AutoNation 2005 Annual Report Download - page 22

Table of Contents
effect of increasing net cash from operating activities with the related offset in net cash from financing activities.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of December 31, 2005, we owned and
operated 346 new vehicle franchises from 269 dealerships located in major metropolitan markets in 17 states, predominantly in the Sunbelt
region of the United States. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 37
different brands of new vehicles. The core brands of vehicles that we sell, representing more than 90% of the new vehicles that we sold in
2005, are manufactured by Ford, General Motors, Daimler Chrysler, Toyota, Nissan, Honda and BMW.
We operate in a single industry segment, automotive retailing. We offer a diversified range of automotive products and services, including
new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products
and other aftermarket products. We also arrange 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, reducing operating expenses, leveraging our market brands and advertising, improving asset management and sharing and
implementing common processes across all of our stores.
Historically, new vehicle sales have accounted for approximately 60% of our total revenue, but less than 30% of our total gross margin.
Our parts and service and finance and insurance operations, while comprising less than 20% of total revenue, contribute approximately 60%
of our gross margin. We believe that many factors affect industry-wide sales of new and used vehicles and finance and insurance products,
and retailers’ gross profit margins, including consumer confidence in the economy, the level of manufacturers’ excess production capacity,
manufacturer incentives (and consumers’ reaction to such offers), intense industry competition, interest rates, the prospects of war, other
international conflicts or terrorist attacks, severe weather conditions, the level of personal discretionary spending, product quality, affordability
and innovation, fuel prices, credit availability, unemployment rates, the number of consumers whose vehicle leases are expiring and the
length of consumer loans on existing vehicles. Our parts and service business is also impacted by these factors.
In 2005, we had year-over-year overall same store gross profit growth driven by increases in used vehicles and parts and services. This
was despite a challenging fourth quarter of 2005 which was impacted by the effects of Hurricane Wilma on our Florida stores and soft
industry sales. Our performance is attributable to our emphasis on store processes, associate training and expense control.
In 2006, we anticipate that industry-wide new vehicle sales will remain stable (nearly 17 million units) in the United States and continue
to be highly competitive. However, the level of retail sales for 2006 is very difficult to predict.
For the years ended December 31, 2005 and 2004, we had net income from continuing operations of $395.5 million and $397.1 million,
respectively, and diluted earnings per share from continuing operations of $1.48 and $1.46, respectively. During 2005 and 2004, we recorded
net income tax benefits in continuing operations totaling $14.5 million and $25.8 million, respectively, primarily related to resolution of
various income tax matters. The results for 2005 include $10.6 million after-tax ($17.4 million pre-tax) of premium and deferred costs
recognized as Other Interest Expense related to the repurchase of $123.1 million (face value) of our 9% senior unsecured notes. Additionally,
the results for 2005 were impacted by higher floorplan interest expense primarily resulting from higher short-term LIBOR interest rates
partially offset by lower average new vehicle inventory balances. The net inventory carrying benefit (floorplan interest expense net of floorplan
assistance recognized from manufacturers) for 2005 was $3.7 million, a decrease of $31.2 million compared to 2004. We expect net floorplan
costs to continue to increase in 2006 as we experience increased interest rates.
During 2005 and 2004, we had income from discontinued operations totaling $101.0 million and $36.5 million, respectively, net of
income taxes. In 2005 and 2004, we recognized gains totaling $110.0 million and $52.2 million, respectively, included in discontinued
operations related to the settlement of various income
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