Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations. We may still be able to incur more debt, intensifying these risks. for AutoNation (AN)

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AN » Topics » Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations. We may still be able to incur more debt, intensifying these risks.

This excerpt taken from the AN 10-K filed Feb 17, 2010.

Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations.

As of December 31, 2009, we had approximately $1.1 billion of total indebtedness (including amounts outstanding under our mortgage facility and capital leases but excluding floorplan financing), and our subsidiaries also had $1.4 billion of floorplan financing. Our substantial indebtedness could have important consequences. For example:

•

We may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

•

We may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions, and other general corporate activities;

•

Covenants relating to our indebtedness may limit our ability to obtain financing for working capital, capital expenditures, acquisitions, and other general corporate activities;

•

Covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

•

We may be more vulnerable to the impact of economic downturns and adverse developments in our business;

•

We may be placed at a competitive disadvantage against any less leveraged competitors;

•

Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise; and

•

Future share repurchases are subject to limitations contained in the indenture relating to our senior unsecured notes.

Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our intangible assets for impairment at least annually, which could result in a material, non-cash write-down of goodwill or franchise rights and could have a material adverse impact on our results of operations and shareholders’ equity.

Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value based test. See “Critical Accounting Policies and Estimates – Goodwill and Other Intangible Assets” in Part II, Item 7 of this Form 10-K for additional information regarding our impairment testing. Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. During 2008, we recorded non-cash impairment charges of $1.76 billion ($1.46 billion after-tax) associated with goodwill and franchise rights. We may be required to incur additional impairment charges in the future. Additional impairment losses could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt agreements and could have a material adverse impact on our results of operations and shareholders’ equity.

These excerpts taken from the AN 10-K filed Feb 17, 2009.

Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations.

As of December 31, 2008, we had approximately $1.3 billion of total indebtedness (including amounts outstanding under our mortgage facility and capital leases but excluding floorplan financing), and our subsidiaries also had $1.9 billion of floorplan financing. Our substantial indebtedness could have important consequences. For example:


	•	We may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

	•	We may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our ability to obtain financing for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•	We may be more vulnerable to the impact of economic downturns and adverse developments in our business;

	•	We may be placed at a competitive disadvantage against any less leveraged competitors;

	•	Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise; and

	•	Future share repurchases are subject to limitations contained in the indenture relating to our senior unsecured notes.

We are dependent upon the success and continued financial viability of the vehicle manufacturers and distributors with which we hold franchises.

The success of our stores is dependent on vehicle manufacturers in several key respects. First, we rely exclusively on the various vehicle manufacturers for our new vehicle inventory. Our ability to sell new vehicles is dependent on a vehicle manufacturer’s ability to produce and allocate to our stores an attractive, high-quality, and desirable product mix at the right time in order to satisfy customer demand. Second, manufacturers generally support their franchisees by providing direct financial assistance in various areas, including, among others, floorplan assistance and advertising assistance. Third, manufacturers provide product warranties and, in some cases, service contracts, to customers. Our stores perform warranty and service contract work for vehicles under manufacturer product warranties and service contracts, and direct bill the manufacturer as opposed to invoicing the store customer. At any particular time, we have significant receivables from manufacturers for warranty and service work performed for customers. In addition, we rely on manufacturers to varying extents for original equipment manufactured replacement parts, training, product brochures and point of sale materials, and other items for our stores.

The core brands of vehicles that we sell are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Daimler, BMW, and Chrysler. In 2008, our Ford, General Motors, and Chrysler stores represented 13%, 12%, and 5% of our new vehicle revenue, respectively. We are subject to a concentration of risk in the event of financial distress, including potential bankruptcy, of a major vehicle manufacturer such as Ford, General Motors, or Chrysler. In the event of such a bankruptcy, among other things, (i) the manufacturer could attempt to terminate our floorplan financing or all or certain of our franchises, in which case we may not receive adequate compensation for our franchises, (ii) consumer demand for their products could be materially adversely affected, (iii) we may be unable to obtain financing for our new vehicle inventory, or to arrange

financing for our customers for their vehicle purchases and leases, through the manufacturer’s captive finance subsidiary, in which case we would be required to seek financing with alternate finance sources, which may be difficult to obtain on similar terms, if at all, and (iv) we may be unable to collect some or all of our significant receivables that are due from such manufacturers and we may be subject to preference claims relating to payments made by manufacturers prior to bankruptcy. Additionally, these events may result in us being required to incur impairment charges with respect to the inventory, fixed assets, and intangible assets related to certain franchises, which could adversely impact our results of operations, financial condition, and our ability to remain in compliance with the financial ratios contained in our debt agreements.

Vehicle manufacturers may be adversely impacted by economic downturns or recessions, significant declines in the sales of their new vehicles, increases in interest rates, declines in their credit ratings, labor strikes or similar disruptions (including within their major suppliers), supply shortages or rising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products (including due to bankruptcy), product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, governmental laws and regulations, or other adverse events. In 2008, vehicle manufacturers, in particular domestic manufacturers, were adversely impacted by the unfavorable economic conditions in the United States. See “Market Challenges” in Part II, Item 7 of this Form 10-K.

Additionally, vehicle manufacturers are subject to federally mandated corporate average fuel economy standards, which will increase substantially as a result of legislation passed in 2007. California and other states, in an effort to reduce greenhouse gases, have enacted, or proposed to enact, automotive emissions standards through legislation or regulations that, pending an expected waiver from the federal government, could significantly increase fuel economy requirements in those states. Significant increases in fuel economy requirements or automotive emissions standards could materially adversely affect the ability of the manufacturers to produce and our ability to sell vehicles in demand by consumers at affordable prices, particularly larger vehicles, which represent a significant portion of our business. These and other risks could materially adversely affect any manufacturer and impact its ability to profitably design, market, produce, or distribute new vehicles, which in turn could materially adversely affect our ability to obtain or finance our desired new vehicle inventories, our ability to take advantage of manufacturer financial assistance programs, our ability to collect in full or on a timely basis our manufacturer warranty and other receivables, and/or our ability to obtain other goods and services provided by the impacted manufacturer. Our business, results of operations, financial condition, shareholders’ equity, cash flows, and prospects could be materially adversely affected as a result of any event that has a material adverse effect on the vehicle manufacturers or distributors who are our primary franchisors.

Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. During 2008, we recorded non-cash impairment charges of $1.76 billion ($1.46 billion after-tax) associated with goodwill and franchise rights. We may be required to incur additional impairment charges in the future. Additional impairment losses could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt agreements and could have a material adverse impact on our results of operations and shareholders’ equity.

Our
substantial indebtedness could adversely affect our financial
condition and operations and prevent us from fulfilling our debt
service obligations.

As of December 31, 2008, we had approximately
$1.3 billion of total indebtedness (including amounts
outstanding under our mortgage facility and capital leases but
excluding floorplan financing), and our subsidiaries also had
$1.9 billion of floorplan financing. Our substantial
indebtedness could have important consequences. For example:


	•	We may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

	•	We may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our ability to obtain financing for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•	We may be more vulnerable to the impact of economic downturns and adverse developments in our business;

	•	We may be placed at a competitive disadvantage against any less leveraged competitors;

	•	Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise; and

	•	Future share repurchases are subject to limitations contained in the indenture relating to our senior unsecured notes.

We are
dependent upon the success and continued financial viability of
the vehicle manufacturers and distributors with which we hold
franchises.

The success of our stores is dependent on vehicle manufacturers
in several key respects. First, we rely exclusively on the
various vehicle manufacturers for our new vehicle inventory. Our
ability to sell new vehicles is dependent on a vehicle
manufacturer’s ability to produce and allocate to our
stores an attractive, high-quality, and desirable product mix at
the right time in order to satisfy customer demand. Second,
manufacturers generally support their franchisees by providing
direct financial assistance in various areas, including, among
others, floorplan assistance and advertising assistance. Third,
manufacturers provide product warranties and, in some cases,
service contracts, to customers. Our stores perform warranty and
service contract work for vehicles under manufacturer product
warranties and service contracts, and direct bill the
manufacturer as opposed to invoicing the store customer. At any
particular time, we have significant receivables from
manufacturers for warranty and service work performed for
customers. In addition, we rely on manufacturers to varying
extents for original equipment manufactured replacement parts,
training, product brochures and point of sale materials, and
other items for our stores.

The core brands of vehicles that we sell are manufactured by
Toyota, Ford, Honda, Nissan, General Motors, Daimler, BMW, and
Chrysler. In 2008, our Ford, General Motors, and Chrysler stores
represented 13%, 12%, and 5% of our new vehicle revenue,
respectively. We are subject to a concentration of risk in the
event of financial distress, including potential bankruptcy, of
a major vehicle manufacturer such as Ford, General Motors, or
Chrysler. In the event of such a bankruptcy, among other things,
(i) the manufacturer could attempt to terminate our
floorplan financing or all or certain of our franchises, in
which case we may not receive adequate compensation for our
franchises, (ii) consumer demand for their products could
be materially adversely affected, (iii) we may be unable to
obtain financing for our new vehicle inventory, or to arrange

financing for our customers for their vehicle purchases and
leases, through the manufacturer’s captive finance
subsidiary, in which case we would be required to seek financing
with alternate finance sources, which may be difficult to obtain
on similar terms, if at all, and (iv) we may be unable to
collect some or all of our significant receivables that are due
from such manufacturers and we may be subject to preference
claims relating to payments made by manufacturers prior to
bankruptcy. Additionally, these events may result in us being
required to incur impairment charges with respect to the
inventory, fixed assets, and intangible assets related to
certain franchises, which could adversely impact our results of
operations, financial condition, and our ability to remain in
compliance with the financial ratios contained in our debt
agreements.

Vehicle manufacturers may be adversely impacted by economic
downturns or recessions, significant declines in the sales of
their new vehicles, increases in interest rates, declines in
their credit ratings, labor strikes or similar disruptions
(including within their major suppliers), supply shortages or
rising raw material costs, rising employee benefit costs,
adverse publicity that may reduce consumer demand for their
products (including due to bankruptcy), product defects, vehicle
recall campaigns, litigation, poor product mix or unappealing
vehicle design, governmental laws and regulations, or other
adverse events. In 2008, vehicle manufacturers, in particular
domestic manufacturers, were adversely impacted by the
unfavorable economic conditions in the United States. See
“Market Challenges” in Part II, Item 7 of
this
Form 10-K.

Additionally, vehicle manufacturers are subject to federally
mandated corporate average fuel economy standards, which will
increase substantially as a result of legislation passed in
2007. California and other states, in an effort to reduce
greenhouse gases, have enacted, or proposed to enact, automotive
emissions standards through legislation or regulations that,
pending an expected waiver from the federal government, could
significantly increase fuel economy requirements in those
states. Significant increases in fuel economy requirements or
automotive emissions standards could materially adversely affect
the ability of the manufacturers to produce and our ability to
sell vehicles in demand by consumers at affordable prices,
particularly larger vehicles, which represent a significant
portion of our business. These and other risks could materially
adversely affect any manufacturer and impact its ability to
profitably design, market, produce, or distribute new vehicles,
which in turn could materially adversely affect our ability to
obtain or finance our desired new vehicle inventories, our
ability to take advantage of manufacturer financial assistance
programs, our ability to collect in full or on a timely basis
our manufacturer warranty and other receivables,
and/or our
ability to obtain other goods and services provided by the
impacted manufacturer. Our business, results of operations,
financial condition, shareholders’ equity, cash flows, and
prospects could be materially adversely affected as a result of
any event that has a material adverse effect on the vehicle
manufacturers or distributors who are our primary franchisors.

Goodwill
and other intangible assets comprise a significant portion of
our total assets. We must test our intangible assets for
impairment at least annually, which could result in a material,
non-cash write-down of goodwill or franchise rights and could
have a material adverse impact on our results of operations and
shareholders’ equity.

Goodwill and indefinite-lived intangibles are subject to
impairment assessments at least annually (or more frequently
when events or circumstances indicate that an impairment may
have occurred) by applying a fair-value based test. Our
principal intangible assets are goodwill and our rights under
our franchise agreements with vehicle manufacturers. During
2008, we recorded non-cash impairment charges of
$1.76 billion ($1.46 billion after-tax) associated
with goodwill and franchise rights. We may be required to incur
additional impairment charges in the future. Additional
impairment losses could have an adverse impact on our ability to
satisfy the financial ratios or other covenants under our debt
agreements and could have a material adverse impact on our
results of operations and shareholders’ equity.

These excerpts taken from the AN 10-K filed Feb 28, 2008.

Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations. We may still be able to incur more debt, intensifying these risks.

As of December 31, 2007, we had approximately $1.8 billion of total indebtedness (including amounts outstanding under our mortgage facility and capital leases but excluding floorplan financing), and our subsidiaries also had $2.2 billion of floorplan financing. In addition, we had the ability to borrow $361.2 million additional indebtedness under our revolving credit facility. Our substantial indebtedness could have important consequences. For example:


	•	We may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

	•	We may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our ability to obtain financing for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•	We may be more vulnerable to the impact of economic downturns and adverse developments in our business;

	•	We may be placed at a competitive disadvantage against any less leveraged competitors;

	•	Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise; and

	•	Our future share repurchases are subject to limitations contained in the indenture relating to our senior unsecured notes.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects, and ability to satisfy our debt service obligations. Subject to restrictions in the indenture governing our senior unsecured notes and in the amended credit agreement governing our revolving credit facility and term loan facility, we may incur additional indebtedness, which could increase the risks associated with our already substantial indebtedness.

Our
substantial indebtedness could adversely affect our financial
condition and operations and prevent us from fulfilling our debt
service obligations. We may still be able to incur more debt,
intensifying these risks.

As of December 31, 2007, we had approximately
$1.8 billion of total indebtedness (including amounts
outstanding under our mortgage facility and capital leases but
excluding floorplan financing), and our subsidiaries also had
$2.2 billion of floorplan financing. In addition, we had
the ability to borrow $361.2 million additional
indebtedness under our revolving credit facility. Our
substantial indebtedness could have important consequences. For
example:


	•	We may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

	•	We may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our ability to obtain financing for working capital, capital expenditures, acquisitions, and other general corporate activities;

	•	Covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•	We may be more vulnerable to the impact of economic downturns and adverse developments in our business;

	•	We may be placed at a competitive disadvantage against any less leveraged competitors;

	•	Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise; and

	•	Our future share repurchases are subject to limitations contained in the indenture relating to our senior unsecured notes.

The occurrence of any one of these events could have a material
adverse effect on our business, financial condition, results of
operations, prospects, and ability to satisfy our debt service
obligations. Subject to restrictions in the indenture governing
our senior unsecured notes and in the amended credit agreement
governing our revolving credit facility and term loan facility,
we may incur additional indebtedness, which could increase the
risks associated with our already substantial indebtedness.

This excerpt taken from the AN 10-K filed Feb 28, 2007.

As of December 31, 2006, we had approximately $1.6 billion of total indebtedness (including amounts outstanding under our mortgage facility and capital leases but excluding floorplan financing), and our subsidiaries also had $2.3 billion of floorplan financing. In addition, we had the ability to borrow $413 million additional indebtedness under our revolving credit facility. Our substantial indebtedness could have important consequences. For example:


	•	we may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of default could result;

	•	we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions and other general corporate activities;

	•	covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate activities;


	•	covenants relating to our indebtedness may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

	•	we may be more vulnerable to the impact of economic downturns and adverse developments in our business;

	•	we may be placed at a competitive disadvantage against any less leveraged competitors; and

	•	our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense will increase if interest rates rise.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our debt service obligations. Subject to restrictions in the indenture governing our new senior unsecured notes and in the amended credit agreement governing our revolving credit facility and term loan facility, we may incur additional indebtedness, which could increase the risks associated with our already substantial indebtedness.

Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our intangible assets for impairment at least annually, which may result in a material, non-cash write down of goodwill or franchise rights and could have a material adverse impact on our results of operations and shareholders’ equity.

Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. These impairment assessments may result in a material, non-cash write-down of goodwill or franchise values. An impairment would have a material adverse impact on our results of operations and shareholders’ equity.

EXCERPTS ON THIS PAGE:

10-K	Feb 17, 2010

10-K (2 sections)	Feb 17, 2009

10-K (2 sections)	Feb 28, 2008

10-K	Feb 28, 2007

AutoNation (AN)

AN » Topics » Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations. We may still be able to incur more debt, intensifying these risks.

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