The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K. OverviewAutoNation, Inc. , through its subsidiaries, is the largest automotive retailer inthe United States . As ofMarch 31, 2020 , we owned and operated 317 new vehicle franchises from 231 stores located inthe United States , predominantly in major metropolitan markets in the Sunbelt region. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 32 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 89% of the new vehicles that we sold during the three months endedMarch 31, 2020 , are manufactured by Toyota (including Lexus), Honda, General Motors,Ford ,FCA US , Mercedes-Benz, BMW, andVolkswagen (including Audi and Porsche). As ofMarch 31, 2020 , we also owned and operated 81 AutoNation-branded collision centers, 5AutoNation USA stores, 4 automotive auction operations, and 16 parts distribution centers. We offer a diversified range of automotive products and services, including new vehicles, used vehicles, "parts and service," which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive "finance and insurance" products, which include vehicle service and other protection products, as well as the arranging of financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging the AutoNation retail brand and advertising, implementing standardized processes, and increasing productivity across all of our stores. AtMarch 31, 2020 , 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 byFord , General Motors, andFCA US . Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, Subaru, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-Benz, BMW, Audi, Lexus, and Jaguar Land Rover. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. For the three months endedMarch 31, 2020 , new vehicle sales accounted for approximately 49% of our total revenue and approximately 12% of our total gross profit. Used vehicle sales accounted for approximately 27% of our total revenue and approximately 11% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 24% of our total revenue for the three months endedMarch 31, 2020 , contributed approximately 77% of our total gross profit for the same period. Impact of the COVID-19 Pandemic on Our Business In the first quarter of 2020,U.S. industry retail new vehicle unit sales decreased 12% as compared to the first quarter of 2019. OnMarch 11, 2020 , theWorld Health Organization declared the current novel coronavirus disease 2019 ("COVID-19") outbreak to be a global pandemic. The COVID-19 pandemic has adversely impacted, and is expected to continue to adversely impact, our operations in the near-term. By earlyApril 2020 , states from which we derive nearly all of our total revenue were under extensive "shelter in place" or "stay at home" orders from federal, state, and local governments, many of which are currently still in place. These orders significantly restrict our business operations, in particular our sales activities. As a result, we had significant declines in new and used vehicle unit sales, including a year-over-year decline of approximately 50% during the last two weeks ofMarch 2020 , and our parts and service business was operating below full capacity. In addition, our stock price, along with theU.S. stock market in general, was adversely impacted by the COVID-19 pandemic. We have taken various actions in an attempt to mitigate the financial impact of the COVID-19 pandemic. Effective inApril 2020 , we placed approximately 7,000 employees on unpaid leave, implemented temporary base pay reductions for our executive officers and associates, and froze corporate new hiring. We also took actions to reduce our advertising expenses by approximately 50% for the second quarter of 2020, significantly reduced our discretionary spending, and postponed over$50 million of capital expenditures through the second quarter of 2020. The majority of our corporate staff are currently under remote work arrangements, which have not affected our ability to maintain support operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. 21
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In light of the uncertainty surrounding the COVID-19 pandemic and the impact that it had on our stock price and results of operations, we performed quantitative goodwill and franchise rights impairment tests as ofMarch 31, 2020 . As a result of these impairment tests, during the three months endedMarch 31, 2020 , we recorded non-cash goodwill and franchise rights impairment charges totaling$375.8 million . See "Critical Accounting Estimates" below for more information. In the current environment, we have a strong focus on preserving liquidity. Our primary liquidity sources are cash and cash equivalents, funds generated through operations, and amounts available under our revolving credit facility, commercial paper program, and secured used vehicle floorplan facilities. We have senior unsecured notes totaling$1.5 billion , with$300.0 million of such notes maturing inJanuary 2021 , and the remainder maturing between 2024 and 2027. Although we have experienced a decrease in our cash flow from operations as a result of the impact of the COVID-19 pandemic, as ofMarch 31, 2020 , our available liquidity totaled approximately$1.2 billion , primarily comprised of borrowing capacity under our revolving credit facility of$822.4 million (as limited under the applicable maximum consolidated leverage ratio contained in our credit agreement) and cash of$411.0 million . Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to augment our liquidity, to reduce our cost of capital, or for general corporate purposes. See "Liquidity and Capital Resources - Available Liquidity Resources" below for more information. We are unable to predict when and how quickly we will be able to resume normal levels of operations. While we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations, we expect that this situation will have a significant adverse effect on our reported results for the second quarter of 2020 and possibly beyond, and depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material. Results of Operations During the three months endedMarch 31, 2020 , we had a net loss from continuing operations of$232.2 million and a diluted loss per share of$2.58 , as compared to net income from continuing operations of$92.1 million and diluted earnings per share of$1.02 during the same period in 2019. Our total gross profit decreased 4% during the first quarter of 2020 compared to the first quarter of 2019, primarily due to a decrease in vehicle unit volume, which was down 9% as compared to the first quarter of 2019. Vehicle unit volume was significantly adversely impacted the last two weeks ofMarch 2020 due to the impact of the COVID-19 pandemic, discussed above. The decrease in vehicle unit volume was partially offset by increases in used vehicle and finance and insurance gross profit per vehicle retailed ("PVR"), which were up 8% and 10%, respectively. Additionally, SG&A expenses decreased in the first quarter of 2020, as compared to the same period in 2019, as a result of the COVID-19 pandemic impacts, including performance-driven decreases in compensation expense resulting from lower sales volumes, and changes in expectations of pay-out levels of performance-based compensation. Net loss from continuing operations during the three months endedMarch 31, 2020 , was adversely impacted by non-cash after-tax goodwill and franchise rights impairment charges totaling$308.4 million and non-cash after-tax other asset impairment charges of$6.2 million . Net income from continuing operations during the three months endedMarch 31, 2019 , benefited from net after-tax gains related to store/property divestitures, net of asset impairments, of$6.3 million . Chief Executive Officer and President Transition OnApril 12, 2020 , our Board of Directors granted the request ofCheryl Miller , Chief Executive Officer and President of the Company, for a leave of absence for health reasons, and appointedMike Jackson , Executive Chairman of the Board, to serve in the additional positions of Chief Executive Officer and President. OnApril 21, 2020 , our Board of Directors promotedJames R. Bender from his position as the Company's Executive Vice President and Chief Operating Officer to the position of President and Chief Operating Officer of the Company, effective as ofApril 22, 2020 . Strategic Initiatives We continue to build upon our comprehensive, customer-focused brand extension strategy, which includes AutoNation-branded parts and accessories,AutoNation-branded Customer Financial Services products (including extended service and maintenance contracts and other vehicle protection products), AutoNation-branded collision centers, AutoNation-branded automotive auctions,AutoNation USA stand-alone used vehicle sales and service centers, and our parts distribution network. InMarch 2020 , we invested$50 million in Waymo, the self-driving technology company of Alphabet Inc., which currently represents an equivalent ownership stake of less than 1%. 22
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Inventory Management Our new and used vehicle inventories are stated at the lower of cost or net realizable value on our consolidated balance sheets. We monitor our vehicle inventory levels based on current economic conditions and seasonal sales trends. We have typically not experienced significant losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We monitor our new vehicle inventory values as compared to net realizable values, and had no new vehicle inventory write-downs atMarch 31, 2020 , or atDecember 31, 2019 . We are actively managing inventory levels in response to impacts from the COVID-19 pandemic. We recondition the majority of used vehicles acquired for retail sale in our parts and service departments and capitalize the related costs to the used vehicle inventory. We monitor our used vehicle inventory values as compared to net realizable values. Typically, used vehicles that are not sold on a retail basis are sold at wholesale auctions. Our used vehicle inventory balance was net of cumulative write-downs of$3.5 million atMarch 31, 2020 , and$3.2 million atDecember 31, 2019 . Parts, accessories, and other inventory are carried at the lower of cost or net realizable value. We estimate the amount of potentially damaged and/or excess and obsolete inventory based upon historical experience, manufacturer return policies, and industry trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of$15.0 million atMarch 31, 2020 , and$11.1 million atDecember 31, 2019 . Critical Accounting Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity withU.S. generally accepted accounting principles ("GAAP"), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For additional discussion of our critical accounting estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K. Goodwill Goodwill for our reporting units is tested for impairment annually as ofApril 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. In light of the uncertainty surrounding the COVID-19 pandemic and the decrease in our market capitalization as ofMarch 31, 2020 , we concluded that a triggering event had occurred potentially indicating that the fair values of our reporting units were less than their carrying values as ofMarch 31, 2020 . Therefore, we performed quantitative goodwill impairment tests for each of our reporting units as ofMarch 31, 2020 . As a result of these impairment tests, during the three months endedMarch 31, 2020 , we recorded non-cash goodwill impairment charges totaling$318.3 million , of which$257.4 million related to our Premium Luxury reporting unit,$41.6 million related to our Collision Centers reporting unit, and$19.3 million related to our Parts Center reporting unit. The non-cash impairment charges are reflected as Goodwill Impairment in the accompanying Unaudited Condensed Consolidated Statements of Operations. The quantitative goodwill impairment test is dependent on many variables used to determine the fair value of our reporting units. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information on how the fair values and carrying values of our reporting units are derived for the quantitative goodwill impairment test. This process also requires that we reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium, based upon our stock price and/or average stock price over a reasonable period as of the measurement date. As a result of the quantitative goodwill impairment tests, the fair values of our Domestic and Import reporting units substantially exceeded their carrying values, goodwill associated with our Premium Luxury reporting unit was partially impaired, and goodwill associated with our Collision Center and Parts Center reporting units was fully impaired. Therefore, the most significant impact of a change in the assumptions used in determining our goodwill impairment as ofMarch 31, 2020 , would have related to our Premium Luxury reporting unit. As noted above, the goodwill impairment testing process requires the estimated aggregate fair values of our reporting units to be reconciled with our market capitalization, including consideration of a control premium, based upon our stock price and/or average stock price over a reasonable period as of the measurement date. The COVID-19 pandemic had a significant adverse impact on theU.S. stock market during the first quarter of 2020, and our closing stock price declined more than 40% to$28.06 as ofMarch 31, 2020 , compared to our closing stock price of$48.65 as 23
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recently asFebruary 21, 2020 . As a result, as ofMarch 31, 2020 , our market capitalization and, therefore, the estimated fair values of our reporting units, significantly decreased. As a measure of sensitivity, a 50 basis point increase in the discount rate, would have resulted in an increase to the goodwill impairment charge of approximately$100 million . This result and discussion is not intended to address all potential outcomes that could have resulted if different assumptions had been used in determining our goodwill impairment given the number of assumptions used in determining the impairment and the degree of sensitivity to changes in such assumptions in the determination of the fair value of the Company and its assets and liabilities. We would have been in compliance with the financial covenants in our debt agreements even if we had impaired all of the goodwill associated with all of our reporting units as such charges do not factor into the calculations for those covenants. As ofMarch 31, 2020 , we have$227.3 million of goodwill related to the Domestic reporting unit,$498.8 million related to the Import reporting unit, and$457.5 million related to the Premium Luxury reporting unit. Goodwill for our Collision Center and Parts Center reporting units was fully impaired as ofMarch 31, 2020 . Other Intangible Assets Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as ofApril 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We also concluded that, as a result of the impacts from the COVID-19 pandemic, a triggering event had occurred that indicated the fair values of our franchise rights may have been less than their carrying values as ofMarch 31, 2020 . We performed quantitative impairment tests as ofMarch 31, 2020 , and as a result, we identified eight stores with franchise rights carrying values that exceeded their fair values, and we recorded non-cash franchise rights impairment charges of$57.5 million . The non-cash impairment charges are reflected as Franchise Rights Impairment in the accompanying Unaudited Condensed Consolidated Statements of Operations. We identified eight additional stores that, while they each had franchise rights fair value in excess of carrying value, had lower relative performance compared to our total store population. We will continue to monitor these stores, as well as all stores, for events or changes in circumstances that may indicate potential impairment. The remainder of our stores had franchise rights with calculated fair values that substantially exceeded their carrying values. As ofMarch 31, 2020 , after the impairment charges, we had 56 stores with franchise rights totaling$509.0 million . The quantitative franchise rights impairment test is dependent on many variables used to determine the fair value of each store's franchise rights. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements for a description of the valuation method and related estimates and assumptions used in our quantitative impairment testing. If the fair value of each of our franchise rights had been determined to be a hypothetical 10% lower as of the valuation date ofMarch 31, 2020 , the resulting incremental charge would have been less than$3 million . The effect of a hypothetical 10% decrease in fair value estimates is not intended to provide a sensitivity analysis of every potential outcome. Impact of the COVID-19 Pandemic on Goodwill and Other Intangible Assets While we cannot predict the duration or scope of the COVID-19 pandemic, the negative financial impact on our financial results and performance could be material in future periods. A change in the conditions, circumstances, or strategy, which influence determinations of fair value, including negative or declining cash flows or a decline in actual or planned revenues for our stores for a prolonged period, and, as it relates to goodwill, a significant decrease in our market capitalization, may result in a need to recognize additional goodwill and/or franchise rights impairment charges in the future. We are scheduled to complete our annual goodwill and franchise rights impairment tests as ofApril 30, 2020 , during the second quarter of 2020. 24
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Reported Operating Data Historical operating results include the results of acquired businesses from the date of acquisition. Three Months Ended March 31, Variance ($ in millions, except per vehicle Favorable / % data) 2020 2019 (Unfavorable) Variance Revenue: New vehicle$ 2,281.9 $ 2,496.7 $ (214.8 ) (8.6 ) Retail used vehicle 1,162.0 1,261.8 (99.8 ) (7.9 ) Wholesale 86.7 77.8 8.9 11.4 Used vehicle 1,248.7 1,339.6 (90.9 ) (6.8 ) Finance and insurance, net 235.8 236.5 (0.7 ) (0.3 ) Total variable operations(1) 3,766.4 4,072.8 (306.4 ) (7.5 ) Parts and service 876.3 876.7 (0.4 ) - Other 24.3 32.3 (8.0 ) Total revenue$ 4,667.0 $ 4,981.8 $ (314.8 ) (6.3 ) Gross profit: New vehicle$ 96.4 $ 121.9 $ (25.5 ) (20.9 ) Retail used vehicle 83.5 84.3 (0.8 ) (0.9 ) Wholesale 7.5 6.2 1.3 Used vehicle 91.0 90.5 0.5 0.6 Finance and insurance 235.8 236.5 (0.7 ) (0.3 ) Total variable operations(1) 423.2 448.9 (25.7 ) (5.7 ) Parts and service 388.8 398.9 (10.1 ) (2.5 ) Other 1.2 1.4 (0.2 ) Total gross profit 813.2 849.2 (36.0 ) (4.2 ) Selling, general, and administrative expenses 600.7 623.0 22.3 3.6 Depreciation and amortization 48.1 44.1 (4.0 ) Goodwill impairment 318.3 - (318.3 ) Franchise rights impairment 57.5 - (57.5 ) Other (income) expense, net 7.9 (8.7 ) (16.6 ) Operating income (loss) (219.3 ) 190.8 (410.1 ) Non-operating income (expense) items: Floorplan interest expense (25.5 ) (39.0 ) 13.5 Other interest expense (23.5 ) (27.8 ) 4.3 Interest income 0.1 0.2 (0.1 ) Other income (loss), net (3.0 ) 1.9 (4.9 ) Income (loss) from continuing operations before income taxes$ (271.2 ) $ 126.1 $ (397.3 ) Retail vehicle unit sales: New vehicle 56,739 63,513 (6,774 ) (10.7 ) Used vehicle 56,149 61,171 (5,022 ) (8.2 ) 112,888 124,684 (11,796 ) (9.5 ) Revenue per vehicle retailed: New vehicle$ 40,217 $ 39,310 $ 907 2.3 Used vehicle$ 20,695 $ 20,627 $ 68 0.3 Gross profit per vehicle retailed: New vehicle$ 1,699 $ 1,919 $ (220 ) (11.5 ) Used vehicle$ 1,487 $ 1,378 $ 109 7.9 Finance and insurance$ 2,089 $ 1,897 $ 192 10.1 Total variable operations(2)$ 3,682 $ 3,551 $ 131 3.7 (1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results. (2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales. 25
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Table of Contents Three Months Ended March 31, 2020 (%) 2019 (%) Revenue mix percentages: New vehicle 48.9 50.1 Used vehicle 26.8 26.9 Parts and service 18.8 17.6 Finance and insurance, net 5.1 4.7 Other 0.4 0.7 Total 100.0 100.0 Gross profit mix percentages: New vehicle 11.9 14.4 Used vehicle 11.2 10.7 Parts and service 47.8 47.0 Finance and insurance 29.0 27.8 Other 0.1 0.1 Total 100.0 100.0 Operating items as a percentage of revenue: Gross profit: New vehicle 4.2 4.9 Used vehicle - retail 7.2 6.7 Parts and service 44.4 45.5 Total 17.4 17.0 Selling, general, and administrative expenses 12.9
12.5
Operating income (loss) NM
3.8
Other operating items as a percentage of total gross profit: Selling, general, and administrative expenses
73.9 73.4 Operating income (loss) NM 22.5 NM - Not Meaningful March 31, 2020 2019 Inventory days supply: New vehicle (industry standard of selling days) 98 days 77 days Used vehicle (trailing calendar month days) 48 days 30 days 26
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Same Store Operating Data We have presented below our operating results on a same store basis, which reflect the results of our stores for the identical months in each period presented in the comparison, commencing with the first full month in which the store was owned by us. Results from divested stores are excluded from both current and prior periods. Therefore, the amounts presented in the 2019 columns may differ from the same store amounts presented for 2019 in the prior year. Three Months Ended March 31, Variance ($ in millions, except per Favorable / % vehicle data) 2020 2019 (Unfavorable) Variance Revenue: New vehicle$ 2,277.9 $ 2,455.7 $ (177.8 ) (7.2 ) Retail used vehicle 1,160.1 1,239.7 (79.6 ) (6.4 ) Wholesale 86.6 76.7 9.9 12.9 Used vehicle 1,246.7 1,316.4 (69.7 ) (5.3 ) Finance and insurance, net 235.6 233.0 2.6 1.1 Total variable operations(1) 3,760.2 4,005.1 (244.9 ) (6.1 ) Parts and service 875.3 860.6 14.7 1.7 Other 24.1 32.2 (8.1 ) Total revenue$ 4,659.6 $ 4,897.9 $ (238.3 ) (4.9 ) Gross profit: New vehicle$ 96.0 $ 121.1 $ (25.1 ) (20.7 ) Retail used vehicle 83.4 83.4 - - Wholesale 7.6 6.4 1.2 Used vehicle 91.0 89.8 1.2 1.3 Finance and insurance 235.6 233.0 2.6 1.1 Total variable operations(1) 422.6 443.9 (21.3 ) (4.8 ) Parts and service 388.9 391.8 (2.9 ) (0.7 ) Other 0.9 1.4 (0.5 ) Total gross profit$ 812.4 $ 837.1 $ (24.7 ) (3.0 ) Retail vehicle unit sales: New vehicle 56,692 62,185 (5,493 ) (8.8 ) Used vehicle 56,093 59,787 (3,694 ) (6.2 ) 112,785 121,972 (9,187 ) (7.5 ) Revenue per vehicle retailed: New vehicle$ 40,180 $ 39,490 $ 690 1.7 Used vehicle$ 20,682 $ 20,735 $ (53 ) (0.3 ) Gross profit per vehicle retailed: New vehicle$ 1,693 $ 1,947 $ (254 ) (13.0 ) Used vehicle$ 1,487 $ 1,395 $ 92 6.6 Finance and insurance$ 2,089 $ 1,910 $ 179 9.4
Total variable operations(2)
93 2.6 (1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results. (2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales. 27
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Table of Contents Three Months Ended March 31, 2020 (%) 2019 (%) Revenue mix percentages: New vehicle 48.9 50.1 Used vehicle 26.8 26.9 Parts and service 18.8 17.6 Finance and insurance, net 5.1 4.8 Other 0.4 0.6 Total 100.0 100.0 Gross profit mix percentages: New vehicle 11.8 14.5 Used vehicle 11.2 10.7 Parts and service 47.9 46.8 Finance and insurance 29.0 27.8 Other 0.1 0.2 Total 100.0 100.0 Operating items as a percentage of revenue: Gross profit: New vehicle 4.2 4.9 Used vehicle - retail 7.2 6.7 Parts and service 44.4 45.5 Total 17.4 17.1 28
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Table of Contents New Vehicle Three Months Ended March 31, Variance ($ in millions, except per vehicle Favorable / % data) 2020 2019 (Unfavorable) Variance Reported: Revenue$ 2,281.9 $ 2,496.7 $ (214.8 ) (8.6 ) Gross profit$ 96.4 $ 121.9 $ (25.5 ) (20.9 ) Retail vehicle unit sales 56,739 63,513 (6,774 ) (10.7 ) Revenue per vehicle retailed$ 40,217 $ 39,310 $ 907 2.3 Gross profit per vehicle retailed$ 1,699 $ 1,919 $ (220 ) (11.5 ) Gross profit as a percentage of revenue 4.2 % 4.9 % Inventory days supply (industry standard of selling days) 98 days 77 days Three Months Ended March 31, Variance Favorable / % 2020 2019 (Unfavorable) Variance Same Store: Revenue$ 2,277.9 $ 2,455.7 $ (177.8 ) (7.2 ) Gross profit$ 96.0 $ 121.1 $ (25.1 ) (20.7 ) Retail vehicle unit sales 56,692 62,185 (5,493 ) (8.8 ) Revenue per vehicle retailed$ 40,180 $ 39,490 $ 690 1.7 Gross profit per vehicle retailed$ 1,693 $ 1,947 $ (254 ) (13.0 ) Gross profit as a percentage of revenue 4.2 % 4.9 % The following discussion of new vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of$4.0 million and$41.0 million in new vehicle revenue and$0.4 million and$0.8 million in new vehicle gross profit for the three months endedMarch 31, 2020 and 2019, respectively, is related to divestiture activity and the opening of a new add-point. First Quarter 2020 compared to First Quarter 2019 Same store new vehicle revenue decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, due to a decrease in same store unit volume, partially offset by an increase in revenue PVR. The decrease in same store unit volume was due to significant declines in new vehicle unit sales during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic. Same store revenue PVR increased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, due in part to a shift in mix toward trucks and sport utility vehicles, which have relatively higher average selling prices. The shift in mix toward trucks and sports utility vehicles is due to a combination of improved vehicle fuel efficiency, relatively low average fuel prices, and changing consumer preference. Average selling prices also increased as a result of increases in the manufacturers' suggested retail prices. Same store gross profit PVR decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in gross profit PVR for Premium Luxury and Domestic vehicles as we focused on balancing gross profit PVRs and unit volume. 29
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New Vehicle Inventory Carrying Benefit (Cost) The following table details net new vehicle inventory carrying benefit (cost), consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit in accordance with GAAP. Three Months Ended March 31, ($ in millions) 2020 2019 Variance Floorplan assistance$ 24.5 $ 25.2 $ (0.7 ) New vehicle floorplan interest expense (23.1 ) (36.4 ) 13.3
Net new vehicle inventory carrying benefit (cost)
First Quarter 2020 compared to First Quarter 2019 We had a net new vehicle inventory carrying benefit for the three months endedMarch 31, 2020 , and a net new vehicle inventory carrying cost for the three months endedMarch 31, 2019 . Floorplan interest expense decreased due to lower average interest rates and lower average floorplan balances. Floorplan interest rates are variable and therefore increase and decrease with changes in the underlying benchmark interest rates. TheFederal Reserve cut interest rate three times over the third and fourth quarters of 2019, and in response to the COVID-19 pandemic, theFederal Reserve cut interest rates to near 0% inMarch 2020 . Although lower average interest rates are beneficial to interest expense, this benefit may be partially or fully offset in stores where days supply averages increase due to lower sales volume. 30
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Table of Contents Used Vehicle Three Months Ended March 31, Variance ($ in millions, except per vehicle Favorable / % data) 2020 2019 (Unfavorable) Variance Reported: Retail revenue$ 1,162.0 $ 1,261.8 $ (99.8 ) (7.9 ) Wholesale revenue 86.7 77.8 8.9 11.4 Total revenue$ 1,248.7 $ 1,339.6 $ (90.9 ) (6.8 ) Retail gross profit$ 83.5 $ 84.3 $ (0.8 ) (0.9 ) Wholesale gross profit 7.5 6.2 1.3 Total gross profit$ 91.0 $ 90.5 $ 0.5 0.6 Retail vehicle unit sales 56,149 61,171 (5,022 ) (8.2 ) Revenue per vehicle retailed$ 20,695 $ 20,627 $ 68 0.3
Gross profit per vehicle retailed
109 7.9 Gross profit as a percentage of revenue 7.2 % 6.7 % Inventory days supply (trailing calendar month days) 48 days 30 days Three Months Ended March 31, Variance Favorable / % 2020 2019 (Unfavorable) Variance Same Store: Retail revenue$ 1,160.1 $ 1,239.7 $ (79.6 ) (6.4 ) Wholesale revenue 86.6 76.7 9.9 12.9 Total revenue$ 1,246.7 $ 1,316.4 $ (69.7 ) (5.3 ) Retail gross profit$ 83.4 $ 83.4 $ - - Wholesale gross profit 7.6 6.4 1.2 Total gross profit$ 91.0 $ 89.8 $ 1.2 1.3 Retail vehicle unit sales 56,093 59,787 (3,694 ) (6.2 ) Revenue per vehicle retailed$ 20,682 $ 20,735 $ (53 ) (0.3 ) Gross profit per vehicle retailed$ 1,487 $ 1,395 $ 92 6.6 Gross profit as a percentage of revenue 7.2 % 6.7 % The following discussion of used vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of$2.0 million and$23.2 million in total used vehicle revenue for the three months endedMarch 31, 2020 and 2019 and$0.7 million in total used vehicle gross profit for the three months endedMarch 31, 2019 , respectively, is related to divestiture activity and the opening of a new add-point. First Quarter 2020 compared to First Quarter 2019 Same store retail used vehicle revenue decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to a decrease in same store unit volume. The decrease in same store unit volume was due to significant declines in used retail vehicle unit sales during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic. These declines were partially offset by an increase in relative market demand for used vehicles as compared to new vehicles, due in part to increased affordability compared to new vehicles and shifting dynamics in the used vehicle market. With the continued elevated levels in off-lease supply of late-model used vehicles, the average age and mileage of used vehicles in the market has decreased, which has provided wider availability of in-demand technology features on used vehicles, resulting in reduced disparity between used vehicles and new vehicles. Our used-to-new vehicle unit sales ratio increased to 98.9% for the three months endedMarch 31, 2020 , as compared to 96.1% for the prior year period. Same store revenue PVR was relatively flat during the three months endedMarch 31, 2020 , as compared to the same period in 2019. Same store gross profit PVR increased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, due to increases in gross profit PVR for Premium Luxury and Import vehicles. 31
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Table of Contents Parts and Service Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Reported: Revenue$ 876.3 $ 876.7 $ (0.4 ) - Gross Profit$ 388.8 $ 398.9 $ (10.1 ) (2.5 ) Gross profit as a percentage of revenue 44.4 % 45.5 % Same Store: Revenue$ 875.3 $ 860.6 $ 14.7 1.7 Gross Profit$ 388.9 $ 391.8 $ (2.9 ) (0.7 ) Gross profit as a percentage of revenue 44.4 % 45.5 % Parts and service revenue is primarily derived from vehicle repairs paid directly by customers or via reimbursement from manufacturers and others under warranty programs, as well as from wholesale parts sales and collision services. The following discussion of parts and service results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of$1.0 million and$16.1 million in parts and service revenue and$0.1 million and$7.1 million in parts and service gross profit for the three months endedMarch 31, 2020 and 2019, respectively, is related to acquisition and divestiture activity, as well as the opening of a new add-point. First Quarter 2020 compared to First Quarter 2019 During the three months endedMarch 31, 2020 , same store parts and service gross profit decreased slightly compared to the same period in 2019, primarily due to decreases in gross profit associated with customer-pay service of$3.1 million , warranty of$2.5 million , and wholesale parts of$2.0 million , which were partially offset by increases in gross profit associated with the preparation of vehicles for sale of$3.3 million and collision business of$1.8 million . Customer-pay service gross profit and warranty gross profit were adversely impacted by a decrease in volume during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic. The decrease in customer-pay volume was partially offset by higher value repair orders and price increases. The decrease in warranty volume was partially offset by higher value repair orders and improved parts and labor rates negotiated with certain manufacturers. Gross profit associated with our wholesale parts business decreased due to inventory write-downs to net realizable value. Gross profit associated with the preparation of vehicles for sale benefited from higher value internal repair orders, partially offset by lower new and used vehicle unit volume. Collision business gross profit benefited from an increase in volume, higher value repair orders, and an increase in gross profit associated with service work outsourced to third-parties. 32
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Table of Contents Finance and Insurance Three Months Ended March 31, Variance Favorable / % ($ in millions, except per vehicle data) 2020 2019 (Unfavorable) Variance Reported: Revenue and gross profit$ 235.8 $ 236.5 $ (0.7 ) (0.3 ) Gross profit per vehicle retailed$ 2,089 $ 1,897 $ 192 10.1 Same Store: Revenue and gross profit$ 235.6 $ 233.0 $
2.6 1.1
Gross profit per vehicle retailed
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 these products on a commission basis, and we also participate in the future underwriting profit on certain products pursuant to retrospective commission arrangements with the issuers of those products. The following discussion of finance and insurance results is on a same store basis. The difference between reported amounts and same store amounts in finance and insurance revenue and gross profit in the above tables of$0.2 million and$3.5 million for the three months endedMarch 31, 2020 and 2019, respectively, is related to divestiture activity, as well as the opening of a new add-point. First Quarter 2020 compared to First Quarter 2019 Same store finance and insurance revenue and gross profit increased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to an increase in finance and insurance gross profit PVR, partially offset by a decrease in vehicle unit volume. The increase in finance and insurance gross profit PVR was primarily due to an increase in product penetration and higher realized margins on vehicle service contracts, including our AutoNation Vehicle Protection Plan product. Finance and insurance gross profit PVR also benefited from higher realized margins on arranged customer financing and amounts financed per transaction. Increases in finance and insurance gross profit PVR were partially offset by a shift in unit volume mix from new vehicles to used vehicles, which have lower average selling prices than new vehicles and therefore typically generate lower gross profit per transaction associated with arranging customer financing. Sales of used vehicles also have lower finance and product penetration as compared to sales of new vehicles. Finance and insurance gross profit PVR was also adversely impacted by a decrease in retrospective commissions due in part to higher claim activity. We expect retrospective commissions to continue to decrease as compared to recent years. 33
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Segment Results In the following table, revenue and segment income of our reportable segments are reconciled to consolidated revenue and consolidated operating income (loss), respectively. The following discussions of segment results are on a reported basis. Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Revenue: Domestic$ 1,483.5 $ 1,568.8 $ (85.3 ) (5.4 ) Import 1,362.1 1,496.1 (134.0 ) (9.0 ) Premium Luxury 1,616.8 1,734.1 (117.3 ) (6.8 ) Total 4,462.4 4,799.0 (336.6 ) (7.0 ) Corporate and other 204.6 182.8 21.8 11.9 Total consolidated revenue$ 4,667.0 $ 4,981.8 $ (314.8 ) (6.3 ) Segment income(1): Domestic$ 54.1 $ 56.2 $ (2.1 ) (3.7 ) Import 65.9 72.6 (6.7 ) (9.2 ) Premium Luxury 80.2 84.3 (4.1 ) (4.9 ) Total 200.2 213.1 (12.9 ) (6.1 ) Corporate and other (445.0 ) (61.3 ) (383.7 ) Floorplan interest expense 25.5 39.0 13.5 Operating income (loss)$ (219.3 ) $ 190.8 $ (410.1 )
(1) Segment income represents income for each of our reportable segments and is defined as operating income less floorplan interest expense.
Retail new vehicle unit sales: Domestic 18,327 20,205 (1,878 ) (9.3 ) Import 25,287 28,756 (3,469 ) (12.1 ) Premium Luxury 13,125 14,552 (1,427 ) (9.8 ) 56,739 63,513 (6,774 ) (10.7 ) 34
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Domestic
The Domestic segment operating results included the following:
Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Revenue$ 1,483.5 $ 1,568.8 $ (85.3 ) (5.4 ) Segment income$ 54.1 $ 56.2 $ (2.1 ) (3.7 ) Retail new vehicle unit sales 18,327 20,205 (1,878 )
(9.3 )
First Quarter 2020 compared to First Quarter 2019 Domestic revenue decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in new and used vehicle unit volume and parts and service volume during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic and the divestitures we completed in 2019. These decreases were partially offset by an increase in new vehicle revenue PVR due in part to a shift in mix toward trucks and sport utility vehicles, which have relatively higher average selling prices, as a result of a combination of improved vehicle fuel efficiency, relatively low average fuel prices, and changing consumer preference. New vehicle average selling prices also increased as a result of increases in the manufacturers' suggested retail prices. Domestic segment income decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in new and used vehicle unit volume, parts and service volume, and new vehicle gross profit, which were adversely impacted by the COVID-19 pandemic. Decreases in Domestic segment income were partially offset by an increase in finance and insurance revenue and gross profit PVR, which benefited from higher realized margins on vehicle service contracts and an increase in product penetration, and decreases in floorplan interest and SG&A expenses. 35
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Import
The Import segment operating results included the following:
Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Revenue$ 1,362.1 $ 1,496.1 $ (134.0 ) (9.0 ) Segment income$ 65.9 $ 72.6 $ (6.7 ) (9.2 ) Retail new vehicle unit sales 25,287 28,756 (3,469 )
(12.1 )
First Quarter 2020 compared to First Quarter 2019 Import revenue decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in new and used vehicle unit volume and parts and service volume during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic and the divestitures we completed in 2019. Import segment income decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in parts and service volume and new and used vehicle unit volume, which were adversely impacted by the COVID-19 pandemic. Decreases in Import segment income were partially offset by an increase in finance and insurance revenue and gross profit PVR, which benefited from higher realized margins on vehicle service contracts and an increase in product penetration, and decreases in SG&A and floorplan interest expenses. 36
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Premium Luxury The Premium Luxury segment operating results included the following: Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Revenue$ 1,616.8 $ 1,734.1 $ (117.3 ) (6.8 ) Segment income$ 80.2 $ 84.3 $ (4.1 ) (4.9 ) Retail new vehicle unit sales 13,125 14,552 (1,427 )
(9.8 )
First Quarter 2020 compared to First Quarter 2019 Premium Luxury revenue decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in new and used vehicle unit volume and parts and service volume during the last two weeks ofMarch 2020 as a result of the COVID-19 pandemic. Premium Luxury segment income decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to decreases in new vehicle gross profit PVR, new vehicle unit volume, and parts and service volume, which were adversely impacted by the COVID-19 pandemic. Decreases in Premium Luxury segment income were partially offset by an increase in used vehicle gross profit PVR and finance and insurance revenue and gross profit PVR, which benefited from higher realized margins on vehicle service contracts and an increase in product penetration, and a decrease in floorplan interest expense. 37
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Corporate and other Corporate and other results included the following: Three months ending March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Revenue$ 204.6 $ 182.8 $ 21.8 11.9 Income (loss)$ (445.0 ) $ (61.3 ) $ (383.7 ) "Corporate and other" is comprised of our other businesses, including collision centers, auction operations,AutoNation USA stand-alone used vehicle sales and service centers, and parts distribution 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 other income items. As ofMarch 31, 2020 , we had 81 AutoNation-branded collision centers, 4 AutoNation-branded auction operations, and 5AutoNation USA stand-alone used vehicle sales and service centers. We also had 6 parts distribution centers that service our wholesale parts sales markets for the sale of original equipment manufacturer parts. Additionally, we directly source and distribute retail and wholesale parts for sale to our customers and other dealerships and collision centers through our 10 operational AutoNation aftermarket collision parts distribution centers. Our aftermarket collision parts business was established in 2018 and is still in its development and expansion phase. As ofMarch 31, 2020 , our aftermarket collision parts distribution centers as a group were not yet profitable and had approximately$31 million of parts inventory. We have invested approximately$16 million in our aftermarket parts distribution centers for equipment, information systems, and other intangible assets. Several of our aftermarket parts distribution centers are operated under a multi-year logistics agreement with a third party. This agreement is subject to a declining early termination penalty, which is estimated to be approximately$14 million as ofMarch 31, 2020 . We also lease facilities for certain of the aftermarket collision parts distribution centers with right-of-use assets of approximately$6 million and remaining lease payments through the various lease terms of approximately$8 million as ofMarch 31, 2020 . Although we believe our aftermarket collision parts business will be profitable over time, we can make no such assurance. We expect to continue to focus on our parts distribution network to support our national wholesale footprint and create more opportunities to offer both original manufacturer and AutoNation aftermarket collision parts to our customers. During the three months endedMarch 31, 2020 , we recorded non-cash goodwill impairment charges totaling$318.3 million , of which$257.4 million related to our Premium Luxury reporting unit,$41.6 million related to our Collision Centers reporting unit, and$19.3 million related to our Parts Center reporting unit. We also recorded non-cash franchise rights impairment charges of$57.5 million . The non-cash goodwill impairments and franchise rights impairments are reflected as Goodwill Impairment and Franchise Rights Impairment, respectively, in the accompanying Unaudited Condensed Consolidated Statements of Operations. and are reported in the "Corporate and other" category of our segment information. During the three months endedMarch 31, 2020 , we recorded non-cash long-lived asset impairment charges associated with our aftermarket collision parts business of$5.8 million , and non-cash intangible asset impairment charges associated with our collision centers and aftermarket collision parts business of$2.4 million , both of which are reported in the "Corporate and other" category of our segment information. Our parts inventory balance for our aftermarket collision parts business was net of cumulative write-downs of$8.2 million atMarch 31, 2020 , and$5.2 million atDecember 31, 2019 . 38
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Selling, General, and Administrative Expenses Our Selling, General, and Administrative ("SG&A") expenses consist primarily of compensation, including store and corporate salaries, commissions, and incentive-based compensation, as well as advertising (net of reimbursement-based manufacturer advertising rebates), and store and corporate overhead expenses, which include occupancy costs, legal, accounting, and professional services, and general corporate expenses. The following table presents the major components of our SG&A expenses. Three Months Ended March 31, Variance Favorable / % ($ in millions) 2020 2019 (Unfavorable) Variance Reported: Compensation$ 374.1 $ 399.0 $ 24.9 6.2 Advertising 46.3 44.2 (2.1 ) (4.8 ) Store and corporate overhead 180.3 179.8 (0.5 ) (0.3 ) Total$ 600.7 $ 623.0 $ 22.3 3.6 SG&A as a % of total gross profit: Compensation 46.0 47.0 100 bps Advertising 5.7 5.2 (50 ) bps Store and corporate overhead 22.2 21.2 (100 ) bps Total 73.9 73.4 (50 ) bps First Quarter 2020 compared to First Quarter 2019 SG&A expenses decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to a decrease in compensation expense, which was driven in part by the impact of the COVID-19 pandemic. As a result of "shelter in place" or "stay at home" orders from federal, state, and local governments and other restrictive orders that were put into place inMarch 2020 , we had significant declines in new and used vehicle unit sales, including a year-over-year decline of approximately 50% during the last two weeks ofMarch 2020 , which negatively impacted compensation for our sales associates. Additionally, performance-based compensation expense decreased$14.2 million , as compared to the first quarter of 2019, primarily due to changes in expectations of pay-out levels as a result of the COVID-19 pandemic impact. As a percentage of total gross profit, SG&A expenses increased to 73.9% during the three months endedMarch 31, 2020 , from 73.4% in the same period in 2019, primarily due to gross profit pressure as a result of the COVID-19 pandemic impact. Effective inApril 2020 , we placed approximately 7,000 employees on unpaid leave, implemented temporary base pay reductions for our executive officers and associates, and froze corporate new hiring. We also took actions to reduce our advertising expenses by approximately 50% for the second quarter of 2020 and significantly reduced our discretionary spending. Goodwill Impairment During the three months endedMarch 31, 2020 , we recorded$318.3 million of non-cash goodwill impairment charges primarily due to the impacts to our business as well as a decrease in our stock price and market capitalization as a result of the COVID-19 pandemic. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information. Franchise Rights Impairment During the three months endedMarch 31, 2020 , we recorded$57.5 million of non-cash franchise right impairment charges to reduce the carrying values of certain franchise rights to their estimated fair values. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information. Other Income (Expense), Net (Operating) During the first quarter of 2020, we recognized asset impairment charges of$8.5 million . During the first quarter of 2019, we recognized net gains of$8.5 million related to store divestitures. 39
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Non-Operating Income (Expense) Floorplan Interest Expense First Quarter 2020 compared to First Quarter 2019 Floorplan interest expense was$25.5 million for the three months endedMarch 31, 2020 , compared to$39.0 million for the same period in 2019. The decrease in floorplan interest expense of$13.5 million was the result of lower average interest rates and lower average vehicle floorplan balances. Floorplan interest rates are variable and therefore increase and decrease with changes in the underlying benchmark interest rates. Other Interest Expense First Quarter 2020 compared to First Quarter 2019 Other interest expense of$23.5 million for the three months endedMarch 31, 2020 , decreased$4.3 million as compared to$27.8 million for the same period in 2019, driven by lower average debt balances and lower average interest rates primarily due to the repayment of the 5.5% Senior Notes due 2020. We also recorded a loss on debt extinguishment of$1.1 million during the three months endedMarch 31, 2020 , resulting from our credit facility debt refinancing inMarch 2020 . Income Tax Provision (Benefit) Income taxes are provided based upon our anticipated underlying annual blended federal and state income tax rates adjusted, as necessary, for any discrete tax matters occurring during the period. As we operate in various states, our effective tax rate is also dependent upon our geographic revenue mix. Our effective income tax rate was 14.4% for the three months endedMarch 31, 2020 , and 27.0% for the three months endedMarch 31, 2019 . The tax rate for the three months endedMarch 31, 2020 , reflects the fact that a significant portion of the goodwill impairment charges taken in the first quarter of 2020 was not deductible for income tax purposes. Discontinued Operations Discontinued operations are related to stores that were sold or terminated prior toJanuary 1, 2014 . Results from discontinued operations, net of income taxes, were primarily related to carrying costs for real estate we have not yet sold associated with stores that were closed prior toJanuary 1, 2014 , and other adjustments related to disposed operations. Liquidity and Capital Resources We manage our liquidity to ensure access to sufficient funding at acceptable costs to fund our ongoing operating requirements and future capital expenditures while continuing to meet our financial obligations. We believe that our cash and cash equivalents, funds generated through operations, and amounts available under our revolving credit facility, commercial paper program, and secured used vehicle floorplan facilities will be sufficient to fund our working capital requirements, service our debt, pay our tax obligations and commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future. We also believe that our liquidity resources will allow us to manage the impact of the COVID-19 pandemic on our business operations for the foreseeable future. The challenges posed by the COVID-19 pandemic on our business are evolving rapidly. Consequently, we will continue to evaluate our financial and liquidity position in light of future developments relating to the COVID-19 pandemic. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to augment our liquidity, to reduce our cost of capital, or for general corporate purposes. Debt Refinancing Transaction OnMarch 26, 2020 , we amended and restated our existing unsecured credit agreement to, among other things, (1) provide for lower commitment fees and loan margins as set forth in the amended and restated credit agreement, (2) extend the maturity date toMarch 26, 2025 , and (3) provide for customary LIBOR replacement provisions. 40
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Available Liquidity Resources We had the following sources of liquidity available: March 31, December 31, (In millions) 2020 2019 Cash and cash equivalents$ 411.0 $ 42.0 Revolving credit facility (1)$ 822.4 (2) $
1,421.1
Secured used vehicle floorplan facilities (3)$ 0.6 $ 0.6 (1) As limited by the maximum consolidated leverage ratio contained in our
credit agreement. The credit agreement also contains an accordion feature
that allows us, subject to credit availability and certain other
conditions, to increase the amount of the revolving credit facility,
together with any added term loans, by up to$500.0 million in the aggregate.
(2) At
In addition, we use the revolving credit facility under our credit
agreement as a liquidity backstop for borrowings under our commercial
paper program. We had$140.0 million of commercial paper notes outstanding atMarch 31, 2020 . See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.
(3) Based on the eligible used vehicle inventory that could have been pledged
as collateral. See Note 5 of the Notes to Unaudited Condensed
Consolidated Financial Statements for more information.
In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of our performance relating to insurance matters. AtMarch 31, 2020 , surety bonds, letters of credit, and cash deposits totaled$107.8 million , of which$39.7 million were letters of credit. We do not currently provide cash collateral for outstanding letters of credit. InFebruary 2019 , we filed an automatic shelf registration statement with theSEC that enables us to offer for sale, from time to time and as the capital markets permit, an unspecified amount of common stock, preferred stock, debt securities, warrants, subscription rights, depositary shares, stock purchase contracts, units, and guarantees of debt securities. Capital Allocation Our capital allocation strategy is focused on growing long-term value per share. We invest capital in our business to maintain and upgrade our existing facilities and to build new facilities for existing franchises, as well as for other strategic and technology initiatives, including our brand extension strategy discussed above under "Strategic Initiatives." We also deploy capital opportunistically to repurchase our common stock and/or debt, to complete acquisitions or investments, and/or build facilities for newly awarded franchises. Our capital allocation decisions will be based on factors such as the expected rate of return on our investment, the market price of our common stock versus our view of its intrinsic value, the market price of our debt, the potential impact on our capital structure, our ability to complete acquisitions that meet our market and vehicle brand criteria and return on investment threshold, and limitations set forth in our debt agreements. Share Repurchases Our Board of Directors from time to time authorizes the repurchase of shares of our common stock up to a certain monetary limit. A summary of shares repurchased under our stock repurchase program authorized by our Board of Directors follows: Three Months Ended March 31, (In millions, except per share data) 2020 2019 Shares repurchased 2.5 1.0 Aggregate purchase price$ 80.0 $ 33.5
Average purchase price per share
The decision to repurchase shares at any given point in time is based on factors such as the market price of our common stock versus our view of its intrinsic value, the potential impact on our capital structure (including compliance with our maximum leverage ratio and other financial covenants in our debt agreements as well as our available liquidity), and the expected return on competing uses of capital such as acquisitions or investments, capital investments in our current businesses, or repurchases of our debt. 41
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As ofMarch 31, 2020 ,$139.0 million remained available under our stock repurchase program most recently authorized by our Board of Directors. We temporarily suspended our share repurchase program at the end of the first quarter of 2020 in light of the COVID-19 pandemic. This suspension does not impact our remaining Board authorization, and we may in the future resume the program when appropriate. Capital Expenditures The following table sets forth information regarding our capital expenditures: Three Months Ended March 31, (In millions) 2020 2019 Purchases of property and equipment, including operating lease buy-outs (1)$ 30.0
(1) Includes accrued construction in progress and excludes property associated
with leases entered into during the year.
AtMarch 31, 2020 , we owned approximately 80% of our new vehicle franchise store locations with a net book value of$2.1 billion , as well as other properties associated with our collision centers, auction operations,AutoNation USA stand-alone used vehicle sales and service centers, parts distribution centers, and other excess properties with a net book value of$468.4 million . None of these properties are mortgaged or encumbered. We have taken various actions in an attempt to mitigate the financial impact of the COVID-19 pandemic, including the postponement of approximately$50 million of capital expenditures through the second quarter of 2020. Planned expenditures beyond the second quarter of 2020 will be evaluated over the next several months. Acquisitions and Divestitures The following table sets forth information regarding cash used in business acquisitions, net of cash acquired, and cash received from business divestitures, net of cash relinquished: Three Months Ended March 31, (In millions) 2020 2019
Cash received from (used in) business acquisitions, net
We did not purchase or divest stores during the three months endedMarch 31, 2020 . We purchased two parts distribution centers and divested two Import stores during the three months endedMarch 31, 2019 . Long-Term Debt and Commercial Paper The following table sets forth our non-vehicle long-term debt, net of debt issuance costs, as ofMarch 31, 2020 , andDecember 31, 2019 . (in millions) March 31, December 31, Debt Description Maturity Date Interest Payable 2020 2019
5.5% Senior Notes
-
300.0
3.5% Senior Notes
450.0
4.5% Senior Notes
450.0
3.8% Senior Notes
300.0 Revolving credit facility March 26, 2025 Monthly 790.0 - Finance leases and Various dates other debt through 2039 Monthly 101.2 93.9 2,391.2 1,943.9 Less: unamortized debt discounts and debt issuance costs (9.2 ) (9.8 ) Less: current maturities (305.6 ) (355.6 ) Long-term debt, net of current maturities$ 2,076.4 $ 1,578.5 42
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InFebruary 2020 , we repaid the outstanding$350.0 million of 5.5% Senior Notes. Our 3.35% Senior Notes due 2021 will mature onJanuary 15, 2021 , and were therefore reclassified to current maturities during the first quarter of 2020. AtMarch 31, 2020 , we had$140.0 million of commercial paper notes outstanding with a weighted-average annual interest rate of 3.30% and a weighted-average remaining term of 1 day. AtDecember 31, 2019 , we had$170.0 million of commercial paper notes outstanding with a weighted-average annual interest rate of 2.13% and a weighted-average remaining term of 12 days. See Note 7 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our long-term debt and commercial paper. Restrictions and Covenants Our credit agreement, the indentures for our senior unsecured notes, and our vehicle floorplan facilities contain numerous customary financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness or prepay existing indebtedness, to create liens or other encumbrances, to sell (or otherwise dispose of) assets, and to merge or consolidate with other entities. Under our credit agreement, we are required to remain in compliance with a maximum leverage ratio and maximum capitalization ratio. The leverage ratio is a contractually defined amount principally reflecting non-vehicle debt divided by a contractually defined measure of earnings with certain adjustments. The capitalization ratio is a contractually defined amount principally reflecting vehicle floorplan payable and non-vehicle debt divided by our total capitalization including vehicle floorplan payable. The specific terms of these covenants can be found in our credit agreement, which we filed with our Current Report on Form 8-K onMarch 26, 2020 . The indentures for our senior unsecured notes contain certain limited covenants, including limitations on liens and sale and leaseback transactions. Our failure to comply with the covenants contained in our debt agreements could result in the acceleration of all of our indebtedness. Our debt agreements have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of AutoNation. During the three months endedMarch 31, 2020 , we recorded non-cash goodwill and franchise rights impairment charges of$375.8 million . See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements. As ofMarch 31, 2020 , we were in compliance with the requirements of the financial covenants under our debt agreements as such non-cash impairment charges do not factor into the calculations for those covenants. Under the terms of our credit agreement, atMarch 31, 2020 , our leverage ratio and capitalization ratio were as follows: March 31, 2020 Requirement Actual Leverage ratio ? 3.75x 2.83x Capitalization ratio ? 70.0% 56.7% After considering the impacts of the COVID-19 pandemic, the actions we have taken, and the other options available to us, we expect to remain in compliance with the requirements of the financial covenants under our debt agreements. To the extent that in the future we believe that we would be unable to comply with the covenants contained in our credit agreement, we would seek an amendment or waiver of our credit agreement, which could increase the cost of our debt. Vehicle Floorplan Payable The components of vehicle floorplan payable are as follows: March 31, December 31, (In millions) 2020 2019
Vehicle floorplan payable - trade
1,455.2 Vehicle floorplan payable$ 3,682.5 $ 3,575.8 43
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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. Vehicle floorplan facilities are primarily collateralized by vehicle inventories and related receivables. See Note 5 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our vehicle floorplan payable. Cash Flows The following table summarizes the changes in our cash provided by (used in) operating, investing, and financing activities: Three Months Ended March 31, (In millions) 2020 2019 Net cash provided by operating activities$ 113.7 $
259.7
Net cash used in investing activities$ (92.2 ) $
(48.6 )
Net cash received from (used in) financing activities
Cash Flows from Operating Activities Our primary sources of operating cash flows result from the sale of vehicles and finance and insurance products, collections from customers for the sale of parts and services, and proceeds from vehicle floorplan payable-trade. Our primary uses of cash from operating activities are repayments of vehicle floorplan payable-trade, purchases of inventory, personnel-related expenditures, and payments related to taxes and leased properties. Net cash provided by operating activities decreased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to an increase in working capital requirements. Cash Flows from Investing Activities Net cash flows from investing activities consist primarily of cash used in capital additions and activity from business acquisitions, business divestitures, property dispositions, and other transactions. Net cash used in investing activities increased during the three months endedMarch 31, 2020 , as compared to the same period in 2019, primarily due to an investment in an equity security and a decrease in cash received from business divestitures, net of cash relinquished, partially offset by a decrease in purchases of property and equipment. Cash Flows from Financing Activities Net cash flows from financing activities primarily include repurchases of common stock, debt activity, and changes in vehicle floorplan payable-non-trade. During the three months endedMarch 31, 2020 , we borrowed$790.0 million under our revolving credit facility and had no repayments. During the three months endedMarch 31, 2019 , we had no borrowings or repayments under our revolving credit facility. Cash flows from financing activities include changes in commercial paper notes outstanding totaling net payments of$30.0 million during the three months endedMarch 31, 2020 , and net payments of$160.0 million during the three months endedMarch 31, 2019 , as well as changes in vehicle floorplan payable-non-trade totaling net proceeds of$30.1 million for the three months endedMarch 31, 2020 , and net payments of$12.5 million for the three months endedMarch 31, 2019 . During the three months endedMarch 31, 2020 , we repaid the outstanding$350.0 million of 5.5% Senior Notes due 2020 through the utilization of our commercial paper program. During the three months endedMarch 31, 2020 , we amended and restated our existing unsecured credit agreement. Cash flows from financing activities during the three months endedMarch 31, 2020 , reflect cash payments of$6.1 million for debt issuance costs for this transaction that are being amortized to interest expense over the term of the related debt arrangement. During the three months endedMarch 31, 2020 , we repurchased 2.5 million shares of common stock for an aggregate purchase price of$80.0 million (average purchase price per share of$31.95 ), including repurchases for which settlement occurred subsequent toMarch 31, 2020 . During the three months endedMarch 31, 2019 , we repurchased 1.0 million shares of 44
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common stock for an aggregate purchase price of$33.5 million (average purchase price per share of$34.34 ), including repurchases for which settlement occurred subsequent toMarch 31, 2019 . Forward-Looking Statements Our business, financial condition, results of operations, cash flows, and prospects, and the prevailing market price and performance of our common stock may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding the impact of the COVID-19 pandemic on our business, results of operations, and financial condition, the actions we are taking in response to the COVID-19 pandemic, our strategic initiatives, partnerships, or investments, including our brand extension strategies, and other statements regarding our expectations for the future performance of our business and the automotive retail industry, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including statements that describe our objectives, plans or goals are, or may be deemed to be, forward-looking statements. Words such as "anticipate," "expect," "intend," "goal," "plan," "believe," "continue," "may," "will," "could," and variations of such words and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements reflect our current expectations concerning future results and events, and they involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these statements. These forward-looking statements speak only as of the date of this report, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances. The risks, uncertainties, and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following: • The COVID-19 pandemic has had a significant adverse impact, and could
continue to have a significant adverse impact, on our business, results of
operations, and financial condition going forward. Future epidemics,
pandemics, and other outbreaks could also have a significant adverse
impact on our business, results of operations, and financial condition.
• The automotive retail industry is sensitive to changing economic conditions and various other factors, including, but not limited to, fuel prices, interest rates, and tariffs. Our business and results of operations are substantially dependent on new and used vehicle sales
levels in
well as the gross profit margins that we can achieve on our sales of vehicles, all of which are very difficult to predict.
• Our new vehicle sales are impacted by the incentive, marketing, and other
programs of vehicle manufacturers.
• We are dependent upon the success and continued financial viability of the
vehicle manufacturers and distributors with which we hold franchises.
• We are investing significantly in our brand extension strategy, and if our
strategic initiatives are not successful, we will have incurred
significant expenses without the benefit of improved financial results.
• If we are not able to maintain and enhance our retail brands and reputation or to attract consumers to our own digital channels, or if
events occur that damage our retail brands, reputation, or sales channels,
our business and financial results may be harmed.
• New laws, regulations, or governmental policies regarding fuel economy and
greenhouse gas emission standards, or changes to existing standards, may
affect vehicle manufacturers' ability to produce cost-effective vehicles
or vehicles that consumers demand, which could adversely impact our business, results of operations, financial condition, cash flow, and prospects.
• Natural disasters and adverse weather events can disrupt our business.
• We are subject to restrictions imposed by, and significant influence from,
vehicle manufacturers that may adversely impact our business, financial
condition, results of operations, cash flows, and prospects, including our
ability to acquire additional stores.
• We are subject to numerous legal and administrative proceedings, which, if
the outcomes are adverse to us, could materially adversely affect our business, results of operations, financial condition, cash flows, and prospects. 45
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• Our operations are subject to extensive governmental laws and regulations.
If we are found to be in purported violation of or subject to liabilities
under any of these laws or regulations, or if new laws or regulations are
enacted that adversely affect our operations, our business, operating
results, and prospects could suffer. • A failure of our information systems or any security breach or
unauthorized disclosure of confidential information could have a material
adverse effect on our business. • Our debt agreements contain certain financial ratios and other
restrictions on our ability to conduct our business, and our substantial
indebtedness could adversely affect our financial condition and operations
and prevent us from fulfilling our debt service obligations.
• We are subject to interest rate risk in connection with our vehicle
floorplan payables, revolving credit facility, and commercial paper
program that could have a material adverse effect on our profitability.
• Goodwill and other intangible assets comprise a significant portion of our
total assets. We must test our goodwill and other intangible assets for
impairment at least annually, which could result in a material, non-cash
write-down of goodwill or franchise rights and could have a material
adverse impact on our results of operations and shareholders' equity. • Our minority equity investments do not have readily determinable fair values and their fair values are subject to fluctuations based on
observable price changes. These fluctuations could result in downward
adjustments or require us to record impairments, both of which could adversely impact our results of operations and financial condition.
• Our largest stockholders, as a result of their ownership stakes in us, may
have the ability to exert substantial influence over actions to be taken
or approved by our stockholders. In addition, future share repurchases and
fluctuations in the levels of ownership of our largest stockholders could
impact the volume of trading, liquidity, and market price of our common
stock.
Please refer to our most recent Annual Report on Form 10-K for additional discussion of the foregoing risks. These forward-looking statements speak only as of the date of this report, and we undertake no obligation to update any forward-looking statements to reflect subsequent events or circumstances. Additional Information Investors and others should note that we announce material financial information using our company website (www.autonation.com), our investor relations website (investors.autonation.com),SEC filings, press releases, public conference calls, and webcasts. Information about AutoNation, its business, and its results of operations may also be announced by posts on the following social media channels: • AutoNation's Twitter feed (www.twitter.com/autonation)
•
The information that we post on these social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested in AutoNation to review the information that we post on these social media channels. These channels may be updated from time to time on AutoNation's investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q. 46
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