AN 10-Q Quarterly Report Sept. 30, 2014 | Alphaminr
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AN 10-Q Quarter ended Sept. 30, 2014

Balance Sheet
Cash Flow
Income Statement
Debt
AUTONATION, INC.
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10-Q 1 an10q93014.htm FORM 10-Q AN 10Q 9/30/14

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-13107
AutoNation, Inc.
(Exact name of registrant as specified in its charter)
Delaware
73-1105145
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
200 SW 1st Avenue, Fort Lauderdale, Florida
33301
(Address of principal executive offices)
(Zip Code)
(954) 769-6000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 27, 2014 , the registrant had 113,143,813 shares of common stock outstanding.



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



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
September 30,
2014
December 31,
2013
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$
67.5

$
69.2

Receivables, net
651.8

740.9

Inventory
2,691.4

2,827.2

Other current assets
196.2

192.7

Total Current Assets
3,606.9

3,830.0

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $942.3 million and $883.7 million, respectively
2,293.4

2,235.3

GOODWILL
1,265.3

1,259.6

OTHER INTANGIBLE ASSETS, NET
339.1

335.1

OTHER ASSETS
289.0

254.1

Total Assets
$
7,793.7

$
7,914.1

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Vehicle floorplan payable - trade
$
1,912.6

$
2,130.1

Vehicle floorplan payable - non-trade
862.1

898.9

Accounts payable
251.1

263.0

Current maturities of long-term debt
17.5

30.1

Other current liabilities
499.2

429.7

Total Current Liabilities
3,542.5

3,751.8

LONG-TERM DEBT, NET OF CURRENT MATURITIES
1,915.5

1,809.8

DEFERRED INCOME TAXES
129.4

116.5

OTHER LIABILITIES
194.3

174.3

COMMITMENTS AND CONTINGENCIES (Note 11)


SHAREHOLDERS’ EQUITY:
Preferred stock, par value $0.01 per share; 5,000,000 shares authorized; none issued
—

—

Common stock, par value $0.01 per share; 1,500,000,000 shares authorized; 163,562,149 shares issued at September 30, 2014, and December 31, 2013, including shares held in treasury
1.6

1.6

Additional paid-in capital
55.6

42.8

Retained earnings
3,639.9

3,337.9

Treasury stock, at cost; 49,033,894 and 42,646,753 shares held, respectively
(1,685.1
)
(1,320.6
)
Total Shareholders’ Equity
2,012.0

2,061.7

Total Liabilities and Shareholders’ Equity
$
7,793.7

$
7,914.1


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



1

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Revenue:
New vehicle
$
2,823.6

$
2,561.6

$
7,989.1

$
7,312.9

Used vehicle
1,148.5

1,044.7

3,280.5

3,110.9

Parts and service
717.4

653.8

2,093.2

1,946.3

Finance and insurance, net
196.5

174.9

554.3

504.4

Other
23.0

35.8

143.9

119.2

TOTAL REVENUE
4,909.0

4,470.8

14,061.0

12,993.7

Cost of sales:
New vehicle
2,666.5

2,406.2

7,524.5

6,866.6

Used vehicle
1,060.1

964.2

3,008.5

2,860.3

Parts and service
413.7

376.7

1,202.0

1,116.7

Other
15.8

27.1

120.8

93.4

TOTAL COST OF SALES (excluding depreciation shown below)
4,156.1

3,774.2

11,855.8

10,937.0

Gross Profit:
New vehicle
157.1

155.4

464.6

446.3

Used vehicle
88.4

80.5

272.0

250.6

Parts and service
303.7

277.1

891.2

829.6

Finance and insurance
196.5

174.9

554.3

504.4

Other
7.2

8.7

23.1

25.8

TOTAL GROSS PROFIT
752.9

696.6

2,205.2

2,056.7

Selling, general, and administrative expenses
522.3

485.1

1,547.6

1,452.5

Depreciation and amortization
27.2

24.1

79.0

70.1

Other expenses (income), net
(4.0
)
0.2

(15.7
)
(3.4
)
OPERATING INCOME
207.4

187.2

594.3

537.5

Non-operating income (expense) items:
Floorplan interest expense
(13.1
)
(12.7
)
(39.6
)
(39.2
)
Other interest expense
(21.7
)
(22.3
)
(64.6
)
(66.6
)
Interest income
0.1

0.1

0.2

0.2

Other income (loss), net
1.1

(0.7
)
3.5

2.2

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
173.8

151.6

493.8

434.1

Income tax provision
67.1

58.8

190.9

168.0

NET INCOME FROM CONTINUING OPERATIONS
106.7

92.8

302.9

266.1

Loss from discontinued operations, net of income taxes
(0.2
)
(0.2
)
(0.9
)
(0.6
)
NET INCOME
$
106.5

$
92.6

$
302.0

$
265.5

BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations
$
0.91

$
0.76

$
2.56

$
2.19

Discontinued operations
$
—

$
—

$
(0.01
)
$
—

Net income
$
0.91

$
0.76

$
2.55

$
2.19

Weighted average common shares outstanding
117.0

121.5

118.5

121.3

DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations
$
0.90

$
0.75

$
2.52

$
2.16

Discontinued operations
$
—

$
—

$
(0.01
)
$
—

Net income
$
0.90

$
0.75

$
2.51

$
2.15

Weighted average common shares outstanding
118.5

123.5

120.2

123.3

COMMON SHARES OUTSTANDING, net of treasury stock, at period end
114.5

121.8

114.5

121.8


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


2

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In millions, except share data)
Common Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Total
Shares
Amount
BALANCE AT DECEMBER 31, 2013
163,562,149

$
1.6

$
42.8

$
3,337.9

$
(1,320.6
)
$
2,061.7

Net income
—

—

—

302.0

—

302.0

Repurchases of common stock
—

—

—

—

(418.2
)
(418.2
)
Stock-based compensation expense
—

—

21.5

—

—

21.5

Shares awarded under stock-based compensation plans, including income tax benefit of $15.4
—

—

(8.7
)
—

53.7

45.0

BALANCE AT SEPTEMBER 30, 2014
163,562,149

$
1.6

$
55.6

$
3,639.9

$
(1,685.1
)
$
2,012.0


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



3

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Nine Months Ended
September 30,
2014
2013
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income
$
302.0

$
265.5

Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations
0.9

0.6

Depreciation and amortization
79.0

70.1

Amortization of debt issuance costs and accretion of debt discounts
4.3

4.3

Stock-based compensation expense
21.5

17.3

Deferred income tax provision
11.9

15.4

Net gain related to business/property dispositions
(12.4
)
(2.1
)
Non-cash impairment charges
0.3

—

Excess tax benefit from stock-based awards
(15.4
)
(8.5
)
Other
(2.6
)
(3.3
)
(Increase) decrease, net of effects from business combinations and divestitures:
Receivables
84.8

95.5

Inventory
146.7

(88.7
)
Other assets
(25.3
)
(13.9
)
Increase (decrease), net of effects from business combinations and divestitures:
Vehicle floorplan payable-trade, net
(211.5
)
47.6

Accounts payable
(3.0
)
16.2

Other liabilities
72.6

46.9

Net cash provided by continuing operations
453.8

462.9

Net cash provided by (used in) discontinued operations
(0.9
)
5.4

Net cash provided by operating activities
452.9

468.3

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment
(151.9
)
(110.6
)
Property operating lease buy-outs
(0.4
)
(41.9
)
Proceeds from the sale of property and equipment
0.2

3.1

Proceeds from assets held for sale
2.6

1.8

Insurance recoveries on property and equipment
1.0

2.2

Cash received from business divestitures, net of cash relinquished
21.5

10.1

Cash used in business acquisitions, net of cash acquired
(13.3
)
(72.9
)
Proceeds from the sale of restricted investments
0.5

—

Other
(9.4
)
(3.6
)
Net cash used in continuing operations
(149.2
)
(211.8
)
Net cash used in discontinued operations
—

—

Net cash used in investing activities
(149.2
)
(211.8
)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4

AUTONATION, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Continued)
Nine Months Ended
September 30,
2014
2013
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Repurchases of common stock
(378.3
)
(18.6
)
Proceeds from revolving credit facility
960.0

620.0

Payments of revolving credit facility
(850.0
)
(840.0
)
Net payments of vehicle floorplan payable - non-trade
(53.0
)
(12.2
)
Payments of mortgage facility
(6.8
)
(6.5
)
Payments of capital leases and other debt obligations
(22.3
)
(23.3
)
Proceeds from the exercise of stock options
29.6

20.5

Excess tax benefit from stock-based awards
15.4

8.5

Net cash used in continuing operations
(305.4
)
(251.6
)
Net cash used in discontinued operations
—

(6.3
)
Net cash used in financing activities
(305.4
)
(257.9
)
DECREASE IN CASH AND CASH EQUIVALENTS
(1.7
)
(1.4
)
CASH AND CASH EQUIVALENTS at beginning of period
69.2

69.7

CASH AND CASH EQUIVALENTS at end of period
$
67.5

$
68.3


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.




5

AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)
1.
INTERIM FINANCIAL STATEMENTS
Business and Basis of Presentation
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2014 , we owned and operated 273 new vehicle franchises from 229 stores located in the 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 34 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 95% of the new vehicles that we sold during the nine months ended September 30, 2014 , are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, BMW, Chrysler, and Volkswagen .
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 and other protection products, as well as the arranging of financing for vehicle purchases through third-party finance sources. For convenience, the terms “AutoNation,” “Company,” and “we” are used to refer collectively to AutoNation, Inc. and its subsidiaries, unless otherwise required by the context. Our dealership operations are conducted by our subsidiaries.
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries; all significant intercompany accounts and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information related to our organization, significant accounting policies, and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state, in all material respects, our financial position and results of operations for the periods presented.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ materially from these estimates. We periodically evaluate estimates and assumptions used in the preparation of the financial statements and make changes on a prospective basis when adjustments are necessary. Significant estimates made by AutoNation in the accompanying Unaudited Condensed Consolidated Financial Statements include certain assumptions related to goodwill, intangible assets, long-lived assets, assets held for sale, accruals for chargebacks against revenue recognized from the sale of finance and insurance products, accruals related to self-insurance programs, certain legal proceedings, estimated tax liabilities, and certain assumptions related to stock-based compensation.
Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our most recent Annual Report on Form 10-K.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that amends the accounting guidance on revenue recognition. The amendments in this accounting standard update are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices, and improve disclosure requirements. The amendments in this accounting standard update are effective for interim and annual reporting periods beginning after December 15, 2016, and should be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting the standard recognized at


6
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

the date of adoption (which requires additional footnote disclosures). Early adoption is not permitted. We are currently evaluating the method of adoption and the impact of the provisions of the accounting standard update.
Reporting Discontinued Operations
In April 2014, the FASB issued an accounting standard update that changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amendments in this accounting standard update should be applied prospectively and are effective for annual periods, and interim periods within those years, beginning on or after December 15, 2014. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. We adopted this accounting standard update effective January 1, 2014. During the first quarter of 2014, we divested our customer lead distribution business, and during the third quarter of 2014, we divested an Import store. See Note 9 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss, a Similar Tax Loss, or a Tax Credit Carryforward Exists
In July 2013, the FASB issued an accounting standard update to reduce the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this accounting standard update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this accounting standard update did not have a material impact on our consolidated financial position, results of operations, or cash flows.

2.
RECEIVABLES, NET
The components of receivables, net of allowance for doubtful accounts, are as follows:
September 30,
2014
December 31,
2013
Trade receivables
$
117.7

$
110.9

Manufacturer receivables
151.9

172.9

Other
46.5

36.9

316.1

320.7

Less: Allowances
(3.6
)
(4.0
)
312.5

316.7

Contracts-in-transit and vehicle receivables
330.2

424.2

Income tax refundable (see Note 6)
9.1

—

Receivables, net
$
651.8

$
740.9


Trade receivables represent amounts due for parts and services that have been sold or delivered, excluding amounts due from manufacturers, as well as receivables from finance organizations for commissions on the sale of financing products. Manufacturer receivables represent receivables from manufacturers including amounts due for holdbacks, rebates, incentives, floorplan assistance, and warranty claims. Contracts-in-transit and vehicle receivables primarily represent receivables from financial institutions for the portion of the vehicle sales price financed by our customers.
We evaluate our receivables for collectability based on the age of receivables and past collection experience.



7
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3.
INVENTORY AND VEHICLE FLOORPLAN PAYABLE
The components of inventory are as follows:
September 30,
2014
December 31,
2013
New vehicles
$
2,139.6

$
2,330.8

Used vehicles
394.7

346.5

Parts, accessories, and other
157.1

149.9

Inventory
$
2,691.4

$
2,827.2


The components of vehicle floorplan payable are as follows:
September 30,
2014
December 31,
2013
Vehicle floorplan payable - trade
$
1,912.6

$
2,130.1

Vehicle floorplan payable - non-trade
862.1

898.9

Vehicle floorplan payable
$
2,774.7

$
3,029.0


Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific new vehicle inventories with the corresponding manufacturers’ captive finance subsidiaries (“trade lenders”). Vehicle floorplan payable-non-trade represents amounts borrowed to finance the purchase of specific new and, to a lesser extent, used vehicle inventories with non-trade lenders, as well as amounts borrowed under our secured used floorplan facilities, which are primarily collateralized by used vehicle inventories and related receivables. Changes in vehicle floorplan payable-trade are reported as operating cash flows and changes in vehicle floorplan payable-non-trade are reported as financing cash flows in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.
Our inventory costs are generally reduced by manufacturer holdbacks, incentives, and floorplan assistance, while the related vehicle floorplan payables are reflective of the gross cost of the vehicle. The vehicle floorplan payables, as shown in the above table, will generally also be higher than the inventory cost due to the timing of the sale of a vehicle and payment of the related liability.
Vehicle 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 new vehicle floorplan facilities so the lender directly funds the manufacturer for the purchase of new vehicle inventory. Vehicle floorplan facilities are primarily collateralized by vehicle inventories and related receivables.
Our used vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged 1.7% for the nine months ended September 30, 2014 , and 1.8% for the nine months ended September 30, 2013 . At September 30, 2014 , the aggregate capacity under our used vehicle floorplan facilities with various lenders to finance a portion of our used vehicle inventory was $275.0 million , of which $189.1 million had been borrowed. The remaining borrowing capacity of $85.9 million was limited to $50.2 million based on the eligible used vehicle inventory that could have been pledged as collateral.
Our new vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged 1.8% for the nine months ended September 30, 2014 , and 2.0% for the nine months ended September 30, 2013 . At September 30, 2014 , the aggregate capacity under our new vehicle floorplan facilities to finance our new vehicle inventory was approximately $3.5 billion , of which $2.6 billion had been borrowed.



8
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets, net, consist of the following:
September 30,
2014
December 31,
2013
Goodwill
$
1,265.3

$
1,259.6

Franchise rights - indefinite-lived
$
332.3

$
329.3

Other intangibles
12.6

11.1

344.9

340.4

Less: accumulated amortization
(5.8
)
(5.3
)
Other intangible assets, net
$
339.1

$
335.1

Goodwill
We test goodwill of our Domestic, Import, and Premium Luxury reporting units for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value. Under accounting standards, an entity is permitted to first make a qualitative assessment of any potential goodwill impairment to determine whether it is necessary to calculate the fair value of a reporting unit under the quantitative two-step goodwill impairment test.
We completed our qualitative assessment of any potential goodwill impairment as of April 30, 2014 . Based on our qualitative assessment, we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts and we were therefore not required to perform the two-step goodwill impairment test for any of our reporting units.
Intangible Assets
Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested at least annually as of April 30 for impairment. Under accounting standards, an entity is permitted to first make a qualitative evaluation about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it is necessary to perform a quantitative impairment test.
We completed our qualitative assessment of any potential franchise rights impairment as of April 30, 2014 . Based on our qualitative assessment, we determined that we should perform a quantitative test for franchise rights related to one store, and no impairment charges resulted from this quantitative test. For the remainder of our franchise rights, we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts based on our qualitative assessment and we were therefore not required to perform a quantitative test.



9
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5.
LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
2014
December 31,
2013
6.75% Senior Notes due 2018
$
396.9

$
396.3

5.5% Senior Notes due 2020
350.0

350.0

Term loan facility due 2016
500.0

500.0

Revolving credit facility due 2016
410.0

300.0

Mortgage facility (1)
187.8

194.7

Capital leases and other debt
88.3

98.9

1,933.0

1,839.9

Less: current maturities
(17.5
)
(30.1
)
Long-term debt, net of current maturities
$
1,915.5

$
1,809.8

(1) The mortgage facility requires monthly principal and interest payments of $1.7 million based on a fixed amortization schedule with a balloon payment of $155.4 million due November 2017.
Senior Unsecured Notes and Credit Agreement
At September 30, 2014 , we had outstanding $396.9 million of 6.75% Senior Notes due 2018, net of debt discount. Interest on the 6.75% Senior Notes due 2018 is payable on April 15 and October 15 of each year. These notes will mature on April 15, 2018 .
At September 30, 2014 , we had outstanding $350.0 million of 5.5% Senior Notes due 2020. Interest is payable on February 1 and August 1 of each year. At any time prior to February 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 on February 1, 2020 .
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 December 7, 2016 . As of September 30, 2014 , we had borrowings outstanding of $410.0 million under our 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 $45.6 million at September 30, 2014 , leaving an additional borrowing capacity under the revolving credit facility of $744.4 million at September 30, 2014 .
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 2.0 x but less than 3.25 x to greater than or equal to 3.25 x would result in a 25 basis point increase in the credit spread under both our term loan facility and revolving credit facility.
Our senior unsecured notes and borrowings under our credit agreement are guaranteed by substantially all of our subsidiaries. Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the parent company) has no independent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint and several, and any subsidiaries other than the guarantor subsidiaries are minor.
Other Debt
At September 30, 2014 , we had $187.8 million outstanding under a mortgage facility with an automotive manufacturer’s captive finance subsidiary that matures on November 30, 2017 . The mortgage facility utilizes a fixed interest rate of 5.864% and is secured by 10 -year mortgages on certain of our store properties. The mortgage facility requires monthly principal and


10
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

interest payments of $1.7 million based on a fixed amortization schedule with a balloon payment of $155.4 million due November 2017. Repayment of the mortgage facility is subject to a prepayment penalty.
At September 30, 2014 , we had capital lease and other debt obligations of $88.3 million , which are due at various dates through 2034 .
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 leverage ratio is 3.75 x and the maximum capitalization ratio is 65.0% . 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 to September 30, 2011 plus $1.52 billion .
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. Our mortgage facility contains covenants regarding maximum cash flow leverage and minimum interest coverage.
Our failure to comply with the covenants contained in our debt agreements could permit acceleration of all of our indebtedness. Our debt agreements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of AutoNation.
Under the terms of our credit agreement, at September 30, 2014 , our leverage ratio and capitalization ratio were as follows:
September 30, 2014
Requirement
Actual
Leverage ratio
≤ 3.75x
2.19x
Capitalization ratio
≤ 65.0%
57.1%
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 our credit agreement described above would not be impacted should a downgrade in our senior unsecured debt credit ratings occur.

6.
INCOME TAXES
Income taxes refundable included in Receivables, Net totaled $9.1 million at September 30, 2014 . Income taxes payable included in Other Current Liabilities totaled $8.4 million at December 31, 2013 .
We file income tax returns in the U.S. federal jurisdiction and various states. As a matter of course, various taxing authorities, including the IRS, regularly audit us. Currently, no tax years are under examination by the IRS, and tax years from 2009 to 2012 are under examination by certain U.S. state jurisdictions. These audits may result in proposed assessments where the ultimate resolution may result in our owing additional taxes. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
It is our continuing policy to account for interest and penalties associated with income tax obligations as a component of Income Tax Provision in the accompanying Unaudited Condensed Consolidated Financial Statements.


11
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

7.
SHAREHOLDERS’ EQUITY
A summary of shares repurchased under our stock repurchase program authorized by our Board of Directors follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Shares repurchased
4.4

—

8.0

0.1

Aggregate purchase price
$
235.9

$
—

$
415.7

$
4.9

Average purchase price per share
$
53.15

$
—

$
51.98

$
40.81


From October 1, 2014 through October 27, 2014, we repurchased an additional 1.4 million shares for an aggregate purchase price of $68.5 million (average purchase price per share of $49.29 ). In October 2014, our Board of Directors authorized an additional $250 million under our existing share repurchase program. As of October 27, 2014, $281.5 million remained available for share repurchases under the program.
A summary of shares of common stock issued in connection with the exercise of stock options follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Shares issued
0.4

0.5

1.5

1.0

Proceeds from the exercise of stock options
$
7.5

$
9.9

$
29.6

$
20.5

Average exercise price per share
$
17.54

$
20.32

$
19.59

$
20.46


The following table presents a summary of shares of common stock issued in connection with grants of restricted stock and shares surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock (in actual number of shares):
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Shares issued
4,020

—

153,900

137,144

Shares surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock
1,788

516

46,265

42,822




12
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8.
EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period, including outstanding unvested restricted stock awards and vested restricted stock unit awards. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding adjusted for the dilutive effect of stock options.
The following table presents the calculation of basic and diluted EPS:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Net income from continuing operations
$
106.7

$
92.8

$
302.9

$
266.1

Loss from discontinued operations, net of income taxes
(0.2
)
(0.2
)
(0.9
)
(0.6
)
Net income
$
106.5

$
92.6

$
302.0

$
265.5

Weighted average common shares outstanding used in calculating basic EPS
117.0

121.5

118.5

121.3

Effect of dilutive stock options
1.5

2.0

1.7

2.0

Weighted average common shares outstanding used in calculating diluted EPS
118.5

123.5

120.2

123.3

Basic EPS amounts:
Continuing operations
$
0.91

$
0.76

$
2.56

$
2.19

Discontinued operations
$
—

$
—

$
(0.01
)
$
—

Net income
$
0.91

$
0.76

$
2.55

$
2.19

Diluted EPS amounts:
Continuing operations
$
0.90

$
0.75

$
2.52

$
2.16

Discontinued operations
$
—

$
—

$
(0.01
)
$
—

Net income
$
0.90

$
0.75

$
2.51

$
2.15


A summary of anti-dilutive options excluded from the computation of diluted earnings per share is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Anti-dilutive options excluded from the computation of diluted earnings per share
0.7

0.6

0.5

0.7


9.
DIVESTITURES
As discussed in Note 1 above, in April 2014, the FASB issued an accounting standard update that changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We adopted this accounting standard update effective January 1, 2014.
During the third quarter of 2014, we divested an Import store and recorded a gain of $4.0 million ( $2.5 million after-tax). During the first quarter of 2014, we divested our customer lead distribution business and recorded a gain of $8.4 million ( $5.2 million after-tax). This business is reported in the “Corporate and other” category of our segment information.
The gains on these divestitures are included in Other Expenses (Income), Net (within Operating Income) in our Unaudited Condensed Consolidated Statements of Income. The financial condition and results of operations of these businesses were not material to our consolidated financial statements.


13
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

10.
ACQUISITIONS
On July 10, 2014, we purchased one store and related assets in the Mobile, Alabama market. This acquisition was not material to our financial condition or results of operations for the three and nine months ended September 30, 2014. Acquisitions are included in the Unaudited Condensed Consolidated Financial Statements from the date of acquisition. The purchase price allocation for this business combination is tentative and subject to final adjustment. On October 22, 2014, we purchased four stores and related assets in the Seattle-Bellevue, Washington market.
On a pro forma basis as if the results of these acquisitions that were completed in 2014 had been included in our consolidated results for the entire three and nine month periods ended September 30, 2014 and 2013, revenue and net income would not have been materially different from our reported revenue and net income for these periods.
We purchased three stores and related assets during the nine months ended September 30, 2013.

11.
COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are involved, and will continue to be involved, in numerous legal proceedings arising out of the conduct of our business, including litigation with customers, wage and hour and other employment-related lawsuits, and actions brought by governmental authorities. Some of these lawsuits purport or may be determined to be class or collective actions and seek substantial damages or injunctive relief, or both, and some may remain unresolved for several years. We are currently defending several purported class action lawsuits in California arising out of alleged violations of state wage and hour laws relating to compensation of automotive technicians. We establish accruals for specific legal proceedings when it is considered probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Our accruals for loss contingencies are reviewed quarterly and adjusted as additional information becomes available. We disclose the amount accrued if material or if such disclosure is necessary for our financial statements to not be misleading. If a loss is not both probable and reasonably estimable, or if an exposure to loss exists in excess of the amount accrued, we assess whether there is at least a reasonable possibility that a loss, or additional loss, may have been incurred. If there is a reasonable possibility that a loss, or additional loss, may have been incurred, we disclose the estimate of the possible loss or range of loss if it is material or a statement that such an estimate cannot be made. Our evaluation of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter.
We believe we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable, and there was no indication of a reasonable possibility that a material loss, or additional material loss, may have been incurred. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our results of operations, financial condition, or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our financial condition, results of operations, and cash flows.
Other Matters
AutoNation, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by our subsidiaries of their respective store premises. Pursuant to these leases, our subsidiaries generally agree to indemnify the lessor and other related parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, we enter into agreements with third parties in connection with the sale of assets or businesses in which we agree to indemnify the purchaser or related parties from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, we enter into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, our liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dispositions of automotive stores, our subsidiaries assign or sublet to the store purchaser the subsidiaries’ interests in any real property leases associated with such stores. In general, our subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, AutoNation and its subsidiaries generally remain subject to the terms of any guarantees made by us and our subsidiaries in connection with such leases. Although we generally have indemnification rights against the assignee or sublessee in the event of non-performance under these leases, as well as certain defenses, we estimate that lessee rental payment obligations during the remaining terms of these leases with expirations ranging from 2015 to 2034 are approximately


14
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

$35 million at September 30, 2014 . We do not have any material known commitments that we or our subsidiaries will be called on to perform under any such assigned leases or subleases at September 30, 2014 . Our exposure under these leases is difficult to estimate and there can be no assurance that any performance by AutoNation or its subsidiaries required under these leases would not have a material adverse effect on our business, financial condition, and cash flows.
At September 30, 2014 , surety bonds, letters of credit, and cash deposits totaled $91.8 million , including $45.6 million of letters of credit. In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of our performance. We do not currently provide cash collateral for outstanding letters of credit.
In the ordinary course of business, we are subject to numerous laws and regulations, including automotive, environmental, health and safety, and other laws and regulations. We do not anticipate that the costs of such compliance will have a material adverse effect on our business, consolidated results of operations, cash flows, or financial condition, although such outcome is possible given the nature of our operations and the extensive legal and regulatory framework applicable to our business. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, established the Consumer Financial Protection Bureau (the “CFPB”), a new independent federal agency funded by the United States Federal Reserve with broad regulatory powers and limited oversight from the United States Congress. Although automotive dealers are generally excluded, the Dodd-Frank Act could lead to additional, indirect regulation of automotive dealers, in particular, their sale and marketing of finance and insurance products, through its regulation of automotive finance companies and other financial institutions. The Dodd-Frank Act also provided the Federal Trade Commission (the “FTC”) with new and expanded authority regarding automotive dealers, and the FTC has implemented an enforcement initiative relating to the advertising practices of automotive dealers.
In addition, the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, is expected to increase our annual employee health care costs that we fund, with the most significant increases commencing in 2015, and significantly increase our cost of compliance and compliance risk related to offering health care benefits.
Further, we expect that new laws and regulations, particularly at the federal level, in other areas may be enacted, which could also materially adversely impact our business. We do not have any material known environmental commitments or contingencies.

12.
SEGMENT INFORMATION
At September 30, 2014 and 2013 , we had three reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-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.
“Corporate and other” is comprised of our other businesses, including collision centers, a customer lead distribution business (which was divested in January 2014), and an auction operation, each of which generates revenues, as well as unallocated corporate overhead expenses and retrospective commissions for certain financing and insurance transactions that we arrange under agreements with third parties.
The reportable segments identified above are the business activities of the Company for which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance. Our chief operating decision maker is our Chief Executive Officer.


15
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Reportable segment revenue and segment income are as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Revenue:
Domestic
$
1,660.7

$
1,491.2

$
4,738.6

$
4,384.5

Import
1,787.8

1,695.5

5,055.0

4,828.5

Premium Luxury
1,422.9

1,247.4

4,161.2

3,662.7

Total
4,871.4

4,434.1

13,954.8

12,875.7

Corporate and other
37.6

36.7

106.2

118.0

Total consolidated revenue
$
4,909.0

$
4,470.8

$
14,061.0

$
12,993.7


Three Months Ended
Nine Months Ended
September 30,
September 30,
2014
2013
2014
2013
Segment income (1) :
Domestic
$
76.7

$
64.2

$
211.0

$
188.9

Import
77.1

72.7

220.0

216.6

Premium Luxury
84.0

74.2

253.1

218.7

Total
237.8

211.1

684.1

624.2

Corporate and other
(43.5
)
(36.6
)
(129.4
)
(125.9
)
Other interest expense
(21.7
)
(22.3
)
(64.6
)
(66.6
)
Interest income
0.1

0.1

0.2

0.2

Other income (loss), net
1.1

(0.7
)
3.5

2.2

Income from continuing operations before income taxes
$
173.8

$
151.6

$
493.8

$
434.1

(1)
Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.

13.
BUSINESS AND CREDIT CONCENTRATIONS
We are subject to a concentration of risk in the event of financial distress of or other adverse event related to a major vehicle manufacturer. The core brands of vehicles that we sell are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, BMW, Chrysler, and Volkswagen . Our business could be materially adversely impacted by a bankruptcy of or other adverse event related to a major vehicle manufacturer or related lender.
We had receivables from manufacturers or distributors of $151.9 million at September 30, 2014 , and $172.9 million at December 31, 2013 . Additionally, a large portion of our Contracts-in-Transit included in Receivables, Net, in the accompanying Unaudited Condensed Consolidated Balance Sheets, are due from automotive manufacturers’ captive finance subsidiaries, which provide financing directly to our new and used vehicle customers. Concentrations of credit risk with respect to non-manufacturer trade receivables are limited due to the wide variety of customers and markets in which our products are sold as well as their dispersion across many different geographic areas in the United States. Consequently, at September 30, 2014 , we do not consider AutoNation to have any significant non-manufacturer concentrations of credit risk.

14.
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated amounts reported.


16
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
The following methods and assumptions were used by us in estimating fair value disclosures for financial instruments:
•
Cash and cash equivalents, accounts receivable, other current assets, vehicle floorplan payable, accounts payable, other current liabilities, and variable rate debt : The amounts reported in the accompanying Unaudited Condensed Consolidated Balance Sheets approximate fair value due to their short-term nature or the existence of variable interest rates that approximate prevailing market rates.
•
Fixed rate debt : Our fixed rate debt primarily consists of amounts outstanding under our senior unsecured notes and mortgages. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 1). We estimate the fair value of our mortgages using a present value technique based on our current market interest rates for similar types of financial instruments (Level 2). A summary of the aggregate carrying values and fair values of our fixed rate debt is as follows:
September 30,
2014
December 31,
2013
Carrying value
$
1,023.0

$
1,039.9

Fair value
$
1,130.2

$
1,135.2


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

Goodwill and Other Intangible Assets
Goodwill for our Domestic, Import, and Premium Luxury reporting units is tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit more likely than not exceeds its fair value.
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 of April 30, 2014 and 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. Accordingly, no impairment charges were recorded for the carrying value of goodwill during the three and nine months ended September 30, 2014 and 2013.
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 of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred.


17
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

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 any potential franchise rights impairment as of April 30, 2014. Based on our qualitative assessment, we determined that we should perform a quantitative test for franchise rights related to one store, and no impairment charges resulted from this quantitative test. For the remainder of our franchise rights, we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts based on our qualitative assessment and we were therefore not required to perform a quantitative test.
The quantitative impairment test for franchise rights requires the comparison of the franchise rights’ estimated fair value to carrying value by store. Fair values of rights under franchise agreements are estimated using Level 3 inputs by discounting expected future cash flows of the store. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic projections, and other marketplace data we believe to be reasonable. The development of the assumptions used in our annual impairment tests are coordinated by our financial planning and analysis group, and the assumptions are reviewed by management.
We completed our qualitative assessment of franchise rights impairment as of April 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. Accordingly, no impairment charges were recorded for the carrying value of franchise rights during the three and nine months ended September 30, 2013 .
Long-Lived Assets
The fair value measurement valuation process for our long-lived assets is established by our corporate real estate services group, which reports to the Company’s President and Chief Operating Officer. Fair value measurements, which are based on Level 3 inputs, and changes in fair value measurements are reviewed and assessed each quarter for properties classified as held for sale, or when an indicator of impairment exists for properties classified as held and used, by the corporate real estate services group. Our corporate real estate services group utilizes its knowledge of the automotive industry and historical experience in real estate markets and transactions in establishing the valuation process, which is generally based on a combination of the market and replacement cost approaches.
In a market approach, the corporate real estate services group uses transaction prices for comparable properties that have recently been sold. These transaction prices are adjusted for factors related to a specific property. The corporate real estate services group also evaluates changes in local real estate markets, and/or recent market interest or negotiations related to a specific property. In a replacement cost approach, the cost to replace a specific long-lived asset is considered, which is adjusted for depreciation from physical deterioration, as well as functional and economic obsolescence, if present and measurable.
To validate the fair values determined under the valuation process noted above, our corporate real estate services group also obtains independent third-party appraisals for our properties and/or third-party brokers’ opinions of value, which are generally developed using the same valuation approaches described above, and evaluates any recent negotiations or discussions with third-party real estate brokers related to a specific long-lived asset or market.
Long-lived Assets Held and Used in Continuing Operations
During the three and nine months ended September 30, 2014 and 2013 , there were no significant impairment charges recorded for the carrying value of long-lived assets held and used in continuing operations.
Long-lived Assets Held for Sale in Continuing Operations
During the nine months ended September 30, 2014 , long-lived assets held for sale in continuing operations with a carrying value of $0.6 million were written down to their fair value of $0.3 million , resulting in a non-cash impairment charge of $0.3 million . The non-cash impairment charge was included in Other Expenses (Income), Net (within Operating Income) in our Unaudited Condensed Consolidated Statements of Income and was reported in the “Corporate and other” category of our segment information. We recorded no impairment charges during the three months ended September 30, 2014 .
During the three and nine months ended September 30, 2013 , no impairment charges were recorded for the carrying value of long-lived assets held for sale in continuing operations.


18
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Long-lived Assets Held for Sale in Discontinued Operations
During the nine months ended September 30, 2014 , long-lived assets held for sale in discontinued operations with a carrying value of $7.1 million were written down to their fair value of $6.9 million , resulting in a non-cash impairment charge of $0.2 million . The non-cash impairment charge was included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Statements of Income. We recorded no impairment charges during the three months ended September 30, 2014 .
During the three and nine months ended September 30, 2013 , no impairment charges were recorded for the carrying value of long-lived assets held for sale in discontinued operations.
As of September 30, 2014 , we had long-lived assets held for sale of $65.4 million in continuing operations and $34.3 million in discontinued operations. Long-lived assets held for sale are included in Other Current Assets in our Unaudited Condensed Consolidated Balance Sheets.

15.
CASH FLOW INFORMATION
We consider all highly liquid investments with a maturity of three months or less as of the date of purchase to be cash equivalents unless the investments are legally or contractually restricted for more than three months. We had non-cash investing and financing activities primarily related to increases in property acquired under capital leases of $11.6 million for the nine months ended September 30, 2014 , and $9.5 million for the nine months ended September 30, 2013 . We also had accrued purchases of property and equipment of $15.7 million at September 30, 2014 and $11.0 million at September 30, 2013 . The effect of non-cash transactions is excluded from the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.
We made interest payments of $99.7 million during the nine months ended September 30, 2014 , and $100.4 million during the nine months ended September 30, 2013 . We made income tax payments, net of income tax refunds, of $180.4 million during the nine months ended September 30, 2014 , and $155.3 million during the nine months ended September 30, 2013 .


19

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 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. Certain reclassifications of amounts previously reported have been made in order to maintain consistency and comparability between periods presented.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2014 , we owned and operated 273 new vehicle franchises from 229 stores located in the 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 34 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 95% of the new vehicles that we sold during the nine months ended September 30, 2014 , are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, BMW, Chrysler, and Volkswagen .
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. We are investing significantly to enhance our ability to generate our own digital traffic and to build an end-to-end customer experience in-store and through our digital channels. We expect that these investments, which may exceed $100 million in the aggregate, will continue for the next several years.
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 and other protection 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 the AutoNation retail brand and advertising, implementing standardized processes, and increasing productivity across all of our stores.
At September 30, 2014 , we had three reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-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 nine months ended September 30, 2014 , new vehicle sales accounted for approximately 57% of our total revenue, but approximately 21% of our total gross profit. Used vehicle sales accounted for approximately 23% of our total revenue, and approximately 12% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 19% of our total revenue for the nine months ended September 30, 2014 , contributed approximately 66% of our total gross profit for the same period.

Results of Operations
Third Quarter 2014 compared to Third Quarter 2013
During the three months ended September 30, 2014 , we had net income from continuing operations of $106.7 million or $0.90 per share on a diluted basis, as compared to net income from continuing operations of $92.8 million or $0.75 per share on a diluted basis during the same period in 2013 .

First Nine Months 2014 compared to First Nine Months 2013
During the nine months ended September 30, 2014 , we had net income from continuing operations of $302.9 million or $2.52 per share on a diluted basis, as compared to net income from continuing operations of $266.1 million or $2.16 per share on a diluted basis during the same period in 2013 .


20

Results for the nine months ended September 30, 2014 , were favorably impacted by a net gain related to business/property dispositions of $8.1 million ($5.0 million after-tax, or $0.04 per share), primarily related to the divestiture of our customer lead distribution business.
Market Conditions
In the third quarter of 2014 , U.S. industry new vehicle unit sales increased 8% as compared to the third quarter of 2013 , driven by replacement demand. Based on industry data, the average age of cars and trucks in the 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. Attractive products and continued access to affordable credit were also supportive of a strong selling environment.
We expect continued growth in new vehicle unit sales in 2015, with full-year 2015 U.S. industry new vehicle unit sales above 17 million. However, actual sales may materially differ.
During the three and nine months ended September 30, 2014, the warranty component of our parts and service business benefited from the rise of manufacturer recalls in our Domestic and Import segments. Additionally, after several years of decline, the number of recent-model-year vehicles in operation has begun to grow due to increases in the annual rate of new vehicle sales in the United States since 2009. The growth in that portion of our service base, together with our customer retention efforts, has benefited the customer-pay service and warranty components of our parts and service business, and we believe that it will continue to benefit those components for the next several years. While the number of older vehicles in operation is expected to decline over the next few years, we believe that overall our parts and service business will benefit from the mix shift in our service base toward newer vehicles.
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 62,831 units in new vehicle inventory at September 30, 2014 , 72,095 units at December 31, 2013 , and 60,035 units at September 30, 2013 .
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 $3.1 million at September 30, 2014 , and $1.8 million at December 31, 2013 .
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 $3.0 million at September 30, 2014 , and $3.6 million at December 31, 2013 .

Critical Accounting Policies and Estimates
We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For 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 of April 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 of April 30, 2014 , 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


21

the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as of April 30, 2011, the date of our most recent quantitative annual impairment test.
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 of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred.
We completed our qualitative assessment of any potential franchise rights impairment as of April 30, 2014 . Based on our qualitative assessment, we determined that we should perform a quantitative test for franchise rights related to one store, and no impairment charges resulted from this quantitative test. For the remainder of our franchise rights, we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts based on our qualitative assessment and we were therefore not required to perform a quantitative test.
Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or changes in circumstances indicate that their carrying amounts may be impaired. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, a current expectation that more-likely-than-not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or a current-period operating or cash flow loss combined with historical losses or projected future losses.
When property and equipment is identified as held for sale, we reclassify the held for sale assets to Other Current Assets and cease recording depreciation. We measure each long-lived asset or disposal group at the lower of its carrying amount or fair value less cost to sell and recognize a loss for any initial adjustment of the long-lived asset’s or disposal group’s carrying amount to fair value less cost to sell in the period the “held for sale” criteria are met. We periodically evaluate the carrying value of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted.
As of September 30, 2014 , we had long-lived assets held for sale of $65.4 million in continuing operations and $34.3 million in discontinued operations.
During the three and nine months ended September 30, 2014 , there were no significant impairment charges recorded for the carrying value of long-lived assets held and used in continuing operations. We recorded a $0.3 million non-cash impairment charge during the nine months ended September 30, 2014 , associated with assets held for sale in continuing operations to reduce the carrying value of these assets to fair value less cost to sell. This charge is recorded as a component of Other Expenses (Income), Net (within Operating Income) in the Unaudited Condensed Consolidated Statements of Income. We recorded no impairment charges during the three months ended September 30, 2014 , associated with assets held for sale in continuing operations.
We recorded a $0.2 million non-cash impairment charge during the nine months ended September 30, 2014 , associated with assets held for sale in discontinued operations. This charge is included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Statements of Income. We recorded no impairment charges during the three months ended September 30, 2014 , associated with assets held for sale in discontinued operations.
The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, which considered information from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets. See Note 14 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.


22

Reported Operating Data
Historical operating results include the results of acquired businesses from the date of acquisition.
($ in millions, except per vehicle data)
Three Months Ended September 30,
Nine Months Ended September 30,
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue:
New vehicle
$
2,823.6

$
2,561.6

$
262.0

10.2

$
7,989.1

$
7,312.9

$
676.2

9.2

Retail used vehicle
1,046.2

933.0

113.2

12.1

2,981.1

2,786.2

194.9

7.0

Wholesale
102.3

111.7

(9.4
)
(8.4
)
299.4

324.7

(25.3
)
(7.8
)
Used vehicle
1,148.5

1,044.7

103.8

9.9

3,280.5

3,110.9

169.6

5.5

Finance and insurance, net
196.5

174.9

21.6

12.3

554.3

504.4

49.9

9.9

Total variable operations (1)
4,168.6

3,781.2

387.4

10.2

11,823.9

10,928.2

895.7

8.2

Parts and service
717.4

653.8

63.6

9.7

2,093.2

1,946.3

146.9

7.5

Other
23.0

35.8

(12.8
)
143.9

119.2

24.7

Total revenue
$
4,909.0

$
4,470.8

$
438.2

9.8

$
14,061.0

$
12,993.7

$
1,067.3

8.2

Gross profit:
New vehicle
$
157.1

$
155.4

$
1.7

1.1

$
464.6

$
446.3

$
18.3

4.1

Retail used vehicle
91.8

80.4

11.4

14.2

273.3

247.1

26.2

10.6

Wholesale
(3.4
)
0.1

(3.5
)
(1.3
)
3.5

(4.8
)
Used vehicle
88.4

80.5

7.9

9.8

272.0

250.6

21.4

8.5

Finance and insurance
196.5

174.9

21.6

12.3

554.3

504.4

49.9

9.9

Total variable operations (1)
442.0

410.8

31.2

7.6

1,290.9

1,201.3

89.6

7.5

Parts and service
303.7

277.1

26.6

9.6

891.2

829.6

61.6

7.4

Other
7.2

8.7

(1.5
)
23.1

25.8

(2.7
)
Total gross profit
752.9

696.6

56.3

8.1

2,205.2

2,056.7

148.5

7.2

Selling, general, and administrative expenses
522.3

485.1

(37.2
)
(7.7
)
1,547.6

1,452.5

(95.1
)
(6.5
)
Depreciation and amortization
27.2

24.1

(3.1
)
79.0

70.1

(8.9
)
Other expenses (income), net
(4.0
)
0.2

4.2

(15.7
)
(3.4
)
12.3

Operating income
207.4

187.2

20.2

10.8

594.3

537.5

56.8

10.6

Non-operating income (expense) items:
Floorplan interest expense
(13.1
)
(12.7
)
(0.4
)
(39.6
)
(39.2
)
(0.4
)
Other interest expense
(21.7
)
(22.3
)
0.6

(64.6
)
(66.6
)
2.0

Interest income
0.1

0.1

—

0.2

0.2

—

Other income (loss), net
1.1

(0.7
)
1.8

3.5

2.2

1.3

Income from continuing operations before income taxes
$
173.8

$
151.6

$
22.2

14.6

$
493.8

$
434.1

$
59.7

13.8

Retail vehicle unit sales:
New vehicle
83,682

76,943

6,739

8.8

235,459

218,454

17,005

7.8

Used vehicle
56,584

52,659

3,925

7.5

161,376

155,280

6,096

3.9

140,266

129,602

10,664

8.2

396,835

373,734

23,101

6.2

Revenue per vehicle retailed:
New vehicle
$
33,742

$
33,292

$
450

1.4

$
33,930

$
33,476

$
454

1.4

Used vehicle
$
18,489

$
17,718

$
771

4.4

$
18,473

$
17,943

$
530

3.0

Gross profit per vehicle retailed:
New vehicle
$
1,877

$
2,020

$
(143
)
(7.1
)
$
1,973

$
2,043

$
(70
)
(3.4
)
Used vehicle
$
1,622

$
1,527

$
95

6.2

$
1,694

$
1,591

$
103

6.5

Finance and insurance
$
1,401

$
1,350

$
51

3.8

$
1,397

$
1,350

$
47

3.5

Total variable operations (2)
$
3,175

$
3,169

$
6

0.2

$
3,256

$
3,205

$
51

1.6

(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.



23

Three Months Ended
Nine Months Ended
September 30,
September 30,
2014 (%)
2013 (%)
2014 (%)
2013 (%)
Revenue mix percentages:
New vehicle
57.5
57.3
56.8
56.3
Used vehicle
23.4
23.4
23.3
23.9
Parts and service
14.6
14.6
14.9
15.0
Finance and insurance, net
4.0
3.9
3.9
3.9
Other
0.5
0.8
1.1
0.9
Total
100.0
100.0
100.0
100.0
Gross profit mix percentages:
New vehicle
20.9
22.3
21.1
21.7
Used vehicle
11.7
11.6
12.3
12.2
Parts and service
40.3
39.8
40.4
40.3
Finance and insurance
26.1
25.1
25.1
24.5
Other
1.0
1.2
1.1
1.3
Total
100.0
100.0
100.0
100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle
5.6
6.1
5.8
6.1
Used vehicle - retail
8.8
8.6
9.2
8.9
Parts and service
42.3
42.4
42.6
42.6
Total
15.3
15.6
15.7
15.8
Selling, general, and administrative expenses
10.6
10.9
11.0
11.2
Operating income
4.2
4.2
4.2
4.1
Operating items as a percentage of total gross profit:
Selling, general, and administrative expenses
69.4
69.6
70.2
70.6
Operating income
27.5
26.9
26.9
26.1
September 30,
2014
2013
Days supply:
New vehicle (industry standard of selling days) (1)
57 days
58 days
Used vehicle (trailing calendar month days)
32 days
31 days
(1) As of December 31, 2013, we have revised our method of calculating new vehicle days supply to exclude fleet sales and in-transit inventory. We have revised prior periods to conform to our revised method of calculation.



24

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 September 30,
Nine Months Ended September 30,
($ in millions, except per vehicle data)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue:
New vehicle
$
2,784.9

$
2,556.4

$
228.5

8.9

$
7,855.7

$
7,294.7

$
561.0

7.7

Retail used vehicle
1,034.7

931.8

102.9

11.0

2,938.8

2,780.3

158.5

5.7

Wholesale
101.2

111.0

(9.8
)
(8.8
)
294.5

323.3

(28.8
)
(8.9
)
Used vehicle
1,135.9

1,042.8

93.1

8.9

3,233.3

3,103.6

129.7

4.2

Finance and insurance, net
194.2

174.7

19.5

11.2

546.6

503.4

43.2

8.6

Total variable operations (1)
4,115.0

3,773.9

341.1

9.0

11,635.6

10,901.7

733.9

6.7

Parts and service
710.3

652.2

58.1

8.9

2,062.7

1,940.3

122.4

6.3

Other
22.8

35.3

(12.5
)
136.9

118.0

18.9

Total revenue
$
4,848.1

$
4,461.4

$
386.7

8.7

$
13,835.2

$
12,960.0

$
875.2

6.8

Gross profit:
New vehicle
$
154.7

$
155.1

$
(0.4
)
(0.3
)
$
456.7

$
445.2

$
11.5

2.6

Retail used vehicle
90.6

80.3

10.3

12.8

268.8

246.4

22.4

9.1

Wholesale
(3.4
)
0.1

(3.5
)
(1.4
)
3.6

(5.0
)
Used vehicle
87.2

80.4

6.8

8.5

267.4

250.0

17.4

7.0

Finance and insurance
194.2

174.7

19.5

11.2

546.6

503.4

43.2

8.6

Total variable operations (1)
436.1

410.2

25.9

6.3

1,270.7

1,198.6

72.1

6.0

Parts and service
300.5

276.5

24.0

8.7

877.7

827.1

50.6

6.1

Other
7.1

8.4

(1.3
)
23.1

25.7

(2.6
)
Total gross profit
$
743.7

$
695.1

$
48.6

7.0

$
2,171.5

$
2,051.4

$
120.1

5.9

Retail vehicle unit sales:
New vehicle
82,447

76,739

5,708

7.4

230,814

217,745

13,069

6.0

Used vehicle
55,943

52,565

3,378

6.4

158,632

154,882

3,750

2.4

138,390

129,304

9,086

7.0

389,446

372,627

16,819

4.5

Revenue per vehicle retailed:
New vehicle
$
33,778

$
33,313

$
465

1.4

$
34,035

$
33,501

$
534

1.6

Used vehicle
$
18,496

$
17,727

$
769

4.3

$
18,526

$
17,951

$
575

3.2

Gross profit per vehicle retailed:
New vehicle
$
1,876

$
2,021

$
(145
)
(7.2
)
$
1,979

$
2,045

$
(66
)
(3.2
)
Used vehicle
$
1,620

$
1,528

$
92

6.0

$
1,694

$
1,591

$
103

6.5

Finance and insurance
$
1,403

$
1,351

$
52

3.8

$
1,404

$
1,351

$
53

3.9

Total variable operations (2)
$
3,176

$
3,172

$
4

0.1

$
3,266

$
3,207

$
59

1.8

(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.



25

Three Months Ended
Nine Months Ended
September 30,
September 30,
2014 (%)
2013 (%)
2014 (%)
2013 (%)
Revenue mix percentages:
New vehicle
57.4
57.3
56.8
56.3
Used vehicle
23.4
23.4
23.4
23.9
Parts and service
14.7
14.6
14.9
15.0
Finance and insurance, net
4.0
3.9
4.0
3.9
Other
0.5
0.8
0.9
0.9
Total
100.0
100.0
100.0
100.0
Gross profit mix percentages:
New vehicle
20.8
22.3
21.0
21.7
Used vehicle
11.7
11.6
12.3
12.2
Parts and service
40.4
39.8
40.4
40.3
Finance and insurance
26.1
25.1
25.2
24.5
Other
1.0
1.2
1.1
1.3
Total
100.0
100.0
100.0
100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle
5.6
6.1
5.8
6.1
Used vehicle - retail
8.8
8.6
9.1
8.9
Parts and service
42.3
42.4
42.6
42.6
Total
15.3
15.6
15.7
15.8



26

New Vehicle
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions, except per vehicle data)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Reported:
Revenue
$
2,823.6

$
2,561.6

$
262.0

10.2

$
7,989.1

$
7,312.9

$
676.2

9.2

Gross profit
$
157.1

$
155.4

$
1.7

1.1

$
464.6

$
446.3

$
18.3

4.1

Retail vehicle unit sales
83,682

76,943

6,739

8.8

235,459

218,454

17,005

7.8

Revenue per vehicle retailed
$
33,742

$
33,292

$
450

1.4

$
33,930

$
33,476

$
454

1.4

Gross profit per vehicle retailed
$
1,877

$
2,020

$
(143
)
(7.1
)
$
1,973

$
2,043

$
(70
)
(3.4
)
Gross profit as a percentage of revenue
5.6
%
6.1
%
5.8
%
6.1
%
Days supply (industry standard of selling days)
57 days

58 days

Three Months Ended September 30,
Nine Months Ended September 30,
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Same Store:
Revenue
$
2,784.9

$
2,556.4

$
228.5

8.9

$
7,855.7

$
7,294.7

$
561.0

7.7

Gross profit
$
154.7

$
155.1

$
(0.4
)
(0.3
)
$
456.7

$
445.2

$
11.5

2.6

Retail vehicle unit sales
82,447

76,739

5,708

7.4

230,814

217,745

13,069

6.0

Revenue per vehicle retailed
$
33,778

$
33,313

$
465

1.4

$
34,035

$
33,501

$
534

1.6

Gross profit per vehicle retailed
$
1,876

$
2,021

$
(145
)
(7.2
)
$
1,979

$
2,045

$
(66
)
(3.2
)
Gross profit as a percentage of revenue
5.6
%
6.1
%
5.8
%
6.1
%

Third Quarter 2014 compared to Third Quarter 2013
Same store new vehicle revenue increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , 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. New product offerings from automotive manufacturers also favorably impacted same store unit volume.
Same store revenue per new vehicle retailed during the three months ended September 30, 2014 , benefited from a shift in mix toward Premium Luxury vehicles, which have relatively higher average selling prices. Same store revenue per new vehicle retailed also benefited from an increase in the average selling prices for Domestic and Premium Luxury vehicles, partially offset by a decrease in the average selling price for Import vehicles.
Same store gross profit per new vehicle retailed decreased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to a decrease in the gross profit per vehicle retailed for Import and Premium Luxury vehicles, partially offset by a shift in mix toward Premium Luxury vehicles, which have a relatively higher average gross profit per vehicle retailed.

First Nine Months 2014 compared to First Nine Months 2013
Same store new vehicle revenue increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , 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. New product offerings from automotive manufacturers also favorably impacted same store unit volume.
Same store revenue per new vehicle retailed during the nine months ended September 30, 2014 , benefited from an increase in the average selling prices for Domestic and Premium Luxury vehicles, partially offset by a decrease in the average selling price for Import vehicles. Same store revenue per new vehicle retailed also benefited from a shift in mix toward Premium Luxury vehicles, which have relatively higher average selling prices.


27

Same store gross profit per new vehicle retailed decreased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to a decrease in gross profit per vehicle retailed for Import vehicles. This decrease was partially offset by a shift in mix toward Premium Luxury vehicles, which have a relatively higher average gross profit per vehicle retailed.
New Vehicle Inventories
Our new vehicle inventories were $2.1 billion or 57 days supply at September 30, 2014 , as compared to new vehicle inventories of $2.3 billion or 62 days supply at December 31, 2013 and $2.0 billion or 58 days supply at September 30, 2013 . We had 62,831 units in new vehicle inventory at September 30, 2014 , 72,095 units at December 31, 2013 , and 60,035 units at September 30, 2013 .
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 September 30,
Nine Months Ended September 30,
(In millions)
2014
2013
Variance
2014
2013
Variance
Floorplan assistance
$
27.4

$
24.7

$
2.7

$
78.1

$
67.1

$
11.0

New vehicle floorplan interest expense
(12.5
)
(12.1
)
(0.4
)
(37.8
)
(37.4
)
(0.4
)
Net new vehicle inventory carrying benefit
$
14.9

$
12.6

$
2.3

$
40.3

$
29.7

$
10.6

Third Quarter 2014 compared to Third Quarter 2013
The net new vehicle inventory carrying benefit increased during the three months ended September 30, 2014 , as compared to the same period in 2013 primarily due to an increase in floorplan assistance. Floorplan assistance increased due to higher new vehicle sales and an increase in the floorplan assistance rate per unit.
First Nine Months 2014 compared to First Nine Months 2013
The net new vehicle inventory carrying benefit increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 primarily due to an increase in floorplan assistance. Floorplan assistance increased due to higher new vehicle sales and an increase in the floorplan assistance rate per unit, which was due in part to a change in a manufacturer floorplan assistance program.



28

Used Vehicle
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions, except per vehicle data)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Reported:
Retail revenue
$
1,046.2

$
933.0

$
113.2

12.1

$
2,981.1

$
2,786.2

$
194.9

7.0

Wholesale revenue
102.3

111.7

(9.4
)
(8.4
)
299.4

324.7

(25.3
)
(7.8
)
Total revenue
$
1,148.5

$
1,044.7

$
103.8

9.9

$
3,280.5

$
3,110.9

$
169.6

5.5

Retail gross profit
$
91.8

$
80.4

$
11.4

14.2

$
273.3

$
247.1

$
26.2

10.6

Wholesale gross profit
(3.4
)
0.1

(3.5
)
(1.3
)
3.5

(4.8
)
Total gross profit
$
88.4

$
80.5

$
7.9

9.8

$
272.0

$
250.6

$
21.4

8.5

Retail vehicle unit sales
56,584

52,659

3,925

7.5

161,376

155,280

6,096

3.9

Revenue per vehicle retailed
$
18,489

$
17,718

$
771

4.4

$
18,473

$
17,943

$
530

3.0

Gross profit per vehicle retailed
$
1,622

$
1,527

$
95

6.2

$
1,694

$
1,591

$
103

6.5

Gross profit as a percentage of revenue
8.8
%
8.6
%
9.2
%
8.9
%
Days supply (trailing calendar month days)
32 days

31 days

Three Months Ended September 30,
Nine Months Ended September 30,
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Same Store:
Retail revenue
$
1,034.7

$
931.8

$
102.9

11.0

$
2,938.8

$
2,780.3

$
158.5

5.7

Wholesale revenue
101.2

111.0

(9.8
)
(8.8
)
294.5

323.3

(28.8
)
(8.9
)
Total revenue
$
1,135.9

$
1,042.8

$
93.1

8.9

$
3,233.3

$
3,103.6

$
129.7

4.2

Retail gross profit
$
90.6

$
80.3

$
10.3

12.8

$
268.8

$
246.4

$
22.4

9.1

Wholesale gross profit
(3.4
)
0.1

(3.5
)
(1.4
)
3.6

(5.0
)
Total gross profit
$
87.2

$
80.4

$
6.8

8.5

$
267.4

$
250.0

$
17.4

7.0

Retail vehicle unit sales
55,943

52,565

3,378

6.4

158,632

154,882

3,750

2.4

Revenue per vehicle retailed
$
18,496

$
17,727

$
769

4.3

$
18,526

$
17,951

$
575

3.2

Gross profit per vehicle retailed
$
1,620

$
1,528

$
92

6.0

$
1,694

$
1,591

$
103

6.5

Gross profit as a percentage of revenue
8.8
%
8.6
%
9.1
%
8.9
%
Third Quarter 2014 compared to Third Quarter 2013
Same store retail used vehicle revenue increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , due to an increase in same store unit volume and an increase in revenue per used vehicle retailed. Same store 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 benefited from an increase in the average selling prices of used vehicles for all three segments, a shift in mix away from Import vehicles, which have relatively lower average selling prices, and an increase in sales of certified pre-owned vehicles, which have relatively higher average selling prices.
Same store gross profit per used vehicle retailed increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , due to a shift in mix away from Import vehicles, which have a relatively lower average gross profit per vehicle retailed, and an increase in the gross profit per vehicle retailed for Premium Luxury vehicles.

First Nine Months 2014 compared to First Nine Months 2013
Same store retail used vehicle revenue increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , due to an increase in revenue per used vehicle retailed and an increase in same store unit volume. Same store revenue per used vehicle retailed benefited from an increase in the average selling prices of used vehicles for all three segments, a shift in mix away from Import vehicles, which have relatively lower average selling prices, and an increase in sales of certified pre-owned vehicles, which have relatively higher average selling prices.


29

Same store unit volume benefited from an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume.
Same store gross profit per used vehicle retailed increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , due to an increase in the gross profit per vehicle retailed for Import and Premium Luxury vehicles and a shift in mix away from Import vehicles, which have a relatively lower average gross profit per vehicle retailed.
Used Vehicle Inventories
Used vehicle inventories were $394.7 million or 32 days supply at September 30, 2014 , compared to $346.5 million or 35 days supply at December 31, 2013 , and $350.4 million or 31 days supply at September 30, 2013 .



30

Parts and Service
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Reported:
Revenue
$
717.4

$
653.8

$
63.6

9.7
$
2,093.2

$
1,946.3

$
146.9

7.5
Gross Profit
$
303.7

$
277.1

$
26.6

9.6
$
891.2

$
829.6

$
61.6

7.4
Gross profit as a percentage of revenue
42.3
%
42.4
%
42.6
%
42.6
%
Same Store:
Revenue
$
710.3

$
652.2

$
58.1

8.9
$
2,062.7

$
1,940.3

$
122.4

6.3
Gross Profit
$
300.5

$
276.5

$
24.0

8.7
$
877.7

$
827.1

$
50.6

6.1
Gross profit as a percentage of revenue
42.3
%
42.4
%
42.6
%
42.6
%

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.
Third Quarter 2014 compared to Third Quarter 2013
During the three months ended September 30, 2014 , same store parts and service gross profit increased as compared to the same period in 2013 , primarily due to increases in gross profit associated with warranty of $10.7 million , customer-pay service of $4.4 million , the preparation of vehicles for sale of $3.9 million , and collision business of $2.2 million .
Warranty gross profit benefited from the rise of manufacturer recalls in our Domestic and Import segments, an increase in volume, improved margin performance, and an increase in manufacturer-paid vehicle maintenance. Customer-pay service gross profit benefited from improved operational execution and improved margin performance. Gross profit associated with the preparation of vehicles for sale benefited from higher new and used vehicle unit volume. Gross profit associated with our collision business benefited from increased volume referred by automotive insurance providers.
First Nine Months 2014 compared to First Nine Months 2013
During the nine months ended September 30, 2014 , same store parts and service gross profit increased as compared to the same period in 2013 , primarily due to increases in gross profit associated with warranty of $20.9 million , the preparation of vehicles for sale of $9.6 million , collision business of $7.4 million , and customer-pay service of $7.3 million .
Warranty gross profit benefited from the rise of manufacturer recalls in our Domestic and Import segments, an increase in volume, improved margin performance, and an increase in manufacturer-paid vehicle maintenance. Gross profit associated with the preparation of vehicles for sale benefited from higher new and used vehicle unit volume. Gross profit associated with our collision business benefited from increased volume referred by automotive insurance providers and improved margin performance. Customer-pay service gross profit benefited from improved operational execution and improved margin performance.



31

Finance and Insurance
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions, except per vehicle data)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Reported:
Revenue and gross profit
$
196.5

$
174.9

$
21.6

12.3
$
554.3

$
504.4

$
49.9

9.9
Gross profit per vehicle retailed
$
1,401

$
1,350

$
51

3.8
$
1,397

$
1,350

$
47

3.5
Same Store:
Revenue and gross profit
$
194.2

$
174.7

$
19.5

11.2
$
546.6

$
503.4

$
43.2

8.6
Gross profit per vehicle retailed
$
1,403

$
1,351

$
52

3.8
$
1,404

$
1,351

$
53

3.9

Third Quarter 2014 compared to Third Quarter 2013
Same store finance and insurance revenue and gross profit increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , due to increases in new and used vehicle unit volume and same store finance and insurance revenue and gross profit per vehicle retailed.
Same store finance and insurance revenue and gross profit per vehicle retailed benefited from a shift in mix toward more profitable vehicle service contracts and an increase in product penetration for vehicle service contracts.
First Nine Months 2014 compared to First Nine Months 2013
Same store finance and insurance revenue and gross profit increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , due to increases in new and used vehicle unit volume and same store finance and insurance revenue and gross profit per vehicle retailed.
Same store finance and insurance revenue and gross profit per vehicle retailed benefited from a shift in mix toward more profitable vehicle service contracts and an increase in product penetration for vehicle service contracts.




32

Segment Results
In the following table, revenue and segment income of our reportable segments is reconciled to consolidated revenue and consolidated operating income, respectively.
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue:
Domestic
$
1,660.7

$
1,491.2

$
169.5

11.4
$
4,738.6

$
4,384.5

$
354.1

8.1

Import
1,787.8

1,695.5

92.3

5.4
5,055.0

4,828.5

226.5

4.7

Premium Luxury
1,422.9

1,247.4

175.5

14.1
4,161.2

3,662.7

498.5

13.6

Total
4,871.4

4,434.1

437.3

9.9
13,954.8

12,875.7

1,079.1

8.4

Corporate and other
37.6

36.7

0.9

2.5
106.2

118.0

(11.8
)
(10.0
)
Total consolidated revenue
$
4,909.0

$
4,470.8

$
438.2

9.8
$
14,061.0

$
12,993.7

$
1,067.3

8.2

Segment income (1) :
Domestic
$
76.7

$
64.2

$
12.5

19.5
$
211.0

$
188.9

$
22.1

11.7

Import
77.1

72.7

4.4

6.1
220.0

216.6

3.4

1.6

Premium Luxury
84.0

74.2

9.8

13.2
253.1

218.7

34.4

15.7

Total
237.8

211.1

26.7

12.6
684.1

624.2

59.9

9.6

Corporate and other
(43.5
)
(36.6
)
(6.9
)
(129.4
)
(125.9
)
(3.5
)
Floorplan interest expense
13.1

12.7

(0.4
)
39.6

39.2

(0.4
)
Operating income
$
207.4

$
187.2

$
20.2

10.8
$
594.3

$
537.5

$
56.8

10.6

(1) Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.
Retail new vehicle unit sales:
Domestic
27,041

25,107

1,934

7.7
77,038

72,842

4,196

5.8

Import
41,765

38,906

2,859

7.3
116,375

108,382

7,993

7.4

Premium Luxury
14,876

12,930

1,946

15.1
42,046

37,230

4,816

12.9

83,682

76,943

6,739

8.8
235,459

218,454

17,005

7.8





33

Domestic
The Domestic segment operating results included the following:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue
$
1,660.7

$
1,491.2

$
169.5

11.4
$
4,738.6

$
4,384.5

$
354.1

8.1
Segment income
$
76.7

$
64.2

$
12.5

19.5
$
211.0

$
188.9

$
22.1

11.7
Retail new vehicle unit sales
27,041

25,107

1,934

7.7
77,038

72,842

4,196

5.8
Third Quarter 2014 compared to Third Quarter 2013
Domestic revenue increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new and used vehicle unit volume and an increase in revenue per new and used 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. New product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. The increase in used vehicle unit volume was primarily due to an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume.
Domestic segment income increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in parts and service gross profit and an increase in finance and insurance revenue and gross profit, which benefited from higher vehicle unit volume and an increase in finance and insurance revenue and gross profit per vehicle retailed. Increases in Domestic segment income were partially offset by an increase in variable expenses.
First Nine Months 2014 compared to First Nine Months 2013
Domestic revenue increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new and used vehicle unit volume and an increase in revenue per new and used 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. New product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. The increase in used vehicle unit volume was primarily due to an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume.
Domestic segment income increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in parts and service gross profit and 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 vehicle unit volume. Increases in Domestic segment income were partially offset by an increase in variable expenses.





34

Import
The Import segment operating results included the following:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue
$
1,787.8

$
1,695.5

$
92.3

5.4
$
5,055.0

$
4,828.5

$
226.5

4.7
Segment income
$
77.1

$
72.7

$
4.4

6.1
$
220.0

$
216.6

$
3.4

1.6
Retail new vehicle unit sales
41,765

38,906

2,859

7.3
116,375

108,382

7,993

7.4
Third Quarter 2014 compared to Third Quarter 2013
Import revenue increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new vehicle unit volume. 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. 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 2013.
Import segment income increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in finance and insurance revenue and gross profit, which benefited from higher new vehicle unit volume and an increase in finance and insurance revenue and gross profit per vehicle retailed. Import segment income also benefited from an increase in parts and service gross profit and the recent acquisitions noted in the paragraph above. These increases were partially offset by an increase in variable expenses and a decrease in new vehicle gross profit due to a decrease in new vehicle gross profit per vehicle retailed.
First Nine Months 2014 compared to First Nine Months 2013
Import revenue increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new vehicle unit volume. 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. 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 second and fourth quarters of 2013.
Import segment income increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , 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 vehicle unit volume. Import segment income also benefited from an increase in parts and service gross profit and the recent acquisitions noted in the paragraph above. These increases were partially offset by an increase in variable expenses and a decrease in new vehicle gross profit due to a decrease in new vehicle gross profit per vehicle retailed.








35

Premium Luxury
The Premium Luxury segment operating results included the following:
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Revenue
$
1,422.9

$
1,247.4

$
175.5

14.1
$
4,161.2

$
3,662.7

$
498.5

13.6
Segment income
$
84.0

$
74.2

$
9.8

13.2
$
253.1

$
218.7

$
34.4

15.7
Retail new vehicle unit sales
14,876

12,930

1,946

15.1
42,046

37,230

4,816

12.9
Third Quarter 2014 compared to Third Quarter 2013
Premium Luxury revenue increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new and used vehicle unit volume and an increase in revenue per new and used 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. New product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. The increase in used vehicle unit volume was primarily due to an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume.
Premium Luxury segment income increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in parts and service gross profit and an increase in finance and insurance revenue and gross profit, which benefited from higher vehicle unit 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 retail used vehicle gross profit, which benefited from higher used vehicle unit volume and an increase in gross profit per used vehicle retailed. Increases in Premium Luxury segment income were partially offset by an increase in variable expenses.
First Nine Months 2014 compared to First Nine Months 2013
Premium Luxury revenue increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in new and used vehicle unit volume and an increase in revenue per new and used 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. New product offerings from automotive manufacturers also favorably impacted new vehicle unit volume. The increase in used vehicle unit volume was primarily due to an increase in sales of certified pre-owned vehicles, as well as an increase in trade-in volume.
Premium Luxury segment income increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in parts and service gross profit and an increase in finance and insurance revenue and gross profit, which benefited from higher vehicle unit 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, which benefited from higher new vehicle unit volume. Increases in Premium Luxury segment income were partially offset by an increase in variable expenses.




36

Selling, General, and Administrative Expenses
Our Selling, General, and Administrative (“SG&A”) expenses 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 expenses.
Three Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
2014
2013
Variance
Favorable /
(Unfavorable)
%
Variance
Reported:
Compensation
$
342.3

$
313.2

$
(29.1
)
(9.3
)
$
1,010.6

$
935.8

$
(74.8
)
(8.0
)
Advertising
40.8

41.9

1.1

2.6

125.7

129.7

4.0

3.1

Store and corporate overhead
139.2

130.0

(9.2
)
(7.1
)
411.3

387.0

(24.3
)
(6.3
)
Total
$
522.3

$
485.1

$
(37.2
)
(7.7
)
$
1,547.6

$
1,452.5

$
(95.1
)
(6.5
)
SG&A as a % of total gross profit:
Compensation
45.5

45.0

(50
)
bps
45.8

45.5

(30
)
bps
Advertising
5.4

6.0

60

bps
5.7

6.3

60

bps
Store and corporate overhead
18.5

18.6

10

bps
18.7

18.8

10

bps
Total
69.4

69.6

20

bps
70.2

70.6

40

bps
Third Quarter 2014 compared to Third Quarter 2013
SG&A expenses increased during the three months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to a performance-driven increase in compensation expense and an increase in store and corporate overhead expenses. As a percentage of total gross profit, SG&A expenses decreased to 69.4% during the three months ended September 30, 2014 , from 69.6% in the same period in 2013 .
First Nine Months 2014 compared to First Nine Months 2013
SG&A expenses increased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to a performance-driven increase in compensation expense and an increase in store and corporate overhead expenses. As a percentage of total gross profit, SG&A expenses decreased to 70.2% during the nine months ended September 30, 2014 , from 70.6% in the same period in 2013 .
Re-branding Initiative
During the nine months ended September 30, 2013 , we recorded non-recurring SG&A expenses of approximately $18 million, primarily comprised of advertising expenses, related to the re-branding of our Domestic and Import stores under the AutoNation retail brand.
Other Expenses (Income), Net (included in Operating Income)
During the third quarter of 2014, we recognized a gain related to the divestiture of an Import store of $4.0 million ($2.5 million after-tax). During the second quarter of 2014, we recognized a gain related to a legal settlement of $4.0 million ($2.5 million after-tax). During the first quarter of 2014, we recognized a net gain related to business/property dispositions of $8.0 million ($5.0 million after-tax), primarily related to the divestiture of our customer lead distribution business.
Non-Operating Income (Expense)
Floorplan Interest Expense
Floorplan interest expense for the three and nine months ended September 30, 2014 , was relatively flat compared to the same periods in 2013 .



37

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. Other interest expense for the three and nine months ended September 30, 2014 , was relatively flat compared to the same periods in 2013 .
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.
Third Quarter 2014 compared to Third Quarter 2013
Our effective income tax rate was 38.6% for the three months ended September 30, 2014 , and 38.8% for the three months ended September 30, 2013 .
First Nine Months 2014 compared to First Nine Months 2013
Our effective income tax rate was 38.7% for the nine months ended September 30, 2014 , and 38.7% for the nine months ended September 30, 2013 .
Discontinued Operations
Discontinued operations are related to stores that were sold or terminated prior to January 1, 2014. 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 were closed prior to January 1, 2014, and other adjustments related to disposed operations.

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)
September 30,
2014
December 31,
2013
Cash and Cash Equivalents
$
67.5

$
69.2

Revolving Credit Facility (1)
$
744.4

$
854.4

Secured Used Vehicle Floorplan Facilities (2)
$
50.2

$
50.0

(1)
Based on aggregate borrowings outstanding of $410.0 million and outstanding letters of credit of $45.6 million at September 30, 2014 , and aggregate borrowings outstanding of $300.0 million and outstanding letters of credit of $45.6 million at December 31, 2013 . 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. At September 30, 2014 , surety bonds, letters of credit, and cash deposits totaled $91.8 million , including $45.6 million of letters of credit. We do not currently provide cash collateral for outstanding letters of credit.
In February 2014, we filed an automatic shelf registration statement with the SEC 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.


38

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 for existing franchises, 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 and/or build facilities for newly awarded franchises. 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
Nine Months Ended
September 30,
September 30,
(In millions, except per share data)
2014
2013
2014
2013
Shares repurchased
4.4

—

8.0

0.1

Aggregate purchase price
$
235.9

$
—

$
415.7

$
4.9

Average purchase price per share
$
53.15

$
—

$
51.98

$
40.81


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 3.75 x 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.

From October 1, 2014 through October 27, 2014, we repurchased an additional 1.4 million shares for an aggregate purchase price of $68.5 million (average purchase price per share of $49.29 ). In October 2014, our Board of Directors authorized an additional $250 million under our existing share repurchase program. As of October 27, 2014, $281.5 million remained available for share repurchases under the program.
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
Nine Months Ended
September 30,
September 30,
(In millions)
2014
2013
2014
2013
Purchases of property and equipment, including operating lease buy-outs (1)
$
52.0

$
85.3

$
139.8

$
139.9

(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 $190 million in 2014 , primarily related to our store facilities.


39

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
Nine Months Ended
September 30,
September 30,
(In millions)
2014
2013
2014
2013
Cash received from (used in) business acquisitions, net
$
(13.3
)
$
(0.4
)
$
(13.3
)
$
(72.9
)
Cash received from (used in) business divestitures, net
$
11.7

$
—

$
21.5

$
10.1

We purchased one store and related assets during the nine months ended September 30, 2014 , compared to three during the nine months ended September 30, 2013 . On October 22, 2014, we purchased four stores and related assets in the Seattle-Bellevue, Washington market.
During the third quarter of 2014, we divested an Import store and recorded a gain of $4.0 million ($2.5 million after-tax). During the first quarter of 2014, we divested our customer lead distribution business and recorded a gain of $8.4 million ( $5.2 million after-tax). This business is reported in the “Corporate and other” category of our segment information.
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.
Long-Term Debt
The following table sets forth our non-vehicle long-term debt as of September 30, 2014 , and December 31, 2013 .
(In millions)
September 30,
2014
December 31,
2013
6.75% Senior Notes due 2018
$
396.9

$
396.3

5.5% Senior Notes due 2020
350.0

350.0

Term loan facility due 2016
500.0

500.0

Revolving credit facility due 2016
410.0

300.0

Mortgage facility (1)
187.8

194.7

Capital leases and other debt
88.3

98.9

1,933.0

1,839.9

Less: current maturities
(17.5
)
(30.1
)
Long-term debt, net of current maturities
$
1,915.5

$
1,809.8

(1) The mortgage facility requires monthly principal and interest payments of $1.7 million based on a fixed amortization schedule with a balloon payment of $155.4 million due November 2017.
Senior Unsecured Notes
At September 30, 2014 , we had outstanding $396.9 million of 6.75% Senior Notes due 2018, net of debt discount. Interest on the 6.75% Senior Notes due 2018 is payable on April 15 and October 15 of each year. These notes will mature on April 15, 2018 .
At September 30, 2014 , we had outstanding $350.0 million of 5.5% Senior Notes due 2020. Interest is payable on February 1 and August 1 of each year. At any time prior to February 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 on February 1, 2020 .
Our senior unsecured notes are guaranteed by substantially all of our subsidiaries.


40

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 on December 7, 2016. As of September 30, 2014 , we had borrowings outstanding of $410.0 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 $45.6 million at September 30, 2014 , leaving an additional borrowing capacity under the revolving credit facility of $744.4 million at September 30, 2014 .
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.
We monitor credit market conditions on an ongoing basis, and we are currently evaluating opportunities to refinance our credit facilities and/or issue additional debt securities.
Vehicle Floorplan Payable
Vehicle floorplan payable-trade totaled $1.9 billion at September 30, 2014 , and $2.1 billion at December 31, 2013 . Vehicle floorplan payable-trade reflects amounts borrowed to finance the purchase of specific new vehicle inventories with manufacturers’ captive finance subsidiaries.
Vehicle floorplan payable-non-trade totaled $862.1 million at September 30, 2014 , and $898.9 million at December 31, 2013 , 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.
At September 30, 2014 , the aggregate capacity under our used vehicle floorplan facilities was $275.0 million . As of that date, $189.1 million had been borrowed under those facilities, and the remaining borrowing capacity of $85.9 million was limited to $50.2 million based on the eligible used vehicle inventory that could have been pledged as collateral.
At December 31, 2013 , the aggregate capacity under our used vehicle floorplan facilities was $275.0 million . As of that date, $177.3 million had been borrowed under those facilities, and the remaining borrowing capacity of $97.7 million was limited to $50.0 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
At September 30, 2014 , we had $187.8 million outstanding under a mortgage facility with an automotive manufacturer’s captive finance subsidiary that matures on November 30, 2017. The mortgage facility utilizes a fixed interest rate of 5.864% and is secured by 10-year mortgages on certain of our store properties. The mortgage facility requires monthly principal and interest payments of $1.7 million based on a fixed amortization schedule with a balloon payment of $155.4 million due November 2017. Repayment of the mortgage facility is subject to a prepayment penalty.
At September 30, 2014 , we had capital lease and other debt obligations of $88.3 million , which are due at various dates through 2034 .


41

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 leverage ratio is 3.75 x and the maximum capitalization ratio is 65.0% . 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 to September 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 on December 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 of AutoNation.
As of September 30, 2014 , we were in compliance with the requirements of the financial covenants under our debt agreements. Under the terms of our credit agreement, at September 30, 2014 , our leverage ratio and capitalization ratio were as follows:
September 30, 2014
Requirement
Actual
Leverage ratio
≤ 3.75x
2.19x
Capitalization ratio
≤ 65.0%
57.1%

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:
Nine Months Ended
September 30,
(In millions)
2014
2013
Net cash provided by operating activities
$
452.9

$
468.3

Net cash used in investing activities
$
(149.2
)
$
(211.8
)
Net cash used in financing activities
$
(305.4
)
$
(257.9
)
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


42

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 decreased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to an increase in working capital requirements, partially offset by an increase in earnings.
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 decreased during the nine months ended September 30, 2014 , as compared to the same period in 2013 , primarily due to a decrease in cash used in business acquisitions, net of cash acquired, a decrease in property operating lease buy-outs, and an increase in cash received from business divestitures, net of cash relinquished, partially offset by an increase in property and equipment purchases.
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 2014 capital expenditures, including accrued construction in progress, will be approximately $190 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 nine months ended September 30, 2014 , we repurchased 8.0 million shares of common stock for an aggregate purchase price of $415.7 million (average purchase price per share of $51.98 ). In addition, during the nine months ended September 30, 2014 , 46,265 shares were surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock.
During the nine months ended September 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 nine months ended September 30, 2013 , 42,822 shares were surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock.
During the nine months ended September 30, 2014 , we borrowed $960.0 million and repaid $850.0 million under our revolving credit facility, for net borrowings of $110.0 million . During the nine months ended September 30, 2013 , we borrowed $620.0 million and repaid $840.0 million under our revolving credit facility, for net repayments of $220.0 million .
We made payments of capital lease and other debt obligations of $22.3 million during the nine months ended September 30, 2014 , and $23.3 million during the nine months ended September 30, 2013 .
We had proceeds from the exercise of stock options of $29.6 million during the nine months ended September 30, 2014 , and $20.5 million during the nine months ended September 30, 2013 .
Cash flows from financing activities also include changes in vehicle floorplan payable-non-trade totaling net payments of $53.0 million for the nine months ended September 30, 2014 and net payments of $12.2 million for the nine months ended September 30, 2013 .


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Recent Accounting Pronouncements
See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements.
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 expected future investments in our business and our expectations for the future performance of our franchises and the automotive retail industry, 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, or 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 United States and in our particular geographic markets and the level of gross profit margins that we can achieve on our sales of new vehicles, all of which are very difficult to predict.
•
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 other restrictions 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, marketing, and other 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 purported 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.


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•
Our largest stockholders, as a result of their ownership stakes in us, may 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 or unauthorized 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. These forward-looking statements speak only as of the date of this report, and 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 about AutoNation, 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 in AutoNation to review the information that we post on these social media channels. These channels may be updated from time to time on AutoNation’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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our primary market risk exposure is changing LIBOR-based interest rates. Interest rate derivatives may be used to hedge a portion of our variable rate debt when appropriate based on market conditions.
We had $2.8 billion of variable rate vehicle floorplan payable at September 30, 2014 , and $3.0 billion at December 31, 2013 . Based on these amounts, a 100 basis point change in interest rates would result in an approximate change of $27.7 million at September 30, 2014 , and $30.3 million at December 31, 2013 , to our annual floorplan interest expense. Our exposure to changes in interest rates with respect to total vehicle floorplan payable is partially mitigated by manufacturers’ floorplan assistance, which in some cases is based on variable interest rates.
We had $0.9 billion of other variable rate debt outstanding at September 30, 2014 and $0.8 billion at December 31, 2013 . Based on the amounts outstanding, a 100 basis point change in interest rates would result in an approximate change to annual interest expense of $9.1 million at September 30, 2014 , and $8.0 million at December 31, 2013 .
Our fixed rate debt, primarily consisting of amounts outstanding under our senior unsecured notes and mortgages, totaled $1.0 billion and had a fair value of $1.1 billion as of September 30, 2014 , and as of December 31, 2013 .

ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.


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Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




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PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS
In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our most recent Annual Report on Form 10-K, which could materially affect our business, financial condition, or future results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information with respect to shares of common stock repurchased by AutoNation, Inc. during the three months ended September 30, 2014 .

Period
Total Number of
Shares Purchased (1)
Avg. Price
Paid Per
Share
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar Value of
Shares That May Yet Be
Purchased  Under The
Programs (in millions) (1)
July 1, 2014 - July 31, 2014
1,527,134

$
56.31

1,526,404

$
250.0

August 1, 2014 - August 31, 2014
766,419

$
53.79

765,573

$
208.8

September 1, 2014 - September 30, 2014
2,147,131

$
50.67

2,146,919

$
100.0

Total
4,440,684

4,438,896

(1)
Our Board of Directors from time to time authorizes the repurchase of shares of our common stock up to a certain monetary limit. As of September 30, 2014 , $100.0 million remained available under our stock repurchase authorization limit. The Board’s authorization has no expiration date. During the third quarter of 2014 , all of the shares reflected in the table above were repurchased under our stock repurchase program, except for 1,788 shares surrendered to AutoNation to satisfy tax withholding obligations in connection with the vesting of restricted stock. In October 2014, our Board authorized the repurchase of an additional $250 million in shares of our common stock.

ITEM 6. EXHIBITS
Exhibit No.
Description
10.1
Amended Employment Agreement, dated October 23, 2014, between AutoNation, Inc. and Michael E. Maroone, President and Chief Operating Officer.
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Exchange Act.
32.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
32.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document




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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AUTONATION, INC.
Date:
October 28, 2014
By:
/s/ Michael J. Stephan
Michael J. Stephan
Vice President – Corporate Controller
(Duly Authorized Officer and
Principal Accounting Officer)



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