
recondition used vehicles acquired for retail sale at our
stores service facilities and capitalize costs related
thereto as used vehicle inventory. Used vehicles that we do not
sell at our stores generally are sold at wholesale through
auctions.
We provide a wide variety of financial products and services to
our customers in a convenient manner and at competitive prices.
We arrange for our customers to finance vehicles through
installment loans or leases with third-party lenders, including
the vehicle manufacturers and distributors captive
finance subsidiaries, in exchange for a commission payable to us
by the third-party lender. Commissions that we receive from
these third-party lenders may be subject to chargeback, in full
or in part, if loans that we arrange are defaulted on or prepaid
or upon other specified circumstances. However, our exposure to
loss in connection with arranging third-party financing
generally is limited to the commissions that we receive. We do
not directly finance our customers vehicle leases or
purchases.
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We also offer our customers various vehicle protection products,
including extended service contracts, maintenance programs,
guaranteed auto protection (known as GAP, this
protection covers the shortfall between a customers loan
balance and insurance payoff in the event of a casualty), credit
insurance, lease wear and tear insurance and theft
protection products at competitive prices. The vehicle
protection products that our stores currently offer to customers
are underwritten and administered by independent third parties,
including the vehicle manufacturers and distributors
captive finance subsidiaries. We primarily sell the products on
a straight commission basis; however, we also participate in
future underwriting profit pursuant to a retrospective
commission arrangement. Commissions that we receive from these
third-party providers may be subject to chargebacks, in full or
in part, if products that we sell, such as extended service
contracts, are cancelled.
Our stores also provide a wide range of vehicle maintenance,
repair, paint and collision repair services, including warranty
work that can be performed only at franchised dealerships and
customer-pay service work.
Sales And
Marketing
We retailed approximately 600,000 new and used vehicles through
our stores in 2006. We sell a broad range of well-known vehicle
makes within each of our markets.
Our marketing efforts focus on mass marketing and targeted
marketing in our local markets and are designed to build our
business with a broad base of repeat, referral and new
customers. We engage in marketing and advertising primarily
through newspapers, radio, television, direct mail and outdoor
billboards in our local markets. As we have consolidated our
operations in certain of our key markets under one local retail
brand name, we have been able to focus our efforts on building
consumer awareness of the selected local retail brand name
rather than on the individual legacy names under which our
stores operated prior to their acquisition by us. We also
continue to develop newspaper, television and radio advertising
campaigns that we can modify for use in multiple local markets.
We realize cost efficiencies with respect to advertising
expenses that are not generally available to smaller retailers,
due to our ability to obtain efficiencies in developing
advertising campaigns and our ability to gain volume discounts
and other concessions as we increase our presence within our key
markets and operate our stores under a single retail brand name
in our local markets.
We also have been able to use our significant scale to market
our stores and vehicle inventory via the Internet. According to
industry analysts, the majority of new car buyers nationwide
consult the Internet for new car information, which is resulting
in better-informed customers and a more efficient sales process.
As part of our
e-commerce
marketing strategy, we are focused on (1) developing
websites and an Internet sales process that appeal to on-line
automobile shoppers; (2) obtaining high visibility on the
Internet through alliances with Internet search engines, such as
Google, through our own websites, and through strategic
partnerships and alliances with other
e-commerce
companies, including Microsofts MSN Autos, America Online,
Edmunds, Kelley Blue Book, Yahoo! Autos and others; and
(3) developing and maintaining a cost structure that
permits us to operate efficiently. In addition, under the terms
of our strategic alliances and partnerships with
e-commerce
companies, we have access to hundreds of thousands of customer
leads, which increases our potential for new and used vehicle
sales.
Agreements
with Vehicle Manufacturers
We have entered into framework agreements with most major
vehicle manufacturers and distributors. These agreements, which
are in addition to the franchise agreements described in the
following paragraph, contain provisions relating to our
management, operation, advertising and marketing, and
acquisition and ownership structure of automotive stores
franchised by such manufacturers. These agreements contain
certain requirements pertaining to our operating performance
(with respect to matters such as sales volume, sales
effectiveness and customer satisfaction), which, if we do not
satisfy, adversely impact our ability to make further
acquisitions of such manufacturers stores or could result
in us being compelled to take certain actions, such as divesting
a significantly underperforming store, subject to applicable
state franchise laws. Additionally, these agreements set limits
(nationally, regionally and in local markets) on the number of
stores that we may acquire of the particular manufacturer and
contain certain restrictions on our ability to name and brand
our stores. Some of these framework agreements give the
manufacturer or distributor the right to acquire at fair market
value, or the right to compel us to sell, the automotive stores
franchised by that manufacturer or distributor under specified
circumstances in the event
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of a change in control of our company (generally including
certain material changes in the composition of our board of
directors during a specified time period, the acquisition of 20%
or more of the voting stock of our company by another vehicle
manufacturer or distributor or the acquisition of 50% or more of
our voting stock by a person, entity or group not affiliated
with a vehicle manufacturer or distributor) or other
extraordinary corporate transactions such as a merger or sale of
all of our assets. In addition, we have granted certain
manufacturers the right to acquire, at fair market value, our
automotive dealerships franchised by that manufacturer in
specified circumstances in the event of our default under the
indenture for our $300 million aggregate principal amount
of floating rate senior notes due 2013 and $300 million
aggregate principal amount of 7% senior notes due 2014
(collectively referred to herein as the new senior
unsecured notes) or the amended credit agreement for our
revolving credit facility and term loan facility.
We operate each of our new vehicle stores under a franchise
agreement with a vehicle manufacturer or distributor. The
franchise agreements grant the franchised automotive store a
non-exclusive right to sell the manufacturer or
distributors brand of vehicles and offer related parts and
service within a specified market area. These franchise
agreements grant our stores the right to use the manufacturer or
distributors trademarks in connection with their
operations, and they also impose numerous operational
requirements and restrictions relating to inventory levels,
working capital levels, the sales process, marketing and
branding, showroom and service facilities and signage,
personnel, changes in management and monthly financial
reporting, among other things. The contractual terms of our
stores franchise agreements provide for various durations,
ranging from one year to no expiration date, and in certain
cases manufacturers have undertaken to renew such franchises
upon expiration so long as the store is in compliance with the
terms of the agreement. We generally expect our franchise
agreements to survive for the foreseeable future and, when the
agreements do not have indefinite terms, anticipate routine
renewals of the agreements without substantial cost or
modification. Our stores franchise agreements provide for
termination of the agreement by the manufacturer or non-renewal
for a variety of causes (including performance deficiencies in
such areas as sales volume, sales effectiveness and customer
satisfaction). However, in general, the states in which we
operate have automotive dealership franchise laws that provide
that, notwithstanding the terms of any franchise agreement, it
is unlawful for a manufacturer to terminate or not renew a
franchise unless good cause exists. It generally is
difficult for a manufacturer to terminate, or not renew, a
franchise under these laws, which were designed to protect
dealers. In addition, in our experience and historically in the
automotive retail industry, dealership franchise agreements are
rarely involuntarily terminated or not renewed by the
manufacturer. From time to time, certain manufacturers assert
sales and customer satisfaction performance deficiencies under
the terms of our framework and franchise agreements at a limited
number of our stores. We generally work with these manufacturers
to address the asserted performance issues. For a further
discussion, please refer to the risk factor captioned
We are subject to restrictions imposed by, and
significant influence from, vehicle manufacturers that may
adversely impact our business, financial condition, results of
operations, cash flows and prospects, including our ability to
acquire additional stores in the Risk
Factors section of this document.
Regulations
Automotive
and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and
federal laws and regulations affect our business. In every state
in which we operate, we must obtain various licenses in order to
operate our businesses, including dealer, sales and finance and
insurance licenses issued by state regulatory authorities.
Numerous laws and regulations govern our conduct of business,
including those relating to our sales, operations, financing,
insurance, advertising and employment practices. These laws and
regulations include state franchise laws and regulations,
consumer protection laws, privacy laws, escheatment laws,
anti-money laundering laws and other extensive laws and
regulations applicable to new and used motor vehicle dealers, as
well as a variety of other laws and regulations. These laws also
include federal and state
wage-hour,
anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to federal
truth-in-lending,
consumer leasing and equal credit opportunity laws and
regulations as well as state and local motor vehicle finance
laws, leasing laws, installment finance laws, usury laws and
other installment sales and leasing laws and regulations, some
of which regulate finance and other fees and charges that may be
imposed or received in connection with motor vehicle retail
installment sales and leasing. Claims arising out of actual or
alleged violations of law may be asserted against us or
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our stores by individuals or governmental entities and may
expose us to significant damages or other penalties, including
revocation or suspension of our licenses to conduct store
operations and fines.
Our operations are subject to the National Traffic and Motor
Vehicle Safety Act, Federal Motor Vehicle Safety Standards
promulgated by the United States Department of Transportation
and the rules and regulations of various state motor vehicle
regulatory agencies. The imported automobiles we purchase are
subject to United States customs duties and, in the ordinary
course of our business we may, from time to time, be subject to
claims for duties, penalties, liquidated damages or other
charges.
Environmental,
Health and Safety Laws and Regulations
Our operations involve the use, handling, storage and
contracting for recycling
and/or
disposal of materials such as motor oil and filters,
transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning products, lubricants, degreasing agents,
tires and fuel. Consequently, our business is subject to a
complex variety of federal, state and local requirements that
regulate the environment and public health and safety.
Most of our stores utilize aboveground storage tanks, and to a
lesser extent underground storage tanks, primarily for
petroleum-based products. Storage tanks are subject to periodic
testing, containment, upgrading and removal under the Resource
Conservation and Recovery Act and its state law counterparts.
Clean-up or
other remedial action may be necessary in the event of leaks or
other discharges from storage tanks or other sources. In
addition, water quality protection programs under the federal
Water Pollution Control Act (commonly known as the Clean Water
Act), the Safe Drinking Water Act and comparable state and local
programs govern certain discharges from some of our operations.
Similarly, certain air emissions from operations such as auto
body painting may be subject to the federal Clean Air Act and
related state and local laws. Certain health and safety
standards promulgated by the Occupational Safety and Health
Administration of the United States Department of Labor and
related state agencies also apply.
Some of our stores are parties to proceedings under the
Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA, typically in connection with materials
that were sent to former recycling, treatment
and/or
disposal facilities owned and operated by independent
businesses. The remediation or
clean-up of
facilities where the release of a regulated hazardous substance
occurred is required under CERCLA and other laws.
We incur significant costs to comply with applicable
environmental, health and safety laws and regulations in the
ordinary course of our business. We do not anticipate, however,
that the costs of such compliance will have a material adverse
effect on our business, results of operations, cash flows or
financial condition, although such outcome is possible given the
nature of our operations and the extensive environmental, public
health and safety regulatory framework. We do not have any
material known environmental commitments or contingencies.
Competition
We operate in a highly competitive industry. We believe that the
principal competitive factors in the automotive retailing
business are location, service, price and selection. Each of our
markets includes a large number of well-capitalized competitors
that have extensive automobile store managerial experience and
strong retail locations and facilities. According to the
National Automotive Dealers Association, Manheim Auctions and
reports of various industry analysts, the automotive retail
industry is served by approximately 21,500 franchised automotive
dealerships and approximately 45,000 independent used vehicle
dealers. Several other public companies operate numerous
automotive retail stores on a national or regional basis. We are
subject to competition from dealers that sell the same brands of
new vehicles that we sell and from dealers that sell other
brands of new vehicles that we do not represent in a particular
market. Our new vehicle store competitors have franchise
agreements with the various vehicle manufacturers and, as such,
generally have access to new vehicles on the same terms as us.
Additionally, we are subject to competition in the automotive
retailing business from private market buyers and sellers of
used vehicles.
In general, the vehicle manufacturers have designated specific
marketing and sales areas within which only one dealer of a
given vehicle brand may operate. Under most of our framework
agreements with the vehicle manufacturers, our ability to
acquire multiple dealers of a given brand within a particular
market is limited. We are
8
also restricted by various state franchise laws from relocating
our stores or establishing new stores of a particular brand
within any area that is served by another dealer of the same
brand, and we generally need the manufacturer to approve the
relocation or grant a new franchise in order to relocate or
establish a store. However, to the extent that a market has
multiple dealers of a particular brand, as most of our key
markets do with respect to most vehicle brands we sell, we are
subject to significant intra-brand competition.
We also are subject to competition from independent automobile
service shops and service center chains. We believe that the
principal competitive factors in the service and repair industry
are price, location, the use of factory-approved replacement
parts, expertise with the particular vehicle lines and customer
service. In addition to competition for vehicle sales and
service, we face competition from a broad range of financial
institutions in our finance and insurance and after-market
products businesses. We believe the principal competitive
factors in these businesses are convenience, price, contract
terms and the ability to finance vehicle protection and
after-market products.
Insurance
And Bonding
Our business exposes us to the risk of liabilities arising out
of our operations. For example, liabilities may arise out of
claims of employees, customers or other third parties for
personal injury or property damage occurring in the course of
our operations. We could also be subject to fines and civil and
criminal penalties in connection with alleged violations of
federal and state laws or regulatory requirements.
The automotive retailing business is also subject to substantial
risk of property loss due to the significant concentration of
property values at store locations. In our case in particular,
our operations are concentrated in states and regions in which
natural disasters and severe weather events (such as hurricanes,
earthquakes and hail storms) may subject us to substantial risk
of property loss and operational disruption. Under
self-insurance programs, we retain various levels of aggregate
loss limits, per claim deductibles and claims handling expenses
as part of our various insurance programs, including property
and casualty, workers compensation and employee medical
benefits. Costs in excess of this retained risk per claim may be
insured under various contracts with third-party insurance
carriers. We estimate the ultimate costs of these retained
insurance risks based on actuarial evaluation and historical
claims experience, adjusted for current trends and changes in
claims-handling procedures. The level of risk we retain may
change in the future as insurance market conditions or other
factors affecting the economics of our insurance purchasing
change. Although we have, subject to certain limitations and
exclusions, substantial insurance, we cannot assure you that we
will not be exposed to uninsured or underinsured losses that
could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Provisions for retained losses and deductibles are made by
charges to expense based upon periodic evaluations of the
estimated ultimate liabilities on reported and unreported
claims. The insurance companies that underwrite our insurance
require that we secure certain of our obligations for deductible
reimbursements with collateral. Our collateral requirements are
set by the insurance companies and, to date, have been satisfied
by posting surety bonds, letters of credit
and/or cash
deposits. Our collateral requirements may change from time to
time based on, among other things, our claims experience. We
include additional details about our collateral requirements in
the Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this
document, as well as in the Notes to our Consolidated Financial
Statements.
Employees
As of December 31, 2006, we employed approximately 26,000
full time employees, approximately 300 of whom were covered by
collective bargaining agreements. We believe that we have good
relations with our employees.
Seasonality
Our operations generally experience higher volumes of vehicle
sales and service in the second and third quarters of each year
due in part to consumer buying trends and the introduction of
new vehicle models. Also, demand for vehicles and light trucks
is generally lower during the winter months than in other
seasons, particularly in regions of the United States where
stores may be subject to adverse winter conditions. Accordingly,
we expect our
9
revenue and operating results generally to be lower in the first
and fourth quarters as compared to the second and third
quarters. However, revenue may be impacted significantly from
quarter to quarter by actual or threatened severe weather
events, and other factors unrelated to weather conditions, such
as changing economic conditions and vehicle manufacturer
incentive programs.
Trademarks
We own a number of registered service marks and trademarks,
including, among other marks, AutoNation
®
and
AutoNation
®.
Pursuant to agreements with vehicle manufacturers, we have the
right to use and display manufacturers trademarks, logos
and designs at our stores and in our advertising and promotional
materials, subject to certain restrictions. We also have
licenses pursuant to various agreements with third parties
authorizing the use and display of the marks
and/or logos
of such third parties, subject to certain restrictions. The
current registrations of our service marks and trademarks in the
United States and foreign countries are effective for varying
periods of time, which we may renew periodically, provided that
we comply with all applicable laws.
Executive
Officers Of AutoNation
We provide below information regarding each of our executive
officers.
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Name
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Age
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Position
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Mike Jackson
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58
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Chairman of the Board and Chief
Executive Officer
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Michael E. Maroone
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53
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Director, President and Chief
Operating Officer
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Michael J. Short
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45
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Executive Vice President and Chief
Financial Officer
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Jonathan P. Ferrando
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Executive Vice President, General
Counsel and Secretary
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Kevin P. Westfall
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Senior Vice President, Sales
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Mike Jackson has served as our Chairman of the Board
since January 1, 2003 and as our Chief Executive Officer
and Director since September 1999. From October 1998 until
September 1999, Mr. Jackson served as Chief Executive
Officer of Mercedes-Benz USA, LLC, a North American operating
unit of DaimlerChrysler AG, a multinational automotive
manufacturing company. From April 1997 until September 1999,
Mr. Jackson also served as President of Mercedes-Benz USA.
From July 1990 until March 1997, Mr. Jackson served in
various capacities at Mercedes-Benz USA, including as Executive
Vice President immediately prior to his appointment as President
of Mercedes-Benz USA. Mr. Jackson was also the managing
partner from March 1979 to July 1990 of Euro Motorcars of
Bethesda, Maryland, a regional group that owned and operated
eleven automotive dealership franchises, including Mercedes-Benz
and other brands of automobiles.
Michael E. Maroone has served as a director since July
2005 and as our President and Chief Operating Officer since
August 1999. Following our acquisition of the Maroone Automotive
Group in January 1997, Mr. Maroone served as President of
our New Vehicle Dealer Division. In January 1998,
Mr. Maroone was named President of our Automotive Retail
Group with responsibility for our new and used vehicle
operations. Prior to joining our company, Mr. Maroone was
President and Chief Executive Officer of the Maroone Automotive
Group, one of the countrys largest privately-held
automotive retail groups prior to its acquisition by us.
Michael J. Short has served as our Executive Vice
President and Chief Financial Officer since January 2007. From
2000 to January 2007, Mr. Short served as Executive Vice
President and Chief Financial Officer of Universal City
Development Partners, Ltd. (dba Universal Orlando)
(Universal Orlando). From 2005 until January 2007,
he also served as Treasurer and Chief Financial Officer of
Universal City Florida Holding Co. I, the limited partner
of Universal Orlando, and Universal City Florida Holding
Co. II, the general partner of Universal Orlando. From 1991
to 2000, Mr. Short held various finance positions at
Universal Orlando, Joseph E. Seagram & Sons, Inc. and
IBM Corporation. Prior to that, he was a helicopter pilot
and tactics instructor for the United States Navy, based out of
Norfolk, Virginia.
Jonathan P. Ferrando has served as our Executive Vice
President, General Counsel and Secretary since March 2005. Prior
thereto, he served as Senior Vice President, General Counsel and
Secretary from January 2000 until March 2005. In September 2004,
Mr. Ferrando assumed responsibility for our human resources
and labor
10
relations functions in addition to his role as General Counsel.
Mr. Ferrando joined our Company in July 1996 and served in
various capacities within our company, including as Senior Vice
President and General Counsel of our Automotive Retail Group
from March 1998 until January 2000. Prior to joining our
company, Mr. Ferrando was a corporate attorney with
Skadden, Arps, Slate, Meagher & Flom from 1991 until
1996.
Kevin P. Westfall has served as our Senior Vice
President Sales since October 2005 and as our Senior
Vice President Finance and Insurance and Fixed
Operations from May 2003 until September 2005. From 2001 until
May 2003, Mr. Westfall served as our Senior Vice
President Finance and Insurance. Previously, he
served as President of our former wholly-owned captive finance
company, AutoNation Financial Services, from 1997 through 2001.
He is also the former President of BMW Financial Services for
North America.
Our business, financial condition, results of operations, cash
flows and prospects, and the prevailing market price and
performance of our common stock, may be adversely affected by a
number of factors, including the matters discussed below.
Certain statements and information set forth in this Annual
Report on
Form 10-K,
as well as other written or oral statements made from time to
time by us or by our authorized officers on our behalf,
constitute forward-looking statements within the
meaning of the Federal Private Securities Litigation Reform Act
of 1995. We intend for our 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. You should note that our forward-looking statements
speak only as of the date of this Annual Report on
Form 10-K
or when made and we undertake no duty or obligation to update or
revise our forward-looking statements, whether as a result of
new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections
reflected in our forward-looking statements are reasonable, such
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our 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 our stockholders and prospective investors should
consider include, but are not limited to, the following:
We are
dependent upon the success and continued financial viability of
the vehicle manufacturers and distributors with which we hold
franchises.
The success of our stores is dependent on vehicle manufacturers
in several key respects. First, we rely exclusively on the
various vehicle manufacturers for our new vehicle inventory. Our
ability to sell new vehicles is dependent on a vehicle
manufacturers ability to produce and allocate to our
stores an attractive, high quality and desirable product mix at
the right time in order to satisfy customer demand. Second,
manufacturers generally support their franchisees by providing
direct financial assistance in various areas, including, among
others, inventory financing assistance and advertising
assistance. Third, manufacturers provide product warranties and,
in some cases, service contracts, to customers. Our stores
perform warranty and service contract work for vehicles under
manufacturer product warranties and service contracts, and
direct bill the manufacturer as opposed to invoicing the store
customer. At any particular time, we have significant
receivables from manufacturers for warranty and service work
performed for customers. In addition, we rely on manufacturers
to varying extents for original equipment manufactured
replacement parts, training, product brochures and point of sale
materials, and other items for our stores.
The core brands of vehicles that we sell, representing more than
90% of the number of new vehicles that we sold in 2006, are
manufactured by Ford, General Motors, DaimlerChrysler, Toyota,
Nissan, Honda and BMW. In particular, our General Motors
Corporation and Ford Motor Company stores represented over 33%
of our new vehicle revenue in 2006. We are subject to a
concentration of risk in the event of financial distress,
including potential bankruptcy, of a major vehicle manufacturer
such as General Motors or Ford. In the event of such a
bankruptcy, among other things, (i) the manufacturer could
attempt to terminate all or certain of our franchises, and we
may not receive adequate compensation for them, (ii) we may
not be able to collect some or all of our significant
receivables that are due from such manufacturers and we may be
subject to preference claims relating to payments made by
manufacturers prior to bankruptcy, (iii) we may not be able
to obtain financing for our new vehicle inventory, or arrange
financing for our customers for their vehicle purchases and
leases, with the manufacturers
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captive finance subsidiary, which may cause us to finance our
new vehicle inventory, and arrange financing for our customers,
with alternate finance sources on less favorable terms, and
(iv) consumer demand for their products could be materially
adversely affected. These events may result in a partial or
complete write-down of our goodwill, intangible franchise rights
with respect to any terminated franchises,
and/or
receivables due from such manufacturers and adversely impact our
results of operations. In addition, vehicle manufacturers may be
adversely impacted by economic downturns or recessions,
significant declines in the sales of their new vehicles,
increases in interest rates, declines in their credit ratings,
labor strikes or similar disruptions (including within their
major suppliers), supply shortages or rising raw material costs,
rising employee benefit costs, adverse publicity that may reduce
consumer demand for their products (including due to
bankruptcy), product defects, vehicle recall campaigns,
litigation, poor product mix or unappealing vehicle design,
changes in governmental laws and regulations, including a
significant increase in the U.S. mandated corporate average
fuel economy standards that could materially adversely impact
our sales and profitability, or other adverse events. These and
other risks could materially adversely affect any manufacturer
and impact its ability to profitably design, market, produce or
distribute new vehicles, which in turn could materially
adversely affect our ability to obtain or finance our new
vehicle inventories, our ability to take advantage of
manufacturer financial assistance programs, our ability to
collect in full or on a timely basis our manufacturer warranty
and other receivables,
and/or our
ability to obtain other goods and services provided by the
impacted manufacturer. Our business, results of operations,
financial condition, shareholders equity, cash flows and
prospects could be materially adversely affected as a result of
any event that has a material adverse effect on the vehicle
manufacturers or distributors who are our primary franchisors.
The
automotive retailing industry is sensitive to changing economic
conditions and various other factors. Our business and results
of operations are substantially dependent on new vehicle sales
levels in the United States and in our particular geographic
markets and the level of gross profit margins that we can
achieve on our sales of new vehicles, all of which are very
difficult to predict.
We believe that many factors affect sales of new vehicles and
retailers gross profit margins in the United States and in
our particular geographic markets, including the economy,
inflation, recession or economic slowdown, consumer confidence,
housing markets, the level of manufacturers production
capacity, manufacturer incentives (and consumers reaction
to such offers), intense industry competition, interest rates,
the prospects of war, other international conflicts or terrorist
attacks, severe weather conditions, the level of personal
discretionary spending, product quality, affordability and
innovation, fuel prices, credit availability, unemployment
rates, the number of consumers whose vehicle leases are
expiring, and the length of consumer loans on existing vehicles.
Increases in interest rates could significantly impact industry
new vehicle sales and vehicle affordability, including due to
the direct relationship between higher rates and higher monthly
loan payments, a critical factor for many vehicle buyers, and
the impact higher rates can have on customers borrowing
capacity and disposable income. Sales of certain new vehicles,
particularly larger trucks and sports utility vehicles that
historically have provided us with higher gross margins, also
could be impacted adversely by significant increases in fuel
prices. Additionally, in 2006, the housing market experienced a
significant decline, particularly in California and Florida. A
continued decline in the housing market, particularly in the
geographic regions in which we operate, could materially
adversely impact our sales.
Our new vehicle sales may differ from industry sales, including
due to particular economic conditions and other factors in the
geographic markets in which we operate. A significant decrease
in new vehicle sales levels in the United States (or in our
particular geographic markets) in the future, or a decrease in
new vehicle gross profit margins, could cause our actual
earnings results to differ materially from our prior results and
projected trends. Economic conditions and the other factors
described above also may materially adversely impact our sales
of used vehicles, finance and vehicle protection products,
vehicle service and parts and repair services.
Our
new vehicle sales are impacted by the consumer incentive and
marketing programs of vehicle manufacturers.
Most vehicle manufacturers from time to time have established
various incentive and marketing programs designed to spur
consumer demand for their vehicles. In addition, certain
manufacturers offer extended product warranties or free service
programs to consumers. From time to time, manufacturers modify
and discontinue these
12
dealer assistance and consumer incentive and marketing programs,
which could have a significant adverse effect on our new vehicle
and aftermarket product sales, consolidated results of
operations and cash flows.
Natural
disasters and adverse weather events can disrupt our
business.
Our stores are concentrated in states and regions in the United
States, including primarily Florida, Texas and California, in
which actual or threatened natural disasters and severe weather
events (such as hurricanes, earthquakes and hail storms) may
disrupt our store operations, which may adversely impact our
business, results of operations, financial condition and cash
flows. In addition to business interruption, the automotive
retailing business is subject to substantial risk of property
loss due to the significant concentration of property values at
store locations. Although we have, subject to certain
limitations and exclusions, substantial insurance, we cannot
assure you that we will not be exposed to uninsured or
underinsured losses that could have a material adverse effect on
our business, financial condition, results of operations or cash
flows.
We are
subject to restrictions imposed by, and significant influence
from, vehicle manufacturers that may adversely impact our
business, financial condition, results of operations, cash flows
and prospects, including our ability to acquire additional
stores.
Vehicle manufacturers and distributors with whom we hold
franchises have significant influence over the operations of our
stores. The terms and conditions of our framework, franchise and
related agreements and the manufacturers interests and
objectives may, in certain circumstances, conflict with our
interests and objectives. For example, manufacturers can set
performance standards with respect to sales volume, sales
effectiveness and customer satisfaction, and can influence our
ability to acquire additional stores, the naming and marketing
of our stores, the operations of our
e-commerce
sites, our selection of store management, the condition of our
store facilities, product stocking and advertising spending
levels, and the level at which we capitalize our stores.
Manufacturers may also have certain rights to restrict our
ability to provide guaranties of our operating companies,
pledges of the capital stock of our subsidiaries and liens on
our assets, which could adversely impact our ability to obtain
financing for our business and operations on favorable terms or
at desired levels. From time to time, we are precluded under
agreements with certain manufacturers from acquiring additional
franchises, or subject to other adverse actions, to the extent
we are not meeting certain performance criteria at our existing
stores (with respect to matters such as sales volume, sales
effectiveness and customer satisfaction) until our performance
improves in accordance with the agreements, subject to
applicable state franchise laws.
Manufacturers also have the right to establish new franchises or
relocate existing franchises, subject to applicable state
franchise laws. The establishment or relocation of franchises in
our markets could have a material adverse effect on the
financial condition, results of operations, cash flows and
prospects of our stores in the market in which the franchise
action is taken.
Our framework, franchise and related agreements also grant the
manufacturer the right to terminate or compel us to sell our
franchise for a variety of reasons (including uncured
performance deficiencies, any unapproved change of ownership or
management or any unapproved transfer of franchise rights or
impairment of financial standing or failure to meet capital
requirements), subject to state laws. From time to time, certain
major manufacturers assert sales and customer satisfaction
performance deficiencies under the terms of our framework and
franchise agreements at a limited number of our stores. While we
believe that we will be able to renew all of our franchise
agreements, we cannot guarantee that all of our franchise
agreements will be renewed or that the terms of the renewals
will be favorable to us. We cannot assure you that our stores
will be able to comply with manufacturers sales, customer
satisfaction and other performance requirements in the future,
which may affect our ability to acquire new stores or renew our
franchise agreements, or subject us to other adverse actions,
including termination or compelled sale of a franchise, any of
which could have a material adverse effect on our financial
condition, results of operations, cash flows and prospects.
In addition, we have granted certain manufacturers the right to
acquire, at fair market value, our automotive dealerships
franchised by that manufacturer in specified circumstances in
the event of our default under the indenture for our new senior
unsecured notes or the amended credit agreement for our
revolving credit facility and term loan facility.
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We are
subject to numerous legal and administrative proceedings, which,
if the outcomes are adverse to us, could materially adversely
affect our business, results of operations, financial condition,
cash flows and prospects.
We are involved, and will continue to be involved, in numerous
legal proceedings arising out of the conduct of our business,
including litigation with customers, employment-related
lawsuits, class actions, purported class actions and actions
brought by governmental authorities. We do not believe that the
ultimate resolution of these matters will have a material
adverse effect on our business, results of operations, financial
condition or cash flows. However, the results of these matters
cannot be predicted with certainty, and an unfavorable
resolution of one or more of these matters could have a material
adverse effect on our business, results of operations, financial
condition, cash flow and prospects.
Our
operations, including, without limitation, our sales of finance,
insurance and vehicle protection products, are subject to
extensive governmental laws, regulation and scrutiny. If we are
found to be in violation of, or subject to liabilities under,
any of these laws or regulations, or if new laws or regulations
are enacted that adversely affect our operations, our business,
operating results and prospects could suffer.
The automotive retailing industry, including our facilities and
operations, is subject to a wide range of federal, state and
local laws and regulations, such as those relating to motor
vehicle sales, retail installment sales, leasing, sales of
finance, insurance and vehicle protection products, licensing,
consumer protection, consumer privacy, escheatment, money
laundering, environmental, health and safety,
wage-hour,
anti-discrimination and other employment practices. Specifically
with respect to motor vehicle sales, retail installment sales,
leasing, and the sale of finance, insurance and vehicle
protection products at our stores, we are subject to various
laws and regulations, the violation of which could subject us to
consumer class action or other lawsuits or governmental
investigations and adverse publicity, in addition to
administrative, civil or criminal sanctions. The violation of
other laws and regulations to which we are subject also can
result in administrative, civil or criminal sanctions against
us, which may include a cease and desist order against the
subject operations or even revocation or suspension of our
license to operate the subject business, as well as significant
fines and penalties. We currently devote significant resources
to comply with applicable federal, state and local regulation of
health, safety, environmental, zoning and land use regulations,
and we may need to spend additional time, effort and money to
keep our existing or acquired facilities in compliance
therewith. In addition, we may be subject to broad liabilities
arising out of contamination at our currently and formerly owned
or operated facilities, at locations to which hazardous
substances were transported from such facilities and at such
locations related to entities formerly affiliated with us.
Although for some such liabilities we believe we are entitled to
indemnification from other entities, we cannot assure you that
such entities will view their obligations as we do, or will be
able to satisfy them.
Legislative or similar measures have recently been enacted or
pursued in certain states in which we operate to limit the fees
that dealerships may earn in connection with arranging financing
for vehicle purchasers, to require disclosure to consumers of
the fees that stores earn to arrange financing and to enact
other additional regulations with respect to various aspects of
our business, including with respect to the sale of used
vehicles and finance and insurance products. Recent litigation
against certain vehicle manufacturers captive finance
subsidiaries alleging discriminatory lending practices has
resulted in settlements, and may result in future settlements,
that could reduce the fees earned by our stores in connection
with the origination of consumer loans. The enactment of laws
and regulations that materially impair or restrict our finance
and insurance or other operations could have a material adverse
effect on our business, results of operations, financial
condition, cash flows and prospects.
Our
ability to grow our business may be limited by our ability to
acquire automotive stores on favorable terms or at
all.
The automotive retail industry is a mature industry.
Accordingly, the growth of our automotive retail business since
our inception has been primarily attributable to acquisitions of
franchised automotive dealership groups. As described above,
manufacturer approval of our proposed acquisitions generally is
subject to our compliance with applicable performance standards
(including with respect to matters such as sales volume, sales
effectiveness and customer satisfaction) or established
acquisition limits, particularly regional and local market
limits. In addition, in the current environment, it has been
difficult to identify dealership acquisitions in our core
markets that meet our
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return on investment targets. As a result, we cannot assure you
that we will be able to acquire stores selling desirable
automotive brands at desirable locations in our key markets or
that any such acquisitions can be completed on favorable terms
or at all. Acquisitions involve a number of risks, many of which
are unpredictable and difficult to quantify or assess,
including, among other matters, risks relating to known and
unknown liabilities of the acquired business and projected
operating performance.
We are
subject to interest rate risk in connection with our floorplan
notes payable, revolving credit facility, term loan facility,
mortgage facility and floating rate senior unsecured notes that
could have a material adverse effect on our
profitability.
Most of our debt, including our floor plan notes, is subject to
variable interest rates. The variable interest rates under our
revolving credit facility, term loan facility, mortgage
facility, floating rate senior unsecured notes and certain of
our floorplan notes payable all increased in 2006. Our variable
interest rate debt will fluctuate with changing market
conditions and, accordingly, our interest expense will increase
if interest rates rise. In addition, our net inventory carrying
cost (floorplan interest expense net of floorplan assistance
that we receive from automotive manufacturers) may increase due
to changes in interest rates, inventory levels and manufacturer
assistance. We cannot assure you that a significant increase in
interest rates would not have a material adverse effect on our
business, financial condition, results of operations or cash
flows.
Our
revolving credit facility, term loan facility, mortgage facility
and the indenture relating to our new senior unsecured notes
contain certain restrictions on our ability to conduct our
business.
The indenture relating to our new senior unsecured notes and the
amended credit agreement relating to our revolving credit
facility and term loan facility contain numerous financial and
operating covenants that limit the discretion of our management
with respect to various business matters. These covenants place
significant restrictions on, among other things, our ability to
incur additional indebtedness, to create liens or other
encumbrances, to make certain payments (including dividends and
repurchases of our shares) and investments, and to sell or
otherwise dispose of assets and merge or consolidate with other
entities. Our amended credit agreement also requires us to meet
certain financial ratios and tests that may require us to take
action to reduce debt or act in a manner contrary to our
business objectives. A failure by us to comply with the
obligations contained in our amended credit agreement or the
indenture relating to our new senior unsecured notes could
result in an event of default under our amended credit agreement
or the indentures, which could permit acceleration of the
related debt and acceleration of debt under other instruments
that may contain cross-acceleration or cross-default provisions.
If any debt is accelerated, our liquid assets may not be
sufficient to repay in full such indebtedness and our other
indebtedness. In addition, we have granted certain manufacturers
the right to acquire, at fair market value, our automotive
stores franchised by that manufacturer in specified
circumstances in the event of our default under the indenture
for our new senior unsecured notes or the amended credit
agreement for our revolving credit facility and term loan
facility.
Our
substantial indebtedness could adversely affect our financial
condition and operations and prevent us from fulfilling our debt
service obligations. We may still be able to incur more debt,
intensifying these risks.
As of December 31, 2006, we had approximately
$1.6 billion of total indebtedness (including amounts
outstanding under our mortgage facility and capital leases but
excluding floorplan financing), and our subsidiaries also had
$2.3 billion of floorplan financing. In addition, we had
the ability to borrow $413 million additional indebtedness
under our revolving credit facility. Our substantial
indebtedness could have important consequences. For example:
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we may have difficulty satisfying our debt service obligations
and, if we fail to comply with these requirements, an event of
default could result;
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we may be required to dedicate a substantial portion of our cash
flow from operations to required payments on indebtedness,
thereby reducing the availability of cash flow for working
capital, capital expenditures, acquisitions and other general
corporate activities;
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covenants relating to our indebtedness may limit our ability to
obtain additional financing for working capital, capital
expenditures, acquisitions and other general corporate
activities;
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covenants relating to our indebtedness may limit our flexibility
in planning for, or reacting to, changes in our business and the
industry in which we operate;
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|
we may be more vulnerable to the impact of economic downturns
and adverse developments in our business;
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|
we may be placed at a competitive disadvantage against any less
leveraged competitors; and
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|
our variable interest rate debt will fluctuate with changing
market conditions and, accordingly, our interest expense will
increase if interest rates rise.
|
The occurrence of any one of these events could have a material
adverse effect on our business, financial condition, results of
operations, prospects and ability to satisfy our debt service
obligations. Subject to restrictions in the indenture governing
our new senior unsecured notes and in the amended credit
agreement governing our revolving credit facility and term loan
facility, we may incur additional indebtedness, which could
increase the risks associated with our already substantial
indebtedness.
Goodwill
and other intangible assets comprise a significant portion of
our total assets. We must test our intangible assets for
impairment at least annually, which may result in a material,
non-cash write down of goodwill or franchise rights and could
have a material adverse impact on our results of operations and
shareholders equity.
Goodwill and indefinite-lived intangibles are subject to
impairment assessments at least annually (or more frequently
when events or circumstances indicate that an impairment may
have occurred) by applying a fair-value based test. Our
principal intangible assets are goodwill and our rights under
our franchise agreements with vehicle manufacturers. These
impairment assessments may result in a material, non-cash
write-down of goodwill or franchise values. An impairment would
have a material adverse impact on our results of operations and
shareholders equity.
ITEM 1.B. UNRESOLVED
STAFF COMMENTS
None.
We lease our corporate headquarters facility in
Fort Lauderdale, Florida pursuant to a lease expiring in
2010. As of February 2007, we also own or lease numerous
facilities relating to our operations in the following
17 states: Alabama; Arizona; California; Colorado; Florida;
Georgia; Idaho; Illinois; Maryland; Minnesota; North Carolina;
Nevada; Ohio; Tennessee; Texas; Virginia and Washington. These
facilities consist primarily of automobile showrooms, display
lots, service facilities, collision repair centers, supply
facilities, automobile storage lots, parking lots and offices.
We believe that our facilities are sufficient for our current
needs and are in good condition in all material respects.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
We are involved, and will continue to be involved, in numerous
legal proceedings arising out of the conduct of our business,
including litigation with customers, employment-related
lawsuits, class actions, purported class actions and actions
brought by governmental authorities. We do not believe that the
ultimate resolution of these matters will have a material
adverse effect on our business, results of operations, financial
condition or cash flows. However, the results of these matters
cannot be predicted with certainty, and an unfavorable
resolution of one or more of these matters could have a material
adverse effect on our business, results of operations, financial
condition, cash flow and prospects.
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ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of our stockholders during
the fourth quarter of the fiscal year ended December 31,
2006.
16
PART II
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|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information, Holders and Dividends
Our common stock is traded on The New York Stock Exchange under
the symbol AN. The following table sets forth, for
the periods indicated, the high and low sales prices per share
of the common stock as reported on the consolidated transaction
reporting system.
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High
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Low
|
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2006
|
|
|
|
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|
|
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Fourth Quarter
|
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$
|
21.52
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|
|
$
|
19.43
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Third Quarter
|
|
|
21.68
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|
|
|
18.95
|
|
Second Quarter
|
|
|
22.94
|
|
|
|
20.56
|
|
First Quarter
|
|
|
22.90
|
|
|
|
20.54
|
|
2005
|
|
|
|
|
|
|
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Fourth Quarter
|
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$
|
22.84
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|
$
|
18.44
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Third Quarter
|
|
|
22.54
|
|
|
|
19.57
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Second Quarter
|
|
|
21.69
|
|
|
|
17.91
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First Quarter
|
|
|
20.05
|
|
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|
18.35
|
|
On February 23, 2007, the closing price of our common stock
was $22.73 per share as reported by the NYSE. As of
February 23, 2007, there were approximately 2,400 holders
of record of our common stock.
We have not declared or paid any cash dividends on our common
stock during our two most recent fiscal years. We do not
anticipate paying cash dividends in the foreseeable future. The
indenture for our new senior unsecured notes and the amended
credit agreement for our revolving credit facility and term loan
facility restrict our ability to declare and pay cash dividends.
Information about our equity compensation plans is set forth in
Item 12 of this
Form 10-K.
Issuer
Purchases of Equity Securities
The table below sets forth information with respect to shares of
common stock repurchased by AutoNation, Inc. during the three
months ended December 31, 2006. See Note 9 of our
Notes to Unaudited Consolidated Financial Statements for
additional information regarding our stock repurchase programs.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
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|
Maximum Dollar Value of
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Shares That May Yet Be
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|
|
of Shares
|
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Price Paid
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|
Announced
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Purchased Under the
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Period
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Purchased
|
|
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per Share
|
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Programs
|
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|
Program (in
millions)(1)(2)
|
|
|
October 1, 2006 to
October 31, 2006
|
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50,000
|
|
|
$
|
20.05
|
|
|
|
50,000
|
|
|
$
|
134.6
|
|
November 1, 2006 to
November 30, 2006
|
|
|
1,050,000
|
|
|
$
|
20.26
|
|
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|
1,050,000
|
|
|
$
|
113.3
|
|
December 1, 2006 to
December 31, 2006
|
|
|
1,000,000
|
|
|
$
|
20.92
|
|
|
|
1,000,000
|
|
|
$
|
92.4
|
|
Total
|
|
|
2,100,000
|
|
|
|
|
|
|
|
2,100,000
|
|
|
|
|
|
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|
(1) |
|
Future share repurchases are subject to limitations contained in
the indentures relating to the Companys new senior
unsecured notes and amended credit agreement relating to its
revolving credit facility. |
|
(2) |
|
Shares are repurchased under our stock repurchase program
approved by the Companys Board of Directors in June 2006,
which authorized the Company to repurchase up to
$250.0 million of shares. This program does not have an
expiration date. |
17
PERFORMANCE
GRAPH
The following graph and table compare the cumulative total
stockholder return on our common stock from December 31,
2001 through December 31, 2006 with the performance of:
(i) the Standard & Poors 500 Stock Index and
(ii) the Standard & Poors Specialty Stores
Index. We have created these comparisons using data supplied by
Research Data Group, Inc. The comparisons reflected in the graph
and table are not intended to forecast the future performance of
our stock and may not be indicative of future performance. The
graph and table assume investments of $100 in our stock and each
index on December 31, 2001.
Cumulative
Total Return
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
12/01
|
|
|
12/02
|
|
|
12/03
|
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|
12/04
|
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12/05
|
|
|
12/06
|
|
|
|
|
AutoNation Inc.
|
|
|
100.00
|
|
|
|
101.87
|
|
|
|
148.99
|
|
|
|
155.80
|
|
|
|
176.24
|
|
|
|
172.91
|
|
S&P 500
|
|
|
100.00
|
|
|
|
77.90
|
|
|
|
100.24
|
|
|
|
111.15
|
|
|
|
116.61
|
|
|
|
135.03
|
|
S&P Specialty Stores
|
|
|
100.00
|
|
|
|
88.89
|
|
|
|
119.69
|
|
|
|
125.92
|
|
|
|
148.72
|
|
|
|
180.78
|
|
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
You should read the following Selected Financial Data in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations, our
Consolidated Financial Statements and Notes thereto and other
financial information included elsewhere in this
Form 10-K.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
(In millions, except per share data)
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Revenue
|
|
$
|
18,988.6
|
|
|
$
|
18,729.5
|
|
|
$
|
18,400.5
|
|
|
$
|
17,602.7
|
|
|
$
|
17,498.5
|
|
Income from continuing operations
before income taxes
|
|
$
|
542.1
|
|
|
$
|
625.2
|
|
|
$
|
601.3
|
|
|
$
|
600.8
|
|
|
$
|
601.1
|
|
Net income
|
|
$
|
316.9
|
|
|
$
|
496.5
|
|
|
$
|
433.6
|
|
|
$
|
479.2
|
|
|
$
|
381.6
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.47
|
|
|
$
|
1.51
|
|
|
$
|
1.47
|
|
|
$
|
1.83
|
|
|
$
|
1.17
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
.38
|
|
|
$
|
.15
|
|
|
$
|
(.12
|
)
|
|
$
|
.03
|
|
Cumulative effect of accounting
change(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(.05
|
)
|
|
|
|
|
Net income
|
|
$
|
1.41
|
|
|
$
|
1.89
|
|
|
$
|
1.63
|
|
|
$
|
1.71
|
|
|
$
|
1.20
|
|
Weighted average common shares
outstanding
|
|
|
225.2
|
|
|
|
262.7
|
|
|
|
266.7
|
|
|
|
279.5
|
|
|
|
316.7
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.45
|
|
|
$
|
1.48
|
|
|
$
|
1.44
|
|
|
$
|
1.78
|
|
|
$
|
1.15
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
.37
|
|
|
$
|
.15
|
|
|
$
|
(.11
|
)
|
|
$
|
.03
|
|
Cumulative effect of accounting
change(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(.05
|
)
|
|
|
|
|
Net income
|
|
$
|
1.38
|
|
|
$
|
1.85
|
|
|
$
|
1.59
|
|
|
$
|
1.67
|
|
|
$
|
1.19
|
|
Weighted average common shares
outstanding
|
|
|
229.3
|
|
|
|
268.0
|
|
|
|
272.5
|
|
|
|
287.0
|
|
|
|
321.5
|
|
Total assets
|
|
$
|
8,607.0
|
|
|
$
|
8,824.5
|
|
|
$
|
8,698.9
|
|
|
$
|
8,823.1
|
|
|
$
|
8,502.7
|
|
Long-term debt, net of current
maturities
|
|
$
|
1,557.9
|
|
|
$
|
484.4
|
|
|
$
|
797.7
|
|
|
$
|
808.5
|
|
|
$
|
642.7
|
|
Shareholders equity
|
|
$
|
3,712.7
|
|
|
$
|
4,669.5
|
|
|
$
|
4,263.1
|
|
|
$
|
3,949.7
|
|
|
$
|
3,910.2
|
|
|
|
|
(1) |
|
During 2003, we recorded a $14.6 million ($9.1 million
after-tax) cumulative effect of accounting change to reflect the
deferral of certain manufacturer allowances, primarily floorplan
assistance, into inventory cost upon the adoption of Emerging
Issues Task Force Issue
No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor, as of
January 1, 2003. |
See Notes 9, 11, 12, 13, and 15 of Notes to
Consolidated Financial Statements for discussion of
shareholders equity, income taxes, earnings per share,
discontinued operations, and acquisitions, respectively, and
their effect on comparability of
year-to-year
data. See Item 5. Market for the Registrants
Common Equity and Related Stockholder Matters for a
discussion of our dividend policy.
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion in conjunction with
Part I, including matters set forth in the Risk
Factors section of this
Form 10-K,
and our Consolidated Financial Statements and notes thereto
included elsewhere in this
Form 10-K.
Certain reclassifications of amounts previously reported have
been made to the accompanying Consolidated Financial Statements
in order to maintain consistency and comparability between
periods presented.
Overview
AutoNation, Inc., through its subsidiaries, is the largest
automotive retailer in the United States. As of
December 31, 2006, we owned and operated 331 new vehicle
franchises from 257 dealerships located in major metropolitan
markets, predominantly in the Sunbelt region of the United
States. Our stores, which we believe include some of the most
recognizable and well known in our key markets, sell 37
different brands of new vehicles. The core brands of vehicles
that we sell, representing more than 90% of the new vehicles
that we sold in 2006, are manufactured by Ford, General Motors,
Daimler Chrysler, Toyota, Nissan, Honda and BMW.
We operate in a single operating and reporting segment,
automotive retailing. We offer a diversified range of automotive
products and services, including new vehicles, used vehicles,
vehicle maintenance and repair services, vehicle parts, extended
service contracts, vehicle protection products and other
aftermarket products. We also arrange financing for vehicle
purchases through third-party finance sources. We believe that
the significant scale of our operations and the quality of our
managerial talent allow us to achieve efficiencies in our key
markets by, among other things, leveraging our market brands and
advertising, improving asset management, driving common
processes and increasing productivity across all of our stores.
New vehicle sales account for approximately 60% of our total
revenue, but less than 30% of our total gross margin. Our parts
and service and finance and insurance operations, while
comprising less than 20% of total revenue, contribute
approximately 60% of our gross margin. We believe that many
factors affect sales of new vehicles and retailers gross
profit margins in the United States and in our particular
geographic markets, including the economy, inflation, recession
or economic slowdown, consumer confidence, housing markets, the
level of manufacturers production capacity, manufacturer
incentives (and consumers reaction to such offers),
intense industry competition, interest rates, the prospects of
war, other international conflicts or terrorist attacks, severe
weather conditions, the level of personal discretionary
spending, product quality, affordability and innovation, fuel
prices, credit availability, unemployment rates, the number of
consumers whose vehicle leases are expiring, and the length of
consumer loans on existing vehicles. Increases in interest rates
could significantly impact industry new vehicle sales and
vehicle affordability, due to the direct relationship between
higher rates and higher monthly loan payments, a critical factor
for many vehicle buyers, and the impact higher rates can have on
customers borrowing capacity and disposable income. Sales
of certain new vehicles, particularly larger trucks and sports
utility vehicles that historically have provided us with higher
gross margins, also could be impacted adversely by significant
increases in fuel prices.
The automotive retail environment was challenging in 2006
compared to 2005 especially in California and Florida where the
housing markets experienced a significant decline. In 2006, we
saw continued declines in our domestic new vehicle business and
a continued revenue shift in our brand mix from domestic brands
to volume import and premium luxury brands. Additionally, we saw
a significant decline in non-luxury truck sales, which we
believe is attributable to economic issues. For 2007, we
anticipate that the automotive retail market will remain
challenging and that full-year industry new vehicle sales will
decline to the low-16 million unit level. However, the
level of retail sales for 2007 is very difficult to predict.
For the years ended December 31, 2006 and 2005, we had net
income from continuing operations of $331.4 million and
$396.9 million, respectively, and diluted earnings per
share from continuing operations of $1.45 and $1.48,
respectively. Our 2006 results were positively impacted by
increased gross profits in parts and service and finance and
insurance, offset by lower used vehicle gross profit, higher
floorplan and other interest expense and $15.2 million
($9.3 million after-tax) of stock option expense related to
the implementation of Statement of
20
Financial Accounting Standard No. 123 (revised 2004),
Share- Based Payment
(SFAS No. 123R). The results for 2006 and
2005 also include $34.5 million and $17.4 million,
respectively, of premium and deferred financing costs recognized
as Interest Expense related to the repurchase of our
9% senior unsecured notes. The effect on earnings per share
of higher other interest expense was more than offset by the 19%
reduction in shares outstanding due to the 50 million share
equity tender offer completed in April 2006. Additionally,
during 2005 we recorded net tax benefits in continuing
operations totaling $14.5 million.
In April 2006, we purchased 50 million shares of our common
stock at $23 per share for an aggregate purchase price of
$1.15 billion pursuant to our equity tender offer. We
repurchased an additional 11.2 million shares of our common
stock for a purchase price of $228.9 million during the
remainder of 2006, for a total of 61.2 million shares
repurchased for an aggregate purchase price of
$1.38 billion in 2006. There is approximately
$92.4 million available for share repurchases authorized by
our Board of Directors. Future share repurchases are subject to
limitations contained in the indenture relating to our new
senior notes. See further discussion under the heading
Financial Condition. During 2006, 5.7 million
shares of our common stock were issued upon the exercise of
stock options, resulting in proceeds of $75.7 million.
During the years ended December 31, 2006 and 2005, we had a
(loss)/income from discontinued operations totaling
$(14.5) million and $99.6 million, respectively, net
of income taxes. For the year ended December 31, 2005, we
recognized income of $110.0 million included in
discontinued operations primarily related to the resolution of
various income tax matters. Certain amounts reflected in the
accompanying Consolidated Financial Statements for the years
ended December 31, 2006, 2005 and 2004, have been adjusted
to classify as discontinued operations the results of stores
that were sold, that we have entered into an agreement to sell,
or for which the Company otherwise deems a proposed sales
transaction to be probable with no material changes expected.
Critical
Accounting Policies
We prepare our Consolidated Financial Statements in conformity
with generally accepted accounting principles which require us
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
reporting period. Actual outcomes could differ from those
estimates. Set forth below are the policies that we have
identified as critical to our business operations and the
understanding of our results of operations or that involve
significant estimates. For detailed discussion of other
significant accounting policies see Note 1, Summary of
Significant Accounting Policies, of Notes to Consolidated
Financial Statements.
Goodwill, Other Intangible Assets and Long-Lived
Assets Goodwill, other intangible assets and
long-lived assets are significant components of our consolidated
balance sheets. Our policies regarding the valuation of
intangible assets affect the amount of future amortization and
possible impairment charges we may incur.
Goodwill consists of the cost of acquired businesses in excess
of the fair value of net assets acquired, using the purchase
method of accounting. Acquired intangible assets are 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 our intent to do so. Our principal identifiable
intangible assets are rights under franchise agreements with
vehicle manufacturers. We generally expect our franchise
agreements to survive for the foreseeable future, and, when the
agreements do not have indefinite terms, anticipate routine
renewals of the agreements without substantial cost. We believe
that our franchise agreements will contribute to cash flows for
the foreseeable future and have indefinite lives.
Goodwill and franchise rights assets are tested for impairment
annually at June 30 or more frequently when events or
circumstances indicate that impairment may have occurred. We are
subject to financial statement risk to the extent that goodwill,
franchise rights assets or other intangible assets become
impaired due to decreases in the fair value of the related
underlying business.
We estimate the depreciable lives of our property, plant and
equipment, including leasehold improvements, and review them for
impairment when events or circumstances indicate that their
carrying amounts may be impaired. We periodically evaluate the
carrying value of assets held for sale to determine if, based on
market conditions, the values of these assets should be
adjusted. Although we believe our property, plant and equipment
and
21
assets held for sale are appropriately valued, the assumptions
and estimates used may change and we may be required to record
impairment charges to reduce the value of these assets.
Revenue Recognition Revenue consists of the
sales of new and used vehicles and commissions from related
finance and insurance products and sales of parts and services.
We recognize revenue in the period in which products are sold or
services are provided. We recognize vehicle and finance and
insurance revenue when a sales contract has been executed, the
vehicle has been delivered and payment has been received or
financing has been arranged. Revenue on finance and insurance
products represents commissions earned by us for: (i) loans
and leases placed with financial institutions in connection with
customer vehicle purchases financed and (ii) vehicle
protection products sold. An estimated liability for chargebacks
against revenue recognized from sales of finance and vehicle
protection products is established during the period in which
the related revenue is recognized. We primarily sell these
products on a straight commission basis; however we also
participate in future underwriting profit on certain extended
service contracts pursuant to retrospective commission
arrangements, which are recognized as earned over the life of
the contracts. Rebates, holdbacks, floorplan assistance and
certain other dealer credits received from manufacturers are
recorded as offsets to the cost of the vehicle and recognized
into income upon the sale of the vehicle or when earned under a
specific manufacturer program, whichever is later.
Other Additionally, significant estimates
have been made by us in the accompanying Consolidated Financial
Statements including allowances for doubtful accounts, accruals
for chargebacks against revenue recognized from the sale of
finance, insurance and other protection products, certain
assumptions related to goodwill and other intangible long-lived
assets and accruals related to self-insurance programs, certain
legal proceedings, estimated tax liabilities, estimated losses
from disposals of discontinued operations and certain
assumptions related to determining stock option compensation.
22
Reported
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2004
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
11,163.0
|
|
|
$
|
11,224.0
|
|
|
$
|
(61.0
|
)
|
|
|
(.5
|
)
|
|
$
|
11,258.0
|
|
|
$
|
(34.0
|
)
|
|
|
(.3
|
)
|
Used vehicle
|
|
|
4,518.1
|
|
|
|
4,315.0
|
|
|
|
203.1
|
|
|
|
4.7
|
|
|
|
4,102.6
|
|
|
|
212.4
|
|
|
|
5.2
|
|
Parts and service
|
|
|
2,600.4
|
|
|
|
2,508.5
|
|
|
|
91.9
|
|
|
|
3.7
|
|
|
|
2,366.9
|
|
|
|
141.6
|
|
|
|
6.0
|
|
Finance and insurance, net
|
|
|
634.3
|
|
|
|
601.0
|
|
|
|
33.3
|
|
|
|
5.5
|
|
|
|
590.8
|
|
|
|
10.2
|
|
|
|
1.7
|
|
Other
|
|
|
72.8
|
|
|
|
81.0
|
|
|
|
(8.2
|
)
|
|
|
|
|
|
|
82.2
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,988.6
|
|
|
$
|
18,729.5
|
|
|
$
|
259.1
|
|
|
|
1.4
|
|
|
$
|
18,400.5
|
|
|
$
|
329.0
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
817.2
|
|
|
$
|
816.7
|
|
|
$
|
.5
|
|
|
|
.1
|
|
|
$
|
809.3
|
|
|
$
|
7.4
|
|
|
|
.9
|
|
Used vehicle
|
|
|
409.1
|
|
|
|
418.8
|
|
|
|
(9.7
|
)
|
|
|
(2.3
|
)
|
|
|
384.1
|
|
|
|
34.7
|
|
|
|
9.0
|
|
Parts and service
|
|
|
1,141.4
|
|
|
|
1,100.0
|
|
|
|
41.4
|
|
|
|
3.8
|
|
|
|
1,036.7
|
|
|
|
63.3
|
|
|
|
6.1
|
|
Finance and insurance
|
|
|
634.3
|
|
|
|
601.0
|
|
|
|
33.3
|
|
|
|
5.5
|
|
|
|
590.8
|
|
|
|
10.2
|
|
|
|
1.7
|
|
Other
|
|
|
42.4
|
|
|
|
47.6
|
|
|
|
(5.2
|
)
|
|
|
|
|
|
|
46.6
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
3,044.4
|
|
|
|
2,984.1
|
|
|
|
60.3
|
|
|
|
2.0
|
|
|
|
2,867.5
|
|
|
|
116.6
|
|
|
|
4.1
|
|
Selling, general &
administrative expenses
|
|
|
2,165.0
|
|
|
|
2,100.9
|
|
|
|
(64.1
|
)
|
|
|
(3.1
|
)
|
|
|
2,029.8
|
|
|
|
(71.1
|
)
|
|
|
(3.5
|
)
|
Depreciation and amortization
|
|
|
82.9
|
|
|
|
78.4
|
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
79.2
|
|
|
|
.8
|
|
|
|
|
|
Other expenses (income), net
|
|
|
(.1
|
)
|
|
|
.8
|
|
|
|
.9
|
|
|
|
|
|
|
|
4.0
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
796.6
|
|
|
|
804.0
|
|
|
|
(7.4
|
)
|
|
|
(.9
|
)
|
|
|
754.5
|
|
|
|
49.5
|
|
|
|
6.6
|
|
Floorplan interest expense
|
|
|
(142.0
|
)
|
|
|
(105.5
|
)
|
|
|
(36.5
|
)
|
|
|
|
|
|
|
(74.7
|
)
|
|
|
(30.8
|
)
|
|
|
|
|
Other interest expense
|
|
|
(90.9
|
)
|
|
|
(63.3
|
)
|
|
|
(27.6
|
)
|
|
|
|
|
|
|
(76.3
|
)
|
|
|
13.0
|
|
|
|
|
|
Other interest expense
senior note repurchases
|
|
|
(34.5
|
)
|
|
|
(17.4
|
)
|
|
|
(17.1
|
)
|
|
|
|
|
|
|
(.6
|
)
|
|
|
(16.8
|
)
|
|
|
|
|
Interest income
|
|
|
8.3
|
|
|
|
7.5
|
|
|
|
.8
|
|
|
|
|
|
|
|
3.5
|
|
|
|
4.0
|
|
|
|
|
|
Other gains (losses), net
|
|
|
4.6
|
|
|
|
(.1
|
)
|
|
|
4.7
|
|
|
|
|
|
|
|
(5.1
|
)
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
542.1
|
|
|
$
|
625.2
|
|
|
$
|
(83.1
|
)
|
|
|
(13.3
|
)
|
|
$
|
601.3
|
|
|
$
|
23.9
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
369,567
|
|
|
|
381,082
|
|
|
|
(11,515
|
)
|
|
|
(3.0
|
)
|
|
|
388,297
|
|
|
|
(7,215
|
)
|
|
|
(1.9
|
)
|
Used vehicle
|
|
|
225,609
|
|
|
|
228,528
|
|
|
|
(2,919
|
)
|
|
|
(1.3
|
)
|
|
|
226,271
|
|
|
|
2,257
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595,176
|
|
|
|
609,610
|
|
|
|
(14,434
|
)
|
|
|
(2.4
|
)
|
|
|
614,568
|
|
|
|
(4,958
|
)
|
|
|
(.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
30,206
|
|
|
$
|
29,453
|
|
|
$
|
753
|
|
|
|
2.6
|
|
|
$
|
28,993
|
|
|
$
|
460
|
|
|
|
1.6
|
|
Used vehicle
|
|
$
|
16,051
|
|
|
$
|
15,262
|
|
|
$
|
789
|
|
|
|
5.2
|
|
|
$
|
14,755
|
|
|
$
|
507
|
|
|
|
3.4
|
|
Gross profit per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
2,211
|
|
|
$
|
2,143
|
|
|
$
|
68
|
|
|
|
3.2
|
|
|
$
|
2,084
|
|
|
$
|
59
|
|
|
|
2.8
|
|
Used vehicle
|
|
$
|
1,816
|
|
|
$
|
1,820
|
|
|
$
|
(4
|
)
|
|
|
(.2
|
)
|
|
$
|
1,689
|
|
|
$
|
131
|
|
|
|
7.8
|
|
Finance and insurance
|
|
$
|
1,066
|
|
|
$
|
986
|
|
|
$
|
80
|
|
|
|
8.1
|
|
|
$
|
961
|
|
|
$
|
25
|
|
|
|
2.6
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
% 2006
|
|
|
% 2005
|
|
|
% 2004
|
|
|
Revenue mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
58.8
|
|
|
|
59.9
|
|
|
|
61.2
|
|
Used vehicle
|
|
|
23.8
|
|
|
|
23.0
|
|
|
|
22.3
|
|
Parts and service
|
|
|
13.7
|
|
|
|
13.4
|
|
|
|
12.9
|
|
Finance and insurance, net
|
|
|
3.3
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Other
|
|
|
.4
|
|
|
|
.5
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
26.8
|
|
|
|
27.4
|
|
|
|
28.2
|
|
Used vehicle
|
|
|
13.4
|
|
|
|
14.0
|
|
|
|
13.4
|
|
Parts and service
|
|
|
37.5
|
|
|
|
36.9
|
|
|
|
36.2
|
|
Finance and insurance
|
|
|
20.8
|
|
|
|
20.1
|
|
|
|
20.6
|
|
Other
|
|
|
1.5
|
|
|
|
1.6
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating items as a percentage of
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
7.3
|
|
|
|
7.3
|
|
|
|
7.2
|
|
Used vehicle retail
|
|
|
11.3
|
|
|
|
11.9
|
|
|
|
11.4
|
|
Parts and service
|
|
|
43.9
|
|
|
|
43.9
|
|
|
|
43.8
|
|
Total
|
|
|
16.0
|
|
|
|
15.9
|
|
|
|
15.6
|
|
Selling, general and
administrative expenses
|
|
|
11.4
|
|
|
|
11.2
|
|
|
|
11.0
|
|
Operating income
|
|
|
4.2
|
|
|
|
4.3
|
|
|
|
4.1
|
|
Other operating items as a
percentage of total gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative expenses
|
|
|
71.1
|
|
|
|
70.4
|
|
|
|
70.8
|
|
Operating income
|
|
|
26.2
|
|
|
|
26.9
|
|
|
|
26.3
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Days supply:
|
|
|
|
|
|
|
|
|
New vehicle (industry standard of
selling days, including fleet)
|
|
|
52 days
|
|
|
|
55 days
|
|
Used vehicle (trailing
30 days)
|
|
|
42 days
|
|
|
|
42 days
|
|
The following table details net inventory carrying benefit
(cost), consisting of floorplan interest expense net of
floorplan assistance earned (amounts received from manufacturers
specifically to support store financing of inventory). Floorplan
assistance is accounted for as a component of new vehicle gross
profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
Variance
|
|
($ in millions)
|
|
2006
|
|
|
2005
|
|
|
2006 vs. 2005
|
|
|
2004
|
|
|
2005 vs. 2004
|
|
|
Floorplan assistance
|
|
$
|
111.6
|
|
|
$
|
109.8
|
|
|
$
|
1.8
|
|
|
$
|
108.7
|
|
|
$
|
1.1
|
|
Floorplan interest expense
|
|
|
(142.0
|
)
|
|
|
(105.5
|
)
|
|
|
(36.5
|
)
|
|
|
(74.7
|
)
|
|
|
(30.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inventory carrying benefit
(cost)
|
|
$
|
(30.4
|
)
|
|
$
|
4.3
|
|
|
$
|
(34.7
|
)
|
|
$
|
34.0
|
|
|
$
|
(29.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Same
Store Operating Data
We have presented below our operating results on a same store
basis to reflect our internal performance. Same store operating
results include the results of stores for identical months in
both years included in the comparison, starting with the first
month of our ownership or operation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
11,050.5
|
|
|
$
|
11,224.0
|
|
|
$
|
(173.5
|
)
|
|
|
(1.5
|
)
|
Used vehicle
|
|
|
4,472.1
|
|
|
|
4,312.3
|
|
|
|
159.8
|
|
|
|
3.7
|
|
Parts and service
|
|
|
2,572.7
|
|
|
|
2,508.5
|
|
|
|
64.2
|
|
|
|
2.6
|
|
Finance and insurance, net
|
|
|
632.3
|
|
|
|
600.5
|
|
|
|
31.8
|
|
|
|
5.3
|
|
Other
|
|
|
27.6
|
|
|
|
28.2
|
|
|
|
(.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
18,755.2
|
|
|
$
|
18,673.5
|
|
|
$
|
81.7
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
806.6
|
|
|
$
|
816.7
|
|
|
$
|
(10.1
|
)
|
|
|
(1.2
|
)
|
Used vehicle
|
|
|
404.6
|
|
|
|
416.2
|
|
|
|
(11.6
|
)
|
|
|
(2.8
|
)
|
Parts and service
|
|
|
1,126.8
|
|
|
|
1,099.9
|
|
|
|
26.9
|
|
|
|
2.4
|
|
Finance and insurance
|
|
|
632.3
|
|
|
|
600.5
|
|
|
|
31.8
|
|
|
|
5.3
|
|
Other
|
|
|
25.5
|
|
|
|
27.1
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
2,995.8
|
|
|
$
|
2,960.4
|
|
|
$
|
35.4
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
367,665
|
|
|
|
381,082
|
|
|
|
(13,417
|
)
|
|
|
(3.5
|
)
|
Used vehicle
|
|
|
224,980
|
|
|
|
228,528
|
|
|
|
(3,548
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
592,645
|
|
|
|
609,610
|
|
|
|
(16,965
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
30,056
|
|
|
$
|
29,453
|
|
|
$
|
603
|
|
|
|
2.0
|
|
Used vehicle
|
|
$
|
15,981
|
|
|
$
|
15,262
|
|
|
$
|
719
|
|
|
|
4.7
|
|
Gross profit per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
2,194
|
|
|
$
|
2,143
|
|
|
$
|
51
|
|
|
|
2.4
|
|
Used vehicle
|
|
$
|
1,810
|
|
|
$
|
1,820
|
|
|
$
|
(10
|
)
|
|
|
(.5
|
)
|
Finance and insurance
|
|
$
|
1,067
|
|
|
$
|
985
|
|
|
$
|
82
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
% 2006
|
|
|
% 2005
|
|
|
Revenue mix percentages:
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
58.9
|
|
|
|
60.1
|
|
Used vehicle
|
|
|
23.8
|
|
|
|
23.1
|
|
Parts and service
|
|
|
13.7
|
|
|
|
13.4
|
|
Finance and insurance, net
|
|
|
3.4
|
|
|
|
3.2
|
|
Other
|
|
|
.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Gross profit mix percentages:
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
26.9
|
|
|
|
27.6
|
|
Used vehicle
|
|
|
13.5
|
|
|
|
14.1
|
|
Parts and service
|
|
|
37.6
|
|
|
|
37.2
|
|
Finance and insurance
|
|
|
21.1
|
|
|
|
20.3
|
|
Other
|
|
|
.9
|
|
|
|
.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
Operating items as a percentage of
revenue:
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
7.3
|
|
|
|
7.3
|
|
Used vehicle retail
|
|
|
11.3
|
|
|
|
11.9
|
|
Parts and service
|
|
|
43.8
|
|
|
|
43.8
|
|
Total
|
|
|
16.0
|
|
|
|
15.9
|
|
25
New
Vehicle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2004
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,163.0
|
|
|
$
|
11,224.0
|
|
|
$
|
(61.0
|
)
|
|
|
(.5
|
)
|
|
$
|
11,258.0
|
|
|
$
|
(34.0
|
)
|
|
|
(.3
|
)
|
Gross profit
|
|
$
|
817.2
|
|
|
$
|
816.7
|
|
|
$
|
.5
|
|
|
|
.1
|
|
|
$
|
809.3
|
|
|
$
|
7.4
|
|
|
|
.9
|
|
Retail vehicle unit sales
|
|
|
369,567
|
|
|
|
381,082
|
|
|
|
(11,515
|
)
|
|
|
(3.0
|
)
|
|
|
388,297
|
|
|
|
(7,215
|
)
|
|
|
(1.9
|
)
|
Revenue per vehicle retailed
|
|
$
|
30,206
|
|
|
$
|
29,453
|
|
|
$
|
753
|
|
|
|
2.6
|
|
|
$
|
28,993
|
|
|
$
|
460
|
|
|
|
1.6
|
|
Gross profit per vehicle retailed
|
|
$
|
2,211
|
|
|
$
|
2,143
|
|
|
$
|
68
|
|
|
|
3.2
|
|
|
$
|
2,084
|
|
|
$
|
59
|
|
|
|
2.8
|
|
Gross profit as a percentage of
revenue
|
|
|
7.3
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
Days supply (industry standard of
selling days, including fleet)
|
|
|
52 days
|
|
|
|
55 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
11,050.5
|
|
|
$
|
11,224.0
|
|
|
$
|
(173.5
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
806.6
|
|
|
$
|
816.7
|
|
|
$
|
(10.1
|
)
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales
|
|
|
367,665
|
|
|
|
381,082
|
|
|
|
(13,417
|
)
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed
|
|
$
|
30,056
|
|
|
$
|
29,453
|
|
|
$
|
603
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit per vehicle retailed
|
|
$
|
2,194
|
|
|
$
|
2,143
|
|
|
$
|
51
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of
revenue
|
|
|
7.3
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details net inventory carrying benefit
(cost), consisting of floorplan interest expense net of
floorplan assistance earned (amounts received from manufacturers
specifically to support store financing of inventory). Floorplan
assistance is accounted for as a component of new vehicle gross
profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
Variance
|
|
($ in millions)
|
|
2006
|
|
|
2005
|
|
|
2006 vs. 2005
|
|
|
2004
|
|
|
2005 vs. 2004
|
|
|
Floorplan assistance
|
|
$
|
111.6
|
|
|
$
|
109.8
|
|
|
$
|
1.8
|
|
|
$
|
108.7
|
|
|
$
|
1.1
|
|
Floorplan interest expense
|
|
|
(142.0
|
)
|
|
|
(105.5
|
)
|
|
|
(36.5
|
)
|
|
|
(74.7
|
)
|
|
|
(30.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net inventory carrying benefit
(cost)
|
|
$
|
(30.4
|
)
|
|
$
|
4.3
|
|
|
$
|
(34.7
|
)
|
|
$
|
34.0
|
|
|
$
|
(29.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported new vehicle performance for 2006 benefited from the
impact of acquisitions when compared to same store performance.
Same store new vehicle revenue for 2006 decreased compared to
2005 primarily as a result of a decrease in same store unit
volume, particularly in our California and Florida businesses,
which is consistent with industry trends in a challenging
automotive retail environment. In all our markets, we are seeing
continued declines in our domestic new vehicle business, which
we expect to continue in 2007. However, the level of retail
sales for 2007 is very difficult to predict. In 2006, we saw a
significant decline in non-luxury truck sales, offset in part by
stronger car sales, which we believe is consistent with industry
trends. We believe these results reflect consumers reduced
preference for trucks, due in large part to economic issues that
included a significant decline in the California and Florida
housing markets, higher interest rates and higher gas prices
during portions of 2006. In 2006, we saw a continued revenue
shift in our brand mix from domestic brands to volume import and
premium luxury brands. In June 2005, General Motors announced an
employee pricing for everyone program, which was
followed in July 2005 with similar programs introduced by Ford
and Chrysler. These programs, which concluded in October 2005,
helped drive increases in sales volume during 2005 that were
partially offset by a challenging United States retail market
and the effects of Hurricane Wilma on our Florida stores during
the fourth quarter of 2005.
Same store gross profit per vehicle retailed increased as a
result of the shift in our sales mix to more imports, including
premium luxury brands. Gross profit as a percentage of revenue
remained constant in 2006 compared to 2005.
26
New vehicle revenue for 2005 decreased compared to 2004
primarily as a result of a unit volume decrease partially offset
by an increase in revenue per unit. In June 2005, General Motors
announced an employee pricing for everyone program,
which was followed in July 2005 with similar programs by Ford
and Chrysler. Although these programs helped drive unit volume
during 2005, a challenging United States automotive retail
environment and the effects of Hurricane Wilma on our Florida
stores negatively impacted new vehicle unit volume during the
fourth quarter of 2005. Despite higher gas prices, rising
interest rates, and a shift in consumer preferences from trucks
to crossover vehicles and cars, we expanded revenue per vehicle
retailed and gross profit per vehicle retailed through our focus
on pricing and profitability and management of our new vehicle
inventory levels and a shift in mix from domestics to imports
and luxury.
At December 31, 2006, our new vehicle inventories were at
$1.9 billion or 52 days supply compared to new vehicle
inventories of $2.1 billion or 55 days supply at
December 31, 2005.
The net inventory carrying cost (floorplan interest expense net
of floorplan assistance from manufacturers) increased in 2006
compared to 2005, primarily as a result of increased floorplan
interest expense due to higher short-term LIBOR interest rates.
27
Used
Vehicle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2004
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenue
|
|
$
|
3,621.2
|
|
|
$
|
3,487.9
|
|
|
$
|
133.3
|
|
|
|
3.8
|
|
|
$
|
3,338.6
|
|
|
$
|
149.3
|
|
|
|
4.5
|
|
Wholesale revenue
|
|
|
896.9
|
|
|
|
827.1
|
|
|
|
69.8
|
|
|
|
8.4
|
|
|
|
764.0
|
|
|
|
63.1
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,518.1
|
|
|
$
|
4,315.0
|
|
|
$
|
203.1
|
|
|
|
4.7
|
|
|
$
|
4,102.6
|
|
|
$
|
212.4
|
|
|
|
5.2
|
|
Retail gross profit
|
|
$
|
409.8
|
|
|
$
|
415.9
|
|
|
$
|
(6.1
|
)
|
|
|
(1.5
|
)
|
|
$
|
382.2
|
|
|
$
|
33.7
|
|
|
|
8.8
|
|
Wholesale gross profit
|
|
|
(0.7
|
)
|
|
|
2.9
|
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
1.9
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
409.1
|
|
|
$
|
418.8
|
|
|
$
|
(9.7
|
)
|
|
|
(2.3
|
)
|
|
$
|
384.1
|
|
|
$
|
34.7
|
|
|
|
9.0
|
|
Retail vehicle unit sales
|
|
|
225,609
|
|
|
|
228,528
|
|
|
|
(2,919
|
)
|
|
|
(1.3
|
)
|
|
|
226,271
|
|
|
|
2,257
|
|
|
|
1.0
|
|
Revenue per vehicle retailed
|
|
$
|
16,051
|
|
|
$
|
15,262
|
|
|
$
|
789
|
|
|
|
5.2
|
|
|
$
|
14,755
|
|
|
$
|
507
|
|
|
|
3.4
|
|
Gross profit per vehicle retailed
|
|
$
|
1,816
|
|
|
$
|
1,820
|
|
|
$
|
(4
|
)
|
|
|
(.2
|
)
|
|
$
|
1,689
|
|
|
$
|
131
|
|
|
|
7.8
|
|
Gross profit as a percentage of
retail revenue
|
|
|
11.3
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
Days supply (trailing 30 days)
|
|
|
42 days
|
|
|
|
42 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenue
|
|
$
|
3,595.4
|
|
|
$
|
3,487.8
|
|
|
$
|
107.6
|
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale revenue
|
|
|
876.7
|
|
|
|
824.5
|
|
|
|
52.2
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
4,472.1
|
|
|
$
|
4,312.3
|
|
|
$
|
159.8
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail gross profit
|
|
$
|
407.3
|
|
|
$
|
415.9
|
|
|
$
|
(8.6
|
)
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale gross profit
|
|
|
(2.7
|
)
|
|
|
.3
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
404.6
|
|
|
$
|
416.2
|
|
|
$
|
(11.6
|
)
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales
|
|
|
224,980
|
|
|
|
228,528
|
|
|
|
(3,548
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed
|
|
$
|
15,981
|
|
|
$
|
15,262
|
|
|
$
|
719
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit per vehicle retailed
|
|
$
|
1,810
|
|
|
$
|
1,820
|
|
|
$
|
(10
|
)
|
|
|
(.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of
retail revenue
|
|
|
11.3
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported used vehicle performance benefited from the impact of
acquisitions when compared to same store performance.
Same store retail used vehicle revenue for 2006 increased
compared to 2005 primarily as a result of increased same store
average revenue per unit retailed, partially offset by decreased
sales volume. Same store revenue per vehicle retailed for 2006
increased due to a shift in our retail used vehicle sales mix to
import luxury vehicles. Same store unit volumes and retail gross
profit per vehicle for 2006 decreased as a result of a
challenging automotive retail environment.
Used vehicle revenue for 2005 increased compared to 2004 due to
an increase in average revenue per vehicle retailed partially
offset by a slight decrease in unit volume. The increase in same
store average revenue per unit is the result of strengthened
used vehicle market prices and the availability of quality used
vehicles from trade-ins. Consistent with the new vehicle unit
volume decline, used vehicle unit volume was impacted by lower
sales unit volumes resulting from a challenging United
States automotive retail environment and the effects of
Hurricane Wilma on our Florida stores during the fourth quarter
of 2005. Gross profit and gross profit as a percentage of
revenue increased as a result of better inventory management
focused on optimizing used vehicle inventory supply, mix and
pricing.
Used vehicle inventories were at $306.0 million or
42 days supply at December 31, 2006 compared to
$318.8 million or 42 days in 2005.
28
Parts
and Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2004
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,600.4
|
|
|
$
|
2,508.5
|
|
|
$
|
91.9
|
|
|
|
3.7
|
|
|
$
|
2,366.9
|
|
|
$
|
141.6
|
|
|
|
6.0
|
|
Gross profit
|
|
$
|
1,141.4
|
|
|
$
|
1,100.0
|
|
|
$
|
41.4
|
|
|
|
3.8
|
|
|
$
|
1,036.7
|
|
|
$
|
63.3
|
|
|
|
6.1
|
|
Gross profit as a percentage of
revenue
|
|
|
43.9
|
%
|
|
|
43.9
|
%
|
|
|
|
|
|
|
|
|
|
|
43.8
|
%
|
|
|
|
|
|
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,572.7
|
|
|
$
|
2,508.5
|
|
|
$
|
64.2
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
1,126.8
|
|
|
$
|
1,099.9
|
|
|
$
|
26.9
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a percentage of
revenue
|
|
|
43.8
|
%
|
|
|
43.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts and service revenue is primarily derived from vehicle
repairs paid directly by the customers or via reimbursement from
manufacturers and others under warranty programs. Reported parts
and service revenue and gross profit benefited from the impact
of acquisitions when compared to same store performance.
Same store parts and service revenue and gross profit increased
during 2006 compared to 2005 due to increases in customer-paid
work for parts and service and wholesale parts, partially offset
by a decrease in warranty business. Warranty declines were
driven in part by improved quality of vehicles manufactured in
recent years, as well as changes to certain manufacturers
warranty and prepaid service programs. The improvements to
customer-paid are attributable to our service drive process,
maintenance menu and service marketing program, as well as our
pricing models and training programs. Additionally, during 2006
we experienced an increase in parts and service revenues and
gross profit related to volume imports and premium luxury
vehicles, compared to flat revenues and a decrease in gross
margin related to parts and service for domestic vehicles.
Despite the business disruption in our Florida stores due to the
effects of Hurricane Wilma, parts and service revenue for 2005
increased compared to 2004 due to increases in customer-paid and
warranty work as well as our parts wholesale business. Parts and
service gross profit for 2005 increased compared to 2004 due to
increases in customer-paid and warranty work. The improvements
are attributable in part to our service drive process,
maintenance menus and service marketing program, as well as the
continued optimization of our pricing models and training
programs.
29
Finance
and Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
|
|
|
|
Favorable /
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2006
|
|
|
2005
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2004
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and gross profit
|
|
$
|
634.3
|
|
|
$
|
601.0
|
|
|
$
|
33.3
|
|
|
|
5.5
|
|
|
$
|
590.8
|
|
|
$
|
10.2
|
|
|
|
1.7
|
|
Gross profit per vehicle retailed
|
|
$
|
1,066
|
|
|
$
|
986
|
|
|
$
|
80
|
|
|
|
8.1
|
|
|
$
|
961
|
|
|
$
|
25
|
|
|
|
2.6
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and gross profit
|
|
$
|
632.3
|
|
|
$
|
600.5
|
|
|
$
|
31.8
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit per vehicle retailed
|
|
$
|
1,067
|
|
|
$
|
985
|
|
|
$
|
82
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported finance and insurance revenue and gross profit
benefited from the impact of acquisitions when compared to same
store performance.
During 2006, same store finance and insurance revenue and gross
profit benefited from increased retrospective commissions
received on extended service contracts, as well as higher new
and used vehicle prices and increased premium luxury revenue per
vehicle retailed. Improvements were also driven by our continued
emphasis on training and certification of store associates,
particularly in third and fourth quartile stores, and on
maximizing our preferred lender relationships.
Finance and insurance revenue and gross profit increased
slightly in 2005 compared to 2004. The improvement was driven by
increased retrospective commissions received on extended service
contracts partially offset by decreased new and used vehicle
sales, which were caused in part due to the effects of Hurricane
Wilma on our Florida stores. Improvements were also driven by
our continued emphasis on training store associates.
30
Operating
Expenses
Selling,
General and Administrative Expenses
During 2006, selling, general and administrative expenses
increased $64.1 million, or 3.1%. As a percentage of total
gross profit, selling, general and administrative expenses
increased to 71.1% in 2006 from 70.4% in 2005. Increases in
selling, general and administrative expenses in 2006 compared to
2005 are due to an increase in compensation expense, including
$15.2 million of non-cash compensation expense related to
the adoption of SFAS No. 123R for stock options during
2006 and increased advertising expenses, resulting from a
decrease in advertising program participation reimbursed by
manufacturers and an increase in non-reimbursed advertising. In
2005, selling, general and administrative expenses included
property damage costs related to Hurricane Wilma.
During 2005, selling, general and administrative expenses
increased $71.1 million or 3.5%. As a percent of total
gross profit, selling, general and administrative expenses
decreased 40 basis points in spite of property damage costs
related to Hurricane Wilma which impacted our Florida stores
during the fourth quarter of 2005. Improvements are due to our
continued efforts to leverage our cost structure, particularly
in the areas of compensation and other selling, general and
administrative expenses, partially offset by increased occupancy
costs.
Non-Operating
Income (Expense)
Floorplan
Interest Expense
Floorplan interest expense was $142.0 million,
$105.5 million and $74.7 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The
increase in 2006 compared to 2005 is primarily the result of
higher short-term LIBOR interest rates. The increase in 2005
compared to 2004 is primarily the result of higher short-term
LIBOR interest rates partially offset by lower average new
vehicle inventory levels.
Other
Interest Expense
Other interest expense was incurred primarily on borrowings
under our term loan facility, mortgage facilities, revolving
credit facility and outstanding senior unsecured notes. Other
interest expense was $90.9 million, $63.3 million and
$76.3 million for the years ended December 31, 2006,
2005 and 2004, respectively. The increase in other interest
expense in 2006 compared to 2005 is primarily due to additional
debt incurred in connection with our equity tender offer in
April 2006, partially offset by the repurchase of our
9% senior unsecured notes and repayments of mortgage
facilities during 2006 and 2005. We expect to continue to have
higher year over year interest expense during the early part of
2007.
The decrease in 2005 compared to 2004 of other interest expense
is primarily due to the repurchase of a portion of our
9% senior unsecured notes. Other interest expense also
includes interest related to the IRS settlement totaling
$4.8 million for the year ended December 31, 2004
which represents interest due under the agreement from the date
of the settlement.
Other
Interest Expense Senior
Note Repurchases
In April 2006, we purchased $309.4 million aggregate
principal of our 9% senior unsecured notes for an aggregate
total consideration of $339.8 million pursuant to our debt
tender offer and consent solicitation. Approximately
$34.5 million of tender premium and other financing costs
related to our debt tender offer was expensed as Other Interest
Expense Senior Note Repurchases in the
accompanying 2006 Consolidated Income Statement.
During 2005 and 2004, we repurchased $123.1 million and
$3.4 million (face value) of our 9.0% senior unsecured
notes at an average price of 110.5% and 114.3% of face value or
$136.0 million and $3.9 million, respectively. The
premium paid and financing costs of $17.4 million and
$.6 million, respectively, were recognized as Other
Interest Expense Senior Note Repurchases in the
accompanying 2005 and 2004 Consolidated Income Statements.
31
Provision
for Income Taxes
The effective income tax rate was 38.9%, 36.5% and 34.7% for the
years ended December 31, 2006, 2005 and 2004, respectively.
Income taxes are provided based upon our anticipated underlying
annual blended federal and state income tax rates, adjusted, as
necessary, for any other tax matters occurring during the
period. As we operate in various states, our effective tax rate
is also dependent upon our geographic revenue mix.
During 2005 and 2004, we recorded net income tax benefits in our
provision for income taxes of $14.5 million and
$25.8 million, respectively, primarily related to the
resolution of various income tax matters. In 2005 and 2004, we
also recognized income of $110.0 million and
$52.2 million, respectively, included in Discontinued
Operations related to the settlement of various income tax
matters.
As a matter of course, various taxing authorities, including the
IRS, regularly audit us. Currently, the IRS is auditing the tax
years from 2002 to 2004. These audits may result in proposed
assessments where the ultimate resolution may result in us owing
additional taxes. We believe that our tax positions comply with
applicable tax law and that we have adequately provided for
these matters. Included in Other Current Liabilities at
December 31, 2006 and 2005 are $58.7 million and
$54.5 million, respectively, provided by us for these
matters. We expect our effective tax rate to be in the low to
mid-39% range on an ongoing basis, excluding the impact of any
potential tax adjustments in the future.
See Note 11, Income Taxes, of the Notes to Consolidated
Financial Statements for further information.
Financial
Condition
At December 31, 2006, we had $52.2 million of
unrestricted cash and cash equivalents. In the ordinary course
of business, we are required to post performance and surety
bonds, letters of credit,
and/or cash
deposits as financial guarantees of our performance. At
December 31, 2006, surety bonds, letters of credit and cash
deposits totaled $124.9 million, including
$92.3 million in letters of credit. We do not currently
provide cash collateral for outstanding letters of credit.
At December 31, 2006, we also had $14.1 million of
9.0% senior unsecured notes due August 1, 2008. The
9% senior unsecured notes are guaranteed by substantially
all of our subsidiaries.
In April 2006, we sold $300.0 million of floating rate
senior unsecured notes due April 15, 2013 and
$300.0 million of 7% senior unsecured notes due
April 15, 2014, in each case at par. The floating rate
senior unsecured notes bear interest at a rate equal to
three-month LIBOR plus 2.0% per annum, adjusted quarterly,
and may be redeemed by us on or after April 15, 2008 at
103% of principal, on or after April 15, 2009 at 102% of
principal, on or after April 15, 2010 at 101% of principal
and on or after April 15, 2011 at 100% of principal. The
7% senior unsecured notes may be redeemed by us on or after
April 15, 2009 at 105.25% of principal, on or after
April 15, 2010 at 103.5% of principal, on or after
April 15, 2011 at 101.75% of principal and on or after
April 15, 2012 at 100% of principal.
In connection with the issuance of the new senior unsecured
notes, we amended our existing credit agreement to provide:
(1) a $675.0 million revolving credit facility that
provides for various interest rates on borrowings generally at
LIBOR plus .80%, and (2) a $600.0 million term loan
facility that bears interest at a rate equal to LIBOR plus
1.25%. In December 2006, the borrowing capacity of the revolving
credit facility increased to $700.0 million under the
amended credit agreement. The amended credit agreement, which
includes the new term loan facility, terminates on July 14,
2010 and is guaranteed by substantially all our subsidiaries.
The credit spread charged for the revolving credit facility is
impacted by our senior unsecured credit ratings. We have
negotiated a letter of credit sublimit as part of our revolving
credit facility. The amount available to be borrowed under the
revolving credit facility is reduced on a
dollar-for-dollar
basis by the cumulative amount of any outstanding letters of
credit, which totaled $92.3 million at December 31,
2006. We had borrowings outstanding under the revolving credit
facility of $195.0 million at December 31, 2006,
leaving $412.7 million of borrowing capacity at
December 31, 2006.
The proceeds of the new senior unsecured notes and term loan
facility, together with cash on hand and borrowings of
$80.0 million under the amended revolving credit facility,
were used to: (1) purchase 50 million shares of our
common stock at $23 per share for an aggregate purchase
price of $1.15 billion pursuant to our equity
32
tender offer, (2) purchase $309.4 million aggregate
principal of our 9% senior unsecured notes for an aggregate
total consideration of $339.8 million pursuant to our debt
tender offer and consent solicitation, and (3) pay related
financing costs. Approximately $34.5 million of tender
premium related to our debt tender offer and other financing
costs was expensed during 2006.
During 2006, we repaid $37.7 million of the outstanding
balance under a mortgage facility with an automotive
manufacturers captive finance subsidiary. At
December 31, 2006, we had $116.0 million outstanding
under this mortgage facility, which bears interest at
LIBOR-based interest rates and is secured by mortgages on
certain of our stores properties.
We had no repurchases of our common stock during the first
quarter of 2006. In April 2006, we purchased 50 million
shares of our common stock at $23 per share for an aggregate
purchase price of $1.15 billion pursuant to our equity
tender offer. After the completion of the equity tender offer,
we repurchased an additional 11.2 million shares of our
common stock for a purchase price of $228.9 million during
the remainder of 2006, for a total of 61.2 million shares
repurchased for an aggregate purchase price of
$1.38 billion in 2006. There is approximately
$92.4 million available for share repurchases authorized by
our Board of Directors as of December 31, 2006.
Future share repurchases are subject to limitations contained in
the indenture relating to our new senior notes. While we expect
to continue repurchasing shares in the future, the decision to
make additional share repurchases will be based on such factors
as the market price of our common stock, the potential impact on
our capital structure and the expected return on competing uses
of capital such as strategic store acquisitions and capital
investments in our current businesses.
Our new senior notes, amended credit agreement and mortgage
facility contain numerous customary financial and operating
covenants that place significant restrictions on us. See
Note 7, Notes Payable and Long-Term Debt, of the Notes
to the Consolidated Financial Statements for further
information. As of December 31, 2006, we were in compliance
with the requirements of all applicable financial and operating
covenants.
In the event of a downgrade in our credit ratings, none of the
covenants described in Note 7 of the Notes to the
Consolidated Financial Statements would be impacted. In
addition, availability under the revolving credit facility
described above would not be impacted should a downgrade in the
senior unsecured credit ratings occur. Certain covenants in the
indenture for the new senior notes would be eliminated with
certain upgrades of the new senior notes to investment grade by
either Standard and Poors or Moodys Investor Service.
At December 31, 2006 and 2005, vehicle floorplan
payable-trade totaled $2.0 billion and $2.3 billion,
respectively. Vehicle floorplan payable-trade reflects amounts
borrowed to finance the purchase of specific vehicle inventories
with manufacturers captive finance subsidiaries. Vehicle
floorplan payable-non-trade totaled $233.9 million and
$102.2 million, at December 31, 2006 and 2005,
respectively, and represents amounts payable borrowed to finance
the purchase of specific vehicle inventories with non-trade
lenders. All the floorplan facilities are at LIBOR-based rates
of interest. Secured floorplan facilities are used to finance
new vehicle inventories and the amounts outstanding thereunder
are due on demand, but are generally paid within several
business days after the related vehicles are sold. Floorplan
facilities are primarily collateralized by new vehicle
inventories and related receivables. Our manufacturer agreements
generally require that the manufacturer have the ability to
draft against the floorplan facilities so that the lender
directly funds the manufacturer for the purchase of inventory.
The floorplan facilities contain certain operational covenants.
At December 31, 2006, we were in compliance with such
covenants in all material respects. At December 31, 2006,
aggregate capacity under the floorplan credit facilities to
finance new vehicles was approximately $3.6 billion, of
which $2.3 billion total was outstanding.
Cash
Flows
Cash and cash equivalents increased (decreased) by
$(193.5) million, $134.9 million and
$(68.5) million during the years ended December 31,
2006, 2005 and 2004, respectively. The major components of these
changes are discussed below.
33
Cash
Flows from Operating Activities
Cash provided by operating activities was $299.1 million,
$579.8 million and $562.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Cash flows from operating activities include net income adjusted
for non-cash items and the effects of changes in working capital
including changes in vehicle floorplan payable-trade (vehicle
floorplan payables with the automotive manufacturers
captive finance subsidiary for the related franchise), which
directly relates to changes in new vehicle inventory for those
franchises. On November 30, 2006, General Motors
(GM) completed the sale of a majority stake in
General Motors Acceptance Corporation (GMAC), which
was GMs wholly-owned captive finance subsidiary prior to
this transaction. GMAC will remain the exclusive provider of
GM-sponsored auto finance programs and is expected to continue
to provide GM dealers and their customers with the same
financial products and services under the same arrangements with
us as before the sale. However, as a result of this sale, we
have treated new vehicles financed after the change in GMAC
ownership control (totaling $139.3 million at
December 31, 2006) as vehicle floorplan-non-trade with
related changes as financing cash flows. Vehicles financed by
GMAC prior to this transaction (totaling $281.2 million at
December 31, 2006) continue to be classified as
floorplan-trade with related changes as operating cash flows.
During 2007, as we sell the vehicles financed by GMAC, the
repayment of the $281.2 million classified as
floorplan-trade at December 31, 2006 will be reflected as a
use of cash flows from operating activities. Vehicle purchases
financed through GMAC in 2007 will be classified as
floorplan-non-trade and reflected as sources of cash flows from
financing activities. Payments to GMAC for purchases classified
as floorplan-non-trade will be reflected as uses of cash flows
from financing activities.
In 2006, we made estimated state tax and federal tax payments
totaling $278.3 million, including approximately
$100 million related to provisions for the third and fourth
quarter of 2005, payment for which had been deferred as allowed
for filers impacted by hurricanes in 2004. In March 2003, we
entered into a settlement agreement with the IRS with respect to
the tax treatment of certain transactions we entered into in
1997 and 1999. In 2004, we prepaid the remaining balance due
related to the IRS settlement totaling $128.9 million,
including accrued interest. Cash used in discontinued operations
was $4.5 million, $3.3 million and $23.4 million
during 2006, 2005 and 2004, respectively. A portion of the cash
used in 2006, 2005 and 2004 relates to payments made in
conjunction with property leases assumed from ANC Rental.
Cash
Flows from Investing Activities
Cash flows from investing activities consist primarily of cash
used in capital additions, activity from business acquisitions,
property dispositions, purchases and sales of investments and
other transactions as further described below.
Capital expenditures, excluding property operating lease
buy-outs, were $170.2 million, $130.9 million and
$132.4 million during the years ended December 31,
2006, 2005 and 2004, respectively. During 2006, we spent
$30.0 million on land purchases for future operating sites,
which is included in the 2006 capital expenditures. We will make
facility and infrastructure upgrades and improvements from time
to time as we identify projects that are required to maintain
our current business or that we expect to provide us with
acceptable rates of return. We expect 2007 capital expenditures
of approximately $140.0 million, excluding any
acquisition-related spending, land purchased for future sites or
lease buy-outs.
Property operating lease buy-outs were $5.9 million,
$10.3 million and $77.7 million for the years ended
December 31, 2006, 2005 and 2004, respectively. We continue
to analyze certain of our higher cost operating leases and
evaluate alternatives in order to lower the effective financing
costs.
Proceeds from the disposal of property held for sale were
$6.5 million, $33.4 million and $37.9 million
during the years ended December 31, 2006, 2005 and 2004,
respectively. These amounts are primarily from the sales of
stores and other properties held for sale. Cash received from
business divestitures, net of cash relinquished, totaled
$24.0 million, $55.0 million and $19.4 million
during the years ended December 31, 2006, 2005 and 2004,
respectively.
Cash used in business acquisitions, net of cash acquired, was
$166.7 million, $15.9 million and $197.9 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. During 2006 and 2005, we acquired five and two
34
automotive retail franchises and other related assets,
respectively. Cash used in business acquisitions during 2006,
2005 and 2004 includes $.2 million, $9.9 million and
$3.3 million in deferred purchase price for certain prior
year automotive retail acquisitions. See discussion in
Note 15, Acquisitions, of Notes to Consolidated Financial
Statements.
Cash
Flows from Financing Activities
Cash flows from financing activities primarily include treasury
stock purchases, stock option exercises, debt activity and
changes in vehicle floorplan payable-non-trade.
In April 2006, we sold $300.0 million of floating rate
senior unsecured notes due April 15, 2013 and
$300.0 million of 7% senior unsecured notes due
April 15, 2014, in each case at par. In connection with the
issuance of the new senior notes, we amended our existing credit
agreement to provide: (1) a $675.0 million revolving
credit facility for which we had net borrowings of
$195.0 million during 2006 and (2) a
$600.0 million term loan facility. In December 2006, the
borrowing capacity of the revolving credit facility increased to
$700.0 million under the amended credit agreement.
The proceeds of the new senior unsecured notes and term loan
facility, together with cash on hand and borrowings of
$80.0 million under the amended revolving credit facility,
were used to: (1) purchase 50 million shares of our
common stock at $23 per share for an aggregate purchase
price of $1.15 billion pursuant to our equity tender offer,
(2) purchase $309.4 million aggregate principal of our
9% senior unsecured notes for an aggregate total
consideration of $339.8 million ($334.2 million of
principal and tender premium and $5.6 million of accrued
interest) pursuant to our debt tender offer and consent
solicitation, and (3) pay related financing costs.
Approximately $34.5 million of tender premium
($24.8 million) and other deferred financing costs
($9.7 million) related to our debt tender offer was
expensed during 2006.
During 2005 and 2004, we repurchased $123.1 million and
$3.4 million (face value) of our 9.0% senior unsecured
notes at an average price of 110.5% and 114.3% of face value or
$136.0 million and $3.9 million, respectively.
As discussed above, in April 2006, we purchased 50 million
shares of our common stock at $23 per share for an
aggregate purchase price of $1.15 billion pursuant to our
equity tender offer. We repurchased an additional
11.2 million shares of our common stock for a purchase
price of $228.9 million during 2006, for a total of
61.2 million shares repurchased for an aggregate purchase
price of $1.38 billion in 2006. During 2005 and 2004, we
repurchased 11.8 million and 14.1 million shares of
our common stock for an aggregate price of $237.1 million
and $236.8 million, respectively, under our Board-approved
share repurchases programs.
During 2006, 2005 and 2004, proceeds from the exercise of stock
options were $75.7 million, $112.8 million and
$94.2 million, respectively.
During the years ended December 31, 2006 and 2005, we
repaid $37.7 million and $164.4 million, respectively
of amounts outstanding under our mortgage facilities, including
prepayments of $154.0 million in 2005.
Cash flows from financing activities include changes in vehicle
floorplan payable-non-trade (vehicle floorplan payables with
lenders other than the automotive manufacturers captive
finance subsidiaries for that franchise) totaling
$96.9 million, $24.4 million and $(143.1) million
for the years ended December 31, 2006, 2005 and 2004,
respectively. A portion of the 2006 change in vehicle floorplan
payable-non-trade relates to the reclassification of
GMAC-financed vehicles from floor plan-trade to
floorplan-non-trade, as a result of GMs sale of a majority
stake in GMAC, effective November 30, 2006, as described
above and in Note 3 to the Notes to the Consolidated
Financial Statements.
Liquidity
We believe that our funds generated through future operations
and availability of borrowings under our secured floorplan
facilities (for new vehicles) and revolving credit facility will
be sufficient to service our debt and fund our working capital
requirements, pay our tax obligations, commitments and
contingencies and meet any seasonal operating requirements for
the foreseeable future. We expect to remain in compliance with
the covenants of our
35
various financing agreements. At December 31, 2006, unused
availability under our revolving credit facility totaled
$412.7 million.
We have not declared or paid any cash dividends on our common
stock during our three most recent fiscal years. We do not
anticipate paying cash dividends in the foreseeable future. The
indenture for our new senior notes restricts our ability to
declare cash dividends.
Contractual
Payment Obligations
The following table summarizes our payment obligations under
certain contracts at December 31, 2006 (in millions):
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Payments Due by Period
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Less Than
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More Than
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Total
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One Year
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1-3 Years
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3-5 Years
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5 Years
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Total vehicle floorplan payable
(Note 3)*
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$
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2,265.0
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$
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2,265.0
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$
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$
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$
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Notes payable and long-term debt
(Note 7)*
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1,571.5
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13.6
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125.9
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832.0
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600.0
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Interest payments**
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162.7
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22.6
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44.0
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42.7
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53.4
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Operating lease commitments
(Note 8)*
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504.7
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60.7
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102.4
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78.1
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263.5
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Acquisition purchase price
commitments
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4.2
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4.2
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Purchase obligations
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148.3
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69.1
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44.3
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34.8
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.1
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Total
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$
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4,656.4
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$
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2,435.2
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$
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316.6
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$
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987.6
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$
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917.0
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*
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See Notes to Consolidated Financial Statements.
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** |
Represents scheduled interest payments on fixed rate senior
unsecured notes. Estimates of future interest payments for
vehicle floorplan payables and other variable rate debt are
excluded.
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In the ordinary course of business, we are required to post
performance and surety bonds, letters of credit,
and/or cash
deposits as financial guarantees of our performance. At
December 31, 2006, surety bonds, letters of credit and cash
deposits totaled $124.9 million, including
$92.3 million letters of credit. We do not currently
provide cash collateral for outstanding letters of credit. We
have negotiated a letter of credit
sub-limit as
part of our revolving credit facility. The amount available to
be borrowed under this revolving credit facility is reduced on a
dollar-for-dollar
basis by the cumulative amount of any outstanding letters of
credit.
As further discussed under the heading Provision for
Income Taxes, there are various tax matters where the
ultimate resolution may result in us owing additional tax
payments.
Off
Balance Sheet Arrangements
We have no off balance sheet arrangements as of
December 31, 2006 and 2005.
Seasonality
Our operations generally experience higher volumes of vehicle
sales and service in the second and third quarters of each year
due in part to consumer buying trends and the introduction of
new vehicle models. Also, demand for vehicles and light trucks
is generally lower during the winter months than in other
seasons, particularly in regions of the United States where
stores may be subject to adverse winter conditions. Accordingly,
we expect our revenue and operating results to be generally
lower in our first and fourth quarters as compared to our second
and third quarters. However, revenue may be impacted
significantly from quarter to quarter by actual or threatened
severe weather events, and by other factors unrelated to weather
conditions, such as changing economic conditions and automotive
manufacturer incentives programs.
36
New
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123R,
Share-Based Payment, a revision of
SFAS No. 123. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107
(SAB 107) regarding its interpretation of
SFAS No. 123R. The standard requires companies to
expense the grant-date fair value of stock options and other
equity-based compensation issued to employees and is effective
for annual periods beginning after December 15, 2006. As of
January 1, 2006, we adopted SFAS No. 123R and
related interpretive guidance issued by the FASB and the SEC
using the modified prospective transition method. Accordingly,
our Consolidated Financial Statements for prior periods have not
been restated to reflect the adoption of SFAS No. 123R.
In October 2005, the FASB issued FASB Staff Position
(FSP)
No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction
Period. FSP
No. FAS 13-1
requires rental costs associated with operating leases that are
incurred during a construction period to be recognized as rental
expense. FSP
No. FAS 13-1
is effective for reporting periods beginning after
December 15, 2005 and did not have a material impact on our
Consolidated Financial Statements.
In March 2006, the EITF reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation) (EITF
06-3), which
allows companies to adopt a policy of presenting taxes in the
income statement on either a gross or net basis. Taxes within
the scope of this EITF include taxes that are imposed on a
revenue transaction between a seller and a customer, for
example, sales taxes, use taxes, value-added taxes, and some
types of excise taxes. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006. EITF
06-3 will
not impact the method for recording and reporting these sales
taxes in our Consolidated Financial Statements as our policy is
to exclude all such taxes from revenue.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN 48) to create a single model
to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We are currently
evaluating the impact of adopting FIN 48 and do not expect
the adoption of FIN 48 will have a material impact on our
Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value and applies to other accounting
pronouncements that require or permit fair value measurements
and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. We are currently evaluating the impact of adopting
SFAS No. 157 on our Consolidated Financial Statements.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, to address diversity in practice
in quantifying financial statement misstatements and the
potential for the build up of improper amounts on the balance
sheet. SAB No. 108 identifies the approach that
registrants should take when evaluating the effects of
unadjusted misstatements on each financial statement, the
circumstances under which corrections of misstatements should
result in a revision to financial statements, and disclosures
related to the correction of misstatements.
SAB No. 108 is effective for the fiscal year ending
December 31, 2006. The adoption of SAB No. 108
did not have a material impact on our Consolidated Financial
Statements.
Forward
Looking Statements
Our business, financial condition, results of operations, cash
flows and prospects, and the prevailing market price and
performance of our common stock, may be adversely affected by a
number of factors, including the matters discussed below.
Certain statements and information set forth in this Annual
Report on
Form 10-K,
as well as other written or oral statements made from time to
time by us or by our authorized executive officers on our
behalf, constitute forward-looking statements within
the meaning of the Federal Private Securities Litigation
37
Reform Act of 1995. We intend for our 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 we set forth this statement and these risk
factors in order to comply with such safe harbor provisions. You
should note that our forward-looking statements speak only as of
the date of this Annual Report on
Form 10-K
or when made and we undertake no duty or obligation to update or
revise our forward-looking statements, whether as a result of
new information, future events or otherwise. Although we believe
that the expectations, plans, intentions and projections
reflected in our forward-looking statements are reasonable, such
statements are subject to known and unknown risks, uncertainties
and other factors that may cause our 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 our stockholders and prospective investors should
consider include, but are not limited to, the following:
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We are dependent upon the success and continued financial
viability of the vehicle manufacturers and distributors with
which we hold franchises.
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The automotive retailing industry is sensitive to changing
economic conditions and various other factors. Our business and
results of operations are substantially dependent on new vehicle
sales levels in the United States and in our particular
geographic markets and the level of gross profit margins that we
can achieve on our sales of new vehicles, all of which are very
difficult to predict.
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Our new vehicle sales are impacted by the consumer incentive and
marketing programs of vehicle manufacturers.
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Natural disasters and adverse weather events can disrupt our
business.
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We are subject to restrictions imposed by, and significant
influence from, vehicle manufacturers that may adversely impact
our business, financial condition, results of operations, cash
flows and prospects, including our ability to acquire additional
stores.
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We are subject to numerous legal and administrative proceedings,
which, if the outcomes are adverse to us, could materially
adversely affect our business, results of operations, financial
condition, cash flows and prospects.
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Our operations, including, without limitation, our sales of
finance and insurance and vehicle protection products, are
subject to extensive governmental laws, regulation and scrutiny.
If we are found to be in violation of, or subject to liabilities
under, any of these laws or regulations, or if new laws or
regulations are enacted that adversely affect our operations,
our business, operating results and prospects could suffer.
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Our ability to grow our business may be limited by our ability
to acquire automotive stores on favorable terms or at all.
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We are subject to interest rate risk in connection with our
floorplan notes payable, revolving credit facility, term loan
facility, mortgage facility and floating rate senior unsecured
notes that could have a material adverse effect on our
profitability.
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Our revolving credit facility, term loan facility, mortgage
facility and the indentures relating to our new senior unsecured
notes contain certain restrictions on our ability to conduct our
business.
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Our substantial indebtedness could adversely affect our
financial condition and operations and prevent us from
fulfilling our debt service obligations. We may still be able to
incur more debt, intensifying these risks.
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Goodwill and other intangible assets comprise a significant
portion of our total assets. We must test our intangible assets
for impairment at least annually, which may result in a
material, non-cash write-down of goodwill or franchise rights
and could have a material adverse impact on our results of
operations and shareholders equity.
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38
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our primary market risk exposure is increasing LIBOR-based
interest rates. Interest rate derivatives may be used to hedge a
portion of the Companys variable rate debt when
appropriate based on market conditions. At December 31,
2006 and 2005, fixed rate debt, primarily consisting of amounts
outstanding under senior unsecured notes, totaled
$360.5 million and $371.3 million, respectively, and
had a fair value of $363.4 million and $398.5 million,
respectively. Interest rate derivatives may be used to adjust
interest rate exposures when appropriate based upon market
conditions.
Interest
Rate Risk
At December 31, 2006 and 2005, we had variable rate vehicle
floorplan payable totaling $2.3 billion and
$2.4 billion, respectively. Based on these amounts at
December 31, 2006 and 2005, a 100 basis point change
in interest rates would result in an approximate
$22.7 million and $24.5 million, respectively, change
to our annual floorplan interest expense. Our exposure to
changes in interest rates with respect to total vehicle
floorplan payable is partially mitigated by manufacturers
floorplan assistance, which in some cases is based on variable
interest rates.
At December 31, 2006 and 2005, we had other variable rate
debt outstanding totaling $1.2 billion and
$153.7 million, respectively. Based on the amounts
outstanding at December 31, 2006 and 2005, a 100 basis
point change in interest rates would result in an approximate
$12.1 million and $1.5 million change to interest
expense, respectively.
Hedging
Risk
We have utilized interest rate derivatives to hedge portions of
our variable rate debt. All of these instruments were designated
as cash flow hedges. During 2006, we had $800.0 million of
interest rate hedge instruments mature, consisting of
$200.0 million in swaps, which effectively locked in a
LIBOR-based rate of 3.0%, and $600.0 million in collars
that capped floating rates to a maximum LIBOR-based rate no
greater than 2.4%. We held no derivative contracts as of
December 31, 2006.
We reflect the current fair value of all derivatives on our
balance sheet. The related gains or losses on these transactions
are deferred in stockholders equity as a component of
Accumulated Other Comprehensive Income (Loss). These deferred
gains and losses are recognized in income in the period in which
the related items being hedged are recognized in expense.
However, to the extent that the change in value of a derivative
contract does not perfectly offset the change in the value of
the items being hedged, that ineffective portion is immediately
recognized in income. At December 31, 2005, net unrealized
gains related to hedges included in Accumulated Other
Comprehensive Gain (Loss), was $2.1 million. For 2006 and
2005, the income statement impact from interest rate hedges was
an additional income of $1.8 million and $.2 million,
respectively.
39
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
40
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
AutoNation, Inc.:
We have audited the consolidated financial statements of
AutoNation, Inc. and subsidiaries (the Company) as listed in the
Index at Item 8. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2006 and 2005
and the results of their operations and their cash flows for
each of the years in the three-year period ended
December 31, 2006 in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial
Statements, effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standard No. 123 (revised
2004), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 27, 2007, expressed an unqualified opinion
on managements assessment of, and the effective operation
of, internal control over financial reporting.
February 27, 2007
Fort Lauderdale, Florida
Certified Public Accountants
41
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
AutoNation, Inc.:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, appearing under Item 9A, that
AutoNation, Inc. and subsidiaries (the Company) maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by the COSO.
Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2006, based on criteria established in
Internal Control Integrated Framework issued
by the COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company as listed in
the Index at Item 8, and our report dated February 27,
2007, expressed an unqualified opinion on those consolidated
financial statements.
February 27, 2007
Fort Lauderdale, Florida
Certified Public Accountants
42
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52.2
|
|
|
$
|
245.7
|
|
Receivables, net
|
|
|
813.7
|
|
|
|
775.0
|
|
Inventory
|
|
|
2,361.4
|
|
|
|
2,584.6
|
|
Other current assets
|
|
|
158.5
|
|
|
|
334.8
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
3,385.8
|
|
|
|
3,940.1
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
1,929.6
|
|
|
|
1,785.9
|
|
GOODWILL, NET
|
|
|
2,799.7
|
|
|
|
2,716.5
|
|
OTHER INTANGIBLE ASSETS, NET
|
|
|
317.2
|
|
|
|
228.1
|
|
OTHER ASSETS
|
|
|
174.7
|
|
|
|
153.9
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,607.0
|
|
|
$
|
8,824.5
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Vehicle floorplan
payable trade
|
|
$
|
2,031.1
|
|
|
$
|
2,343.5
|
|
Vehicle floorplan
payable non-trade
|
|
|
233.9
|
|
|
|
102.2
|
|
Accounts payable
|
|
|
212.4
|
|
|
|
209.1
|
|
Notes payable and current
maturities of long-term obligations
|
|
|
13.6
|
|
|
|
40.6
|
|
Other current liabilities
|
|
|
539.5
|
|
|
|
716.8
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,030.5
|
|
|
|
3,412.2
|
|
LONG-TERM DEBT, NET OF CURRENT
MATURITIES
|
|
|
1,557.9
|
|
|
|
484.4
|
|
DEFERRED INCOME TAXES
|
|
|
225.4
|
|
|
|
186.2
|
|
OTHER LIABILITIES
|
|
|
80.5
|
|
|
|
72.2
|
|
COMMITMENTS AND CONTINGENCIES
(Note 8)
|
|
|
|
|
|
|
|
|
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;
223,562,149 and 273,562,137 shares issued, respectively,
including shares held in treasury
|
|
|
2.2
|
|
|
|
2.7
|
|
Additional paid-in capital
|
|
|
1,092.0
|
|
|
|
2,201.0
|
|
Retained earnings
|
|
|
2,989.4
|
|
|
|
2,672.5
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(.4
|
)
|
|
|
1.8
|
|
Treasury stock, at cost;
16,809,630 and 11,329,650 shares held, respectively
|
|
|
(370.5
|
)
|
|
|
(208.5
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
3,712.7
|
|
|
|
4,669.5
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and
Shareholders Equity
|
|
$
|
8,607.0
|
|
|
$
|
8,824.5
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
11,163.0
|
|
|
$
|
11,224.0
|
|
|
$
|
11,258.0
|
|
Used vehicle
|
|
|
4,518.1
|
|
|
|
4,315.0
|
|
|
|
4,102.6
|
|
Parts and service
|
|
|
2,600.4
|
|
|
|
2,508.5
|
|
|
|
2,366.9
|
|
Finance and insurance, net
|
|
|
634.3
|
|
|
|
601.0
|
|
|
|
590.8
|
|
Other
|
|
|
72.8
|
|
|
|
81.0
|
|
|
|
82.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE
|
|
|
18,988.6
|
|
|
|
18,729.5
|
|
|
|
18,400.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
10,345.8
|
|
|
|
10,407.3
|
|
|
|
10,448.7
|
|
Used vehicle
|
|
|
4,109.0
|
|
|
|
3,896.2
|
|
|
|
3,718.5
|
|
Parts and service
|
|
|
1,459.0
|
|
|
|
1,408.5
|
|
|
|
1,330.2
|
|
Other
|
|
|
30.4
|
|
|
|
33.4
|
|
|
|
35.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COST OF SALES
|
|
|
15,944.2
|
|
|
|
15,745.4
|
|
|
|
15,533.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
817.2
|
|
|
|
816.7
|
|
|
|
809.3
|
|
Used vehicle
|
|
|
409.1
|
|
|
|
418.8
|
|
|
|
384.1
|
|
Parts and service
|
|
|
1,141.4
|
|
|
|
1,100.0
|
|
|
|
1,036.7
|
|
Finance and insurance
|
|
|
634.3
|
|
|
|
601.0
|
|
|
|
590.8
|
|
Other
|
|
|
42.4
|
|
|
|
47.6
|
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL GROSS PROFIT
|
|
|
3,044.4
|
|
|
|
2,984.1
|
|
|
|
2,867.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general &
administrative expenses
|
|
|
2,165.0
|
|
|
|
2,100.9
|
|
|
|
2,029.8
|
|
Depreciation and amortization
|
|
|
82.9
|
|
|
|
78.4
|
|
|
|
79.2
|
|
Other expenses (income), net
|
|
|
(.1
|
)
|
|
|
.8
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
796.6
|
|
|
|
804.0
|
|
|
|
754.5
|
|
Floorplan interest expense
|
|
|
(142.0
|
)
|
|
|
(105.5
|
)
|
|
|
(74.7
|
)
|
Other interest expense
|
|
|
(90.9
|
)
|
|
|
(63.3
|
)
|
|
|
(76.3
|
)
|
Other interest expense
senior note repurchases
|
|
|
(34.5
|
)
|
|
|
(17.4
|
)
|
|
|
(.6
|
)
|
Interest income
|
|
|
8.3
|
|
|
|
7.5
|
|
|
|
3.5
|
|
Other gains (losses), net
|
|
|
4.6
|
|
|
|
(.1
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
|
|
|
542.1
|
|
|
|
625.2
|
|
|
|
601.3
|
|
PROVISION FOR INCOME TAXES
|
|
|
210.7
|
|
|
|
228.3
|
|
|
|
208.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME FROM CONTINUING
OPERATIONS
|
|
|
331.4
|
|
|
|
396.9
|
|
|
|
392.9
|
|
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES
|
|
|
(14.5
|
)
|
|
|
99.6
|
|
|
|
40.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
316.9
|
|
|
$
|
496.5
|
|
|
$
|
433.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.47
|
|
|
$
|
1.51
|
|
|
$
|
1.47
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
.38
|
|
|
$
|
.15
|
|
Net income
|
|
$
|
1.41
|
|
|
$
|
1.89
|
|
|
$
|
1.63
|
|
Weighted average common shares
outstanding
|
|
|
225.2
|
|
|
|
262.7
|
|
|
|
266.7
|
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.45
|
|
|
$
|
1.48
|
|
|
$
|
1.44
|
|
Discontinued operations
|
|
$
|
(.06
|
)
|
|
$
|
.37
|
|
|
$
|
.15
|
|
Net income
|
|
$
|
1.38
|
|
|
$
|
1.85
|
|
|
$
|
1.59
|
|
Weighted average common shares
outstanding
|
|
|
229.3
|
|
|
|
268.0
|
|
|
|
272.5
|
|
COMMON SHARES OUTSTANDING,
net of treasury stock
|
|
|
206.8
|
|
|
|
262.2
|
|
|
|
264.3
|
|
The accompanying notes are an integral part of these statements.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
hensive
|
|
|
|
|
|
Compre-
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Income
|
|
|
Treasury
|
|
|
hensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Stock
|
|
|
Income
|
|
|
BALANCE AT DECEMBER 31, 2003
|
|
|
293,562,137
|
|
|
$
|
2.9
|
|
|
$
|
2,581.0
|
|
|
$
|
1,742.4
|
|
|
$
|
(3.2
|
)
|
|
$
|
(373.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
433.6
|
|
|
|
|
|
|
|
|
|
|
$
|
433.6
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on cash flow
hedges, restricted investments and marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
435.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236.8
|
)
|
|
|
|
|
Treasury stock cancellation
|
|
|
(20,000,000
|
)
|
|
|
(.2
|
)
|
|
|
(318.2
|
)
|
|
|
|
|
|
|
|
|
|
|
318.4
|
|
|
|
|
|
Exercise of stock options,
including income tax benefit of $20.7
|
|
|
|
|
|
|
|
|
|
|
(22.8
|
)
|
|
|
|
|
|
|
|
|
|
|
137.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2004
|
|
|
273,562,137
|
|
|
|
2.7
|
|
|
|
2,240.0
|
|
|
|
2,176.0
|
|
|
|
(1.5
|
)
|
|
|
(154.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
496.5
|
|
|
|
|
|
|
|
|
|
|
$
|
496.5
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on cash flow
hedges, restricted investments and marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237.1
|
)
|
|
|
|
|
Exercise of stock options,
including income tax benefit of $30.9
|
|
|
|
|
|
|
|
|
|
|
(39.0
|
)
|
|
|
|
|
|
|
|
|
|
|
182.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2005
|
|
|
273,562,137
|
|
|
|
2.7
|
|
|
|
2,201.0
|
|
|
|
2,672.5
|
|
|
|
1.8
|
|
|
|
(208.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316.9
|
|
|
|
|
|
|
|
|
|
|
$
|
316.9
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on cash flow
hedges, restricted investments and marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
314.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,380.6
|
)
|
|
|
|
|
Treasury stock cancellation
|
|
|
(50,000,000
|
)
|
|
|
(.5
|
)
|
|
|
(1,100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
1,100.5
|
|
|
|
|
|
Other
|
|
|
12
|
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including income tax benefit of $18.0
|
|
|
|
|
|
|
|
|
|
|
(24.4
|
)
|
|
|
|
|
|
|
|
|
|
|
118.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2006
|
|
|
223,562,149
|
|
|
$
|
2.2
|
|
|
$
|
1,092.0
|
|
|
$
|
2,989.4
|
|
|
$
|
(.4
|
)
|
|
$
|
(370.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
316.9
|
|
|
$
|
496.5
|
|
|
$
|
433.6
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) on discontinued
operations
|
|
|
14.5
|
|
|
|
(99.6
|
)
|
|
|
(40.7
|
)
|
Depreciation and amortization
|
|
|
82.9
|
|
|
|
78.4
|
|
|
|
79.2
|
|
Amortization of debt issue costs
and discounts
|
|
|
3.7
|
|
|
|
7.7
|
|
|
|
6.6
|
|
Stock option expense
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
Interest expense on senior note
repurchase
|
|
|
34.5
|
|
|
|
12.9
|
|
|
|
.5
|
|
Income taxes
|
|
|
206.4
|
|
|
|
196.9
|
|
|
|
160.7
|
|
Other
|
|
|
(3.7
|
)
|
|
|
(.2
|
)
|
|
|
4.7
|
|
Changes in assets and liabilities,
net of effects from business combinations and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(4.2
|
)
|
|
|
(80.2
|
)
|
|
|
(10.8
|
)
|
Inventory
|
|
|
268.5
|
|
|
|
(125.4
|
)
|
|
|
217.1
|
|
Other assets
|
|
|
(14.0
|
)
|
|
|
42.4
|
|
|
|
(8.8
|
)
|
Vehicle floorplan payable-trade, net
|
|
|
(325.8
|
)
|
|
|
77.9
|
|
|
|
(74.6
|
)
|
Accounts payable
|
|
|
2.9
|
|
|
|
36.9
|
|
|
|
5.9
|
|
IRS settlement payment
|
|
|
|
|
|
|
|
|
|
|
(128.9
|
)
|
Other liabilities
|
|
|
(294.2
|
)
|
|
|
(61.1
|
)
|
|
|
(59.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing
operations
|
|
|
303.6
|
|
|
|
583.1
|
|
|
|
585.4
|
|
Net cash provided by (used in)
discontinued operations
|
|
|
(4.5
|
)
|
|
|
(3.3
|
)
|
|
|
(23.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
299.1
|
|
|
|
579.8
|
|
|
|
562.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment, excluding property operating lease buy-outs
|
|
|
(170.2
|
)
|
|
|
(130.9
|
)
|
|
|
(132.4
|
)
|
Property operating lease buy-outs
|
|
|
(5.9
|
)
|
|
|
(10.3
|
)
|
|
|
(77.7
|
)
|
Proceeds from the sale of property
and equipment
|
|
|
1.4
|
|
|
|
.6
|
|
|
|
2.8
|
|
Proceeds from the disposal of
property held for sale
|
|
|
6.5
|
|
|
|
33.4
|
|
|
|
37.9
|
|
Cash used in business acquisitions,
net of cash acquired
|
|
|
(166.7
|
)
|
|
|
(15.9
|
)
|
|
|
(197.9
|
)
|
Net change in restricted cash
|
|
|
(3.9
|
)
|
|
|
31.0
|
|
|
|
13.2
|
|
Purchases of restricted investments
|
|
|
(6.5
|
)
|
|
|
(23.9
|
)
|
|
|
(17.8
|
)
|
Proceeds from the sales of
restricted investments
|
|
|
13.4
|
|
|
|
13.4
|
|
|
|
22.6
|
|
Cash received from business
divestitures, net of cash relinquished
|
|
|
24.0
|
|
|
|
55.0
|
|
|
|
19.4
|
|
Other
|
|
|
(.1
|
)
|
|
|
(.2
|
)
|
|
|
(.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing
operations
|
|
|
(308.0
|
)
|
|
|
(47.8
|
)
|
|
|
(330.4
|
)
|
Net cash provided by (used in)
discontinued operations
|
|
|
(.6
|
)
|
|
|
6.0
|
|
|
|
.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(308.6
|
)
|
|
|
(41.8
|
)
|
|
|
(330.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(1,380.6
|
)
|
|
|
(237.1
|
)
|
|
|
(236.8
|
)
|
Proceeds from senior unsecured
notes issued
|
|
|
600.0
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan facility
|
|
|
600.0
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit
facility
|
|
|
1,039.0
|
|
|
|
|
|
|
|
|
|
Payment of revolving credit facility
|
|
|
(844.0
|
)
|
|
|
|
|
|
|
|
|
Repurchase of 9% senior
unsecured notes
|
|
|
(334.2
|
)
|
|
|
(136.0
|
)
|
|
|
(3.9
|
)
|
Net proceeds (payments) of vehicle
floor plan-non-trade
|
|
|
96.9
|
|
|
|
24.4
|
|
|
|
(143.1
|
)
|
Payments of mortgage facilities
|
|
|
(37.7
|
)
|
|
|
(164.4
|
)
|
|
|
(11.7
|
)
|
Proceeds (payments) of notes
payable and long-term debt
|
|
|
(3.4
|
)
|
|
|
(1.3
|
)
|
|
|
1.6
|
|
Proceeds from the exercise of stock
options
|
|
|
75.7
|
|
|
|
112.8
|
|
|
|
94.2
|
|
Tax benefit from stock options
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing
operations
|
|
|
(186.9
|
)
|
|
|
(401.6
|
)
|
|
|
(299.5
|
)
|
Net cash provided by (used in)
discontinued operations
|
|
|
2.9
|
|
|
|
(1.5
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(184.0
|
)
|
|
|
(403.1
|
)
|
|
|
(300.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
|
|
|
(193.5
|
)
|
|
|
134.9
|
|
|
|
(68.5
|
)
|
CASH AND CASH EQUIVALENTS at
beginning of period
|
|
|
245.7
|
|
|
|
110.8
|
|
|
|
179.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS at end of
period
|
|
$
|
52.2
|
|
|
$
|
245.7
|
|
|
$
|
110.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
46
AUTONATION,
INC.
(All tables in millions, except per share data)
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
and Business
AutoNation, Inc. (the Company), through its
subsidiaries, is the largest automotive retailer in the
United States. As of December 31, 2006, the Company
owned and operated 331 new vehicle franchises from 257 stores
located in major metropolitan markets, predominantly in the
Sunbelt region of the United States. The Company offers a
diversified range of automotive products and services, including
new vehicles, used vehicles, vehicle maintenance and repair
services, vehicle parts, extended service contracts, vehicle
protection products and other aftermarket products. The Company
also arranges financing for vehicle purchases through
third-party finance sources.
Basis
of Presentation
The accompanying Consolidated Financial Statements include the
accounts of AutoNation, Inc. and its subsidiaries. All of the
Companys automotive dealership subsidiaries are indirectly
wholly owned by the parent company, AutoNation, Inc. The Company
operates in a single industry segment, automotive retailing. All
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Significant estimates made by the Company in the
accompanying Consolidated Financial Statements include
allowances for doubtful accounts, accruals for chargebacks
against revenue recognized from the sale of finance and
insurance products, certain assumptions related to intangible
long-lived assets and accruals related to self-insurance
programs, certain legal proceedings, estimated tax liabilities,
estimated losses from disposals of discontinued operations and
certain assumptions related to determining stock option
compensation.
Certain reclassifications of amounts previously reported have
been made to the accompanying Consolidated Financial Statements
in order to maintain consistency and comparability between
periods presented.
Inventory
Inventory consists primarily of new and used vehicles held for
sale, valued at the lower of cost or market using the specific
identification method. Cost includes acquisition,
reconditioning, dealer installed accessories and transportation
expenses. Parts and accessories are valued at the lower of cost
(first-in,
first-out) or market.
Investments
Investments in marketable securities are included in Other
Assets in the accompanying Consolidated Balance Sheets and
relate to the Companys insurance programs. Restricted
investments, included in Other Assets, consist primarily of
marketable corporate and government debt securities. Marketable
securities include investments in debt and equity securities and
are primarily classified as available for sale. Investments in
debt securities include investment grade corporate bonds,
government securities and other instruments with maturities
ranging from 2007 to 2036. Marketable securities are stated at
fair value with unrealized gains and losses included in
Accumulated Other Comprehensive Income (Loss) in the
Companys Consolidated Balance Sheets.
Other-than-temporary
declines in investment values are recorded as a component of
Other Income (Expense), Net in the Companys Consolidated
Income Statements. Fair value is estimated based on quoted
market prices.
47
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property
and Equipment, net
Property and equipment are recorded at cost. Expenditures for
major additions and improvements are capitalized, while minor
replacements, maintenance and repairs are charged to expense as
incurred. When property is retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in Other Expenses
(Income), Net in the Consolidated Income Statements.
Depreciation is provided over the estimated useful lives of the
assets involved using the straight-line method. Leasehold
improvements are amortized over the estimated useful life of the
asset or the respective lease term used in determining lease
classification, whichever is shorter. The estimated useful lives
are: five to forty years for buildings and improvements, and
three to ten years for furniture, fixtures and equipment.
The Company continually evaluates property and equipment,
including leasehold improvements, to determine whether events
and circumstances have occurred that may warrant revision of the
estimated useful life or whether the remaining balance should be
evaluated for possible impairment. The Company uses an estimate
of the related undiscounted cash flows over the remaining life
of the property and equipment in assessing whether an asset has
been impaired. The Company measures impairment losses based upon
the amount by which the carrying amount of the asset exceeds the
fair value. Fair values generally are estimated using prices for
similar assets
and/or
discounted cash flows.
Goodwill
and Other Intangible Assets, net
The Company accounts for acquisitions using the purchase method
of accounting. Goodwill consists of the cost of acquired
businesses in excess of the fair value of the net assets
acquired. Additionally, other intangible assets are 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 Companys intent to do so.
The Companys principal identifiable intangible assets are
rights under franchise agreements with vehicle manufacturers.
The Company generally expects its franchise agreements to
survive for the foreseeable future and, when the agreements do
not have indefinite terms, anticipates routine renewals of the
agreements without substantial cost. The contractual terms of
the Companys franchise agreements provide for various
durations, ranging from one year to no expiration date, and in
certain cases manufacturers have undertaken to renew such
franchises upon expiration so long as the dealership is in
compliance with the terms of the agreement. However, in general,
the states in which the Company operates have automotive
dealership franchise laws that provide that, notwithstanding the
terms of any franchise agreement, it is unlawful for a
manufacturer to terminate or not renew a franchise unless
good cause exists. It is generally difficult for a
manufacturer to terminate, or not renew, a franchise under these
franchise laws, which were designed to protect dealers. In
addition, in the Companys experience and historically in
the automotive retail industry, dealership franchise agreements
are rarely involuntarily terminated or not renewed by the
manufacturer. Accordingly, the Company believes that its
franchise agreements will contribute to cash flows for the
foreseeable future and have indefinite lives. Other intangibles
are amortized using a straight-line method over their useful
lives, generally ranging from three to sixteen years.
The Company has completed impairment tests as of June 30,
2006 and 2005 for goodwill and franchise rights assets. The
goodwill test includes determining the fair value of the
Companys single reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting
unit. The test for franchise rights assets requires the
comparisons of estimated fair value to its carrying value by
store. No impairment charges resulted from the required
impairment tests. Goodwill and franchise rights assets are
tested for impairment annually at June 30 or more
frequently when events or circumstances indicate that an
impairment may have occurred.
48
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Assets
Other assets consist of various items, net of applicable
amortization, including, among other items, service loaner and
rental vehicle inventory, net, investments in marketable
securities, property held for sale, notes receivable, restricted
assets and debt issuance costs. Debt issuance costs are
amortized to Other Interest Expense using the effective interest
method through maturity.
At December 31, 2006 and 2005, the Company had
$18.7 million and $22.0 million, respectively, of
property held for sale.
Other
Current Liabilities
Other Current Liabilities consist of various items payable
within one year including, among other items, accruals for
payroll and benefits, sales taxes, finance and insurance
chargeback liabilities, deferred revenue, accrued expenses, and
customer deposits. Other Current Liabilities also includes other
tax accruals, totaling $58.7 million and $54.5 million
at December 31, 2006 and 2005, respectively. See
Note 11, Income Taxes, of Notes to Consolidated Financial
Statements for additional discussion of income taxes.
Employee
Savings Plan
The Company offers a 401(k) plan to all of its employees and
provides a matching contribution to certain employees that
participate. The matching contribution expensed by the Company
totaled $5.3 million, $5.8 million and
$11.0 million in 2006, 2005 and 2004, respectively.
In 2005, the Company established a deferred compensation plan
(the Plan) to provide certain employees with the
opportunity to accumulate assets for retirement on a
tax-deferred basis commencing in 2006. Participants in the Plan
are allowed to defer a portion of their compensation and are
100% vested in their respective deferrals and earnings.
Participants may choose from a variety of investment options,
which determine their earnings credits. The Company provides a
matching contribution to participants in the Plan and may also
make discretionary contributions. The total contributions
expensed by the Company totaled $3.3 million in 2006.
Matching contributions vest over two years from the effective
date of the employers matching contribution and
discretionary contributions vest three years after the effective
date of the discretionary contribution. Certain participants in
the Plan are not eligible for matching contributions to the
Companys 401(k) plan. The balances due to participants in
the Plan were $10.2 million as of December 31, 2006,
and are included in Other Liabilities in the accompanying
Consolidated Balance Sheet.
Stock
Options
The Company has various stock option plans under which options
to purchase shares of common stock may be granted to key
employees and directors of the Company. Upon exercise, shares of
common stock are issued from the Companys treasury stock.
Options granted under the plans are non-qualified and are
granted at a price equal to or above the closing market price of
the common stock on the trading day immediately prior to the
date of grant. Generally, options granted will have a term of
10 years from the date of grant, and will vest in
increments of 25% per year over a four-year period on the
yearly anniversary of the grant date.
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R). In March
2005, the SEC issued Staff Accounting Bulletin No. 107
(SAB 107) regarding its interpretation of
SFAS No. 123R. The standard requires companies to
expense the grant-date fair value of stock options and other
equity-based compensation issued to employees and is effective
for annual periods beginning after June 15, 2005. As of
January 1, 2006, the Company adopted
SFAS No. 123R and related interpretive guidance issued
by the FASB and the SEC using the modified prospective
transition method. Under the modified prospective transition
method, SFAS No. 123R applies to new awards and to
awards modified, repurchased or cancelled after the required
effective
49
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date. Additionally, compensation cost for the portion of awards
for which the requisite service has not been rendered as of the
required effective date is recognized as the requisite service
is rendered on or after the required effective date.
Accordingly, the Companys Consolidated Financial
Statements for prior periods have not been restated to reflect
the adoption of SFAS No. 123R.
Prior to January 1, 2006, the Company applied APB 25
in accounting for stock-based employee compensation arrangements
whereby compensation cost related to stock options was generally
not recognized in determining net income and the pro forma
impact of compensation cost related to stock options was
disclosed. The Companys pro forma net income and pro forma
earnings per share that would have been reported if the fair
value method had been applied to all awards were as follows for
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
496.5
|
|
|
$
|
433.6
|
|
Pro forma stock-based compensation
cost, net of taxes
|
|
|
(9.3
|
)
|
|
|
(10.5
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
487.2
|
|
|
$
|
423.1
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, as
reported
|
|
$
|
1.89
|
|
|
$
|
1.63
|
|
Pro forma stock-based compensation
cost
|
|
$
|
(.04
|
)
|
|
$
|
(.04
|
)
|
Pro forma basic earnings per share
|
|
$
|
1.85
|
|
|
$
|
1.59
|
|
Diluted earnings per share, as
reported
|
|
$
|
1.85
|
|
|
$
|
1.59
|
|
Pro forma stock-based compensation
cost
|
|
$
|
(.03
|
)
|
|
$
|
(.04
|
)
|
Pro forma diluted earnings per
share
|
|
$
|
1.82
|
|
|
$
|
1.55
|
|
Risk-free interest rate
|
|
|
3.69-4.10
|
%
|
|
|
3.12-3.93
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Expected term
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
33
|
%
|
|
|
37
|
%
|
Derivative
Financial Instruments
The Company recognizes all derivative instruments on the balance
sheet at fair value. The related gains or losses on these
transactions are deferred in stockholders equity as a
component of Accumulated Other Comprehensive Income (Loss).
These deferred gains and losses are recognized in income or
expense in the period in which the related items being hedged
are recognized in expense. However, to the extent that the
change in value of a derivative contract does not perfectly
offset the change in the value of the items being hedged, that
ineffective portion is immediately recognized in income. The
Company recognizes gains or losses when the underlying
transaction settles.
During 2006, the Company had $800.0 million of interest
rate hedge instruments (cash flow hedges) mature, consisting of
$200.0 million in swaps, which effectively locked in a
LIBOR-based rate of 3.0%, and $600 million in collars that
capped floating rates to a maximum LIBOR-based rate no greater
than 2.4%. The Company held no derivative contracts as of
December 31, 2006.
At December 31, 2005 and 2004, net unrealized losses, net
of income taxes, related to hedges included in Accumulated Other
Comprehensive Income (Loss) were $2.1 million and
$(1.5) million, respectively. For the years ended
December 31, 2006, 2005 and 2004, the income statement
impact from interest rate hedges was an additional income
(expense) of $1.8 million, $.2 million and
$(2.9) million, respectively. At December 31, 2005 and
2004, all of the Companys derivative contracts were
determined to be highly effective, and no ineffective portion
was recognized in income.
50
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue
Recognition
Revenue consists of sales of new and used vehicles and related
finance and insurance (F&I) products, sales of
parts and services and sales of other products. The Company
recognizes revenue in the period in which products are sold or
services are provided. The Company recognizes vehicle and
finance and insurance revenue when a sales contract has been
executed, the vehicle has been delivered and payment has been
received or financing has been arranged. Revenue on finance and
insurance products represents commissions earned by the Company
for: (i) loans and leases placed with financial
institutions in connection with customer vehicle purchases
financed and (ii) vehicle protection products sold.
Rebates, holdbacks, floorplan assistance and certain other
dealer credits received directly from manufacturers are recorded
as a reduction of the cost of the vehicle and recognized into
income upon the sale of the vehicle or when earned under a
specific manufacturer program, whichever is later.
The Company sells and receives a commission, which is recognized
upon sale, on the following types of products: extended
warranties, guaranteed auto protection (GAP,
which covers the shortfall between loan balance and insurance
payoff), credit insurance, lease wear and tear
insurance and theft protection products. The products the
Company offers include products that are sold and administered
by independent third parties, including the vehicle
manufacturers captive finance subsidiaries. Pursuant to
the Companys arrangements with these third-party
providers, it primarily sells the products on a straight
commission basis; however, it may sell the product, recognize
commission and participate in future profit pursuant to
retrospective commission arrangements, which are recognized as
earned over the life of the policies. Certain commissions earned
from the sales of finance, insurance and other protection
products are subject to chargebacks should the contracts be
terminated prior to their expirations. An estimated liability
for chargebacks against revenue recognized from sales of F&I
products is recorded in the period in which the related revenue
is recognized. Chargeback liabilities were $70.1 million
and $67.7 million at December 31, 2006 and 2005,
respectively.
Advertising
The Company expenses the cost of advertising as incurred or when
such advertising initially takes place, net of earned
manufacturer credits and other discounts. Manufacturer
advertising credits are earned in accordance with the respective
manufacturers program, which is typically after the
Company has incurred the corresponding advertising expenses.
Advertising expense, net of allowances was $221.7 million,
$206.2 million and $202.4 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Advertising
allowances from manufacturers were $34.2 million,
$43.1 million and $47.6 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Income
Taxes
The Company and its subsidiaries file a consolidated federal
income tax return. Deferred income taxes have been provided 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.
Earnings
(Loss) Per Share
Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) 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 of dilutive options.
New
Accounting Pronouncements
As of January 1, 2006, the Company adopted
SFAS No. 123R and related interpretive guidance. See
Stock Options section of Note 1 of Notes to the
Consolidated Financial Statements for additional discussion.
51
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2005, the FASB issued FASB Staff Position
(FSP)
No. FAS 13-1,
Accounting for Rental Costs Incurred during a Construction
Period. FSP
No. FAS 13-1
requires rental costs associated with operating leases that are
incurred during a construction period to be recognized as rental
expense. FSP
No. FAS 13-1
is effective for reporting periods beginning after
December 15, 2005 and did not have a material impact on the
Companys Consolidated Financial Statements.
In March 2006, the EITF reached a consensus on EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (that is, Gross versus Net Presentation) (EITF
06-3), which
allows companies to adopt a policy of presenting taxes in the
income statement on either a gross or net basis. Taxes within
the scope of this EITF include taxes that are imposed on a
revenue transaction between a seller and a customer, for
example, sales taxes, use taxes, value-added taxes, and some
types of excise taxes. EITF
06-3 is
effective for interim and annual reporting periods beginning
after December 15, 2006. EITF
06-3 will
not impact the method for recording and reporting these sales
taxes in the Companys Consolidated Financial Statements as
the Companys policy is to exclude all such taxes from
revenue.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109, Accounting for
Income Taxes (FIN 48) to create a single model
to address accounting for uncertainty in tax positions.
FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized. FIN 48 also
provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is
currently evaluating the impact of adopting FIN 48 and does
not expect the adoption of FIN 48 will have a material
impact on its Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value and applies to other accounting
pronouncements that require or permit fair value measurements
and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007 and interim periods within those
fiscal years. The Company is currently evaluating the impact of
adopting SFAS No. 157 on its Consolidated Financial
Statements.
In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) No. 108, to address diversity in practice
in quantifying financial statement misstatements and the
potential for the build up of improper amounts on the balance
sheet. SAB No. 108 identifies the approach that
registrants should take when evaluating the effects of
unadjusted misstatements on each financial statement, the
circumstances under which corrections of misstatements should
result in a revision to financial statements, and disclosures
related to the correction of misstatements.
SAB No. 108 is effective for the Company for the
fiscal year ending December 31, 2006. The adoption of
SAB No. 108 did not have a material impact on the
Companys Consolidated Financial Statements.
52
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of receivables, net of allowance for doubtful
accounts, at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Trade receivables
|
|
$
|
91.2
|
|
|
$
|
94.5
|
|
Manufacturer receivables
|
|
|
161.4
|
|
|
|
172.4
|
|
Other
|
|
|
102.8
|
|
|
|
96.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355.4
|
|
|
|
363.4
|
|
Less: Allowances
|
|
|
(6.1
|
)
|
|
|
(6.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
349.3
|
|
|
|
356.8
|
|
Contracts-in-transit
and vehicle receivables
|
|
|
435.5
|
|
|
|
418.2
|
|
Income tax refundable (See
Note 11)
|
|
|
28.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
813.7
|
|
|
$
|
775.0
|
|
|
|
|
|
|
|
|
|
|
Contracts-in-transit
and vehicle receivables represent receivables from financial
institutions for the portion of the vehicle sales price financed
by the Companys customers.
|
|
3.
|
INVENTORY
AND VEHICLE FLOORPLAN PAYABLE
|
The components of inventory at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
New vehicles
|
|
$
|
1,902.0
|
|
|
$
|
2,118.2
|
|
Used vehicles
|
|
|
306.0
|
|
|
|
318.8
|
|
Parts, accessories and other
|
|
|
153.4
|
|
|
|
147.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,361.4
|
|
|
$
|
2,584.6
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, vehicle floorplan
payable-trade totaled $2.0 billion and $2.3 billion,
respectively. Vehicle floorplan payable-trade reflects amounts
borrowed to finance the purchase of specific vehicle inventories
with the corresponding manufacturers captive finance
subsidiaries (trade lenders). Vehicle floorplan
payable-non-trade totaled $233.9 million and
$102.2 million, at December 31, 2006 and 2005,
respectively, and represents amounts borrowed to finance the
purchase of specific vehicle inventories with non-trade lenders.
On November 30, 2006, General Motors (GM)
completed the sale of a majority stake in General Motors
Acceptance Corporation (GMAC), which was GMs
wholly-owned captive finance subsidiary prior to this
transaction. GMAC will remain the exclusive provider of
GM-sponsored auto finance programs and is expected to continue
to provide GM dealers and their customers with the same
financial products and services under the same arrangements with
the Company as before the sale. As a result of this sale, the
Company has treated new vehicles financed after the change in
GMAC ownership control (totaling $139.3 million at
December 31, 2006) as vehicle floorplan-non-trade.
Vehicles financed by GMAC prior to this transaction (totaling
$281.2 million at December 31, 2006) continue to
be classified as floorplan-trade. Changes in vehicle floorplan
payable-trade are reported as operating cash flows and changes
in vehicle floorplan-non-trade are reported as financing cash
flows in the accompanying Consolidated Statements of Cash Flows.
All Company floorplan facilities, which utilize LIBOR-based
interest rates, averaged 6.2% and 4.6% for 2006 and 2005,
respectively. Secured floorplan facilities are used to finance
new vehicle inventories and the amounts outstanding thereunder
are due on demand, but are generally paid within several
business days after the related vehicles are sold. Floorplan
facilities are primarily collateralized by new vehicle
inventories and related receivables. The Companys
manufacturer agreements generally require that the manufacturer
have the ability to draft against
53
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the floorplan facilities so that the lender directly funds the
manufacturer for the purchase of inventory. The floorplan
facilities contain certain operational covenants. At
December 31, 2006, the Company was in compliance with such
covenants in all material respects. At December 31, 2006,
aggregate capacity under the floorplan credit facilities to
finance new vehicles was approximately $3.6 billion, of
which $2.3 billion total was outstanding.
4. PROPERTY
AND EQUIPMENT, NET
A summary of property and equipment, net, at December 31 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land
|
|
$
|
842.2
|
|
|
$
|
737.6
|
|
Buildings and improvements
|
|
|
1,165.1
|
|
|
|
1,082.1
|
|
Furniture, fixtures and equipment
|
|
|
462.5
|
|
|
|
425.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,469.8
|
|
|
|
2,245.1
|
|
Less: accumulated depreciation and
amortization
|
|
|
(540.2
|
)
|
|
|
(459.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,929.6
|
|
|
$
|
1,785.9
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS, NET
|
Goodwill and other intangible assets, net, at December 31
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Goodwill
|
|
$
|
3,065.5
|
|
|
$
|
2,982.3
|
|
Less: accumulated amortization
|
|
|
(265.8
|
)
|
|
|
(265.8
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
|
2,799.7
|
|
|
|
2,716.5
|
|
|
|
|
|
|
|
|
|
|
Franchise rights
indefinite-lived
|
|
|
312.4
|
|
|
|
224.4
|
|
Other intangibles
|
|
|
7.9
|
|
|
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320.3
|
|
|
|
230.6
|
|
Less: accumulated amortization
|
|
|
(3.1
|
)
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net
|
|
$
|
317.2
|
|
|
$
|
228.1
|
|
|
|
|
|
|
|
|
|
|
Goodwill and franchise rights-indefinite-lived are not
amortized. Goodwill was amortized until January 1, 2002
when the Company adopted provisions of SFAS No. 142,
Goodwill and Other Intangible Assets. Other
intangibles are amortized primarily over three to sixteen years
using a straight-line method.
Under self-insurance programs, the Company retains various
levels of aggregate loss limits, per claim deductibles and
claims handling expenses as part of its various insurance
programs, including property and casualty, employee medical
benefits and workers compensation. Costs in excess of this
retained risk per claim may be insured under various contracts
with third party insurance carriers. The ultimate costs of these
retained insurance risks are estimated by management and by
third-party actuarial evaluation of historical claims
experience, adjusted for current trends and changes in
claims-handling procedures.
54
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2006 and 2005 current insurance accruals
were included in Other Current Liabilities in the Consolidated
Balance Sheets and long-term insurance accruals were included in
Other Liabilities in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Insurance accruals
current portion
|
|
$
|
41.2
|
|
|
$
|
43.2
|
|
Insurance accruals
long-term portion
|
|
|
47.1
|
|
|
|
44.4
|
|
|
|
|
|
|
|
|
|
|
Total insurance accruals
|
|
$
|
88.3
|
|
|
$
|
87.6
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
NOTES PAYABLE
AND LONG-TERM DEBT
|
Notes payable and long-term debt at December 31 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Floating rate senior unsecured
notes
|
|
$
|
300.0
|
|
|
$
|
|
|
7% senior unsecured notes
|
|
|
300.0
|
|
|
|
|
|
Term loan facility
|
|
|
600.0
|
|
|
|
|
|
Revolving credit facility
|
|
|
195.0
|
|
|
|
|
|
9% senior unsecured notes,
net of unamortized discount of $1.8 million at
December 31, 2005
|
|
|
14.1
|
|
|
|
321.7
|
|
Mortgage facility
|
|
|
116.0
|
|
|
|
153.7
|
|
Other debt
|
|
|
46.4
|
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,571.5
|
|
|
|
525.0
|
|
Less: current maturities
|
|
|
(13.6
|
)
|
|
|
(40.6
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current
maturities
|
|
$
|
1,557.9
|
|
|
$
|
484.4
|
|
|
|
|
|
|
|
|
|
|
In April 2006, the Company sold $300.0 million of floating
rate senior unsecured notes due April 15, 2013 and
$300.0 million of 7% senior unsecured notes due
April 15, 2014, in each case at par. The floating rate
senior unsecured notes bear interest at a rate equal to
three-month LIBOR plus 2.0% per annum, adjusted quarterly, and
may be redeemed by the Company on or after April 15, 2008
at 103% of principal, on or after April 15, 2009 at 102% of
principal, on or after April 15, 2010 at 101% of principal
and on or after April 15, 2011 at 100% of principal. The
7% senior unsecured notes may be redeemed by the Company on
or after April 15, 2009 at 105.25% of principal, on or
after April 15, 2010 at 103.5% of principal, on or after
April 15, 2011 at 101.75% of principal and on or after
April 15, 2012 at 100% of principal.
In connection with the issuance of the new senior unsecured
notes, the Company amended its existing credit agreement to
provide: (1) a $675.0 million revolving credit
facility that provides for various interest rates on borrowings
generally at LIBOR plus .80%, and (2) a $600.0 million
term loan facility that bears interest at a rate equal to LIBOR
plus 1.25%. In December 2006, the borrowing capacity of the
revolving credit facility was increased to $700.0 million
under the amended credit agreement. The amended credit
agreement, which includes the new term loan facility, terminates
on July 14, 2010, and is guaranteed by substantially all of
the Companys subsidiaries. The credit spread charged for
the revolving credit facility is impacted by the Companys
senior unsecured credit ratings. The Company has negotiated a
letter of credit sublimit as part of its revolving credit
facility. The amount available to be borrowed under the
revolving credit facility is reduced on a
dollar-for-dollar
basis by the cumulative amount of any outstanding letters of
credit, which totaled $92.3 million at December 31,
2006.
The proceeds of the new senior unsecured notes and term loan
facility, together with cash on hand and borrowings of
$80.0 million under the amended revolving credit facility,
were used to: (1) purchase 50 million
55
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares of the Companys common stock at $23 per share
for an aggregate purchase price of $1.15 billion pursuant
to the Companys equity tender offer, (2) purchase
$309.4 million aggregate principal of the Companys
9% senior unsecured notes for an aggregate total
consideration of $339.8 million pursuant to the
Companys debt tender offer and consent solicitation, and
(3) pay related financing costs. Approximately
$34.5 million of tender premium and other financing costs
related to the Companys debt tender offer was expensed
during 2006.
As discussed above, in April 2006 the Company purchased
$309.4 million aggregate principal amount of the
9% senior notes. The 9% senior unsecured notes are
guaranteed by substantially all of the Companys
subsidiaries. As of April 12, 2006, covenants related to
the 9% senior unsecured notes were substantially eliminated
as a result of the successful completion of the consent
solicitation. The remaining aggregate principal amount of
9% senior unsecured notes was not tendered for purchase
and, accordingly, remains outstanding after completion of the
transaction.
During 2005 and 2004, the Company repurchased
$123.1 million and $3.4 million (face value) of its
9.0% senior unsecured notes at an average price of 110.5%
and 114.3% of face value or $136.0 million and
$3.9 million, respectively. The premium paid and financing
costs of $17.4 million and $.6 million, respectively,
were recognized as Other Interest Expense Senior
Note Repurchases in the accompanying 2005 and 2004
Consolidated Income Statements.
At December 31, 2006, the Company had $116.0 million
outstanding under a mortgage facility with an automotive
manufacturers captive finance subsidiary. The facility,
which utilizes LIBOR-based interest rates, averaged 6.4% and
5.2% for 2006 and 2005, respectively. The mortgage facility is
secured by mortgages on certain of the Companys store
properties.
The Companys new senior unsecured notes, amended credit
agreement and mortgage facility contain numerous customary
financial and operating covenants that place significant
restrictions on the Company, including the Companys
ability to incur additional indebtedness or prepay existing
indebtedness, to create liens or other encumbrances, to sell (or
otherwise dispose of) assets and merge or consolidate with other
entities. The indenture for the Companys new senior
unsecured notes restricts the Companys ability to make
payments in connection with share repurchases, dividends, debt
retirement, investments and similar matters to a cumulative
aggregate amount that is limited to $500 million plus 50%
of the Companys cumulative consolidated net income (as
defined in the indenture), subject to certain exceptions and
conditions set forth in the indenture. The amended credit
agreement requires the Company to meet certain financial ratios,
including financial covenants, as defined, requiring the
maintenance of a maximum consolidated cash flow leverage ratio,
as defined, (2.75 times) and a maximum capitalization ratio
(65%), as defined. In addition, the indenture for the new senior
unsecured notes contains a debt incurrence restriction based on
a minimum fixed charge coverage ratio (2:1), and the mortgage
facility contains covenants regarding maximum cash flow leverage
and minimum interest coverage. In the event that the Company
were to default in the observance or performance of any of the
financial covenants in the amended credit agreement or mortgage
facility and such default were to continue beyond any cure
period or waiver, the lender under the respective facility could
elect to terminate the facilities and declare all outstanding
obligations under such facilities immediately payable. The
Companys amended credit agreement, the indenture for the
Companys new senior unsecured notes, vehicle floorplan
payable facilities and mortgage facility have cross-default
provisions that trigger a default in the event of an uncured
default under other material indebtedness of the Company. In
connection with the issuance of the new senior unsecured notes,
in November 2006, the Company completed an exchange offer
registered with the SEC pursuant to which the senior unsecured
notes were exchanged for substantially similar new notes that
are not subject to certain transfer restrictions. As of
December 31, 2006, the Company was in compliance with the
requirements of all applicable financial and operating covenants.
The Companys senior unsecured notes and borrowings under
the amended credit agreement are guaranteed by substantially all
of the Companys subsidiaries. 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.
56
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In the event of a downgrade in the Companys credit
ratings, none of the covenants described above would be
impacted. In addition, availability under the amended credit
agreement described above would not be impacted should a
downgrade in the senior unsecured debt credit ratings occur.
Certain covenants in the indenture for the new senior unsecured
notes would be eliminated with an upgrade of the Companys
new senior unsecured notes to investment grade by either
Standard & Poors or Moodys Investors
Services.
During 2000, the Company entered into a sale-leaseback
transaction involving its corporate headquarters facility that
resulted in net proceeds of approximately $52.1 million.
This transaction was accounted for as a financing lease, wherein
the property remains on the books and continues to be
depreciated. The Company has the option to renew the lease at
the end of the ten-year lease term subject to certain
conditions. The gain on this transaction has been deferred and
will be recognized at the end of the lease term, including
renewals. At December 31, 2006 and 2005, the remaining
obligation related to this transaction of $42.8 million and
$44.9 million, respectively, is included in Other Debt in
the above table.
At December 31, 2006, aggregate maturities of notes payable
and long-term debt, excluding vehicle floorplan payable, were as
follows:
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2007
|
|
$
|
13.6
|
|
2008
|
|
|
104.0
|
|
2009
|
|
|
21.9
|
|
2010
|
|
|
830.6
|
|
2011
|
|
|
1.4
|
|
Thereafter
|
|
|
600.0
|
|
|
|
|
|
|
|
|
$
|
1,571.5
|
|
|
|
|
|
|
|
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Proceedings
The Company is involved, and will continue to be involved, in
numerous legal proceedings arising out of the conduct of its
business, including litigation with customers, employment
related lawsuits, class actions, purported class actions and
actions brought by governmental authorities.
Many of the Companys Texas dealership subsidiaries had
been named in three class action lawsuits brought against the
Texas Automobile Dealers Association (TADA) and
approximately 700 new vehicle stores in Texas that are members
of the TADA. The three actions allege that, since January 1994,
Texas dealers deceived customers with respect to a vehicle
inventory tax and violated federal antitrust and other laws as
well. In February 2005, the Company and the plaintiffs in all
three of the cases agreed to settlement terms. The state court
granted final approval of the settlement on August 14,
2006. The Company has been dismissed from the state court
actions and the federal court action. The anticipated expense of
the settlement is not material and includes the Companys
stores issuing coupons for discounts off future vehicle
purchases, refunding cash in certain circumstances and paying
attorneys fees and certain costs. Under the terms of the
settlement, the Companys stores are permitted to continue
to itemize and pass through to the customer the cost of the
vehicle inventory tax.
In addition to the foregoing cases, 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 results of operations, financial condition or cash flows.
However, the results of these matters cannot be predicted with
certainty, and an unfavorable resolution of one or more of these
matters could have a material adverse effect on its financial
condition, results of operations and cash flows.
57
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lease
Commitments
The Company leases real property, equipment and software under
various operating leases most of which have terms from one to
twenty years. The Company accounts for leases under
SFAS No. 13, Accounting for Leases, and
other related authoritative literature.
Expenses under real property, equipment and software leases were
$60.7 million, $59.8 million and $56.7 million
for the years ended December 31, 2006, 2005 and 2004,
respectively. The leases require payment of real estate taxes,
insurance and common area maintenance in addition to rent. Most
of the leases contain renewal options and escalation clauses.
Lease expense is recognized on a straight-line basis over the
term of the lease, including any option periods, as appropriate.
The same lease term is used for lease classification, the
amortization period of related leasehold improvements and the
estimation of future lease commitments.
Future minimum lease obligations under non-cancelable real
property, equipment and software leases with initial terms in
excess of one year at December 31, 2006 are as follows:
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2007
|
|
$
|
60.7
|
|
2008
|
|
|
54.7
|
|
2009
|
|
|
47.7
|
|
2010
|
|
|
41.2
|
|
2011
|
|
|
36.9
|
|
Thereafter
|
|
|
263.5
|
|
|
|
|
|
|
|
|
|
504.7
|
|
Less: sublease rentals
|
|
|
(14.0
|
)
|
|
|
|
|
|
|
|
$
|
490.7
|
|
|
|
|
|
|
Other
Matters
The Company, acting through its subsidiaries, is the lessee
under many real estate leases that provide for the use by the
Companys subsidiaries of their respective dealership
premises. Pursuant to these leases, the Companys
subsidiaries generally agree to indemnify the lessor and other
related parties from certain liabilities arising as a result of
the use of the leased premises, including environmental
liabilities, or a breach of the lease by the lessee.
Additionally, from time to time, the Company enters into
agreements with third parties in connection with the sale of
assets or businesses in which it agrees to indemnify the
purchaser or related parties from certain liabilities or costs
arising in connection with the assets or business. Also, in the
ordinary course of business in connection with purchases or
sales of goods and services, the Company enters into agreements
that may contain indemnification provisions. In the event that
an indemnification claim is asserted, liability would be limited
by the terms of the applicable agreement.
From time to time, primarily in connection with dispositions of
automotive stores, the Companys subsidiaries assign or
sublet to the dealership purchaser the subsidiaries
interests in any real property leases associated with such
stores. In general, the Companys subsidiaries retain
responsibility for the performance of certain obligations under
such leases to the extent that the assignee or sublessee does
not perform, whether such performance is required prior to or
following the assignment or subletting of the lease.
Additionally, the Company and its subsidiaries generally remain
subject to the terms of any guarantees made by the Company and
its subsidiaries in connection with such leases. Although the
Company generally has indemnification rights against the
assignee or sublessee in the event of non-performance under
these leases, as well as certain defenses, and the Company
presently has no reason to believe that it or its subsidiaries
will be called on to perform under any such assigned leases or
subleases, the Company estimates that lessee rental payment
obligations during the remaining terms of
58
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
these leases are approximately $80 million at
December 31, 2006. The Company and its subsidiaries also
may be called on to perform other obligations under these
leases, such as environmental remediation of the leased premises
or repair of the leased premises upon termination of the lease,
although the Company presently has no reason to believe that it
or its subsidiaries will be called on to so perform and such
obligations cannot be quantified at this time. The
Companys exposure under these leases is difficult to
estimate and there can be no assurance that any performance of
the Company or its subsidiaries required under these leases
would not have a material adverse effect on the Companys
business, financial condition and cash flows.
At December 31, 2006, surety bonds, letters of credit and
cash deposits totaled $124.9 million, including
$92.3 million of letters of credit. In the ordinary course
of business, the Company is required to post performance and
surety bonds, letters of credit,
and/or cash
deposits as financial guarantees of the Companys
performance. The Company does not currently provide cash
collateral for outstanding letters of credit.
In the ordinary course of business, the Company is subject to
numerous laws and regulations, including automotive,
environmental, health and safety and other laws and regulations.
The Company does not anticipate that the costs of such
compliance will have a material adverse effect on its business,
consolidated results of operations, cash flows or financial
condition, although such outcome is possible given the nature of
the Companys operations and the extensive legal and
regulatory framework applicable to its business. The Company
does not have any material known environmental commitments or
contingencies.
A summary of yearly repurchase activity follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Aggregate
|
|
Year Ended December 31:
|
|
Repurchased
|
|
|
Purchase Price
|
|
|
2006
|
|
|
61.2
|
|
|
$
|
1,380.6
|
|
2005
|
|
|
11.8
|
|
|
$
|
237.1
|
|
2004
|
|
|
14.1
|
|
|
$
|
236.8
|
|
As discussed in Note 7 to the Notes to the Consolidated
Financial Statements, the Company purchased 50 million
shares of its common stock at $23 per share for an aggregate
purchase price of $1.15 billion pursuant to an equity
tender offer in April 2006. After the completion of the equity
tender offer, the Company repurchased an additional
11.2 million shares of its common stock for a purchase
price of $228.9 million during the remainder of 2006, for a
total of 61.2 million shares repurchased for an aggregate
purchase price of $1.38 billion in 2006. There is
approximately $92.4 million available for share repurchases
authorized by the Companys Board of Directors as of
December 31, 2006. Future share repurchases are subject to
limitations contained in the indenture relating to the
Companys senior unsecured notes.
In 2006 and 2004, the Companys Board of Directors
authorized the retirement of 50 million and 20 million
treasury shares, respectively, which assumed the status of
authorized but unissued shares. This had the effect of reducing
treasury stock and issued common stock, which includes treasury
stock. The Companys outstanding common stock, net of
treasury stock, was not impacted by the treasury share
retirements. The Companys common stock, additional paid-in
capital and treasury stock accounts have been adjusted
accordingly. There was no impact to shareholders equity.
The Company has 5 million authorized shares of preferred
stock, par value $.01 per share, none of which are issued
or outstanding. The Board of Directors has the authority to
issue the preferred stock in one or more series and to establish
the rights, preferences and dividends.
During 2006, 2005 and 2004, proceeds from the exercise of stock
options were $75.7 million, $112.8 million and
$94.2 million, respectively.
59
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, the Company recorded $15.2 million
($9.3 million on an after-tax basis) of compensation
expense (included in Selling, General and Administrative
Expenses in the 2006 Consolidated Income Statement) attributable
to stock options granted or vested subsequent to
December 31, 2005.
The Company uses the Black-Scholes valuation model to determine
compensation expense and amortizes compensation expense over the
requisite service period of the grants on a straight-line basis.
The following table summarizes the assumptions used:
|
|
|
Risk-free interest rate
|
|
2.99% - 5.16%
|
Expected dividend yield
|
|
|
Expected term
|
|
4 7 years
|
Expected volatility
|
|
32% 40%
|
The risk-free interest rate is based on the U.S. Treasury
yield curve at the time of the grant. The expected term of stock
options granted is derived from historical data and represents
the period of time that stock options are expected to be
outstanding. The expected volatility is based on historical
volatility, implied volatility and other factors impacting the
Company, including the debt and equity tender offers discussed
in Notes 7 and 9 to the Notes to the Consolidated Financial
Statements.
The following table summarizes stock option activity during 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic Value
|
|
|
|
(in millions)
|
|
|
Price
|
|
|
(Years)
|
|
|
(in millions)
|
|
|
Options outstanding at beginning
of year
|
|
|
28.0
|
|
|
$
|
16.39
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2.2
|
|
|
$
|
20.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5.7
|
)
|
|
$
|
13.24
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(.6
|
)
|
|
$
|
18.91
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1.4
|
)
|
|
$
|
24.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of year
|
|
|
22.5
|
|
|
$
|
17.01
|
|
|
|
4.1
|
|
|
$
|
97.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of year
|
|
|
17.5
|
|
|
$
|
16.27
|
|
|
|
2.8
|
|
|
$
|
88.4
|
|
Options available for future grants
|
|
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of stock options
granted during 2006, 2005 and 2004 was $8.21, $7.74 and $5.88,
respectively. The total intrinsic value of stock options
exercised during 2006, 2005 and 2004 was $47.5 million,
$84.9 million and $54.0 million, respectively.
A summary of non-vested stock option transactions is as follows
for 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Shares
|
|
|
Granted-Date Fair
|
|
|
|
(in millions)
|
|
|
Value (per share)
|
|
|
Nonvested at beginning of period
|
|
|
6.0
|
|
|
$
|
6.67
|
|
Granted
|
|
|
2.0
|
|
|
$
|
8.18
|
|
Vested
|
|
|
(2.4
|
)
|
|
$
|
6.23
|
|
Forfeited
|
|
|
(.6
|
)
|
|
$
|
6.98
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period
|
|
|
5.0
|
|
|
$
|
7.44
|
|
|
|
|
|
|
|
|
|
|
60
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, there was $27.3 million of
total unrecognized compensation cost related to non-vested stock
options, which is expected to be recognized over a period of
four years. The total fair value of shares vested during 2006
was $14.7 million.
Prior to the adoption of SFAS No. 123R, the Company
reported all tax benefits resulting from the exercise of common
stock options as operating cash flows in the Companys
Consolidated Statements of Cash Flows. In accordance with
SFAS No. 123R, tax benefits from the exercise of stock
options of $18.0 million are reported as financing cash
flows in 2006.
The components of the provision for income taxes from continuing
operations for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
165.7
|
|
|
$
|
180.7
|
|
|
$
|
147.3
|
|
State
|
|
|
26.9
|
|
|
|
31.7
|
|
|
|
23.6
|
|
Federal and state deferred
|
|
|
19.7
|
|
|
|
30.4
|
|
|
|
63.3
|
|
Change in valuation allowance, net
|
|
|
(2.3
|
)
|
|
|
2.1
|
|
|
|
.5
|
|
Adjustments and settlements, net
|
|
|
.7
|
|
|
|
(16.6
|
)
|
|
|
(26.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
210.7
|
|
|
$
|
228.3
|
|
|
$
|
208.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes calculated
using the statutory federal income tax rate to the
Companys provision for income taxes from continuing
operations for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
%
|
|
|
2005
|
|
|
%
|
|
|
2004
|
|
|
%
|
|
|
Provision for income taxes at
statutory rate of 35%
|
|
$
|
189.7
|
|
|
|
35.0
|
|
|
$
|
218.8
|
|
|
|
35.0
|
|
|
$
|
210.5
|
|
|
|
35.0
|
|
Non-deductible expenses
|
|
|
3.2
|
|
|
|
.6
|
|
|
|
2.3
|
|
|
|
.4
|
|
|
|
2.1
|
|
|
|
.4
|
|
State income taxes, net of federal
benefit
|
|
|
19.4
|
|
|
|
3.6
|
|
|
|
21.7
|
|
|
|
3.5
|
|
|
|
21.6
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212.3
|
|
|
|
39.2
|
|
|
|
242.8
|
|
|
|
38.9
|
|
|
|
234.2
|
|
|
|
39.0
|
|
Change in valuation allowance, net
|
|
|
(2.3
|
)
|
|
|
(.4
|
)
|
|
|
2.1
|
|
|
|
.3
|
|
|
|
.5
|
|
|
|
.1
|
|
Adjustments and settlements, net
|
|
|
.7
|
|
|
|
.1
|
|
|
|
(16.6
|
)
|
|
|
(2.7
|
)
|
|
|
(26.3
|
)
|
|
|
(4.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
210.7
|
|
|
|
38.9
|
|
|
$
|
228.3
|
|
|
|
36.5
|
|
|
$
|
208.4
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income tax asset and liability components at
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
(8.3
|
)
|
|
$
|
(8.9
|
)
|
Receivable reserves
|
|
|
(5.6
|
)
|
|
|
(5.4
|
)
|
Warranty, chargeback and
self-insurance liabilities
|
|
|
(58.0
|
)
|
|
|
(57.1
|
)
|
Other accrued liabilities
|
|
|
(31.0
|
)
|
|
|
(28.3
|
)
|
Other, net
|
|
|
(31.4
|
)
|
|
|
(22.6
|
)
|
Loss carryforwards
Federal and State
|
|
|
(17.2
|
)
|
|
|
(20.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(151.5
|
)
|
|
|
(142.5
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowances
|
|
|
12.3
|
|
|
|
14.8
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Long-lived assets (intangibles and
property)
|
|
|
283.7
|
|
|
|
232.4
|
|
Other, net
|
|
|
6.1
|
|
|
|
5.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289.8
|
|
|
|
237.5
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax (assets)
liabilities
|
|
$
|
150.6
|
|
|
$
|
109.8
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006 and 2005, current deferred income tax
assets of $74.8 million and $76.4 million,
respectively, are classified as Other Current Assets in the
accompanying Consolidated Balance Sheets.
At December 31, 2006, income taxes refundable included in
Accounts Receivable totaled $28.9 million. At
December 31, 2005, income taxes payable included in Other
Current Liabilities totaled $88.5 million.
At December 31, 2006, the Company had $6.6 million of
federal capital loss carryforwards in addition to gross domestic
state net operating loss carryforwards and capital loss
carryforwards totaling approximately $334.7 million
(representing a deferred tax asset of $17.2 million), which
expire from 2007 through 2027. At December 31, 2006, the
Company had $12.3 million of valuation allowance related to
these loss carryforwards. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The Company provides valuation
allowances to offset portions of deferred tax assets due to
uncertainty surrounding the future realization of such deferred
tax assets. The Company adjusts the valuation allowance in the
period management determines it is more likely than not that
deferred tax assets will or will not be realized. Certain
decreases to valuation allowances are offset against intangible
assets associated with business acquisitions accounted for under
the purchase method of accounting.
In March 2003, the Company entered into a settlement agreement
with the IRS with respect to the tax treatment of certain
transactions the Company entered into in 1997 and 1999. In 2004,
the Company paid the remaining balance due related to the IRS
settlement totaling $128.9 million, including accrued
interest.
During 2005 and 2004, the Company recorded net income tax
benefits to the provision for income taxes totaling
$14.5 million and $25.8 million, respectively,
primarily related to the resolution of various income tax
matters. The Company also recognized income of
$110.0 million and $52.2 million included in
Discontinued Operations in 2005 and 2004, respectively, related
to the settlement of various income tax matters.
As a matter of course, various taxing authorities, including the
IRS, regularly audit the Company. Currently, the IRS is auditing
the tax years from 2002 to 2004. These audits may result in
proposed assessments where the ultimate resolution may result in
the Company owing additional taxes. The Company believes that
its tax positions comply with applicable tax law and that it has
adequately provided for these matters. Included in Other Current
62
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liabilities at December 31, 2006 and 2005 are
$58.7 million and $54.5 million, respectively,
provided by the Company for these matters.
The computation of weighted average common and common equivalent
shares used in the calculation of basic and diluted earnings per
share is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average shares
outstanding used to calculate basic earnings per share
|
|
|
225.2
|
|
|
|
262.7
|
|
|
|
266.7
|
|
Effect of dilutive options
|
|
|
4.1
|
|
|
|
5.3
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common
equivalent shares used to calculate diluted earnings per share
|
|
|
229.3
|
|
|
|
268.0
|
|
|
|
272.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 7 of the Notes to Consolidated
Financial Statements, in April 2006 the Company repurchased
50 million shares of its common stock pursuant to an equity
tender offer. As of December 31, 2006, the Company had
employee stock options outstanding of 22.5 million of which
5.5 million have been excluded from the computation of
diluted earnings per share since they are anti-dilutive. As of
December 31, 2005 and 2004, outstanding employee stock
options totaling 7.2 million and 9.3 million,
respectively, have been excluded since they were anti-dilutive.
|
|
13.
|
DISCONTINUED
OPERATIONS
|
Discontinued operations are related to stores that were sold,
that the Company has entered into an agreement to sell, or for
which the Company otherwise deems a proposed sales transaction
to be probable, with no material changes expected. Generally,
the sale of a store is completed within 60 to 90 days after
the date of a sale agreement. The accompanying Consolidated
Financial Statements for all the periods presented have been
adjusted to classify these stores as discontinued operations.
Also included in results from discontinued operations in 2005
and 2004 is income from an income tax adjustment related to
items previously reported in discontinued operations. Selected
income statement data for the Companys discontinued
operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Total revenue
|
|
$
|
325.8
|
|
|
$
|
738.5
|
|
|
$
|
1,333.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued
operations
|
|
$
|
(10.4
|
)
|
|
$
|
(14.2
|
)
|
|
$
|
(4.8
|
)
|
Pre-tax loss on disposal of
discontinued operations
|
|
|
(6.6
|
)
|
|
|
(6.3
|
)
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.0
|
)
|
|
|
(20.5
|
)
|
|
|
(12.3
|
)
|
Income t |