AutoNation 2003 Annual Report Download - page 42

Table of Contents
• Our ability to grow our business may be limited by our ability to acquire automotive stores in key markets on favorable terms or at
all.
• We are subject to interest rate risk in connection with our floorplan notes payable, revolving credit facilities and mortgage facilities
that could have a material adverse effect on our profitability.
• Our revolving credit facilities and the indenture relating to our senior unsecured notes contain certain restrictions on our ability to
conduct our business.
• We must test our intangibles for impairment at least annually, which may 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.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is changing interest rates. Our policy is to manage interest rates through the use of a combination of
fixed and floating rate debt. At December 31, 2003, fixed rate debt, primarily consisting of amounts outstanding under senior unsecured
notes, totaled $494.7 million and had a fair value of $557.1 million. Interest rate derivatives may be used to adjust interest rate exposures
when appropriate, based upon market conditions.
Interest Rate Risk
At December 31, 2003 and 2002, we had variable rate floorplan notes payable totaling $2.8 billion and $2.3 billion, respectively. Based
on these amounts at December 31, 2003 and 2002, a 100 basis point change in interest rates would result in an approximate $28.0 million
and $23.0 million, respectively, change to our annual floorplan interest expense. Our exposure to changes in interest rates with respect to
floorplan notes payable is partially mitigated by manufacturers’ floorplan assistance which in some cases is based on variable interest rates.
Net of floorplan assistance, at December 31, 2003 and 2002, a 100 basis point change in interest rates would result in an approximate
$23.4 million and $17.1 million, respectively, change to our net inventory carrying costs.
At December 31, 2003 and 2002, we had other variable rate debt outstanding totaling $329.7 million and $153.2 million, respectively.
Based on the amounts outstanding at December 31, 2003 and 2002, a 100 basis point change in interest rates would result in an
approximate $3.3 million and $1.5 million change to interest expense, respectively.
Hedging Risk
We comply with Statement of Financial Accounting Standards Nos. 133, 137, 138 and 149 (collectively “SFAS 133”) pertaining to the
accounting for derivatives and hedging activities. SFAS 133 requires us to recognize all derivative instruments on the balance sheet at fair
value. In accordance with SFAS 133, we reflect the current fair value of all derivatives on our balance sheet. The related gains or losses on
these transactions are deferred in stockholders’ equity as a component of other comprehensive income. These deferred gains and losses are
recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change
in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is
immediately recognized in income. All of our interest rate hedges are designated as cash flow hedges. During the year ended December 31,
2003, we entered into a series of interest rate hedge transactions, consisting of a combination of forward starting swaps, and cap and floor
options (collars) with a notional value of $800.0 million, designed to convert certain floating rate floorplan notes payable and mortgage notes
to fixed rate debt. We have $200 million in notional swaps, which start in 2004 and effectively lock in a rate of 3.0%, and $600 million in
notional collars that cap floating rates to a maximum rate no greater than 2.4%. All of our hedges mature over the next three years. For the
year ended December 31, 2003, net unrealized losses related to hedges included in other comprehensive loss were $3.1 million. As of
December 31, 2003, all of our derivative contracts were determined to be highly effective, and no ineffective portion was recognized in
income. We had no outstanding derivatives at December 31, 2002.
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