AutoNation 2015 Annual Report Download - page 77

Table of Contents
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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.
Under the terms of our credit agreement, at December 31, 2015, our leverage ratio and capitalization ratio were as follows:
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
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Leverage ratio ≤ 3.75x 2.32x
Capitalization ratio ≤ 70.0%
61.0%
Both the leverage ratio and the capitalization ratio limit our ability to incur additional non-vehicle debt. The capitalization ratio also limits our ability to
incur additional vehicle floorplan indebtedness and repurchase shares.
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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, 2015 and 2014, we believe we have adequately accrued for the potential impact of loss contingencies that are probable and
reasonably estimable, and there was no indication of a reasonable possibility that a material loss, or additional material loss, may have been incurred. We do
not believe that the ultimate resolution of 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 years.
Expenses under real property, equipment, and software leases were $51.4 million in 2015, $49.0 million in 2014, and $47.6 million in 2013. 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.
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