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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 1-13107

AutoNation, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   73-1105145
(State or other jurisdiction of   (I.R.S. Employer

incorporation or organization)

  Identification No.)
200 SW 1st Avenue, Fort Lauderdale, Florida   33301
(Address of principal executive offices)   (Zip Code)

(954) 769-6000

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   þ   No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   þ   No  ¨

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.

 

Large accelerated filer þ    Accelerated filer   ¨
Non-accelerated filer ¨   (Do not check if a smaller reporting company)    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  ¨   No  þ

As of July 25, 2011, the registrant had 145,773,917 shares of common stock outstanding.

 

 

 


Table of Contents

AUTONATION, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

            
         Page  

Item 1.

  Financial Statements   
  Unaudited Condensed Consolidated Balance Sheets as of
June 30, 2011, and December 31, 2010
     1   
  Unaudited Condensed Consolidated Income Statements for the
Three and Six Months Ended June 30, 2011 and 2010
     2   
  Unaudited Condensed Consolidated Statement of Shareholders’
Equity for the Six Months Ended June 30, 2011
     3   
  Unaudited Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2011 and 2010
     4   
  Notes to Unaudited Condensed Consolidated Financial Statements      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      45   

Item 4.

  Controls and Procedures      45   
  PART II. OTHER INFORMATION   

Item 1A.

  Risk Factors      47   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      47   

Item 6.

  Exhibits      48   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 
ASSETS      

CURRENT ASSETS:

     

Cash and cash equivalents

     $ 81.8           $ 95.1     

Receivables, net

     404.6           462.0     

Inventory

     1,780.0           1,867.0     

Other current assets

     222.7           204.7     
                 

Total Current Assets

     2,489.1           2,628.8     

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $723.5 million and $689.6 million, respectively

     1,884.3           1,838.0     

GOODWILL (Note 4)

     1,172.2           1,142.4     

OTHER INTANGIBLE ASSETS, NET (Note 4)

     217.8           202.0     

OTHER ASSETS

     172.5           163.0     
                 

Total Assets

     $ 5,935.9           $ 5,974.2     
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY      

CURRENT LIABILITIES:

     

Vehicle floorplan payable - trade

     $ 1,161.6           $ 1,379.9     

Vehicle floorplan payable - non-trade

     511.4           486.5     

Accounts payable

     197.7           164.0     

Current maturities of long-term obligations

     11.9           8.1     

Other current liabilities

     328.9           360.9     
                 

Total Current Liabilities

     2,211.5           2,399.4     

LONG-TERM DEBT, NET OF CURRENT MATURITIES

     1,433.1           1,340.6     

DEFERRED INCOME TAXES

     32.2           25.9     

OTHER LIABILITIES

     143.0           129.4     

COMMITMENTS AND CONTINGENCIES (Note 10)

     

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; 163,562,149 shares issued at June 30, 2011, and December 31, 2010, including shares held in treasury

     1.6           1.6     

Additional paid-in capital

     18.7           2.0     

Retained earnings

     2,506.5           2,365.2     

Treasury stock, at cost; 17,888,268 and 15,197,680 shares held, respectively

     (410.7)          (289.9)    
                 

Total Shareholders’ Equity

     2,116.1           2,078.9     
                 

Total Liabilities and Shareholders’ Equity

     $ 5,935.9           $ 5,974.2     
                 

The accompanying notes are an integral part of these statements.

 

1


Table of Contents

AUTONATION, INC.

UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS

(In millions, except per share data)

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenue:

           

New vehicle

     $ 1,746.6           $ 1,656.6           $ 3,531.7           $ 3,117.1     

Used vehicle

     887.3           783.7           1,718.7           1,515.3     

Parts and service

     572.0           547.3           1,142.0           1,084.8     

Finance and insurance, net

     117.0           104.7           227.7           200.0     

Other

     13.4           12.0           27.3           23.7     
                                   

TOTAL REVENUE

     3,336.3           3,104.3           6,647.4           5,940.9     
                                   

Cost of Sales:

           

New vehicle

     1,609.9           1,547.8           3,269.7           2,905.3     

Used vehicle

     808.7           714.3           1,562.0           1,379.5     

Parts and service

     326.8           308.1           652.3           608.8     

Other

     7.5           4.8           13.8           9.6     
                                   

TOTAL COST OF SALES

     2,752.9           2,575.0           5,497.8           4,903.2     
                                   

Gross Profit:

           

New vehicle

     136.7           108.8           262.0           211.8     

Used vehicle

     78.6           69.4           156.7           135.8     

Parts and service

     245.2           239.2           489.7           476.0     

Finance and insurance

     117.0           104.7           227.7           200.0     

Other

     5.9           7.2           13.5           14.1     
                                   

TOTAL GROSS PROFIT

     583.4           529.3           1,149.6           1,037.7     
                                   

Selling, general, and administrative expenses

     417.6           383.1           825.3           756.5     

Depreciation and amortization

     21.1           19.6           41.8           38.5     

Other expenses (income), net

     0.3           0.6           (1.9)          1.6     
                                   

OPERATING INCOME

     144.4           126.0           284.4           241.1     

Floorplan interest expense

     (10.9)          (9.7)          (22.1)          (19.3)    

Other interest expense

     (15.9)          (14.7)          (32.2)          (23.7)    

Loss on debt extinguishment

     -             (19.6)          -             (19.6)    

Interest income

     0.3           0.3           0.6           0.5     

Other gains (losses), net

     0.5           (0.3)          2.2           (0.4)    
                                   

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     118.4           82.0           232.9           178.6     

INCOME TAX PROVISION

     45.1           32.0           89.3           69.8     
                                   

NET INCOME FROM CONTINUING OPERATIONS

     73.3           50.0           143.6           108.8     

Loss from discontinued operations, net of income taxes

     (1.4)          (2.8)          (2.3)          (6.4)    
                                   

NET INCOME

     $ 71.9           $ 47.2           $ 141.3           $ 102.4     
                                   

BASIC EARNINGS (LOSS) PER SHARE:

           

Continuing operations

     $ 0.50           $ 0.31           $ 0.97           $ 0.65     

Discontinued operations

     $ (0.01)          $ (0.02)          $ (0.02)          $ (0.04)    

Net income

     $ 0.49           $ 0.29           $ 0.95           $ 0.62     

Weighted average common shares outstanding

       147.4             161.9             148.2             166.3     

DILUTED EARNINGS (LOSS) PER SHARE:

           

Continuing operations

     $ 0.49           $ 0.31           $ 0.95           $ 0.65     

Discontinued operations

     $ (0.01)          $ (0.02)          $ (0.02)          $ (0.04)    

Net income

     $ 0.48           $ 0.29           $ 0.94           $ 0.61     

Weighted average common shares outstanding

     150.0           163.2           150.9           167.4     

COMMON SHARES OUTSTANDING, net of treasury stock

     145.7           149.3           145.7           149.3     

The accompanying notes are an integral part of these statements.

 

2


Table of Contents

AUTONATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(In millions, except share data)

 

Variance Variance Variance Variance Variance Variance
     Common Stock      Additional
Paid-In
     Retained      Treasury         
     Shares      Amount      Capital      Earnings      Stock      Total  

BALANCE AT DECEMBER 31, 2010

       163,562,149           $ 1.6           $ 2.0          $ 2,365.2           $ (289.9)          $ 2,078.9     

Net income

     -             -             -             141.3           -             141.3     

Repurchases of common stock

     -             -             -             -             (170.6)          (170.6)    

Stock-based compensation expense

     -             -             11.5           -             -             11.5     

Shares awarded under stock-based compensation plans, including income tax benefit of $15.1

     -             -             5.2           -             49.8           55.0     
                                                     

BALANCE AT JUNE 30, 2011

       163,562,149           $ 1.6           $ 18.7           $ 2,506.5           $ (410.7)          $ 2,116.1     
                                                     

The accompanying notes are an integral part of these statements.

 

3


Table of Contents

AUTONATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

December 31, December 31,
     Six Months Ended
June 30,
 
     2011      2010  

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:

     

Net income

     $ 141.3           $ 102.4     

Adjustments to reconcile net income to net cash provided by operating activities:

     

Loss from discontinued operations

     2.3           6.4     

Depreciation and amortization

     41.8           38.5     

Amortization of debt issuance costs and discounts

     2.1           1.4     

Stock-based compensation expense

     11.5           10.6     

Deferred income tax provision

     4.7           5.9     

Non-cash impairment charges

     -             0.7     

Write-off of deferred debt issuance costs

     -             3.5     

Net loss (gain) on asset sales and dispositions

     (1.7)          0.5     

Other

     (2.5)          0.8     

(Increase) decrease, net of effects from business combinations and divestitures:

     

Receivables

     55.1           10.5     

Inventory

     99.3           (173.0)    

Other assets

     (12.3)          16.9     

Increase (decrease), net of effects from business combinations and divestitures:

     

Vehicle floorplan payable-trade, net

     (218.3)          92.3     

Accounts payable

     33.4           25.9     

Other liabilities

     (31.9)          (11.7)    
                 

Net cash provided by continuing operations

     124.8           131.6     

Net cash provided by discontinued operations

     0.3           1.1     
                 

Net cash provided by operating activities

     125.1           132.7     
                 

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:

     

Purchases of property and equipment

     (63.6)          (40.3)    

Proceeds from the sale of property and equipment

     3.0           0.2     

Proceeds from assets held for sale

     -             2.2     

Insurance recoveries on property and equipment

     -             1.8     

Cash used in business acquisitions, net of cash acquired

     (64.2)          (12.5)    

Proceeds from the sale of restricted investments

     -             1.3     

Cash received from business divestitures, net of cash relinquished

     1.2           4.8     

Other

     (5.1)          -       
                 

Net cash used in continuing operations

     (128.7)          (42.5)    

Net cash used in discontinued operations

     -             (0.3)    
                 

Net cash used in investing activities

     (128.7)          (42.8)    
                 

The accompanying notes are an integral part of these statements.

 

4


Table of Contents

AUTONATION, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Continued)

 

December 31, December 31,
     Six Months Ended
June 30,
 
     2011      2010  

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:

     

Repurchases of common stock

     $ (170.6)        $ (419.3)    

Proceeds from revolving credit facilities

     250.0           195.0     

Payment of revolving credit facilities

     (155.0)          -       

Proceeds from 6.75% Senior Notes due 2018

     -             394.0     

Payment of term loan facility

     -             (66.6)    

Payment of Floating Rate Senior Notes due 2013

     -             (146.1)    

Payment of 7% Senior Notes due 2014

     -             (117.9)    

Payment of debt issuance costs

     -             (11.9)    

Net proceeds from vehicle floorplan payable - non-trade

     15.0           7.7     

Payments of mortgage facilities

     (3.8)          (3.6)    

Payments of long-term debt

     (0.3)          (0.2)    

Proceeds from the exercise of stock options

     39.9           5.6     

Tax benefit from stock-based awards

     15.1           0.9     
                 

Net cash used in continuing operations

     (9.7)          (162.4)    

Net cash provided by discontinued operations

     -             0.6     
                 

Net cash used in financing activities

     (9.7)          (161.8)    
                 

DECREASE IN CASH AND CASH EQUIVALENTS

     (13.3)          (71.9)    

CASH AND CASH EQUIVALENTS at beginning of period

     95.1           173.5     
                 

CASH AND CASH EQUIVALENTS at end of period

     $ 81.8           $ 101.6     
                 

The accompanying notes are an integral part of these statements

 

5


Table of Contents

AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In millions, except per share data)

 

1. INTERIM FINANCIAL STATEMENTS

Business and Basis of Presentation

AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of June 30, 2011, we owned and operated 254 new vehicle franchises1 from 213 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 (also referred to as “parts and service”), and automotive finance and insurance products (also referred to as “finance and insurance”), including the arranging of 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.

The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries; all significant intercompany accounts and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information related to our organization, significant accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state, in all material respects, our financial position and results of operations for the periods presented.

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 Unaudited Condensed Consolidated Financial Statements include certain assumptions related to goodwill, intangible assets, long-lived assets, assets held for sale, 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.

Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our most recent Annual Report on Form 10-K.

Certain reclassifications of amounts previously reported have been made to the accompanying Unaudited Condensed Consolidated Financial Statements in order to maintain consistency and comparability between periods presented.

New Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update which requires the presentation of components of other comprehensive income with the components of net income in either (1) a continuous statement of comprehensive income that contains two sections, net income and other comprehensive income, or (2) two separate but consecutive statements. This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity, and is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard update will not have an impact on our consolidated financial position, results of operations, or cash flows, as it only requires a change in the format of our current presentation of comprehensive income.

 

1 

Includes three Maybach and three Sprinter franchises that we did not count as separate franchises in prior periods.

 

6


Table of Contents

AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Amendments to Fair Value Measurements

In May 2011, the FASB issued an accounting standard update that amends the accounting standard on fair value measurements. The accounting standard update provides for a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. generally accepted accounting principles and International Financial Reporting Standards. The accounting standard update changes certain fair value measurement principles, clarifies the application of existing fair value measurement, and expands the fair value measurement disclosure requirements, particularly for Level 3 fair value measurements. The amendments in this accounting standard update are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2011. We do not expect the adoption of this accounting standard update will have a material effect on our condensed consolidated financial statements, but may require certain additional disclosures.

 

2. RECEIVABLES, NET

The components of receivables, net of allowance for doubtful accounts, are as follows:

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 

Trade receivables

     $ 87.7           $ 89.8     

Manufacturer receivables

     115.3           127.8     

Other

     30.5           37.5     
                 
     233.5           255.1     

Less: Allowances

     (3.4)          (3.7)    
                 
     230.1           251.4     

Contracts-in-transit and vehicle receivables

     171.7           210.6     

Income tax refundable (see Note 6)

     2.8           -       
                 

Receivables, net

     $ 404.6           $ 462.0     
                 

Contracts-in-transit and vehicle receivables primarily represent receivables from financial institutions for the portion of the vehicle sales price financed by our customers.

 

3. INVENTORY AND VEHICLE FLOORPLAN PAYABLE

The components of inventory are as follows:

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 

New vehicles

     $  1,314.9           $  1,479.6     

Used vehicles

     345.4           271.8     

Parts, accessories, and other

     119.7           115.6     
                 
     $ 1,780.0           $  1,867.0     
                 

 

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Table of Contents

AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The components of vehicle floorplan payable are as follows:

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 

Vehicle floorplan payable - trade

     $  1,161.6           $  1,379.9     

Vehicle floorplan payable - non-trade

     511.4           486.5     
                 
     $ 1,673.0           $ 1,866.4     
                 

Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific new vehicle inventories with the corresponding manufacturers’ captive finance subsidiaries (“trade lenders”). Vehicle floorplan payable-non-trade represents amounts borrowed to finance the purchase of specific new and, to a lesser extent, used vehicle inventories with non-trade lenders, as well as amounts borrowed under our secured used floorplan facilities, which are primarily collateralized by used vehicle inventories and related receivables. Changes in vehicle floorplan payable-trade are reported as operating cash flows and changes in vehicle floorplan payable-non-trade are reported as financing cash flows in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.

Our inventory costs are generally reduced by manufacturer holdbacks, incentives, and floorplan assistance, while the related vehicle floorplan payables are reflective of the gross cost of the vehicle. The vehicle floorplan payables, as shown in the above table, will generally also be higher than the inventory cost due to the timing of the sale of a vehicle and payment of the related liability.

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 the manufacturer for the purchase of new vehicle inventory. Floorplan facilities are primarily collateralized by vehicle inventories and related receivables.

Our vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged 2.4% for the six months ended June 30, 2011, and 2.7% for the six months ended June 30, 2010. At June 30, 2011, the aggregate capacity under our floorplan credit agreements with various lenders to finance a portion of our used vehicle inventory was $210.0 million, of which $97.1 million had been borrowed. The remaining borrowing capacity of $112.9 million was limited to $96.2 million based on the eligible used vehicle inventory that could have been pledged as collateral. At June 30, 2011, the aggregate capacity under all of our floorplan credit facilities to finance vehicles was approximately $2.7 billion, of which $1.7 billion had been borrowed.

 

4. GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets, net, consist of the following:

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 

Goodwill

     $  1,172.2           $  1,142.4     
                 

Franchise rights - indefinite-lived

     $ 212.6           $ 199.1     

Other intangibles

     8.3           5.6     
                 
     220.9           204.7     

Less: accumulated amortization

     (3.1)          (2.7)    
                 

Other intangible assets, net

     $ 217.8           $ 202.0     
                 

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Goodwill

Goodwill is tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. We completed our annual impairment tests as of April 30, 2011, and no goodwill impairment charges resulted from the required goodwill impairment test.

Intangible Assets

Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested at least annually as of April 30 for impairment. We completed our annual impairment test as of April 30, 2011, and no franchise rights impairment charges resulted from the required impairment test.

 

5. LONG-TERM DEBT

Long-term debt consisted of the following:

 

December 31, December 31,
     June 30,
2011
     December 31,
2010
 

7% Senior Notes due 2014

     $  14.7           $  14.7     

6.75% Senior Notes due 2018

     394.7           394.4     

Term loan facility due 2012

     54.0           54.0     

Term loan facility due 2014

     479.4           479.4     

Revolving credit facility due 2012

     24.6           16.1     

Revolving credit facility due 2014

     250.4           163.9     

Mortgage facility (1)

     215.4           219.2     

Other debt due from 2011 to 2031

     11.8           7.0     
                 
     1,445.0           1,348.7     

Less: current maturities

     (11.9)          (8.1)    
                 

Long-term debt, net of current maturities

     $ 1,433.1           $ 1,340.6     
                 

 

  (1) The mortgage facility requires monthly principal and interest payments of $1.7 million based on a fixed amortization schedule with a balloon payment of $155.4 million due November 2017.

Debt Refinancing

Please refer to Note 7 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our most recent Annual Report on Form 10-K for a discussion of certain refinancing transactions that we completed during the second quarter of 2010.

Senior Unsecured Notes and Amended Credit Agreement

At June 30, 2011, we had outstanding $394.7 million of 6.75% Senior Notes due 2018. Interest on the 6.75% Senior Notes due 2018 is payable on April 15 and October 15 of each year. These notes will mature on April 15, 2018.

At June 30, 2011, we had outstanding $14.7 million of 7% Senior Notes due 2014. Interest on the 7% Senior Notes due 2014 is payable on April 15 and October 15 of each year. The 7% Senior Notes due 2014 will mature on April 15, 2014, and may be redeemed by us currently at 101.75% of principal and at 100% of principal on or after April 15, 2012.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Under our amended credit agreement, we have a $533.4 million term loan facility and a $638.6 million revolving credit facility. The term loan facility is bifurcated into a $54.0 million tranche due July 18, 2012 (the “non-extended term loan facility”) and a $479.4 million tranche due July 18, 2014 (the “extended term loan facility”). The revolving credit facility is bifurcated into a $57.0 million tranche due July 18, 2012 (the “non-extended revolving credit facility”) and a $581.6 million tranche due July 18, 2014 (the “extended revolving credit facility”).

As of June 30, 2011, we had borrowings outstanding of $24.6 million under the non-extended revolving credit facility and $250.4 million under the extended revolving credit facility. We have a $200 million letter of credit sublimit as part of our revolving credit facilities. The amount available to be borrowed under the revolving credit facilities is reduced on a dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit, which was $59.7 million at June 30, 2011, leaving an additional borrowing capacity in the aggregate under both the non-extended and extended revolving credit facilities of $303.9 million at June 30, 2011.

Our non-extended term loan facility provides for various interest rates generally at LIBOR plus 0.875%. Our non-extended revolving credit facility provides for a 0.15% facility fee and various interest rates on borrowings generally at LIBOR plus 0.725%.

Our extended term loan facility provides for various interest rates generally at LIBOR plus 2.25%, and our extended revolving credit facility provides for a commitment fee on undrawn amounts of 0.50% and various interest rates on borrowings generally at LIBOR plus 2.25%.

The credit spread charged for our non-extended term loan and revolving credit facilities is impacted by our senior unsecured credit ratings.

The credit spread charged for the extended term loan and revolving credit facilities is affected by our leverage ratio. For instance, an increase in our leverage ratio from greater than or equal to 2.0x but less than 3.0x to greater than or equal to 3.0x would result in a 25 basis point increase in the credit spread under both our extended term loan facility and extended revolving credit facility.

Our senior unsecured notes and borrowings under the amended credit agreement are guaranteed by substantially all of our subsidiaries. Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the parent company) has no independent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint and several, and any subsidiaries other than the guarantor subsidiaries are minor.

Other Debt

At June 30, 2011, we had $215.4 million outstanding under a mortgage facility with an automotive manufacturer’s captive finance subsidiary that matures on November 30, 2017. The mortgage facility utilizes a fixed interest rate of 5.864% and is secured by 10-year mortgages on certain of our store properties.

Restrictions and Covenants

Our amended credit agreement, the indenture for our 6.75% Senior Notes due 2018, our vehicle floorplan facilities, and our mortgage facility contain customary financial and operating covenants that place restrictions on us, including our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell (or otherwise dispose of) assets, and to merge or consolidate with other entities.

Under our amended credit agreement we are required to remain in compliance with a maximum leverage ratio and maximum capitalization ratio. The leverage ratio is a contractually defined amount principally reflecting non-vehicle debt divided by a contractually defined measure of earnings with certain adjustments. The capitalization ratio is a contractually defined amount principally reflecting vehicle floorplan payable and non-vehicle debt divided by our total capitalization including vehicle floorplan payable. Under the amended credit agreement, the maximum capitalization ratio is 60% and the maximum leverage ratio is 3.25x. In calculating our leverage ratio, we are not required to include letters of credit in the definition of debt (except to the extent of letters of credit in excess of $150.0 million), and, in calculating our capitalization ratio, we are permitted to add back to shareholders’ equity all goodwill, franchise rights, and long-lived asset impairment charges subsequent to 2007.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The indenture for our 6.75% Senior Notes due 2018 contains certain limited covenants, including limitations on liens and sale and leaseback transactions, but does not contain a restricted payments covenant or a debt incurrence restriction. Our mortgage facility contains covenants regarding maximum cash flow leverage and minimum interest coverage.

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.

Under the terms of our amended credit agreement, at June 30, 2011, our leverage ratio and capitalization ratio were as follows:

 

     June 30, 2011
     Requirement    Actual

Leverage ratio

   < 3.25x      2.39x  

Capitalization ratio

   < 60%    46.2%

Both the 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 vehicle floorplan indebtedness.

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 our senior unsecured debt credit ratings occur.

 

6. INCOME TAXES

Income taxes refundable included in Receivables, Net, totaled $2.8 million at June 30, 2011, and income taxes payable included in Other Current Liabilities totaled $10.7 million at December 31, 2010.

We file income tax returns in the U.S. federal jurisdiction and various states.As a matter of course, various taxing authorities, including the IRS, regularly audit us. Currently, no tax years are under examination by the IRS. These audits may result in proposed assessments where the ultimate resolution may result in our owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.

It is our continuing policy to account for interest and penalties associated with income tax obligations as a component of Income Tax Provision in the accompanying Unaudited Condensed Consolidated Financial Statements.

 

7. SHAREHOLDERS’ EQUITY

A summary of shares repurchased under our share repurchase program authorized by our Board of Directors follows:

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Shares repurchased

     3.4           20.9           5.1           23.0     

Aggregate purchase price

     $  110.9           $ 414.4           $  169.7           $  451.6     

Average purchase price per share

     $ 33.04           $ 19.83           $ 32.97           $ 19.66     

On May 3, 2011, our Board of Directors authorized an additional $250 million under our existing share repurchase program. As of June 30, 2011, $313.5 million remained available for share repurchases under the share repurchase program approved by our Board of Directors.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

A summary of shares of common stock issued in connection with the exercise of stock options follows:

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Shares issued

     0.4           0.3           2.3           0.3     

Proceeds from exercise of stock options

     $  8.0           $ 5.3           $  39.9           $  5.6     

Average exercise price per share

     $  17.81           $  16.70           $  17.05           $  16.36     

The following table presents a summary of shares of common stock issued in connection with grants of restricted stock and shares surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock (in actual number of shares):

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Shares issued

     -             -             163,892           188,740     

Shares surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock

     23,008           12,465           31,297           20,689     

 

8. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of stock options.

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows:

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  

Weighted average common shares outstanding used in calculating basic earnings per share

     147.4           161.9           148.2           166.3     

Effect of dilutive stock-based awards

     2.6           1.3           2.7           1.1     
                                   

Weighted average common and common equivalent shares used in calculating diluted earnings per share

     150.0           163.2           150.9           167.4     
                                   

A summary of anti-dilutive options excluded from the computation of diluted earnings per share follows:

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Anti-dilutive options excluded from the computation of diluted earnings per share

     0.4           4.3           0.4           5.3     

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

9. ACQUISITIONS

We acquired one automotive retail franchise and related assets during the six months ended June 30, 2011, for which we paid in cash $64.2 million. We acquired two automotive retail franchises during the six months ended June 30, 2010, for which we paid in cash $12.5 million.

The acquisition that occurred during the six months ended June 30, 2011 was not material to our financial condition or results of operations. Additionally, the pro forma consolidated income statements as if the results of this acquisition had been included in our consolidated results for the entire six month periods ended June 30, 2011 and 2010, would not have been materially different from our reported consolidated income statements for these periods.

 

10. COMMITMENTS AND CONTINGENCIES

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 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 financial condition, results of operations, and cash flows.

Other Matters

AutoNation, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by our subsidiaries of their respective dealership premises. Pursuant to these leases, our subsidiaries generally agree to indemnify the lessor and other related parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, we enter into agreements with third parties in connection with the sale of assets or businesses in which we agree to indemnify the purchaser or related parties from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, we enter into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, our liability would be limited by the terms of the applicable agreement.

From time to time, primarily in connection with dispositions of automotive stores, our subsidiaries assign or sublet to the dealership purchaser the subsidiaries’ interests in any real property leases associated with such stores. In general, our subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, AutoNation and its subsidiaries generally remain subject to the terms of any guarantees made by us and our subsidiaries in connection with such leases. Although we generally have indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, we estimate that lessee rental payment obligations during the remaining terms of these leases with expirations ranging from 2011 to 2034 are approximately $67 million at June 30, 2011. We do not have any material known commitments that we or our subsidiaries will be called on to perform under any such assigned leases or subleases at June 30, 2011. Our exposure under these leases is difficult to estimate and there can be no assurance that any performance of AutoNation or its subsidiaries required under these leases would not have a material adverse effect on our business, financial condition, and cash flows.

At June 30, 2011, surety bonds, letters of credit, and cash deposits totaled $92.1 million, including $59.7 million of letters of credit. 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. We do not currently provide cash collateral for outstanding letters of credit.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

In the ordinary course of business, we are subject to numerous laws and regulations, including automotive, environmental, health and safety, and other laws and regulations. We do not anticipate that the costs of such compliance will have a material adverse effect on our business, consolidated results of operations, cash flows, or financial condition, although such outcome is possible given the nature of our operations and the extensive legal and regulatory framework applicable to our business. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, establishes a new consumer financial protection agency with broad regulatory powers. Although automotive dealers are generally excluded, the Dodd-Frank Act could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions. In addition, we expect that the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, will increase our annual employee health care costs that we fund, with the most significant increases commencing in 2014. Further, we expect that new laws and regulations, particularly at the federal level, in other areas may be enacted, which could also materially adversely impact our business. We do not have any material known environmental commitments or contingencies.

 

11. 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. Generally, the sale of a store is completed within 60 to 90 days after the date of a sale agreement. We account for a store that either has been disposed of or is classified as held for sale as a discontinued operation if (a) the operations and cash flows of the store have been (or will be) eliminated from our ongoing operations and (b) we will not have any significant continuing involvement in the operations of the store after the disposal transaction.

In evaluating whether a store’s cash flows will be eliminated from our ongoing operations, we consider whether we expect to continue to generate revenues or incur expenses from the sale of similar products or services to customers of the disposed store in the same geographic market. If we believe that a significant portion of the cash flows previously generated by the disposed store will migrate to our other operating stores, we will not treat the disposition as a discontinued operation.

We received proceeds (net of cash relinquished) of $1.2 million during the six months ended June 30, 2011, and $4.8 million during the same period in 2010 related to discontinued operations.

As of June 30, 2011, we had assets held for sale of $55.5 million in discontinued operations, primarily related to real estate we have not yet sold related to stores that have been closed. Assets and liabilities of discontinued operations are reported in the “Corporate and other” category of our segment information.

 

12. SEGMENT INFORMATION

At June 30, 2011 and 2010, we had three operating and reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, 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.

“Corporate and other” is comprised of our other businesses, including collision centers, E-commerce activities, and an auction operation, each of which generates revenues, as well as unallocated corporate overhead expenses and retrospective commissions for certain financing and insurance transactions that we arrange under agreements with third parties.

The operating segments identified above are the business activities of the Company for which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer. We have determined that our three operating segments also represent our reportable segments.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Reportable segment revenues and segment income (loss) are as follows:

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenues:

           

Domestic

     $ 1,145.0           $ 1,036.0           $ 2,241.1           $ 1,946.6     

Import

       1,213.5             1,177.1             2,510.7             2,248.8     

Premium Luxury

       941.6             860.4             1,819.9             1,683.1     

Corporate and other

       36.2             30.8             75.7             62.4     
                                   

Total revenues

     $ 3,336.3           $ 3,104.3           $ 6,647.4           $ 5,940.9     
                                   

 

December 31, December 31, December 31, December 31,
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Segment income (loss)*:

           

Domestic

     $ 46.4           $ 41.5           $ 89.1           $ 73.6     

Import

       65.7             52.4             123.1             102.4     

Premium Luxury

       56.6             48.5             111.7             95.3     

Corporate and other

       (35.2)            (26.1)            (61.6)            (49.5)    
                                   

Total segment income

       133.5             116.3             262.3             221.8     

Other interest expense

       (15.9)            (14.7)            (32.2)            (23.7)    

Loss on debt extinguishment

     -               (19.6)          -               (19.6)    

Interest income

       0.3             0.3             0.6             0.5     

Other gains (losses), net

       0.5             (0.3)            2.2             (0.4)    
                                   

Income from continuing operations before income taxes

     $ 118.4           $ 82.0           $ 232.9           $ 178.6     
                                   

 

* Segment income (loss) is defined as operating income less floorplan interest expense.

 

13. BUSINESS AND CREDIT CONCENTRATIONS

We are subject to a concentration of risk in the event of financial distress of or other adverse event related to a major vehicle manufacturer. The core brands of vehicles that we sell are manufactured by Ford, Toyota, Honda, General Motors, Nissan, Mercedes, BMW, and Chrysler. Our business could be materially adversely impacted by a bankruptcy of or other adverse event related to a major vehicle manufacturer or related lender.

We had receivables from manufacturers or distributors of $115.3 million at June 30, 2011, and $127.8 million at December 31, 2010. Additionally, a large portion of our Contracts-in-Transit included in Receivables, Net, in the accompanying Consolidated Balance Sheets, are due from automotive manufacturers’ captive finance subsidiaries which provide financing directly to our new and used vehicle customers. Concentrations of credit risk with respect to non-manufacturer trade receivables are limited due to the wide variety of customers and markets in which our products are sold as well as their dispersion across many different geographic areas in the United States. Consequently, at June 30, 2011, we do not consider AutoNation to have any significant non-manufacturer concentrations of credit risk.

 

14. FAIR VALUE MEASUREMENTS

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following methods and assumptions were used by us in estimating fair value disclosures for financial instruments:

 

   

Cash and cash equivalents, trade and manufacturer receivables, other current assets, vehicle floorplan payable, accounts payable, other current liabilities, and variable rate debt: The amounts reported in the accompanying Unaudited Condensed Consolidated Balance Sheets approximate fair value due to their short-term nature.

 

   

Marketable Securities: Investments in marketable securities are stated at fair value, estimated based on quoted market prices. The carrying amount and fair value of our investments in marketable securities totaled $1.8 million at June 30, 2011 and December 31, 2010.

 

   

Fixed rate debt: Our fixed rate debt consists primarily of amounts outstanding under our senior unsecured notes and mortgages. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability and we estimate the fair value of our mortgages using a present value technique based on our current market interest rates for similar types of financial instruments. A summary of the carrying values and fair values of our 7% Senior Notes due 2014, 6.75% Senior Notes due 2018, mortgage facility, and capital leases and other long-term debt are as follows:

 

December 31, December 31,
     June 30,      December 31,  
     2011      2010  

Carrying value

   $ 636.6           $ 635.3     

Fair value

   $ 658.5           $ 644.1     

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2    Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Nonfinancial assets such as goodwill, other intangible assets, and long-lived assets held and used are measured at fair value when there is an indicator of impairment and recorded at fair value only when impairment is recognized or for a business combination. The fair values less costs to sell of long-lived assets held for sale are assessed each reporting period they remain classified as held for sale. Subsequent changes in the held for sale long-lived asset’s fair value less cost to sell (increase or decrease) is reported as an adjustment to its carrying amount, except that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset at the time it was initially classified as held for sale.

 

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AUTONATION, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The following table presents nonfinancial assets measured and recorded at fair value on a nonrecurring basis during the six months ended June 30, 2011:

 

December 31, December 31, December 31, December 31,
     Fair Value Measurements Using         

Description

   Level 1      Level 2      Level 3      Gain/(Loss)  

Long-lived assets held for sale in discontinued operations

     -             -               10.9             (0.5)    

During the three and six months ended June 30, 2011, no impairment charges were recorded for the carrying value of goodwill or franchise rights in accordance with accounting guidance for goodwill and other intangible assets. See Note 5 of the Notes to Consolidated Financial Statements in Part II, Item 8 of our most recent Annual Report on Form 10-K for information on how fair value measurements are derived for our goodwill and franchise rights.

During the three and six months ended June 30, 2011, no impairment charges were recorded for the carrying value of long-lived assets held and used or long-lived assets held for sale in continuing operations.

During the three and six months ended June 30, 2011, long-lived assets held for sale in discontinued operations with a carrying amount of $11.4 million were written down to their fair value of $10.9 million, resulting in a non-cash impairment charge of $0.5 million, which was determined based on pending agreements to sell the related assets. This amount was included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Financial Statements.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our Audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.

Certain amounts have been reclassified from the previously reported financial statements to conform to the financial statement presentation of the current period.

Overview

AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of June 30, 2011, we owned and operated 254 new vehicle franchises1 from 213 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 32 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 90% of the new vehicles that we sold during the six months ended June 30, 2011, are manufactured by Ford, Toyota, Honda, General Motors, Nissan, Mercedes, 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.

At June 30, 2011, we had three operating and reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, 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.

For the six months ended June 30, 2011, new vehicle sales accounted for approximately 53% of our total revenue, but approximately 23% of our total gross profit. Used vehicle sales accounted for approximately 26% of our total revenue, and approximately 14% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 21% of our total revenue for the six months ended June 30, 2011, contributed approximately 62% of our total gross profit for the same period.

Results of Operations

Second Quarter 2011 compared to Second Quarter 2010

During the three months ended June 30, 2011, we had net income from continuing operations of $73.3 million or $0.49 per share on a diluted basis, as compared to net income from continuing operations of $50.0 million or $0.31 per share on a diluted basis during the same period in 2010.

Results for the three months ended June 30, 2010, were adversely impacted by a loss on debt extinguishment, including debt refinancing costs and the write-off of previously deferred debt issuance costs, of $19.6 million ($12.1 million after-tax, or approximately $0.07 per share).

 

 

1 

Includes three Maybach and three Sprinter franchises that we did not count as separate franchises in prior periods.

 

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First Six Months 2011 compared to First Six Months 2010

During the six months ended June 30, 2011, we had net income from continuing operations of $143.6 million or $0.95 per share on a diluted basis, as compared to net income from continuing operations of $108.8 million or $0.65 per share on a diluted basis during the same period in 2010.

Results for the six months ended June 30, 2010, were adversely impacted by the loss on debt extinguishment described above of $19.6 million ($12.1 million after-tax, or approximately $0.07 per share).

Market Conditions

In the second quarter of 2011, the seasonally adjusted annual rate (“SAAR”) of industry new vehicle sales in the United States was 12.1 million, an increase of 7% as compared to the new vehicle SAAR of 11.3 million in the second quarter of 2010.

The earthquake and tsunami that struck Japan in March 2011 caused significant production and supply chain disruptions that resulted in significantly reduced new vehicle production by Japanese manufacturers, both in and outside of Japan, and lower new vehicle shipments from those manufacturers. In the second quarter of 2011, our unit sales of new vehicles produced by Japanese manufacturers decreased 17%, as compared to the second quarter of 2010.

We estimate that vehicle shipments from the Japanese manufacturers were approximately 40% below planned levels in the second quarter and that, by September, they will be approximately 10%-15% below planned levels. Margins on vehicles from Japanese manufacturers benefited from constrained supply, and while we believe that they will remain strong in the third quarter, we expect that the improving supply environment will result in lower margins on those vehicles as compared to the second quarter. Based on currently available information, we expect that the new vehicle sales environment will begin to normalize in the fourth quarter of 2011. Our planning assumption for 2011 full-year industry new vehicle sales in the United States remains at the mid-12 million unit level.

Inventory Management

Our new and used vehicle inventories are stated at the lower of cost or market on 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 had 38,907 units in new vehicle inventory at June 30, 2011, 48,499 units at December 31, 2010, and 37,445 units at June 30, 2010. We continue to monitor our new vehicle inventory levels closely based on current economic conditions.

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. At June 30, 2011, we did not anticipate losses on our used vehicle inventory expected to be liquidated at wholesale. At December 31, 2010, our used vehicle inventory balance was net of cumulative write-downs of $0.4 million.

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 $2.9 million at June 30, 2011, and $3.4 million at December 31, 2010.

Critical Accounting Policies and Estimates

We prepare our Unaudited Condensed 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 as of 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 Unaudited Condensed Consolidated Financial Statements. For a complete discussion of our critical and significant accounting policies and estimates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

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Goodwill and Other Intangible Assets

Goodwill and franchise rights assets are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred.

We completed our annual tests for impairment of goodwill as of April 30, 2011, and no impairment charges resulted from the required impairment test.

We estimate the fair value of our reporting units using an “income” valuation approach, which discounts projected free cash flows of the reporting unit at a computed weighted average cost of capital as the discount rate. The income valuation approach requires the use of significant estimates and assumptions, which include revenue growth rates and future operating margins used to calculate projected future cash flows, weighted average costs of capital, and future economic and market conditions. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest. We believe this reconciliation process is consistent with a market participant perspective. We base our cash flow forecasts on our knowledge of the automotive industry, our recent performance, our expectations of our future performance, and other assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.

The test for goodwill impairment is a two-step approach. A first step failure would have required us to perform the second step of the goodwill impairment test to measure the amount of implied fair value of goodwill and, if required, the recognition of a non-cash goodwill impairment charge. As of June 30, 2011, we have $156.5 million of goodwill related to the Domestic reporting unit, $531.5 million related to the Import reporting unit, and $484.2 million related to the Premium Luxury reporting unit. A significant change in the assumptions used to estimate fair value could result in a material impairment charge to the goodwill associated with our reporting units.

The fair values of the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as of April 30, 2011, the date of our most recent annual impairment test.

Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested at least annually on April 30 for impairment. The impairment test for intangibles with indefinite lives required the comparison of estimated fair value to its carrying value by store. Fair values of rights under franchise agreements are estimated by discounting expected future cash flows of the store. We completed our annual impairment test for intangibles with indefinite lives as of April 30, 2011, and no impairment charges resulted from the required impairment test.

Long-Lived Assets

We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or changes in circumstances indicate that their carrying amounts may be impaired. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, a current expectation that more-likely-than-not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or a current-period operating or cash flow loss combined with historical losses or projected future losses.

When property and equipment is identified as held for sale, we reclassify the held for sale assets to Other Current Assets and cease recording depreciation. We measure each long-lived asset or disposal group at the lower of its carrying amount or fair value less cost to sell and recognize a loss for any initial adjustment of the long-lived asset’s or disposal group’s carrying amount to fair value less cost to sell in the period the “held for sale” criteria are met. 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.

 

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As of June 30, 2011, we had long-lived assets held for sale of $76.2 million in continuing operations and $53.3 million in discontinued operations.

We recorded no impairment charges during the six months ended June 30, 2011, associated with assets held and used or assets held for sale in continuing operations. During the three and six months ended June 30, 2011, we recorded a non-cash impairment charge of $0.5 million associated with long-lived assets held for sale in discontinued operations, which is included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Financial Statements.

The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, including consideration of information from third-party real estate valuation sources. 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.

 

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Reported Operating Data

Historical operating results include the results of acquired businesses from the date of acquisition.

 

Variance Variance Variance Variance Variance Variance Variance Variance
($ in millions, except per vehicle data)    Three Months Ended June 30,      Six Months Ended June 30,  
   2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Revenue:

                       

New vehicle

     $ 1,746.6           $ 1,656.6           $ 90.0           5.4           $ 3,531.7           $ 3,117.1           $ 414.6           13.3     

Used vehicle

     887.3           783.7           103.6           13.2           1,718.7           1,515.3           203.4           13.4     

Parts and service

     572.0           547.3           24.7           4.5           1,142.0           1,084.8           57.2           5.3     

Finance and insurance, net

     117.0           104.7           12.3           11.7           227.7           200.0           27.7           13.9     

Other

     13.4           12.0           1.4              27.3           23.7           3.6        
                                                           

Total revenue

     $ 3,336.3           $ 3,104.3           $ 232.0           7.5           $ 6,647.4           $ 5,940.9           $ 706.5           11.9     
                                                           

Gross profit:

                       

New vehicle

     $ 136.7           $ 108.8           $ 27.9           25.6           $ 262.0           $ 211.8           $ 50.2           23.7     

Used vehicle

     78.6           69.4           9.2           13.3           156.7           135.8           20.9           15.4     

Parts and service

     245.2           239.2           6.0           2.5           489.7           476.0           13.7           2.9     

Finance and insurance

     117.0           104.7           12.3           11.7           227.7           200.0           27.7           13.9     

Other

     5.9           7.2           (1.3)             13.5           14.1           (0.6)       
                                                           

Total gross profit

     583.4           529.3           54.1           10.2           1,149.6           1,037.7           111.9           10.8     

Selling, general and administrative expenses

     417.6           383.1           (34.5)          (9.0)          825.3           756.5           (68.8)          (9.1)    

Depreciation and amortization

     21.1           19.6           (1.5)             41.8           38.5           (3.3)       

Other expenses (income), net

     0.3           0.6           0.3              (1.9)          1.6           3.5        
                                                           

Operating income

     144.4           126.0           18.4           14.6           284.4           241.1           43.3           18.0    

Floorplan interest expense

     (10.9)          (9.7)          (1.2)             (22.1)          (19.3)          (2.8)       

Other interest expense

     (15.9)          (14.7)          (1.2)             (32.2)          (23.7)          (8.5)       

Loss on debt extinguishment

     -             (19.6)          19.6              -             (19.6)          19.6        

Interest income

     0.3           0.3           -                0.6           0.5           0.1        

Other gains (losses), net

     0.5           (0.3)          0.8              2.2           (0.4)          2.6        
                                                           

Income from continuing operations before income taxes

     $ 118.4           $ 82.0           $ 36.4           44.4           $ 232.9           $ 178.6           $ 54.3           30.4     
                                                           

Retail vehicle unit sales:

                       

New vehicle

     51,824           51,840           (16)          (0.0)          107,534           97,184           10,350           10.6     

Used vehicle

     42,833           40,464           2,369           5.9           84,922           78,116           6,806           8.7     
                                                           
     94,657           92,304           2,353           2.5           192,456           175,300           17,156           9.8     
                                                           

Revenue per vehicle retailed:

                       

New vehicle

     $ 33,703           $ 31,956           $ 1,747           5.5           $ 32,843           $ 32,074           $ 769           2.4     

Used vehicle

     $ 18,350           $ 17,381           $ 969           5.6           $ 17,821           $ 17,238           $ 583           3.4     

Gross profit per vehicle retailed:

                       

New vehicle

     $ 2,638           $ 2,099           $ 539           25.7           $ 2,436           $ 2,179           $ 257           11.8     

Used vehicle

     $ 1,800           $ 1,626           $ 174           10.7           $ 1,777           $ 1,651           $ 126           7.6     

Finance and insurance

     $ 1,236           $ 1,134           $ 102           9.0           $ 1,183           $ 1,141           $ 42           3.7     

 

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December 31, December 31, December 31, December 31,
     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011 (%)      2010 (%)      2011 (%)      2010 (%)  

Revenue mix percentages:

           

New vehicle

     52.4           53.4           53.1           52.5     

Used vehicle

     26.6           25.2           25.9           25.5     

Parts and service

     17.1           17.6           17.2           18.3     

Finance and insurance, net

     3.5           3.4           3.4           3.4     

Other

     0.4           0.4           0.4           0.3     
                                   

Total

     100.0           100.0           100.0           100.0     
                                   

Gross profit mix percentages:

           

New vehicle

     23.4           20.6           22.8           20.4     

Used vehicle

     13.5           13.1           13.6           13.1     

Parts and service

     42.0           45.2           42.6           45.9     

Finance and insurance

     20.1           19.8           19.8           19.3     

Other

     1.0           1.3           1.2           1.3     
                                   

Total

     100.0           100.0           100.0           100.0     
                                   

Operating items as a percentage of revenue:

           

Gross profit:

           

New vehicle

     7.8           6.6           7.4           6.8     

Used vehicle - retail

     9.8           9.4           10.0           9.6     

Parts and service

     42.9           43.7           42.9           43.9     

Total

     17.5           17.1           17.3           17.5     

Selling, general and administrative expenses

     12.5           12.3           12.4           12.7     

Operating income

     4.3           4.1           4.3           4.1     

Operating items as a percentage of total gross profit:

           

Selling, general and administrative expenses

     71.6           72.4           71.8           72.9     

Operating income

     24.8           23.8           24.7           23.2     
                   June 30,
2011
     June 30,
2010
 

Days supply:

           

New vehicle (industry standard of selling days, including fleet)

  

     59 days         55 days   

Used vehicle (trailing 30 days)

  

     47 days         44 days   

The following table details net new vehicle inventory carrying benefit, 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.

 

Variance Variance Variance Variance Variance Variance
     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions)    2011      2010      Variance      2011      2010      Variance  

Floorplan assistance

     $ 13.7           $ 14.1           $ (0.4)          $ 29.0           $ 26.5           $ 2.5     

Floorplan interest expense (new vehicles)

     (10.3)          (9.4)          (0.9)          (20.8)          (18.5)          (2.3)    
                                                     

Net new vehicle inventory carrying benefit

     $ 3.4           $ 4.7           $ (1.3)          $ 8.2           $ 8.0           $ 0.2     
                                                     

 

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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.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions, except per vehicle data)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Revenue:

                       

New vehicle

     $ 1,689.9           $ 1,656.6           $ 33.3           2.0           $ 3,436.8           $ 3,117.1           $ 319.7           10.3     

Used vehicle

     857.8           783.7           74.1           9.5           1,670.8           1,515.3           155.5           10.3     

Parts and service

     559.3           547.3           12.0           2.2           1,115.8           1,084.8           31.0           2.9     

Finance and insurance, net

     113.8           104.7           9.1           8.7           222.3           200.0           22.3           11.2     

Other

     13.1           12.0           1.1              26.8           23.7           3.1        
                                                           

Total revenue

     $ 3,233.9           $ 3,104.3           $ 129.6           4.2           $ 6,472.5           $ 5,940.9           $ 531.6           8.9     
                                                           

Gross profit:

                       

New vehicle

     $ 131.8           $ 108.8           $ 23.0           21.1           $ 254.7           $ 211.8           $ 42.9           20.3     

Used vehicle

     76.5           69.4           7.1           10.2           153.2           135.8           17.4           12.8     

Parts and service

     239.2           239.2           -             -             477.7           476.0           1.7           0.4     

Finance and insurance

     113.8           104.7           9.1           8.7           222.3           200.0           22.3           11.2     

Other

     5.7           7.2           (1.5)             13.1           14.1           (1.0)       
                                                           

Total gross profit

     $ 567.0           $ 529.3           $ 37.7           7.1           $ 1,121.0           $ 1,037.7           $ 83.3           8.0     
                                                           

Retail vehicle unit sales:

                       

New vehicle

     49,892           51,840           (1,948)          (3.8)          104,139           97,184           6,955           7.2     

Used vehicle

     41,658           40,464           1,194           3.0           82,925           78,116           4,809           6.2     
                                                           
     91,550           92,304           (754)          (0.8)          187,064           175,300           11,764           6.7     
                                                           

Revenue per vehicle retailed:

                       

New vehicle

     $ 33,871           $ 31,956           $ 1,915           6.0           $ 33,002           $ 32,074           $ 928           2.9     

Used vehicle

     $ 18,385           $ 17,381           $ 1,004           5.8           $ 17,851           $ 17,238           $ 613           3.6     

Gross profit per vehicle retailed:

                       

New vehicle

     $ 2,642           $ 2,099           $ 543           25.9           $ 2,446           $ 2,179           $ 267           12.3     

Used vehicle

     $ 1,800           $ 1,626           $ 174           10.7           $ 1,779           $ 1,651           $ 128           7.8     

Finance and insurance

     $ 1,243           $ 1,134           $ 109           9.6           $ 1,188           $ 1,141           $ 47           4.1     

 

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Table of Contents
December 31, December 31, December 31, December 31,
     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011 (%)      2010 (%)      2011 (%)      2010 (%)  

Revenue mix percentages:

           

New vehicle

     52.3           53.4           53.1           52.5     

Used vehicle

     26.5           25.2           25.8           25.5     

Parts and service

     17.3           17.6           17.2           18.3     

Finance and insurance, net

     3.5           3.4           3.4           3.4     

Other

     0.4           0.4           0.5           0.3     
                                   

Total

     100.0           100.0           100.0           100.0     
                                   

Gross profit mix percentages:

           

New vehicle

     23.2           20.6           22.7           20.4     

Used vehicle

     13.5           13.1           13.7           13.1     

Parts and service

     42.2           45.2           42.6           45.9     

Finance and insurance

     20.1           19.8           19.8           19.3     

Other

     1.0           1.3           1.2           1.3     
                                   

Total

     100.0           100.0           100.0           100.0     
                                   

Operating items as a percentage of revenue:

           

Gross profit:

           

New vehicle

     7.8           6.6           7.4           6.8     

Used vehicle - retail

     9.8           9.4           10.0           9.6     

Parts and service

     42.8           43.7           42.8           43.9     

Total

     17.5           17.1           17.3           17.5     

 

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New Vehicle

 

     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions, except per vehicle data)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Reported:

                       

Revenue

     $ 1,746.6           $ 1,656.6           $ 90.0           5.4           $ 3,531.7           $ 3,117.1           $ 414.6           13.3     

Gross profit

     $ 136.7           $ 108.8           $ 27.9           25.6           $ 262.0           $ 211.8           $ 50.2           23.7     

Retail vehicle unit sales

     51,824           51,840           (16)          (0.0)          107,534           97,184           10,350           10.6     

Revenue per vehicle retailed

     $ 33,703           $ 31,956           $ 1,747           5.5           $ 32,843           $ 32,074           $ 769           2.4     

Gross profit per vehicle retailed

     $ 2,638           $ 2,099           $ 539           25.7           $ 2,436           $ 2,179           $ 257           11.8     

Gross profit as a percentage of revenue

     7.8%           6.6%                 7.4%           6.8%           

Days supply (industry standard of selling days, including fleet)

     59 days           55 days                       
    

 

Three Months Ended June 30,

     Six Months Ended June 30,  
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Same Store:

                       

Revenue

     $ 1,689.9           $ 1,656.6           $ 33.3           2.0           $ 3,436.8           $ 3,117.1           $ 319.7           10.3     

Gross profit

     $ 131.8           $ 108.8           $ 23.0           21.1           $ 254.7           $ 211.8           $ 42.9           20.3     

Retail vehicle unit sales

     49,892           51,840           (1,948)          (3.8)          104,139           97,184           6,955           7.2     

Revenue per vehicle retailed

     $ 33,871           $ 31,956           $ 1,915           6.0           $ 33,002           $ 32,074           $ 928           2.9     

Gross profit per vehicle retailed

     $ 2,642           $ 2,099           $ 543           25.9           $ 2,446           $ 2,179           $ 267           12.3     

Gross profit as a percentage of revenue

     7.8%           6.6%                 7.4%           6.8%           

Second Quarter 2011 compared to Second Quarter 2010

Same store new vehicle revenue increased during the three months ended June 30, 2011, as compared to the same period in 2010, as a result of an increase in revenue per new vehicle retailed, partially offset by a decrease in same store unit volume. The decrease in same store unit volume was primarily due to the significant production and supply chain disruptions caused by the earthquake and tsunami that struck Japan in March 2011. These production and supply chain disruptions resulted in significantly reduced new vehicle production by Japanese manufacturers and lower new vehicle shipments from those manufacturers, which adversely impacted our new vehicle sales unit volume primarily in our Import segment. Manufacturers also reduced incentives during the three months ended June 30, 2011, as compared to the same period in 2010, which adversely impacted same store unit volume.

Same store revenue per new vehicle retailed increased during the three months ended June 30, 2011, as compared to the same period in 2010. Same store revenue per new vehicle retailed benefited from a shift in mix away from import vehicles, which have relatively lower average selling prices, toward domestic and premium luxury vehicles. Same store revenue per new vehicle retailed also benefited from an increase in the average selling prices for new vehicles, primarily due to increases in manufacturer pricing and supply and demand imbalances resulting from the Japan supply constraints.

Same store gross profit per new vehicle retailed benefited from an increase in new vehicle gross profit due to the tight supply of vehicles produced by Japanese manufacturers. Same store gross profit per new vehicle retailed also benefited from the recognition of certain performance-based manufacturer incentives related to premium luxury vehicles previously sold, which favorably impacted gross profit and operating income by $1.4 million. We were able to recognize these incentives due to our achievement of certain manufacturer incentive program goals during the second quarter of 2011. We expect to recognize the remaining incentives under this program in the second half of 2011.

First Six Months 2011 compared to First Six Months 2010

Same store new vehicle revenue increased during the six months ended June 30, 2011, as compared to the same period in 2010, as a result of an increase in same store unit volume and an increase in same store revenue per new vehicle retailed. The increase in same store unit volume was primarily due to improved market conditions, including improved credit availability offered to consumers and increased consumer demand, as well as reinstatement or expansion of certain manufacturer leasing programs. The increase in same store unit volume for the six months ended June 30, 2011, was partially offset by the Japan supply constraints, which adversely impacted unit sales in the second quarter of 2011.

 

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Same store revenue per new vehicle retailed increased during the six months ended June 30, 2011, as compared to the same period in 2010, primarily due to a shift in mix away from import vehicles, which have relatively lower average selling prices, toward domestic vehicles. Same store revenue per new vehicle retailed also benefited from an increase in the average selling prices for new vehicles in the Import segment, primarily due to the supply and demand imbalances resulting from the Japan supply constraints, and in the Premium Luxury segment, primarily due to improved market conditions.

Same store gross profit per new vehicle retailed benefited from an increase in new vehicle gross profit due to the tight supply of vehicles produced by Japanese manufacturers. Same store gross profit per new vehicle retailed also benefited from the recognition of certain performance-based manufacturer incentives related to premium luxury vehicles previously sold, which favorably impacted gross profit and operating income by $6.0 million. We were able to recognize these incentives due to our achievement of certain manufacturer incentive program goals during the first half of 2011. We expect to recognize the remaining incentives under this program in the second half of 2011.

See “Market Conditions” above for a discussion of the automotive retail environment, including our expectations regarding the supply of vehicles produced by Japanese manufacturers, and the related impact on new vehicle sales and margins.

New Vehicle Inventories

Our new vehicle inventories were $1.3 billion or 59 days supply at June 30, 2011, as compared to new vehicle inventories of $1.5 billion or 63 days supply at December 31, 2010, and $1.2 billion or 55 days supply at June 30, 2010. We had 38,907 units in new vehicle inventory at June 30, 2011, 48,499 units at December 31, 2010, and 37,445 units at June 30, 2010.

The following table details net new vehicle inventory carrying benefit, 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.

 

     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions)    2011      2010      Variance      2011      2010      Variance  

Floorplan assistance

     $ 13.7           $ 14.1           $ (0.4)          $ 29.0           $ 26.5           $ 2.5     

Floorplan interest expense (new vehicles)

     (10.3)          (9.4)          (0.9)          (20.8)          (18.5)          (2.3)    
                                                     

Net new vehicle inventory carrying benefit

     $ 3.4           $ 4.7           $ (1.3)          $ 8.2           $ 8.0           $ 0.2     
                                                     

Second Quarter 2011 compared to Second Quarter 2010

The net new vehicle inventory carrying benefit decreased during the three months ended June 30, 2011, as compared to the same period in 2010 due to an increase in floorplan interest expense primarily due to higher average vehicle floorplan payable balances during the period, partially offset by a decrease in floorplan assistance primarily due to a decrease in the floorplan assistance rate per unit.

First Six Months 2011 compared to First Six Months 2010

The net new vehicle inventory carrying benefit increased during the six months ended June 30, 2011, as compared to the same period in 2010 due to an increase in floorplan assistance primarily as a result of higher new vehicle sales, partially offset by an increase in floorplan interest expense primarily due to higher average vehicle floorplan payable balances during the period.

 

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Used Vehicle

 

     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions, except per vehicle data)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Reported:

                       

Retail revenue

     $ 786.0           $ 703.3           $ 82.7           11.8           $ 1,513.4           $ 1,346.6           $ 166.8           12.4     

Wholesale revenue

     101.3           80.4           20.9           26.0           205.3           168.7           36.6           21.7     
                                                           

Total revenue

     $ 887.3           $ 783.7           $ 103.6           13.2           $ 1,718.7           $ 1,515.3           $ 203.4           13.4     
                                                           

Retail gross profit

     $ 77.1           $ 65.8           $ 11.3           17.2           $ 150.9           $ 129.0           $ 21.9           17.0     

Wholesale gross profit

     1.5           3.6           (2.1)             5.8           6.8           (1.0)       
                                                           

Total gross profit

     $ 78.6           $ 69.4           $ 9.2           13.3           $ 156.7           $ 135.8           $ 20.9           15.4     
                                                           

Retail vehicle unit sales

     42,833           40,464           2,369           5.9           84,922           78,116           6,806           8.7     

Revenue per vehicle retailed

     $ 18,350           $ 17,381           $ 969           5.6           $ 17,821           $ 17,238           $ 583           3.4     

Gross profit per vehicle retailed

     $ 1,800           $ 1,626           $ 174           10.7           $ 1,777           $ 1,651           $ 126           7.6     

Gross profit as a percentage of revenue

     9.8%           9.4%                 10.0%           9.6%           

Days supply (trailing 30 days)

     47 days           44 days                       
     Three Months Ended June 30,      Six Months Ended June 30,  
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Same Store:

                       

Retail revenue

     $ 765.9           $ 703.3           $ 62.6           8.9           $ 1,480.3           $ 1,346.6           $ 133.7           9.9     

Wholesale revenue

     91.9           80.4           11.5           14.3           190.5           168.7           21.8           12.9     
                                                           

Total revenue

     $ 857.8           $ 783.7           $ 74.1           9.5           $ 1,670.8           $ 1,515.3           $ 155.5           10.3     
                                                           

Retail gross profit

     $ 75.0           $ 65.8           $ 9.2           14.0           $ 147.5           $ 129.0           $ 18.5           14.3     

Wholesale gross profit

     1.5           3.6           (2.1)             5.7           6.8           (1.1)       
                                                           

Total gross profit

     $ 76.5           $ 69.4           $ 7.1           10.2           $ 153.2           $ 135.8           $ 17.4           12.8     
                                                           

Retail vehicle unit sales

     41,658           40,464           1,194           3.0           82,925           78,116           4,809           6.2     

Revenue per vehicle retailed

     $ 18,385           $ 17,381           $ 1,004           5.8           $ 17,851           $ 17,238           $ 613           3.6     

Gross profit per vehicle retailed

     $ 1,800           $ 1,626           $ 174           10.7           $ 1,779           $ 1,651           $ 128           7.8     

Gross profit as a percentage of revenue

     9.8%           9.4%                 10.0%           9.6%           

Second Quarter 2011 compared to Second Quarter 2010

Same store retail used vehicle revenue increased during the three months ended June 30, 2011, as compared to the same period in 2010, as a result of both an increase in same store unit volume and an increase in revenue per used vehicle retailed. The increase in used vehicle sales volume was driven in part by an increase in sales of value-priced vehicles. We opened 19 Value Vehicle Outlets (“VVOs”) primarily in the second half of 2010 and an additional 7 in the first half of 2011 to address industry supply constraints and meet market demand. Through our VVOs, which are located on existing store facilities, we sell vehicles that we would have traditionally wholesaled with an average retail price lower than that of used vehicles we typically retail. Additionally, used vehicle sales volumes benefited from an increase in trade-in volume. These increases were partially offset by a decline in certified pre-owned vehicle sales due to elevated used vehicle pricing in comparison to new vehicle pricing and a decrease in supply of vehicles eligible for certified pre-owned designation.

Same store revenue per used vehicle retailed benefited from an increase in the average selling prices for used vehicles in all three segments primarily due to tighter supply, which has driven up the wholesale values of used vehicles. Used vehicle supply has been impacted by the decline in new vehicle sales in recent years, and the decline in off-lease vehicles, as well as by customers retaining their vehicles for longer periods of time. Used vehicle prices also increased in the second quarter of 2011 due to the Japan supply constraints for new vehicles. The increase in same store revenue per used vehicle retailed was partially offset by a decline in revenues as a result of increased sales of value-priced vehicles, which have lower average retail prices than used vehicles we typically retail.

 

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Same store gross profit per used vehicle retailed increased during the three months ended June 30, 2011, as compared to the same period in 2010, primarily due to an increase in gross profit per used vehicle retailed in all three segments—Domestic, Import, and Premium Luxury – due to the tighter supply of used vehicle inventory. The increase in same store gross profit per used vehicle retailed was partially offset by lender advances not increasing at the same level as used vehicle values and by increased sales of value-priced vehicles, which generate a relatively lower gross profit per vehicle retailed than used vehicles we typically retail.

First Six Months 2011 compared to First Six Months 2010

Same store retail used vehicle revenue increased during the six months ended June 30, 2011, as compared to the same period in 2010, as a result of both an increase in same store unit volume and an increase in revenue per used vehicle retailed. The increase in used vehicle sales volume was driven in part by an increase in sales of value-priced vehicles through our VVOs. Additionally, used vehicle sales volumes benefited from an increase in trade-in volume associated with the increase in new vehicle sales volume. These increases were partially offset by a decline in certified pre-owned vehicle sales due to elevated used vehicle pricing in comparison to new vehicle pricing and a decrease in supply of vehicles eligible for certified pre-owned designation.

Same store revenue per used vehicle retailed benefited from an increase in the average selling prices for used vehicles in all three segments primarily due to tighter supply, which has driven up the wholesale values of used vehicles. Used vehicle supply has been impacted by the decline in new vehicle sales in recent years, and the decline in off-lease vehicles, as well as by customers retaining their vehicles for longer periods of time. The increase in same store revenue per used vehicle retailed was partially offset by a decline in revenues as a result of increased sales of value-priced vehicles, which have lower average retail prices than used vehicles we typically retail.

Same store gross profit per used vehicle retailed increased during the six months ended June 30, 2011, as compared to the same period in 2010, primarily due to an increase in gross profit per used vehicle retailed in all three segments—Domestic, Import, and Premium Luxury – due to the tighter supply of used vehicle inventory. The increase in same store gross profit per used vehicle retailed was partially offset by lender advances not increasing at the same level as used vehicle values and by increased sales of value-priced vehicles, which generate a relatively lower gross profit per vehicle retailed than used vehicles we typically retail.

Used Vehicle Inventories

Used vehicle inventories were $345.4 million or 47 days supply at June 30, 2011, compared to $271.8 million or 42 days supply at December 31, 2010, and $283.5 million or 44 days supply at June 30, 2010.

 

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Table of Contents

Parts and Service

 

Variance Variance Variance Variance Variance Variance Variance Variance
      Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Reported:

                       

Revenue

     $ 572.0           $ 547.3           $ 24.7           4.5           $ 1,142.0         $ 1,084.8         $ 57.2           5.3     

Gross Profit

     $ 245.2           $ 239.2           $ 6.0           2.5           $ 489.7         $ 476.0         $ 13.7           2.9     

Gross profit as a percentage of revenue

     42.9%             43.7%                 42.9%           43.9%           

Same Store:

                       

Revenue

     $ 559.3           $ 547.3           $ 12.0           2.2         $ 1,115.8         $ 1,084.8         $ 31.0           2.9     

Gross Profit

     $ 239.2           $ 239.2           $ -             -           $ 477.7         $ 476.0         $ 1.7           0.4     

Gross profit as a percentage of revenue

       42.8%             43.7%                 42.8%           43.9%           

Parts and service revenue is primarily derived from vehicle repairs paid directly by customers or via reimbursement from manufacturers and others under warranty programs.

Second Quarter 2011 compared to Second Quarter 2010

During the three months ended June 30, 2011, same store parts and service gross profit was flat as compared to the same period in 2010. Same store parts and service gross profit was adversely impacted by a decline in gross profit associated with warranty of $2.6 million, offset primarily by an increase in gross profit associated with customer-pay service of $1.0 million.

Customer-pay service gross profit benefited from improved market conditions and better marketing of products and services in the service department. Warranty was adversely impacted during the three months ended June 30, 2011, by fewer vehicles in operation as a result of lower vehicle sales in recent years and, to a lesser extent, improved quality of vehicles manufactured in recent years.

First Six Months 2011 compared to First Six Months 2010

During the six months ended June 30, 2011, same store parts and service gross profit increased as compared to the same period in 2010, primarily due to increases in gross profit associated with the preparation of vehicles for sale and service work outsourced to third-parties of $2.8 million and customer-pay service of $2.8 million, partially offset by a decline in gross profit associated with warranty of $4.6 million.

Gross profit associated with the preparation of vehicles for sale and service work outsourced to third-parties benefited from higher new and used vehicle sales volume. Customer-pay service gross profit benefited from improved market conditions and better marketing of products and services in the service department. Warranty benefited in the prior year from an increase in warranty service related to the Toyota recalls. Additionally, warranty was adversely impacted during the six months ended June 30, 2011, by fewer vehicles in operation as a result of lower vehicle sales in recent years and, to a lesser extent, improved quality of vehicles manufactured in recent years.

We expect the decline in new vehicle sales over the past few years, which has led to a decline in the total number of recent-model-year vehicles in operation, our primary service base, may have an adverse impact on our parts and service business for the next several years.

 

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Table of Contents

Finance and Insurance

 

Variance Variance Variance Variance Variance Variance Variance Variance
     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions, except per vehicle data)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Reported:

                       

Revenue and gross profit

     $ 117.0           $ 104.7           $ 12.3             11.7           $ 227.7           $ 200.0           $ 27.7             13.9     

Gross profit per vehicle retailed

     $ 1,236           $ 1,134           $ 102             9.0           $ 1,183           $ 1,141           $ 42             3.7     

Same Store:

                       

Revenue and gross profit

     $ 113.8           $ 104.7           $ 9.1             8.7           $ 222.3           $ 200.0           $ 22.3             11.2     

Gross profit per vehicle retailed

     $ 1,243           $ 1,134           $ 109             9.6           $ 1,188           $ 1,141           $ 47             4.1     

Second Quarter 2011 compared to Second Quarter 2010

Same store finance and insurance revenue and gross profit increased during the three months ended June 30, 2011, as compared to the same period in 2010, primarily due to an increase in same store finance and insurance revenue and gross profit per vehicle retailed, partially offset by a decrease in new vehicle sales in the Import segment.

Same store finance and insurance revenue and gross profit per vehicle retailed benefited from an increase in revenue associated with arranging customer financing, an increase in margin on product contracts sold, more customers financing vehicles through the dealerships, and an increase in amounts financed per transaction. This benefit was partially offset by a decline in profit resulting from chargeback experience.

First Six Months 2011 compared to First Six Months 2010

Same store finance and insurance revenue and gross profit increased during the six months ended June 30, 2011, as compared to the same period in 2010, primarily due to an increase in new and used vehicle sales volumes and an increase in same store finance and insurance revenue and gross profit per vehicle retailed.

Same store finance and insurance revenue and gross profit per vehicle benefited from an increase revenue associated with arranging customer financing, an increase in margin on product contracts sold, more customers financing vehicles through the dealerships, and an increase in amounts financed per transaction. This benefit was partially offset by a decline in profit resulting from chargeback experience.

 

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Table of Contents

Segment Results

In the following table, total Segment Income (Loss) of the operating segments is reconciled to consolidated operating income.

 

 

Variance Variance Variance Variance Variance Variance Variance Variance
     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Varince
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Revenue

                       

Domestic

     $ 1,145.0           $ 1,036.0           $ 109.0           10.5           $ 2,241.1           $ 1,946.6           $ 294.5           15.1     

Import

     1,213.5           1,177.1           36.4           3.1           2,510.7           2,248.8           261.9           11.6     

Premium Luxury

     941.6           860.4           81.2           9.4           1,819.9           1,683.1           136.8           8.1     

Corporate and other

     36.2           30.8           5.4           17.5           75.7           62.4           13.3           21.3     
                                                           

Total revenue

     $ 3,336.3           $ 3,104.3         $ 232.0           7.5           $ 6,647.4           $ 5,940.9           $ 706.5           11.9     
                                                           

*Segment income (loss)

                       

Domestic

     $ 46.4           $ 41.5           $ 4.9           11.8           $ 89.1           $ 73.6           $ 15.5           21.1     

Import

     65.7           52.4           13.3           25.4           123.1           102.4           20.7           20.2     

Premium Luxury

     56.6           48.5           8.1           16.7           111.7           95.3           16.4           17.2     

Corporate and other

     (35.2)          (26.1)          (9.1)             (61.6)          (49.5)          (12.1)       
                                                           

Total segment income

     133.5           116.3           17.2           14.8           262.3           221.8           40.5           18.3     

Add: Floorplan interest expense

     10.9           9.7           (1.2)             22.1           19.3           (2.8)       
                                                           

Operating income

     $ 144.4           $ 126.0           $ 18.4           14.6           $ 284.4           $ 241.1           $ 43.3           18.0     
                                                           

*Segment income (loss) is defined as operating income less floorplan interest expense.

  

Retail new vehicle unit sales:

  

Domestic

     18,751           16,516           2,235           13.5           36,487           30,127           6,360           21.1     

Import

     23,854           26,944           (3,090)          (11.5)          53,516           50,818           2,698           5.3     

Premium Luxury

     9,219           8,380           839           10.0           17,531           16,239           1,292           8.0     
                                                           
     51,824           51,840           (16)          (0.0)          107,534           97,184           10,350           10.6     
                                                           

 

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Table of Contents

Domestic

The Domestic segment operating results included the following:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
($ in millions)    2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
     2011      2010      Variance
Favorable /
(Unfavorable)
     %
Variance
 

Revenue

     $ 1,145.0         $ 1,036.0         $ 109.0           10.5           $ 2,241.1           $ 1,946.6         $ 294.5           15.1     

Segment income

     $ 46.4         $ 41.5         $ 4.9           11.8           $ 89.1           $ 73.6         $ 15.5           21.1     

Retail new vehicle unit sales

     18,751           16,516           2,235           13.5           36,487           30,127