AutoNation 2003 Annual Report Download - page 32

Table of Contents
Operating Expenses
Selling, General and Administrative Expenses
In 2003, selling, general and administrative expenses decreased $43.2 million or 2%. As a percent of total gross profit, selling, general
and administrative expenses improved 90 basis points as a result of our continued focus on cost-cutting and operational improvements,
particularly in the areas of compensation and other selling, general and administrative expenses, partially offset by increases in advertising
expenses. In the area of compensation, we continue to focus on better aligning the compensation of employees with the performance of our
stores and increasing the variability of our compensation expense.
Total selling, general and administrative expenses in 2002 decreased compared to 2001 primarily due to savings from decreased store
selling, general and administration expenses particularly compensation expenses, partially offset by increases due to investments in
strategic initiatives and related infrastructure.
Amortization
The decrease in amortization in 2002 was due to the elimination of goodwill amortization as a result of new goodwill accounting rules
effective January 1, 2002.
Loan and Lease Underwriting Activities
In December 2001, we decided to exit the business of underwriting retail automobile loans for customers at our stores, which we
determined was not a part of our core automotive retail business. In 2003, we sold all of the related finance receivables portfolio to a third
party and received proceeds equal to the net carrying value of the finance receivables and servicing liabilities at the closing date of the
transactions totaling approximately $52 million, resulting in no gain or loss on the transaction. We continue to provide automobile loans and
leases for our customers through unrelated third-party financing sources.
Loan and lease underwriting income in 2003 and 2002 was the result of our focus on the management of our finance receivables and
improved collections prior to the sale of our finance receivables portfolio in 2003.
Other Losses (Gains)
Other losses for 2003 were primarily the result of a real estate impairment charge totaling $27.5 million related to three underperforming
franchised new vehicle stores which currently operate in converted used vehicle megastores.
Other gains in 2001 primarily consists of a $19.3 million pre-tax gain from the sale of the New Jersey-based Flemington dealership
group.
Non-Operating Income (Expense)
Floorplan Interest Expense
Decreases in floorplan interest expense in 2003 and 2002 are primarily the result of lower interest rates partially offset by higher average
inventory levels. For the year ended December 31, 2003, the income statement impact from interest rate hedges was not significant. There
were no interest rate hedges in 2002 and 2001. See discussion in Item 7A, Quantitative and Qualitative Disclosures About Market Risk.
Interest Expense — IRS Settlement
As described below, in March 2003, we entered into a settlement agreement with the IRS. Interest expense — IRS settlement is related
to interest due under the agreement from the date of settlement.
Other Interest Expense
During 2003 and 2002, other interest expense was incurred primarily on borrowings under our mortgage facilities and the outstanding
senior unsecured notes. The increase in 2003 is primarily due to incremental debt
28