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, 2017
, we owned and operated
361
new vehicle franchises from
254
stores located in the United States, predominantly in major metropolitan markets in the Sunbelt region. Our stores sell
33
different new vehicle brands. The core brands of new vehicles that we sell, representing approximately
93%
of the new vehicles that we sold during the
nine
months ended
September 30, 2017
, are manufactured by
Toyota (including Lexus), Honda, Ford, General Motors, FCA US, Mercedes-Benz, Nissan, BMW, and Volkswagen (including Audi and Porsche)
. We also own and operate
73
AutoNation branded collision centers.
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; intercompany accounts and transactions have been eliminated. The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Additionally, operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. The Unaudited Condensed Consolidated Financial Statements herein should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included within our most recent Annual Report on Form 10-K. 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 GAAP 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. The significant estimates made 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.
Recent Accounting Pronouncements
Improvements to Employee Share-Based Payment Accounting
In March 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification within the statement of cash flows, and accounting for forfeitures. The amendments in this accounting standard update were effective for periods beginning after December 15, 2016.
The new standard requires excess tax benefits or deficiencies for share-based payments to be recognized as income tax benefit or expense, rather than within additional paid-in capital. Furthermore, cash flows related to excess tax benefits are required to be classified as operating activities in the statement of cash flows rather than financing activities. We adopted these
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
amendments effective January 1, 2017, on a prospective basis. For the
nine
months ended
September 30, 2017
, we recorded
$2.5 million
of tax deficiencies, which is reflected as a component of the income tax provision on the Unaudited Condensed Consolidated Statement of Income and as cash used in operating activities on the Unaudited Condensed Consolidated Statement of Cash Flows. We elected not to adjust the prior year cash flow presentation.
The new standard also eliminates the requirement to estimate forfeitures when recognizing stock compensation expense during the vesting period. As permitted by the standard, we have elected to account for forfeitures of stock-based awards as they occur. The new standard requires that this change be adopted on a modified retrospective basis, as such, we recorded a cumulative effect adjustment of
$0.2 million
(pre-tax) to reduce retained earnings and increase additional paid-in capital as of January 1, 2017.
The new standard also requires the presentation of cash paid to taxing authorities at settlement arising from the withholding of shares from employees be classified as a financing activity on the statement of cash flows, which is where we had previously classified these items. This change, therefore, did not impact our consolidated financial statements.
Simplifying the Goodwill Impairment Test
In January 2017, the FASB issued an accounting standard update that simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test. Under the new standard, goodwill impairment should be recognized based on the amount by which the carrying amount of a reporting unit exceeds its fair value, but should not exceed the total amount of goodwill allocated to the reporting unit. The amendments in this accounting standard update are to be applied prospectively and are effective for interim or annual goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this standard in connection with our annual goodwill impairment test as of April 30, 2017. The provisions of this accounting standard update did not have an impact on our consolidated financial statements. See Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our annual goodwill impairment testing.
Revenue Recognition
In May 2014, the 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. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The principles in the standard should be applied using a five-step model that includes 1) identifying the contract(s) with a customer, 2) identifying the performance obligations in the contract, 3) determining the transaction price, 4) allocating the transaction price to the performance obligations in the contract, and 5) recognizing revenue when (or as) the performance obligations are satisfied. The standard also requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In addition, the standard amends the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, sales of real estate) to be consistent with the standard’s guidance on recognition and measurement (including the constraint on revenue). The FASB also subsequently issued several amendments to the standard, including clarification on principal versus agent guidance, identifying performance obligations, and immaterial goods and services in a contract.
The amendments in this accounting standard update must 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 modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). We currently anticipate adopting the standard using the modified retrospective approach applied only to contracts not completed as of the date of adoption, with no restatement of comparative periods and a cumulative effect adjustment recognized as of the date of adoption.
This accounting standard update is effective for reporting periods beginning after December 15, 2017. We will adopt this accounting standard update effective January 1, 2018. As part of our implementation process, we have gained an understanding of the new standard and performed an analysis to identify accounting policies that may need to change and additional disclosures that will be required. We have considered factors such as customer contracts with unique revenue recognition considerations, the nature and type of goods and services we offer, the degree to which contracts include multiple performance
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
obligations or variable consideration, and the pattern in which revenue is currently recognized, among other things. While we have not completed the implementation process, we have substantially evaluated all of our revenue streams and we expect similar performance obligations to result under the new standard as compared with deliverables and separate units of accounting currently identified. As a result, we expect the timing of our revenue recognition for most of our revenue streams to generally remain the same, however we have identified certain revenue streams that will be affected by the new standard.
First, the timing of revenue recognition associated with customer loyalty programs that we offer in certain of our stores will be deferred. We currently accrue the incremental cost of loyalty points awarded under current guidance. Under the new standard, a customer loyalty program that provides a customer with a material right is accounted for as a separate performance obligation with revenue recognized when the loyalty points are redeemed. Second, the timing of revenue recognition for automotive repair and maintenance services will be accelerated, as we have determined these performance obligations are satisfied over time under the new standard. Lastly, a portion of the transaction price related to sales of finance and insurance contracts will be considered variable consideration and subject to accelerated recognition under the new standard. The new standard requires an entity to estimate variable consideration and apply the constraint in determining the transaction price. We currently expect that all changes to our revenue recognition as a result of adopting the new standard will result in a net, after-tax cumulative effect adjustment to retained earnings in the range of
$7 million
to
$10 million
.
We do not expect a significant impact in the amount or timing of gain or loss recognition related to our periodic sales of real estate. We are also currently evaluating the changes in controls and processes that are necessary to implement the new standard, but do not expect material changes.
Accounting for Leases
In February 2016, the FASB issued an accounting standard update that amends the accounting guidance on leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The amendments in this accounting standard update are effective for us on January 1, 2019, with early adoption permitted. We will adopt this accounting standard update effective January 1, 2019. A modified retrospective transition approach is required for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
We expect that this standard will have a material effect on our financial statements due to the recognition of new ROU assets and lease liabilities on our balance sheet for real estate and equipment operating leases. We expect that our leasing activity may increase between now and the adoption date. We expect to elect all of the standard’s available practical expedients on adoption. Consequently, on adoption, we expect to recognize additional operating liabilities ranging from
$300 million
to
$400 million
, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. We have a significant number of real estate leases, including for land and buildings. The majority of our leases for land are classified as operating leases under current lease accounting guidance. For new leases entered into after adoption, the new lease standard may affect the pattern of expense recognition related to the land component of a new real estate lease, since those land leases may be classified as financing leases under the new standard.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued an accounting standard update that provides classification guidance on eight specific cash flow issues, for which guidance previously did not exist or was unclear. The amendments in this accounting standard update are effective for periods beginning after December 15, 2017. Early adoption is permitted for any entity in any interim or annual period. We will adopt this accounting standard update effective January 1, 2018. The provisions of this accounting standard update will not have a material impact on our consolidated statements of cash flows.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of receivables, net of allowance for doubtful accounts, are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Trade receivables
|
$
|
147.3
|
|
|
$
|
147.6
|
|
Manufacturer receivables
|
222.9
|
|
|
234.9
|
|
Other
|
74.5
|
|
|
48.7
|
|
|
444.7
|
|
|
431.2
|
|
Less: allowances for doubtful accounts
|
(5.1
|
)
|
|
(5.8
|
)
|
|
439.6
|
|
|
425.4
|
|
Contracts-in-transit and vehicle receivables
|
461.4
|
|
|
595.9
|
|
Income taxes receivable (see Note 6)
|
—
|
|
|
11.6
|
|
Receivables, net
|
$
|
901.0
|
|
|
$
|
1,032.9
|
|
Trade receivables represent amounts due for parts and services that have been delivered or sold, excluding amounts due from manufacturers, as well as receivables from finance organizations for commissions on the sale of finance and insurance products. Manufacturer receivables represent amounts due from manufacturers 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.
|
|
3.
|
INVENTORY AND VEHICLE FLOORPLAN PAYABLE
|
The components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
New vehicles
|
$
|
2,651.7
|
|
|
$
|
2,761.5
|
|
Used vehicles
|
555.7
|
|
|
559.1
|
|
Parts, accessories, and other
|
201.2
|
|
|
199.5
|
|
Inventory
|
$
|
3,408.6
|
|
|
$
|
3,520.1
|
|
The components of vehicle floorplan payable are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Vehicle floorplan payable - trade
|
$
|
2,069.3
|
|
|
$
|
2,308.8
|
|
Vehicle floorplan payable - non-trade
|
1,561.2
|
|
|
1,540.4
|
|
Vehicle floorplan payable
|
$
|
3,630.5
|
|
|
$
|
3,849.2
|
|
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 vehicle floorplan facilities. 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, floorplan assistance, and non-reimbursement-based manufacturer advertising rebates, 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.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 allow the manufacturer to draft against new vehicle floorplan facilities so the lender funds the manufacturer directly for the purchase of new vehicle inventory. Vehicle floorplan facilities are primarily collateralized by vehicle inventories and related receivables.
Our new vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged
2.7%
for the
nine
months ended
September 30, 2017
, and
2.0%
for the
nine
months ended
September 30, 2016
. At
September 30, 2017
, the aggregate capacity under our new vehicle floorplan facilities to finance our new vehicle inventory was approximately
$4.7 billion
, of which
$3.2 billion
had been borrowed.
Our used vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged
2.7%
for the
nine
months ended
September 30, 2017
, and
2.0%
for the
nine
months ended
September 30, 2016
. At
September 30, 2017
, the aggregate capacity under our used vehicle floorplan facilities with various lenders to finance a portion of our used vehicle inventory was
$510.0 million
, of which
$394.3 million
had been borrowed. The remaining borrowing capacity of
$115.7 million
was limited to
$0.5 million
based on the eligible used vehicle inventory that could have been pledged as collateral.
|
|
4.
|
GOODWILL AND INTANGIBLE ASSETS, NET
|
Goodwill and intangible assets, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Goodwill
|
$
|
1,529.8
|
|
|
$
|
1,511.3
|
|
|
|
|
|
Franchise rights - indefinite-lived
|
$
|
603.7
|
|
|
$
|
589.4
|
|
Other intangibles
|
20.9
|
|
|
16.3
|
|
|
624.6
|
|
|
605.7
|
|
Less: accumulated amortization
|
(8.3
|
)
|
|
(7.5
|
)
|
Other intangible assets, net
|
$
|
616.3
|
|
|
$
|
598.2
|
|
See Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements for information about our annual impairment tests of goodwill and franchise rights.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
5.
|
LONG-TERM DEBT AND COMMERCIAL PAPER
|
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
6.75% Senior Notes due 2018
|
$
|
400.0
|
|
|
$
|
400.0
|
|
5.5% Senior Notes due 2020
|
350.0
|
|
|
350.0
|
|
3.35% Senior Notes due 2021
|
300.0
|
|
|
300.0
|
|
4.5% Senior Notes due 2025
|
450.0
|
|
|
450.0
|
|
Revolving credit facility
(1)
|
82.0
|
|
|
—
|
|
Mortgage facility
(2)
|
145.7
|
|
|
153.2
|
|
Capital leases and other debt
|
143.7
|
|
|
136.2
|
|
|
1,871.4
|
|
|
1,789.4
|
|
Less: unamortized debt discounts and debt issuance costs
|
(8.8
|
)
|
|
(10.8
|
)
|
Less: current maturities
|
(566.9
|
)
|
|
(167.5
|
)
|
Long-term debt, net of current maturities
|
$
|
1,295.7
|
|
|
$
|
1,611.1
|
|
(1)
In October 2017, we amended our existing unsecured credit agreement and extended the stated termination date to October 19, 2022.
|
(2)
The mortgage facility requires monthly principal and interest payments of $1.6 million based on a fixed amortization schedule with a balloon payment of $143.9 million due November 2017.
|
Debt Refinancing Transaction
On October 19, 2017, we amended and restated our existing unsecured credit agreement to, among other things, (1) extend the stated termination date to October 19, 2022, (2) modify the maximum leverage ratio of 3.75x to allow for an increase in the maximum leverage ratio to 4.25x following the closing date of the amended credit agreement, subject to step-downs back to 3.75x over time, and (3) modify the guarantor requirement to allow the release of all of the guarantors under our credit agreement at such time and for so long as such guarantors cease to guarantee other certain material indebtedness.
Senior Unsecured Notes and Credit Agreement
At
September 30, 2017
, we had outstanding
$400.0 million
of
6.75%
Senior Notes due 2018. Interest is payable on
April 15
and
October 15
of each year. These notes will mature on
April 15, 2018
, and were therefore reclassified to current maturities during the second quarter of 2017.
At
September 30, 2017
, 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. These notes will mature on
February 1, 2020
.
At
September 30, 2017
, we had outstanding
$300.0 million
of
3.35%
Senior Notes due 2021. Interest is payable on January 15 and July 15 of each year. These notes will mature on
January 15, 2021
.
At
September 30, 2017
, we had outstanding
$450.0 million
of
4.5%
Senior Notes due 2025. Interest is payable on April 1 and October 1 of each year. These notes will mature on
October 1, 2025
.
The interest rate payable on the 2021 Notes and 2025 Notes is subject to adjustment upon the occurrence of certain credit rating events as provided in the indentures for these senior unsecured notes.
Under our credit agreement, we have a
$1.8 billion
revolving credit facility that matures on
October 19, 2022
. The credit agreement also contains an accordion feature that allows us, subject to credit availability and certain other conditions, to increase the amount of the revolving credit facility, together with any added term loans, by up to
$500.0 million
in the aggregate. As of
September 30, 2017
, we had borrowings outstanding of
$82.0 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
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
credit, which was
$49.0 million
at
September 30, 2017
, leaving a borrowing capacity under the revolving credit facility of
$1.7 billion
at
September 30, 2017
. As of
September 30, 2017
, this borrowing capacity was limited under the applicable maximum consolidated leverage ratio contained in our credit agreement to
$679.0 million
.
Our revolving credit facility under the amended credit agreement provides for a commitment fee on undrawn amounts ranging from
0.150%
to
0.25%
and interest on borrowings at
LIBOR
or the base rate, in each case plus an applicable margin. The applicable margin ranges from
1.25%
to
1.625%
for
LIBOR
borrowings and
0.25%
to
0.625%
for base rate borrowings. The interest rate charged for our 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 12.5 basis point increase in the applicable margin.
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 Long-Term Debt
At
September 30, 2017
, we had
$145.7 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
$1.6 million
based on a fixed amortization schedule with a balloon payment of
$143.9 million
due November 2017. We are subject to make-whole payments if the mortgage facility is prepaid prior to its maturity date.
At
September 30, 2017
, we had capital lease and other debt obligations of
$143.7 million
, which are due at various dates through
2037
.
Commercial Paper
We have a commercial paper program pursuant to which we may issue short-term, unsecured commercial paper notes on a private placement basis up to a maximum aggregate amount outstanding at any time of
$1.0 billion
. The interest rate for the commercial paper notes varies based on duration and market conditions. The maturities of the commercial paper notes may vary, but may not exceed
397 days
from the date of issuance. The commercial paper notes are guaranteed by substantially all of our subsidiaries. Proceeds from the issuance of commercial paper notes are used to repay borrowings under the revolving credit facility, to finance acquisitions and for working capital, capital expenditures, share repurchases, and/or other general corporate purposes. We plan to use the revolving credit facility under our credit agreement as a liquidity backstop for borrowings under the commercial paper program. A downgrade in our credit ratings could negatively impact our ability to issue, or the interest rates for, commercial paper notes.
At
September 30, 2017
, we had
$995.0 million
of commercial paper notes outstanding with a weighted-average annual interest rate of
1.80%
and a weighted-average remaining term of
14 days
. At
December 31, 2016
, we had
$942.0 million
of commercial paper notes outstanding with a weighted-average annual interest rate of
1.26%
and a weighted-average remaining term of
24 days
.
Income taxes payable included in Other Current Liabilities totaled
$32.8 million
at
September 30, 2017
. Income taxes receivable included in Receivables, net totaled
$11.6 million
at
December 31, 2016
.
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
2016
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.
It is our 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.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares repurchased
|
9.2
|
|
|
1.0
|
|
|
10.1
|
|
|
9.9
|
|
Aggregate purchase price
|
$
|
400.0
|
|
|
$
|
50.0
|
|
|
$
|
434.9
|
|
|
$
|
470.6
|
|
Average purchase price per share
|
$
|
43.28
|
|
|
$
|
48.62
|
|
|
$
|
42.99
|
|
|
$
|
47.48
|
|
In August 2017, our Board of Directors authorized the repurchase of an additional
$250 million
of shares of our common stock. As of
September 30, 2017
,
$113.7 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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares issued
|
0.1
|
|
|
0.1
|
|
|
0.7
|
|
|
0.3
|
|
Proceeds from the exercise of stock options
|
$
|
1.9
|
|
|
$
|
4.6
|
|
|
$
|
24.7
|
|
|
$
|
7.8
|
|
Average exercise price per share
|
$
|
35.27
|
|
|
$
|
35.55
|
|
|
$
|
33.77
|
|
|
$
|
30.93
|
|
The following table presents a summary of shares of common stock issued in connection with grants of restricted stock and settlement of restricted stock units (“RSUs”), as well as 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,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Shares issued
|
—
|
|
|
—
|
|
|
20,000
|
|
|
152,683
|
|
Shares surrendered to AutoNation to satisfy tax withholding obligations
|
141
|
|
|
4,788
|
|
|
26,061
|
|
|
37,673
|
|
|
|
8.
|
STOCK-BASED COMPENSATION
|
I
n January 2017, our Board, upon the recommendation of its Compensation Committee, discontinued the AutoNation, Inc. 2008 Employee Equity and Incentive Plan and approved the AutoNation, Inc. 2017 Employee Equity and Incentive Plan (the “2017 Plan”), in each case subject to stockholder approval of the 2017 Plan at our 2017 Annual Meeting of Stockholders (the “2017 Annual Meeting”). The 2017 Plan provides for the grant of time-based and performance-based RSUs and restricted stock, stock options, stock appreciation rights, and other stock-based and cash-based awards to employees. A maximum of
5.5 million
shares may be issued under the 2017 Plan.
In January 2017, our Board’s Compensation Committee approved the 2017 annual equity awards for eligible employees under the 2017 Plan, which awards were issued on March 1, 2017, subject to stockholder approval of the 2017 Plan. Our stockholders approved the 2017 Plan at the 2017 Annual Meeting held on April 19, 2017, and on that date, the 2017 annual equity awards were considered granted for accounting purposes. The 2017 annual equity awards include time-based and performance-based RSUs. Time-based RSUs vest in equal installments over
four
years. The performance-based RSUs are subject to a
one
-year earnings performance measure. Certain performance-based RSUs vest in equal installments over
four
years, and others cliff vest after
three
years subject to the achievement of certain additional performance goals measured over a
three
-year period. The additional performance goals are based on an additional measure of earnings, a measure of return on invested capital, and a measure of our performance relative to certain customer satisfaction indices.
We granted
0.6 million
RSUs during the
nine months ended
September 30, 2017
, which were primarily related to the 2017 annual equity awards discussed above. The fair value of each RSU award grant is based on the closing price of our
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
common stock on the date of grant. Compensation cost for time-based RSUs is recognized on a straight-line basis over the shorter of the stated vesting period or the period until employees become retirement-eligible, and for performance-based awards, is recognized over the requisite service period based on the current expectation that performance goals will be achieved at the stated target level. The amount of compensation cost recognized on performance-based RSUs depends on the relative satisfaction of the performance condition based on performance to date.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are to be included in the computation of earnings per share (“EPS”) under the two-class method. Our restricted stock awards are considered participating securities because they contain non-forfeitable rights to dividends. As the number of shares granted under such awards that have not yet vested is immaterial, all earnings per share amounts reflect such shares as if they were fully vested shares and the disclosures associated with the two-class method are not presented.
Basic 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 RSU awards. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options and unvested RSU awards.
The following table presents the calculation of basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income from continuing operations
|
$
|
97.6
|
|
|
$
|
107.8
|
|
|
$
|
283.5
|
|
|
$
|
316.1
|
|
Loss from discontinued operations, net of income taxes
|
(0.1
|
)
|
|
(0.5
|
)
|
|
(0.2
|
)
|
|
(0.9
|
)
|
Net income
|
$
|
97.5
|
|
|
$
|
107.3
|
|
|
$
|
283.3
|
|
|
$
|
315.2
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in calculating basic EPS
|
97.3
|
|
|
101.9
|
|
|
99.9
|
|
|
103.8
|
|
Effect of dilutive stock options and unvested RSUs
|
0.4
|
|
|
0.7
|
|
|
0.4
|
|
|
0.7
|
|
Weighted average common shares outstanding used in calculating diluted EPS
|
97.7
|
|
|
102.6
|
|
|
100.3
|
|
|
104.5
|
|
|
|
|
|
|
|
|
|
Basic EPS amounts
(1)
:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.00
|
|
|
$
|
1.06
|
|
|
$
|
2.84
|
|
|
$
|
3.05
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
Net income
|
$
|
1.00
|
|
|
$
|
1.05
|
|
|
$
|
2.84
|
|
|
$
|
3.04
|
|
|
|
|
|
|
|
|
|
Diluted EPS amounts
(1)
:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
1.00
|
|
|
$
|
1.05
|
|
|
$
|
2.83
|
|
|
$
|
3.02
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
Net income
|
$
|
1.00
|
|
|
$
|
1.05
|
|
|
$
|
2.82
|
|
|
$
|
3.02
|
|
(1)
Earnings per share amounts are calculated discretely and therefore may not add up to the total due to rounding.
|
A summary of anti-dilutive equity instruments excluded from the computation of diluted earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Anti-dilutive equity instruments excluded from the computation of diluted earnings per share
|
3.2
|
|
|
3.0
|
|
|
3.3
|
|
|
2.9
|
|
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During the
third
quarter of
2017
, we divested
one
Domestic store and
one
Import store and recorded a gain of
$9.3 million
. During the second quarter of
2017
, we divested
one
Import store and recorded a gain of
$14.8 million
. During the first quarter of
2017
, we divested
one
Import store and recorded a gain of
$4.3 million
.
During the third quarter of
2016
, we divested
one
Domestic store and
one
Import store and recorded a net gain of
$11.8 million
. During the second quarter of
2016
, we divested
one
Domestic store and
six
Import stores and recorded a net gain of
$11.5 million
. During the first quarter of
2016
, we divested
two
Import stores and recorded a gain of
$6.2 million
.
The gains on these divestitures are included in Other 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.
During the
nine
months ended
September 30, 2017
, we purchased
four
collision centers located in Texas, Florida, Washington, and California. We also purchased
one
store located in Florida. Acquisitions are included in the Unaudited Condensed Consolidated Financial Statements from the date of acquisition. The purchase price allocations for these business combinations are preliminary and subject to final adjustment. We purchased
18
stores during the
nine
months ended
September 30, 2016
.
The acquisitions that occurred during the
nine
months ended
September 30, 2017
were not material to our financial condition or results of operations. Additionally, on a pro forma basis as if the results of these acquisitions had been included in our consolidated results for the entire
nine
month periods ended
September 30, 2017
and
2016
, revenue and net income would not have been materially different from our reported revenue and net income for these periods.
|
|
12.
|
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 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.
As of
September 30, 2017
and
2016
, we have 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 results of operations, financial condition, or 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
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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
2017
to
2034
are approximately
$22 million
at
September 30, 2017
. 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, 2017
. 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, 2017
, surety bonds, letters of credit, and cash deposits totaled
$107.2 million
, of which
$49.0 million
were 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, 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. We do not have any material known environmental commitments or contingencies.
At
September 30, 2017
and
2016
, 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 FCA US. 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, auction operations, and AutoNation USA stand-alone used vehicle sales and service centers, all of which generate revenues but do not meet the quantitative thresholds for determining reportable segments, as well as unallocated corporate overhead expenses and retrospective commissions for certain finance 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.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In the following tables of financial data, revenue and segment income of our reportable segments are reconciled to consolidated revenue and consolidated income from continuing operations before income taxes, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenue:
|
|
|
|
|
|
|
|
Domestic
|
$
|
1,912.4
|
|
|
$
|
2,044.9
|
|
|
$
|
5,557.7
|
|
|
$
|
5,888.2
|
|
Import
|
1,789.7
|
|
|
1,779.0
|
|
|
5,123.5
|
|
|
5,202.1
|
|
Premium Luxury
|
1,634.3
|
|
|
1,680.6
|
|
|
4,894.9
|
|
|
4,865.6
|
|
Total
|
5,336.4
|
|
|
5,504.5
|
|
|
15,576.1
|
|
|
15,955.9
|
|
Corporate and other
|
96.0
|
|
|
63.0
|
|
|
275.0
|
|
|
172.6
|
|
Total consolidated revenue
|
$
|
5,432.4
|
|
|
$
|
5,567.5
|
|
|
$
|
15,851.1
|
|
|
$
|
16,128.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment income
(1)
:
|
|
|
|
|
|
|
|
Domestic
|
$
|
69.0
|
|
|
$
|
83.9
|
|
|
$
|
190.5
|
|
|
$
|
246.9
|
|
Import
|
81.0
|
|
|
79.3
|
|
|
227.9
|
|
|
230.0
|
|
Premium Luxury
|
78.8
|
|
|
80.9
|
|
|
243.3
|
|
|
256.8
|
|
Total
|
228.8
|
|
|
244.1
|
|
|
661.7
|
|
|
733.7
|
|
Corporate and other
|
(42.7
|
)
|
|
(43.3
|
)
|
|
(118.3
|
)
|
|
(137.2
|
)
|
Other interest expense
|
(30.0
|
)
|
|
(28.9
|
)
|
|
(88.0
|
)
|
|
(85.9
|
)
|
Interest income
|
0.2
|
|
|
0.3
|
|
|
0.8
|
|
|
0.8
|
|
Other income, net
|
1.6
|
|
|
2.6
|
|
|
6.4
|
|
|
3.4
|
|
Income from continuing operations before income taxes
|
$
|
157.9
|
|
|
$
|
174.8
|
|
|
$
|
462.6
|
|
|
$
|
514.8
|
|
(1)
Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.
|
|
|
14.
|
BUSINESS AND CREDIT CONCENTRATIONS
|
We own and operate franchised automotive stores in the United States pursuant to franchise agreements with vehicle manufacturers. 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 or related lender or supplier. The core brands of vehicles that we sell, representing approximately
93%
of the new vehicles sold during the
nine
months ended
September 30, 2017
, are manufactured by
Toyota (including Lexus), Honda, Ford, General Motors, FCA US, Mercedes-Benz, Nissan, BMW, and Volkswagen (including Audi and Porsche)
. Our business could be materially adversely impacted by a bankruptcy of or other adverse event related to a major vehicle manufacturer or related lender or supplier.
We had receivables from manufacturers or distributors of
$222.9 million
at
September 30, 2017
, and
$234.9 million
at
December 31, 2016
. 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, 2017
, we do not consider AutoNation to have any significant non-manufacturer concentrations of credit risk.
During the
nine
months ended
September 30, 2017
, approximately
62%
of our total retail new vehicle unit sales was generated by our stores in Florida, Texas, and California. During the third quarter of 2017, certain stores in our Texas and Florida markets were impacted by Hurricanes Harvey and Irma, respectively. We incurred approximately
$3 million
of
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
unrecovered hurricane-related losses associated with flooded vehicles and minor property damage sustained at multiple locations.
|
|
15.
|
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 judgment, and therefore cannot be determined with precision.
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, receivables, other current assets, vehicle floorplan payable, accounts payable, other current liabilities, commercial paper, 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 long-term debt
: Our fixed rate long-term 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 long-term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2016
|
Carrying value
|
$
|
1,780.6
|
|
|
$
|
1,778.6
|
|
Fair value
|
$
|
1,857.4
|
|
|
$
|
1,862.2
|
|
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 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. We elected to perform a quantitative goodwill impairment test as of
April 30
,
2017
. As discussed in Note 1 above, the FASB issued an accounting standard that requires goodwill impairment to be measured based on the amount by which the carrying amount of a reporting unit exceeds its fair value. The adoption of this standard had no impact to our consolidated financial statements as the fair values of each of our reporting units were substantially in excess of their carrying values as of April 30, 2017.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The quantitative goodwill impairment test requires a determination of whether the fair value of a reporting unit is less than its carrying value. 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 that 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.
For our
April 30
, 2016 annual goodwill impairment assessment, we chose to make a qualitative evaluation about the likelihood of goodwill impairment and determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts.
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 elected to perform quantitative franchise rights impairment tests as of
April 30
, 2017, and
no
impairment charges resulted from the impairment tests.
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.
For our
April 30
, 2016 annual franchise rights impairment assessment, we chose to make a qualitative evaluation about the likelihood of franchise rights impairment to determine whether it was necessary to perform a quantitative test. Based on our qualitative assessment of potential franchise rights impairment, we determined that we should perform a quantitative test for certain franchise rights, and
no
impairment charges resulted from these quantitative tests.
Long-Lived Assets
The fair value measurement valuation process for our long-lived assets is established by our corporate real estate services group. 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.
AUTONATION, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of
September 30, 2017
, we had long-lived assets held for sale of
$23.8 million
in continuing operations and
$13.8 million
in discontinued operations. As of
December 31, 2016
, we had long-lived assets held for sale of
$41.4 million
in continuing operations and
$15.7 million
in discontinued operations. Long-lived assets held for sale are included in Other Current Assets in our Unaudited Condensed Consolidated Balance Sheets. The following table presents long-lived assets measured and recorded at fair value on a nonrecurring basis during the
nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Description
|
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
|
Gain/(Loss)
|
|
Fair Value
Measurements Using
Significant
Unobservable Inputs
(Level 3)
|
|
Gain/(Loss)
|
Long-lived assets held and used
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
5.9
|
|
|
$
|
(1.9
|
)
|
Long-lived assets held for sale:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.9
|
|
|
$
|
0.2
|
|
|
$
|
19.4
|
|
|
$
|
(12.1
|
)
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
12.7
|
|
|
(0.7
|
)
|
Total long-lived assets held for sale
|
|
$
|
2.9
|
|
|
$
|
0.2
|
|
|
$
|
32.1
|
|
|
$
|
(12.8
|
)
|
Long-Lived Assets Held and Used in Continuing Operations
The non-cash impairment charges recorded during the
nine
months ended
September 30, 2017
and
2016
, are included in Other Income, Net (within Operating Income) in our Unaudited Condensed Consolidated Statements of Income and are reported in the “Corporate and other” category of our segment information.
Long-Lived Assets Held for Sale in Continuing Operations
The net adjustments recorded to long-lived assets held for sale during the
nine
months ended
September 30, 2017
, and non-cash impairment charges recorded during the
nine
months ended
September 30, 2016
, are included in Other Income, Net (within Operating Income) in our Unaudited Condensed Consolidated Statements of Income and are reported in the “Corporate and other” category of our segment information.
Long-Lived Assets Held for Sale in Discontinued Operations
The non-cash impairment charges recorded during the
nine
months ended
September 30, 2016
, are included in Loss from Discontinued Operations in our Unaudited Condensed Consolidated Statements of Income.
|
|
16.
|
CASH FLOW INFORMATION
|
We had non-cash investing and financing activities of
$3.3 million
related to capital leases and deferred purchase price commitments associated with our 2017 acquisitions for the
nine
months ended
September 30, 2017
. We also had non-cash investing and financing activities related to increases in property acquired under capital leases of
$7.7 million
during the
nine
months ended
September 30, 2017
. We had non-cash investing and financing activities of
$36.3 million
related to increases in property acquired under capital leases during the
nine
months ended
September 30, 2016
. In addition, we had accrued purchases of property and equipment of
$22.7 million
at
September 30, 2017
and
$14.5 million
at
September 30, 2016
.
We made interest payments, net of amounts capitalized and including interest on vehicle inventory financing, of
$148.6 million
during the
nine
months ended
September 30, 2017
, and
$133.0 million
during the
nine
months ended
September 30, 2016
. We made income tax payments, net of income tax refunds, of
$126.3 million
during the
nine
months ended
September 30, 2017
, and
$193.3 million
during the
nine
months ended
September 30, 2016
.