AutoNation (AN)

 

Our results of operations for 2008 reflected a challenging and volatile automotive retail market impacted by the unfavorable economic conditions in the United States, including the continued turbulence in the credit and housing markets. Volatility in fuel prices impacted consumer preferences and caused dramatic swings in consumer demand for various vehicle models, which led to supply and demand imbalances. Additionally, tight credit conditions limited the ability of some of our customers to purchase vehicles as well as finance and insurance products. In the fourth quarter of 2008, the seasonally adjusted annual rate (“SAAR”) of new vehicle sales in the United States was 10.3 million. In comparison, full-year U.S. industry new vehicle sales were 13.2 million in 2008 and 16.1 million in 2007. Industry analysts expect that the 2009 SAAR will be in the range of 11 million new vehicle units with weakness in the first half of the year. Based on these expectations, we believe that we will be able to manage within all financial covenants in our debt agreements. See “Liquidity and Capital Resources — Restrictions and Covenants” below.

 

While the domestic manufacturers have underperformed relative to their import and premium luxury competitors over the past several years, the performance gap widened in 2008, due in part to the unfavorable economic conditions in the United States, which disproportionately impacted the domestic manufacturers. Recent government assistance has been provided to certain domestic manufacturers, but the future viability of some or all of the domestic manufacturers may be dependent on additional government assistance. The bankruptcy of one or more of the domestic manufacturers could have a material adverse effect on us. For example, the manufacturers could attempt to terminate our floorplan financing and all or certain of our domestic franchises, we may be unable to collect accounts receivable from the manufacturers, and we may be required to incur impairment charges with respect to the inventory, fixed assets, and intangible assets related to our domestic franchises. At December 31, 2008, we had approximately $49.3 million in accounts receivable, $768.1 million of inventory, $721.8 million of fixed assets, and $178.3 million of goodwill and other intangible assets related to our domestic franchises. Additionally, there are uncertainties surrounding the potential impact of a domestic manufacturer bankruptcy, such as the impact on warranties provided to vehicle purchasers and the availability of parts and services needed to maintain and repair vehicles. As a result, the impact of such a bankruptcy on our financial condition and results of operations is not determinable at this time. See the risk factor “We are dependent upon the success and continued financial viability of the vehicle manufacturers and distributors with which we hold franchises” in Part I, Item 1A of this Form 10-K.

 

As part of our continuing response to the ongoing market challenges, in July 2008, we announced a cost reduction plan with a targeted annualized run-rate savings of approximately $100 million. In the fourth quarter of 2008, in response to the turmoil in the credit markets and the related impact on the automotive retail market, we expanded our cost reduction plan and implemented additional actions that enabled us to reduce our annualized costs by an additional $100 million. Accordingly, at December 31, 2008, we had reduced our costs by approximately $200 million on an annualized run-rate basis.

 

 

Our results of operations for 2008 reflected a challenging and
volatile automotive retail market impacted by the unfavorable
economic conditions in the United States, including the
continued turbulence in the credit and housing markets.
Volatility in fuel prices impacted consumer preferences and
caused dramatic swings in consumer demand for various vehicle
models, which led to supply and demand imbalances. Additionally,
tight credit conditions limited the ability of some of our
customers to purchase vehicles as well as finance and insurance
products. In the fourth quarter of 2008, the seasonally adjusted
annual rate (“SAAR”) of new vehicle sales in the
United States was 10.3 million. In comparison, full-year
U.S. industry new vehicle sales were 13.2 million in 2008
and 16.1 million in 2007. Industry analysts expect that the
2009 SAAR will be in the range of 11 million new vehicle
units with weakness in the first half of the year. Based on
these expectations, we believe that we will be able to manage
within all financial covenants in our debt agreements. See
“Liquidity and Capital Resources — Restrictions
and Covenants” below.

 

While the domestic manufacturers have underperformed relative to
their import and premium luxury competitors over the past
several years, the performance gap widened in 2008, due in part
to the unfavorable economic conditions in the United States,
which disproportionately impacted the domestic manufacturers.
Recent government assistance has been provided to certain
domestic manufacturers, but the future viability of some or all
of the domestic manufacturers may be dependent on additional
government assistance. The bankruptcy of one or more of the
domestic manufacturers could have a material adverse effect on
us. For example, the manufacturers could attempt to terminate
our floorplan financing and all or certain of our domestic
franchises, we may be unable to collect accounts receivable from
the manufacturers, and we may be required to incur impairment
charges with respect to the inventory, fixed assets, and
intangible assets related to our domestic franchises. At
December 31, 2008, we had approximately $49.3 million
in accounts receivable, $768.1 million of inventory,
$721.8 million of fixed assets, and $178.3 million of
goodwill and other intangible assets related to our domestic
franchises. Additionally, there are uncertainties surrounding
the potential impact of a domestic manufacturer bankruptcy, such
as the impact on warranties provided to vehicle purchasers and
the availability of parts and services needed to maintain and
repair vehicles. As a result, the impact of such a bankruptcy on
our financial condition and results of operations is not
determinable at this time. See the risk factor “We are
dependent upon the success and continued financial viability of
the vehicle manufacturers and distributors with which we hold
franchises” in Part I, Item 1A of this
Form 10-K.

 

As part of our continuing response to the ongoing market
challenges, in July 2008, we announced a cost reduction plan
with a targeted annualized run-rate savings of approximately
$100 million. In the fourth quarter of 2008, in response to
the turmoil in the credit markets and the related impact on the
automotive retail market, we expanded our cost reduction plan
and implemented additional actions that enabled us to reduce our
annualized costs by an additional $100 million.
Accordingly, at December 31, 2008, we had reduced our costs
by approximately $200 million on an annualized run-rate
basis.