10-K
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, 2008
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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
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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110 S.E. 6TH STREET,
FORT LAUDERDALE, FLORIDA
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33301
(Zip Code)
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(Address of principal executive
offices)
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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 $0.01 Per Share
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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, 2008, the aggregate market value of the
common stock of the registrant held by non-affiliates was
approximately $1.0 billion based on the closing price of
the common stock on the New York Stock Exchange on such date.
As of February 9, 2009, the registrant had
176,853,283 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement relating to
its 2009 Annual Meeting of Stockholders are incorporated herein
by reference in Part III.
AUTONATION,
INC.
FORM 10-K
FOR THE
FISCAL YEAR ENDED DECEMBER 31, 2008
INDEX
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Page
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Business
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1
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Risk Factors
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11
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Unresolved Staff Comments
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18
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Properties
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18
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Legal Proceedings
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18
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Submission of Matters to a Vote of Security Holders
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19
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Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
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20
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Selected Financial Data
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22
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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23
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Quantitative and Qualitative Disclosures About Market Risk
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52
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Financial Statements and Supplementary Data
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53
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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92
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Controls and Procedures
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92
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Other Information
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92
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Directors, Executive Officers and Corporate Governance
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92
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Executive Compensation
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93
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Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
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93
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Certain Relationships and Related Transactions, and Director
Independence
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93
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Principal Accounting Fees and Services
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93
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Exhibits, Financial Statement Schedules
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93
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PART I
General
AutoNation, Inc., through its subsidiaries, is the largest
automotive retailer in the United States. As of
December 31, 2008, we owned and operated 302 new vehicle
franchises from 232 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 approximately 96% of the new vehicles
that we sold in 2008, are manufactured by Toyota, Ford, Honda,
Nissan, General Motors, Daimler, BMW, and Chrysler.
We offer a diversified range of automotive products and
services, including new vehicles, used vehicles, parts and
automotive services, and automotive finance and insurance
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, implementing
standardized processes, and increasing productivity across all
of our stores.
We were incorporated in Delaware in 1991. For convenience, the
terms AutoNation, Company, and
we are used to refer collectively to AutoNation,
Inc. and its subsidiaries, unless otherwise required by the
context. Our dealership operations are conducted by our
subsidiaries.
Operating
Segments
As of December 31, 2008, we had three operating segments:
Domestic, Import, and Premium Luxury. Our Domestic segment is
comprised of retail automotive franchises that sell new vehicles
manufactured by General Motors, Ford, and Chrysler. Our Import
segment is comprised of retail automotive franchises that sell
new vehicles manufactured primarily by Toyota, Honda, and
Nissan. Our Premium Luxury segment is comprised of retail
automotive franchises that sell new vehicles manufactured
primarily by Mercedes, BMW, and Lexus. The franchises in each
segment also sell used vehicles, parts and automotive services,
and automotive finance and insurance products. For the year
ended December 31, 2008, Domestic revenue represented 35%
of total revenue, Import revenue represented 39% of total
revenue, and Premium Luxury represented 26% of total revenue.
Our operating segment structure as of December 31, 2008
reflected changes we made during the third quarter of 2008.
Prior to the third quarter of 2008, we had a single operating
segment. During the third quarter of 2008, our Chief Executive
Officer made changes to his management approach that divided our
business into the three operating segments described above. This
change in our operating segment structure had no effect on our
previously reported consolidated results of operations,
financial position, or cash flows. We have reclassified
historical amounts to conform to our current segment
presentation. For additional information regarding the change in
our operating segment structure as well as financial information
for our three operating segments, please refer to Note 21
of the Notes to Consolidated Financial Statements set forth in
Part II, Item 8 of this
Form 10-K.
Except to the extent that differences among operating segments
are material to an understanding of our business taken as a
whole, the description of our business in this report is
presented on a consolidated basis.
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, and we leverage information technology to
enhance our customer relationships.
A key component of our long-term 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
dealership acquisitions, and to repurchase our debt
and/or
common stock. Our capital allocation decisions will be based on
factors such as the expected rate of return on our investment,
the market price of our common stock versus our view of its
intrinsic value, the potential impact on our capital structure,
our ability to complete dealership acquisitions that meet our
return on investment target, and limitations set forth in our
debt agreements. As part of our long-term strategy, we also
intend to divest non-core stores in order to improve our
portfolio of stores in furtherance of our brand portfolio
strategy as described in the next paragraph and to generate
sales proceeds that can be reinvested at a higher expected rate
of return. In 2008, in light of the economic conditions, our
liquidity and capital resource strategies were focused on
generating cash and paying down debt to maintain compliance with
the financial covenants in our debt agreements. See
Liquidity and Capital Resources in Part II,
Item 7 of this
Form 10-K.
We expect that in 2009 we will continue to use a substantial
portion of our cash to pay down debt.
As part of our business strategy, our acquisition and
divestiture program has been and is designed to improve our
store brand portfolio by focusing our store mix more towards
import and premium luxury brands. In 1999, approximately 60% of
our new vehicle revenue was attributable to our domestic
franchises, while approximately 40% was attributable to import
and premium luxury franchises. In 2008, approximately 70% of our
new vehicle revenue was generated by import and premium luxury
franchises and approximately 30% was generated by domestic
franchises. We are focused on improving our brand portfolio by
selling underperforming stores, which are primarily domestic,
and we expect that in 2009 we will continue to increase our mix
of import and premium luxury stores. See Market
Challenges in Part II, Item 7 of this
Form 10-K
for a discussion of the difficult conditions in the automotive
retail market and the related impact on domestic manufacturers.
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, including a customer-friendly sales menu
designed to provide clear disclosure of purchase or lease
transaction terms. We believe these processes improve the sales
and service experiences of our customers. 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, maintenance, and collision needs. Our key initiatives
for our parts and service business are focused on optimizing our
processes, pricing, and promotion, thus improving customer
retention. 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. Our processes and marketing communications
are focused on increasing our customer-pay service, collision,
and parts business. As a result of our significant scale, we
believe we can communicate frequently and effectively with our
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customers. We optimize our pricing to maintain a competitive
offering 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
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,
and with a 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 believe the combination of
our pledge and our menu improves our customers shopping
experience for finance and insurance products at our stores. We
offer our customers aftermarket products such as extended
service contracts, maintenance programs, theft deterrent
systems, and various insurance products. We 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
planning and tracking systems in 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 manage our new vehicle inventory to achieve specific days
supply 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 in order to
minimize carrying costs. We believe our inventory management
enables us to (1) respond to customer requests better than
independent retailers in the markets where we have a critical
mass in a particular brand, (2) minimize carrying costs by
maintaining lower days supply, and (3) better plan and
forecast inventory levels. See also Inventory
Management in Part II, Item 7 of this
Form 10-K.
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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. Our used vehicle
business strategy is focused on (1) utilizing our web-based
vehicle inventory management system to leverage our local market
inventory and optimize our supply, mix, and pricing,
(2) 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, and
(3) 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. We
have deployed used vehicle specialists in each of our key
markets to assist us in executing our strategy.
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Managing Costs: We actively 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.
For example, we realize cost efficiencies with respect to
advertising and facilities maintenance that are generally not
available to smaller retailers. In 2008, we implemented a cost
reduction plan in response to the ongoing market challenges. See
Market Challenges in Part II, Item 7 of
this
Form 10-K.
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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 enhance
standardized compensation guidelines and common element pay
plans at our stores. These guidelines and pay plans take into
account our sales volume, customer satisfaction, gross margin
objectives, vehicle brand, and the size of the store. Our goals
are to improve employee productivity, to 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 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 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 run the AutoNation General Manager
University 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 non-premium luxury 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 sales, service, and finance and insurance
standardized processes, 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, 2008, accounted for approximately
68% of our total revenue during 2008.
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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 customers 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, auctions, lease terminations, 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 offer a wide variety of financial products and services to
our customers. 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. Commissions that we receive may be subject to
chargeback, in full or in part, if loans that we arrange default
or are prepaid or upon other specified circumstances. However,
our exposure to loss in connection with these financing
arrangements generally is limited to the commissions that we
receive. We do not directly finance our customers vehicle
leases or purchases.
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),
tire and wheel protection, and theft protection
products. 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 for certain products pursuant to
retrospective commission arrangements. 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 440,000 new and used vehicles through
our stores in 2008. We sell a broad range of well-known vehicle
brands 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, we have been able to focus our efforts on building
consumer awareness of the selected local retail brand rather
than on the individual legacy names under which many of 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 non-premium luxury 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
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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 Internet search engines, such as Google,
through our own websites, and through strategic partnerships and
alliances with
e-commerce
companies, and (3) developing and maintaining a cost
structure that permits us to operate efficiently.
Agreements
with Vehicle Manufacturers
Framework
Agreements
We have entered into framework agreements with most major
vehicle manufacturers and distributors. These agreements, which
are in addition to the franchise agreements described below,
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 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 floating rate senior unsecured notes due 2013 and
7% senior unsecured notes due 2014 (collectively referred
to herein as the senior unsecured notes) or the
amended credit agreement for our revolving credit facility and
term loan facility.
In January 2009, our Board of Directors authorized and approved
letter agreements with certain automotive manufacturers in order
to, among other things, eliminate any potential adverse
consequences under our framework agreements with those
manufacturers in the event that ESL Investments, Inc. and
certain of its investment affiliates (together, ESL)
acquires 50% or more of our common stock. The letter agreements
with American Honda Motor Co., Inc. (Honda) and
Toyota Motor Sales, U.S.A., Inc. (Toyota) also
contain governance-related and other provisions as described
below. Also a party to both the Honda and Toyota Agreements is
ESL, our largest shareholder. As of February 6, 2009, ESL
beneficially owned approximately 45% of the outstanding shares
of our common stock.
Under the terms of the Honda Agreement, Honda has agreed not to
assert its right to purchase our Honda and Acura franchises
and/or
similar remedies under the manufacturer framework agreement
between Honda and the Company in the event that ESL acquires 50%
or more of our common stock. If ESL acquires more than 50% of
our common stock, ESL has agreed to vote all shares in excess of
50% in the same proportion as all non-ESL-owned shares are
voted. In addition, we have agreed to ensure that a majority of
our Board is independent of both the Company and ESL under
existing New York Stock Exchange (NYSE) listing
standards. Furthermore, the Honda Agreement provides that
Hondas consent does not apply to a going
private transaction under
Rule 13e-3
of the Securities Exchange Act of 1934. The terms and conditions
of the Honda Agreement will only apply at such time and for so
long as ESL owns more than 50% of our common stock.
Under the terms of the Toyota Agreement, Toyota has agreed not
to assert its right to purchase our Toyota and Lexus franchises
and/or
similar remedies under the manufacturer framework agreement
between
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Toyota and the Company in the event that ESL acquires 50% or
more of our common stock. If ESL acquires more than 50% of our
common stock, ESL has agreed to vote all shares in excess of 50%
in the same proportion as all non-ESL-owned shares are voted.
Furthermore, we have agreed that a majority of our Board will be
independent from both the Company and from ESL under existing
NYSE listing standards. We have also agreed not to merge,
consolidate, or combine with any entity owned or controlled by
ESL unless Toyota consents thereto. In addition, the Toyota
Agreement provides that in the event that we appoint a Chief
Operating Officer who, in the good faith judgment of our Board,
does not have sufficient breadth and depth of experience, a
relevant, successful automotive track record, and extensive
successful automotive experience, ESL shall be required to
divest its shares in excess of 50% within nine (9) months
or its voting interest will be limited to 25%, and if ESL does
not divest such shares within eighteen (18) months, it will
lose all voting rights until it divests such shares. The terms
and conditions of the Toyota Agreement will only apply at such
time and for so long as ESL owns more than 50% of our common
stock and will terminate on December 31, 2009 with respect
to future stock acquisitions by ESL, provided that ESL may seek
successive annual one-year extensions, and Toyota may not
unreasonably withhold or delay its consent thereto.
In connection with the Toyota and Honda agreements described
above, in January 2009, our Board authorized and approved a
separate letter agreement between the Company and ESL in which
ESL has agreed to vote shares of our common stock owned by ESL
in excess of 45% in the same proportion as all non-ESL-owned
shares are voted. The ESL Agreement expires on January 28,
2010, unless extended by mutual agreement of the parties.
We have also entered into separate letter agreements with
certain other manufacturers that eliminate any potential adverse
consequences under our framework agreements with those
manufacturers in the event that ESL acquires 50% or more of our
common stock. ESL is not a party to any of those agreements.
Franchise
Agreements
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 manufacturers 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 relevant
manufacturers 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, 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. We
generally work with these manufacturers to address the asserted
performance issues. For additional information, 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.
7
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 our
stores by individuals, a class of 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
8
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 CNW Marketing Research, Inc., as of December 2008, the
automotive retail industry is served by approximately 19,000
franchised automotive dealerships and approximately 39,000
independent used vehicle dealers. We face competition from
several other public companies that operate numerous automotive
retail stores on a national or regional basis and from private
market buyers and sellers of used vehicles. 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
compete with other dealers for qualified employees, particularly
for general managers and sales and service personnel.
In general, the vehicle manufacturers have designated 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 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 aftermarket
products businesses. We believe the principal competitive
factors in these businesses are product selection, convenience,
price, contract terms, and the ability to finance vehicle
protection and aftermarket 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, fires, landslides, 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
9
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.
Employees
As of December 31, 2008, we employed approximately
20,000 full-time employees, approximately 121 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 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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60
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Chairman of the Board and Chief Executive Officer
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Michael E. Maroone
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55
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Director, President and Chief Operating Officer
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Michael J. Short
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47
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Executive Vice President and Chief Financial Officer
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Jonathan P. Ferrando
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43
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Executive Vice President, General Counsel and Secretary
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Kevin P. Westfall
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53
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Senior Vice President, Sales
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Mike Jackson has served as our Chairman of the
Board since January 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
10
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 AutoNation, 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 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. He served 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.
SEC
Filings and Certifications
Our web site is located at www.autonation.com, and our
Investor Relations web site is located at
corp.autonation.com/investors.
The information on or accessible through our web sites is not
incorporated by reference in this Annual Report on
Form 10-K.
Our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to reports filed or furnished pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended, are available, free of charge, on our Investor
Relations web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission (the SEC).
The Company has filed the certifications required under
Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits
to this Annual Report on
Form 10-K.
On June 5, 2008, the Company submitted to the New York
Stock Exchange (the NYSE) the annual CEO
certification as required under applicable rules of the NYSE.
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
11
officers on our behalf, constitute forward-looking
statements within the meaning of the Federal Private
Securities Litigation Reform Act of 1995. Words such as
anticipates, believes,
estimates, expects, intends,
may, plans, seeks,
projects, will, would, and
similar expressions are intended to identify such
forward-looking statements. 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
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:
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
automotive retailers gross profit margins in the United
States and in our particular geographic markets, including the
economy, fuel prices, credit availability, interest rates,
consumer confidence, the level of personal discretionary
spending, unemployment rates, the state of housing markets, auto
emission and fuel economy standards, the rate of inflation, the
level of manufacturers production capacity, manufacturer
incentives (and consumers reaction to such offers),
intense industry competition, the prospects of war, other
international conflicts or terrorist attacks, severe weather
events, product quality, affordability and innovation, the
number of consumers whose vehicle leases are expiring, and the
length of consumer loans on existing vehicles. Changes in
interest rates can significantly impact industry new vehicle
sales and vehicle affordability due to the direct relationship
between interest rates and monthly loan payments, a critical
factor for many vehicle buyers, and the impact interest rates
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, are sensitive to fuel
prices and the level of construction activity. In 2008, new
vehicle sales were impacted by unfavorable economic conditions
in the United States, including the continued turbulence in the
credit and housing markets, and experienced a significant
decline. See the risk factor Our results of operations
and financial condition have been and could continue to be
adversely affected by the conditions in the credit markets and
the declining economic conditions in the United States
below. Additionally, in 2008, volatility in fuel prices impacted
consumer preferences and caused dramatic swings in consumer
demand for various vehicle models, which led to supply and
demand imbalances.
In the fourth quarter of 2008, the seasonally adjusted annual
rate of new vehicle sales in the United States was
10.3 million. In comparison, full-year U.S. industry new
vehicle sales were 13.2 million in 2008 and
16.1 million in 2007. We expect that the
U.S. automotive retail market will remain challenging in
2009. Our new vehicle sales may differ from industry sales due
to particular economic conditions and other factors in the
geographic markets in which we operate. Economic conditions and
the other factors described above may also materially adversely
impact our sales of used vehicles, parts and automotive repair
and maintenance services, and automotive finance and insurance
products.
Our
results of operations and financial condition have been and
could continue to be adversely affected by the conditions in the
credit markets and the declining economic conditions in the
United States.
The recent turmoil in the credit markets has resulted in tighter
credit conditions and has adversely impacted our business. In
the automotive finance market, tight credit conditions have
resulted in a decrease in the availability of automotive loans
and leases and more stringent lending restrictions.
Additionally, the
12
declining economic conditions in the United States have
adversely impacted demand for new and used vehicles. As a
result, our new and used vehicle sales and margins have been
adversely impacted. If the unfavorable economic conditions
continue and the availability of automotive loans and leases
remains limited, we anticipate that our vehicle sales and
margins will continue to be adversely impacted. In addition, we
obtain a significant amount of financing for our customers
through the captive finance companies of automotive
manufacturers, including the domestic manufacturers whose
finance companies have been adversely affected by the conditions
in the credit markets. In the fourth quarter of 2008, the
availability of automotive loans and leases through certain of
these companies declined significantly, forcing us to seek
alternate financing sources. To the extent that we are unable to
obtain financing for our customers through these companies, our
sales of vehicles, particularly domestic, could continue to be
adversely affected.
We also rely on floorplan financing to purchase new vehicle
inventory, primarily through the manufacturer-related captive
finance companies. Certain of these companies have altered their
floorplan programs to our detriment, providing additional
restrictions on lending and increasing interest rates. To the
extent that these companies cannot or are unwilling to provide
floorplan financing on customary terms, we would need to seek
floorplan financing from other lenders. Any inability to obtain
floorplan financing on customary terms, or the termination of
our floorplan financing agreements by our floorplan lenders, in
which case we could be required to repay our floorplan financing
on demand, could materially adversely affect our results of
operations, financial condition, and cash flows.
Our
revolving credit facility, term loan facility, mortgage
facility, and the indenture relating to our senior unsecured
notes contain certain financial ratios and other restrictions on
our ability to conduct our business.
The indenture relating to our 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. A failure by us to comply with the obligations
contained in our amended credit agreement or the indenture
relating to our senior unsecured notes could result in an event
of default under our amended credit agreement or the indenture,
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 senior unsecured notes or
the amended credit agreement for our revolving credit facility
and term loan facility.
Under our amended credit agreement, we are required to remain in
compliance with a maximum consolidated leverage ratio and a
maximum capitalization ratio. See Liquidity and Capital
Resources Restrictions and Covenants in
Part II, Item 7 of this
Form 10-K.
The decline in our earnings has adversely impacted our
consolidated leverage ratio. Recent impairment charges
associated with goodwill and franchise rights have adversely
impacted our capitalization ratio. See Liquidity and
Capital Resources Restrictions and Covenants
in Part II, Item 7 of this
Form 10-K.
If our earnings continue to decline or if we are required to
record additional charges in the future, we may be unable to
comply with the financial ratios required by our amended credit
agreement. In such case, we would seek an amendment or waiver of
our amended credit agreement or consider other options, such as
raising capital through an equity issuance to pay down debt,
which could be dilutive to stockholders. There can be no
assurance that our lenders would agree to an amendment or waiver
of our amended credit agreement. In the event we obtain an
amendment or waiver of our amended credit agreement, we would
likely incur additional fees and higher interest expense.
13
Our
substantial indebtedness could adversely affect our financial
condition and operations and prevent us from fulfilling our debt
service obligations.
As of December 31, 2008, we had approximately
$1.3 billion of total indebtedness (including amounts
outstanding under our mortgage facility and capital leases but
excluding floorplan financing), and our subsidiaries also had
$1.9 billion of floorplan financing. 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 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;
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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; and
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Future share repurchases are subject to limitations contained in
the indenture relating to our senior unsecured notes.
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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.
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, floorplan 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 are manufactured by
Toyota, Ford, Honda, Nissan, General Motors, Daimler, BMW, and
Chrysler. In 2008, our Ford, General Motors, and Chrysler stores
represented 13%, 12%, and 5% of our new vehicle revenue,
respectively. We are subject to a concentration of risk in the
event of financial distress, including potential bankruptcy, of
a major vehicle manufacturer such as Ford, General Motors, or
Chrysler. In the event of such a bankruptcy, among other things,
(i) the manufacturer could attempt to terminate our
floorplan financing or all or certain of our franchises, in
which case we may not receive adequate compensation for our
franchises, (ii) consumer demand for their products could
be materially adversely affected, (iii) we may be unable to
obtain financing for our new vehicle inventory, or to arrange
14
financing for our customers for their vehicle purchases and
leases, through the manufacturers captive finance
subsidiary, in which case we would be required to seek financing
with alternate finance sources, which may be difficult to obtain
on similar terms, if at all, and (iv) we may be unable 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. Additionally, these events may result in us being
required to incur impairment charges with respect to the
inventory, fixed assets, and intangible assets related to
certain franchises, which could adversely impact our results of
operations, financial condition, and our ability to remain in
compliance with the financial ratios contained in our debt
agreements.
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, governmental laws and regulations, or other
adverse events. In 2008, vehicle manufacturers, in particular
domestic manufacturers, were adversely impacted by the
unfavorable economic conditions in the United States. See
Market Challenges in Part II, Item 7 of
this
Form 10-K.
Additionally, vehicle manufacturers are subject to federally
mandated corporate average fuel economy standards, which will
increase substantially as a result of legislation passed in
2007. California and other states, in an effort to reduce
greenhouse gases, have enacted, or proposed to enact, automotive
emissions standards through legislation or regulations that,
pending an expected waiver from the federal government, could
significantly increase fuel economy requirements in those
states. Significant increases in fuel economy requirements or
automotive emissions standards could materially adversely affect
the ability of the manufacturers to produce and our ability to
sell vehicles in demand by consumers at affordable prices,
particularly larger vehicles, which represent a significant
portion of our business. 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 desired 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.
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 could 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. During
2008, we recorded non-cash impairment charges of
$1.76 billion ($1.46 billion after-tax) associated
with goodwill and franchise rights. We may be required to incur
additional impairment charges in the future. Additional
impairment losses could have an adverse impact on our ability to
satisfy the financial ratios or other covenants under our debt
agreements and could have a material adverse impact on our
results of operations and shareholders equity.
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
15
discontinue these dealer assistance and consumer incentive and
marketing programs, which could have a significant adverse
effect on our new vehicle and aftermarket product sales, 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, fires, landslides, 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 deductibles, 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 applicable state franchise laws. From
time to time, certain major manufacturers assert sales and
customer satisfaction performance deficiencies under the terms
of our framework and franchise agreements. Additionally, our
framework agreements contain restrictions regarding a change in
control, which may be outside of our control. See
Agreements with Vehicle Manufacturers in
Part I, Item 1 of this
Form 10-K.
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 performance, and other 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. Furthermore, we rely on the
16
protection of state franchise laws in the states in which we
operate and if those laws are repealed or weakened, our
framework, franchise, and related agreements may become more
susceptible to termination, non-renewal, or renegotiation.
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 senior
unsecured notes or the amended credit agreement for our
revolving credit facility and term loan facility.
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 and insurance and vehicle protection products, are
subject to extensive governmental laws and regulations. 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, vehicle emissions and fuel economy,
health and safety,
wage-hour,
anti-discrimination, and other employment practices. 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 operations and 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.
Failure to comply with applicable laws and regulations may have
an adverse effect on our business, results of operations,
financial condition, cash flows, and prospects.
The enactment of new laws and regulations that materially impair
or restrict our sales, finance and insurance, or other
operations could have a material adverse effect on our business,
results of operations, financial condition, cash flows, and
prospects. We expect that new laws and regulations, particularly
at the federal level, in the labor, employment, environmental,
and consumer protection areas will be enacted, which could
significantly increase our costs.
17
We are subject to interest rate risk in connection with
our floorplan payable, revolving credit facility, term loan
facility, and floating rate senior unsecured notes that could
have a material adverse effect on our profitability.
Most of our debt, including our floorplan payable, is subject to
variable interest rates. 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 (new vehicle 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 largest stockholder, as a result of its voting
ownership, may have the ability to exert substantial influence
over actions to be taken or approved by our stockholders.
As of February 6, 2009, ESL Investments, Inc. and certain
of its investment affiliates (together, ESL)
beneficially owned approximately 45% of the outstanding shares
of our common stock. As a result, ESL may have the ability to
exert substantial influence over actions to be taken or approved
by our stockholders, including the election of directors and any
transactions involving a change of control. William C. Crowley,
one of our directors, is the President and Chief Operating
Officer of ESL Investments, Inc. In the future, ESL may acquire
or sell shares of common stock and thereby increase or decrease
its ownership stake in us.
In January 2009, our Board of Directors authorized and approved
letter agreements with certain automotive manufacturers in order
to, among other things, eliminate any potential adverse
consequences under our framework agreements with those
manufacturers in the event that ESL acquires 50% or more of our
common stock. Certain of those letter agreements also contain
governance-related and other provisions. In addition, our Board
authorized and approved a separate letter agreement between the
Company and ESL (the ESL Agreement) in which ESL has
agreed to vote shares of our common stock owned by ESL in excess
of 45% in the same proportion as all non-ESL-owned shares are
voted. The ESL Agreement expires on January 28, 2010,
unless extended by mutual agreement of the parties. For
additional information regarding these letter agreements, see
Agreements with Vehicle Manufacturers in
Part I, Item 1 of this
Form 10-K.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We lease our current corporate headquarters facility in
Fort Lauderdale, Florida. In October 2008, we executed a
lease for 105,000 square feet at a new location in
Fort Lauderdale, Florida, for our corporate headquarters
pursuant to a lease expiring on December 31, 2020. We
expect to move to the new location in mid-2009. As of February
2009, we also own or lease numerous facilities relating to our
operations under each of our operating segments. These
facilities are located in the following 15 states: Alabama,
Arizona, California, Colorado, Florida, Georgia, Illinois,
Maryland, Minnesota, 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
18
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.
|
|
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,
2008.
19
PART II
|
|
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 the
high and low sales prices of our common stock for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
11.70
|
|
|
$
|
3.97
|
|
Third Quarter
|
|
$
|
19.59
|
|
|
$
|
7.30
|
|
Second Quarter
|
|
$
|
17.40
|
|
|
$
|
10.00
|
|
First Quarter
|
|
$
|
16.63
|
|
|
$
|
11.72
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
18.62
|
|
|
$
|
14.65
|
|
Third Quarter
|
|
$
|
22.72
|
|
|
$
|
17.03
|
|
Second Quarter
|
|
$
|
22.86
|
|
|
$
|
20.21
|
|
First Quarter
|
|
$
|
23.19
|
|
|
$
|
20.65
|
|
As of February 9, 2009, there were approximately 2,352
holders of record of our common stock. A substantially greater
number of holders of our common stock are street
name or beneficial holders, whose shares are held of
record by banks, brokers, and other financial institutions.
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 senior unsecured notes restricts our ability
to declare and pay cash dividends. See Liquidity and
Capital Resources Restrictions and Covenants
in Part II, Item 7 of this Form 10-K.
Issuer
Purchases of Equity Securities
On October 23, 2007, our Board of Directors approved a
share repurchase program (the Share Repurchase
Program), which authorized AutoNation to repurchase up to
$250 million in shares of our common stock. The Share
Repurchase Program does not have an expiration date. During the
fourth quarter of 2008, we did not repurchase any shares of our
common stock. As of December 31, 2008, up to
$142.7 million in shares may yet be repurchased under the
Share Repurchase Program.
Stock
Performance Graph
The following graph and table compare the cumulative total
stockholder return on our common stock from December 31,
2003 through December 31, 2008 with the performance of:
(i) the Standard & Poors
(S&P) 500 Index, (ii) the S&P
Specialty Stores Index, the industry index that we used in our
Form 10-K
for the year ended December 31, 2007, and (iii) the
Dow Jones U.S. Specialty Retailers Index. We believe that
using the Dow Jones U.S. Specialty Retailers Index, which
is broader than the S&P Specialty Stores Index, provides a
more meaningful comparison of our stock performance to
investors, and we intend to use that index in future filings
with the SEC. We have included the S&P Specialty Stores
Index in the graph below in accordance with SEC rules.
20
As of December 31, 2008, the S&P Specialty Stores
Index consisted of Office Depot, Inc., Staples, Inc., and
Tiffany & Co., and the Dow Jones U.S. Specialty
Retailers Index consisted of the following companies:
|
|
|
|
|
99¢ Only Stores
|
|
Dollar Tree, Inc.
|
|
RadioShack Corporation
|
Advance Auto Parts, Inc.
|
|
GameStop Corp. Class A
|
|
RealNetworks, Inc.
|
AutoNation, Inc.
|
|
Group 1 Automotive, Inc.
|
|
Sally Beauty Holdings, Inc.
|
AutoZone, Inc.
|
|
Netflix, Inc.
|
|
Staples, Inc.
|
Barnes & Noble, Inc.
|
|
OReilly Automotive, Inc.
|
|
Tiffany & Co.
|
Bed Bath & Beyond Inc.
|
|
Office Depot, Inc.
|
|
Tractor Supply Company
|
Best Buy Co., Inc.
|
|
OfficeMax Incorporated
|
|
Williams-Sonoma, Inc.
|
CarMax, Inc.
|
|
The Pep Boys Manny, Moe & Jack
|
|
Zale Corporation
|
Dicks Sporting Goods, Inc.
|
|
PetSmart, Inc.
|
|
|
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 that $100 was invested on
December 31, 2003 in each of our common stock, the S&P
500 Index, the S&P Specialty Stores Index, and the Dow
Jones U.S. Specialty Retailers Index and that any dividends
were reinvested.
Comparison
of Five-Year Cumulative Return for AutoNation, Inc., the
S&P 500 Index,
the S&P Specialty Stores Index, and the Dow Jones
U.S. Specialty Retailers Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
|
|
AutoNation Inc.
|
|
|
100.00
|
|
|
|
104.57
|
|
|
|
118.29
|
|
|
|
116.06
|
|
|
|
85.25
|
|
|
|
53.78
|
|
S&P 500
|
|
|
100.00
|
|
|
|
110.88
|
|
|
|
116.33
|
|
|
|
134.70
|
|
|
|
142.10
|
|
|
|
89.53
|
|
S&P Specialty Stores
|
|
|
100.00
|
|
|
|
105.20
|
|
|
|
124.25
|
|
|
|
151.04
|
|
|
|
110.87
|
|
|
|
70.30
|
|
Dow Jones U.S. Specialty Retailers
|
|
|
100.00
|
|
|
|
111.63
|
|
|
|
119.28
|
|
|
|
131.03
|
|
|
|
122.89
|
|
|
|
81.81
|
|
21
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended December 31,
|
|
(In millions, except per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Revenue
|
|
$
|
14,131.9
|
|
|
$
|
17,346.5
|
|
|
$
|
18,218.5
|
|
|
$
|
17,820.8
|
|
|
$
|
17,421.1
|
|
Income (loss) from continuing operations before income taxes (1)
|
|
$
|
(1,422.7
|
)
|
|
$
|
460.4
|
|
|
$
|
538.1
|
|
|
$
|
609.1
|
|
|
$
|
579.3
|
|
Net income (loss) (1)
|
|
$
|
(1,243.1
|
)
|
|
$
|
278.7
|
|
|
$
|
316.9
|
|
|
$
|
496.5
|
|
|
$
|
433.6
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.89
|
)
|
|
$
|
1.46
|
|
|
$
|
1.46
|
|
|
$
|
1.47
|
|
|
$
|
1.42
|
|
Discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.42
|
|
|
$
|
0.21
|
|
Net income (loss)
|
|
$
|
(6.99
|
)
|
|
$
|
1.41
|
|
|
$
|
1.41
|
|
|
$
|
1.89
|
|
|
$
|
1.63
|
|
Weighted average common shares outstanding
|
|
|
177.8
|
|
|
|
198.3
|
|
|
|
225.2
|
|
|
|
262.7
|
|
|
|
266.7
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.89
|
)
|
|
$
|
1.44
|
|
|
$
|
1.43
|
|
|
$
|
1.44
|
|
|
$
|
1.39
|
|
Discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.41
|
|
|
$
|
0.20
|
|
Net income (loss)
|
|
$
|
(6.99
|
)
|
|
$
|
1.39
|
|
|
$
|
1.38
|
|
|
$
|
1.85
|
|
|
$
|
1.59
|
|
Weighted average common shares outstanding
|
|
|
177.8
|
|
|
|
200.0
|
|
|
|
229.3
|
|
|
|
268.0
|
|
|
|
272.5
|
|
Total assets
|
|
$
|
6,014.1
|
|
|
$
|
8,479.6
|
|
|
$
|
8,601.4
|
|
|
$
|
8,824.5
|
|
|
$
|
8,698.9
|
|
Long-term debt, net of current maturities
|
|
$
|
1,225.6
|
|
|
$
|
1,751.9
|
|
|
$
|
1,557.9
|
|
|
$
|
484.4
|
|
|
$
|
797.7
|
|
Shareholders equity
|
|
$
|
2,198.1
|
|
|
$
|
3,473.5
|
|
|
$
|
3,712.7
|
|
|
$
|
4,669.5
|
|
|
$
|
4,263.1
|
|
|
|
|
(1) |
|
During 2008, we recorded impairment charges of
$1.76 billion ($1.46 billion after-tax) associated
with goodwill and franchise rights. See Note 5 of the Notes
to Consolidated Financial Statements for more information. |
See the Notes to Consolidated Financial Statements for
discussion of Shareholders Equity (Note 9), Income
Taxes (Note 11), Earnings (Loss) Per Share (Note 12),
Discontinued Operations (Note 13), and Acquisitions
(Note 15), and the effect on comparability of year-to-year
data. See Part I, Item 5 of this
Form 10-K
for a discussion of our dividend policy.
22
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read 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 in Part II, Item 8 of 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.
Except to the extent that differences among operating segments
are material to an understanding of our business taken as a
whole, we present the discussion in Managements Discussion
and Analysis of Financial Condition and Results of Operations on
a consolidated basis.
Overview
AutoNation, Inc., through its subsidiaries, is the largest
automotive retailer in the United States. As of
December 31, 2008, we owned and operated 302 new vehicle
franchises from 232 stores 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 approximately 96% of the new vehicles
that we sold in 2008, are manufactured by Toyota, Ford, Honda,
Nissan, General Motors, Daimler, BMW, and Chrysler.
We offer a diversified range of automotive products and
services, including new vehicles, used vehicles, parts and
automotive repair and maintenance services, and automotive
finance and insurance 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, implementing standardized processes, and increasing
productivity across all of our stores.
As of December 31, 2008, we had three operating segments:
Domestic, Import, and Premium Luxury. Our Domestic segment is
comprised of retail automotive franchises that sell new vehicles
manufactured by General Motors, Ford, and Chrysler. Our Import
segment is comprised of retail automotive franchises that sell
new vehicles manufactured primarily by Toyota, Honda, and
Nissan. Our Premium Luxury segment is comprised of retail
automotive franchises that sell new vehicles manufactured
primarily by Mercedes, BMW, and Lexus. The franchises in each
segment also sell used vehicles, parts and automotive repair and
maintenance services, and automotive finance and insurance
products. See Segment Results below and Note 21
of the Notes to Consolidated Financial Statements for additional
information regarding our operating segments.
For the year ended December 31, 2008, new vehicle sales
account for approximately 55% of our total revenue, but
approximately 22% of our total gross margin. Our parts and
service and finance and insurance operations, while comprising
approximately 21% of total revenue, contribute approximately 65%
of our gross margin.
We had a net loss from continuing operations of
$1.2 billion and diluted loss per share of $6.89 in 2008,
as compared to net income from continuing operations of
$288.7 million and diluted earnings per share of $1.44 in
2007. The 2008 results were impacted by a non-cash goodwill
impairment charge of $1.61 billion ($1.37 billion
after-tax), non-cash franchise impairments of
$146.5 million ($90.8 million after-tax), a favorable
tax adjustment of approximately $35 million, and a gain on
senior note repurchases of $51.3 million
($31.5 million after-tax). See further discussion of these
items in Note 5, 7, and 11 of the Notes to Consolidated
Financial Statements. The 2007 results included favorable tax
adjustments of $12.0 million.
23
Market
Challenges
Our results of operations for 2008 reflected a challenging and
volatile automotive retail market impacted by the unfavorable
economic conditions in the United States, including the
continued turbulence in the credit and housing markets.
Volatility in fuel prices impacted consumer preferences and
caused dramatic swings in consumer demand for various vehicle
models, which led to supply and demand imbalances. Additionally,
tight credit conditions limited the ability of some of our
customers to purchase vehicles as well as finance and insurance
products. In the fourth quarter of 2008, the seasonally adjusted
annual rate (SAAR) of new vehicle sales in the
United States was 10.3 million. In comparison, full-year
U.S. industry new vehicle sales were 13.2 million in 2008
and 16.1 million in 2007. Industry analysts expect that the
2009 SAAR will be in the range of 11 million new vehicle
units with weakness in the first half of the year. Based on
these expectations, we believe that we will be able to manage
within all financial covenants in our debt agreements. See
Liquidity and Capital Resources Restrictions
and Covenants below.
While the domestic manufacturers have underperformed relative to
their import and premium luxury competitors over the past
several years, the performance gap widened in 2008, due in part
to the unfavorable economic conditions in the United States,
which disproportionately impacted the domestic manufacturers.
Recent government assistance has been provided to certain
domestic manufacturers, but the future viability of some or all
of the domestic manufacturers may be dependent on additional
government assistance. The bankruptcy of one or more of the
domestic manufacturers could have a material adverse effect on
us. For example, the manufacturers could attempt to terminate
our floorplan financing and all or certain of our domestic
franchises, we may be unable to collect accounts receivable from
the manufacturers, and we may be required to incur impairment
charges with respect to the inventory, fixed assets, and
intangible assets related to our domestic franchises. At
December 31, 2008, we had approximately $49.3 million
in accounts receivable, $768.1 million of inventory,
$721.8 million of fixed assets, and $178.3 million of
goodwill and other intangible assets related to our domestic
franchises. Additionally, there are uncertainties surrounding
the potential impact of a domestic manufacturer bankruptcy, such
as the impact on warranties provided to vehicle purchasers and
the availability of parts and services needed to maintain and
repair vehicles. As a result, the impact of such a bankruptcy on
our financial condition and results of operations is not
determinable at this time. See the risk factor We are
dependent upon the success and continued financial viability of
the vehicle manufacturers and distributors with which we hold
franchises in Part I, Item 1A of this
Form 10-K.
As part of our continuing response to the ongoing market
challenges, in July 2008, we announced a cost reduction plan
with a targeted annualized run-rate savings of approximately
$100 million. In the fourth quarter of 2008, in response to
the turmoil in the credit markets and the related impact on the
automotive retail market, we expanded our cost reduction plan
and implemented additional actions that enabled us to reduce our
annualized costs by an additional $100 million.
Accordingly, at December 31, 2008, we had reduced our costs
by approximately $200 million on an annualized run-rate
basis.
Inventory
Management
Our new and used vehicle inventories are stated at the lower of
cost or market in our consolidated balance sheets.
We have generally not experienced losses on the sale of new
vehicle inventory, in part due to incentives provided by
manufacturers to promote sales of new vehicles and our inventory
management practices. We reduced our new vehicle inventory to
54,074 units at December 31, 2008, from
60,832 units at December 31, 2007. Although we focus
on managing our inventory levels in accordance with consumer
demand, we believe we must maintain a minimum level of inventory
at our lower volume stores that is representative of the full
line of vehicles offered by manufacturers. This may result in a
higher days supply of inventory than would otherwise result if
we were in a better economic environment. However, given our
inventory management practices (such as managing our inventory
purchases based on our sales forecasts and sharing inventory
among stores within a local market), we do not believe the
current business climate is likely to result in material
impairment charges related to new vehicle inventory (subject to
the risks noted in Market Challenges
24
above). We continue to monitor our new vehicle inventory levels
closely based on current economic conditions and will adjust
them as appropriate.
In general, used vehicles that are not sold on a retail basis
are liquidated at wholesale auctions. We record estimated losses
on used vehicle inventory expected to be liquidated at wholesale
auctions at a loss. Our used vehicle inventory balance was net
of cumulative write-downs of $1.7 million at
December 31, 2008, and $2.0 million at
December 31, 2007.
Parts, accessories, and other inventory are carried at the lower
of acquisition cost
(first-in,
first-out method) or market. We estimate the amount of potential
obsolete inventory based upon past experience and market trends.
Our parts, accessories, and other inventory balance was net of
cumulative write-downs of $6.3 million at December 31,
2008, and $5.8 million at December 31, 2007.
Critical
Accounting Policies and Estimates
We prepare our Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United
States, which require us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
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. We evaluate our
estimates on an ongoing basis and we base our estimates on
historical experience and various other assumptions we believe
to be reasonable. Actual outcomes could differ materially from
those estimates in a manner that could have a material effect on
our Consolidated Financial Statements. Set forth below are the
policies and estimates that we have identified as critical to
our business operations and an understanding of our results of
operations, based on the high degree of judgment or complexity
in their application.
Goodwill
and Other Intangible Assets
Goodwill and franchise rights assets are tested for impairment
annually or more frequently when events or circumstances
indicate that impairment may have occurred. As discussed in
Note 5 of the Notes to Consolidated Financial Statements,
during 2008, we recorded $1.61 billion ($1.37 billion
after-tax) of non-cash goodwill impairment charges and
$146.5 million ($90.8 million after-tax) of non-cash
impairment charges related to franchise rights intangible
assets. Despite these impairment charges, as of
December 31, 2008, we were in compliance with the
requirements of all applicable financial covenants under our
debt agreements, as further discussed below in Liquidity
and Capital Resources Restrictions and
Covenants.
As a result of the change in our operating segment structure
described in Note 21 of the Notes to Consolidated Financial
Statements, we were required to reassess the reporting units to
which goodwill is assigned for goodwill impairment testing
purposes. This reassessment resulted in a conclusion that our
reporting units were comprised of three operating segments:
Domestic, Import, and Premium Luxury.
We are required to complete interim tests for impairment of
goodwill and other intangible assets when events occur or
circumstances change between annual tests that indicate that the
assets might be impaired. We continue to face a challenging
automotive retail environment and an uncertain economic
environment in general. As a result of these conditions, there
can be no assurance that an additional material impairment
charge will not occur in a future period. We will continue to
monitor events in future periods to determine if additional
asset impairment testing should be performed. If we are required
to apply the second step of the goodwill impairment test to the
goodwill in any of our three reporting units in future periods,
we believe that we could incur another significant non-cash
impairment charge related to goodwill, which could have a
material adverse impact on our consolidated financial statements
and on our ability to satisfy the financial ratios or other
covenants under our debt and other agreements.
The goodwill impairment analysis is dependent on many variables
used to determine fair value of the Company overall and the fair
value of the Companys assets and liabilities. Please see
Note 5 of the Notes to Consolidated Financial Statements
for a description of the valuation methods and related estimates
and assumptions used in our impairment testing. The complexity
of the analysis does not permit a simplistic determination of
the impact of changes in assumptions. We believe that the most
significant impact of a
25
change in the assumptions used in determining our goodwill
impairment as of September 30, 2008, would have related to
the amount of impairment associated with our domestic reporting
unit, and that a relatively small change in assumptions could
have resulted in two potentially different outcomes: 1) if
the assumptions used (primarily regarding expected future cash
flows) were slightly more favorable, we would possibly not have
impaired the goodwill associated with our domestic reporting
unit, or 2) if the assumptions used had been slightly less
favorable, it is possible we would have concluded that most, if
not all, of the goodwill associated with the domestic reporting
unit would have been impaired. This discussion is not intended
to address all potential outcomes that could have resulted if
different assumptions had been used in determining our goodwill
impairment given the number of assumptions used in determining
the impairment and the degree of sensitivity in the
determination of the fair value of the Company and its assets
and liabilities to changes in such assumptions. We would have
been in compliance with the financial covenants in our debt
agreements even if we had impaired all of the goodwill
associated with our domestic reporting unit.
We estimate the fair value of franchise rights primarily using a
discounted cash flow (DCF) model. The forecasted
cash flows used in the DCF model contain inherent uncertainties,
including significant estimates and assumptions related to
growth rates, margins, working capital requirements, capital
expenditures, and cost of capital, for which we utilize certain
market participant-based assumptions, using third-party industry
projections, economic projections, and other marketplace data we
believe to be reasonable.
We are subject to financial statement risk to the extent that
our franchise rights become impaired due to decreases in the
fair value of the related underlying business. The risk of a
franchise rights impairment loss may increase to the extent that
a stores earnings or projected growth rates decline.
Our franchise rights, which related to 19 franchises and totaled
$173.9 million at December 31, 2008, are evaluated on
a
franchise-by-franchise
basis. We recorded impairment charges of $146.5 million
during 2008 related to rights under certain franchise
agreements. If the fair value of each of our franchise rights
had been determined to be a hypothetical 10% lower as of the
valuation date of September 30, 2008, the resulting
incremental charge would have been less than $17.4 million.
Long-Lived
Assets
We estimate the depreciable lives of our property 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 and equipment and 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.
During 2008, we recorded $7.2 million of non-cash
impairment charges related to our property and equipment,
including property held for sale, to reduce the value of these
assets to fair market value. These charges are recorded as a
component of Other Expenses (Income), Net in the Consolidated
Income Statements.
Chargeback
Reserve
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. 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.
We may be charged back for commissions related to financing,
insurance, or vehicle protection products in the event of early
termination of the contracts by customers
(chargebacks). These commissions are recorded at the
time of the sale of the vehicles, net of an estimated liability
for chargebacks.
We estimate our liability for chargebacks on an individual
product basis using our historical chargeback experience, based
primarily on cancellation data we receive from third parties
that sell and administer these
26
products. Our estimated liability for chargebacks totaled
$61.0 million at December 31, 2008, and
$62.5 million at December 31, 2007.
Chargebacks are influenced by increases or decreases in early
termination rates resulting from cancellation of vehicle
protection products, defaults, refinancings, payoffs before
maturity, and other factors. While we consider these factors in
the estimation of our chargeback liability, actual events may
differ from our estimates, which could result in a change in our
estimated liability for chargebacks. A 10% change in our
estimated chargebacks would have changed our estimated liability
for chargebacks at December 31, 2008, by approximately
$6.1 million.
See Finance and Insurance below and Note 20 of
the Notes to Consolidated Finance Statements for further
information regarding chargeback liabilities.
Revenue
Recognition
Revenue consists of the sales of new and used vehicles,
commissions from related finance and insurance products, sales
of parts and services, and sales of other products. 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. Rebates, holdbacks, floorplan assistance, and certain
other dealer credits received 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.
Income
Taxes
Accounting for our income taxes requires significant judgment in
the evaluation of our uncertain tax positions and in the
calculation of our provision for income taxes. Effective
January 1, 2007, we adopted Financial Accounting Standards
Board (FASB) Financial Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 contains a two-step
approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate available evidence to determine if
it appears more likely than not that an uncertain tax position
will be sustained on an audit by a taxing authority, based
solely on the technical merits of the tax position. The second
step is to measure the tax benefit as the largest amount that is
more than 50% likely of being realized upon settling the
uncertain tax position.
Although we believe we have adequately reserved for our
uncertain tax positions, the ultimate outcome of these tax
matters may differ from our expectations. We adjust our reserves
in light of changing facts and circumstances, such as the
completion of a tax audit, expiration of a statute of
limitations, the refinement of an estimate, and interest
accruals associated with uncertain tax positions until they are
resolved. To the extent that the final tax outcome of these
matters is different than the amounts recorded, such differences
will impact the provision for income taxes in the period in
which such determination is made. Our unrecognized tax benefits
were reduced by approximately $35 million (net of tax
effect) as a result of the expiration of a statute of
limitations in October 2008.
Our future effective tax rates could be affected by changes in
our deferred tax assets or liabilities, the valuation of our
uncertain tax positions, or by changes in tax laws, regulations,
accounting principles, or interpretations thereof.
Other
Additionally, significant estimates have been made by us in the
accompanying Consolidated Financial Statements including
allowances for doubtful accounts, accruals related to
self-insurance programs, certain legal proceedings, estimated
losses from disposals of discontinued operations, and certain
assumptions related to determining stock-based compensation.
27
Reported
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
%
|
|
|
|
|
|
Favorable/
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
Variance
|
|
($ in millions, except per vehicle data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
7,756.2
|
|
|
$
|
10,014.3
|
|
|
$
|
(2,258.1
|
)
|
|
|
(22.5
|
)
|
|
$
|
10,756.0
|
|
|
$
|
(741.7
|
)
|
|
|
(6.9
|
)
|
Used vehicle
|
|
|
3,364.5
|
|
|
|
4,139.9
|
|
|
|
(775.4
|
)
|
|
|
(18.7
|
)
|
|
|
4,302.5
|
|
|
|
(162.6
|
)
|
|
|
(3.8
|
)
|
Parts and service
|
|
|
2,465.2
|
|
|
|
2,539.9
|
|
|
|
(74.7
|
)
|
|
|
(2.9
|
)
|
|
|
2,476.9
|
|
|
|
63.0
|
|
|
|
2.5
|
|
Finance and insurance, net
|
|
|
482.6
|
|
|
|
584.3
|
|
|
|
(101.7
|
)
|
|
|
(17.4
|
)
|
|
|
611.0
|
|
|
|
(26.7
|
)
|
|
|
(4.4
|
)
|
Other
|
|
|
63.4
|
|
|
|
68.1
|
|
|
|
(4.7
|
)
|
|
|
(6.9
|
)
|
|
|
72.1
|
|
|
|
(4.0
|
)
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
14,131.9
|
|
|
$
|
17,346.5
|
|
|
$
|
(3,214.6
|
)
|
|
|
(18.5
|
)
|
|
$
|
18,218.5
|
|
|
$
|
(872.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
510.9
|
|
|
$
|
709.1
|
|
|
$
|
(198.2
|
)
|
|
|
(28.0
|
)
|
|
$
|
790.1
|
|
|
$
|
(81.0
|
)
|
|
|
(10.3
|
)
|
Used vehicle
|
|
|
278.4
|
|
|
|
352.0
|
|
|
|
(73.6
|
)
|
|
|
(20.9
|
)
|
|
|
390.7
|
|
|
|
(38.7
|
)
|
|
|
(9.9
|
)
|
Parts and service
|
|
|
1,071.8
|
|
|
|
1,108.8
|
|
|
|
(37.0
|
)
|
|
|
(3.3
|
)
|
|
|
1,088.2
|
|
|
|
20.6
|
|
|
|
1.9
|
|
Finance and insurance
|
|
|
482.6
|
|
|
|
584.3
|
|
|
|
(101.7
|
)
|
|
|
(17.4
|
)
|
|
|
611.0
|
|
|
|
(26.7
|
)
|
|
|
(4.4
|
)
|
Other
|
|
|
35.8
|
|
|
|
39.1
|
|
|
|
(3.3
|
)
|
|
|
(8.4
|
)
|
|
|
40.6
|
|
|
|
(1.5
|
)
|
|
|
(3.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
|
2,379.5
|
|
|
|
2,793.3
|
|
|
|
(413.8
|
)
|
|
|
(14.8
|
)
|
|
|
2,920.6
|
|
|
|
(127.3
|
)
|
|
|
(4.4
|
)
|
Selling, general, and administrative expenses
|
|
|
1,813.8
|
|
|
|
1,999.8
|
|
|
|
186.0
|
|
|
|
9.3
|
|
|
|
2,057.9
|
|
|
|
58.1
|
|
|
|
2.8
|
|
Depreciation and amortization
|
|
|
90.8
|
|
|
|
90.3
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
80.0
|
|
|
|
(10.3
|
)
|
|
|
|
|
Goodwill impairment
|
|
|
1,610.0
|
|
|
|
|
|
|
|
(1,610.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise rights impairment
|
|
|
146.5
|
|
|
|
2.2
|
|
|
|
(144.3
|
)
|
|
|
|
|
|
|
|
|
|
|
(2.2
|
)
|
|
|
|
|
Other expenses (income), net
|
|
|
13.2
|
|
|
|
(0.4
|
)
|
|
|
(13.6
|
)
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(1,294.8
|
)
|
|
|
701.4
|
|
|
|
(1,996.2
|
)
|
|
|
NM
|
|
|
|
782.9
|
|
|
|
(81.5
|
)
|
|
|
(10.4
|
)
|
Floorplan interest expense
|
|
|
(87.4
|
)
|
|
|
(129.0
|
)
|
|
|
41.6
|
|
|
|
|
|
|
|
(132.5
|
)
|
|
|
3.5
|
|
|
|
|
|
Other interest expense
|
|
|
(89.4
|
)
|
|
|
(114.1
|
)
|
|
|
24.7
|
|
|
|
|
|
|
|
(90.8
|
)
|
|
|
(23.3
|
)
|
|
|
|
|
Other interest expense senior note repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34.5
|
)
|
|
|
34.5
|
|
|
|
|
|
Gain on senior note repurchases
|
|
|
51.3
|
|
|
|
|
|
|
|
51.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2.2
|
|
|
|
3.4
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
8.3
|
|
|
|
(4.9
|
)
|
|
|
|
|
Other gains (losses), net
|
|
|
(4.6
|
)
|
|
|
(1.3
|
)
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
4.7
|
|
|
|
(6.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
(1,422.7
|
)
|
|
$
|
460.4
|
|
|
$
|
(1,883.1
|
)
|
|
|
NM
|
|
|
$
|
538.1
|
|
|
$
|
(77.7
|
)
|
|
|
(14.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
255,843
|
|
|
|
322,849
|
|
|
|
(67,006
|
)
|
|
|
(20.8
|
)
|
|
|
354,938
|
|
|
|
(32,089
|
)
|
|
|
(9.0
|
)
|
Used vehicle
|
|
|
181,281
|
|
|
|
201,175
|
|
|
|
(19,894
|
)
|
|
|
(9.9
|
)
|
|
|
213,199
|
|
|
|
(12,024
|
)
|
|
|
(5.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,124
|
|
|
|
524,024
|
|
|
|
(86,900
|
)
|
|
|
(16.6
|
)
|
|
|
568,137
|
|
|
|
(44,113
|
)
|
|
|
(7.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
30,316
|
|
|
$
|
31,019
|
|
|
$
|
(703
|
)
|
|
|
(2.3
|
)
|
|
$
|
30,304
|
|
|
$
|
715
|
|
|
|
2.4
|
|
Used vehicle
|
|
$
|
15,665
|
|
|
$
|
16,432
|
|
|
$
|
(767
|
)
|
|
|
(4.7
|
)
|
|
$
|
16,129
|
|
|
$
|
303
|
|
|
|
1.9
|
|
Gross profit per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
1,997
|
|
|
$
|
2,196
|
|
|
$
|
(199
|
)
|
|
|
(9.1
|
)
|
|
$
|
2,226
|
|
|
$
|
(30
|
)
|
|
|
(1.3
|
)
|
Used vehicle
|
|
$
|
1,583
|
|
|
$
|
1,745
|
|
|
$
|
(162
|
)
|
|
|
(9.3
|
)
|
|
$
|
1,829
|
|
|
$
|
(84
|
)
|
|
|
(4.6
|
)
|
Finance and insurance
|
|
$
|
1,104
|
|
|
$
|
1,115
|
|
|
$
|
(11
|
)
|
|
|
(1.0
|
)
|
|
$
|
1,075
|
|
|
$
|
40
|
|
|
|
3.7
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008(%)
|
|
|
2007(%)
|
|
|
2006(%)
|
|
|
Revenue mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
54.9
|
|
|
|
57.7
|
|
|
|
59.0
|
|
Used vehicle
|
|
|
23.8
|
|
|
|
23.9
|
|
|
|
23.6
|
|
Parts and service
|
|
|
17.4
|
|
|
|
14.6
|
|
|
|
13.6
|
|
Finance and insurance, net
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
Other
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
21.5
|
|
|
|
25.4
|
|
|
|
27.1
|
|
Used vehicle
|
|
|
11.7
|
|
|
|
12.6
|
|
|
|
13.4
|
|
Parts and service
|
|
|
45.0
|
|
|
|
39.7
|
|
|
|
37.3
|
|
Finance and insurance
|
|
|
20.3
|
|
|
|
20.9
|
|
|
|
20.9
|
|
Other
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating items as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
6.6
|
|
|
|
7.1
|
|
|
|
7.3
|
|
Used vehicle retail
|
|
|
10.1
|
|
|
|
10.6
|
|
|
|
11.3
|
|
Parts and service
|
|
|
43.5
|
|
|
|
43.7
|
|
|
|
43.9
|
|
Total
|
|
|
16.8
|
|
|
|
16.1
|
|
|
|
16.0
|
|
Selling, general and administrative expenses
|
|
|
12.8
|
|
|
|
11.5
|
|
|
|
11.3
|
|
Operating income (loss)
|
|
|
NM
|
|
|
|
4.0
|
|
|
|
4.3
|
|
Other operating items as a percentage of total gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
76.2
|
|
|
|
71.6
|
|
|
|
70.5
|
|
Operating income (loss)
|
|
|
NM
|
|
|
|
25.1
|
|
|
|
26.8
|
|
NM Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Days supply:
|
|
|
|
|
|
|
|
|
New vehicle (industry standard of selling days, including fleet)
|
|
|
84 days
|
|
|
|
52 days
|
|
Used vehicle (trailing 30 days)
|
|
|
30 days
|
|
|
|
44 days
|
|
29
The following table details net new vehicle inventory carrying
cost, consisting of new vehicle floorplan interest expense net
of floorplan assistance earned (amounts received from
manufacturers specifically to support store financing of new
vehicle inventory). Floorplan assistance is accounted for as a
component of new vehicle gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
Variance
|
|
|
|
2008
|
|
|
2007
|
|
|
2008 vs. 2007
|
|
|
2006
|
|
|
2007 vs. 2006
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floorplan assistance
|
|
$
|
70.0
|
|
|
$
|
97.2
|
|
|
$
|
(27.2
|
)
|
|
$
|
104.1
|
|
|
$
|
(6.9
|
)
|
Floorplan interest expense (new vehicles)
|
|
|
(83.7
|
)
|
|
|
(128.5
|
)
|
|
|
44.8
|
|
|
|
(132.0
|
)
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new vehicle inventory carrying cost
|
|
$
|
(13.7
|
)
|
|
$
|
(31.3
|
)
|
|
$
|
17.6
|
|
|
$
|
(27.9
|
)
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Same
Store Operating Data
We have presented below our operating results on a same store
basis to reflect our internal performance. The Same
Store amounts presented below include the results of
dealerships for the identical months in each period presented in
the comparison, commencing with the first full month in which
the dealership was owned by us. For example, the results for a
dealership acquired in February 2007 would be included only in
our same store comparison of 2008 to 2007, not in our same store
comparison of 2007 to 2006. Results for a dealership that we
classified as a discontinued operation in October 2008 would be
removed entirely from our same store comparison of 2008 to 2007.
Therefore, the amounts presented in the year 2007 column that is
being compared to the 2008 column may differ from the amounts
presented in the year 2007 column that is being compared to the
year 2006 column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
%
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
%
|
|
($ in millions, except per
vehicle data)
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
Variance
|
|
|
2007
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
Variance
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
7,712.0
|
|
|
$
|
10,012.8
|
|
|
$
|
(2,300.8
|
)
|
|
|
(23.0
|
)
|
|
$
|
10,107.7
|
|
|
$
|
10,985.0
|
|
|
$
|
(877.3
|
)
|
|
|
(8.0
|
)
|
Used vehicle
|
|
|
3,336.3
|
|
|
|
4,137.3
|
|
|
|
(801.0
|
)
|
|
|
(19.4
|
)
|
|
|
4,205.7
|
|
|
|
4,410.9
|
|
|
|
(205.2
|
)
|
|
|
(4.7
|
)
|
Parts and service
|
|
|
2,450.5
|
|
|
|
2,539.7
|
|
|
|
(89.2
|
)
|
|
|
(3.5
|
)
|
|
|
2,563.9
|
|
|
|
2,532.5
|
|
|
|
31.4
|
|
|
|
1.2
|
|
Finance and insurance, net
|
|
|
479.7
|
|
|
|
584.3
|
|
|
|
(104.6
|
)
|
|
|
(17.9
|
)
|
|
|
596.5
|
|
|
|
624.6
|
|
|
|
(28.1
|
)
|
|
|
(4.5
|
)
|
Other
|
|
|
20.3
|
|
|
|
24.9
|
|
|
|
(4.6
|
)
|
|
|
(18.5
|
)
|
|
|
25.1
|
|
|
|
27.8
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
13,998.8
|
|
|
$
|
17,299.0
|
|
|
$
|
(3,300.2
|
)
|
|
|
(19.1
|
)
|
|
$
|
17,498.9
|
|
|
$
|
18,580.8
|
|
|
$
|
(1,081.9
|
)
|
|
|
(5.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
507.5
|
|
|
$
|
708.9
|
|
|
$
|
(201.4
|
)
|
|
|
(28.4
|
)
|
|
$
|
712.6
|
|
|
$
|
805.2
|
|
|
$
|
(92.6
|
)
|
|
|
(11.5
|
)
|
Used vehicle
|
|
|
274.4
|
|
|
|
349.9
|
|
|
|
(75.5
|
)
|
|
|
(21.6
|
)
|
|
|
355.2
|
|
|
|
398.2
|
|
|
|
(43.0
|
)
|
|
|
(10.8
|
)
|
Parts and service
|
|
|
1,062.8
|
|
|
|
1,106.4
|
|
|
|
(43.6
|
)
|
|
|
(3.9
|
)
|
|
|
1,116.4
|
|
|
|
1,111.7
|
|
|
|
4.7
|
|
|
|
0.4
|
|
Finance and insurance
|
|
|
479.7
|
|
|
|
584.3
|
|
|
|
(104.6
|
)
|
|
|
(17.9
|
)
|
|
|
596.5
|
|
|
|
624.6
|
|
|
|
(28.1
|
)
|
|
|
(4.5
|
)
|
Other
|
|
|
22.6
|
|
|
|
25.3
|
|
|
|
(2.7
|
)
|
|
|
(10.7
|
)
|
|
|
25.7
|
|
|
|
24.5
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
2,347.0
|
|
|
$
|
2,774.8
|
|
|
$
|
(427.8
|
)
|
|
|
(15.4
|
)
|
|
$
|
2,806.4
|
|
|
$
|
2,964.2
|
|
|
$
|
(157.8
|
)
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
254,739
|
|
|
|
322,801
|
|
|
|
(68,062
|
)
|
|
|
(21.1
|
)
|
|
|
327,372
|
|
|
|
362,895
|
|
|
|
(35,523
|
)
|
|
|
(9.8
|
)
|
Used vehicle
|
|
|
180,304
|
|
|
|
201,134
|
|
|
|
(20,830
|
)
|
|
|
(10.4
|
)
|
|
|
205,490
|
|
|
|
219,271
|
|
|
|
(13,781
|
)
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
435,043
|
|
|
|
523,935
|
|
|
|
(88,892
|
)
|
|
|
(17.0
|
)
|
|
|
532,862
|
|
|
|
582,166
|
|
|
|
(49,304
|
)
|
|
|
(8.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
30,274
|
|
|
$
|
31,018
|
|
|
$
|
(744
|
)
|
|
|
(2.4
|
)
|
|
$
|
30,875
|
|
|
$
|
30,270
|
|
|
$
|
605
|
|
|
|
2.0
|
|
Used vehicle
|
|
$
|
15,635
|
|
|
$
|
16,433
|
|
|
$
|
(798
|
)
|
|
|
(4.9
|
)
|
|
$
|
16,387
|
|
|
$
|
16,107
|
|
|
$
|
280
|
|
|
|
1.7
|
|
Gross profit per vehicle retailed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
1,992
|
|
|
$
|
2,196
|
|
|
$
|
(204
|
)
|
|
|
(9.3
|
)
|
|
$
|
2,177
|
|
|
$
|
2,219
|
|
|
$
|
(42
|
)
|
|
|
(1.9
|
)
|
Used vehicle
|
|
$
|
1,579
|
|
|
$
|
1,745
|
|
|
$
|
(166
|
)
|
|
|
(9.5
|
)
|
|
$
|
1,739
|
|
|
$
|
1,827
|
|
|
$
|
(88
|
)
|
|
|
(4.8
|
)
|
Finance and insurance
|
|
$
|
1,103
|
|
|
$
|
1,115
|
|
|
$
|
(12
|
)
|
|
|
(1.1
|
)
|
|
$
|
1,119
|
|
|
$
|
1,073
|
|
|
$
|
46
|
|
|
|
4.3
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Years Ended December 31,
|
|
|
|
2008(%)
|
|
|
2007(%)
|
|
|
2007(%)
|
|
|
2006(%)
|
|
|
Revenue mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
55.1
|
|
|
|
57.9
|
|
|
|
57.8
|
|
|
|
59.1
|
|
Used vehicle
|
|
|
23.8
|
|
|
|
23.9
|
|
|
|
24.0
|
|
|
|
23.7
|
|
Parts and service
|
|
|
17.5
|
|
|
|
14.7
|
|
|
|
14.7
|
|
|
|
13.6
|
|
Finance and insurance, net
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
|
|
3.4
|
|
Other
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit mix percentages:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
21.6
|
|
|
|
25.5
|
|
|
|
25.4
|
|
|
|
27.2
|
|
Used vehicle
|
|
|
11.7
|
|
|
|
12.6
|
|
|
|
12.7
|
|
|
|
13.4
|
|
Parts and service
|
|
|
45.3
|
|
|
|
39.9
|
|
|
|
39.8
|
|
|
|
37.5
|
|
Finance and insurance
|
|
|
20.4
|
|
|
|
21.1
|
|
|
|
21.3
|
|
|
|
21.1
|
|
Other
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating items as a percentage of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
6.6
|
|
|
|
7.1
|
|
|
|
7.1
|
|
|
|
7.3
|
|
Used vehicle retail
|
|
|
10.1
|
|
|
|
10.6
|
|
|
|
10.6
|
|
|
|
11.3
|
|
Parts and service
|
|
|
43.4
|
|
|
|
43.6
|
|
|
|
43.5
|
|
|
|
43.9
|
|
Total
|
|
|
16.8
|
|
|
|
16.0
|
|
|
|
16.0
|
|
|
|
16.0
|
|
32
New
Vehicle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
($ in millions, except per vehicle data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,756.2
|
|
|
$
|
10,014.3
|
|
|
$
|
(2,258.1
|
)
|
|
|
(22.5
|
)
|
|
$
|
10,756.0
|
|
|
$
|
(741.7
|
)
|
|
|
(6.9
|
)
|
Gross profit
|
|
$
|
510.9
|
|
|
$
|
709.1
|
|
|
$
|
(198.2
|
)
|
|
|
(28.0
|
)
|
|
$
|
790.1
|
|
|
$
|
(81.0
|
)
|
|
|
(10.3
|
)
|
Retail vehicle unit sales
|
|
|
255,843
|
|
|
|
322,849
|
|
|
|
(67,006
|
)
|
|
|
(20.8
|
)
|
|
|
354,938
|
|
|
|
(32,089
|
)
|
|
|
(9.0
|
)
|
Revenue per vehicle retailed
|
|
$
|
30,316
|
|
|
$
|
31,019
|
|
|
$
|
(703
|
)
|
|
|
(2.3
|
)
|
|
$
|
30,304
|
|
|
$
|
715
|
|
|
|
2.4
|
|
Gross profit per vehicle retailed
|
|
$
|
1,997
|
|
|
$
|
2,196
|
|
|
$
|
(199
|
)
|
|
|
(9.1
|
)
|
|
$
|
2,226
|
|
|
$
|
(30
|
)
|
|
|
(1.3
|
)
|
Gross profit as a percentage of revenue
|
|
|
6.6
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
Days supply (industry standard of selling days, including fleet)
|
|
|
84 days
|
|
|
|
52 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2007
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,712.0
|
|
|
$
|
10,012.8
|
|
|
$
|
(2,300.8
|
)
|
|
|
(23.0
|
)
|
|
$
|
10,107.7
|
|
|
$
|
10,985.0
|
|
|
$
|
(877.3
|
)
|
|
|
(8.0
|
)
|
Gross profit
|
|
$
|
507.5
|
|
|
$
|
708.9
|
|
|
$
|
(201.4
|
)
|
|
|
(28.4
|
)
|
|
$
|
712.6
|
|
|
$
|
805.2
|
|
|
$
|
(92.6
|
)
|
|
|
(11.5
|
)
|
Retail vehicle unit sales
|
|
|
254,739
|
|
|
|
322,801
|
|
|
|
(68,062
|
)
|
|
|
(21.1
|
)
|
|
|
327,372
|
|
|
|
362,895
|
|
|
|
(35,523
|
)
|
|
|
(9.8
|
)
|
Revenue per vehicle retailed
|
|
$
|
30,274
|
|
|
$
|
31,018
|
|
|
$
|
(744
|
)
|
|
|
(2.4
|
)
|
|
$
|
30,875
|
|
|
$
|
30,270
|
|
|
$
|
605
|
|
|
|
2.0
|
|
Gross profit per vehicle retailed
|
|
$
|
1,992
|
|
|
$
|
2,196
|
|
|
$
|
(204
|
)
|
|
|
(9.3
|
)
|
|
$
|
2,177
|
|
|
$
|
2,219
|
|
|
$
|
(42
|
)
|
|
|
(1.9
|
)
|
Gross profit as a percentage of revenue
|
|
|
6.6
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
7.1
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
Same store new vehicle revenue decreased $2.3 billion or
23.0% during 2008, as compared to 2007, as a result of a
decrease in same store unit volume of 21.1% and a decrease in
same store revenue per vehicle retailed of 2.4%. These decreases
were primarily due to the challenging automotive retail
environment, particularly with respect to domestic vehicles.
Results were adversely impacted by overall economic conditions,
including reduced credit availability offered to consumers,
particularly in the second half of 2008, the discontinuation or
limitation of certain manufacturer leasing programs, and a
decline in consumer confidence. Additionally, volatility in fuel
prices impacted consumer preference and caused dramatic swings
in consumer demand for various vehicle models, which led to
supply and demand imbalances. The significantly higher fuel
prices during most of 2008 caused a shift in consumer demand
toward more fuel-efficient vehicles. In addition, there was a
shift in demand toward entry-level premium luxury vehicles as a
result of the economic conditions and premium luxury
manufacturer programs launching and promoting these types of
vehicles during 2008. The average revenue per vehicle retailed
declined due to the relatively lower selling prices of these
vehicles. We expect that the automotive retail market will
remain challenging and that adverse market conditions will
continue into 2009.
Same store new vehicle revenue decreased $877.3 million or
8.0% during 2007, as compared to 2006, primarily as a result of
a challenging automotive retail environment, which resulted in
decreased same store unit volume, particularly in California and
Florida. We believe these results were driven in part by
continued weakness in the housing market. These volume decreases
were partially offset by an increase in same store average
revenue per unit retailed, primarily as a result of the
continued shift in our brand mix to premium luxury brands, as
well as higher average prices for domestic vehicles.
Same store gross profit per new vehicle retailed decreased 9.3%
during 2008, as compared to 2007. The decrease was driven
largely by more stringent credit conditions in the automotive
retail credit market and by the shift in demand to lower-priced
premium luxury vehicles which have lower margins. Same store
gross
33
profit per vehicle retailed decreased 1.9% during 2007, as
compared to 2006, primarily as a result of a competitive retail
environment resulting in pricing pressures across all brand
product lines, partially offset by the shift in our sales mix to
more premium luxury brands.
Our new vehicle inventories were $1.6 billion or
84 days supply at December 31, 2008, as compared to
new vehicle inventories of $1.8 billion or 52 days
supply at December 31, 2007. The increase in our new
vehicle inventory days supply is primarily due to lower sales
during 2008.
The following table details net new vehicle inventory carrying
cost, consisting of new vehicle floorplan interest expense net
of floorplan assistance earned (amounts received from
manufacturers specifically to support store financing of new
vehicle inventory). Floorplan assistance is accounted for as a
component of new vehicle gross profit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance 2008
|
|
|
|
|
|
Variance 2007
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
vs. 2007
|
|
|
2006
|
|
|
vs. 2006
|
|
|
Floorplan assistance
|
|
$
|
70.0
|
|
|
$
|
97.2
|
|
|
$
|
(27.2
|
)
|
|
$
|
104.1
|
|
|
$
|
(6.9
|
)
|
Floorplan interest expense (new vehicles)
|
|
|
(83.7
|
)
|
|
|
(128.5
|
)
|
|
|
44.8
|
|
|
|
(132.0
|
)
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net new vehicle inventory carrying cost
|
|
$
|
(13.7
|
)
|
|
$
|
(31.3
|
)
|
|
$
|
17.6
|
|
|
$
|
(27.9
|
)
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net new vehicle inventory carrying cost (new vehicle
floorplan interest expense net of floorplan assistance from
manufacturers) decreased $17.6 million in 2008, as compared
to 2007, primarily as a result of a decrease in new vehicle
floorplan interest expense due to lower floorplan interest
rates, partially offset by a decrease in floorplan assistance
due to lower new vehicle sales and a decrease in the floorplan
assistance rate per unit.
The net new vehicle inventory carrying cost (new vehicle
floorplan interest expense net of floorplan assistance from
manufacturers) increased $3.4 million in 2007, as compared
to 2006, primarily as a result of a decrease in floorplan
assistance due to lower new vehicle sales, partially offset by a
decrease in floorplan interest expense due to lower new vehicle
inventory levels.
34
Used
Vehicle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
/ (Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
/ (Unfavorable)
|
|
|
% Variance
|
|
($ in millions, except per vehicle data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenue
|
|
$
|
2,839.7
|
|
|
$
|
3,305.7
|
|
|
$
|
(466.0
|
)
|
|
|
(14.1
|
)
|
|
$
|
3,438.7
|
|
|
$
|
(133.0
|
)
|
|
|
(3.9
|
)
|
Wholesale revenue
|
|
|
524.8
|
|
|
|
834.2
|
|
|
|
(309.4
|
)
|
|
|
(37.1
|
)
|
|
|
863.8
|
|
|
|
(29.6
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,364.5
|
|
|
$
|
4,139.9
|
|
|
$
|
(775.4
|
)
|
|
|
(18.7
|
)
|
|
$
|
4,302.5
|
|
|
$
|
(162.6
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail gross profit
|
|
$
|
286.9
|
|
|
$
|
351.1
|
|
|
$
|
(64.2
|
)
|
|
|
(18.3
|
)
|
|
$
|
389.9
|
|
|
$
|
(38.8
|
)
|
|
|
(10.0
|
)
|
Wholesale gross profit
|
|
|
(8.5
|
)
|
|
|
0.9
|
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
278.4
|
|
|
$
|
352.0
|
|
|
$
|
(73.6
|
)
|
|
|
(20.9
|
)
|
|
$
|
390.7
|
|
|
$
|
(38.7
|
)
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales
|
|
|
181,281
|
|
|
|
201,175
|
|
|
|
(19,894
|
)
|
|
|
(9.9
|
)
|
|
|
213,199
|
|
|
|
(12,024
|
)
|
|
|
(5.6
|
)
|
Revenue per vehicle retailed
|
|
$
|
15,665
|
|
|
$
|
16,432
|
|
|
$
|
(767
|
)
|
|
|
(4.7
|
)
|
|
$
|
16,129
|
|
|
$
|
303
|
|
|
|
1.9
|
|
Gross profit per vehicle retailed
|
|
$
|
1,583
|
|
|
$
|
1,745
|
|
|
$
|
(162
|
)
|
|
|
(9.3
|
)
|
|
$
|
1,829
|
|
|
$
|
(84
|
)
|
|
|
(4.6
|
)
|
Gross profit as a percentage of retail revenue
|
|
|
10.1
|
%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
Days supply (trailing 30 days)
|
|
|
30 days
|
|
|
|
44 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
|
|
|
|
|
|
|
|
|
Favorable
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
/ (Unfavorable)
|
|
|
% Variance
|
|
|
2007
|
|
|
2006
|
|
|
/ (Unfavorable)
|
|
|
% Variance
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenue
|
|
$
|
2,819.1
|
|
|
$
|
3,305.2
|
|
|
$
|
(486.1
|
)
|
|
|
(14.7
|
)
|
|
$
|
3,367.4
|
|
|
$
|
3,531.7
|
|
|
$
|
(164.3
|
)
|
|
|
(4.7
|
)
|
Wholesale revenue
|
|
|
517.2
|
|
|
|
832.1
|
|
|
|
(314.9
|
)
|
|
|
(37.8
|
)
|
|
|
838.3
|
|
|
|
879.2
|
|
|
|
(40.9
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
3,336.3
|
|
|
$
|
4,137.3
|
|
|
$
|
(801.0
|
)
|
|
|
(19.4
|
)
|
|
$
|
4,205.7
|
|
|
$
|
4,410.9
|
|
|
$
|
(205.2
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail gross profit
|
|
$
|
284.7
|
|
|
$
|
351.0
|
|
|
$
|
(66.3
|
)
|
|
|
(18.9
|
)
|
|
$
|
357.3
|
|
|
$
|
400.5
|
|
|
$
|
(43.2
|
)
|
|
|
(10.8
|
)
|
Wholesale gross profit
|
|
|
(10.3
|
)
|
|
|
(1.1
|
)
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
(2.3
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
274.4
|
|
|
$
|
349.9
|
|
|
$
|
(75.5
|
)
|
|
|
(21.6
|
)
|
|
$
|
355.2
|
|
|
$
|
398.2
|
|
|
$
|
(43.0
|
)
|
|
|
(10.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail vehicle unit sales
|
|
|
180,304
|
|
|
|
201,134
|
|
|
|
(20,830
|
)
|
|
|
(10.4
|
)
|
|
|
205,490
|
|
|
|
219,271
|
|
|
|
(13,781
|
)
|
|
|
(6.3
|
)
|
Revenue per vehicle retailed
|
|
$
|
15,635
|
|
|
$
|
16,433
|
|
|
$
|
(798
|
)
|
|
|
(4.9
|
)
|
|
$
|
16,387
|
|
|
$
|
16,107
|
|
|
$
|
280
|
|
|
|
1.7
|
|
Gross profit per vehicle retailed
|
|
$
|
1,579
|
|
|
$
|
1,745
|
|
|
$
|
(166
|
)
|
|
|
(9.5
|
)
|
|
$
|
1,739
|
|
|
$
|
1,827
|
|
|
$
|
(88
|
)
|
|
|
(4.8
|
)
|
Gross profit as a percentage of retail revenue
|
|
|
10.1
|
%
|
|
|
10.6
|
%
|
|
|
|
|
|
|
|
|
|
|
10.6
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
Same store retail used vehicle revenue decreased
$486.1 million or 14.7% during 2008, as compared to 2007,
primarily as a result of a reduction in revenue per vehicle
retailed and a decrease in same store unit volume. The decrease
in used vehicle sales volumes was driven by the challenging
automotive retail environment, including the reduced credit
availability offered to consumers, particularly in the second
half of 2008, and a decline in consumer confidence. The decrease
in used vehicle sales volumes was also driven in part by a
decrease in trade-in volume associated with new vehicle sales,
as well as a reduction in traffic into our stores resulting from
the significant decline in consumer confidence during 2008.
Additionally, volatility in fuel prices impacted consumer
preference and caused dramatic swings in consumer demand for
various vehicle models, which led to supply and demand
imbalances. The changes in consumer preference in used vehicles
created market volatility, which was unprecedented in the
industry. We expect that the automotive retail market will
remain challenging and that adverse market conditions will
continue into 2009.
Same store retail used vehicle revenue decreased
$164.3 million or 4.7% during 2007, as compared to 2006,
primarily as a result of a decrease in same store unit volume,
partially offset by an increase in same
35
store average revenue per unit retailed. Same store unit volume
decreased as a result of a challenging retail environment,
particularly in California and Florida. We also saw a decrease
in used vehicle sales volumes in our domestic brand stores in
our markets, driven in part by a decrease in trade-in volume
associated with new vehicle sales. Same store revenue per
vehicle retailed during 2007 increased 1.7% as compared to 2006,
due to a shift in our sales mix toward premium luxury stores.
Same store gross profit per used vehicle retailed decreased 9.5%
during 2008, as compared to 2007, due to more stringent credit
conditions in the automotive retail credit market and increased
pricing pressure as a result of a competitive retail
environment. Additionally, significantly higher fuel costs
during most of 2008 put increasing margin pressure on less
fuel-efficient trucks and sport utility vehicles, particularly
during the period of peak fuel prices.
Same store gross profit per vehicle retailed decreased 4.8%
during 2007, as compared to 2006, primarily as a result of an
increase in the average cost of our used vehicle inventory
combined with the competitive retail market environment.
Used vehicle inventories were $149.6 million or
30 days supply at December 31, 2008, compared to
$305.2 million or 44 days at December 31, 2007.
We reduced our used vehicle inventories and days supply during
2008 to manage cash flow and to mitigate our exposure to the
volatility of the used vehicle market by enabling us to react
more quickly to consumer demand.
36
Parts
and Service
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,465.2
|
|
|
$
|
2,539.9
|
|
|
$
|
(74.7
|
)
|
|
|
(2.9
|
)
|
|
$
|
2,476.9
|
|
|
$
|
63.0
|
|
|
|
2.5
|
|
Gross profit
|
|
$
|
1,071.8
|
|
|
$
|
1,108.8
|
|
|
$
|
(37.0
|
)
|
|
|
(3.3
|
)
|
|
$
|
1,088.2
|
|
|
$
|
20.6
|
|
|
|
1.9
|
|
Gross profit as a percentage of revenue
|
|
|
43.5
|
%
|
|
|
43.7
|
%
|
|
|
|
|
|
|
|
|
|
|
43.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2007
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,450.5
|
|
|
$
|
2,539.7
|
|
|
$
|
(89.2
|
)
|
|
|
(3.5
|
)
|
|
$
|
2,563.9
|
|
|
$
|
2,532.5
|
|
|
$
|
31.4
|
|
|
|
1.2
|
|
Gross profit
|
|
$
|
1,062.8
|
|
|
$
|
1,106.4
|
|
|
$
|
(43.6
|
)
|
|
|
(3.9
|
)
|
|
$
|
1,116.4
|
|
|
$
|
1,111.7
|
|
|
$
|
4.7
|
|
|
|
0.4
|
|
Gross profit as a percentage of revenue
|
|
|
43.4
|
%
|
|
|
43.6
|
%
|
|
|
|
|
|
|
|
|
|
|
43.5
|
%
|
|
|
43.9
|
%
|
|
|
|
|
|
|
|
|
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.
Same store parts and service revenue decreased
$89.2 million or 3.5% during 2008, as compared to 2007,
primarily due to a $30.8 million decrease in revenues
associated with the preparation of vehicles for sale, a
$20.9 million decrease in wholesale parts revenue, a
$20.7 million decrease in warranty revenue, an
$11.2 million decrease in revenues from service work
outsourced to third-parties, and a $5.8 million decrease in
customer-paid revenues. Additionally, during 2008 we experienced
a 1.1% decrease in parts and service revenues and a 1.3%
decrease in gross profit related to volume imports and premium
luxury vehicles, compared to a 6.3% decrease in revenues and a
7.5% decrease in gross profit related to parts and service for
domestic vehicles.
The decrease in revenues associated with the preparation of
vehicles for sale was primarily due to lower new and used
vehicle unit sales volume. Wholesale parts sales decreased in
2008 due to the difficult market conditions. 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 and
lower vehicle sales volume. Customer-paid business growth was
constrained by economic pressures on consumer spending. We
expect that the automotive retail market will remain challenging
and that adverse market conditions will continue into 2009.
Same store parts and service revenue increased
$31.4 million or 1.2% during 2007, as compared to 2006,
primarily due to a $39.3 million increase in customer-paid
revenue for parts and service, a $19.1 million increase in
wholesale parts revenue, and smaller increases in other parts
and service revenues, such as service work outsourced to
third-parties and retail parts sales. Partially offsetting these
increases was a $27.4 million decrease in warranty revenue
and a $7.7 million decrease in revenues associated with the
preparation of vehicles for sales. Warranty declines were driven
in part by improved quality of vehicles manufactured in recent
years, as well as changes to certain manufacturers
warranty and prepaid service programs and lower vehicles sales
volume. The improvements to customer-paid business are
attributable to our service drive process, maintenance menu, and
service marketing program, as well as our pricing models and
training programs. Additionally, during 2007 we experienced a
3.4% increase in parts and service revenues and a 2.7% increase
in gross profit related to volume imports and premium luxury
vehicles, compared to a 1.1% decrease in revenues and a 2.4%
decrease in gross profit related to parts and service for
domestic vehicles.
37
Finance
and Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
($ in millions, except per vehicle data)
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and gross profit
|
|
$
|
482.6
|
|
|
$
|
584.3
|
|
|
$
|
(101.7
|
)
|
|
|
(17.4
|
)
|
|
$
|
611.0
|
|
|
$
|
(26.7
|
)
|
|
|
(4.4
|
)
|
Gross profit per vehicle retailed
|
|
$
|
1,104
|
|
|
$
|
1,115
|
|
|
$
|
(11
|
)
|
|
|
(1.0
|
)
|
|
$
|
1,075
|
|
|
$
|
40
|
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2007
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Same Store:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue and gross profit
|
|
$
|
479.7
|
|
|
$
|
584.3
|
|
|
$
|
(104.6
|
)
|
|
|
(17.9
|
)
|
|
$
|
596.5
|
|
|
$
|
624.6
|
|
|
$
|
(28.1
|
)
|
|
|
(4.5
|
)
|
Gross profit per vehicle retailed
|
|
$
|
1,103
|
|
|
$
|
1,115
|
|
|
$
|
(12
|
)
|
|
|
(1.1
|
)
|
|
$
|
1,119
|
|
|
$
|
1,073
|
|
|
$
|
46
|
|
|
|
4.3
|
|
Same store finance and insurance revenue and gross profit
decreased $104.6 million or 17.9% during 2008, as compared
to 2007, primarily due to lower new and used sales volumes. We
expect that the automotive retail market will remain challenging
and that adverse market conditions will continue into 2009.
Same store finance and insurance revenue and gross profit per
vehicle retailed decreased 1.1% during 2008, as compared to
2007, due primarily to the current unfavorable economic
conditions in the United States, including increased tightening
in the automotive retail credit market, partially offset by an
increase in finance and insurance products sold per customer.
Finance and insurance revenue and gross profit during 2008 was
negatively impacted by an increase in the rate of chargebacks as
a percentage of finance and insurance revenue and gross profit.
See Critical Accounting Estimates above and
Note 20 of the Notes to Consolidated Financial Statements
for a discussion regarding chargeback liabilities.
Same store finance and insurance revenue and gross profit
decreased $28.1 million or 4.5% during 2007, as compared to
2006, due to lower new and used sales volumes partially offset
by an increase in finance and insurance revenue and gross profit
per vehicle retailed. Increased same store finance and insurance
revenue and gross profit per vehicle retailed was driven by an
increase in finance and insurance products sold per customer and
our continued emphasis on training and certification of store
associates, particularly in third and fourth quartile stores,
and on maximizing our preferred lender relationships. Same store
finance and insurance revenue and gross profit per vehicle
retailed was impacted by a decrease in retrospective commissions
received on extended service contracts of $1.4 million in
2007.
38
Segment
Results
As discussed in Note 21 of the Notes to Consolidated
Financial Statements, we made changes to our management approach
that divided our business into three operating segments:
(1) Domestic, (2) Import, and (3) Premium Luxury.
This realignment had no effect on our previously reported
consolidated results of operations, financial position, or cash
flows. In connection with this change, we have reclassified
historical amounts to conform to our current segment
presentation.
Our Domestic segment is comprised of retail automotive
franchises that sell new vehicles manufactured by General
Motors, Ford, and Chrysler. Our Import segment is comprised of
retail automotive franchises that sell new vehicles manufactured
primarily by Toyota, Honda, and Nissan. Our Premium Luxury
segment is comprised of retail automotive franchises that sell
new vehicles manufactured primarily by Mercedes, BMW, and Lexus.
The franchises in each segment also sell used vehicles, parts
and automotive services, and automotive finance and insurance
products.
Corporate and other is comprised of our other
businesses, including collision centers,
E-commerce
activities, and auction operations, as well as unallocated
corporate overhead expenses.
In the following table of financial data, total Segment Income
(Loss) of the operating segments is reconciled to consolidated
operating income (loss).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
($ in millions)
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
4,927.2
|
|
|
$
|
6,562.9
|
|
|
$
|
(1,635.7
|
)
|
|
|
(24.9
|
)
|
|
$
|
7,310.3
|
|
|
$
|
(747.4
|
)
|
|
|
(10.2
|
)
|
Import
|
|
|
5,449.9
|
|
|
|
6,397.9
|
|
|
|
(948.0
|
)
|
|
|
(14.8
|
)
|
|
|
6,577.3
|
|
|
|
(179.4
|
)
|
|
|
(2.7
|
)
|
Premium Luxury
|
|
|
3,645.2
|
|
|
|
4,272.8
|
|
|
|
(627.6
|
)
|
|
|
(14.7
|
)
|
|
|
4,173.5
|
|
|
|
99.3
|
|
|
|
2.4
|
|
Corporate and other
|
|
|
109.6
|
|
|
|
112.9
|
|
|
|
(3.3
|
)
|
|
|
(2.9
|
)
|
|
|
157.4
|
|
|
|
(44.5
|
)
|
|
|
(28.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
14,131.9
|
|
|
$
|
17,346.5
|
|
|
$
|
(3,214.6
|
)
|
|
|
(18.5
|
)
|
|
$
|
18,218.5
|
|
|
$
|
(872.0
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Segment income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
107.1
|
|
|
$
|
204.5
|
|
|
$
|
(97.4
|
)
|
|
|
(47.6
|
)
|
|
$
|
225.1
|
|
|
|
(20.6
|
)
|
|
|
(9.2
|
)
|
Import
|
|
|
187.9
|
|
|
|
250.0
|
|
|
|
(62.1
|
)
|
|
|
(24.8
|
)
|
|
|
252.5
|
|
|
|
(2.5
|
)
|
|
|
(1.0
|
)
|
Premium Luxury
|
|
|
184.2
|
|
|
|
226.2
|
|
|
|
(42.0
|
)
|
|
|
(18.6
|
)
|
|
|
231.0
|
|
|
|
(4.8
|
)
|
|
|
(2.1
|
)
|
Corporate and other
|
|
|
(1,861.4
|
)
|
|
|
(108.3
|
)
|
|
|
(1,753.1
|
)
|
|
|
|
|
|
|
(58.2
|
)
|
|
|
(50.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income (loss)
|
|
$
|
(1,382.2
|
)
|
|
$
|
572.4
|
|
|
$
|
(1,954.6
|
)
|
|
|
|
|
|
$
|
650.4
|
|
|
|
(78.0
|
)
|
|
|
|
|
Add: Floorplan interest expense
|
|
|
87.4
|
|
|
|
129.0
|
|
|
|
(41.6
|
)
|
|
|
|
|
|
|
132.5
|
|
|
|
(3.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(1,294.8
|
)
|
|
$
|
701.4
|
|
|
$
|
(1,996.2
|
)
|
|
|
|
|
|
$
|
782.9
|
|
|
$
|
(81.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Segment income (loss) is defined as operating income (loss) less
floorplan interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail new vehicle unit sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
80,153
|
|
|
|
113,549
|
|
|
|
(33,396
|
)
|
|
|
(29.4
|
)
|
|
|
137,062
|
|
|
|
(23,513.0
|
)
|
|
|
(17.2
|
)
|
Import
|
|
|
135,464
|
|
|
|
161,232
|
|
|
|
(25,768
|
)
|
|
|
(16.0
|
)
|
|
|
169,922
|
|
|
|
(8,690.0
|
)
|
|
|
(5.1
|
)
|
Premium Luxury
|
|
|
40,226
|
|
|
|
48,068
|
|
|
|
(7,842
|
)
|
|
|
(16.3
|
)
|
|
|
47,954
|
|
|
|
114.0
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,843
|
|
|
|
322,849
|
|
|
|
(67,006
|
)
|
|
|
(20.8
|
)
|
|
|
354,938
|
|
|
|
(32,089
|
)
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Domestic
The Domestic segment operating results included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,927.2
|
|
|
$
|
6,562.9
|
|
|
$
|
(1,635.7
|
)
|
|
|
(24.9
|
)
|
|
$
|
7,310.3
|
|
|
$
|
(747.4
|
)
|
|
|
(10.2
|
)
|
Segment income
|
|
$
|
107.1
|
|
|
$
|
204.5
|
|
|
$
|
(97.4
|
)
|
|
|
(47.6
|
)
|
|
$
|
225.1
|
|
|
$
|
(20.6
|
)
|
|
|
(9.2
|
)
|
Retail new vehicle unit sales
|
|
|
80,153
|
|
|
|
113,549
|
|
|
|
(33,396
|
)
|
|
|
(29.4
|
)
|
|
|
137,062
|
|
|
|
(23,513
|
)
|
|
|
(17.2
|
)
|
Domestic revenue decreased $1.6 billion or 24.9% during
2008, as compared to 2007, primarily due to lower vehicle sales.
The decrease in volume was more pronounced in the Domestic
segment, as compared to the Import and Premium Luxury segments.
As a result, the decline in revenues in the Domestic segment was
much greater than the decline in the revenues of our other
segments. Our Domestic stores derive a greater proportion of
their revenue and earnings from sales of trucks and
sport-utility vehicles, and, as a result of significantly higher
fuel prices during most of 2008, particularly in the third
quarter, demand shifted away from those types of vehicles to
smaller, more fuel-efficient cars. Additionally, a reduction in
the availability of favorable customer financing from the
finance captives of domestic manufacturers, including the
discontinuation or limitation of certain lease programs for
domestic vehicles, contributed to the decline in sales volume
from our Domestic stores. The decline in Domestic parts and
service business was also greater in comparison to Import and
Premium Luxury due to the improved quality of domestic vehicles,
fewer units in operation, and lower domestic vehicle sales
volume.
Domestic segment income decreased $97.4 million or 47.6%
during 2008, as compared to 2007, primarily due to decreased
revenues and increased pricing pressure as a result of the
competitive retail environment. Additionally, the
disproportionate decline in revenues in the Domestic segment as
compared to our other segments resulted in a much more
significant deleveraging of the Domestic segments cost
structure, as costs and expenses could not be reduced in
proportion to the reduction in revenues.
Domestic revenue decreased $747.4 million or 10.2% during
2007, as compared to 2006, primarily due to lower vehicle sales.
Domestic segment income decreased $20.6 million or 9.2%
during 2007, as compared to 2006, primarily due to decreased
revenues and increased pricing pressure as a result of the
competitive retail environment.
Import
The Import segment operating results included the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,449.9
|
|
|
$
|
6,397.9
|
|
|
$
|
(948.0
|
)
|
|
|
(14.8
|
)
|
|
$
|
6,577.3
|
|
|
$
|
(179.4
|
)
|
|
|
(2.7
|
)
|
Segment income
|
|
$
|
187.9
|
|
|
$
|
250.0
|
|
|
$
|
(62.1
|
)
|
|
|
(24.8
|
)
|
|
$
|
252.5
|
|
|
$
|
(2.5
|
)
|
|
|
(1.0
|
)
|
Retail new vehicle unit sales
|
|
|
135,464
|
|
|
|
161,232
|
|
|
|
(25,768
|
)
|
|
|
(16.0
|
)
|
|
|
169,922
|
|
|
|
(8,690
|
)
|
|
|
(5.1
|
)
|
Import revenue decreased $948.0 million or 14.8% during
2008, as compared to 2007, primarily due to lower vehicle sales.
Sales volume decreases in the Import segment were partially
mitigated by the shift in demand toward more fuel-efficient
vehicles, from which our Import stores derive a greater
proportion of their business, as compared to our Domestic and
Premium Luxury stores. Import segment income decreased
$62.1 million or 24.8% during 2008, as compared to 2007,
due to decreased revenues and increased pricing pressure as a
result of the competitive retail environment.
40
Import revenue decreased $179.4 million or 2.7% during
2007, as compared to 2006, primarily due to lower vehicle sales.
Import segment income decreased $2.5 million or 1.0% during
2007, as compared to 2006, due to decreased revenues and
increased pricing pressure as a result of the competitive retail
environment.
Premium
Luxury
The Premium Luxury segment operating results included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
|
|
Favorable/
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
|
2006
|
|
|
(Unfavorable)
|
|
|
% Variance
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,645.2
|
|
|
$
|
4,272.8
|
|
|
$
|
(627.6
|
)
|
|
|
(14.7
|
)
|
|
$
|
4,173.5
|
|
|
$
|
99.3
|
|
|
|
2.4
|
|
Segment income
|
|
$
|
184.2
|
|
|
$
|
226.2
|
|
|
$
|
(42.0
|
)
|
|
|
(18.6
|
)
|
|
$
|
231.0
|
|
|
$
|
(4.8
|
)
|
|
|
(2.1
|
)
|
Retail new vehicle unit sales
|
|
|
40,226
|
|
|
|
48,068
|
|
|
|
(7,842
|
)
|
|
|
(16.3
|
)
|
|
|
47,954
|
|
|
|
114
|
|
|
|
0.2
|
|
Premium Luxury revenue decreased $627.6 million or 14.7%
during 2008, as compared to 2007, primarily due to lower vehicle
sales and a decrease in revenue per vehicle retailed. The
results for our Premium Luxury segment were adversely affected
by a shift in consumer demand toward lower-priced premium luxury
vehicles. This shift in demand was caused by the difficult
economic conditions, as well as several premium luxury
manufacturers launching and promoting lower-priced vehicles
during 2008. Premium Luxury segment income decreased
$42.0 million or 18.6% during 2008, as compared to 2007,
primarily due to margin compression as a result of the shift in
consumer demand toward lower-priced premium luxury vehicles.
Premium Luxury revenue increased $99.3 million or 2.4%
during 2007, as compared to 2006, primarily due to higher
vehicle sales and an increase in revenue per vehicle retailed.
Premium Luxury segment income decreased $4.8 million or
2.1% during 2007, as compared to 2006, primarily due to margin
compression.
41
Operating
Expenses
Selling,
General, and Administrative Expenses
During 2008, selling, general, and administrative expenses
decreased $186.0 million or 9.3%. As a percentage of total
gross profit, selling, general, and administrative expenses
increased to 76.2% in 2008 from 71.6% in 2007 resulting from
deleveraging of our cost structure due to the decline in
vehicles sales, partially offset by our cost savings initiatives
discussed in Market Challenges above. Selling,
general, and administrative expenses decreased in 2008, as
compared to 2007, due to a $120.7 million decrease in
compensation expense and a $44.6 million decrease in gross
advertising expenditures, partially offset by a
$5.1 million decrease in advertising reimbursements from
manufacturers.
During 2007, selling, general, and administrative expenses
decreased $58.1 million or 2.8%. As a percentage of total
gross profit, selling, general, and administrative expenses
increased to 71.6% in 2007 from 70.5% in 2006 resulting from
deleveraging of our cost structure due to the decline in
vehicles sales. Selling, general, and administrative expenses
decreased in 2007, as compared to 2006, due to a
$54.2 million decrease in compensation expense and a
$7.3 million decrease in gross advertising expenditures,
partially offset by a $3.3 million decrease in advertising
reimbursements from manufacturers.
Compensation expense for 2008 includes a $5.3 million
non-cash stock compensation expense adjustment as discussed in
Note 10 of the Notes to Consolidated Financial Statements.
Non-Operating
Income (Expenses)
Floorplan
Interest Expense
Floorplan interest expense was $87.4 million in 2008,
$129.0 million in 2007, and $132.5 million in 2006.
The decrease in 2008, as compared to 2007, is primarily the
result of lower short-term LIBOR interest rates, partially
offset by higher average vehicle floorplan balances and the
additional floorplan interest expense incurred in connection
with the floorplan credit agreements we entered into during the
second quarter of 2008 to finance a portion of our used vehicle
inventory. The decrease in 2007, as compared to 2006, is
primarily the result of lower inventory levels, partially offset
by higher short-term LIBOR interest rates during 2007.
Other
Interest Expense
Other interest expense was incurred primarily on borrowings
under our term loan facility, mortgage facility, revolving
credit facility, and outstanding senior unsecured notes. Other
interest expense was $89.4 million in 2008,
$114.1 million in 2007, and $90.8 million in 2006.
The decrease in other interest expense of $24.7 million in
2008, as compared to 2007, was primarily due to a
$14.4 million decrease in interest expense resulting from
lower interest rates on our term loan facility, a
$7.9 million decrease in interest expense related to the
repurchase of our floating rate and 7% senior unsecured
notes of $232.9 million, and a $6.0 million decrease
in interest expense resulting from lower levels of debt
outstanding during the year associated with our revolving credit
facility and 9% senior unsecured notes. These decreases
were partially offset by a $4.5 million increase in
interest expense related to higher levels of debt outstanding
during the year associated with our mortgage facility.
The increase in other interest expense of $23.3 million in
2007, as compared to 2006, was primarily due to a
$21.8 million increase in interest expense related to the
$1.15 billion of additional debt incurred in connection
with our April 2006 equity tender offer and a $6.2 million
increase in interest expense related to our revolving credit
facility, primarily as a result of increased borrowings in 2007.
Partially offsetting these increases was an $8.7 million
reduction in interest expense resulting from the repurchase of
our 9% senior unsecured notes and repayments of mortgage
facilities. Additionally, during 2007 we incurred
$2.6 million of expenses in connection with the
modifications to our term loan, revolving credit facilities, and
our mortgage facility.
42
Other
Interest Expense Senior Note
Repurchases
In April 2006, we repurchased $309.4 million aggregate
principal amount 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
Consolidated Income Statements.
Gain
on Senior Note Repurchases
During 2008, we repurchased $105.5 million aggregate
principal amount of our floating rate senior unsecured notes due
April 15, 2013, and $127.4 million aggregate principal
amount of our 7% senior unsecured notes due April 15,
2014. We recorded a gain of $51.3 million in connection
with these repurchases, net of the write-off of related
unamortized debt issuance costs, which is recorded in Gain on
Senior Note Repurchases in the accompanying Consolidated Income
Statements.
We also committed to repurchase an additional $11.1 million
aggregate principal amount of our 7% senior unsecured notes
for which settlement occurred subsequent to December 31,
2008. We have reclassified these amounts from long-term to
current debt as of December 31, 2008. We will record a gain
in the first quarter of 2009 of $3.0 million on the
repurchase of these notes, net of the write-off of related
unamortized debt issuance costs.
Provision
for Income Taxes
Our effective income tax rate was 13.9% in 2008, 37.3% in 2007,
and 38.9% in 2006. The tax rate for 2008 reflects the fact that
a significant portion of the impairment charges taken in 2008
was not deductible for income tax purposes. 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. We expect our underlying tax rate to
be approximately 40% on an ongoing basis, excluding the impact
of any potential tax adjustments in the future.
As of December 31, 2008, we had unrecognized tax benefits
recorded in accordance with FIN 48. See Note 11 of the
Notes to Consolidated Financial Statements for additional
discussion.
Our unrecognized tax benefits were reduced by approximately
$35 million (net of tax effect) as a result of the
expiration of a statute of limitations in October 2008. We do
not expect that our unrecognized tax benefits will significantly
increase or decrease during the twelve months beginning
January 1, 2009.
During 2007, we recorded net income tax benefits in our
provision for income taxes of $12.0 million related to the
resolution of certain tax matters, changes in certain state tax
laws, and other adjustments.
During 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 2005.
Discontinued
Operations
Discontinued operations are related to stores that were sold or
terminated, that we have entered into an agreement to sell or
terminate, or for which we otherwise deem a proposed sales
transaction or termination to be probable, with no material
changes expected. We had a loss from discontinued operations
totaling $17.7 million in 2008, $10.0 million in 2007,
and $12.1 million in 2006, net of income taxes. Certain
amounts reflected in the accompanying Consolidated Financial
Statements for the years ended December 31, 2008, 2007, and
2006, have been adjusted to classify the results of these stores
as discontinued operations.
43
Liquidity
and Capital Resources
We believe that our cash and cash equivalents, funds generated
through future operations, and availability of borrowings under
our secured floorplan facilities and revolving credit facility
will be sufficient to service our debt and fund our working
capital requirements, pay our tax obligations and commitments
and contingencies, and meet any seasonal operating requirements
for the foreseeable future. For information regarding compliance
with our covenants, refer to the discussion under the heading
Restrictions and Covenants below.
At December 31, 2008, we had $111.0 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, 2008, surety bonds, letters of credit, and
cash deposits totaled $110.2 million, including
$72.4 million in letters of credit. We do not currently
provide cash collateral for outstanding letters of credit.
See the table at the beginning of Note 7 of the Notes to
Consolidated Financial Statements for the amounts of our notes
payable and long-term debt as of December 31, 2008 and 2007.
Senior
Unsecured Notes and Amended Credit Agreement
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 currently 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 April 2006, we also completed the first amendment to our
credit agreement to provide: (1) a $675.0 million
revolving credit facility that provided for various interest
rates on borrowings generally at LIBOR plus 0.80%, and
(2) a $600.0 million term loan facility bearing
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 proceeds of the 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 pursuant to our 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 our debt tender
offer was expensed during 2006.
In July 2007, we completed a second amendment of the credit
agreement. Under the terms of the second amendment, the interest
rate on the term loan facility decreased from LIBOR plus 1.25%
to LIBOR plus 0.875% and the interest rate on the revolving
credit facility decreased from LIBOR plus 0.80% to LIBOR plus
0.725%. Additionally, the credit agreement termination date was
extended from July 14, 2010, to July 18, 2012, and
certain other terms and conditions were modified as a result of
this amendment. We incurred $1.6 million of expenses in
connection with this modification during 2007, which are
included as a component of Other Interest Expense in the
accompanying Consolidated Income Statements.
We have 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 was $72.4 million at December 31, 2008.
We had no borrowings outstanding under the revolving credit
facility at December 31, 2008, leaving $627.6 million
of borrowing capacity at December 31, 2008. As of
December 31, 2008, this borrowing
44
capacity was limited under the maximum consolidated leverage
ratio contained in our amended credit agreement to approximately
$301 million.
During 2008, we repurchased $105.5 million aggregate
principal amount of our floating rate senior unsecured notes due
April 15, 2013, for an aggregate total consideration of
$79.8 million. We also repurchased $127.4 million
aggregate principal amount of our 7% senior unsecured notes
due April 15, 2014, for an aggregate total consideration of
$102.3 million. We recorded a gain of $51.3 million in
connection with these repurchases, net of the write-off of
related unamortized debt issuance costs. This gain is classified
as Gain on Senior Note Repurchases in the accompanying
Consolidated Income Statements. At December 31, 2008, we
had outstanding $194.5 million of floating rate senior
unsecured notes due April 15, 2013, and $172.6 million
of 7% senior unsecured notes due April 15, 2014, in
each case at par.
We also committed to repurchase an additional $11.1 million
aggregate principal amount of our 7% senior unsecured notes
for which settlement occurred subsequent to December 31,
2008. We have reclassified these amounts from long-term to
current debt as of December 31, 2008. We will record a gain
in the first quarter of 2009 of $3.0 million on the
repurchase of these notes, net of the write-off of related
unamortized debt issuance costs.
The credit spread charged for the revolving credit facility and
term loan facility is impacted by our senior unsecured credit
ratings from Standard & Poors (BB+, with
negative outlook) and Moodys (Ba2, with negative outlook).
For instance, under the current terms of our amended credit
agreement, a one-notch downgrade of our senior unsecured credit
rating by either Standard & Poors or
Moodys would result in a 25 basis point increase in
the credit spread under our term loan facility, a 20 basis
point increase in the credit spread under our revolving credit
facility, and a 5 basis point increase in the facility fee
applicable to our revolving credit facility. Credit ratings
could be lowered if new vehicle demand worsens significantly,
threatening our earnings and cash flow, or if we increase our
financial leverage through acquisitions or share repurchases.
The outlook could be revised back to stable if market demand
returns in the near term or if we demonstrate our ability to
maintain reasonable profitability, cash flow, and leverage
measures despite the ongoing revenue pressures.
We may from time to time repurchase additional senior unsecured
notes in open market purchases or privately negotiated
transactions. Additionally, we may in the future prepay our term
loan facility or other debt. The decision to repurchase senior
unsecured notes or to prepay our term loan facility or other
debt will be based on prevailing market conditions, our
liquidity requirements, contractual restrictions, and other
factors.
Other
Debt
On August 1, 2008, we repaid $14.1 million of
9% senior unsecured notes that matured on that date.
At December 31, 2008, we had $233.3 million
outstanding under a mortgage facility with an automotive
manufacturers captive finance subsidiary. The mortgage
facility was refinanced under a new facility in November 2007 to
provide a fixed interest rate (5.864%) and provide financing
secured by
10-year
mortgages on certain of our store properties. In connection with
this refinancing, in 2007 we received net proceeds of
approximately $126.4 million and recorded $1.0 million
of expenses, which are included as a component of Other Interest
Expense in the accompanying Consolidated Income Statements.
Prior to this refinancing, the facility utilized short-term
LIBOR-based interest rates, which averaged 6.54% for 2007.
Vehicle floorplan payable-trade totaled $1.5 billion at
December 31, 2008, and $1.7 billion at
December 31, 2007. 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
$453.5 million at December 31, 2008, and
$440.9 million at December 31, 2007, and represents
amounts borrowed to finance the purchase of specific new and, to
a lesser extent, used vehicle inventories with non-trade
lenders. All the floorplan facilities are at one-month
LIBOR-based rates of interest.
Floorplan facilities are due on demand, but in the case of new
vehicle inventories, are generally paid within several business
days after the related vehicles are sold. Our manufacturer
agreements generally require that the manufacturer have the
ability to draft against the new floorplan facilities so the
lender directly funds
45
the manufacturer for the purchase of new vehicle inventory.
Floorplan facilities are primarily collateralized by vehicle
inventories and related receivables.
Share
Repurchases and Dividends
The following table sets forth information regarding our share
repurchases over the past three years:
|
|
|
|
|
|
|
|
|
Year Ended December 31:
|
|
Shares Repurchased
|
|
Aggregate Purchase Price
|
|
2008
|
|
|
3.8
|
|
|
$
|
54.1
|
|
2007
|
|
|
33.2
|
|
|
$
|
645.7
|
|
2006
|
|
|
61.2
|
|
|
$
|
1,380.6
|
|
As of December 31, 2008, $142.7 million remained
available for share repurchases under the existing repurchase
program approved by our Board of Directors. Future share
repurchases are subject to limitations contained in the
indenture relating to our floating rate and 7% senior
unsecured notes.
The decision to repurchase shares in the future will be based on
such factors as the market price of our common stock versus our
view of its intrinsic value, the potential impact on our capital
structure (including compliance with the financial ratios in our
debt agreements), and the expected return on competing uses of
capital such as dealership acquisitions, capital investments in
our current businesses, or repurchases of our debt. In 2008, in
light of the economic conditions, our liquidity and capital
resource strategies were focused on generating cash and paying
down debt to remain in compliance with the financial covenants
in our debt agreements. We expect that in 2009 we will continue
to use a substantial portion of our cash to pay down debt. See
also Restrictions and Covenants below.
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 for the foreseeable future. The
indenture for our floating rate and 7% senior unsecured
notes restricts our ability to declare cash dividends. See
Restrictions and Covenants below.
Restrictions
and Covenants
Our amended credit agreement, the indenture for our floating
rate and 7% senior unsecured notes, our vehicle floorplan
payable facilities, and our mortgage facility contain numerous
customary financial and operating covenants that place
significant restrictions on us, including our ability to incur
additional indebtedness or prepay existing indebtedness, to
declare cash dividends, to create liens or other encumbrances,
to sell (or otherwise dispose of) assets, and to merge or
consolidate with other entities.
For example, under the amended credit agreement, we are required
to remain in compliance with a maximum consolidated leverage
ratio, as defined (3.0 times through September 30, 2009,
after which it will revert to 2.75 times). In March 2008,
we amended our credit agreement to provide that non-cash
impairment losses associated with goodwill and intangible assets
as well as certain other non-cash charges would be excluded from
the computation of the maximum consolidated leverage ratio. We
are also required to remain in compliance with a maximum
capitalization ratio (65%), as defined.
In addition, the indenture for the floating rate and
7% 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.
The indenture for our floating rate and 7% senior unsecured
notes restricts our 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 $500.0 million plus 50% of our cumulative consolidated
net income (as defined in the indenture) since April 1,
2006, the net proceeds of stock option exercises, and certain
other items, subject to certain exceptions and conditions set
forth in the indenture.
Our failure to comply with the covenants contained in our debt
agreements could permit acceleration of all of our indebtedness.
Our debt agreements have cross-default provisions that trigger a
default in the event of an uncured default under other material
indebtedness of AutoNation.
46
During 2008, we recorded impairment charges of
$1.76 billion ($1.46 billion after-tax) associated
with goodwill and franchise rights. See Note 5 of the Notes
to Consolidated Financial Statements. Despite these impairment
charges, as of December 31, 2008, we were in compliance
with the requirements of all applicable financial covenants
under our debt agreements. As of December 31, 2008, under
our amended credit agreement, our consolidated leverage ratio
was approximately 2.45 to 1, as defined in our credit agreement.
Our capitalization ratio was adversely impacted by the
impairment charges, and as of December 31, 2008, this ratio
was approximately 59.7%, as defined in our credit agreement.
Both the consolidated leverage ratio and the capitalization
ratio limit our ability to incur additional non-vehicle debt.
The capitalization ratio also limits our ability to incur
additional floorplan indebtedness.
Our liquidity and capital resource strategies are currently
focused on generating cash and paying down debt to remain in
compliance with the financial covenants in our debt agreements.
To the extent that in the future we believe that we will be
unable to comply with the covenants in our amended credit
agreement, we will seek an amendment or waiver of our amended
credit agreement, which could increase the cost of our debt. We
may also consider other options, such as raising capital through
an equity issuance to pay down debt, which could be dilutive to
stockholders. See the risk factor Our revolving credit
facility, term loan facility, mortgage facility, and the
indenture relating to our senior unsecured notes contain certain
financial ratios and other restrictions on our ability to
conduct our business in Part I, Item 1A, of
this
Form 10-K.
In the event of a downgrade in our 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 floating rate and 7% senior unsecured notes would
be eliminated with an upgrade of our senior unsecured notes to
investment grade by either Standard & Poors or
Moodys.
Cash
Flows
Cash and cash equivalents increased by $78.0 million during
2008, and decreased by $19.7 million during 2007 and
$197.5 million during 2006. The major components of these
changes are discussed below.
Cash
Flows from Operating Activities
Net cash provided by operating activities during 2008 was
$685.4 million, as compared to $207.2 million in 2007,
and $299.5 million in 2006.
Net cash provided by operating activities during 2008 was
primarily affected by a change in the classification of
borrowings from a floorplan lender, and a reduction in earnings,
as further discussed below.
Net cash provided by operating activities during 2008 was
affected by a change in the classification of borrowings from a
floorplan lender, in connection with the sale of a majority
stake in General Motors Acceptance Corporation
(GMAC) by General Motors (GM), which was
GMs wholly-owned captive finance subsidiary prior to this
transaction. As a result of this sale, which occurred on
November 30, 2006, we have classified new borrowings from
GMAC subsequent to this transaction as vehicle floorplan
non-trade, with related changes reflected as financing cash
flows. Accordingly, net floorplan borrowings from GMAC
subsequent to this transaction are reflected as cash provided by
financing activities, while repayments in 2007 of amounts due to
GMAC prior to this transaction (totaling $305.8 million
during 2007) are reflected as cash used by operating
activities. During 2008, all borrowings and repayments related
to GMAC were reflected as financing activities, since the
repayment of amounts due to GMAC prior to this transaction were
completed during 2007. After considering the effect of this
reclassification, net cash provided by operating activities
during 2008, compared to 2007, was impacted by an increase in
cash provided by changes in working capital, partially offset by
a reduction in earnings.
Net cash provided by operating activities during 2007, as
compared to 2006, was also impacted by the GMAC
reclassification. Net floorplan borrowings from GMAC totaled
$231.5 million during 2007 and were reflected as cash
provided by financing activities, while repayments in 2007 of
amounts due to GMAC prior to this transaction continued to be
reflected as cash used by operating activities. Partially
offsetting the GMAC
47
reclassification was a $130.4 million reduction in tax
payments during 2007, as compared to 2006. A portion of this
reduction pertains to estimated federal tax payments totaling
approximately $100 million that we made in 2006, related to
estimated taxes for the third and fourth quarter of 2005,
payment for which had been deferred as allowed for filers
affected by hurricanes in 2005. The reduction in cash provided
by operating activities also reflects lower earnings in 2007, as
compared to 2006. Additionally, cash provided by operating
activities was favorably impacted in 2006 by a
$34.5 million adjustment to net income to reflect tender
premium and other financing costs related to our April 2006 debt
tender offer as a financing activity.
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, including property operating lease
buy-outs, were $117.4 million during 2008, as compared to
$159.7 million in 2007, and $175.0 million in 2006. 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 project that 2009 full year
capital expenditures will be approximately $90 million to
$95 million. Excluding acquisition-related spending, land
purchased for future sites, and lease buy-outs, and net of
related asset sales, we expect full year 2009 capital
expenditures will be approximately $75 million to
$80 million.
Property operating lease buy-outs were $20.4 million during
2008, as compared to $2.3 million in 2007, and
$5.9 million in 2006. We continue to analyze certain higher
cost operating leases and evaluate alternatives in order to
lower the effective financing costs.
Proceeds from the sale of property and equipment including the
disposal of property held for sale were $3.3 million in
2008, $12.3 million in 2007, and $7.8 million in 2006.
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
$49.6 million in 2008, $55.1 million in 2007, and
$24.0 million in 2006.
Total cash used in business acquisitions, net of cash acquired,
was $32.2 million in 2008, $6.7 million in 2007, and
$166.7 million in 2006. During 2008, we acquired three
automotive retail franchises and other related assets as
compared to ten in 2007 and five in 2006. Cash used in business
acquisitions included deferred purchase price for certain prior
year automotive retail acquisitions of $0.2 million in
2006. See discussion in Note 15 of the Notes to
Consolidated Financial Statements.
Cash
Flows from Financing Activities
Net cash flows from financing activities primarily include
treasury stock purchases, stock option exercises, debt activity,
and changes in vehicle floorplan payable-non-trade.
We repurchased 3.8 million shares of our common stock for
an aggregate purchase price of $54.1 million during 2008
(average purchase price per share of $14.37). We repurchased
33.2 million shares of our common stock for an aggregate
purchase price of $645.7 million during 2007 (average
purchase price per share of $19.43), including repurchases for
which settlement occurred subsequent to December 31, 2007.
During 2008, proceeds from the exercise of stock options were
$1.0 million (average exercise price per share of $10.71),
as compared to $96.6 million in 2007 (average exercise
price per share of $14.12), and $75.7 million in 2006
(average exercise price per share of $13.24).
During 2008, we repurchased $105.5 million aggregate
principal amount of our floating rate senior unsecured notes for
an aggregate total consideration of $79.8 million
(including $0.8 million of accrued interest) and
$127.4 million aggregate principal amount of our
7% senior unsecured notes for an aggregate total
consideration of $102.3 million (including
$2.5 million of accrued interest).
We repaid $14.1 million of our 9% senior unsecured
notes that matured on August 1, 2008.
48
We repaid $6.4 million during 2008, $4.0 million in
2007, and $37.7 million in 2006 of amounts outstanding
under our mortgage facilities.
During 2008, we borrowed $531.0 million and repaid
$791.0 million outstanding under our revolving credit
facility, for net repayments of $260.0 million. During
2007, we borrowed $1.32 billion and repaid
$1.26 billion outstanding under our revolving credit
facility, for net borrowings of $65.0 million. During 2006,
we borrowed $1.04 billion and repaid $844.0 million
outstanding under our revolving credit facility, for net
borrowings of $195.0 million.
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 net proceeds
of $3.3 million during 2008, net proceeds of
$211.5 million during 2007, and net proceeds of
$84.7 million during 2006. As discussed above, the
repayment of $305.8 million of amounts due to GMAC prior to
the sale by GM of a majority interest in GMAC were reflected as
cash used by operating activities during 2007, while all
repayments to GMAC were reflected as cash used by financing
activities during 2008. Proceeds received and repayments made
under the floorplan credit agreements we entered into during the
second quarter of 2008 to finance a portion of our used vehicle
inventory were reflected as cash provided by (used in) financing
activities during 2008.
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 April 2006 senior unsecured notes, we amended
our existing credit agreement to provide: (1) a
$675.0 million revolving credit facility for which we had
no borrowings outstanding as of December 31, 2008, 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 senior unsecured notes issued in April 2006
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. During
2006, we expensed $34.5 million of tender premium
($24.8 million) and other deferred financing costs
($9.7 million) related to our debt tender offer.
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.
49
Contractual
Payment Obligations
The following table summarizes our payment obligations under
certain contracts at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
1 - 3 Years
|
|
|
3 - 5 Years
|
|
|
5 Years
|
|
(In millions)
|
|
|
|
|
|
Vehicle floorplan payable (Note 3)*
|
|
$
|
1,927.9
|
|
|
$
|
1,927.9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Notes payable and long-term debt (Note 7)*
|
|
|
1,258.9
|
|
|
|
33.3
|
|
|
|
50.8
|
|
|
|
812.1
|
|
|
|
362.7
|
|
Interest payments**
|
|
|
177.8
|
|
|
|
26.4
|
|
|
|
50.7
|
|
|
|
48.7
|
|
|
|
52.0
|
|
Operating lease commitments (Note 8)***
|
|
|
569.3
|
|
|
|
51.9
|
|
|
|
93.8
|
|
|
|
85.8
|
|
|
|
337.8
|
|
Acquisition purchase price commitments
|
|
|
17.5
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
13.1
|
|
FIN 48 unrecognized tax benefits, net (Note 11)*
|
|
|
9.3
|
|
|
|
|
|
|
|
5.4
|
|
|
|
0.6
|
|
|
|
3.3
|
|
Purchase obligations
|
|
|
168.5
|
|
|
|
45.5
|
|
|
|
54.8
|
|
|
|
47.4
|
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,129.2
|
|
|
$
|
2,089.4
|
|
|
$
|
255.5
|
|
|
$
|
994.6
|
|
|
$
|
789.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
See Notes to Consolidated Financial Statements. |
|
|
|
** |
|
Primarily represents scheduled interest payments on fixed rate
senior unsecured notes and mortgage facilities. Estimates of
future interest payments for vehicle floorplan payables and
other variable rate debt are excluded. |
|
|
|
*** |
|
Amounts for operating lease commitments do not include certain
operating expenses such as maintenance, insurance, and real
estate taxes. In 2008, these charges totaled approximately
$48 million. See Note 8 of the Notes to Consolidated
Financial Statements. |
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, 2008, surety bonds, letters of credit, and
cash deposits totaled $110.2 million, including
$72.4 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 in Note 11 of the Notes to
Consolidated Financial Statements there are various tax matters
where the ultimate resolution may result in us owing additional
tax payments.
Off
Balance Sheet Arrangements
As of December 31, 2008, we did not have any significant
off-balance-sheet arrangements, as defined in
Item 303(a)(4)(ii) of SEC
Regulation S-K.
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 generally to be
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 incentive programs.
New
Accounting Pronouncements
See Note 1 of the Notes to our Consolidated Financial
Statements.
50
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 officers on our behalf,
constitute forward-looking statements within the
meaning of the Federal Private Securities Litigation Reform Act
of 1995. Words such as anticipates,
believes, estimates,
expects, intends, may,
plans, seeks, projects,
will, would, and similar expressions are
intended to identify such forward-looking statements. 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 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:
|
|
|
|
|
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.
|
|
|
|
Our results of operations and financial condition have been and
could continue to be adversely affected by the conditions in the
credit markets and the declining economic conditions in the
United States.
|
|
|
|
Our revolving credit facility, term loan facility, mortgage
facility, and the indenture relating to our senior unsecured
notes contain certain financial ratios and other restrictions on
our ability to conduct our business.
|
|
|
|
Our substantial indebtedness could adversely affect our
financial condition and operations and prevent us from
fulfilling our debt service obligations.
|
|
|
|
We are dependent upon the success and continued financial
viability of the vehicle manufacturers and distributors with
which we hold franchises.
|
|
|
|
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 could 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.
|
|
|
|
Our new vehicle sales are impacted by the consumer incentive and
marketing programs of vehicle manufacturers.
|
|
|
|
Natural disasters and adverse weather events can disrupt our
business.
|
|
|
|
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.
|
|
|
|
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.
|
|
|
|
Our operations, including, without limitation, our sales of
finance and insurance and vehicle protection products, are
subject to extensive governmental laws and regulations. If we
are found to be in violation
|
51
|
|
|
|
|
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.
|
|
|
|
|
|
We are subject to interest rate risk in connection with our
floorplan payable, revolving credit facility, term loan
facility, and floating rate senior unsecured notes that could
have a material adverse effect on our profitability.
|
|
|
|
Our largest stockholder, as a result of its voting ownership,
may have the ability to exert substantial influence over actions
to be taken or approved by our stockholders.
|
|
|
ITEM 7A.
|
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 our variable rate debt when appropriate based on
market conditions. At December 31, 2008, our fixed rate
debt, primarily consisting of amounts outstanding under senior
unsecured notes and mortgages, totaled $465.1 million and
had a fair value of $377.8 million. At December 31,
2007, our fixed rate debt, primarily consisting of amounts
outstanding under senior unsecured notes and mortgages, totaled
$595.2 million and had a fair value of $578.9 million.
Interest
Rate Risk
We had $1.9 billion of variable rate vehicle floorplan
payables at December 31, 2008, and $2.1 billion at
December 31, 2007. Based on these amounts, a 100 basis
point change in interest rates would result in an approximate
change of $19.3 million in 2008 and $21.2 million in
2007 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.
We had $0.8 billion of other variable rate debt outstanding
at December 31, 2008, and $1.2 billion at
December 31, 2007. Based on the amounts outstanding at
year-end, a 100 basis point change in interest rates would
result in an approximate change to interest expense of
$7.9 million in 2008 and $11.8 million in 2007.
52
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
53
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
AutoNation, Inc.:
We have audited the accompanying consolidated financial
statements of AutoNation, Inc. and subsidiaries 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 AutoNation, Inc. and subsidiaries as of
December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 11 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
AutoNation, Inc.s internal control over financial
reporting as of December 31, 2008, 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 16, 2009 expressed an unqualified opinion on the
effectiveness of the Companys internal control over
financial reporting.
/s/ KPMG LLP
February 16, 2009
Fort Lauderdale, Florida
Certified Public Accountants
54
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
AutoNation, Inc.:
We have audited AutoNation, Inc. and subsidiaries (the
Company) internal control over financial reporting as of
December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). AutoNation, Inc.s management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting, appearing under Item 9A. Our
responsibility is to express an opinion on 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, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
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 16,
2009 expressed an unqualified opinion on those consolidated
financial statements.
/s/ KPMG LLP
February 16, 2009
Fort Lauderdale, Florida
Certified Public Accountants
55
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
111.0
|
|
|
$
|
33.0
|
|
Receivables, net
|
|
|
387.4
|
|
|
|
702.9
|
|
Inventory
|
|
|
1,876.0
|
|
|
|
2,258.1
|
|
Other current assets
|
|
|
179.7
|
|
|
|
310.8
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,554.1
|
|
|
|
3,304.8
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
1,937.0
|
|
|
|
1,955.0
|
|
GOODWILL, NET
|
|
|
1,149.1
|
|
|
|
2,737.1
|
|
OTHER INTANGIBLE ASSETS, NET
|
|
|
177.7
|
|
|
|
316.5
|
|
OTHER ASSETS
|
|
|
196.2
|
|
|
|
166.2
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
6,014.1
|
|
|
$
|
8,479.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Vehicle floorplan payable trade
|
|
$
|
1,474.4
|
|
|
$
|
1,682.1
|
|
Vehicle floorplan payable non-trade
|
|
|
453.5
|
|
|
|
440.9
|
|
Accounts payable
|
|
|
140.2
|
|
|
|
208.8
|
|
Notes payable and current maturities of long-term obligations
|
|
|
33.3
|
|
|
|
23.9
|
|
Other current liabilities
|
|
|
354.4
|
|
|
|
546.8
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
2,455.8
|
|
|
|
2,902.5
|
|
LONG-TERM DEBT, NET OF CURRENT MATURITIES
|
|
|
1,225.6
|
|
|
|
1,751.9
|
|
DEFERRED INCOME TAXES
|
|
|
|
|
|
|
220.7
|
|
OTHER LIABILITIES
|
|
|
134.6
|
|
|
|
131.0
|
|
COMMITMENTS AND CONTINGENCIES (Note 8)
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.01 per share;
5,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Common stock, par value $0.01 per share;
1,500,000,000 shares authorized; 193,562,149 shares
issued at December 31, 2008 and 2007, including shares held
in treasury
|
|
|
1.9
|
|
|
|
1.9
|
|
Additional paid-in capital
|
|
|
481.8
|
|
|
|
461.0
|
|
Retained earnings (Note 11)
|
|
|
2,023.0
|
|
|
|
3,266.1
|
|
Accumulated other comprehensive loss
|
|
|
(0.7
|
)
|
|
|
(0.2
|
)
|
Treasury stock, at cost; 16,708,866 and 13,205,583 shares
held, respectively
|
|
|
(307.9
|
)
|
|
|
(255.3
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
2,198.1
|
|
|
|
3,473.5
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
6,014.1
|
|
|
$
|
8,479.6
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
$
|
7,756.2
|
|
|
$
|
10,014.3
|
|
|
$
|
10,756.0
|
|
Used vehicle
|
|
|
3,364.5
|
|
|
|
4,139.9
|
|
|
|
4,302.5
|
|
Parts and service
|
|
|
2,465.2
|
|
|
|
2,539.9
|
|
|
|
2,476.9
|
|
Finance and insurance, net
|
|
|
482.6
|
|
|
|
584.3
|
|
|
|
611.0
|
|
Other
|
|
|
63.4
|
|
|
|
68.1
|
|
|
|
72.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE
|
|
|
14,131.9
|
|
|
|
17,346.5
|
|
|
|
18,218.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
7,245.3
|
|
|
|
9,305.2
|
|
|
|
9,965.9
|
|
Used vehicle
|
|
|
3,086.1
|
|
|
|
3,787.9
|
|
|
|
3,911.8
|
|
Parts and service
|
|
|
1,393.4
|
|
|
|
1,431.1
|
|
|
|
1,388.7
|
|
Other
|
|
|
27.6
|
|
|
|
29.0
|
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COST OF SALES
|
|
|
11,752.4
|
|
|
|
14,553.2
|
|
|
|
15,297.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
New vehicle
|
|
|
510.9
|
|
|
|
709.1
|
|
|
|
790.1
|
|
Used vehicle
|
|
|
278.4
|
|
|
|
352.0
|
|
|
|
390.7
|
|
Parts and service
|
|
|
1,071.8
|
|
|
|
1,108.8
|
|
|
|
1,088.2
|
|
Finance and insurance
|
|
|
482.6
|
|
|
|
584.3
|
|
|
|
611.0
|
|
Other
|
|
|
35.8
|
|
|
|
39.1
|
|
|
|
40.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL GROSS PROFIT
|
|
|
2,379.5
|
|
|
|
2,793.3
|
|
|
|
2,920.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general & administrative expenses
|
|
|
1,813.8
|
|
|
|
1,999.8
|
|
|
|
2,057.9
|
|
Depreciation and amortization
|
|
|
90.8
|
|
|
|
90.3
|
|
|
|
80.0
|
|
Goodwill impairment
|
|
|
1,610.0
|
|
|
|
|
|
|
|
|
|
Franchise rights impairment
|
|
|
146.5
|
|
|
|
2.2
|
|
|
|
|
|
Other expenses (income), net
|
|
|
13.2
|
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
(1,294.8
|
)
|
|
|
701.4
|
|
|
|
782.9
|
|
Floorplan interest expense
|
|
|
(87.4
|
)
|
|
|
(129.0
|
)
|
|
|
(132.5
|
)
|
Other interest expense
|
|
|
(89.4
|
)
|
|
|
(114.1
|
)
|
|
|
(90.8
|
)
|
Other interest expense senior note repurchases
|
|
|
|
|
|
|
|
|
|
|
(34.5
|
)
|
Gain on senior note repurchases
|
|
|
51.3
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2.2
|
|
|
|
3.4
|
|
|
|
8.3
|
|
Other gains (losses), net
|
|
|
(4.6
|
)
|
|
|
(1.3
|
)
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
(1,422.7
|
)
|
|
|
460.4
|
|
|
|
538.1
|
|
INCOME TAX PROVISION (BENEFIT)
|
|
|
(197.3
|
)
|
|
|
171.7
|
|
|
|
209.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
(1,225.4
|
)
|
|
|
288.7
|
|
|
|
329.0
|
|
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
|
|
|
(17.7
|
)
|
|
|
(10.0
|
)
|
|
|
(12.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(1,243.1
|
)
|
|
$
|
278.7
|
|
|
$
|
316.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.89
|
)
|
|
$
|
1.46
|
|
|
$
|
1.46
|
|
Discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Net income (loss)
|
|
$
|
(6.99
|
)
|
|
$
|
1.41
|
|
|
$
|
1.41
|
|
Weighted average common shares outstanding
|
|
|
177.8
|
|
|
|
198.3
|
|
|
|
225.2
|
|
DILUTED EARNINGS (LOSS) PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(6.89
|
)
|
|
$
|
1.44
|
|
|
$
|
1.43
|
|
Discontinued operations
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
Net income (loss)
|
|
$
|
(6.99
|
)
|
|
$
|
1.39
|
|
|
$
|
1.38
|
|
Weighted average common shares outstanding
|
|
|
177.8
|
|
|
|
200.0
|
|
|
|
229.3
|
|
COMMON SHARES OUTSTANDING, net of treasury stock
|
|
|
176.9
|
|
|
|
180.4
|
|
|
|
206.8
|
|
The accompanying notes are an integral part of these statements.
57
AUTONATION,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
For the
Years Ended December 31, 2008, 2007, and 2006
(In millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other Compre-
|
|
|
|
|
|
hensive
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
hensive Income
|
|
|
Treasury
|
|
|
Income
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
(Loss)
|
|
|
Stock
|
|
|
(Loss)
|
|
|
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 loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
|
|
(0.5
|
)
|
|
|
(1,100.0
|
)
|
|
|
|
|
|
|
|
|
|
|
1,100.5
|
|
|
|
|
|
Other
|
|
|
12
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation 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
|
|
|
|
(0.4
|
)
|
|
|
(370.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278.7
|
|
|
|
|
|
|
|
|
|
|
$
|
278.7
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on restricted investments and marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
278.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(645.7
|
)
|
|
|
|
|
Treasury stock cancellation
|
|
|
(30,000,000
|
)
|
|
|
(0.3
|
)
|
|
|
(611.7
|
)
|
|
|
|
|
|
|
|
|
|
|
612.0
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, including income tax benefit of $17.7
|
|
|
|
|
|
|
|
|
|
|
(34.6
|
)
|
|
|
|
|
|
|
|
|
|
|
148.9
|
|
|
|
|
|
Cumulative effect of change in accounting for uncertainties in
income taxes
(FIN 48-Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2007
|
|
|
193,562,149
|
|
|
$
|
1.9
|
|
|
$
|
461.0
|
|
|
$
|
3,266.1
|
|
|
$
|
(0.2
|
)
|
|
$
|
(255.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,243.1
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1,243.1
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on restricted investments and marketable
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,243.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54.1
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options, including income tax benefit of $0.3
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008
|
|
|
193,562,149
|
|
|
$
|
1.9
|
|
|
$
|
481.8
|
|
|
$
|
2,023.0
|
|
|
$
|
(0.7
|
)
|
|
$
|
(307.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
58
AUTONATION,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,243.1
|
)
|
|
$
|
278.7
|
|
|
$
|
316.9
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
17.7
|
|
|
|
10.0
|
|
|
|
12.1
|
|
Depreciation and amortization
|
|
|
90.8
|
|
|
|
90.3
|
|
|
|
80.0
|
|
Amortization of debt issue costs and discounts
|
|
|
5.3
|
|
|
|
4.3
|
|
|
|
3.7
|
|
Stock option expense
|
|
|
21.0
|
|
|
|
15.3
|
|
|
|
15.2
|
|
Goodwill impairment
|
|
|
1,610.0
|
|
|
|
|
|
|
|
|
|
Franchise rights impairment
|
|
|
146.5
|
|
|
|
2.2
|
|
|
|
|
|
Other non-cash impairment charges
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
Interest expense on senior note repurchase
|
|
|
|
|
|
|
|
|
|
|
34.5
|
|
Gain on senior note repurchases
|
|
|
(51.3
|
)
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
(267.3
|
)
|
|
|
10.6
|
|
|
|
17.4
|
|
Other
|
|
|
(0.9
|
)
|
|
|
3.1
|
|
|
|
(3.7
|
)
|
Changes in assets and liabilities, net of effects from business
combinations and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
321.9
|
|
|
|
78.4
|
|
|
|
(39.0
|
)
|
Inventory
|
|
|
392.6
|
|
|
|
0.7
|
|
|
|
246.3
|
|
Other assets
|
|
|
(20.5
|
)
|
|
|
(27.8
|
)
|
|
|
1.5
|
|
Vehicle floorplan payable-trade, net
|
|
|
(207.7
|
)
|
|
|
(260.3
|
)
|
|
|
(285.4
|
)
|
Accounts payable
|
|
|
(68.6
|
)
|
|
|
4.5
|
|
|
|
3.9
|
|
Other liabilities
|
|
|
(91.0
|
)
|
|
|
(1.3
|
)
|
|
|
(88.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operations
|
|
|
664.6
|
|
|
|
208.7
|
|
|
|
314.8
|
|
Net cash provided by (used in) discontinued operations
|
|
|
20.8
|
|
|
|
(1.5
|
)
|
|
|
(15.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
685.4
|
|
|
|
207.2
|
|
|
|
299.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(97.0
|
)
|
|
|
(157.4
|
)
|
|
|
(169.1
|
)
|
Property operating lease buy-outs
|
|
|
(20.4
|
)
|
|
|
(2.3
|
)
|
|
|
(5.9
|
)
|
Proceeds from the sale of property and equipment
|
|
|
3.3
|
|
|
|
3.5
|
|
|
|
1.3
|
|
Proceeds from the disposal of property held for sale
|
|
|
|
|
|
|
8.8
|
|
|
|
6.5
|
|
Cash used in business acquisitions, net of cash acquired
|
|
|
(32.2
|
)
|
|
|
(6.7
|
)
|
|
|
(166.7
|
)
|
Net change in restricted cash
|
|
|
9.5
|
|
|
|
(1.3
|
)
|
|
|
(3.9
|
)
|
Purchases of restricted investments
|
|
|
(2.0
|
)
|
|
|
(13.7
|
)
|
|
|
(6.5
|
)
|
Proceeds from the sales of restricted investments
|
|
|
13.0
|
|
|
|
22.8
|
|
|
|
13.4
|
|
Cash received from business divestitures, net of cash
relinquished
|
|
|
49.6
|
|
|
|
55.1
|
|
|
|
24.0
|
|
Other
|
|
|
(0.4
|
)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(76.6
|
)
|
|
|
(91.4
|
)
|
|
|
(307.0
|
)
|
Net cash provided by (used in) discontinued operations
|
|
|
1.5
|
|
|
|
0.9
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(75.1
|
)
|
|
|
(90.5
|
)
|
|
|
(308.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
59
AUTONATION,
INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(58.8
|
)
|
|
|
(644.2
|
)
|
|
|
(1,380.6
|
)
|
Repurchase of floating rate senior unsecured notes
|
|
|
(79.0
|
)
|
|
|
|
|
|
|
|
|
Repurchase of 7% senior unsecured notes
|
|
|
(99.8
|
)
|
|
|
|
|
|
|
|
|
Payment of 9% senior unsecured notes
|
|
|
(14.1
|
)
|
|
|
|
|
|
|
|
|
Repurchase of 9% senior unsecured notes
|
|
|
|
|
|
|
|
|
|
|
(334.2
|
)
|
Proceeds from senior unsecured notes issued
|
|
|
|
|
|
|
|
|
|
|
600.0
|
|
Proceeds from term loan facility
|
|
|
|
|
|
|
|
|
|
|
600.0
|
|
Proceeds from revolving credit facility
|
|
|
531.0
|
|
|
|
1,323.0
|
|
|
|
1,039.0
|
|
Payment of revolving credit facility
|
|
|
(791.0
|
)
|
|
|
(1,258.0
|
)
|
|
|
(844.0
|
)
|
Net proceeds of vehicle floor plan non-trade
|
|
|
3.3
|
|
|
|
211.5
|
|
|
|
84.7
|
|
Proceeds from mortgage facilities
|
|
|
|
|
|
|
126.4
|
|
|
|
|
|
Payments of mortgage facilities
|
|
|
(6.4
|
)
|
|
|
(4.0
|
)
|
|
|
(37.7
|
)
|
Payments of notes payable and long-term debt
|
|
|
(3.5
|
)
|
|
|
(3.6
|
)
|
|
|
(3.4
|
)
|
Proceeds from the exercise of stock options
|
|
|
1.0
|
|
|
|
96.6
|
|
|
|
75.7
|
|
Tax benefit from stock options
|
|
|
0.3
|
|
|
|
17.7
|
|
|
|
18.0
|
|
Other
|
|
|
7.0
|
|
|
|
(1.0
|
)
|
|
|
(16.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continuing operations
|
|
|
(510.0
|
)
|
|
|
(135.6
|
)
|
|
|
(199.1
|
)
|
Net cash provided by (used in) discontinued operations
|
|
|
(22.3
|
)
|
|
|
(0.8
|
)
|
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(532.3
|
)
|
|
|
(136.4
|
)
|
|
|
(188.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
78.0
|
|
|
|
(19.7
|
)
|
|
|
(197.5
|
)
|
CASH AND CASH EQUIVALENTS at beginning of period
|
|
|
33.0
|
|
|
|
52.7
|
|
|
|
250.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS at end of period
|
|
$
|
111.0
|
|
|
$
|
33.0
|
|
|
$
|
52.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
60
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data)
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Organization
and Business
AutoNation, Inc., through its subsidiaries, is the largest
automotive retailer in the United States. As of
December 31, 2008, we owned and operated 302 new vehicle
franchises from 232 stores located in major metropolitan
markets, predominantly in the Sunbelt region of the United
States. We offer a diversified range of automotive products and
services, including new vehicles, used vehicles, parts and
automotive repair and maintenance services, and automotive
finance and insurance products. We also arrange financing for
vehicle purchases through third-party finance sources. For
convenience, the terms AutoNation,
Company, and we are used to refer
collectively to AutoNation, Inc. and its subsidiaries, unless
otherwise required by the context. Our dealership operations are
conducted by our subsidiaries.
Basis
of Presentation
The accompanying Consolidated Financial Statements include the
accounts of AutoNation, Inc. and its subsidiaries. All of our
automotive dealership subsidiaries are indirectly wholly owned
by the parent company, AutoNation, Inc. All significant
intercompany accounts and transactions have been eliminated in
the consolidation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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. In preparing these
financial statements, management has made its best estimates and
judgments of certain amounts included in the financial
statements, giving due consideration to materiality. We base our
estimates and judgments on historical experience and other
assumptions that we believe are reasonable. However, application
of these accounting policies involves the exercise of judgment
and use of assumptions as to future uncertainties and, as a
result, actual results could differ materially from these
estimates. We periodically evaluate estimates and assumptions
used in the preparation of the financial statements and make
changes on a prospective basis when adjustments are necessary.
Significant estimates made by AutoNation in the accompanying
Consolidated Financial Statements include certain assumptions
related to goodwill, intangible, and long-lived assets,
allowances for doubtful accounts, accruals for chargebacks
against revenue recognized from the sale of finance and
insurance products, accruals related to self-insurance programs,
certain legal proceedings, estimated tax liabilities, estimated
losses from disposals of discontinued operations, and certain
assumptions related to stock-based 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.
In addition, we changed our operating segment structure in the
third quarter of 2008. See Note 21 of the Notes to
Consolidated Financial Statements for more information.
Cash
and Cash Equivalents
We consider all highly liquid investments with a maturity of
three months or less as of the date of purchase to be cash
equivalents unless the investments are legally or contractually
restricted for more than three months.
61
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 our self-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
2009 to 2036. Marketable securities are stated at fair value
with unrealized gains and losses included in Accumulated Other
Comprehensive Income (Loss) in our Consolidated Balance Sheets.
Other-than-temporary declines in investment values are recorded
as a component of Other Expenses (Income), Net in the
Consolidated Income Statements. Fair value is estimated based on
quoted market prices.
Property
and Equipment, net
Property and equipment are recorded at cost less accumulated
depreciation. 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.
We continually evaluate 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. We use 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. We measure 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.
During 2008, we recorded $7.2 million of non-cash
impairment charges related to our property and equipment,
including property held for sale, to reduce the carrying value
of these assets to fair market value. These charges are recorded
as a component of Other Expenses (Income), Net in the
Consolidated Income Statements.
We identify property and equipment as held for sale when they
meet the criteria of Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets. We reclassify held for sale
assets to Other Current Assets and cease recording depreciation.
Property held for sale is reported in the Corporate and
other category of our segment information in Note 21 of
the Notes to Consolidated Financial Statements. We had property
held for sale of $39.5 million at December 31, 2008,
and $10.9 million at December 31, 2007.
Goodwill
and Other Intangible Assets, net
We account 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
62
AUTONATION,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The contractual terms of our 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 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 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 our experience and historically
in the automotive retail industry, dealership franchise
agreements are rarely involuntarily terminated or not renewed by
the manufacturer. Accordingly, we believe that our 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.
Goodwill and franchise rights assets are tested for impairment
annually or more frequently when events or circumstances
indicate that impairment may have occurred. During 2008, we
changed our annual impairment test date from June 30 to
April 30, as this date provides additional time to complete
the impairment testing and report the results of those tests in
our June 30 Quarterly Report on
Form 10-Q.
During 2008, we recorded impairment charges of
$1.76 billion ($1.46 billion after-tax) associated
with goodwill and franchise rights. See Note 5 of the Notes
to Consolidated Financial Statements for more information.
Other
Assets
Other assets consist of various items, including, among other
items, service loaner and rental vehicle inventory, net,
investments in marketable securities, the cash surrender value
of corporate-owned life insurance held in a Rabbi Trust for
deferred compensation plan participants, notes receivable,
restricted assets, and debt issuance costs. Debt issuance costs
are amortized to Other Interest Expense in the accompanying
Consolidated Income Statements using the effective interest
method through maturity.
Other
Current Liabilities
Other current liabilities consist of various items payable
within