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Article by DailyStocks_admin    (03-20-12 02:00 AM)

Description

Autonation Inc. 10% Owner INVESTMENT LLC CASCADE bought 60000 shares on 3-14-2012 at $ 34.6

BUSINESS OVERVIEW

Operating Segments
As of December 31, 2011 , we had three operating segments: Domestic, Import, and Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by General Motors, Ford, 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, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. For the year ended December 31, 2011 , Domestic revenue represented 34% of total revenue, Import revenue represented 37% of total revenue, and Premium Luxury revenue represented 28% of total revenue. For additional financial information regarding our three operating segments, please refer to Note 20 of the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of this Form 10-K.

Except to the extent that differences among operating segments are material to an understanding of our business taken as a whole, the description of our business in this report is presented on a consolidated basis.
Business Strategy
We seek to be the best-run, most profitable automotive retailer in the nation. The foundation of our business model is operational excellence, with a focus on developing and maintaining satisfied relationships with our customers. In order to achieve and sustain operational excellence, we are pursuing the following strategies:


•Create an industry-leading automotive retail consumer experience

•Leverage our significant scale and cost structure to improve our operating efficiency

•Leverage information technology to enhance customer relationships and improve productivity

•Build powerful local brands while also building consumer awareness of the AutoNation brand
We have a well-diversified brand portfolio. In 2011 , approximately 39% of our new vehicle revenue was generated by Import franchises, approximately 28% by Premium Luxury franchises, and approximately 33% was generated by Domestic franchises. While we will continue to look for acquisition and new store opportunities that meet our market and brand criteria and return on investment threshold, we do not expect significant shifts in our overall store mix in 2012 .
A key component of our long-term strategy is to maximize the return on investment generated by the use of cash flow that our business generates, while maintaining a strong balance sheet. We expect to use our cash flow to make capital investments in our business, to complete dealership acquisitions, and to repurchase our common stock and/or debt. 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 brand criteria and return on investment threshold, and limitations set forth in our debt agreements. For additional information regarding our capital allocation strategy, please refer to “Liquidity and Capital Resources – Capital Allocation” in Part II, Item 7 of this Form 10-K.
Finally, we believe that our business benefits from diverse revenue streams generated by our new and used vehicle sales, parts and service business, and finance and insurance sales. Our higher-margin parts and service business has historically been less sensitive to macroeconomic trends as compared to new vehicle sales.
Create an Industry-Leading Automotive Retail Consumer Experience
One of our goals is to provide an industry-leading retail consumer experience at our stores in order to build customer loyalty to our brand. The following practices and initiatives support an enhanced customer retail experience:

•Improving Customer Service: The success of our stores depends in significant part on our ability to deliver positive experiences to our customers, which generate recurring and referral business. We have developed and implemented standardized, customer-friendly sales and service processes, including a customer-friendly sales menu designed to provide clear disclosure of purchase or lease transaction terms. We also offer our customers a limited-mileage, money-back guarantee on both our new and used vehicles as an indication of our commitment to their satisfaction. We believe these policies improve the sales and service experiences of our customers. We emphasize the importance of customer satisfaction to our key store personnel by basing a portion of their compensation on the quality of customer service they provide in connection with vehicle sales and service.

•Increasing Parts and Service Sales: One of our goals is to have our customers bring their vehicles to our stores for all of their vehicle service, maintenance, and collision needs. Our key initiatives for our parts and service business are focused on optimizing our processes, pricing, and promotion, thus improving customer retention. Across all of our stores, we have implemented standardized service processes and marketing communications, which offer the complete range of vehicle maintenance and repair services and are focused on increasing our customer-pay service, collision, and parts business. As a result of our significant scale, we can communicate effectively with our customers. We optimize our pricing to maintain a competitive offering for commonly-performed vehicle services and repairs for like-brand vehicles within each of our markets.


•Increasing Finance, Insurance, and Other Aftermarket Product Sales: We continue to improve our finance and insurance business by using our standardized processes across our store network. One of our goals is to improve customer retention after the sale of the vehicle through our finance and insurance products. Our customers are presented with the “AutoNation Pledge,” which provides clear disclosure relating to the finance and insurance sales process, and with a customer-friendly finance and insurance menu, which is designed to ensure that we offer our customers the complete range of finance, insurance, protection, and other aftermarket products in a transparent manner. We offer our customers aftermarket products such as extended service contracts, maintenance programs, theft deterrent systems, and various insurance products. We continue to focus on optimizing the mix of financing sources available to promote vehicle sales and improve the customer experience.
Leverage Our Significant Scale and Cost Structure to Improve our Operating Efficiency
We leverage our scale as the largest automotive retailer in the United States to drive significant cost savings in our business. The following practices and initiatives reflect our commitment to leveraging our scale and managing cost:

•Managing New Vehicle Inventories and Optimizing New Vehicle Pricing: We manage our new vehicle inventories to optimize our stores’ supply and mix of vehicle inventory. Through the use of our planning and tracking systems in markets where our stores have critical mass in a particular brand, we view new vehicle inventories at those same brand stores in the aggregate and coordinate vehicle ordering and inventories across those stores. We manage our new vehicle inventory to achieve specific days supply targets in order to support sales volumes. We also target our new vehicle inventory purchasing to our core, or highest-volume, model packages. We are focused on maintaining appropriate inventory levels in order to minimize carrying costs. We believe our inventory management enables us to (1) respond to customer requests better than independent automotive retailers, (2) minimize carrying costs by optimizing days supply, and (3) better plan and forecast inventory levels. See also “Inventory Management” in Part II, Item 7 of this Form 10-K. Further, during 2011 we implemented a pricing strategy across our store portfolio that included the deployment of a proprietary pricing tool to capture various market pricing metrics and establish target and floor prices.

•Increasing Used Vehicle Sales and Managing Used Vehicle Inventories: Each of our stores offers a variety of used vehicles. As the largest retailer of new vehicles, we believe that we have superior access to desirable used vehicle inventory. We are also able to realize the benefits of vehicle manufacturer-supported certified pre-owned vehicle programs, which are typically more profitable than our non-certified used vehicle sales. Our used vehicle business strategy is focused on (1) utilizing our web-based vehicle inventory management system to optimize our supply, mix, and pricing, (2) leveraging our used vehicle inventory to offer our customers a wide selection of desirable lower-cost vehicles, which are often in high demand by consumers, and (3) leveraging our scale with comprehensive used vehicle marketing programs, such as market-wide promotional events and standardized approaches to advertising that we can implement more effectively than smaller automotive retailers because of our size. We have deployed used vehicle specialists in each of our key markets to assist us in executing our strategy.

•Centralizing Store Back-Office Operations in Our Shared Services Center: We have centralized key store-level accounting and administrative activities in our Shared Services Center located in Irving, Texas. The initial or “core” phase included the centralization of basic accounting functions. We have implemented the core phase in substantially all of our stores. In the “extended” phase, we are transferring additional accounting responsibilities, including the accounting for vehicle sales, lien payoffs, receipt of vehicles, floorplan transactions, and manufacturer payables, as well as certain other reconciliation processes. We have substantially implemented the extended phase in 156 of our 215 stores as of December 31, 2011 , and we plan to implement the extended phase in substantially all remaining stores in 2012. By shifting these functions from the stores to the Shared Services Center, we have improved financial controls and lowered servicing costs. We also believe that the standardization of these processes across our stores improves the customer experience.

•Increasing Employee Productivity: Our compensation and employee training programs drive productivity through standardized operating practices. Our standardized compensation guidelines and common element pay plans at our stores take into account our sales volume, customer satisfaction, gross margin objectives, vehicle brand, and store size. Our goals related to compensation are to improve employee productivity, to reward and retain high-performing employees, and to ensure appropriate variability of our compensation expense. Further, our customized comprehensive training program for key store employees facilitates standardized operating practices and policies across all of our stores. Our training program educates our key store employees about their respective job roles and responsibilities, applicable laws and regulations, and our standardized processes in all of our areas of operation, including sales, finance and insurance, and parts and service. We also require all of our employees, from our senior management to our technicians, to participate in our Business Ethics Program. In addition, we run several AutoNation University programs for our general managers and sales and service managers and associates to develop leadership skills and to ensure consistent execution of our practices and policies. We expect our comprehensive training program to improve our productivity by ensuring that all of our employees consistently execute our business strategy and manage our daily operations in accordance with our common processes and policies, applicable laws and regulations, and our high standards of business ethics.

•Managing Costs: We actively manage our business and leverage our scale to reduce costs. We continue to focus on developing national vendor relationships to standardize our stores’ approach to purchasing certain equipment, supplies, and services, and to improve our cost efficiencies. For example, we realize cost efficiencies with respect to advertising and facilities maintenance that are generally not available to smaller automotive retailers.
Leverage Information Technology to Enhance Customer Relationships and Improve Productivity
We use a web-based customer relationship management tool across all of our stores, which enables us to promote and sell our vehicles and other products more effectively by facilitating better understanding of our customer traffic flows and better management of our showroom sales processes and customer relationships. We have developed a company-wide customer database that captures information on our stores’ existing and potential customers. We believe our customer database enables us to implement more effectively our vehicle sales and service marketing programs. We expect our customer database and other tools to empower us to implement our customer relationship strategy more effectively and improve our productivity.
We also use the Internet to acquire and develop customer leads and referrals. Our website facilitates consumer research about vehicle purchases, including vehicle specifications and financing options. In addition, we are focused on connecting with our customers through social media websites, such as Facebook, Twitter, and YouTube. See “Sales and Marketing” below.
Build a Powerful Local Brand in Each of Our Markets While Also Building Consumer Awareness of the AutoNation Brand
In many of our key markets where we have significant presence, we are marketing our non-premium luxury stores under a local retail brand. We continue to position these local retail brands to communicate to customers the key features that we believe differentiate our stores in our branded markets from our competitors, such as the large inventory available for customers, our sales, service, and finance and insurance standardized processes, and the competitive pricing we offer for widely available vehicle repair services. We believe that this consolidated local market strategy enables us to achieve marketing and advertising cost savings and efficiencies that generally are not available to many of our local competitors. We also believe that we can create strong retail brand awareness in our markets.
Further, through our website, store signage, and media presence, we are creating consumer awareness of the AutoNation brand. Our goal is that our customers will increasingly associate their local dealership not only with the local-market brand, but also with the national AutoNation brand.
We have fifteen local brands in our key markets, including “Maroone” in South Florida; “GO” in Denver, Colorado; “AutoWay” in Tampa, Florida; “Bankston” in Dallas, Texas; “Courtesy” in Orlando, Florida; “Desert” in Las Vegas, Nevada; “Team” in Atlanta, Georgia; “Mike Shad” in Jacksonville, Florida; “Dobbs” in Memphis, Tennessee; “Fox” in Baltimore, Maryland; “Mullinax” in Cleveland, Ohio; “Appleway” in Spokane, Washington; “Champion” in South Texas; “Power” in Southern California and Arizona; and “AutoWest” in Northern California. The stores we operate under these local retail brands as of December 31, 2011 , accounted for approximately 69% of our total revenue during 2011 .


Each of our stores acquires new vehicles for retail sale either directly from the applicable automotive manufacturer or distributor or through dealer trades with other stores of the same franchise. Accordingly, we depend in large part on the automotive manufacturers and distributors to provide us with high-quality vehicles that customers desire and to supply us with such vehicles at suitable quantities and prices and at the right times. Our operations, particularly our sales of new vehicles, are also impacted by the sales incentive programs offered by the automotive manufacturers to spur consumer demand for their vehicles. We generally acquire used vehicles from customer trade-ins, auctions, lease terminations, and other sources. We generally recondition used vehicles acquired for retail sale at our stores’ service facilities and capitalize costs related thereto as used vehicle inventory. We opened 27 Value Vehicle Outlets (“VVOs”) during 2010 and 2011 to address industry supply constraints and meet market demand. Through our VVOs, which are located on existing store facilities, we sell vehicles that we would have traditionally wholesaled with an average retail price lower than that of used vehicles we typically retail. Used vehicles that we do not sell at our stores or VVOs generally are sold at wholesale prices through auctions. See also “Inventory Management” in Part II, Item 7 of this Form 10-K.
We offer a wide variety of automotive finance and insurance products to our customers. We arrange for our customers to finance vehicles through installment loans or leases with third-party lenders, including the vehicle manufacturers’ and distributors’ captive finance subsidiaries, in exchange for a commission payable to us. Commissions that we receive may be subject to chargeback, in full or in part, if loans that we arrange default or are prepaid or upon other specified circumstances. However, our exposure to loss in connection with these financing arrangements generally is limited to the commissions that we receive. We do not directly finance our customers’ vehicle leases or purchases.
We also offer our customers various vehicle protection products, including extended service contracts, maintenance programs, guaranteed auto protection (known as “GAP,” this protection covers the shortfall between a customer’s loan balance and insurance payoff in the event of a casualty), “tire and wheel” protection, and theft protection products. The vehicle protection products that our stores currently offer to customers are underwritten and administered by independent third parties, including the vehicle manufacturers’ and distributors’ captive finance subsidiaries. We primarily sell the products on a straight commission basis; however, we also participate in future underwriting profit for certain products pursuant to retrospective commission arrangements. Commissions that we receive from these third-party providers may be subject to chargeback, in full or in part, if products that we sell, such as extended service contracts, are cancelled. See also “Critical Accounting Policies and Estimates – Chargeback Reserve” in Part II, Item 7 of this Form 10-K.
Our stores also provide a wide range of vehicle maintenance, repair, paint, and collision repair services, including warranty work that can be performed only at franchised dealerships and customer-pay service work.
Sales and Marketing
We retailed approximately 400,000 new and used vehicles through our stores in 2011 . We sell a broad range of well-known vehicle brands within each of our markets.
We have been able to use our significant scale to market our stores and vehicle inventory via the Internet. We believe that the majority of new car buyers research new car information online, which is resulting in better-informed customers and a more efficient sales process. As part of our e-commerce marketing strategy, we are focused on (1) developing websites and an Internet sales process that appeal to online automobile shoppers, (2) obtaining high visibility on the Internet through search engines such as Google, through our own websites, through social media websites such as Facebook, and through strategic partnerships and alliances with e-commerce companies, and (3) developing and maintaining a cost structure that permits us to operate efficiently.
Our marketing efforts are designed to build our business with a broad base of repeat, referral, and new customers. In addition to our online efforts, we engage in marketing and advertising through newspapers, radio, television, direct mail, and outdoor billboards in our local markets. As we have consolidated our operations in certain of our key markets under one local retail brand, we have been able to focus our efforts on building consumer awareness of the selected local retail brand rather than on the individual legacy names under which many of our stores operated prior to their acquisition by us. We also continue to develop advertising campaigns that we can modify for use in multiple local markets. We realize cost efficiencies with respect to advertising expenses that are not generally available to smaller retailers due to our ability to obtain efficiencies in developing advertising campaigns and our ability to gain volume discounts and other concessions as we increase our presence within our key markets and operate our non-premium luxury stores under a single retail brand name in our local markets.

CEO BACKGROUND

Mike Jackson, Robert J. Brown, Rick L. Burdick, William C. Crowley, David B. Edelson, Robert R. Grusky, Michael Larson, Michael E. Maroone, Carlos A. Migoya, and Alison H. Rosenthal,

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of December 31, 2011 , we owned and operated 258 new vehicle franchises from 215 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 32 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 90% of the new vehicles that we sold in 2011 , are manufactured by Ford, Toyota, Nissan, General Motors, Honda, Mercedes-Benz, BMW, and Chrysler .
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, parts and automotive repair and maintenance services (also referred to as “parts and service”), and automotive finance and insurance products (also referred to as “finance and insurance”), which includes the arranging of financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores.
As of December 31, 2011 , we had three operating segments: Domestic, Import, and Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by General Motors, Ford, 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, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products.
For the year ended December 31, 2011 , new vehicle sales accounted for approximately 54% of our total revenue, but approximately 24% of our total gross profit. Used vehicle sales accounted for approximately 25% of our total revenue, and approximately 12% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 20% of total revenue, contributed approximately 63% of our gross profit.

Results of Operations
We had net income from continuing operations of $284.2 million and diluted earnings per share of $1.93 in 2011 , as compared to net income from continuing operations of $235.3 million and diluted earnings per share of $1.48 in 2010 , and net income from continuing operations of $233.1 million and diluted earnings per share of $1.31 in 2009 .
The 2011 results were impacted by a loss on debt extinguishment, including debt refinancing costs and the write-off of previously deferred debt issuance costs, of $2.2 million ($1.4 million after-tax).
The 2010 results were impacted by a loss on debt extinguishment, including debt refinancing costs and the write-off of previously deferred debt issuance costs, of $19.6 million ($12.1 million after-tax).
The 2009 results were impacted by a favorable tax adjustment of approximately $12.7 million, a net gain on asset sales and dispositions of $16.8 million ($10.4 million after-tax), and a gain on senior note repurchases of $13.0 million ($8.1 million after-tax). See Notes 7 and 11 of the Notes to Consolidated Financial Statements for additional information. Our results of operations for 2009 were also favorably impacted by the Consumer Assistance to Recycle and Save Act of 2009, commonly referred to as “cash for clunkers,” that officially began in July 2009 and ended in August 2009. Cash for clunkers stimulated consumer demand for new vehicles, and we sold approximately 12,500 new vehicles under the program.
Market Conditions
Full-year U.S. industry new vehicle unit sales were 12.7 million in 2011 , as compared to 11.5 million in 2010 and 10.4 million in 2009 . While unemployment in the United States remained high, housing markets remained depressed, and the SAAR remained below pre-recession levels, we saw an improving automotive retail market during 2011 as compared to the past few years, and we expect continued improvement over the next several years. We currently anticipate full-year U.S. industry new vehicle unit sales will increase to approximately 14.0 million in 2012 . However, actual sales may materially differ.
In 2011, the earthquake and tsunami that struck Japan and the flooding in Thailand caused significant production and supply chain disruptions that resulted in significantly reduced new vehicle production and lower new vehicle shipments by Japanese manufacturers. These disruptions also impacted non-Japanese manufacturers that rely on components produced in Japan and/or Thailand. In 2011, our unit sales of new vehicles were adversely impacted by these disruptions; however, gross profit per vehicle retailed benefited significantly from constrained supply. Shipments from Japanese manufacturers began to improve at the end of the third quarter and continued to improve in the fourth quarter of 2011. We expect that the improving supply environment will result in lower gross profit per vehicle retailed in 2012.
While we believe that new vehicle unit sales will improve in 2012 and over the next several years, we also believe that the automotive retail market will remain challenging and that the annual rate of new vehicle unit sales will remain below pre-recession levels in 2012 . The rate of industry new vehicle unit sales over the past few years has led to a decline in the number of recent-model-year vehicles in operation, our primary service base, and it may take several years for this service base to return to pre-recession levels.
Debt Refinancing
Please refer to “Liquidity and Capital Resources – Debt Refinancing Transactions” below for a discussion of certain refinancing transactions that we completed during the second quarter of 2010, the fourth quarter of 2011, and the first quarter of 2012.
Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market in our Consolidated Balance Sheets.
We have generally not experienced losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We had 43,906 units in new vehicle inventory at December 31, 2011 , and 48,499 units at December 31, 2010 . We continue to monitor our new vehicle inventory levels closely based on current economic conditions and will adjust them as appropriate.
In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory expected to be liquidated at wholesale auctions at a loss. Our used vehicle inventory balance was net of cumulative write-downs of $0.9 million at December 31, 2011 , and $0.4 million at December 31, 2010 .
Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount of potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $2.8 million at December 31, 2011 , and $3.4 million at December 31, 2010 .
Critical Accounting Policies and Estimates
We prepare our 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 at 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 Consolidated Financial Statements. Set forth below are the policies and estimates that we have identified as critical to our business operations and an understanding of our results of operations, based on the high degree of judgment or complexity in their application.
Goodwill
Goodwill is tested for impairment annually on April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred.
We completed our annual test for impairment of goodwill as of April 30, 2011 , and no goodwill impairment charges resulted from the required impairment test. The goodwill impairment analysis is dependent on many variables used to determine the fair value of our reporting units.
As discussed in Note 5 of the Notes to Consolidated Financial Statements, we estimate the fair value of our reporting units using an “income” valuation approach, which discounts projected free cash flows of the reporting unit at a computed weighted average cost of capital as the discount rate. The income valuation approach requires the use of significant estimates and assumptions, which include revenue growth rates and future operating margins used to calculate projected future cash flows, weighted average costs of capital, and future economic and market conditions. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest. We believe this reconciliation process is consistent with a market participant perspective. We base our cash flow forecasts on our knowledge of the automotive industry, our recent performance, our expectations of our future performance, and other assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.
The test for goodwill impairment is a two-step approach. A first step failure would have required us to perform the second step of the goodwill impairment test to measure the amount of implied fair value of goodwill and, if required, the recognition of a non-cash goodwill impairment charge. As of December 31, 2011 , we have $156.4 million of goodwill related to the Domestic reporting unit, $531.6 million related to the Import reporting unit, and $484.2 million related to the Premium Luxury reporting unit. A significant change in the assumptions used to estimate fair value could result in a material impairment charge to the goodwill associated with our reporting units.
The fair values of the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as of April 30, 2011 , the date of our most recent annual impairment test.
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 at least annually on April 30 for impairment. The impairment test for intangibles with indefinite lives requires the comparison of estimated fair value to its carrying value by store. Fair values of rights under franchise agreements are estimated 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.
We completed our annual impairment test for intangible assets with indefinite lives as of April 30, 2011 , and no impairment charges resulted from the required impairment tests. Our franchise rights, which related to 28 franchises and totaled $212.6 million at April 30, 2011 , are evaluated for impairment on a franchise-by-franchise basis. If the fair value of each of our franchise rights had been determined to a be a hypothetical 10% lower as of the valuation date of April 30, 2011, the resulting impairment charge would have been less than $3.0 million .
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 evaluating potential impairment of long-lived assets held and used, we first compare the carrying amount of the asset group to the asset group’s estimated future undiscounted cash flows. If the estimated future undiscounted cash flows are less than the carrying amount of the asset group, we then compare the carrying amount of the asset group to the asset group’s estimated fair value to determine if impairment exists. The fair value measurements for our long-lived assets held and used are based on Level 3 inputs, which considered information obtained from third-party real estate valuation sources. See Note 17 of the Notes to Consolidated Financial Statements for more information about our fair value measurements. We recognize an impairment loss if the amount of the asset group’s carrying amount exceeds the asset group’s estimated fair value. If we recognize an impairment loss, the adjusted carrying amount of the asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful life of that asset.
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. Any subsequent change in the fair value less cost to sell (increase or decrease) of each asset held for sale 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 or disposal group at the time it was initially classified as held for sale. Such valuations include estimations of fair values and incremental direct costs to transact a sale. The fair value measurements for our long-lived assets held for sale were based on Level 3 inputs, which considered information obtained from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets.
We had assets held for sale in continuing operations of $70.1 million at December 31, 2011 , and $62.5 million at December 31, 2010 . We recorded $1.1 million during 2011 and $2.5 million during 2010 of non-cash impairment charges associated with assets held for sale in continuing operations to reduce the carrying value of these assets to fair value less cost to sell. During 2011 , we also recorded $1.1 million of non-cash impairment charges related to a valuation adjustment for the cumulative depreciation not recorded during the held for sale period for continuing operations assets that were reclassified from held for sale to held and used during 2011. The 2011 and 2010 charges are recorded as a component of Other Expenses (Income), Net in the Consolidated Income Statements and are reported in the "Corporate and other" category of our segment information.
We had assets held for sale in discontinued operations of $49.5 million at December 31, 2011 , and $53.8 million at December 31, 2010 . We recorded $0.5 million during 2011 and $3.4 million during 2010 of non-cash impairment charges associated with assets held for sale in discontinued operations to reduce the carrying value of these assets to fair value less cost to sell. These charges are recorded as a component of Loss from Discontinued Operations in the Consolidated Income Statements.
Our impairment loss calculations contain uncertainties because they require us to make assumptions and to apply judgment to estimate future undiscounted cash flows and asset fair values, including forecasting useful lives of the assets. Although we believe our property and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets.
Chargeback Reserve
Revenue on finance and insurance products represents commissions earned by us for: (i) loans and leases placed with financial institutions in connection with customer vehicle purchases financed, (ii) vehicle service contracts sold, and (iii) insurance and other products sold. We primarily sell these products on a straight commission basis; however we also participate in future underwriting profit on certain extended service contracts pursuant to retrospective commission arrangements, which are recognized as earned.
We may be charged back for commissions related to financing, insurance, or vehicle protection products in the event of early termination of the contracts by customers (“chargebacks”). These commissions are recorded at the time of the sale of the vehicles, net of an estimated liability for chargebacks.

We estimate our liability for chargebacks on an individual product basis using our historical chargeback experience, based primarily on cancellation data we receive from third parties that sell and administer these products. Our estimated liability for chargebacks totaled $46.2 million at December 31, 2011 , and $42.5 million at December 31, 2010 .
Chargebacks are influenced by the volume of vehicle sales in recent years and increases or decreases in early termination rates resulting from cancellation of vehicle protection products, defaults, refinancings, payoffs before maturity, and other factors. While we consider these factors in the estimation of our chargeback liability, actual events may differ from our estimates, which could result in a change in our estimated liability for chargebacks. The increase in our liability for chargebacks is largely attributable to higher volume of vehicle sales in recent years, as well as an increase in customer cancellations of finance and insurance products. A 10% change in our estimated chargebacks would have changed our estimated liability for chargebacks at December 31, 2011 , by approximately $4.6 million .
See Note 19 of the Notes to Consolidated Finance Statements for further information regarding chargeback liabilities.
Self Insurance Reserves
Under our self insurance programs, we retain various levels of aggregate loss limits, per claim deductibles, and claims-handling expenses as part of our various insurance programs, including property and casualty, employee medical benefits, automobile, and workers’ compensation. Costs in excess of this retained risk per claim may be insured under various contracts with third-party insurance carriers. We review our claim and loss history on a periodic basis to assist in assessing our future liability. The ultimate costs of these retained insurance risks are estimated by management and by third-party actuarial evaluation of historical claims experience, adjusted for current trends and changes in claims-handling procedures. Our results could be materially impacted by claims and other expenses related to our self insurance programs if future occurrences and claims differ from these assumptions and historical trends. Self insurance reserves totaled $58.2 million at December 31, 2011 , and $64.0 million at December 31, 2010 . A 10% change in the volume of claims would have changed our estimated liability at December 31, 2011 , by approximately $5.8 million . We believe our actual loss experience has not been materially different from our recorded estimates.
Revenue Recognition
Revenue consists of the sales of new and used vehicles, sales of parts and services, commissions from finance and insurance products, and sales of other products. We recognize revenue in the period in which products are sold or services are provided. We recognize vehicle and finance and insurance revenue when a sales contract has been executed, the vehicle has been delivered, and payment has been received or financing has been arranged. Rebates, holdbacks, floorplan assistance, and certain other incentives received from manufacturers are recorded as a reduction of the cost of the vehicle and recognized into income upon the sale of the vehicle or when earned under a specific manufacturer program, whichever is later. See Note 1 of the Notes to Consolidated Financial Statements for further information regarding revenue recognition.
Income Taxes
Estimates and judgments are used in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We regularly evaluate the recoverability of our deferred tax assets and provide valuation allowances to offset portions of deferred tax assets due to uncertainty surrounding the future realization of such deferred tax assets. Valuation allowances are based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences, and the implementation of tax-planning strategies. We adjust the valuation allowance in the period we determine it is more likely than not that deferred tax assets will or will not be realized. If a change in circumstances results in a change in our ability to realize our deferred tax assets, our tax provision would be adjusted in the period when the change in circumstances occurs.
Accounting for our income taxes also requires significant judgment in the evaluation of our uncertain tax positions and in the calculation of our provision for income taxes. Accounting standards related to accounting for uncertainty in income taxes prescribe a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate available evidence to determine if it appears more likely than not that an uncertain tax position will be sustained on an audit by a taxing authority, based solely on the technical merits of the tax position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settling the uncertain tax position.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of September 30, 2011 , we owned and operated 257 new vehicle franchises from 214 stores located in major metropolitan markets, predominantly in the Sunbelt region of the United States. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 32 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 90% of the new vehicles that we sold during the nine months ended September 30, 2011 , are manufactured by Ford, Toyota, Nissan, General Motors, Honda, Mercedes, BMW, and Chrysler .
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores.
At September 30, 2011 , we had three operating and reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes, BMW, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products.
For the nine months ended September 30, 2011 , new vehicle sales accounted for approximately 53% of our total revenue, but approximately 23% of our total gross profit. Used vehicle sales accounted for approximately 26% of our total revenue, and approximately 13% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 20% of our total revenue for the nine months ended September 30, 2011 , contributed approximately 63% of our total gross profit for the same period.

Results of Operations
Third Quarter 2011 compared to Third Quarter 2010
During the three months ended September 30, 2011 , we had net income from continuing operations of $70.7 million or $0.48 per share on a diluted basis, as compared to net income from continuing operations of $58.5 million or $0.39 per share on a diluted basis during the same period in 2010 .
First Nine Months 2011 compared to First Nine Months 2010
During the nine months ended September 30, 2011 , we had net income from continuing operations of $214.3 million or $1.43 per share on a diluted basis, as compared to net income from continuing operations of $167.2 million or $1.04 per share on a diluted basis during the same period in 2010 .
Results for the nine months ended September 30, 2010 , were adversely impacted by a loss on debt extinguishment, including debt refinancing costs and the write-off of previously deferred debt issuance costs, of $19.6 million ($12.1 million after-tax, or approximately $0.07 per share).
Market Conditions
In the third quarter of 2011 , the seasonally adjusted annual rate (“SAAR”) of industry new vehicle sales in the United States was 12.4 million , an increase of 7% as compared to the new vehicle SAAR of 11.6 million in the third quarter of 2010 .
The earthquake and tsunami that struck Japan in March 2011 caused significant production and supply chain disruptions that resulted in significantly reduced new vehicle production by Japanese manufacturers, both in and outside of Japan, and lower new vehicle shipments from those manufacturers. In the second and third quarters of 2011, unit sales of new vehicles produced by Japanese manufacturers were negatively impacted by these disruptions; however, gross profit on those vehicles benefited significantly from constrained supply. Shipments from Japanese manufacturers began to improve at the end of the third quarter, and we believe that that they will continue to improve in the fourth quarter. We expect that the improving supply environment will result in lower gross profit on those vehicles in the fourth quarter, as compared to second and third quarters of 2011. Our planning assumption for 2011 full-year industry new vehicle unit sales in the United States remains at the mid-12 million unit level.

Continued concerns over sovereign debt levels in the United States and Europe, and the possible negative implications to banks and the global economy arising out of the European debt crisis, could adversely impact the U.S. economy, consumer confidence and demand for new and used vehicles.
Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market on our consolidated balance sheets.
We have generally not experienced losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We had 33,914 units in new vehicle inventory at September 30, 2011 , 48,499 units at December 31, 2010 , and 41,788 units at September 30, 2010 . We continue to monitor our new vehicle inventory levels closely based on current economic conditions.
In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory expected to be liquidated at wholesale auctions at a loss. Our used vehicle inventory balance was net of cumulative write-downs of $0.7 million at September 30, 2011 , and $0.4 million at December 31, 2010 .
Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount of potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $3.1 million at September 30, 2011 , and $3.4 million at December 31, 2010 .

Critical Accounting Policies and Estimates
We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For a complete discussion of our critical and significant accounting policies and estimates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 .
Goodwill and Other Intangible Assets
Goodwill and franchise rights assets are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We completed our annual tests for impairment of goodwill and other intangible assets as of April 30, 2011, and no impairment charges resulted from the required impairment test.
The fair values of the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as of April 30, 2011, the date of our most recent annual impairment test.
As of September 30, 2011 , we have $156.5 million of goodwill related to the Domestic reporting unit, $531.5 million related to the Import reporting unit, and $484.2 million related to the Premium Luxury reporting unit. A significant change in the assumptions used to estimate fair value could result in a material impairment charge to the goodwill associated with our reporting units.

Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or changes in circumstances indicate that their carrying amounts may be impaired. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, a current expectation that more-likely-than-not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or a current-period operating or cash flow loss combined with historical losses or projected future losses.
When property and equipment is identified as held for sale, we reclassify the held for sale assets to Other Current Assets and cease recording depreciation. We measure each long-lived asset or disposal group at the lower of its carrying amount or fair value less cost to sell and recognize a loss for any initial adjustment of the long-lived asset’s or disposal group’s carrying amount to fair value less cost to sell in the period the “held for sale” criteria are met. We periodically evaluate the carrying value of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted.
As of September 30, 2011 , we had long-lived assets held for sale of $81.9 million in continuing operations and $49.5 million in discontinued operations.
We recorded no impairment charges during the three and nine months ended September 30, 2011 , associated with assets held and used or assets held for sale in continuing operations. During the nine months ended September 30, 2011 , we recorded a non-cash impairment charge of $0.5 million associated with long-lived assets held for sale in discontinued operations, which is included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Financial Statements. We recorded no impairment charges during the three months ended September 30, 2011 , associated with assets held for sale in discontinued operations.
The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, which considered information from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets. Although we believe our property and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets.

Third Quarter 2011 compared to Third Quarter 2010
Same store new vehicle revenue increased during the three months ended September 30, 2011 , as compared to the same period in 2010 , as a result of an increase in revenue per new vehicle retailed, partially offset by a decrease in same store unit volume. The decrease in same store unit volume was primarily due to the significant production and supply chain disruptions caused by the earthquake and tsunami that struck Japan in March 2011. These production and supply chain disruptions resulted in significantly reduced new vehicle production by Japanese manufacturers and lower new vehicle shipments from those manufacturers, which adversely impacted our new vehicle sales unit volume primarily in our Import segment. Manufacturers also reduced incentives during the three months ended September 30, 2011 , as compared to the same period in 2010, which adversely impacted same store unit volume.
Same store revenue per new vehicle retailed increased during the three months ended September 30, 2011 , as compared to the same period in 2010 . Same store revenue per new vehicle retailed benefited from a shift in mix away from import vehicles, which have relatively lower average selling prices, toward domestic and premium luxury vehicles. Same store revenue per new vehicle retailed also benefited from an increase in the average selling prices for new vehicles, primarily due to increases in manufacturer pricing and supply and demand imbalances resulting from the Japan supply constraints.
Same store gross profit per new vehicle retailed benefited from an increase in new vehicle gross profit due primarily to the tight supply of vehicles produced by Japanese manufacturers.
First Nine Months 2011 compared to First Nine Months 2010
Same store new vehicle revenue increased during the nine months ended September 30, 2011 , as compared to the same period in 2010 , as a result of an increase in same store unit volume and an increase in same store revenue per new vehicle retailed. The increase in same store unit volume was primarily due to improved market conditions, including improved credit availability offered to consumers and increased consumer demand, as well as reinstatement or expansion of certain manufacturer leasing programs. The increase in same store unit volume for the nine months ended September 30, 2011 , was partially offset by the Japan supply constraints, which adversely impacted unit sales in the second and third quarters of 2011, and by a decrease in manufacturer incentives.


Same store revenue per new vehicle retailed increased during the nine months ended September 30, 2011 , as compared to the same period in 2010 , primarily due to a shift in mix away from import vehicles, which have relatively lower average selling prices, toward domestic and premium luxury vehicles. Same store revenue per new vehicle retailed also benefited from an increase in the average selling prices for new vehicles in the Import segment, primarily due to the supply and demand imbalances resulting from the Japan supply constraints, and in the Premium Luxury segment, primarily due to improved market conditions.
Same store gross profit per new vehicle retailed benefited from a shift in mix away from import vehicles, which generate relatively lower gross profit per vehicle retailed, due to the tight supply of vehicles produced by Japanese manufacturers, as well as from an increase in new vehicle gross profit in all three segments. Same store gross profit per new vehicle retailed also benefited from the recognition of certain performance-based manufacturer incentives related to premium luxury vehicles previously sold, which favorably impacted gross profit and operating income by $6.0 million. We were able to recognize these incentives due to our achievement of certain manufacturer incentive program goals during the first half of 2011. We expect to recognize the remaining incentives under this program in the fourth quarter of 2011.
See “Market Conditions” above for a discussion of the automotive retail environment, including our expectations regarding the supply of vehicles produced by Japanese manufacturers, and the related impact on new vehicle sales and margins.

Same store gross profit per used vehicle retailed decreased during the three months ended September 30, 2011 , as compared to the same period in 2010 , primarily due to increased sales of value-priced vehicles, which generate a relatively lower gross profit per vehicle retailed than used vehicles we typically retail.
First Nine Months 2011 compared to First Nine Months 2010
Same store retail used vehicle revenue increased during the nine months ended September 30, 2011 , as compared to the same period in 2010 , as a result of both an increase in same store unit volume and an increase in revenue per used vehicle retailed. The increase in used vehicle sales volume was driven in part by an increase in sales of value-priced vehicles through our VVOs. Additionally, used vehicle sales volumes benefited from an increase in trade-in volume associated with the increase in new vehicle sales volume. These increases were partially offset by a decline in certified pre-owned vehicle sales due to elevated used vehicle pricing in comparison to new vehicle pricing and a decrease in supply of vehicles eligible for certified pre-owned designation.
Same store revenue per used vehicle retailed benefited from an increase in the average selling prices for used vehicles in all three segments primarily due to tighter supply, which has driven up the wholesale values of used vehicles. Used vehicle supply has been impacted by the decline in new vehicle sales in recent years, and the decline in off-lease vehicles, as well as by customers retaining their vehicles for longer periods of time. The increase in same store revenue per used vehicle retailed was partially offset by a decline in revenues as a result of increased sales of value-priced vehicles, which have lower average retail prices than used vehicles we typically retail.
Same store gross profit per used vehicle retailed increased during the nine months ended September 30, 2011 , as compared to the same period in 2010 , primarily due to an increase in gross profit per used vehicle retailed due to the tighter supply of used vehicle inventory. The increase in same store gross profit per used vehicle retailed was partially offset by increased sales of value-priced vehicles, which generate a relatively lower gross profit per vehicle retailed than used vehicles we typically retail.
Used Vehicle Inventories
Used vehicle inventories were $305.4 million or 43 days supply at September 30, 2011 , compared to $271.8 million or 42 days supply at December 31, 2010 , and $306.0 million or 46 days supply at September 30, 2010 .

Third Quarter 2011 compared to Third Quarter 2010
During the three months ended September 30, 2011 , same store parts and service gross profit decreased as compared to the same period in 2010 . Same store parts and service gross profit was adversely impacted by decline s in gross profit associated with warranty of $6.5 million and the preparation of vehicles for sale and service work outsourced to third-parties of $2.8 million , partially offset by an increase in gross profit associated with customer-pay service of $1.8 million .
Warranty was adversely impacted during the three months ended September 30, 2011 , by fewer vehicles in operation as a result of lower vehicle sales in recent years and, to a lesser extent, improved quality of vehicles manufactured in recent years. Additionally, warranty was favorably impacted by the rise in manufacturer recalls in the automotive industry in the prior year. Gross profit associated with the preparation of vehicles for sale and service work outsourced to third-parties was adversely impacted by lower new vehicle sales volume. Customer-pay service gross profit benefited from improved market conditions and better marketing of products and services in the service department.
First Nine Months 2011 compared to First Nine Months 2010
During the nine months ended September 30, 2011 , same store parts and service gross profit decreased as compared to the same period in 2010 , primarily due to a decline in gross profit associated with warranty of $11.1 million , partially offset by an increase in gross profit associated with customer-pay service of $4.6 million .
Warranty was adversely impacted during the nine months ended September 30, 2011 , by fewer vehicles in operation as a result of lower vehicle sales in recent years and, to a lesser extent, improved quality of vehicles manufactured in recent years. Additionally, warranty benefited from an increase in warranty service related to the rise of manufacturer recalls in the automotive industry in the prior year. Customer-pay service gross profit benefited from improved market conditions and better marketing of products and services in the service department.
We expect the decline in new vehicle sales over the past few years, which has led to a decline in the total number of recent-model-year vehicles in operation, our primary service base, may have an adverse impact on our parts and service business for the next several years.

Selling, General, and Administrative Expenses
Our Selling, General, and Administrative expenses (“SG&A”) consist primarily of compensation, including salaries, commissions and incentive-based compensation, as well as advertising (net of reimbursement-based manufacturer advertising rebates), occupancy costs, legal, accounting, and professional services, and general corporate expenses.
Third Quarter 2011 compared to Third Quarter 2010
SG&A expenses increased $8.5 million during the three months ended September 30, 2011 , as compared to the same period in 2010 , due to a $4.6 million increase in compensation expense and a $5.1 million increase in other SG&A expenses, partially offset by a $1.4 million decrease in gross advertising expenditures. As a percentage of total gross profit, SG&A expenses decreased to 71.5% during the three months ended September 30, 2011 , from 73.9% in the same period in 2010 , resulting from our continued effective management of our cost structure and improved gross profit.
First Nine Months 2011 compared to First Nine Months 2010
SG&A expenses increased $77.3 million during the nine months ended September 30, 2011 , as compared to the same period in 2010 , due to a $47.8 million increase in compensation expense, a $21.4 million increase in other SG&A expenses, a $4.2 million increase associated with hail storm-related losses, and a $5.3 million increase in gross advertising expenditures, partially offset by a $1.4 million increase in advertising reimbursements from manufacturers. As a percentage of total gross profit, SG&A expenses decreased to 71.7% during the nine months ended September 30, 2011 , from 73.2% in the same period in 2010 , resulting from our continued effective management of our cost structure and improved gross profit.
Non-Operating Income (Expense)
Floorplan Interest Expense
Third Quarter 2011 compared to Third Quarter 2010
Floorplan interest expense was $9.7 million for the three months ended September 30, 2011 , as compared to $10.8 million for the same period in 2010 . The decrease in floorplan interest expense of $1.1 million during the three months ended September 30, 2011 , is primarily the result of lower floorplan interest rates.
First Nine Months 2011 compared to First Nine Months 2010
Floorplan interest expense was $31.8 million for the nine months ended September 30, 2011 , as compared to $30.2 million for the same period in 2010 . The increase in floorplan interest expense of $1.6 million during the nine months ended September 30, 2011 , is primarily the result of higher average vehicle floorplan payable balances, partially offset by lower floorplan interest rates.

CONF CALL

Cheryl Scully

Good morning, and welcome to AutoNation's fourth quarter and full year 2011 conference call and webcast. Leading our call today will be Mike Jackson, our Chairman and Chief Executive Officer; Mike Maroone, our President and Chief Operating Officer; and Mike Short, our Chief Financial Officer. Following their remarks, we will open up the call for questions. Kate Keyser-Pearlman and I will also be available by phone following the call to address any additional questions that you may have.

Before we begin, let me read our brief statement regarding forward-looking comments and the use of non-GAAP financial measures. Certain statements and information on this call will constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks, which may cause the actual results or performance to differ materially from expectations. Additional discussions of factors that could cause actual results to differ materially are contained in our SEC filings. Certain non-GAAP financial measures, as defined under SEC rules, may be discussed on this call. Reconciliations are available on our Investor Relations website at investors.autonation.com under Financials. And now I'll turn the call over to AutoNation's Chairman and Chief Executive Officer, Mike Jackson.

Michael J. Jackson

Good morning, thank you for joining us. Today, we reported an all-time record adjusted quarterly EPS from continuing operations of $0.51 for the fourth quarter, a 13% increase on a per share basis as compared to $0.45 for the same period in the prior year. Fourth quarter 2011 revenue totaled $3.7 billion compared to $3.2 billion in the year-ago period, an increase of 13%, driven primarily by stronger, new and used vehicle revenue. We also reported an increase of 7% in operating income to $144 million. In the fourth quarter, total U.S. industry new vehicle retail sales increased 7% based on CNW Research data. In comparison, during the same period, AutoNation's new vehicle unit sales increased 13%, or 10% on a same-store sales basis.

For the full year, adjusted EPS from continuing operations of $1.94 was a record, up 24% over prior year. Revenue for the full year was up 11% over the prior year.

In 2011, we repurchased 17.1 million shares, or $583 million, average price of $34.14. From January 1 to January 25, 2012, we have repurchased an additional 3.5 million shares or $122 million at an average price per share of $34.74. Since the year I arrived in 1999, we have bought back 395 million shares or $6.5 billion, at an average price of $16.44 per share.

Today, we also announced that our Board of Directors authorized the repurchase of an additional $250 million of AutoNation common stock. AutoNation has $278 million remaining board authorization for share repurchase.

AutoNation has an optimal brand and market mix that position us well for strong performance and new vehicle sales as the market rebounds. As we look at 2012, we believe that the improvement in new vehicle sales will continue. The recovery has 3 drivers: the first is the aged fleet on the road, which is now approaching 11 years old; the second is the accelerated price of new products being launched by the manufacturers; and, finally, the availability of credit financing to our customers. Our planning assumption for 2012 industry new vehicle light sales is 14 million units, which should be around a 10% improvement over 2011.

We have been consistently demonstrating our ability to perform in what we expect to be a multiyear recovery in auto retail. I'll now turn the call over to our Chief Financial Officer, Mike Short.

Mike Short

Thank you, Mike. And good morning, ladies and gentlemen. For the fourth quarter, we reported adjusted net income from continuing operations of $71 million, or $0.51 per share versus $68 million dollars, or $0.45 per share during the fourth quarter of 2010, a 13% improvement on a per share basis. Our fourth quarter results for this year exclude $1.4 million, which is $0.01 per share, of debt refinancing costs. There were no adjustments to net income in the prior-year period. Adjustments to net income are included in the reconciliations provided in our press release.

Last quarter, we indicated that we expected to receive the remaining incentives under the Premium Luxury program during the fourth quarter. Gross profit was favorably impacted by $2 million this quarter due to these incentives. This compares to gross profit of $13 million from incentives recognized in the fourth quarter of 2010.

In the fourth quarter, revenue increased $432 million, or 13% compared to the prior year, and gross profit improved by $35 million, or 6%. SG&A, as a percentage of gross profit, was 71.3% for the quarter, which represents an 80-basis-point improvement compared to the year-ago period. Excluding the benefit from the additional incentives in both quarters, SG&A as a percentage of gross profit improved by 220 basis points.

In December, we entered into a new 5-year, unsecured credit agreement with a $500 million term loan facility and a $1.2 billion revolving credit facility. This refinancing extended our debt maturities, lowered our borrowing costs and increased our available liquidity, better aligning capacity with our growing EBITDA in a rising SAAR environment. In the new facility, the maximum leverage ratio increased from 3.25x to 3.75x, and the maximum capitalization ratio increased from 60% to 65%. We also decreased the pricing from LIBOR plus 225 basis points to LIBOR plus 175 basis points. We believe that the favorable refinancing terms reflect the market's confidence in AutoNation's operating strength, disciplined financial management and solid cash flow generation.

Returning to fourth quarter results, net new vehicle floorplan continue to be a benefit for the quarter. It was a benefit of $6 million, an improvement of $3.2 million from the fourth quarter of 2010, primarily due to lower credit spreads compared to the year-ago period. Floorplan debt was approximately $1.9 billion at quarter end, an increase of approximately $388 million from September 30, 2011, in-line with inventory levels.

Nonvehicle interest expense was $17.4 million for the quarter, an increase of $1.1 million compared to the $16.3 million we recorded in the fourth quarter of 2010 due to higher debt levels. During the quarter, we borrowed $195 million under our revolving credit facility, resulting in $495 million of outstanding borrowings under the facility at the end of December. Our fourth quarter nonvehicle debt balance was $1.6 billion, an increase of $298 million compared to the fourth quarter of 2010. The provision for income tax in the quarter was $43 million, or 38%.

From October 1, 2011, through January 25, 2012, we repurchased 9.8 million shares for $339.9 million, at an average price of $34.67 per share. For the full year 2011, we repurchased 17.1 million shares for $583.4 million at an average price of $34.14 per share. Today, we announced that our board authorized the repurchase of up to an additional $250 million of AutoNation common stock. AutoNation has $278 million remaining in board authorization for share repurchase. As of January 25, there were approximately 132 million shares outstanding.

Capital expenditures were $45 million for the quarter and $144 million for the full year 2011. For 2012, we expect CapEx to be approximately $145 million. Capital expenditures are on an accrual basis, excluding operating lease buyouts and related asset sales.

We remain within the limits of our financial covenants. Our leverage ratio at December 31 was 2.59x, or 2.34x on a net debt basis, including used floorplan availability, compared to the limit of 3.75x.

Our quarter-end cash balance was $87 million, which, combined with our additional borrowing capacity, resulted in a total liquidity of approximately $810 million at the end of December. This provides us with substantial financial flexibility in a rising SAAR environment. Our cash flow generation, combined with our strong balance sheet and disciplined cost structure, position the company to continue to benefit from the improving SAAR and to maximize the value of the company and shareholder returns.

Now let me turn you over to our President and Chief Operating Officer, Mike Maroone.

Michael E. Maroone

Thanks, Mike, and good morning. In addition to delivering the best ever EPS in the company's history for both a quarter and a full year, I'm pleased to report that for the fourth quarter and the full year, AutoNation achieved solid increases in both new and used unit volume, revenue growth across all areas of our business and double-digit gross profit growth for new vehicles and finance and insurance. In addition, we delivered a solid operating margin of 3.9% for the quarter and 4.1% for the full year, illustrating the resiliency of our business model and our ability to navigate changes in the marketplace.

Fourth quarter total segment income of $133 million grew 8% or $10 million compared to the period a year ago, with increases across all 3 segments. A $44 million Domestic segment income increased $8 million, or 21%; import segment income of $53 million grew $7 million, or 15%; while Luxury segment income of $70 million grew by $4 million, or 6%. As I continue, my comments will be on a same-store basis compared to the quarter a year ago, unless noted otherwise.

In the quarter, AutoNation delivered 59,000 new vehicles on a same-store basis, an increase of 10%, comparing favorably to industry retail sales, which were up 7% according to CNW Research. On a total-store basis, we recognized increases across all 3 segments, with Domestic new unit sales up 21%, Premium Luxury in new unit sales up 28%, and imports up 3% as supply continues to rebuild.

Relative to geography, Texas was exceptionally strong in the quarter and our Florida and California markets showed solid improvement.

At $2 billion, new vehicle revenue increased $257 million, or 14%, with revenue increases across all 3 segments driven by increased volume. Revenue per vehicle retailed was up $1200 or 4% to $34,700. Gross profit for new vehicle retailed improved $54 or 2% compared to the fourth quarter of 2010, excluding the benefit of -- from the additional performance-based manufacture incentives in both quarters, gross profit per new vehicle retailed improved $267 or 12% on a same-store basis. We attribute our progress in improving new vehicle PVRs to the use of our proprietary pricing tool and tight supply in some import brands. Our ongoing goal is to increase market share while maintaining or expanding margins compared to predisruption levels.

New vehicle gross profit as a percentage of revenue in the quarter was 7.1%, off 10 basis points. Excluding the benefit from the incentives in both quarters, new vehicle gross profit as a percent of revenue improved 60 basis points on a same-store basis.

At December 31, new vehicle day supply was 50 days, or 44,000 units compared to 63 days or 48,500 units a year earlier. Looking ahead, our new vehicle inventory is in great shape, and we intend to buy aggressively for the spring selling season.

Today, we are pleased with the inventory levels for our Domestic and Premium Luxury segments. For Imports, Nissan is in very good shape. We expect our Toyota inventory to be closer to normalized by the end of the current quarter, and our Honda inventory will be slower to rebuild as they were more impacted by the Thai flooding.

Turning to used vehicles, AutoNation retailed 41,000 used vehicles on a same-store basis in the quarter, up 5% compared to a year ago. Same-store retail used vehicle revenue was $740 million, increased $54 million or 8% year-over-year. Revenue per used vehicle retailed of $17,950 was up 2%, as industry used vehicle prices remained strong in the quarter due to consumer demand and tight inventory availability.

Same-store retail used vehicle gross profit of $61 million was in-line with the period a year ago, and gross profit per used vehicle retailed at $1487 was down $78 or 5%.

Effective with the fourth quarter, we changed our used day supply calculation to better reflect our operating metrics and practices. This includes a shift from dollar day supply to unit day supply. Using the new calculation on December 31, our used vehicle day supply was 31 days compared to 34 days a year ago, and 30 days at September 30. Our Investor Relations teams will be available after the call to discuss the methodology changes in more detail.

Added into the spring selling season, our used vehicle inventory is in good shape, relative to both supply and mix.

Next, parts, service and collision, where same-store revenue of $566 million increased $6 million, or 1% compared to the quarter a year ago, and $193 million customer pay revenue was up $9 million, or 5%, marking the sixth consecutive quarter of year-over-year increases. We also saw a strong lift in internal driven by volume and a 3% increase in collision revenue. Warranty revenue declined 17%, attributable, in part, to the decline in the recall activity compared to the fourth quarter of 2010. In 2010, there was a surge in recall activity in the U.S., with the highest levels since 2004. Pure units in operation over the past several years, along with improved vehicle quality, are also factors in the reduction in the warranty revenue.

Gross profit of $235 million declined $7 million, or 3% compared to the quarter a year ago. Customer pay gross profit grew 2%, up for the sixth consecutive quarter year-over-year. A decline in warranty gross profit more than offset gross profit gains in other areas, including internal and collision.

Finance and insurance, total gross profit in the quarter was $122 million, an increase of $15 million, or 14% compared to a year ago. Same-store gross profit per vehicle retailed was $1223 per vehicle, up $63 or 5% in the quarter. For the full year, same store F&I gross profit per vehicle retailed was $1204, up $61 or 5%. This is a full year record and marks the first full year result above $1200. We continue to be very pleased with our industry-leading results in finance and insurance.

Crisp execution of our best practice processes drove both improved rate and product commissions. We experienced solid product penetration, and our strong preferred lender network for prime, nonprime and subprime continues to be a benefit. We added nonprime and subprime lenders to our network during Q4, a further indication of the continued healthy credit environment.

At December 31, our store portfolio numbered 215 stores and 258 franchises, represented 32 brands in 15 states. In the quarter, we opened Power FIAT in North Phoenix. We came into the year with an aggressive plan to build new facilities and undertake several major facility renovations. In the fourth quarter, we completed 3 more significant ground-up construction projects for BMW Tucson, Champion Toyota Gulf Freeway and Champion Honda in Corpus Christi. We also completed the extensive renovation and expansion of another 6 stores in the quarter. Looking ahead, we will continue to invest in our facilities and seek acquisition opportunities that meet our market brand and a return on investment criteria.

Before I close my remarks, I'd like to share that David Koehler has been appointed Senior Vice President of Variable Operations, with responsibility for new and used vehicle operations and finance and insurance. Prior to this, David served as a Market President in our Florida region. Additionally, Alan McLaren has joined the company as Senior Vice President of Customer Care, responsible for parts, service and collision. Prior to this, Alan served as a Senior Executive with Mercedes-Benz U.S.A. This marks a change to the reporting structure in our operations team. For some time, all store operations reported to me through a senior -- through a single Senior Executive, dividing the structure distinctly between sales and service that provides increased expertise and focus for each area.

I'll also note that to advance the customer experience post vehicle acquisition and grow customer retention, parts, service and collision will now be known as Customer Care at AutoNation.

We are pleased to expand our operations teams with the addition of these 2 seasoned automotive executives, who both have a proven track record of driving results.

In closing, the fourth quarter was a record-breaking EPS performance at AutoNation. I want to thank each of our Associates who share our passion for delighting customers and delivering results. With that, I'll turn it over to Mike Jackson.

Michael J. Jackson

Thanks, Mike. Over the next several years, we will continue to see all the OEMs accelerate the new product launches with an industry average of over 40 launches per year through 2015. The industry replacement each year has historically averaged about 15%. This will increase to an average of 25% through 2015. This, along with an improving economy, a genuine replacement need, great financing, will drive new vehicle sales back to 16 million units. As we look at 2012, we believe that the improvement in new vehicle sales will continue. Our planning assumption for 2012, industry new vehicle unit sales is 14 million units, which would be a 10% improvement over 2011. We will now take questions.

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