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AUTONATION, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. 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. OverviewAutoNation, Inc. , through its subsidiaries, is the largest automotive retailer inthe United States . As ofJune 30, 2013 , we owned and operated 265 new vehicle franchises from 224 stores located inthe United States , predominantly in major metropolitan markets in the Sunbelt region. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 32 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 96% of the new vehicles that we sold during the six months endedJune 30, 2013 , are manufactured by Toyota, Ford, Honda, Nissan, General Motors,Mercedes-Benz , BMW, Chrysler, and Volkswagen. OnJanuary 31, 2013 , we announced that we would be marketing our Domestic and Import stores under theAutoNation retail brand. The rebranding of these stores, which previously operated under various local market retail brands, commenced in the first quarter of 2013 and was completed in the second quarter of 2013. We offer a diversified range of automotive products and services, including new vehicles, used vehicles, "parts and service," which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive "finance and insurance" products, which include vehicle service, insurance, and other products, as well as the arranging of 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. AtJune 30, 2013 , 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 byMercedes-Benz , BMW,Lexus , and Audi. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. For the six months endedJune 30, 2013 , new vehicle sales accounted for approximately 56% of our total revenue, but approximately 21% of our total gross profit. Used vehicle sales accounted for approximately 24% of our total revenue, and approximately 13% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 19% of our total revenue for the six months endedJune 30, 2013 , contributed approximately 65% of our total gross profit for the same period. Results of Operations Second Quarter 2013 compared to Second Quarter 2012 During the three months endedJune 30, 2013 , we had net income from continuing operations of$90.1 million or$0.73 per share on a diluted basis, as compared to net income from continuing operations of$79.0 million or$0.64 per share on a diluted basis during the same period in 2012. Results for the three months endedJune 30, 2012 , were adversely impacted by a non-cash franchise rights impairment charge of$4.2 million ($2.6 million after-tax, or$0.02 per share). First Six Months 2013 compared to First Six Months 2012 During the six months endedJune 30, 2013 , we had net income from continuing operations of$173.3 million or$1.41 per share on a diluted basis, as compared to net income from continuing operations of$152.5 million or$1.19 per share on a diluted basis during the same period in 2012. Results for the six months endedJune 30, 2012 , were adversely impacted by a non-cash franchise rights impairment charge of$4.2 million ($2.6 million after-tax, or$0.02 per share). 18
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Market Conditions In the second quarter of 2013, U.S. industry new vehicle unit sales increased 9% compared to the second quarter of 2012, driven in part by replacement demand. Based on industry data, the average age of cars and trucks inthe United States is at a record high of 11.4 years compared to an average age of 9.8 years during the period from 2002 to 2007. While a robust consumer credit environment and an increase in new product offerings from automotive manufacturers were supportive of a strong selling environment, increased product competition, particularly in the mid-size vehicle market, pressured Import new vehicle margins. New vehicle margin compression was partially offset by an increase in finance and insurance gross profit per vehicle retailed. We continue to anticipate full-year U.S. industry new vehicle unit sales will be at the mid-15 million unit level, an improvement compared to 2012 but still below pre-recession levels. After several years of decline, the number of recent-model-year vehicles in operation, our primary service base, has stabilized due to increases in the annual rate of new vehicle sales inthe United States since 2009. As a result, our parts and service business has begun to benefit, and we expect that it will continue to benefit over the next several years as this service base is expected to gradually return to pre-recession levels. Inventory Management Our new and used vehicle inventories are stated at the lower of cost or market on our consolidated balance sheets. We monitor our vehicle inventory levels closely based on current economic conditions and seasonal sales trends. 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 64,649 units in new vehicle inventory atJune 30, 2013 , 58,819 units atDecember 31, 2012 , and 49,187 units atJune 30, 2012 . We recondition the majority of used vehicles acquired for retail sale in our parts and service departments and capitalize the related costs to the used vehicle inventory. 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. Our used vehicle inventory balance was net of cumulative write-downs of$1.1 million atJune 30, 2013 , and$1.2 million atDecember 31, 2012 . 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$3.3 million atJune 30, 2013 , and$3.2 million atDecember 31, 2012 . Critical Accounting Policies and Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted inthe 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 additional discussion of our critical accounting policies and estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10?K. Goodwill Goodwill for our Domestic, Import, and Premium Luxury reporting units is tested for impairment annually as ofApril 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. Under accounting standards, we chose to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of our reporting units under the two-step goodwill impairment test. We completed our qualitative assessment of potential goodwill impairment as ofApril 30, 2013 , and we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts. The fair values of the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as ofApril 30, 2011 , the date of our most recent quantitative annual impairment test. 19
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Other Intangible Assets Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as ofApril 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. Under accounting standards, we chose to make a qualitative evaluation about the likelihood of franchise rights impairment to determine whether it was necessary to perform a quantitative impairment test. We completed our qualitative assessment of franchise rights impairment as ofApril 30, 2013 and we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts. 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 ofJune 30, 2013 , we had long-lived assets held for sale of$71.1 million in continuing operations and$34.5 million in discontinued operations. During the three and six months endedJune 30, 2013 , no impairment charges were recorded for the carrying value of long-lived assets held and used in continuing operations, and no impairment charges were recorded for the carrying value of long-lived assets held for sale in continuing or discontinued operations. The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, which considered information from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets. See Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our fair value measurement valuation process. Although we believe our property and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets. 20
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Reported Operating Data Historical operating results include the results of acquired businesses from the date of acquisition. Three Months Ended June 30, Six Months Ended June 30, Variance Variance ($ in millions, except Favorable / % Favorable / % per vehicle data) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue: New vehicle$ 2,493.6 $ 2,196.1 $ 297.5 13.5$ 4,751.3 $ 4,190.4 $ 560.9 13.4 Retail used vehicle 954.0 829.5 124.5 15.0 1,853.2 1,630.6 222.6 13.7 Wholesale 102.5 117.9 (15.4 ) (13.1 ) 213.0 235.6 (22.6 ) (9.6 ) Used vehicle 1,056.5 947.4 109.1 11.5 2,066.2 1,866.2 200.0 10.7 Finance and insurance, 173.9 145.1 28.8 19.8 329.5 275.3 54.2 19.7 net Total variable 3,724.0 3,288.6 435.4 13.2 7,147.0 6,331.9 815.1 12.9 operations(1) Parts and service 655.9 602.5 53.4 8.9 1,292.5 1,202.4 90.1 7.5 Other 46.6 13.4 33.2 83.4 27.2 56.2 Total revenue$ 4,426.5 $ 3,904.5 $ 522.0 13.4$ 8,522.9 $ 7,561.5 $ 961.4 12.7 Gross profit: New vehicle$ 149.2 $ 145.5 $ 3.7 2.5$ 290.9 $ 279.5 $ 11.4 4.1 Retail used vehicle 83.3 75.1 8.2 10.9 166.7 153.6 13.1 8.5 Wholesale 0.8 2.0 (1.2 ) 3.4 4.6 (1.2 ) Used vehicle 84.1 77.1 7.0 9.1 170.1 158.2 11.9 7.5 Finance and insurance 173.9 145.1 28.8 19.8 329.5 275.3 54.2 19.7 Total variable 407.2 367.7 39.5 10.7 790.5 713.0 77.5 10.9 operations(1) Parts and service 280.2 253.4 26.8 10.6 552.5 503.6 48.9 9.7 Other 8.7 6.9 1.8 17.1 14.4 2.7 Total gross profit 696.1 628.0 68.1 10.8 1,360.1 1,231.0 129.1 10.5 Selling, general, and administrative expenses 494.1 438.6 (55.5 ) (12.7 ) 967.4 871.5 (95.9 ) (11.0 ) Depreciation and 23.3 20.8 (2.5 ) 46.0 42.0 (4.0 ) amortization Franchise rights - 4.2 4.2 - 4.2 4.2 impairment Other expenses (2.2 ) 0.2 2.4 (3.6 ) 0.4 4.0 (income), net Operating income 180.9 164.2 16.7 10.2 350.3 312.9 37.4 12.0 Non-operating income (expense) items: Floorplan interest (13.6 ) (10.8 ) (2.8 ) (26.5 ) (21.5 ) (5.0 ) expense Other interest expense (22.0 ) (22.5 ) 0.5 (44.3 ) (43.0 ) (1.3 ) Interest income - 0.1 (0.1 ) 0.1 0.2 (0.1 ) Other income (loss), 1.3 (1.4 ) 2.7 2.9 0.6 2.3 net Income from continuing operations before income taxes$ 146.6 $ 129.6 $ 17.0 13.1$ 282.5 $ 249.2 $ 33.3 13.4 Retail vehicle unit sales: New vehicle 74,352 66,987 7,365 11.0 141,511 128,503 13,008 10.1 Used vehicle 52,116 46,236 5,880 12.7 102,621 92,352 10,269 11.1 126,468 113,223 13,245 11.7 244,132 220,855 23,277 10.5 Revenue per vehicle retailed: New vehicle$ 33,538 $ 32,784 $ 754 2.3$ 33,575 $ 32,609 $ 966 3.0 Used vehicle$ 18,305 $ 17,941 $ 364 2.0$ 18,059 $ 17,656 $ 403 2.3 Gross profit per vehicle retailed: New vehicle$ 2,007 $ 2,172 $ (165 ) (7.6 )$ 2,056 $ 2,175 $ (119 ) (5.5 ) Used vehicle$ 1,598 $ 1,624 $ (26 ) (1.6 )$ 1,624 $ 1,663 $ (39 ) (2.3 ) Finance and insurance$ 1,375 $ 1,282 $ 93 7.3$ 1,350 $ 1,247 $ 103 8.3 Total variable$ 3,213 $ 3,230 $ (17 ) (0.5 )$ 3,224 $ 3,208 $ 16 0.5 operations(2)
(1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results. (2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales.
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Table of Contents Three Months Ended Six Months Ended June 30, June 30, 2013 (%) 2012 (%) 2013 (%) 2012 (%) Revenue mix percentages: New vehicle 56.3 56.2 55.7 55.4 Used vehicle 23.9 24.3 24.2 24.7 Parts and service 14.8 15.4 15.2 15.9 Finance and insurance, net 3.9 3.7 3.9 3.6 Other 1.1 0.4 1.0 0.4 Total 100.0 100.0 100.0 100.0 Gross profit mix percentages: New vehicle 21.4 23.2 21.4 22.7 Used vehicle 12.1 12.3 12.5 12.9 Parts and service 40.3 40.4 40.6 40.9 Finance and insurance 25.0 23.1 24.2 22.4 Other 1.2 1.0 1.3 1.1 Total 100.0 100.0 100.0 100.0 Operating items as a percentage of revenue: Gross profit: New vehicle 6.0 6.6 6.1 6.7 Used vehicle - retail 8.7 9.1 9.0 9.4 Parts and service 42.7 42.1 42.7 41.9 Total 15.7 16.1 16.0 16.3 Selling, general, and administrative expenses 11.2 11.2 11.4 11.5 Operating income 4.1 4.2 4.1 4.1 Operating items as a percentage of total gross profit: Selling, general, and administrative expenses 71.0 69.8 71.1 70.8 Operating income 26.0 26.1 25.8 25.4 June 30, June 30, 2013 2012
Days supply: New vehicle (industry standard of selling days, including fleet)
67 days 60 days Used vehicle (trailing calendar month days) 30 days 31 days The following table details net new vehicle inventory carrying benefit, consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit. Three Months Ended June 30, Six Months Ended June 30, (In millions) 2013 2012 Variance 2013 2012 Variance
Floorplan assistance
42.4$ 35.7 $ 6.7 Floorplan interest expense (new vehicles) (13.1 ) (10.3 ) (2.8 ) (25.4 ) (20.7 ) (4.7 ) Net new vehicle inventory carrying benefit$ 10.7 $ 8.2 $ 2.5 $ 17.0 $ 15.0 $ 2.0 22
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Same Store Operating Data We have presented below our operating results on a same store basis to reflect our internal performance. The "Same Store" amounts presented below include the results of our stores for the identical months in each period presented in the comparison, commencing with the first full month in which the store was owned by us. Three Months Ended June 30, Six Months Ended June 30, ($ in millions, Variance Variance except per vehicle Favorable / % Favorable / % data) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue: New vehicle $ 2,398.4$ 2,196.1 $ 202.3 9.2$ 4,586.9 $ 4,190.4 $ 396.5 9.5 Retail used vehicle 919.6 829.5 90.1 10.9 1,789.9 1,630.6 159.3 9.8 Wholesale 99.5 117.9 (18.4 ) (15.6 ) 204.5 235.6 (31.1 ) (13.2 ) Used vehicle 1,019.1 947.4 71.7 7.6 1,994.4 1,866.2 128.2 6.9 Finance and 168.6 145.1 23.5 16.2 320.1 275.3 44.8 16.3 insurance, net Total variable 3,586.1 3,288.6 297.5 9.0 6,901.4 6,331.9 569.5 9.0 operations(1) Parts and service 638.4 602.5 35.9 6.0 1,261.5 1,202.4 59.1 4.9 Other 45.9 13.4 32.5 80.1 27.2 52.9 Total revenue $ 4,270.4$ 3,904.5 $ 365.9 9.4$ 8,243.0 $ 7,561.5 $ 681.5 9.0 Gross profit: New vehicle $ 143.1$ 145.5 $ (2.4 ) (1.6 )$ 280.0 $ 279.5 $ 0.5 0.2 Retail used vehicle 80.9 75.1 5.8 7.7 161.9 153.6 8.3 5.4 Wholesale 1.0 2.0 (1.0 ) 3.4 4.6 (1.2 ) Used vehicle 81.9 77.1 4.8 6.2 165.3 158.2 7.1 4.5 Finance and insurance 168.6 145.1 23.5 16.2 320.1 275.3 44.8 16.3 Total variable 393.6 367.7 25.9 7.0 765.4 713.0 52.4 7.3 operations(1) Parts and service 272.2 253.4 18.8 7.4 538.5 503.6 34.9 6.9 Other 8.7 6.9 1.8 17.1 14.4 2.7 Total gross profit $ 674.5$ 628.0 $ 46.5 7.4$ 1,321.0 $ 1,231.0 $ 90.0 7.3 Retail vehicle unit sales: New vehicle 71,696 66,987 4,709 7.0 136,988 128,503 8,485 6.6 Used vehicle 50,377 46,236 4,141 9.0 99,578 92,352 7,226 7.8 122,073 113,223 8,850 7.8 236,566 220,855 15,711 7.1 Revenue per vehicle retailed: New vehicle $ 33,452$ 32,784 $ 668 2.0$ 33,484 $ 32,609 $ 875 2.7 Used vehicle $ 18,254$ 17,941 $ 313 1.7$ 17,975 $ 17,656 $ 319 1.8 Gross profit per vehicle retailed: New vehicle $ 1,996$ 2,172 $ (176 ) (8.1 )$ 2,044 $ 2,175 $ (131 ) (6.0 ) Used vehicle $ 1,606$ 1,624 $ (18 ) (1.1 )$ 1,626 $ 1,663 $ (37 ) (2.2 ) Finance and insurance $ 1,381$ 1,282 $ 99 7.7$ 1,353 $ 1,247 $ 106 8.5 Total variable $ 3,216$ 3,230 $ (14 ) (0.4 )$ 3,221 $ 3,208 $ 13 0.4 operations(2)
(1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results. (2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales.
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Table of Contents Three Months Ended Six Months Ended June 30, June 30, 2013 (%) 2012 (%) 2013 (%) 2012 (%) Revenue mix percentages: New vehicle 56.2 56.2 55.6 55.4 Used vehicle 23.9 24.3 24.2 24.7 Parts and service 14.9 15.4 15.3 15.9 Finance and insurance, net 3.9 3.7 3.9 3.6 Other 1.1 0.4 1.0 0.4 Total 100.0 100.0 100.0 100.0 Gross profit mix percentages: New vehicle 21.2 23.2 21.2 22.7 Used vehicle 12.1 12.3 12.5 12.9 Parts and service 40.4 40.4 40.8 40.9 Finance and insurance 25.0 23.1 24.2 22.4 Other 1.3 1.0 1.3 1.1 Total 100.0 100.0 100.0 100.0 Operating items as a percentage of revenue: Gross profit: New vehicle 6.0 6.6 6.1 6.7 Used vehicle - retail 8.8 9.1 9.0 9.4 Parts and service 42.6 42.1 42.7 41.9 Total 15.8 16.1 16.0 16.3 24
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Table of Contents New Vehicle Three Months Ended June 30, Six Months Ended June 30, Variance Variance ($ in millions, except Favorable / % Favorable / % per vehicle data) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Reported: Revenue$ 2,493.6 $ 2,196.1 $ 297.5 13.5$ 4,751.3 $ 4,190.4 $ 560.9 13.4 Gross profit$ 149.2 $ 145.5 $ 3.7 2.5$ 290.9 $ 279.5 $ 11.4 4.1 Retail vehicle unit sales 74,352 66,987 7,365 11.0 141,511 128,503 13,008 10.1 Revenue per vehicle retailed$ 33,538 $ 32,784 $ 754 2.3$ 33,575 $ 32,609 $ 966 3.0 Gross profit per vehicle retailed$ 2,007 $ 2,172</money> $ (165 ) (7.6 )$ 2,056 $ 2,175 $ (119 ) (5.5 ) Gross profit as a percentage of revenue 6.0 % 6.6 % 6.1 % 6.7 % Days supply (industry standard of selling days, including fleet) 67 days 60 days Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / % 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Same Store: Revenue$ 2,398.4 $ 2,196.1 $ 202.3 9.2$ 4,586.9 $ 4,190.4 $ 396.5 9.5 Gross profit$ 143.1 $ 145.5 $ (2.4 ) (1.6 )$ 280.0 $ 279.5 $ 0.5 0.2 Retail vehicle unit sales 71,696 66,987 4,709 7.0 136,988 128,503 8,485 6.6 Revenue per vehicle retailed$ 33,452 $ 32,784 $ 668 2.0$ 33,484 $ 32,609 $ 875 2.7 Gross profit per vehicle retailed$ 1,996 $ 2,172 $ (176 ) (8.1 )$ 2,044 $ 2,175 $ (131 ) (6.0 ) Gross profit as a percentage of revenue 6.0 % 6.6 % 6.1 % 6.7 % Second Quarter 2013 compared to Second Quarter 2012 Same store new vehicle revenue increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, as a result of an increase in same store unit volume and an increase in revenue per new vehicle retailed. The increase in same store unit volume was primarily due to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted same store unit volume. Same store revenue per new vehicle retailed during the three months endedJune 30, 2013 , benefited from an increase in the average selling prices for new vehicles in all three segments, as well as a shift in mix away from import vehicles, which have relatively lower average selling prices. Same store gross profit per new vehicle retailed decreased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to a decrease in gross profit per vehicle retailed for Import vehicles as a result of increased product competition, particularly in the mid-size vehicle market. First Six Months 2013 compared to First Six Months 2012 Same store new vehicle revenue increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, as a result of an increase in same store unit volume and an increase in revenue per new vehicle retailed. The increase in same store unit volume was primarily due to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted same store unit volume. Same store revenue per new vehicle retailed during the six months endedJune 30, 2013 , benefited from an increase in the average selling prices for new vehicles in all three segments, as well as a shift in mix away from import vehicles, which have relatively lower average selling prices. Same store gross profit per new vehicle retailed decreased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to a decrease in gross profit per vehicle retailed for Import vehicles as a result of increased product competition, particularly in the mid-size vehicle market. 25
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New Vehicle Inventories Our new vehicle inventories were$2.1 billion or 67 days supply atJune 30, 2013 , as compared to new vehicle inventories of$1.9 billion or 55 days supply atDecember 31, 2012 and$1.6 billion or 60 days supply atJune 30, 2012 . We had 64,649 units in new vehicle inventory atJune 30, 2013 , 58,819 units atDecember 31, 2012 , and 49,187 units atJune 30, 2012 . The following table details net new vehicle inventory carrying benefit, consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit. Three Months Ended June 30, Six Months Ended June 30, (In millions) 2013 2012 Variance 2013 2012 Variance
Floorplan assistance
42.4$ 35.7 $ 6.7 Floorplan interest expense (new vehicles) (13.1 ) (10.3 ) (2.8 ) (25.4 ) (20.7 ) (4.7 ) Net new vehicle inventory carrying benefit$ 10.7 $ 8.2 $ 2.5 $
17.0
Second Quarter 2013 compared to Second Quarter 2012 The net new vehicle inventory carrying benefit increased during the three months endedJune 30, 2013 , as compared to the same period in 2012 primarily due to an increase in floorplan assistance, partially offset by an increase in floorplan interest expense. Floorplan assistance increased primarily due to a change in a manufacturer floorplan assistance program and higher new vehicle sales. Floorplan interest expense increased due to higher average vehicle floorplan payable balances during the year, partially offset by lower negotiated floorplan interest rates. First Six Months 2013 compared to First Six Months 2012 The net new vehicle inventory carrying benefit increased during the six months endedJune 30, 2013 , as compared to the same period in 2012 primarily due to an increase in floorplan assistance, partially offset by an increase in floorplan interest expense. Floorplan assistance increased primarily due to higher new vehicle sales and a change in a manufacturer floorplan assistance program. Floorplan interest expense increased due to higher average vehicle floorplan payable balances during the year, partially offset by lower negotiated floorplan interest rates. 26
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Used Vehicle Three Months Ended June 30, Six Months Ended June 30, ($ in millions, Variance Variance except per vehicle Favorable / % Favorable / % data) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Reported: Retail revenue$ 954.0 $ 829.5 $ 124.5 15.0
(15.4 ) (13.1 ) 213.0 235.6 (22.6 ) (9.6 )
Total revenue
0.8 2.0 (1.2 ) 3.4 4.6 (1.2 )
Total gross profit
52,116 46,236 5,880 12.7 102,621 92,352 10,269 11.1 Revenue per vehicle retailed$ 18,305 $ 17,941 $ 364 2.0$ 18,059 $ 17,656 $ 403 2.3 Gross profit per vehicle retailed$ 1,598 $ 1,624 $ (26 ) (1.6 )$ 1,624 $ 1,663 $ (39 ) (2.3 ) Gross profit as a percentage of revenue 8.7 % 9.1 % 9.0 % 9.4 % Days supply (trailing calendar month days) 30 days 31 days Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / % 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Same Store: Retail revenue$ 919.6 $ 829.5 $ 90.1 10.9
(18.4 ) (15.6 ) 204.5 235.6 (31.1 ) (13.2 )
Total revenue
1.0 2.0 (1.0 ) 3.4 4.6 (1.2 )
Total gross profit
50,377 46,236 4,141 9.0 99,578 92,352 7,226 7.8 Revenue per vehicle retailed$ 18,254 $ 17,941 $ 313 1.7$ 17,975 $ 17,656 $ 319 1.8 Gross profit per vehicle retailed$ 1,606 $ 1,624 $ (18 ) (1.1 )$ 1,626 $ 1,663 $ (37 ) (2.2 ) Gross profit as a percentage of revenue 8.8 % 9.1 %
9.0 % 9.4 %
Second Quarter 2013 compared to Second Quarter 2012 Same store retail used vehicle revenue increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in same store unit volume and an increase in revenue per used vehicle retailed. Used vehicle unit volume benefited from an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume. Same store revenue per used vehicle retailed increased during the three months endedJune 30, 2013 , due in part to an increase in the average selling price for domestic and premium luxury vehicles, as well as an increase in sales of certified pre-owned vehicles, which have relatively higher average selling prices. Same store gross profit per used vehicle retailed decreased during the three months endedJune 30, 2013 , as compared to the same period in 2012, due in part to compressed margins on certified pre-owned vehicles for premium luxury vehicles. First Six Months 2013 compared to First Six Months 2012 Same store retail used vehicle revenue increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in same store unit volume and an increase in revenue per used vehicle retailed. Used vehicle unit volume benefited from an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume. Same store revenue per used vehicle retailed increased during the six months endedJune 30, 2013 , due in part to an increase in the average selling price for domestic and premium luxury vehicles, as well as an increase in sales of certified pre-owned vehicles, which have relatively higher average selling prices. 27
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Same store gross profit per used vehicle retailed decreased during the six months ended
Used Vehicle Inventories Used vehicle inventories were$360.6 million or 30 days supply atJune 30, 2013 , compared to$318.7 million or 35 days supply atDecember 31, 2012 , and$323.3 million or 31 days supply atJune 30, 2012 . 28
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Parts and Service
Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / %
($ in millions) 2013 2012 (Unfavorable) Variance
2013 2012 (Unfavorable) Variance Reported: Revenue$ 655.9 $ 602.5 $ 53.4 8.9$ 1,292.5 $ 1,202.4 $ 90.1 7.5 Gross Profit$ 280.2 $ 253.4 $ 26.8 10.6
42.7 % 41.9 % Same Store: Revenue$ 638.4 $ 602.5 $ 35.9 6.0
42.7 % 41.9 %
Parts and service revenue is primarily derived from vehicle repairs paid directly by customers or via reimbursement from manufacturers and others under warranty programs, as well as from wholesale parts sales and collision businesses. Second Quarter 2013 compared to Second Quarter 2012 During the three months endedJune 30, 2013 , same store parts and service gross profit increased as compared to the same period in 2012, primarily due to increases in gross profit associated with warranty of$8.0 million , customer-pay service of$5.8 million , and the preparation of vehicles for sale of$4.1 million . Warranty gross profit benefited from an increase in warranty service related to increased units in operation in our primary service base and the rise of manufacturer recalls in the automotive industry, as well as an increase in manufacturer-paid vehicle maintenance. See "Market Conditions." Customer-pay service gross profit benefited from improved operational execution, improved margin performance, and better marketing of products and services in the service department. Gross profit associated with the preparation of vehicles for sale benefited from higher new and used vehicle sales volume. First Six Months 2013 compared to First Six Months 2012 During the six months endedJune 30, 2013 , same store parts and service gross profit increased as compared to the same period in 2012, primarily due to increases in gross profit associated with warranty of$14.0 million , customer-pay service of$10.2 million , and the preparation of vehicles for sale of$8.5 million . Warranty gross profit benefited from an increase in warranty service related to increased units in operation in our primary service base and the rise of manufacturer recalls in the automotive industry, as well as an increase in manufacturer-paid vehicle maintenance. See "Market Conditions." Customer-pay service gross profit benefited from improved operational execution, improved margin performance, and better marketing of products and services in the service department. Gross profit associated with the preparation of vehicles for sale benefited from higher new and used vehicle sales volume. 29
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Table of Contents Finance and Insurance Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / % ($ in millions, except per vehicle data) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Reported: Revenue and gross profit$ 173.9 $ 145.1 $
28.8 19.8
93 7.3$ 1,350 $ 1,247 $ 103 8.3 Same Store: Revenue and gross profit$ 168.6 $ 145.1 $
23.5 16.2
99 7.7$ 1,353 $ 1,247 $ 106 8.5 Second Quarter 2013 compared to Second Quarter 2012 Same store finance and insurance revenue and gross profit increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, due to increases in same store finance and insurance revenue and gross profit per vehicle retailed and new and used unit sales. Same store finance and insurance revenue and gross profit per vehicle retailed benefited from an increase in commission on product contracts sold, an increase in product penetration, more customers financing vehicles through our stores, an increase in amounts financed per transaction, and an increase in revenue and gross profit per transaction associated with arranging customer financing. First Six Months 2013 compared to First Six Months 2012 Same store finance and insurance revenue and gross profit increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, due to increases in same store finance and insurance revenue and gross profit per vehicle retailed and new and used unit sales. Same store finance and insurance revenue and gross profit per vehicle retailed benefited from an increase in commission on product contracts sold, an increase in product penetration, more customers financing vehicles through our stores, an increase in revenue and gross profit per transaction associated with arranging customer financing, and an increase in amounts financed per transaction. 30
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Segment Results In the following table, total segment income of the operating segments is reconciled to consolidated operating income.
Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / % ($ in millions) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue: Domestic$ 1,515.3 $ 1,295.1 $ 220.2 17.0$ 2,893.3 $ 2,524.2 $ 369.1 14.6 Import 1,629.3 1,475.8 153.5 10.4 3,133.0 2,842.4 290.6 10.2 Premium Luxury 1,242.4 1,093.4 149.0 13.6 2,415.3 2,115.6 299.7 14.2 Total segment revenue 4,387.0 3,864.3 522.7 13.5 8,441.6 7,482.2 959.4 12.8 Corporate and other 39.5 40.2 (0.7 ) (1.7 ) 81.3 79.3 2.0 2.5 Total consolidated revenue$ 4,426.5 $ 3,904.5 $ 522.0 13.4$ 8,522.9 $ 7,561.5 $ 961.4 12.7 Segment income*: Domestic$ 66.1 $ 53.6 $ 12.5 23.3$ 124.7 $ 103.3 $ 21.4 20.7 Import 72.9 67.2 5.7 8.5 143.9 129.1 14.8 11.5 Premium Luxury 75.7 68.3 7.4 10.8 144.5 127.1 17.4 13.7 Total segment income 214.7 189.1 25.6 13.5 413.1 359.5 53.6 14.9 Corporate and other (47.4 ) (35.7 ) (11.7 ) (89.3 ) (68.1 ) (21.2 ) Floorplan interest expense 13.6 10.8 (2.8 ) 26.5 21.5 (5.0 ) Operating income$ 180.9 $ 164.2 $ 16.7
10.2
* Segment income for each of our segments is defined as operating income less floorplan interest expense.
Retail new vehicle unit sales: Domestic 25,191 21,993 3,198 14.5 47,735 42,506 5,229 12.3 Import 36,444 33,715 2,729 8.1 69,476 64,753 4,723 7.3 Premium Luxury 12,717 11,279 1,438 12.7 24,300 21,244 3,056 14.4 74,352 66,987 7,365 11.0 141,511 128,503 13,008 10.1 31
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Domestic
The Domestic segment operating results included the following:
Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / %
($ in millions) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue
$ 1,515.3 $ 1,295.1 $ 220.2
17.0
25,191 21,993 3,198 14.5 47,735 42,506 5,229 12.3 Second Quarter 2013 compared to Second Quarter 2012 Domestic revenue increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was due in part to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisition we completed in the fourth quarter of 2012. Domestic segment income increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in finance and insurance revenue and gross profit, which benefited from an increase in finance and insurance revenue and gross profit per vehicle retailed and higher new and used vehicle unit volume. Domestic segment income also benefited from increases in new and used vehicle gross profit and parts and service gross profit, and from the recent acquisition noted in the paragraph above. Increases in Domestic segment income were partially offset by an increase in variable expenses. First Six Months 2013 compared to First Six Months 2012 Domestic revenue increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was due in part to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisition we completed in the fourth quarter of 2012. Domestic segment income increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in finance and insurance revenue and gross profit, which benefited from an increase in finance and insurance revenue and gross profit per vehicle retailed and higher new and used vehicle unit volume. Domestic segment income also benefited from increases in new and used vehicle gross profit and parts and service gross profit, and from the recent acquisition noted in the paragraph above. Increases in Domestic segment income were partially offset by an increase in variable expenses. 32
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Import
The Import segment operating results included the following:
Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / %
($ in millions) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue
$ 1,629.3 $ 1,475.8 $ 153.5
10.4
5.7 8.5$ 143.9 $ 129.1 $ 14.8 11.5 Retail new vehicle unit sales 36,444 33,715 2,729 8.1 69,476 64,753 4,723 7.3 Second Quarter 2013 compared to Second Quarter 2012 Import revenue increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was primarily due to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisitions we completed in the fourth quarter of 2012 and second quarter of 2013. Import segment income increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to increases in finance and insurance revenue and gross profit, which benefited from an increase in finance and insurance revenue and gross profit per vehicle retailed and higher new and used vehicle sales volume, and parts and service gross profit, which also benefited from higher new and used vehicle sales volume. Import segment income also benefited from the recent acquisitions noted in the paragraph above. The increase in Import segment income was partially offset by an increase in variable expenses. First Six Months 2013 compared to First Six Months 2012 Import revenue increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was primarily due to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisitions we completed in the fourth quarter of 2012 and second quarter of 2013. Import segment income increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to increases in finance and insurance revenue and gross profit, which benefited from an increase in finance and insurance revenue and gross profit per vehicle retailed and higher new and used vehicle sales volume, and parts and service gross profit, which also benefited from higher new and used vehicle sales volume. Import segment income also benefited from the recent acquisitions noted in the paragraph above. The increase in Import segment income was partially offset by an increase in variable expenses. 33
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Premium Luxury The Premium Luxury segment operating results included the following: Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / %
($ in millions) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Revenue
$ 1,242.4 $ 1,093.4 $ 149.0
13.6
7.4 10.8$ 144.5 $ 127.1 $ 17.4 13.7 Retail new vehicle unit sales 12,717 11,279 1,438 12.7 24,300 21,244 3,056 14.4 Second Quarter 2013 compared to Second Quarter 2012 Premium Luxury revenue increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was due in part to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisitions we completed in the fourth quarter of 2012. Premium Luxury segment income increased during the three months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to increases in parts and service gross profit, which benefited from higher new and used vehicle sales volume, and finance and insurance revenue and gross profit, which benefited from higher new and used vehicle sales volume and an increase in finance and insurance revenue and gross profit per vehicle retailed. Premium Luxury segment income also benefited from the recent acquisitions noted in the paragraph above. Increases in Premium Luxury segment income were partially offset by an increase in variable expenses. The prior year period was also favorably impacted by certain performance-based manufacturer incentives. First Six Months 2013 compared to First Six Months 2012 Premium Luxury revenue increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in new vehicle unit volume and an increase in revenue per new vehicle retailed. The increase in new vehicle unit volume was due in part to replacement demand and improved market conditions, including increased consumer borrowing and improved consumer confidence as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. New vehicle unit volume also benefited from the acquisitions we completed in the fourth quarter of 2012. Premium Luxury segment income increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to increases in parts and service gross profit, which benefited from higher new and used vehicle sales volume, and finance and insurance revenue and gross profit, which benefited from higher new and used vehicle sales volume and an increase in finance and insurance revenue and gross profit per vehicle retailed. Premium Luxury segment income also benefited from an increase in new vehicle gross profit and the recent acquisitions noted in the paragraph above. Increases in Premium Luxury segment income were partially offset by an increase in variable expenses. The prior year period was also favorably impacted by certain performance-based manufacturer incentives. 34
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Selling, General, and Administrative Expenses Our Selling, General, and Administrative expenses ("SG&A") consist primarily of compensation, including store and corporate salaries, commissions, and incentive-based compensation, as well as advertising (net of reimbursement-based manufacturer advertising rebates), and store and corporate overhead expenses, which include occupancy costs, legal, accounting, and professional services, and general corporate expenses. The following table presents the major components of our SG&A. Three Months Ended June 30, Six Months Ended June 30, Variance Variance Favorable / % Favorable / % ($ in millions) 2013 2012 (Unfavorable) Variance 2013 2012 (Unfavorable) Variance Reported: Compensation $ 319.8 $ 289.0 $ (30.8 ) (10.7 ) $ 636.5 $ 578.9 $ (57.6 ) (9.9 ) Advertising 47.6 34.7 (12.9 ) (37.2 ) 87.8 66.4 (21.4 ) (32.2 ) Store and corporate overhead 126.7 114.9 (11.8 ) (10.3 ) 243.1 226.2 (16.9 ) (7.5 ) Total $ 494.1 $ 438.6 $ (55.5 ) (12.7 ) $ 967.4 $ 871.5 $ (95.9 ) (11.0 ) SG&A as a % of total gross profit: Compensation 45.9 46.0 10 bps 46.8 47.0 20 bps Advertising 6.8 5.5 (130 ) bps 6.5 5.4 (110 ) bps Store and corporate overhead 18.3 18.3 - bps 17.8 18.4 60 bps Total 71.0 69.8 (120 ) bps 71.1 70.8 (30 ) bps Second Quarter 2013 compared to Second Quarter 2012 SG&A expenses increased during the three months ended June 30, 2013 , as compared to the same period in 2012, primarily due to a performance-driven increase in compensation expense, and increases in gross advertising expenditures and store and corporate overhead expenses. As a percentage of total gross profit, SG&A expenses increased to 71.0% during the three months ended June 30, 2013 , from 69.8% in the same period in 2012, primarily due to an increase in expenses resulting from our re-branding initiative noted below. First Six Months 2013 compared to First Six Months 2012 SG&A expenses increased during the six months ended June 30, 2013 , as compared to the same period in 2012, primarily due to a performance-driven increase in compensation expense, and increases in gross advertising expenditures and store and corporate overhead expenses. As a percentage of total gross profit, SG&A expenses increased to 71.1% during the six months ended June 30, 2013 , from 70.8% in the same period in 2012, primarily due to an increase in expenses resulting from our re-branding initiative noted below. Re-branding Initiative On January 31, 2013 , we announced that we would be marketing our Domestic and Import stores under the AutoNation retail brand. The rebranding of these stores, which previously operated under various local market retail brands, commenced in the first quarter of 2013 and was completed in the second quarter of 2013. As part of the rebranding initiative, we incurred non-recurring SG&A expenses, primarily related to advertising, of approximately $18 million during the six months ended June 30, 2013 . Non-Operating Income (Expense) Floorplan Interest Expense Second Quarter 2013 compared to Second Quarter 2012 Floorplan interest expense was $13.6 million for the three months ended June 30, 2013 , as compared to $10.8 million for the same period in 2012. The increase in floorplan interest expense of $2.8 million during the three months ended June 30, 2013 , is primarily the result of higher average vehicle floorplan balances, partially offset by lower negotiated floorplan interest rates. 35
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First Six Months 2013 compared to First Six Months 2012 Floorplan interest expense was$26.5 million for the six months endedJune 30, 2013 , as compared to$21.5 million for the same period in 2012. The increase in floorplan interest expense of$5.0 million during the six months endedJune 30, 2013 , is primarily the result of higher average vehicle floorplan balances, partially offset by lower negotiated floorplan interest rates. Other Interest Expense Other interest expense was incurred primarily on borrowings under our outstanding senior unsecured notes, mortgage facility, revolving credit facility, and term loan facility. Second Quarter 2013 compared to Second Quarter 2012 Other interest expense was$22.0 million for the three months endedJune 30, 2013 , relatively flat compared to$22.5 million for the same period in 2012. First Six Months 2013 compared to First Six Months 2012 Other interest expense was$44.3 million for the six months endedJune 30, 2013 , compared to$43.0 million for the same period in 2012. The increase in other interest expense of$1.3 million was primarily due to a$1.6 million increase resulting from theFebruary 2012 issuance of our 5.5% Senior Notes due 2020. Provision for Income Taxes Income taxes are provided based upon our anticipated underlying annual blended federal and state income tax rates adjusted, as necessary, for any other tax matters occurring during the period. As we operate in various states, our effective tax rate is also dependent upon our geographic revenue mix. Second Quarter 2013 compared to Second Quarter 2012 Our effective income tax rate was 38.5% for the three months endedJune 30, 2013 , and 39.0% for the three months endedJune 30, 2012 . First Six Months 2013 compared to First Six Months 2012 Our effective income tax rate was 38.7% for the six months endedJune 30, 2013 , and 38.8% for the six months endedJune 30, 2012 . Discontinued Operations Discontinued operations are related to stores that were sold or terminated, that we have entered into an agreement to sell or terminate, or for which we otherwise deem a proposed sales transaction or termination to be probable, with no material changes expected. We 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. Second Quarter 2013 compared to Second Quarter 2012 We had a loss from discontinued operations, net of income taxes, totaling$0.2 million during the three months endedJune 30, 2013 , and$0.4 million during the three months endedJune 30, 2012 . Results from discontinued operations, net of income taxes, were primarily related to carrying costs for real estate we have not yet sold associated with stores that have been closed and other adjustments related to disposed operations, partially offset by a gain on disposal of a store during the second quarter of 2013. First Six Months 2013 compared to First Six Months 2012 We had a loss from discontinued operations, net of income taxes, totaling$0.4 million during the six months endedJune 30, 2013 , and$0.9 million during the six months endedJune 30, 2012 . Results from discontinued operations, net of income taxes, were primarily related to carrying costs for real estate we have not yet sold associated with stores that have been 36
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closed and other adjustments related to disposed operations, partially offset by a gain on disposal of a store during the second quarter of 2013.
Liquidity and Capital Resources We manage our liquidity to ensure access to sufficient funding at acceptable costs to fund our ongoing operating requirements and future capital expenditures while continuing to meet our financial obligations. We believe that our cash and cash equivalents, funds generated through future operations, and amounts available under our revolving credit facility and secured used vehicle floorplan facilities will be sufficient to fund our working capital requirements, service our debt, pay our tax obligations and commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future. Available Liquidity Resources We had the following sources of liquidity available: (In millions) June 30, 2013 December 31, 2012 Cash and Cash Equivalents $ 69.7 $
69.7
Revolving Credit Facility (1) $ 744.0 $
603.5
Secured Used Vehicle Floorplan Facilities (2) $ 50.3 $
92.9
(1) Based on aggregate borrowings outstanding of
letters of credit of
borrowings outstanding of
of$56.5 million atDecember 31, 2012 . See "Long-Term Debt - Credit Agreement" for additional information.
(2) Based on the eligible used vehicle inventory that could have been pledged as
collateral. See "Long-Term Debt - Vehicle Floorplan Payable" for additional
information.
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. AtJune 30, 2013 , surety bonds, letters of credit, and cash deposits totaled$92.9 million , including$56.0 million of letters of credit. We do not currently provide cash collateral for outstanding letters of credit. InFebruary 2012 , we filed an automatic shelf registration statement with theSEC that enables us to offer for sale, from time to time and as the capital markets permit, an unspecified amount of common stock, preferred stock, debt securities, warrants, subscription rights, depositary shares, stock purchase contracts, units, and guarantees of debt securities. Capital Allocation Our capital allocation strategy is focused on maximizing stockholder returns. The first priority of our capital allocation strategy is to maintain a strong balance sheet. Second, we invest capital in our business to maintain and upgrade our existing facilities and to build new facilities, as well as for other strategic and technology initiatives. Third, we deploy capital opportunistically to repurchase our common stock and/or debt or to complete dealership acquisitions. Our capital allocation decisions will be based on factors such as the expected rate of return on our investment, the market price of our common stock versus our view of its intrinsic value, the market price of our debt, the potential impact on our capital structure, our ability to complete dealership acquisitions that meet our market and vehicle brand criteria and return on investment threshold, and limitations set forth in our debt agreements. Share Repurchases A summary of shares repurchased under our stock repurchase program authorized by our Board of Directors follows: Three Months Ended Six
Months Ended
June 30, June 30, (In millions, except per share data) 2013 2012 2013 2012 Shares repurchased 0.1 3.7 0.1 15.4 Aggregate purchase price$ 2.7 $ 126.2 $
4.9
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The decision to repurchase shares at any given point in time is based on factors such as the market price of our common stock versus our view of its intrinsic value, the potential impact on our capital structure (including compliance with our 3.75x maximum leverage ratio and other financial covenants in our debt agreements as well as our available liquidity), and the expected return on competing uses of capital such as dealership acquisitions, capital investments in our current businesses, or repurchases of our debt. As ofJune 30, 2013 ,$314.3 million remained available under our stock repurchase authorization limit. Senior Note Repurchases and Debt Prepayment We may from time to time repurchase our outstanding senior unsecured notes in open market purchases or privately negotiated transactions. Additionally, we may in the future prepay our term loan facility or other debt. The decision to repurchase senior unsecured notes or to prepay our term loan facility or other debt is based on prevailing market conditions, our liquidity requirements, contractual restrictions, and other factors. Capital Expenditures The following table sets forth information regarding our capital expenditures: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2013 2012 2013 2012 Purchases of property and equipment, including operating lease buy-outs (1)$ 31.5 $ 47.9
(1) Includes accrued construction in progress and excludes property acquired
under capital leases. Excluding land purchased for future sites and lease buy-outs, and net of related asset sales, we anticipate that our capital expenditures, including accrued construction in progress, will be approximately$180 million in 2013, primarily related to our store facilities. Acquisitions and Divestitures The following table sets forth information regarding cash used in business acquisitions, net of cash acquired, and cash received from business divestitures, net of cash relinquished: Three Months Ended Six Months Ended June 30, June 30, (In millions) 2013 2012 2013 2012 Cash received from (used in) business acquisitions, net$ (69.7 ) $ -$ (72.5 ) $ - Cash received from (used in) business divestitures, net$ 10.1 $ -
We purchased three stores and related assets during the three and six months endedJune 30, 2013 . The acquisitions wereDon Davis Toyota in theDallas, Texas market, which was completed onMay 1, 2013 , and SanTan Honda Superstore and Hyundai ofTempe in thePhoenix, Arizona market, which were completed onMay 22, 2013 . We did not purchase any stores during the three and six months endedJune 30, 2012 . Cash Dividends We have not declared or paid any cash dividends on our common stock during our two most recent fiscal years. We do not currently anticipate paying cash dividends for the foreseeable future. 38
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Long-Term Debt The following table sets forth our non-vehicle long-term debt as ofJune 30, 2013 , andDecember 31, 2012 . (In millions) June 30, 2013 December 31,
2012
6.75% Senior Notes due 2018$ 396.0 $
395.6
5.5% Senior Notes due 2020 350.0
350.0
Term loan facility due 2016 500.0
500.0
Revolving credit facility due 2016 400.0
540.0
Mortgage facility (1) 199.1
203.3
Capital leases and other debt 91.7 107.2 1,936.8 2,096.1 Less: current maturities (29.6 )
(29.8 ) Long-term debt, net of current maturities
(1) The mortgage facility requires monthly principal and interest payments
of
payment of
Senior Unsecured Notes AtJune 30, 2013 , we had outstanding$396.0 million of 6.75% Senior Notes due 2018, net of debt discount. Interest on the 6.75% Senior Notes due 2018 is payable onApril 15 andOctober 15 of each year. These notes will mature onApril 15, 2018 . AtJune 30, 2013 , we had outstanding$350.0 million of 5.5% Senior Notes due 2020. Interest is payable onFebruary 1 andAugust 1 of each year. At any time prior toFebruary 1, 2015 , we may redeem up to 35% of the principal amount of these notes with the net cash proceeds of one or more public equity offerings of our common stock at 105.5% of principal. These notes will mature onFebruary 1, 2020 . Our senior unsecured notes are guaranteed by substantially all of our subsidiaries. Credit Agreement Under our credit agreement, we have a$500.0 million term loan facility and a$1.2 billion revolving credit facility. The term loan and revolving credit facilities under the credit agreement mature onDecember 7, 2016 . As ofJune 30, 2013 , we had borrowings outstanding of$400.0 million under the revolving credit facility. We have a$200.0 million letter of credit sublimit as part of our revolving credit facility. The amount available to be borrowed under the revolving credit facility is reduced on a dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit, which was$56.0 million atJune 30, 2013 , leaving an additional borrowing capacity under the revolving credit facility of$744.0 million atJune 30, 2013 . Funds borrowed under our credit agreement may be used to repay indebtedness, finance acquisitions, and for working capital, capital expenditures, share repurchases, and other general corporate purposes. Our term loan facility provides for various interest rates generally at LIBOR plus 1.75%. Our revolving credit facility provides for a commitment fee on undrawn amounts of 0.30% and various interest rates on borrowings generally at LIBOR plus 1.75%. The credit spread charged for both our term loan facility and revolving credit facility 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 3.25x to greater than or equal to 3.25x would result in a 25 basis point increase in the credit spread under both our term loan facility and revolving credit facility. Borrowings under the credit agreement are guaranteed by substantially all of our subsidiaries. Vehicle Floorplan Payable Vehicle floorplan payable-trade totaled$1.9 billion atJune 30, 2013 , and$1.8 billion atDecember 31, 2012 . Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific new vehicle inventories with manufacturers' captive finance subsidiaries. 39
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Vehicle floorplan payable-non-trade totaled$804.1 million atJune 30, 2013 , and$773.9 million atDecember 31, 2012 , and 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 vehicle floorplan facilities, which are primarily collateralized by used vehicle inventories and related receivables. AtJune 30, 2013 , the aggregate capacity under our used vehicle floorplan facilities was$275.0 million . As of that date,$182.2 million had been borrowed under those facilities, and the remaining borrowing capacity of$92.8 million was limited to$50.3 million based on the eligible used vehicle inventory that could have been pledged as collateral. AtDecember 31, 2012 , the aggregate capacity under our used vehicle floorplan facilities was$275.0 million . As of that date,$119.5 million had been borrowed under those facilities, and the remaining borrowing capacity of$155.5 million was limited to$92.9 million based on the eligible used vehicle inventory that could have been pledged as collateral. All the floorplan facilities utilize LIBOR-based interest rates. 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 vehicle 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. Other Debt AtJune 30, 2013 , we had$199.1 million outstanding under a mortgage facility with an automotive manufacturer's captive finance subsidiary that matures onNovember 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. AtJune 30, 2013 , we had capital lease and other debt obligations of$91.7 million , which are due at various dates through 2033. Restrictions and Covenants Our credit agreement, the indentures for our 6.75% Senior Notes due 2018 and 5.5% Senior Notes due 2020, 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 credit agreement, we are required to remain in compliance with a maximum leverage ratio and maximum capitalization ratio. The leverage ratio is a contractually defined amount principally reflecting non-vehicle debt divided by a contractually defined measure of earnings with certain adjustments. The capitalization ratio is a contractually defined amount principally reflecting vehicle floorplan payable and non-vehicle debt divided by our total capitalization including vehicle floorplan payable. Under the credit agreement, the maximum capitalization ratio is 65.0% and the maximum leverage ratio is 3.75x. In calculating our leverage and capitalization ratios, 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 ). In addition, 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 toSeptember 30, 2011 plus$1.52 billion . The specific terms of these covenants can be found in our credit agreement, which we filed with our Current Report on Form 8-K onDecember 8, 2011 . The indentures for our 6.75% Senior Notes due 2018 and 5.5% Senior Notes due 2020 contain certain limited covenants, including limitations on liens and sale and leaseback transactions, but do 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 ofAutoNation . As ofJune 30, 2013 , we were in compliance with the requirements of the financial covenants under our debt agreements. Under the terms of our credit agreement, atJune 30, 2013 , our leverage ratio and capitalization ratio were as follows: June 30, 2013 Requirement Actual Leverage ratio < 3.75x 2.51x Capitalization ratio < 65.0% 57.9% 40
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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 and repurchase shares. In the event of a downgrade in our credit ratings, none of the covenants described above would be impacted. In addition, availability under the credit agreement described above would not be impacted should a downgrade in our senior unsecured debt credit ratings occur. Cash Flows The following table summarizes the changes in our cash provided by (used in) operating, investing, and financing activities: Six Months Ended June 30, (In millions) 2013 2012
Net cash provided by operating activities
Cash Flows from Operating Activities Our primary sources of operating cash flows are collections from contracts-in-transit and customers following the sale of vehicles, collections from customers for the sale of parts and services and finance and insurance products, and proceeds from vehicle floorplan payable-trade. Our primary uses of cash from operating activities are repayments of vehicle floorplan payable-trade, purchases of parts inventory, personnel related expenditures, and payments related to taxes and leased properties. Net cash provided by operating activities increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to a decrease in working capital requirements. Cash Flows from Investing Activities Net cash flows from investing activities consist primarily of cash used in capital additions, activity from business acquisitions, business divestitures, property dispositions, and other transactions. Net cash used in investing activities increased during the six months endedJune 30, 2013 , as compared to the same period in 2012, primarily due to an increase in cash used in acquisitions. We will make facility and infrastructure upgrades and improvements from time to time as we identify projects that are required to maintain our current business or that we expect to provide us with acceptable rates of return. Excluding land purchased for future sites and lease buy-outs, and net of related asset sales, we project that 2013 capital expenditures, including accrued construction in progress, will be approximately$180 million . Cash Flows from Financing Activities Net cash flows from financing activities primarily include repurchases of common stock, debt activity, changes in vehicle floorplan payable-non-trade, and stock option exercises. During the six months endedJune 30, 2013 , we repurchased 0.1 million shares of common stock for an aggregate purchase price of$4.9 million (average purchase price per share of$40.81 ). In addition, during the six months endedJune 30, 2013 , 42,306 shares were surrendered toAutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock. During the six months endedJune 30, 2012 , we repurchased 15.4 million shares of common stock for an aggregate purchase price of$531.6 million (average purchase price per share of$34.54 ), including repurchases for which settlement occurred subsequent toJune 30, 2012 . During the six months endedJune 30, 2012 , 36,935 shares were surrendered toAutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock. During the six months endedJune 30, 2013 , we borrowed$375.0 million and repaid$515.0 million under our revolving credit facility, for net repayments of$140.0 million . During the six months endedJune 30, 2012 , we borrowed$715.0 million and repaid$680.0 million under our revolving credit facility, for net borrowings of$35.0 million . 41
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Cash flows from financing activities include changes in vehicle floorplan payable - non-trade totaling net proceeds of$28.9 million for the six months endedJune 30, 2013 , and net proceeds of$102.9 million for the six months endedJune 30, 2012 . Forward-Looking Statements Our business, financial condition, results of operations, cash flows, and prospects, and the prevailing market price and performance of our common stock may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, including without limitation statements regarding our expectations for the automotive retail industry and the Company, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including statements that describe our objectives, plans or goals are, or may be deemed to be, forward-looking statements. Words such as "anticipate," "expect," "intend," "goal," "plan," "believe," "continue," "may," "will," and variations of such words and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements reflect our current expectations concerning future results and events, and they involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause our actual results, performance or achievements to be materially different from any future results, performance and achievements expressed or implied by these statements. The risks, uncertainties, and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following: • The automotive retail industry is sensitive to changing economic
conditions and various other factors. Our business and results of
operations are substantially dependent on new vehicle sales levels in the
gross profit margins that we can achieve on our sales of new vehicles, all
of which are very difficult to predict. • Our results of operations and financial condition have been and could continue to be adversely affected by the unfavorable economic conditionsinthe United States and/orEurope . • If we are not able to maintain and enhance our retail brands and reputation, or if events occur that damage our retail brands and reputation, our business and financial results may be harmed. • Our debt agreements contain certain financial ratios and otherrestrictions on our ability to conduct our business, and our substantial
indebtedness could adversely affect our financial condition and operations
and prevent us from fulfilling our debt service obligations.
• We are dependent upon the success and continued financial viability of the
vehicle manufacturers and distributors with which we hold franchises.
• Goodwill and other intangible assets comprise a significant portion of our
total assets. We must test our goodwill and other intangible assets for
impairment at least annually, which could result in a material, non-cash
write-down of goodwill or franchise rights and could have a material
adverse impact on our results of operations and shareholders' equity.
• Our new vehicle sales are impacted by the consumer incentive and marketing
programs of vehicle manufacturers.
• Natural disasters and adverse weather events can disrupt our business.
• We are subject to restrictions imposed by, and significant influence from,
vehicle manufacturers that may adversely impact our business, financial
condition, results of operations, cash flows, and prospects, including our
ability to acquire additional stores.
• We are subject to numerous legal and administrative proceedings, which if
the outcomes are adverse to us, could materially adversely affect our business, results of operations, financial condition, cash flows, and prospects.• Our operations are subject to extensive governmental laws and regulations.
If we are found to be in violation of or subject to liabilities under any
of these laws or regulations, or if new laws or regulations are enacted
that adversely affect our operations, our business, operating results, and
prospects could suffer.
• We are subject to interest rate risk in connection with our vehicle
floorplan payables, revolving credit facility, and term loan facility that
could have a material adverse effect on our profitability. 42--------------------------------------------------------------------------------
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• Our largest stockholders, as a result of their ownership stakes in us,
have the ability to exert substantial influence over actions to be taken
or approved by our stockholders or Board of Directors. In addition, future
share repurchases and fluctuations in the levels of ownership of our largest stockholders could impact the volume of trading, liquidity, and market price of our common stock. • A failure of our information systems or any security breach orunauthorized disclosure of confidential information could have a material
adverse effect on our business.
Please refer to our most recent Annual Report on Form 10-K for additional discussion of the foregoing risks. We undertake no obligation to update any forward-looking statements to reflect subsequent events or circumstances. Additional Information Investors and others should note that we announce material financial information using our company website (www.autonation.com), our investor relations website (investors.autonation.com),SEC filings, press releases, public conference calls and webcasts. Information aboutAutoNation , its business, and its results of operations may also be announced by posts on the following social media channels: •AutoNation's Twitter feed (www.twitter.com/autonation)•
Mike Jackson's Twitter feed (www.twitter.com/CEOMikeJackson)•
AutoNation's Facebook page (www.facebook.com/autonation)•
Mike Jackson's Facebook page (www.facebook.com/CEOMikeJackson)The information that we post on these social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested inAutoNation to review the information that we post on these social media channels. These channels may be updated from time to time onAutoNation's investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.
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