NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All tables in millions, except per share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of
December 31, 2017
, we owned and operated
360
new vehicle franchises from
253
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 in
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
76
AutoNation-branded collision centers.
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, “parts and service” (also referred to as “Customer Care”), which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive “finance and insurance” products (also referred to as “Customer Financial Services”), 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.
Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries. All of our automotive dealership subsidiaries are indirectly wholly owned by the parent company, AutoNation, Inc. Intercompany accounts and transactions have been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. 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 critical accounting estimates made in the accompanying Consolidated Financial Statements include certain assumptions related to goodwill, other intangible assets, and accruals for chargebacks against revenue recognized from the sale of finance and insurance products. Other significant accounting estimates include certain assumptions related to long-lived assets, assets held for sale, accruals related to self-insurance programs, certain legal proceedings, and estimated tax liabilities.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less as of the date of purchase to be cash equivalents unless the investments are legally or contractually restricted for more than three months. Under our cash management system, outstanding checks that are in excess of the cash balances at certain banks are included in Accounts Payable in the Consolidated Balance Sheets and changes in these amounts are reflected in operating cash flows in the accompanying Consolidated Statements of Cash Flows.
Inventory
Inventory consists primarily of new and used vehicles held for sale, valued at the lower of cost or market using the specific identification method. Cost includes acquisition, reconditioning, dealer installed accessories, and transportation expenses. Our new vehicle inventory costs are generally reduced by manufacturer holdbacks (percentage of either the
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
manufacturer’s suggested retail price or invoice price of a new vehicle that the manufacturer repays to the dealer), incentives, floorplan assistance, and non-reimbursement-based manufacturer advertising assistance. Parts, accessories, and other inventory are valued at the lower of acquisition cost (first-in, first-out) or market. See Note
3
of the Notes to Consolidated Financial Statements for more detailed information about our inventory.
Property and Equipment, net
Property and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized, while minor replacements, maintenance, and repairs are charged to expense as incurred. In addition, we capitalize interest on borrowings during the active construction period of capital projects. Capitalized interest is added to the cost of the assets and depreciated over the estimated useful lives of the assets. Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability and included in current and/or long-term debt based on the lease term. When property is retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in Other Income, Net (within Operating Income) in the Consolidated Statements of Income. See Note
4
of the Notes to Consolidated Financial Statements for detailed information about our property and equipment.
Depreciation is recorded over the estimated useful lives of the assets involved using the straight-line method. Leasehold improvements and capitalized lease assets are amortized to depreciation expense over the estimated useful life of the asset or the respective lease term used in determining lease classification, whichever is shorter. The range of estimated useful lives is as follows:
|
|
Buildings and improvements
|
5
to
40
years
|
|
|
Furniture, fixtures, and equipment
|
3
to
10
years
|
We continually evaluate property and equipment, including leasehold improvements, to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the remaining balance should be evaluated for possible impairment. 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. We use an estimate of the related undiscounted cash flows over the remaining life of the property and equipment in assessing whether an asset has been impaired. We measure impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value.
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. 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 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.
Assets held for sale in both continuing operations and discontinued operations are reported in the “Corporate and other” category of our segment information.
We had assets held for sale of
$169.1 million
at December 31,
2017
, and
$41.4 million
at December 31,
2016
, included in continuing operations. We had assets held for sale of
$14.4 million
at December 31,
2017
, and
$15.7 million
at December 31,
2016
, included in discontinued operations.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
See Note
16
of the Notes to Consolidated Financial Statements for information about our fair value measurement valuation process and impairment charges that were recorded during
2017
and
2016
.
Goodwill and Other Intangible Assets, net
Goodwill consists of the cost of acquired businesses in excess of the fair value of the net assets acquired. Additionally, other intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of our intent to do so.
Our principal identifiable intangible assets are rights under franchise agreements with vehicle manufacturers. We generally expect our franchise agreements to survive for the foreseeable future and, when the agreements do not have indefinite terms, anticipate routine renewals of the agreements without substantial cost. The contractual terms of our franchise agreements provide for various durations, ranging from
one
year to no expiration date, and in certain cases, manufacturers have undertaken to renew such franchises upon expiration so long as the dealership is in compliance with the terms of the agreement. However, in general, the states in which we operate have automotive dealership franchise laws that provide that, notwithstanding the terms of any franchise agreement, it is unlawful for a manufacturer to terminate or not renew a franchise unless “good cause” exists. It is generally difficult, outside of bankruptcy, for a manufacturer to terminate or not renew a franchise under these franchise laws, which were designed to protect dealers. In addition, in our experience and historically in the automotive retail industry, dealership franchise agreements are rarely involuntarily terminated or not renewed by the manufacturer outside of bankruptcy. Accordingly, we believe that our franchise agreements will contribute to cash flows for the foreseeable future and have indefinite lives. Other intangible assets are amortized using a straight-line method over their useful lives, generally ranging from
three
to
thirty
years.
We do not amortize goodwill or franchise rights assets. Goodwill and franchise rights are tested for impairment annually or more frequently when events or changes in circumstances indicate that impairment may have occurred. We elected to perform a quantitative goodwill impairment test as of
April 30
,
2017
, and
no
goodwill impairment charges resulted from the impairment test. For our
April 30
, 2016 annual goodwill impairment test, 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.
We elected to perform quantitative franchise rights impairment tests as of
April 30
,
2017
, and
no
impairment charges resulted from the impairment tests. For our
April 30
,
2016
annual franchise rights 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, we determined that we should perform a quantitative test for certain franchise rights; however,
no
impairment charges resulted from these quantitative tests during 2016.
See Note
5
of the Notes to Consolidated Financial Statements for more information about our goodwill and other intangible assets and Note
16
of the Notes to Consolidated Financial Statements for information about our annual impairment tests of goodwill and franchise rights.
Other Current Assets
Other current assets consist of various items, including, among other items, assets held for sale in continuing operations and discontinued operations and prepaid expenses.
Other Assets
Other assets consist of various items, including, among other items, service loaner and rental vehicle inventory, net, and the cash surrender value of corporate-owned life insurance held in a Rabbi Trust for deferred compensation plan participants.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Other Current Liabilities
Other current liabilities consist of various items payable within one year including, among other items, accruals for payroll and benefits and sales taxes, income taxes payable, liabilities held for sale (which are comprised primarily of floorplan payables of disposal groups held for sale), the current portions of finance and insurance chargeback liabilities, self-insurance liabilities, and deferred revenue, customer deposits, accrued interest payable, and accrued expenses.
Other Liabilities
Other liabilities consist of various items payable beyond one year including, among other items, the long-term portions of deferred compensation obligations, finance and insurance chargeback liabilities, self-insurance liabilities, and deferred revenue.
Employee Savings Plans
We offer a 401(k) plan to all of our employees and provide a matching contribution to certain employees that participate in the plan. We provided a matching contribution of
$7.1 million
in
2017
,
$6.8 million
in
2016
, and
$6.8 million
in
2015
. Employer matching contributions are subject to a
three
-year graded vesting period for employees hired subsequent to
January 1, 2011
, and are fully vested immediately upon contribution for employees hired prior to January 1, 2011.
We offer a deferred compensation plan (the “Plan”) to provide certain employees and non-employee directors with the opportunity to accumulate assets for retirement on a tax-deferred basis. Participants in the Plan are allowed to defer a portion of their compensation and are fully vested in their respective deferrals and earnings. Participants may choose from a variety of investment options, which determine their earnings credits. We provided a matching contribution to employee participants in the Plan of
$0.7 million
for
2017
,
$0.7 million
for
2016
, and
$0.6 million
for
2015
. One-third of the matching contribution is vested and credited to participants on the first business day of the subsequent calendar year, and an additional one-third vests and is credited on each of the first and second anniversaries of such date. We may also make discretionary contributions, which vest
three
years after the effective date of the discretionary contribution. Participants eligible for a matching contribution under the Plan are not eligible for a matching contribution in our 401(k) plan. The balances due to participants in the Plan were
$78.1 million
as of December 31,
2017
, and
$68.2 million
as of December 31,
2016
, and are included in Other Current Liabilities and Other Liabilities in the accompanying Consolidated Balance Sheets.
Stock-Based Compensation
In 2017, we granted stock-based awards in the form of time-based and performance-based restricted stock units (“RSUs”). In 2016 and 2015, we granted stock-based awards in the form of stock options, restricted stock, and RSUs. Restricted stock awards, which are considered nonvested share awards as defined under U.S. generally accepted accounting principles, and RSUs are issued from our treasury stock. Compensation cost for restricted stock awards and RSUs is based on the closing price of our common stock on the date of grant. Stock options granted under all plans are non-qualified. Upon exercise of stock options, shares of common stock are issued from our treasury stock. We use the Black-Scholes valuation model to determine compensation expense associated with our stock options.
Certain of our equity-based compensation plans contain provisions that provide for vesting of awards upon retirement. Accordingly, compensation cost for time-based RSUs, restricted stock awards, and stock options is recognized on a straight-line basis over the shorter of the stated vesting period or the period until employees become retirement-eligible. Compensation cost for performance-based RSUs 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. We account for forfeitures of stock-based awards as they occur. See Note
10
of the Notes to Consolidated Financial Statements for more information about our stock-based compensation arrangements.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Revenue Recognition
Revenue consists of the sales of new and used vehicles, sales of parts and automotive services, commissions for the placement of finance and insurance products, and sales of other products. We recognize revenue (which excludes sales taxes) in the period in which products are sold or services are provided. The automotive services we provide include, but are not limited to, customer-paid repairs and maintenance, as well as repairs and maintenance under manufacturer warranties and extended service contracts. 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. Revenue on finance and insurance products represents commissions earned by us for the placement of: (i) loans and leases with financial institutions in connection with customer vehicle purchases financed, (ii) vehicle service contracts with third-party providers, and (iii) other vehicle protection products with third-party providers.
We sell and receive a commission, which is recognized upon sale, on the following types of products: 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 products we offer include products that are sold and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Pursuant to our arrangements with these third-party providers, we primarily sell the products on a straight commission basis; however, we may sell the product, recognize commission, and participate in future profit pursuant to retrospective commission arrangements with the issuers of those contracts, which is recognized as earned. Certain commissions earned from the sales of finance and insurance products are subject to chargeback should the contracts be terminated prior to their expirations. An estimated liability for chargebacks against revenue recognized from sales of finance and insurance products is recorded in the period in which the related revenue is recognized. Our estimated liability for chargebacks is based primarily on our historical chargeback experience, based on internal cancellation data, as well as cancellation data received from third parties that sell and administer these products, and is influenced by the volume of vehicle sales in recent years, commission levels, product penetration, product mix, and increases or decreases in early termination rates resulting from cancellation of vehicle service contracts and other protection products, defaults, refinancings and payoffs before maturity, and other factors. Chargeback liabilities were
$120.8 million
at December 31,
2017
, and
$116.8 million
at December 31,
2016
. See Note
18
of the Notes to Consolidated Financial Statements for more information regarding chargeback liabilities.
Insurance
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. See Note
6
of the Notes to Consolidated Financial Statements for more information on our self-insurance liabilities.
Manufacturer Incentives and Other Rebates
We receive various incentives from manufacturers based on achieving certain objectives, such as specified sales volume targets, as well as other objectives, including maintaining standards of a particular vehicle brand, which may include but are not limited to facility image and design requirements, customer satisfaction survey results, and training standards, among others. These incentives are typically based upon units purchased or sold. These manufacturer incentives are recognized as a reduction of new vehicle cost of sales when earned, generally at the time the related vehicles are sold or upon attainment of the particular program goals, whichever is later.
We also receive manufacturer rebates and assistance for holdbacks, floorplan interest, and non-reimbursement-based advertising expenses (described below), which are reflected as a reduction in the carrying value of each vehicle purchased by us. We recognize holdbacks, floorplan interest assistance, non-reimbursement-based advertising rebates, cash
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
incentives, and other rebates received from manufacturers that are tied to specific vehicles as a reduction to cost of sales as the related vehicles are sold.
Advertising
We generally expense the cost of advertising as incurred, net of earned manufacturer reimbursements for specific advertising costs and other discounts. Advertising expense, net of manufacturer advertising reimbursements, was
$192.8 million
in
2017
,
$196.7 million
in
2016
, and
$188.5 million
in
2015
, and is reflected as a component of Selling, General, and Administrative Expenses in the accompanying Consolidated Statements of Income.
Manufacturer advertising rebates that are reimbursements of costs associated with specific advertising expenses are earned in accordance with the respective manufacturers’ reimbursement-based advertising assistance programs, which is typically after we have incurred the corresponding advertising expenses, and are reflected as a reduction of advertising expense. Manufacturer advertising reimbursements classified as an offset to advertising expenses were
$65.0 million
in
2017
,
$58.5 million
in
2016
, and
$56.4 million
in
2015
. All other non-reimbursement-based manufacturer advertising rebates that are not associated with specific advertising expenses are recorded as a reduction of inventory and recognized as a reduction of new vehicle cost of sales in the period the related vehicle is sold.
Parts and Service Internal Profit
Our parts and service departments recondition the majority of used vehicles acquired by our used vehicle departments and perform minor preparatory work on new vehicles acquired by our new vehicle departments. The parts and service departments charge the new and used vehicle departments as if they were third parties in order to account for total activity performed by that department. Revenues and costs of sales associated with the internal work performed by our parts and service departments are reflected in our parts and service results in our Consolidated Statements of Income. New and used vehicle revenues and costs of sales are reduced by the amount of the intracompany charge. As a result, the revenues and costs of sales associated with the internal work performed by our parts and service departments are eliminated in consolidation. We also maintain an allowance for internal profit on vehicles that have not been sold.
Income Taxes
We file a consolidated federal income tax return. Deferred income taxes have been provided for temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. See Note
11
of the Notes to Consolidated Financial Statements for more detailed information related to income taxes.
Taxes Assessed by Governmental Authorities
Taxes assessed by governmental authorities that are directly imposed on revenue transactions are excluded from revenue in our Consolidated Financial Statements.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period, including outstanding unvested restricted stock awards, which contain rights to non-forfeitable dividends, and vested RSU awards. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding, noted above, adjusted for the dilutive effect of stock options and unvested RSU awards. See Note
12
of the Notes to Consolidated Financial Statements for more information on the computation of earnings (loss) per share.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 amendments effective January 1, 2017, on a prospective basis. In
2017
, we recorded
$4.3 million
of tax deficiencies, which is reflected as a component of the income tax provision on the Consolidated Statement of Income and as cash used in operating activities on the 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
16
of the Notes to 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
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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. 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 adopted 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.
As part of our implementation process, we performed an analysis to identify accounting policies that needed 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 obligations or variable consideration, and the pattern in which revenue is currently recognized, among other things. We have evaluated all of our revenue streams, and similar performance obligations will result under the new standard as compared with deliverables and separate units of accounting currently identified. As a result, the timing of our revenue recognition for most of our revenue streams will 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 is 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 are finalizing our cumulative effect adjustment and currently expect that all changes to our revenue recognition methods as a result of adopting the new standard will result in a net, after-tax cumulative effect adjustment to retained earnings as of January 1, 2018 in the range of
$9 million
to
$12 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 also have evaluated the changes in controls and processes that are necessary to implement the new standard, and no material changes were required.
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
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
expedients on adoption. Consequently, on adoption, we currently expect to recognize additional operating liabilities ranging from
$375 million
to
$475 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.
2. RECEIVABLES, NET
The components of receivables, net of allowance for doubtful accounts, at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Trade receivables
|
$
|
162.6
|
|
|
$
|
147.6
|
|
Manufacturer receivables
|
253.3
|
|
|
234.9
|
|
Other
|
44.9
|
|
|
48.7
|
|
|
460.8
|
|
|
431.2
|
|
Less: allowances for doubtful accounts
|
(5.5
|
)
|
|
(5.8
|
)
|
|
455.3
|
|
|
425.4
|
|
Contracts-in-transit and vehicle receivables
|
655.7
|
|
|
595.9
|
|
Income taxes receivable (See Note 11)
|
—
|
|
|
11.6
|
|
Receivables, net
|
$
|
1,111.0
|
|
|
$
|
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 at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
New vehicles
|
$
|
2,577.9
|
|
|
$
|
2,761.5
|
|
Used vehicles
|
576.5
|
|
|
559.1
|
|
Parts, accessories, and other
|
211.2
|
|
|
199.5
|
|
Inventory
|
$
|
3,365.6
|
|
|
$
|
3,520.1
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The components of vehicle floorplan payables at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Vehicle floorplan payable - trade
|
$
|
2,179.1
|
|
|
$
|
2,308.8
|
|
Vehicle floorplan payable - non-trade
|
1,627.8
|
|
|
1,540.4
|
|
Vehicle floorplan payable
|
$
|
3,806.9
|
|
|
$
|
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 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.
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 the 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
2.6%
during
2017
and
2.0%
during
2016
. At
December 31, 2017
, the aggregate capacity under our floorplan credit agreements with various lenders to finance our new vehicle inventory was approximately
$4.7 billion
, of which
$3.4 billion
had been borrowed.
Our used vehicle floorplan facilities utilize LIBOR-based interest rates, which averaged
2.5%
during
2017
and
2.1%
during
2016
. At
December 31, 2017
, the aggregate capacity under our floorplan credit agreements with various lenders to finance a portion of our used vehicle inventory was
$500.0 million
, of which
$439.8 million
had been borrowed. The remaining borrowing capacity of
$60.2 million
was limited to
$0.4 million
based on the eligible used vehicle inventory that could have been pledged as collateral.
4. PROPERTY AND EQUIPMENT, NET
A summary of property and equipment, net, at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land
|
$
|
1,332.5
|
|
|
$
|
1,267.4
|
|
Buildings and improvements
|
2,121.1
|
|
|
2,009.6
|
|
Furniture, fixtures, and equipment
|
720.2
|
|
|
659.4
|
|
|
4,173.8
|
|
|
3,936.4
|
|
Less: accumulated depreciation and amortization
|
(1,211.1
|
)
|
|
(1,093.2
|
)
|
Property and equipment, net
|
$
|
2,962.7
|
|
|
$
|
2,843.2
|
|
We capitalized interest in connection with various construction projects to build, upgrade, or remodel our facilities of
$1.0 million
in
2017
,
$0.5 million
in
2016
, and
$0.9 million
in
2015
.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and intangible assets, net, at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Goodwill
|
$
|
1,515.0
|
|
|
$
|
1,511.3
|
|
|
|
|
|
Franchise rights - indefinite-lived
|
$
|
572.2
|
|
|
$
|
589.4
|
|
Other intangible assets
|
23.3
|
|
|
16.3
|
|
|
595.5
|
|
|
605.7
|
|
Less: accumulated amortization
|
(8.7
|
)
|
|
(7.5
|
)
|
Intangible assets, net
|
$
|
586.8
|
|
|
$
|
598.2
|
|
Goodwill
Goodwill allocated to our reporting units and changes in the carrying amount of goodwill for the years ended December 31,
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
Import
|
|
Premium
Luxury
|
|
Other
|
|
Consolidated
|
Goodwill at January 1, 2016
(1)
|
$
|
203.1
|
|
|
$
|
570.9
|
|
|
$
|
620.5
|
|
|
$
|
—
|
|
|
$
|
1,394.5
|
|
Acquisitions, dispositions, and other adjustments, net
|
49.0
|
|
|
(12.7
|
)
|
|
76.9
|
|
|
3.6
|
|
|
116.8
|
|
Goodwill at December 31, 2016
(1)
|
252.1
|
|
|
558.2
|
|
|
697.4
|
|
|
3.6
|
|
|
1,511.3
|
|
Acquisitions, dispositions, and other adjustments, net
(2)
|
(20.4
|
)
|
|
(25.8
|
)
|
|
14.7
|
|
|
35.2
|
|
|
3.7
|
|
Goodwill at December 31, 2017
(1)
|
$
|
231.7
|
|
|
$
|
532.4
|
|
|
$
|
712.1
|
|
|
$
|
38.8
|
|
|
$
|
1,515.0
|
|
|
|
(1)
|
Net of accumulated impairment losses of
$1.47 billion
associated with our single reporting unit (prior to September 30, 2008, our reporting unit structure was comprised of a single reporting unit) and
$140.0 million
associated with our Domestic reporting unit, both of which were recorded during the year ended December 31, 2008.
|
|
|
(2)
|
Includes amounts reclassified to held for sale, which are presented in Other Current Assets in our Consolidated Balance Sheet as of December 31, 2017.
|
Intangible Assets
Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers. As of
December 31, 2017
, we had
$572.2 million
of franchise rights recorded on our Consolidated Balance Sheet, of which
$168.0 million
was related to Domestic stores,
$108.9 million
was related to Import stores, and
$295.3 million
was related to Premium Luxury stores. Certain franchise rights were reclassified to held for sale and are presented in Other Current Assets in our Consolidated Balance Sheet as of December 31, 2017.
See Note
16
of the Notes to Consolidated Financial Statements for more information about our annual impairment tests of goodwill and franchise rights.
6. SELF-INSURANCE
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.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31,
2017
and
2016
, current and long-term self-insurance liabilities were included in Other Current Liabilities and Other Liabilities, respectively, in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Self-insurance - current portion
|
$
|
29.5
|
|
|
$
|
27.2
|
|
Self-insurance - long-term portion
|
48.7
|
|
|
48.7
|
|
Total self-insurance liabilities
|
$
|
78.2
|
|
|
$
|
75.9
|
|
7. LONG-TERM DEBT AND COMMERCIAL PAPER
Long-term debt at December 31 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Description
|
|
Maturity Date
|
|
Interest Payable
|
|
2017
|
|
2016
|
6.75% Senior Notes
|
|
April 15, 2018
|
|
April 15 and October 15
|
|
$
|
400.0
|
|
|
$
|
400.0
|
|
5.5% Senior Notes
|
|
February 1, 2020
|
|
February 1 and August 1
|
|
350.0
|
|
|
350.0
|
|
3.35% Senior Notes
|
|
January 15, 2021
|
|
January 15 and July 15
|
|
300.0
|
|
|
300.0
|
|
3.5% Senior Notes
|
|
November 15, 2024
|
|
May 15 and November 15
|
|
450.0
|
|
|
—
|
|
4.5% Senior Notes
|
|
October 1, 2025
|
|
April 1 and October 1
|
|
450.0
|
|
|
450.0
|
|
3.8% Senior Notes
|
|
November 15, 2027
|
|
May 15 and November 15
|
|
300.0
|
|
|
—
|
|
Revolving credit facility
|
|
October 19, 2022
|
|
Monthly
|
|
—
|
|
|
—
|
|
Mortgage facility
|
|
November 30, 2017
|
|
Monthly
|
|
—
|
|
|
153.2
|
|
Capital leases and other debt
|
|
Various dates through 2037
|
|
Monthly
|
|
139.4
|
|
|
136.2
|
|
|
|
|
|
|
|
2,389.4
|
|
|
1,789.4
|
|
Less: unamortized debt discounts and debt issuance costs
|
|
(15.7
|
)
|
|
(10.8
|
)
|
Less: current maturities
|
|
|
|
|
|
(414.5
|
)
|
|
(167.5
|
)
|
Long-term debt, net of current maturities
|
|
|
|
$
|
1,959.2
|
|
|
$
|
1,611.1
|
|
At December 31,
2017
, aggregate maturities of non-vehicle long-term debt were as follows:
|
|
|
|
|
Year Ending December 31:
|
|
2018
|
$
|
414.5
|
|
2019
|
43.5
|
|
2020
|
354.1
|
|
2021
|
304.2
|
|
2022
|
4.5
|
|
Thereafter
|
1,268.6
|
|
|
$
|
2,389.4
|
|
Senior Unsecured Notes and Credit Agreement
On November 7, 2017, we issued
$450.0 million
aggregate principal amount of 3.5% Senior Notes due 2024 and
$300.0 million
aggregate principal amount of 3.8% Senior Notes due 2027. The 3.5% Senior Notes due 2024 and 3.8% Senior Notes due 2027 were sold at
99.876%
and
99.925%
of the aggregate principal amount, respectively. Our
6.75%
Senior Notes due 2018 will mature on
April 15, 2018
, and were therefore reclassified to current maturities during the second quarter of 2017.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The interest rates payable on the
3.35%
Senior Notes,
3.5%
Senior Notes,
4.5%
Senior Notes, and
3.8%
Senior Notes are subject to adjustment upon the occurrence of certain credit rating events as provided in the indentures for these senior unsecured notes.
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
3.75
x to allow for an increase in the maximum leverage ratio to
4.25
x following the closing date of the amended credit agreement, subject to step-downs back to
3.75
x by December 31, 2018, 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.
Under our credit agreement, we have a
$1.8 billion
revolving credit facility as well as 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. We have a
$200.0 million
letter of credit sublimit as part of our revolving credit facility. The amount available to be borrowed under the revolving credit facility is reduced on a dollar-for-dollar basis by the cumulative amount of any outstanding letters of credit, which was
$49.3 million
at December 31,
2017
, leaving an additional borrowing capacity under the revolving credit facility of
$1.8 billion
at December 31,
2017
. As of
December 31, 2017
, this borrowing capacity was limited under the maximum consolidated leverage ratio contained in our credit agreement to
$1.4 billion
.
Our revolving credit facility 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
In the fourth quarter of 2017, we repaid our mortgage facility in full and made a balloon payment of
$143.9 million
.
At December 31,
2017
, we had capital lease and other debt obligations of
$139.4 million
, which are due at various dates through
2037
. See Note
8
of the Notes to Consolidated Financial Statements for more information related to capital lease obligations.
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 December 31,
2017
, we had
$330.0 million
of commercial paper notes outstanding with a weighted-average annual interest rate of
1.97%
and a weighted-average remaining term of
24 days
. At December 31, 2016, we had
$942.0 million
of
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
commercial paper notes outstanding with a weighted-average annual interest rate of
1.26%
and a weighted-average remaining term of
24 days
.
8. 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 December 31,
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 any 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.
Lease Commitments
We lease real property, equipment, and software under various operating leases, most of which have terms from
one
to
twenty-five
years.
Expenses under real property, equipment, and software leases were
$56.3 million
in
2017
,
$52.8 million
in
2016
, and
$51.4 million
in
2015
. The leases require payment of real estate taxes, insurance, and maintenance in addition to rent. Most of the leases contain renewal options, rent abatements, and rent escalation clauses. Lease expense is recognized on a straight-line basis over the term of the lease, including any option periods, as appropriate. The same lease term is used for lease classification, the amortization period of related leasehold improvements, and the estimation of future lease commitments.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future minimum lease obligations under non-cancelable real property, equipment, and software leases with initial terms in excess of one year at December 31,
2017
, are as follows:
|
|
|
|
|
|
|
|
|
Noncancelable Lease Commitments
|
Capital
|
|
Operating
(1)
|
2018
|
$
|
21.0
|
|
|
$
|
54.3
|
|
2019
|
34.4
|
|
|
49.9
|
|
2020
|
9.1
|
|
|
46.1
|
|
2021
|
8.8
|
|
|
42.3
|
|
2022
|
8.9
|
|
|
39.2
|
|
Thereafter
|
97.6
|
|
|
301.6
|
|
Total minimum lease payments
|
$
|
179.8
|
|
|
$
|
533.4
|
|
Less: Amounts representing interest
|
(58.0
|
)
|
|
|
|
$
|
121.8
|
|
|
|
|
|
(1)
|
Future minimum operating lease payments do not reflect future minimum sublease income of
$1.9 million
.
Additionally, operating leases that are on a month-to-month basis are not included.
|
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 dealership premises. Pursuant to these leases, our subsidiaries generally agree to indemnify the lessor and other related parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities, or a breach of the lease by the lessee. Additionally, from time to time, we enter into agreements with third parties in connection with the sale of assets or businesses in which we agree to indemnify the purchaser or related parties from certain liabilities or costs arising in connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services, we enter into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted, our liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dispositions of automotive stores, our subsidiaries assign or sublet to the dealership 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 in connection with such leases. 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 presently have no reason to believe that we or our subsidiaries will be called on to perform under any such remaining assigned leases or subleases. We estimate that lessee rental payment obligations during the remaining terms of these leases with expirations ranging from
2018
to
2034
are approximately
$21 million
at
December 31, 2017
. There can be no assurance that any performance of AutoNation or its subsidiaries required under these leases would not have a material adverse effect on our business, financial condition, and cash flows.
At
December 31, 2017
, surety bonds, letters of credit, and cash deposits totaled
$110.4 million
, of which
$49.3 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
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
9. SHAREHOLDERS’ EQUITY
A summary of shares repurchased under our stock repurchase program authorized by our Board of Directors follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Shares repurchased
|
10.1
|
|
|
10.5
|
|
|
3.9
|
|
Aggregate purchase price
|
$
|
434.9
|
|
|
$
|
497.0
|
|
|
$
|
235.1
|
|
Average purchase price per share
|
$
|
42.99
|
|
|
$
|
47.30
|
|
|
$
|
60.49
|
|
As of December 31, 2017,
$113.7 million
remained available under our stock repurchase limit most recently authorized by our Board of Directors.
Our Board of Directors authorized the retirement of
18.0 million
shares and
43.0 million
shares of our treasury stock in November 2017 and October 2015, respectively, which assumed the status of authorized but unissued shares. Upon the retirement of treasury stock, it is our policy to charge the excess of the cost of the treasury stock over its par value entirely to additional paid-in capital. Any amounts exceeding additional paid-in capital are charged to retained earnings. This retirement had the effect of reducing treasury stock and issued common stock, which includes treasury stock. Our common stock, additional paid-in capital, retained earnings, and treasury stock accounts were adjusted accordingly. There was no impact to shareholders’ equity or outstanding common stock.
We have
5.0 million
authorized shares of preferred stock, par value
$0.01
per share,
none
of which are issued or outstanding. The Board of Directors has the authority to issue the preferred stock in one or more series and to establish the rights, preferences, and dividends.
A summary of shares of common stock issued in connection with the exercise of stock options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Shares issued
|
1.0
|
|
|
0.3
|
|
|
1.3
|
|
Proceeds from the exercise of stock options
|
$
|
39.7
|
|
|
$
|
8.4
|
|
|
$
|
30.0
|
|
Average exercise price per share
|
$
|
37.85
|
|
|
$
|
31.21
|
|
|
$
|
23.33
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Shares issued
|
20,000
|
|
|
143,424
|
|
|
159,442
|
|
Shares surrendered to AutoNation to satisfy tax withholding obligations
|
26,514
|
|
|
38,906
|
|
|
36,712
|
|
10. STOCK-BASED COMPENSATION
In January 2017, our Board, upon the recommendation of its Compensation Committee, discontinued the 2008 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 Plan provides for the grant of time-based and performance-based RSUs and restricted stock, stock options, stock appreciation
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
The AutoNation, Inc. 2014 Non-Employee Director Equity Plan (the “2014 Director Plan”) provides for the grant of stock options, restricted stock, RSUs, stock appreciation rights, and other stock-based awards to our non-employee directors. As of December 31,
2017
, the total number of shares authorized for issuance under the 2014 Director Plan was
600,000
. No director may be granted awards in any calendar year with an aggregate grant date fair market value (determined, with respect to options and stock appreciation rights, based on a Black-Scholes or other option valuation methodology approved by the Compensation Committee) in excess of
$750,000
per director.
Restricted Stock Units
On January 3, 2017, each of our non-employee directors received a grant of
5,073
RSUs under the 2014 Director Plan. RSUs granted to our non-employee directors are fully vested on the grant date and are settled in shares of the Company’s common stock on the first trading day of February in the third year following the grant date, unless the non-employee director elects to defer delivery in accordance with the terms of the award and the 2014 Director Plan. Settlement of the RSUs will be accelerated in certain circumstances as provided in the terms of the award and the 2014 Director Plan, including in the event the non-employee director ceases to serve as a non-employee director of the Company. Compensation cost is recognized on the grant date and is based on the closing price of our common stock on the grant date.
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.
The fair value of each RSU award grant is based on the closing price of our 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. We account for forfeitures of stock-based awards as they occur.
The following table summarizes information about vested and unvested RSUs for 2017:
|
|
|
|
|
|
|
|
|
RSUs
|
|
Shares
(in actual number of shares)
|
|
Weighted-Average
Grant Date
Fair Value
|
Nonvested at January 1
|
—
|
|
|
$
|
—
|
|
Granted
(1)
|
632,255
|
|
|
$
|
43.66
|
|
Vested
|
(45,657
|
)
|
|
$
|
49.28
|
|
Forfeited
|
(66,989
|
)
|
|
$
|
43.30
|
|
Nonvested at December 31
|
519,609
|
|
|
$
|
43.22
|
|
|
|
(1)
|
The RSUs granted during
2017
are primarily related to our employee annual equity award grant in April
2017
and non-employee director annual equity award grant in January 2017.
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average grant-date fair value of RSUs and total fair value of RSUs vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average grant-date fair value of RSUs granted
|
$
|
43.66
|
|
|
$
|
58.69
|
|
|
$
|
60.04
|
|
Total fair value of RSUs vested (in millions)
|
$
|
2.2
|
|
|
$
|
2.3
|
|
|
$
|
2.7
|
|
Stock Options
Stock options granted under all plans are non-qualified. Upon exercise, shares of common stock are issued from our treasury stock. Employee stock options granted in 2016 have a term of
10
years from the date of grant and vest in equal installments over
four
years on the anniversary of the grant date. Employee stock options granted in 2015 were granted quarterly, have a term of
10
years from the first date of grant, and vest in equal installments over
four
years commencing on June 1 of the year following the grant date.
We use the Black-Scholes valuation model to determine compensation expense and amortize compensation expense on a straight-line basis over the requisite service period of the grants. We account for forfeitures of stock-based awards as they occur. Certain of our equity-based compensation plans contain provisions that provide for vesting of awards upon retirement. Accordingly, compensation cost is recognized over the shorter of the stated vesting period or the period until employees become retirement-eligible.
The following table summarizes the assumptions used related to the valuation of our stock options granted during
2016
and
2015
:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.16% - 1.55%
|
|
|
0.76% - 1.86%
|
|
Expected dividend yield
|
—
|
|
|
—
|
|
Expected term
|
4 - 7 years
|
|
|
2 - 7 years
|
|
Expected volatility
|
29% - 31%
|
|
|
24% - 34%
|
|
The risk-free interest rate is based on the U.S. Treasury yield curve at the time of the grant with a remaining term equal to the expected term used for stock options granted. The expected term of stock options granted is derived from historical data and represents the period of time that stock options are expected to be outstanding. The expected volatility is based on historical volatility, implied volatility, and other factors.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes stock option activity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Shares
(in millions)
|
|
Weighted-
Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic Value
(in millions)
|
Options outstanding at January 1
|
5.2
|
|
|
$
|
46.99
|
|
|
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
(1.0
|
)
|
|
$
|
37.85
|
|
|
|
|
|
Forfeited
|
(0.2
|
)
|
|
$
|
56.35
|
|
|
|
|
|
Expired
|
(0.3
|
)
|
|
$
|
54.91
|
|
|
|
|
|
Options outstanding as of December 31
|
3.7
|
|
|
$
|
48.49
|
|
|
5.82
|
|
$
|
23.4
|
|
Options exercisable at December 31
|
2.7
|
|
|
$
|
45.65
|
|
|
5.19
|
|
$
|
23.5
|
|
Options exercisable at December 31 and expected to vest thereafter
|
3.7
|
|
|
$
|
48.52
|
|
|
5.76
|
|
$
|
23.5
|
|
Options available for future grants at December 31
|
5.4
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of stock options granted and total intrinsic value of stock options exercised are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average grant-date fair value of stock options granted
|
$
|
—
|
|
|
$
|
17.96
|
|
|
$
|
19.38
|
|
Total intrinsic value of stock options exercised (in millions)
|
$
|
11.9
|
|
|
$
|
5.3
|
|
|
$
|
51.9
|
|
Restricted Stock
Restricted stock awards are considered nonvested share awards as defined under U.S. generally accepted accounting principles and are issued from our treasury stock. Restricted stock awards granted in 2016 vest in equal installments over
four
years on the anniversary date of the grant. Restricted stock awards granted in 2015 vest in equal installments over
four
years commencing on June 1 of the year following the grant date. Compensation cost for restricted stock awards is based on the closing price of our common stock on the date of grant and is recognized on a straight-line basis over the shorter of the stated vesting period or the period until employees become retirement-eligible. We account for forfeitures of stock-based awards as they occur.
The following table summarizes information about vested and unvested restricted stock for
2017
:
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Shares
(in actual number of shares)
|
|
Weighted-Average
Grant Date
Fair Value
|
Nonvested at January 1
|
266,906
|
|
|
$
|
54.23
|
|
Granted
|
—
|
|
|
$
|
—
|
|
Vested
|
(100,341
|
)
|
|
$
|
51.99
|
|
Forfeited
|
(18,634
|
)
|
|
$
|
55.10
|
|
Nonvested at December 31
|
147,931
|
|
|
$
|
55.65
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The weighted average grant-date fair value of restricted stock awards granted and total fair value of restricted stock awards vested are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Weighted average grant-date fair value of restricted stock awards granted
|
$
|
—
|
|
|
$
|
52.23
|
|
|
$
|
62.54
|
|
Total fair value of restricted stock awards vested (in millions)
|
$
|
4.2
|
|
|
$
|
6.4
|
|
|
$
|
8.8
|
|
Compensation Expense
The following table summarizes the total stock-based compensation expense recognized in Selling, General, and Administrative Expenses in the Consolidated Statements of Income and the total recognized tax benefit related thereto:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
RSUs
|
$
|
14.2
|
|
|
$
|
2.3
|
|
|
$
|
2.7
|
|
Stock options
|
3.1
|
|
|
16.2
|
|
|
14.8
|
|
Restricted stock
|
3.3
|
|
|
6.6
|
|
|
6.5
|
|
Total stock-based compensation expense
|
$
|
20.6
|
|
|
$
|
25.1
|
|
|
$
|
24.0
|
|
|
|
|
|
|
|
Tax benefit related to stock-based compensation expense
|
$
|
7.8
|
|
|
$
|
9.6
|
|
|
$
|
9.2
|
|
As of
December 31, 2017
, there was
$17.7 million
of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, of which
$10.5 million
relates to RSUs,
$3.0 million
relates to stock options, and
$4.2 million
relates to restricted stock. These amounts are expected to be recognized over a weighted average period of
1.64
years.
Tax benefits related to stock options exercised and vesting of restricted stock were
$6.2 million
in
2017
,
$4.8 million
in
2016
, and
$23.3 million
in
2015
.
11. INCOME TAXES
The components of the income tax provision from continuing operations for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
Federal
|
$
|
190.6
|
|
|
$
|
234.9
|
|
|
$
|
235.0
|
|
State
|
29.4
|
|
|
31.4
|
|
|
34.1
|
|
Federal and state deferred
|
(22.1
|
)
|
|
3.7
|
|
|
10.3
|
|
Change in valuation allowance, net
|
3.3
|
|
|
0.3
|
|
|
0.1
|
|
Adjustments and settlements
|
0.3
|
|
|
0.3
|
|
|
(0.5
|
)
|
Income tax provision
|
$
|
201.5
|
|
|
$
|
270.6
|
|
|
$
|
279.0
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the income tax provision calculated using the statutory federal income tax rate to our income tax provision from continuing operations for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
%
|
|
2016
|
|
%
|
|
2015
|
|
%
|
Income tax provision at statutory rate
|
$
|
222.8
|
|
|
35.0
|
|
|
$
|
245.8
|
|
|
35.0
|
|
|
$
|
253.0
|
|
|
35.0
|
|
Non-deductible expenses, net
|
5.9
|
|
|
0.9
|
|
|
4.6
|
|
|
0.7
|
|
|
3.5
|
|
|
0.5
|
|
State income taxes, net of federal benefit
|
19.7
|
|
|
3.1
|
|
|
21.7
|
|
|
3.1
|
|
|
23.6
|
|
|
3.3
|
|
|
248.4
|
|
|
39.0
|
|
|
272.1
|
|
|
38.8
|
|
|
280.1
|
|
|
38.8
|
|
Change in tax rate
|
(44.2
|
)
|
|
(6.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in valuation allowance, net
|
3.3
|
|
|
0.5
|
|
|
0.3
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Adjustments and settlements
|
0.3
|
|
|
0.1
|
|
|
0.3
|
|
|
—
|
|
|
(0.5
|
)
|
|
(0.1
|
)
|
Federal and state tax credits
|
(3.7
|
)
|
|
(0.6
|
)
|
|
(1.9
|
)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
|
(0.1
|
)
|
Other, net
|
(2.6
|
)
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
Income tax provision
|
$
|
201.5
|
|
|
31.7
|
|
|
$
|
270.6
|
|
|
38.5
|
|
|
$
|
279.0
|
|
|
38.6
|
|
Deferred income tax asset and liability components at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Inventory
|
$
|
22.8
|
|
|
$
|
36.8
|
|
Receivable allowances
|
1.9
|
|
|
3.3
|
|
Warranty, chargeback, and self-insurance liabilities
|
47.4
|
|
|
71.2
|
|
Other accrued liabilities
|
25.4
|
|
|
33.1
|
|
Deferred compensation
|
18.8
|
|
|
31.8
|
|
Stock-based compensation
|
18.9
|
|
|
25.7
|
|
Loss carryforwards—federal and state
|
6.5
|
|
|
5.4
|
|
Other, net
|
10.2
|
|
|
17.1
|
|
Total deferred income tax assets
|
151.9
|
|
|
224.4
|
|
Valuation allowance
|
(5.4
|
)
|
|
(2.5
|
)
|
Deferred income tax assets, net of valuation allowance
|
146.5
|
|
|
221.9
|
|
Deferred income tax liabilities:
|
|
|
|
Long-lived assets (intangible assets and property)
|
(207.1
|
)
|
|
(293.3
|
)
|
Other, net
|
(11.3
|
)
|
|
(20.1
|
)
|
Total deferred income tax liabilities
|
(218.4
|
)
|
|
(313.4
|
)
|
Net deferred income tax liabilities
|
$
|
(71.9
|
)
|
|
$
|
(91.5
|
)
|
Our net deferred tax liability of
$71.9 million
as of
December 31, 2017
and
$91.5 million
as of
December 31, 2016
is classified as Deferred Income Taxes in the accompanying Consolidated Balance Sheets.
Income taxes payable included in Other Current Liabilities totaled
$81.1 million
at December 31,
2017
. Income taxes receivable included in Receivables, net totaled
$11.6 million
at
December 31, 2016
.
At December 31,
2017
, we had
$82.0 million
of gross domestic state net operating loss carryforwards and capital loss carryforwards, and
$3.6 million
of state tax credits, all of which result in a deferred tax asset of
$7.0 million
and expire from
2018
through
2037
.
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 provide valuation allowances to offset portions of deferred tax assets due to uncertainty surrounding the future realization of such deferred tax assets. At December 31, 2017, we had
$3.6 million
of valuation allowance related to state net operating loss carryforwards and
$1.8 million
of valuation allowance
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
related to the stock-based compensation deferred tax asset impacted by the new tax reform legislation. See “Tax Reform” below. We adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized.
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. These audits may culminate in proposed assessments which may ultimately result in our owing additional taxes. Currently,
no
tax years are under examination by the IRS and tax years from
2009
to
2016
are under examination by U.S. state jurisdictions. We believe that our tax positions comply with applicable tax law and that we have adequately provided for these matters.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance at January 1
|
$
|
5.8
|
|
|
$
|
5.6
|
|
|
$
|
4.9
|
|
Additions based on tax positions related to the current year
|
—
|
|
|
—
|
|
|
—
|
|
Additions for tax positions of prior years
|
0.8
|
|
|
0.8
|
|
|
0.7
|
|
Reductions for tax positions of prior years
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
Reductions for expirations of statute of limitations
|
(0.2
|
)
|
|
(0.2
|
)
|
|
—
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
Balance at December 31
|
$
|
6.4
|
|
|
$
|
5.8
|
|
|
$
|
5.6
|
|
We had accumulated interest and penalties associated with these unrecognized tax benefits of
$6.8 million
at December 31,
2017
,
$6.1 million
at December 31,
2016
, and
$5.5 million
at December 31,
2015
. We additionally had a deferred tax asset of
$2.8 million
at December 31,
2017
,
$4.2 million
at December 31,
2016
, and
$4.0 million
at December 31,
2015
, related to these balances. The net of the unrecognized tax benefits, associated interest, penalties, and deferred tax asset was
$10.4 million
at December 31,
2017
,
$7.7 million
at December 31,
2016
, and
$7.1 million
at December 31,
2015
, which if resolved favorably (in whole or in part) would reduce our effective tax rate. The unrecognized tax benefits, associated interest, penalties, and deferred tax asset are included as components of Other Liabilities and Deferred Income Taxes in the Consolidated Balance Sheets.
It is our policy to account for interest and penalties associated with income tax obligations as a component of income tax expense. We recognized
$0.4 million
during
2017
,
$0.4 million
during
2016
, and
$0.4 million
during
2015
(each net of tax effect), of interest and penalties as part of the provision for income taxes in the Consolidated Statements of Income.
We do not expect that our unrecognized tax benefits will significantly increase or decrease during the twelve months beginning January 1,
2018
.
Tax Reform
On December 22, 2017, H.R. 1 formerly known as the “Tax Cuts and Jobs Act,” was enacted into law. This new tax legislation, among other things, reduces the U.S. federal corporate tax rate from
35%
to
21%
effective January 1, 2018.
At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. For the items for which we were able to determine a reasonable estimate, we recognized a provisional benefit of
$41.3 million
, which is net of a valuation allowance on equity compensation related to the new tax law limiting deductibility of officers’ compensation. The provisional amounts are included as components of income tax expense from continuing operations and had a
6.5%
impact on our annual effective income tax rate.
To determine our provisional amounts, we remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal tax rate and its related impact on the state tax rate. However, we are still analyzing certain aspects of the new legislation and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In addition, our
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
estimates may also be affected as we gain a more thorough understanding of the tax law. The provisional amounts will be subject to adjustment during a measurement period of up to one year.
12. EARNINGS (LOSS) PER SHARE
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 (loss) 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 (loss) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net income from continuing operations
|
$
|
435.0
|
|
|
$
|
431.7
|
|
|
$
|
443.7
|
|
Loss from discontinued operations, net of income taxes
|
(0.4
|
)
|
|
(1.2
|
)
|
|
(1.1
|
)
|
Net income
|
$
|
434.6
|
|
|
$
|
430.5
|
|
|
$
|
442.6
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used in calculating basic EPS
|
97.8
|
|
|
103.1
|
|
|
112.7
|
|
Effect of dilutive stock options
|
0.4
|
|
|
0.7
|
|
|
1.2
|
|
Weighted average common shares outstanding used in calculating diluted EPS
|
98.2
|
|
|
103.8
|
|
|
113.9
|
|
|
|
|
|
|
|
Basic EPS amounts
(1)
:
|
|
|
|
|
|
Continuing operations
|
$
|
4.45
|
|
|
$
|
4.19
|
|
|
$
|
3.94
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net income
|
$
|
4.44
|
|
|
$
|
4.18
|
|
|
$
|
3.93
|
|
|
|
|
|
|
|
Diluted EPS amounts
(1)
:
|
|
|
|
|
|
Continuing operations
|
$
|
4.43
|
|
|
$
|
4.16
|
|
|
$
|
3.90
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Net income
|
$
|
4.43
|
|
|
$
|
4.15
|
|
|
$
|
3.89
|
|
(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:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Anti-dilutive equity instruments excluded from the computation of diluted earnings per share
|
3.1
|
|
|
3.0
|
|
|
0.7
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13. STORE DIVESTITURES
During
2017
, we recorded gains of
$78.2 million
for the divestiture of
two
Domestic stores and
four
Import stores, which were partially offset by write-downs of
$26.2 million
recorded in the fourth quarter of 2017 associated with pending business divestitures that are expected to close in the first half of 2018. During
2016
, we divested
five
Domestic stores and
nine
Import stores and recorded a net gain of
$61.8 million
. During
2015
, we divested
three
Import stores and recorded a gain of
$7.4 million
.
The net gains on these divestitures are included in Other Income, Net (within Operating Income) in our Consolidated Statements of Income. The financial condition and results of operations of these businesses were not material to our consolidated financial statements.
14. ACQUISITIONS
During
2017
, we purchased
seven
collision centers located in Texas, Florida, Washington, California, and Arizona. We also purchased
one
store located in Florida. Acquisitions are included in the Consolidated Financial Statements from the date of acquisition. The purchase price allocations for the business combinations in
2017
are preliminary and subject to final adjustment. We purchased
20
stores and
one
collision center in
2016
and
22
stores in
2015
.
The acquisitions that occurred during
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 years ended December 31,
2017
and
2016
, revenue and net income would not have been materially different from our reported revenue and net income for these periods.
15. CASH FLOW INFORMATION
We had non-cash investing and financing activities primarily related to increases in property acquired under capital leases of
$11.5 million
during
2017
and
$27.3 million
during
2015
. We had non-cash investing and financing activities of
$3.3 million
and
$47.2 million
related to capital leases and deferred purchase price commitments associated with our 2017 and 2016 acquisitions, respectively. We also had accrued purchases of property and equipment of
$48.5 million
at
December 31, 2017
,
$29.1 million
at
December 31, 2016
, and
$25.3 million
at
December 31, 2015
.
We made interest payments, net of amounts capitalized and including interest on vehicle inventory financing, of
$205.9 million
in
2017
,
$183.9 million
in
2016
, and
$135.3 million
in
2015
. We made income tax payments, net of income tax refunds, of
$127.0 million
in
2017
,
$265.5 million
in
2016
, and
$278.8 million
in
2015
.
16. 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.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
|
|
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities
|
|
|
Level 2
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
|
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
|
The following methods and assumptions were used by us in estimating fair value disclosures for financial instruments:
|
|
•
|
Cash and cash equivalents, receivables, other current assets, vehicle floorplan payable, accounts payable, other current liabilities, commercial paper, and variable rate debt:
The amounts reported in the accompanying 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 consists primarily of amounts outstanding under our senior unsecured notes. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 1). A summary of the aggregate carrying values and fair values of our fixed rate long-term debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Carrying value
|
$
|
2,373.7
|
|
|
$
|
1,778.6
|
|
Fair value
|
$
|
2,442.1
|
|
|
$
|
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 or disposal groups 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 or disposal group’s fair value less cost to sell (increase or decrease) are 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.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table presents nonfinancial assets measured and recorded at fair value on a nonrecurring basis during the years ended December 31,
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
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
|
$
|
5.9
|
|
|
$
|
(1.9
|
)
|
Assets held for sale:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
121.3
|
|
|
$
|
(26.0
|
)
|
|
$
|
19.4
|
|
|
$
|
(12.1
|
)
|
Discontinued operations
|
—
|
|
|
—
|
|
|
12.7
|
|
|
(0.7
|
)
|
Total assets held for sale
|
$
|
121.3
|
|
|
$
|
(26.0
|
)
|
|
$
|
32.1
|
|
|
$
|
(12.8
|
)
|
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 update 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.
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 expected future 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. 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. 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 and 2015 annual goodwill impairment assessments, 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
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 and 2015 annual franchise rights impairment assessments, 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.
As a result of the issues related to Volkswagen associated with certain of its diesel engine vehicles, during the fourth quarter of 2015, we performed a quantitative impairment test of the franchise rights recorded at our Volkswagen stores. As a result of this test, we recorded non-cash impairment charges during 2015 of
$15.4 million
to reduce the carrying values of the Volkswagen franchise rights to their estimated fair values. The non-cash impairment charges are reflected as Franchise Rights Impairment in the accompanying Consolidated Statements of Income.
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 certain cases, fair value measurements are based on pending agreements to sell the related assets.
In a market approach, the corporate real estate services group uses transaction prices for comparable properties that have recently been sold. These transaction prices are adjusted for factors related to a specific property. The corporate real estate services group also evaluates changes in local real estate markets, and/or recent market interest or negotiations related to a specific property. In a replacement cost approach, the cost to replace a specific long-lived asset is considered, which is adjusted for depreciation from physical deterioration, as well as functional and economic obsolescence, if present and measurable.
To validate the fair values determined under the valuation process noted above, our corporate real estate services group also obtains independent third-party appraisals for our properties and/or third-party brokers’ opinions of value, which are generally developed using the same valuation approaches described above, and evaluates any recent negotiations or discussions with third-party real estate brokers related to a specific long-lived asset or market.
Long-lived Assets Held and Used in Continuing Operations
The non-cash impairment charges of
$0.4 million
and
$1.9 million
recorded in 2017 and 2016, respectively, are included in Other Income, Net (within Operating Income) in our Consolidated Statements of Income and are reported in the “Corporate and other” category of our segment information.
Assets Held for Sale in Continuing Operations
The net adjustments recorded to assets held for sale in 2017 of
$26.0 million
and non-cash impairment charges recorded in 2016 of
$12.1 million
, are included in Other Income, Net (within Operating Income) in our Consolidated Statements of Income and are reported in the “Corporate and other” category of our segment information.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Assets Held for Sale in Discontinued Operations
The non-cash impairment charges recorded in 2016 of
$0.7 million
are included in Loss from Discontinued Operations in our Consolidated Statements of Income.
As of
December 31, 2017
, we had assets held for sale of
$169.1 million
in continuing operations, primarily related to inventory, goodwill, franchise rights, and property of disposal groups held for sale, as well as other property held for sale. As of
December 31, 2017
, we also had assets held for sale of
$14.4 million
in discontinued operations, primarily related to property held for sale. As of
December 31, 2016
, we had assets held for sale of
$41.4 million
in continuing operations and
$15.7 million
in discontinued operations, primarily related to property held for sale.
17. BUSINESS AND CREDIT CONCENTRATIONS
We own and operate franchised automotive stores in the United States pursuant to franchise agreements with vehicle manufacturers. Franchise agreements generally provide the manufacturers or distributors with considerable influence over the operations of the store. The success of any franchised automotive dealership is dependent, to a large extent, on the financial condition, management, marketing, production, and distribution capabilities of the vehicle manufacturers or distributors of which we hold franchises. We had receivables from manufacturers or distributors of
$253.3 million
at December 31,
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 Consolidated Balance Sheets, are due from automotive manufacturers’ captive finance subsidiaries which provide financing directly to our new and used vehicle customers.
In
2017
, approximately
63%
of our total revenue 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 unrecovered hurricane-related losses associated with flooded vehicles and minor property damage sustained at multiple locations.
We purchase substantially all of our new vehicles from various manufacturers or distributors at the prevailing prices available to all franchised dealers. Additionally, we finance our new vehicle inventory primarily with automotive manufacturers’ captive finance subsidiaries. Our sales volume could be adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an adequate supply of vehicles and related financing.
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 that we sold in
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 another bankruptcy of or other adverse event related to a major vehicle manufacturer or related lender or supplier.
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 December 31,
2017
, we do not consider AutoNation to have any significant non-manufacturer concentrations of credit risk.
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
18. CHARGEBACK LIABILITY
We may be charged back for commissions related to financing, vehicle service, or protection products in the event of early termination, default, or prepayment of the contracts by customers (“chargebacks”). However, our exposure to loss generally is limited to the commissions that we receive. These commissions are recorded at the time of the sale of the vehicles, net of an estimated liability for chargebacks. The following is a rollforward of our estimated chargeback liability for each of the three years presented in our Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance - January 1
|
$
|
116.8
|
|
|
$
|
97.3
|
|
|
$
|
84.9
|
|
Add: Provisions
|
96.3
|
|
|
106.6
|
|
|
90.0
|
|
Deduct: Chargebacks
|
(92.3
|
)
|
|
(87.1
|
)
|
|
(77.6
|
)
|
Balance - December 31
|
$
|
120.8
|
|
|
$
|
116.8
|
|
|
$
|
97.3
|
|
19. SEGMENT INFORMATION
At December 31,
2017
,
2016
, and
2015
, 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 General Motors, Ford, 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 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.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
Domestic
|
$
|
7,452.8
|
|
|
$
|
7,810.0
|
|
|
$
|
7,069.8
|
|
Import
|
6,873.4
|
|
|
6,886.1
|
|
|
7,037.2
|
|
Premium Luxury
|
6,832.7
|
|
|
6,665.3
|
|
|
6,607.8
|
|
Total
|
21,158.9
|
|
|
21,361.4
|
|
|
20,714.8
|
|
Corporate and other
|
375.7
|
|
|
247.6
|
|
|
147.2
|
|
Total consolidated revenue
|
$
|
21,534.6
|
|
|
$
|
21,609.0
|
|
|
$
|
20,862.0
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Segment income
(1)
:
|
|
|
|
|
|
Domestic
|
$
|
257.1
|
|
|
$
|
311.1
|
|
|
$
|
336.9
|
|
Import
|
303.1
|
|
|
296.8
|
|
|
311.4
|
|
Premium Luxury
|
348.8
|
|
|
350.2
|
|
|
376.2
|
|
Total
|
909.0
|
|
|
958.1
|
|
|
1,024.5
|
|
Corporate and other
|
(162.6
|
)
|
|
(145.1
|
)
|
|
(209.7
|
)
|
Other interest expense
|
(120.2
|
)
|
|
(115.5
|
)
|
|
(90.9
|
)
|
Interest income
|
1.0
|
|
|
1.1
|
|
|
0.1
|
|
Other income (loss), net
|
9.3
|
|
|
3.7
|
|
|
(1.3
|
)
|
Income from continuing operations before income taxes
|
$
|
636.5
|
|
|
$
|
702.3
|
|
|
$
|
722.7
|
|
|
|
(1)
|
Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.
|
In the following tables of financial data, floorplan interest expense, depreciation and amortization, total assets, and capital expenditures are reconciled to the consolidated totals as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Floorplan interest expense:
|
|
|
|
|
|
Domestic
|
$
|
40.9
|
|
|
$
|
33.7
|
|
|
$
|
24.1
|
|
Import
|
23.2
|
|
|
17.4
|
|
|
15.0
|
|
Premium Luxury
|
28.4
|
|
|
22.7
|
|
|
18.0
|
|
Corporate and other
|
4.5
|
|
|
2.7
|
|
|
1.2
|
|
Total floorplan interest expense
|
$
|
97.0
|
|
|
$
|
76.5
|
|
|
$
|
58.3
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Depreciation and amortization:
|
|
|
|
|
|
Domestic
|
$
|
38.2
|
|
|
$
|
37.5
|
|
|
$
|
31.0
|
|
Import
|
34.3
|
|
|
35.4
|
|
|
32.9
|
|
Premium Luxury
|
44.5
|
|
|
40.7
|
|
|
35.0
|
|
Corporate and other
|
41.6
|
|
|
29.8
|
|
|
28.5
|
|
Total depreciation and amortization
|
$
|
158.6
|
|
|
$
|
143.4
|
|
|
$
|
127.4
|
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Capital expenditures:
|
|
|
|
|
|
Domestic
|
$
|
36.2
|
|
|
$
|
62.5
|
|
|
$
|
61.4
|
|
Import
|
32.8
|
|
|
28.0
|
|
|
34.0
|
|
Premium Luxury
|
101.7
|
|
|
95.6
|
|
|
101.9
|
|
Corporate and other
|
162.2
|
|
|
67.1
|
|
|
69.6
|
|
Total capital expenditures
|
$
|
332.9
|
|
|
$
|
253.2
|
|
|
$
|
266.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Assets:
|
|
|
|
|
|
Domestic
|
$
|
2,563.9
|
|
|
$
|
2,742.8
|
|
|
$
|
2,573.9
|
|
Import
|
1,992.6
|
|
|
2,065.5
|
|
|
2,145.2
|
|
Premium Luxury
|
2,716.8
|
|
|
2,603.4
|
|
|
2,554.6
|
|
Corporate and other:
|
|
|
|
|
|
Goodwill
|
1,515.0
|
|
|
1,511.3
|
|
|
1,394.5
|
|
Franchise rights
|
572.2
|
|
|
589.4
|
|
|
432.4
|
|
Other Corporate and other assets
|
911.0
|
|
|
547.6
|
|
|
447.6
|
|
Total assets
|
$
|
10,271.5
|
|
|
$
|
10,060.0
|
|
|
$
|
9,548.2
|
|
20. MULTIEMPLOYER PENSION PLANS
Five
of our
253
stores participate in multiemployer pension plans. We contribute to these multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of our union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
|
|
a.
|
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
b.
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be assumed by the remaining participating employers.
|
|
|
c.
|
If we choose to stop participating in a multiemployer plan, we may be required to pay the plan an amount based on the underfunded status of the plan, subject to certain limits, referred to as a withdrawal liability.
|
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
One of the multiemployer pension plans in which we participate is designated as being in “red zone” status, as defined by the Pension Protection Act (PPA) of 2006. Our participation in this plan for the year ended December 31,
2017
, is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employer Identification Number (EIN) and the three-digit plan number. The most recent PPA zone status available in
2017
and
2016
is for the plan’s year end at December 31,
2016
, and December 31,
2015
, respectively. The zone status is based on information that we received from the plan and is certified by the plan’s actuary. Among other factors, plans in the red zone are generally
less than 65 percent
funded. The last column lists the expiration date of the collective-bargaining agreements to which the plan is subject. A rehabilitation plan has been implemented for this plan. There have been no significant changes that affect the comparability of
2017
,
2016
, and
2015
contributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection Act Zone Status
|
|
Contributions of AutoNation
($ in millions)
(1)
|
|
|
|
Expiration Date of Collective-Bargaining Agreement
|
Pension Fund
|
|
EIN/Pension PlanNumber
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2015
|
|
Surcharge Imposed
|
|
Automotive Industries Pension Plan
|
|
94-1133245 - 001
|
|
Red
|
|
Red
|
|
$
|
1.3
|
|
|
$
|
1.1
|
|
|
$
|
1.0
|
|
|
Yes
|
|
(2)
|
Other funds
|
|
|
|
|
|
|
|
0.3
|
|
|
0.4
|
|
|
0.4
|
|
|
|
|
|
Total contributions
|
|
|
|
|
|
|
|
$
|
1.6
|
|
|
$
|
1.5
|
|
|
$
|
1.4
|
|
|
|
|
|
|
|
(1)
|
Our stores were not listed in the Automotive Industries Pension Plan’s Form 5500 as providing more than 5% of the total contributions for the plan years ended December 31,
2016
or
2015
.
|
|
|
(2)
|
We are party to
two
collective-bargaining agreements that require contributions to the Automotive Industries Pension Plan. Both agreements have an expiration date of December 31, 2019.
|
In the event that we cease participating in this plan, we could be assessed a withdrawal liability. We currently do not have any plans that would trigger the withdrawal liability under this multiemployer pension plan.
AUTONATION, INC.
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is an analysis of certain items in the Consolidated Statements of Income by quarter for
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Revenue
|
2017
|
|
$
|
5,139.4
|
|
|
$
|
5,279.3
|
|
|
$
|
5,432.4
|
|
|
$
|
5,683.5
|
|
|
2016
|
|
$
|
5,119.6
|
|
|
$
|
5,441.4
|
|
|
$
|
5,567.5
|
|
|
$
|
5,480.5
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
2017
|
|
$
|
819.8
|
|
|
$
|
826.1
|
|
|
$
|
845.9
|
|
|
$
|
867.2
|
|
|
2016
|
|
$
|
825.9
|
|
|
$
|
841.8
|
|
|
$
|
836.4
|
|
|
$
|
809.1
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(1)
|
2017
|
|
$
|
206.7
|
|
|
$
|
196.2
|
|
|
$
|
211.2
|
|
|
$
|
229.3
|
|
|
2016
|
|
$
|
207.4
|
|
|
$
|
226.5
|
|
|
$
|
219.0
|
|
|
$
|
236.6
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
(1) (2)
|
2017
|
|
$
|
98.2
|
|
|
$
|
87.7
|
|
|
$
|
97.6
|
|
|
$
|
151.5
|
|
|
2016
|
|
$
|
96.2
|
|
|
$
|
112.1
|
|
|
$
|
107.8
|
|
|
$
|
115.6
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(1) (2)
|
2017
|
|
$
|
98.1
|
|
|
$
|
87.7
|
|
|
$
|
97.5
|
|
|
$
|
151.3
|
|
|
2016
|
|
$
|
95.9
|
|
|
$
|
112.0
|
|
|
$
|
107.3
|
|
|
$
|
115.3
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
(1) (2) (3)
|
2017
|
|
$
|
0.97
|
|
|
$
|
0.87
|
|
|
$
|
1.00
|
|
|
$
|
1.65
|
|
|
2016
|
|
$
|
0.90
|
|
|
$
|
1.09
|
|
|
$
|
1.06
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations
(1) (2) (3)
|
2017
|
|
$
|
0.97
|
|
|
$
|
0.86
|
|
|
$
|
1.00
|
|
|
$
|
1.64
|
|
|
2016
|
|
$
|
0.90
|
|
|
$
|
1.08
|
|
|
$
|
1.05
|
|
|
$
|
1.14
|
|
|
|
(1)
|
During the fourth quarter of 2017, we recorded net gains of
$25.0 million
(
$15.5 million
after-tax) related to business/property dispositions. During the fourth quarter of 2016, we recorded gains of $31.7 million ($19.6 million after-tax) related to a business divestiture and $14.4 million ($8.9 million after-tax) related to a legal settlement.
|
|
|
(2)
|
During the fourth quarter of 2017, we recognized a $41.3 million provisional income tax benefit due to the revaluation of our deferred tax liability as a result of the U.S. tax reform bill enacted in December 2017.
|
|
|
(3)
|
The sum of quarterly basic and diluted earnings per share from continuing operations may not equal full year amounts as reported in the Consolidated Statements of Income due to the effect of the calculation of weighted average common stock equivalents on a quarterly basis.
|