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AutoNation 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
AN 10Q 9/30/11
 
 
 
 
 
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 September 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 1stAvenue, 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   o
Non-accelerated filer o   (Do not check if a smaller reporting company)
  
Smaller reporting company   o
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 October 19, 2011, the registrant had 139,898,186 shares of common stock outstanding.

 
 
 
 
 


AUTONATION, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
 
Page
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1A.
Item 2.
Item 6.



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
 
 
September 30,
2011
 
December 31,
2010
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
67.3

 
$
95.1

Receivables, net
402.1

 
462.0

Inventory
1,601.7

 
1,867.0

Other current assets
224.9

 
204.7

Total Current Assets
2,296.0

 
2,628.8

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $738.1 million and $689.6 million, respectively
1,919.2

 
1,838.0

GOODWILL (Note 4)
1,172.2

 
1,142.4

OTHER INTANGIBLE ASSETS, NET (Note 4)
218.0

 
202.0

OTHER ASSETS
161.4

 
163.0

Total Assets
$
5,766.8

 
$
5,974.2

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Vehicle floorplan payable - trade
$
1,043.2

 
$
1,379.9

Vehicle floorplan payable - non-trade
468.1

 
486.5

Accounts payable
169.0

 
164.0

Current maturities of long-term obligations
93.2

 
8.1

Other current liabilities
386.3

 
360.9

Total Current Liabilities
2,159.8

 
2,399.4

LONG-TERM DEBT, NET OF CURRENT MATURITIES
1,394.2

 
1,340.6

DEFERRED INCOME TAXES
43.6

 
25.9

OTHER LIABILITIES
144.3

 
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 September 30, 2011, and December 31, 2010, including shares held in treasury
1.6

 
1.6

Additional paid-in capital
18.0

 
2.0

Retained earnings
2,577.2

 
2,365.2

Treasury stock, at cost; 22,121,886 and 15,197,680 shares held, respectively
(571.9
)
 
(289.9
)
Total Shareholders’ Equity
2,024.9

 
2,078.9

Total Liabilities and Shareholders’ Equity
$
5,766.8

 
$
5,974.2

The accompanying notes are an integral part of these statements.


1


AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENTS
(In millions, except per share data)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Revenue:
 
 
 
 
 
 
 
New vehicle
$
1,881.6

 
$
1,773.3

 
$
5,413.3

 
$
4,890.4

Used vehicle
911.9

 
812.4

 
2,630.6

 
2,327.7

Parts and service
578.0

 
564.1

 
1,720.0

 
1,648.9

Finance and insurance, net
121.9

 
111.9

 
349.6

 
311.9

Other
13.1

 
12.2

 
40.4

 
35.9

TOTAL REVENUE
3,506.5

 
3,273.9

 
10,153.9

 
9,214.8

Cost of Sales:
 
 
 
 
 
 
 
New vehicle
1,743.4

 
1,661.4

 
5,013.1

 
4,566.7

Used vehicle
845.4

 
743.2

 
2,407.4

 
2,122.7

Parts and service
336.1

 
318.5

 
988.4

 
927.3

Other
6.4

 
5.4

 
20.2

 
15.1

TOTAL COST OF SALES
2,931.3

 
2,728.5

 
8,429.1

 
7,631.8

Gross Profit:
 
 
 
 
 
 
 
New vehicle
138.2

 
111.9

 
400.2

 
323.7

Used vehicle
66.5

 
69.2

 
223.2

 
205.0

Parts and service
241.9

 
245.6

 
731.6

 
721.6

Finance and insurance
121.9

 
111.9

 
349.6

 
311.9

Other
6.7

 
6.8

 
20.2

 
20.8

TOTAL GROSS PROFIT
575.2

 
545.4

 
1,724.8

 
1,583.0

Selling, general, and administrative expenses
411.4

 
402.9

 
1,236.7

 
1,159.4

Depreciation and amortization
20.9

 
18.7

 
62.7

 
57.2

Other expenses (income), net
(1.2
)
 
2.9

 
(3.1
)
 
4.5

OPERATING INCOME
144.1

 
120.9

 
428.5

 
361.9

Floorplan interest expense
(9.7
)
 
(10.8
)
 
(31.8
)
 
(30.2
)
Other interest expense
(16.4
)
 
(16.1
)
 
(48.6
)
 
(39.8
)
Loss on debt extinguishment

 

 

 
(19.6
)
Interest income

 
0.3

 
0.6

 
0.8

Other losses, net
(2.4
)
 
(0.7
)
 
(0.2
)
 
(1.1
)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
115.6

 
93.6

 
348.5

 
272.0

INCOME TAX PROVISION
44.9

 
35.1

 
134.2

 
104.8

NET INCOME FROM CONTINUING OPERATIONS
70.7

 
58.5

 
214.3

 
167.2

Loss from discontinued operations, net of income taxes

 
(1.6
)
 
(2.3
)
 
(7.9
)
NET INCOME
$
70.7

 
$
56.9

 
$
212.0

 
$
159.3

BASIC EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
 
Continuing operations
$
0.49

 
$
0.40

 
$
1.46

 
$
1.05

Discontinued operations
$

 
$
(0.01
)
 
$
(0.02
)
 
$
(0.05
)
Net income
$
0.49

 
$
0.39

 
$
1.44

 
$
1.00

Weighted average common shares outstanding
144.4

 
147.5

 
146.9

 
160.0

DILUTED EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
 
 
Continuing operations
$
0.48

 
$
0.39

 
$
1.43

 
$
1.04

Discontinued operations
$

 
$
(0.01
)
 
$
(0.02
)
 
$
(0.05
)
Net income
$
0.48

 
$
0.38

 
$
1.42

 
$
0.99

Weighted average common shares outstanding
147.0

 
149.6

 
149.5

 
161.4

COMMON SHARES OUTSTANDING, net of treasury stock
141.4

 
148.0

 
141.4

 
148.0


The accompanying notes are an integral part of these statements.

2


AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In millions, except share data)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
December 31, 2010
163,562,149

 
$
1.6

 
$
2.0

 
$
2,365.2

 
$
(289.9
)
 
$
2,078.9

Net income

 

 

 
212.0

 

 
212.0

Repurchases of common stock

 

 

 

 
(367.0
)
 
(367.0
)
Stock-based compensation expense

 

 
15.7

 

 

 
15.7

Shares awarded under stock-based compensation plans, including income tax benefit of $19.0

 

 
0.3

 

 
85.0

 
85.3

September 30, 2011
163,562,149

 
$
1.6

 
$
18.0

 
$
2,577.2

 
$
(571.9
)
 
$
2,024.9


The accompanying notes are an integral part of these statements.


3


AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
 
Nine Months Ended
 
September 30,
 
2011
 
2010
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
 
 
 
Net income
$
212.0

 
$
159.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Loss from discontinued operations
2.3

 
7.9

Depreciation and amortization
62.7

 
57.2

Amortization of debt issuance costs and discounts
3.2

 
2.4

Stock-based compensation expense
15.7

 
13.6

Deferred income tax provision
15.9

 
10.9

Non-cash impairment charges

 
3.7

Write-off of deferred debt issuance costs

 
3.5

Net loss (gain) on asset sales and dispositions
(3.0
)
 
0.4

Other
(0.2
)
 
1.2

(Increase) decrease, net of effects from business combinations and divestitures:
 
 
 
Receivables
57.5

 
11.8

Inventory
277.6

 
(321.5
)
Other assets
(10.5
)
 
27.2

Increase (decrease), net of effects from business combinations and divestitures:
 
 
 
Vehicle floorplan payable-trade, net
(336.7
)
 
174.2

Accounts payable
5.0

 
32.1

Other liabilities
9.3

 
12.5

Net cash provided by continuing operations
310.8

 
196.4

Net cash provided by discontinued operations
0.3

 
1.3

Net cash provided by operating activities
311.1

 
197.7

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
 
 
 
Purchases of property and equipment
(113.8
)
 
(77.7
)
Property operating lease buy-outs
(13.8
)
 
(2.6
)
Proceeds from the sale of property and equipment
3.0

 
0.2

Proceeds from assets held for sale
9.0

 
5.8

Insurance recoveries on property and equipment

 
1.8

Cash used in business acquisitions, net of cash acquired
(64.2
)
 
(73.1
)
Proceeds from the sale of restricted investments

 
1.3

Cash received from business divestitures, net of cash relinquished
4.9

 
12.4

Other
0.2

 
(1.1
)
Net cash used in continuing operations
(174.7
)
 
(133.0
)
Net cash used in discontinued operations

 
(0.3
)
Net cash used in investing activities
(174.7
)
 
(133.3
)

The accompanying notes are an integral part of these statements.

4


AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Continued)
 
 
Nine Months Ended
 
September 30,
 
2011
 
2010
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
 
 
 
Repurchases of common stock
$
(335.0
)
 
$
(507.3
)
Proceeds from revolving credit facilities
300.0

 
325.0

Payment of revolving credit facilities
(180.0
)
 
(115.0
)
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 (payments of) vehicle floorplan payable - non-trade
(28.3
)
 
61.8

Payments of mortgage facilities
(5.7
)
 
(5.4
)
Payments of long-term debt
(0.5
)
 
(0.3
)
Proceeds from the exercise of stock options
66.3

 
30.1

Tax benefit from stock-based awards
19.0

 
6.3

Net cash used in continuing operations
(164.2
)
 
(153.3
)
Net cash used in discontinued operations

 
(0.1
)
Net cash used in financing activities
(164.2
)
 
(153.4
)
DECREASE IN CASH AND CASH EQUIVALENTS
(27.8
)
 
(89.0
)
CASH AND CASH EQUIVALENTS at beginning of period
95.1

 
173.5

CASH AND CASH EQUIVALENTS at end of period
$
67.3

 
$
84.5


The accompanying notes are an integral part of these statements


5


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 September 30, 2011, we owned and operated 257 new vehicle franchises from 214 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.
New Accounting Pronouncements
Testing for Goodwill Impairment
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments in this accounting standard update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years 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 is intended to simplify the assessment for goodwill impairment.



6

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Multiemployer Pension Plan Disclosures
In September 2011, the FASB issued an accounting standard update that requires employers that participate in multiemployer pension plans to provide additional quantitative and qualitative disclosures. The amended disclosures provide users with more detailed information about an employer's involvement in multiemployer pension plans and are effective for annual periods ending after December 15, 2011. Five of our 214 stores participate in multiemployer pension plans. We are currently evaluating the disclosure requirements of this accounting standard update.

Presentation of Comprehensive Income
In June 2011, the 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.

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 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:
 
 
September 30, 2011
 
December 31, 2010
Trade receivables
$
91.0

 
$
89.8

Manufacturer receivables
107.3

 
127.8

Other
34.7

 
37.5

 
233.0

 
255.1

Less: Allowances
(2.7
)
 
(3.7
)
 
230.3

 
251.4

Contracts-in-transit and vehicle receivables
171.8

 
210.6

Receivables, net
$
402.1

 
$
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.



7

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


3.
INVENTORY AND VEHICLE FLOORPLAN PAYABLE
The components of inventory are as follows:

 
September 30, 2011
 
December 31, 2010
New vehicles
$
1,173.7

 
$
1,479.6

Used vehicles
305.4

 
271.8

Parts, accessories, and other
122.6

 
115.6

 
$
1,601.7

 
$
1,867.0


The components of vehicle floorplan payable are as follows:

 
September 30, 2011
 
December 31, 2010
Vehicle floorplan payable - trade
$
1,043.2

 
$
1,379.9

Vehicle floorplan payable - non-trade
468.1

 
486.5

 
$
1,511.3

 
$
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 nine months ended September 30, 2011, and 2.6% for the nine months ended September 30, 2010. At September 30, 2011, the aggregate capacity under our floorplan credit agreements with various lenders to finance a portion of our used vehicle inventory was $245.0 million, of which $86.6 million had been borrowed. The remaining borrowing capacity of $158.4 million was limited to $99.5 million based on the eligible used vehicle inventory that could have been pledged as collateral. At September 30, 2011, the aggregate capacity under all of our floorplan facilities to finance vehicles was approximately $2.8 billion, of which $1.5 billion had been borrowed.



8

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)


4.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets, net, consist of the following:

 
September 30, 2011
 
December 31, 2010
Goodwill
$
1,172.2

 
$
1,142.4

Franchise rights - indefinite-lived
$
212.6

 
$
199.1

Other intangibles
8.4

 
5.6

 
221.0

 
204.7

Less: accumulated amortization
(3.0
)
 
(2.7
)
Other intangible assets, net
$
218.0

 
$
202.0


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:
 
 
September 30, 2011
 
December 31, 2010
7% Senior Notes due 2014
$
14.7

 
$
14.7

6.75% Senior Notes due 2018
394.8

 
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
26.8

 
16.1

Revolving credit facility due 2014
273.2

 
163.9

Mortgage facility (1)
213.5

 
219.2

Capital leases due from 2011 to 2031
31.0

 
7.0

 
1,487.4

 
1,348.7

Less: current maturities
(93.2
)
 
(8.1
)
Long-term debt, net of current maturities
$
1,394.2

 
$
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.

9

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Senior Unsecured Notes and Amended Credit Agreement
At September 30, 2011, we had outstanding $394.8 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 September 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.
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 September 30, 2011, we had borrowings outstanding of $26.8 million under the non-extended revolving credit facility and $273.2 million under the extended revolving credit facility. We have a $200.0 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 September 30, 2011, leaving an additional borrowing capacity in the aggregate under both the non-extended and extended revolving credit facilities of $278.9 million at September 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 September 30, 2011, we had $213.5 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. At September 30, 2011, we had capital lease obligations of $31.0 million.
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

10

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 60.0% 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.
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 September 30, 2011, our leverage ratio and capitalization ratio were as follows:

 
September 30, 2011
 
Requirement
  
Actual
Leverage ratio
< 3.25x
  
2.38x
Capitalization ratio
< 60.0%
  
45.9%

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 payable included in Other Current Liabilities totaled $14.3 million at September 30, 2011, and $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:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Shares repurchased
5.7

 
2.9

 
10.8

 
25.9

Aggregate purchase price
$
195.9

 
$
55.0

 
$
365.6

 
$
506.6

Average purchase price per share
$
34.66

 
$
19.08

 
$
33.85

 
$
19.59



11

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

As of September 30, 2011, $117.6 million remained available for share repurchases under the share repurchase program approved by our Board of Directors. From October 1, 2011 through October 19, 2011, we repurchased an additional 1.5 million shares for an aggregate purchase price of $51.9 million (average purchase price per share of $33.67) pursuant to a Rule 10b5-1 plan. In October 2011, our Board of Directors authorized an additional $250 million under our existing share repurchase program. As of October 19, 2011, $315.7 million remained available for share repurchases under the program.
A summary of shares of common stock issued in connection with the exercise of stock options follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Shares issued
1.4

 
1.6

 
3.8

 
1.9

Proceeds from exercise of stock options
$
26.3

 
$
24.5

 
$
66.3

 
$
30.1

Average exercise price per share
$
18.35

 
$
15.35

 
$
17.54

 
$
15.53


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):

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 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
11,688

 
12,796

 
42,985

 
33,485


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:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Weighted average common shares outstanding used in calculating basic earnings per share
144.4

 
147.5

 
146.9

 
160.0

Effect of dilutive stock-based awards
2.6

 
2.1

 
2.6

 
1.4

Weighted average common and common equivalent shares used in calculating diluted earnings per share
147.0

 
149.6

 
149.5

 
161.4



12

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Anti-dilutive options excluded from the computation of diluted earnings per share
0.4

 
0.5

 
0.4

 
3.7


9.
ACQUISITIONS
We acquired one automotive retail franchise and related assets during the nine months ended September 30, 2011, for which we paid in cash $64.2 million. We acquired five automotive retail franchises during the nine months ended September 30, 2010, for which we paid in cash $73.1 million.
The acquisition that occurred during the nine months ended September 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 nine month periods ended September 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 $65 million at September 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 September 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.

13

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

At September 30, 2011, surety bonds, letters of credit, and cash deposits totaled $92.2 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.
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 $4.9 million during the nine months ended September 30, 2011, and $12.4 million during the same period in 2010 related to discontinued operations.
As of September 30, 2011, we had assets held for sale of $51.7 million in discontinued operations, primarily related to real estate we have not yet sold associated with 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 September 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.

14

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Domestic
$
1,204.4

 
$
1,102.6

 
$
3,445.5

 
$
3,048.7

Import
1,318.3

 
1,275.1

 
3,829.0

 
3,523.9

Premium Luxury
948.7

 
863.3

 
2,768.5

 
2,546.3

Corporate and other
35.1

 
32.9

 
110.9

 
95.9

Total revenues
$
3,506.5

 
$
3,273.9

 
$
10,153.9

 
$
9,214.8


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Segment income (loss)*:
 
 
 
 
 
 
 
Domestic
$
46.7

 
$
42.5

 
$
135.8

 
$
116.1

Import
65.0

 
51.3

 
187.9

 
153.6

Premium Luxury
49.5

 
47.7

 
161.3

 
142.8

Corporate and other
(26.8
)
 
(31.4
)
 
(88.3
)
 
(80.8
)
Total segment income
134.4

 
110.1

 
396.7

 
331.7

Other interest expense
(16.4
)
 
(16.1
)
 
(48.6
)
 
(39.8
)
Loss on debt extinguishment

 

 

 
(19.6
)
Interest income

 
0.3

 
0.6

 
0.8

Other losses, net
(2.4
)
 
(0.7
)
 
(0.2
)
 
(1.1
)
Income from continuing operations before income taxes
$
115.6

 
$
93.6

 
$
348.5

 
$
272.0

*    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, Nissan, General Motors, Honda, 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 $107.3 million at September 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 September 30, 2011, we do not consider AutoNation to have any significant non-manufacturer concentrations of credit risk.

14.
FINANCIAL INSTRUMENTS AND 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.

15

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 $1.7 million at September 30, 2011 and $1.8 million at 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:

 
September 30, 2011
 
December 31, 2010
Carrying value
$
654.0

 
$
635.3

Fair value
$
663.4

 
$
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.
The following tables presents nonfinancial assets measured and recorded at fair value on a nonrecurring basis during the nine months ended September 30, 2011 and 2010:
 
 
 
Nine Months Ended
 
 
September 30, 2011
Description
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Gain/(Loss)
Long-lived assets held for sale in discontinued operations
 
$
10.9

 
$
(0.5
)


16

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

 
 
Nine Months Ended
 
 
September 30, 2010
Description
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Gain/(Loss)
Long-lived assets held and used
 
$
3.7

 
$
(0.6
)
 
 
 
 
 
Long-lived assets held for sale:
 
 
 
 
   Continuing operations
 
$
10.7

 
$
(3.1
)
   Discontinued operations
 
34.9

 
(3.2
)
     Total long-lived assets held for sale
 
$
45.6

 
$
(6.3
)

Goodwill and Other Intangible Assets
During the three and nine months ended September 30, 2011 and 2010, 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.
Long-lived Assets Held and Used in Continuing Operations
During the three and nine months ended September 30, 2011, no impairment charges were recorded for the carrying value of long-lived assets held and used in continuing operations.
During the nine months ended September 30, 2010, long-lived assets held and used in continuing operations with a carrying amount of $4.3 million were written down to their fair value of $3.7 million, resulting in a non-cash impairment charge of $0.6 million, which was included in Other Expenses (Income), Net in our Unaudited Condensed Consolidated Financial Statements, of which $0.4 million was reflected as a component of Import Segment Income and $0.2 million was reflected as a component of Domestic Segment Income of our segment information. The $0.6 million of impairment charges includes $0.2 million that was recorded during the three months ended September 30, 2010.
Long-lived Assets Held for Sale in Continuing Operations
During the three and nine months ended September 30, 2011, no impairment charges were recorded for the carrying value of long-lived assets held for sale in continuing operations.
During the nine months ended September 30, 2010, long-lived assets held for sale in continuing operations with a carrying amount of $9.4 million were written down to their fair value of $6.0 million, resulting in a non-cash impairment charge of $3.4 million. Additionally, an adjustment of $0.3 million was recorded to long-lived assets held for sale with a carrying amount of $4.4 million as a result of an increase in the asset group's fair value. The adjustment was limited to the carrying amount of $4.7 million at the time the long-lived asset group was initially classified as held for sale. These amounts were included in Other Expenses (Income), Net in our Unaudited Condensed Consolidated Financial Statements and included as a component of Segment Income (Loss) in the "Corporate and other" category of our segment information. The $3.1 million of net impairment charges includes $2.6 million that was recorded during the three months ended September 30, 2010.
Long-lived Assets Held for Sale in Discontinued Operations
During the nine months ended September 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. This amount was included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Financial Statements. We recorded no impairment charges during the three months ended September 30, 2011.
During the nine months ended September 30, 2010, long-lived assets held for sale in discontinued operations with a carrying amount of $28.9 million were written down to their fair value of $25.1 million, resulting in a non-cash impairment charge of $3.8 million. Additionally, an adjustment of $0.6 million was recorded to long-lived assets held for sale in

17

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

discontinued operations with a carrying amount of $9.2 million to increase the asset group's carrying amount to its fair value of $9.8 million. These amounts were included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Financial Statements in the "Corporate and other" category of our segment information. The $3.2 million of net impairment charges recorded includes $0.6 million that was recorded during the three months ended September 30, 2010.
As of September 30, 2011, we had assets held for sale of $81.9 million in continuing operations and $49.5 million in discontinued operations.
The fair value measurements for our long-lived assets held and used and held for sale were based on Level 3 inputs, which considered information obtained from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets.

15.
CASH FLOW INFORMATION
We consider all highly liquid investments with purchased maturities of three months or less to be cash equivalents unless the investments are legally or contractually restricted for more than three months. We had non-cash investing activities related to the increase in property acquired under capital leases of $24.2 million for the nine months ended September 30, 2011. The effect of non-cash transactions is excluded from the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.
We made interest payments of $71.4 million during the nine months ended September 30, 2011, and $52.8 million during the nine months ended September 30, 2010. We made income tax payments, net of income tax refunds, of $95.2 million during the nine months ended September 30, 2011, and $75.0 million during the nine months ended September 30, 2010.



18


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, 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.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2011, we owned and operated 257 new vehicle franchises from 214 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 nine months ended September 30, 2011, are manufactured by Ford, Toyota, Nissan, General Motors, Honda, 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 September 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 nine months ended September 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 13% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 20% of our total revenue for the nine months ended September 30, 2011, contributed approximately 63% of our total gross profit for the same period.

Results of Operations
Third Quarter 2011 compared to Third Quarter 2010
During the three months ended September 30, 2011, we had net income from continuing operations of $70.7 million or $0.48 per share on a diluted basis, as compared to net income from continuing operations of $58.5 million or $0.39 per share on a diluted basis during the same period in 2010.
First Nine Months 2011 compared to First Nine Months 2010
During the nine months ended September 30, 2011, we had net income from continuing operations of $214.3 million or $1.43 per share on a diluted basis, as compared to net income from continuing operations of $167.2 million or $1.04 per share on a diluted basis during the same period in 2010.
Results for the nine months ended September 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).
Market Conditions
In the third quarter of 2011, the seasonally adjusted annual rate (“SAAR”) of industry new vehicle sales in the United States was 12.4 million, an increase of 7% as compared to the new vehicle SAAR of 11.6 million in the third 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 and third quarters of 2011, unit sales of new vehicles

19


produced by Japanese manufacturers were negatively impacted by these disruptions; however, gross profit on those vehicles benefited significantly from constrained supply. Shipments from Japanese manufacturers began to improve at the end of the third quarter, and we believe that that they will continue to improve in the fourth quarter. We expect that the improving supply environment will result in lower gross profit on those vehicles in the fourth quarter, as compared to second and third quarters of 2011. Our planning assumption for 2011 full-year industry new vehicle unit sales in the United States remains at the mid-12 million unit level.

Continued concerns over sovereign debt levels in the United States and Europe, and the possible negative implications to banks and the global economy arising out of the European debt crisis, could adversely impact the U.S. economy, consumer confidence and demand for new and used vehicles.
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 33,914 units in new vehicle inventory at September 30, 2011, 48,499 units at December 31, 2010, and 41,788 units at September 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. Our used vehicle inventory balance was net of cumulative write-downs of $0.7 million at September 30, 2011, and $0.4 million at December 31, 2010.
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 $3.1 million at September 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.
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 and other intangible assets as of April 30, 2011, and no impairment charges resulted from the required impairment test.
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.
As of September 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.

20


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.
As of September 30, 2011, we had long-lived assets held for sale of $81.9 million in continuing operations and $49.5 million in discontinued operations.
We recorded no impairment charges during the three and nine months ended September 30, 2011, associated with assets held and used or assets held for sale in continuing operations. During the nine months ended September 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. We recorded no impairment charges during the three months ended September 30, 2011, associated with assets held for sale in discontinued operations.
The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, which considered information from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets. 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.

21


Reported Operating Data
Historical operating results include the results of acquired businesses from the date of acquisition.
 
($ in millions, except per vehicle data)
Three Months Ended September 30,
 
Nine Months Ended September 30,
2011
 
2010
 
Variance
Favorable /
(Unfavorable)
 
%
Variance
 
2011
 
2010
 
Variance
Favorable /
(Unfavorable)
 
%
Variance
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle
$
1,881.6

 
$
1,773.3

 
$
108.3

 
6.1

 
$
5,413.3

 
$
4,890.4

 
$
522.9

 
10.7

Used vehicle
911.9

 
812.4

 
99.5

 
12.2

 
2,630.6

 
2,327.7

 
302.9

 
13.0

Parts and service
578.0

 
564.1

 
13.9

 
2.5

 
1,720.0

 
1,648.9

 
71.1

 
4.3

Finance and insurance, net
121.9

 
111.9

 
10.0

 
8.9

 
349.6

 
311.9

 
37.7

 
12.1

Other
13.1

 
12.2

 
0.9

 
 
 
40.4

 
35.9

 
4.5

 
 
Total revenue
$
3,506.5

 
$
3,273.9

 
$
232.6

 
7.1

 
$
10,153.9

 
$
9,214.8

 
$
939.1

 
10.2

Gross profit:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle
$
138.2

 
$
111.9

 
$
26.3

 
23.5

 
$
400.2

 
$
323.7

 
$
76.5

 
23.6

Used vehicle
66.5

 
69.2

 
(2.7
)
 
(3.9
)
 
223.2

 
205.0

 
18.2

 
8.9

Parts and service
241.9

 
245.6

 
(3.7
)
 
(1.5
)
 
731.6

 
721.6

 
10.0

 
1.4

Finance and insurance
121.9

 
111.9

 
10.0

 
8.9

 
349.6

 
311.9

 
37.7

 
12.1

Other
6.7

 
6.8

 
(0.1
)
 
 
 
20.2

 
20.8

 
(0.6
)
 
 
Total gross profit
575.2

 
545.4

 
29.8

 
5.5

 
1,724.8

 
1,583.0

 
141.8

 
9.0

Selling, general and administrative expenses
411.4

 
402.9

 
(8.5
)
 
(2.1
)
 
1,236.7

 
1,159.4

 
(77.3
)
 
(6.7
)
Depreciation and amortization
20.9

 
18.7

 
(2.2
)
 
 
 
62.7

 
57.2

 
(5.5
)
 
 
Other expenses (income), net
(1.2
)
 
2.9

 
4.1

 
 
 
(3.1
)
 
4.5

 
7.6

 
 
Operating income
144.1

 
120.9

 
23.2

 
19.2

 
428.5

 
361.9

 
66.6

 
18.4

Floorplan interest expense
(9.7
)
 
(10.8
)
 
1.1

 
 
 
(31.8
)
 
(30.2
)
 
(1.6
)
 
 
Other interest expense
(16.4
)
 
(16.1
)
 
(0.3
)
 
 
 
(48.6
)
 
(39.8
)
 
(8.8
)
 
 
Loss on debt extinguishment

 

 

 
 
 

 
(19.6
)
 
19.6

 
 
Interest income

 
0.3

 
(0.3
)
 
 
 
0.6

 
0.8

 
(0.2
)
 
 
Other losses, net
(2.4
)
 
(0.7
)
 
(1.7
)
 
 
 
(0.2
)
 
(1.1
)
 
0.9

 
 
Income from continuing operations before income taxes
$
115.6

 
$
93.6

 
$
22.0

 
23.5

 
$
348.5

 
$
272.0

 
$
76.5

 
28.1

Retail vehicle unit sales:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle
56,309

 
56,121

 
188

 
0.3

 
163,843

 
153,305

 
10,538

 
6.9

Used vehicle
44,226

 
42,904

 
1,322

 
3.1

 
129,148

 
121,020

 
8,128

 
6.7

 
100,535

 
99,025

 
1,510

 
1.5

 
292,991

 
274,325

 
18,666

 
6.8

Revenue per vehicle retailed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New vehicle
$
33,416

 
$
31,598

 
$
1,818

 
5.8

 
$
33,040

 
$
31,900

 
$
1,140

 
3.6

Used vehicle
$
17,648

 
$
17,073

 
$
575

 
3.4

 
$
17,762