Summary of AUTONATION INC /FL

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Item 1. 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.
Certain amounts have been reclassified from the previously reported financial statements to conform to the financial statement presentation of the current period.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of March 31, 2009, we owned and operated 296 new vehicle franchises from 228 stores located in major metropolitan markets, 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 approximately 96% of the new vehicles that we sold during the three months ended March 31, 2009, are manufactured by Toyota, Ford, Honda, General Motors, Nissan, Mercedes, BMW, and Chrysler.
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance 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, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores.
At March 31, 2009, we had three operating and reportable segments:
(1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes, BMW, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products. Prior period amounts have been reclassified to reflect our operating segment structure at March 31, 2009. For the three months ended March 31, 2009, new vehicle sales accounted for approximately 49% of our total revenue, but approximately 16% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 26% of total revenue for the three months ended March 31, 2009, contributed approximately 68% of our gross profit for the same period. During the three months ended March 31, 2009, we had net income from continuing operations of $48.6 million and diluted earnings per share of $0.27, as compared to net income from continuing operations of $55.7 million and diluted earnings per share of $0.31, during the same period in 2008. Results for the three months ended March 31, 2009, were favorably impacted by a gain on senior note repurchases of $11.9 million ($7.4 million after-tax) and a net gain on asset sales and dispositions of $9.6 million ($5.9 million after-tax), partially offset by property impairments of $7.8 million ($4.8 million after-tax). Market Challenges
Our results of operations for the first quarter of 2009 reflected a challenging automotive retail market impacted by the unfavorable economic conditions in the United States. Although first quarter sales were lower than expectations, we believe that sales rates will improve in the second half of this year. In this environment, we believe that we will be able to manage within the financial covenants in our debt agreements. See "Liquidity and Capital Resources - Restrictions and Covenants" below.
Government assistance has been provided to General Motors and Chrysler, and the future viability of these manufacturers is dependent on additional government assistance. Additionally, there can be no assurance that Ford will not need government assistance in the future to continue its operations. Unless General Motors and Chrysler receive significant additional government assistance in the second quarter of 2009, they will likely be forced to seek bankruptcy protection. Both of these manufacturers would need debtor-in-possession financing to emerge from any bankruptcy, which would be difficult, if not impossible, to obtain without government assistance.
The bankruptcy of one or more of the domestic manufacturers could have a material adverse effect on us. For example, the manufacturers could attempt to terminate our floorplan financing and all or certain of our domestic franchises, we may be unable to collect accounts receivable from the manufacturers, and we may be required to incur impairment charges with respect to the inventory, fixed assets, and intangible assets related to our domestic franchises. At March 31, 2009, we had approximately $33.6 million in accounts receivable, $667.0 million of inventory, $662.1 million of fixed assets, and $172.4 million of goodwill and other intangible assets related to our domestic franchises. Additionally, there are uncertainties surrounding the potential impact of a domestic manufacturer bankruptcy, such as the impact on warranties provided to vehicle purchasers and the availability of parts and services needed to maintain and repair

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vehicles. As a result, the impact of such a bankruptcy on our financial condition and results of operations is not determinable at this time. See also Note 15 of the Notes to Unaudited Condensed Consolidated Financial Statements in this Form 10-Q and the risk factor "We are dependent upon the success and continued financial viability of the vehicle manufacturers and distributors with which we hold franchises" in our Annual Report on Form 10-K for the year ended December 31, 2008.
In 2008, we implemented a cost reduction program as part of our continuing response to the ongoing market challenges. Pursuant to this program, we have taken actions to reduce our costs in excess of $200 million on an annualized run-rate basis through March 31, 2009.
Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market on our consolidated balance sheets.
We have generally not experienced 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 reduced our new vehicle inventory to 40,924 units at March 31, 2009, from 52,066 units at December 31, 2008, and 60,694 units at March 31, 2008. Although we focus on managing our inventory levels in accordance with consumer demand, we believe we must maintain a minimum level of inventory at our lower volume stores that is representative of the full line of vehicles offered by manufacturers. This may result in a higher days supply of inventory than would otherwise result if we were in a better economic environment. However, given our inventory management practices (such as managing our inventory purchases based on our sales forecasts and sharing inventory among stores within a local market), we do not believe the current business climate is likely to result in material impairment charges related to new vehicle inventory (subject to the risks noted in "Market Challenges" above). We continue to monitor our new vehicle inventory levels closely based on current economic conditions and will adjust them as appropriate.
In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory expected to be liquidated at wholesale auctions at a loss. Our used vehicle inventory balance was net of cumulative write-downs of $0.1 million at March 31, 2009, and $1.7 million at December 31, 2008.
Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount of potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $5.0 million at March 31, 2009, and $6.3 million at December 31, 2008.
Critical Accounting Policies and Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, 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 a complete discussion of our critical and significant accounting policies and estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Goodwill and franchise rights assets are tested for impairment annually on April 30 or more frequently when events or circumstances indicate that impairment may have occurred. As discussed in Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements, during 2008, we recorded $1.61 billion ($1.37 billion after-tax) of non-cash goodwill impairment charges and $146.5 million ($90.8 million after-tax) of non-cash impairment charges related to franchise rights intangible assets.
We are scheduled to complete our annual tests for impairment of goodwill and other intangible assets on April 30, 2009, and we will continue to monitor events in future periods to determine if additional asset impairment testing should be performed. We continue to face a challenging automotive retail environment and an uncertain economic environment in general. As a result of these conditions, there can be no assurance that an additional material impairment charge will not occur in a future period.

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Reported Operating Data
   Historical operating results include the results of acquired businesses from
the date of acquisition.

($ in millions, except per                                    Three Months Ended March 31,
   vehicle data)                                                                Variance
                                                                               Favorable /           %
                                                2009             2008          (Unfavorable)      Variance
Revenue:
New vehicle                                  $  1,213.9       $  2,125.5       $     (911.6 )        (42.9 )
Used vehicle                                      612.7            934.4             (321.7 )        (34.4 )
Parts and service                                 554.4            622.4              (68.0 )        (10.9 )
Finance and insurance, net                         78.7            140.2              (61.5 )        (43.9 )
Other                                              13.4             16.8               (3.4 )

Total revenue                                $  2,473.1       $  3,839.3       $   (1,366.2 )        (35.6 )

Gross profit:
New vehicle                                  $     75.6       $    141.6       $      (66.0 )        (46.6 )
Used vehicle                                       65.6             80.6              (15.0 )        (18.6 )
Parts and service                                 243.4            271.2              (27.8 )        (10.3 )
Finance and insurance                              78.7            140.2              (61.5 )        (43.9 )
Other                                               7.3              9.6               (2.3 )

Total gross profit                                470.6            643.2             (172.6 )        (26.8 )
Selling, general and administrative
expenses                                          364.6            474.6              110.0           23.2
Depreciation and amortization                      20.7             22.7                2.0
Other expenses (income), net                       (3.5 )            0.3                3.8

Operating income                                   88.8            145.6              (56.8 )        (39.0 )

Floorplan interest expense                        (10.1 )          (23.9 )             13.8
Other interest expense                            (11.8 )          (26.8 )             15.0
Gain on senior note repurchases                    11.9                -               11.9
Interest income                                     0.3              0.5               (0.2 )
Other losses, net                                  (1.6 )           (1.7 )              0.1

Income from continuing operations before                                                    )
income taxes                                 $     77.5       $     93.7       $      (16.2          (17.3 )


Retail vehicle unit sales:
New vehicle                                      39,220           69,254            (30,034 )        (43.4 )
Used vehicle                                     35,329           48,351            (13,022 )        (26.9 )

                                                 74,549          117,605            (43,056 )        (36.6 )


Revenue per vehicle retailed:
New vehicle                                  $   30,951       $   30,691       $        260            0.8
Used vehicle                                 $   15,409       $   16,039       $       (630 )         (3.9 )

Gross profit per vehicle retailed:
New vehicle                                  $    1,928       $    2,045       $       (117 )         (5.7 )
Used vehicle                                 $    1,800       $    1,673       $        127            7.6
Finance and insurance                        $    1,056       $    1,192       $       (136 )        (11.4 )

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                                                            Three Months Ended
                                                                 March 31,
                                                           2009 (%)      2008 (%)
Revenue mix percentages:
New vehicle                                                   49.1          55.4
Used vehicle                                                  24.8          24.3
Parts and service                                             22.4          16.2
Finance and insurance, net                                     3.2           3.7
Other                                                          0.5           0.4

Total                                                        100.0         100.0

Gross profit mix percentages:
New vehicle                                                   16.1          22.0
Used vehicle                                                  13.9          12.5
Parts and service                                             51.7          42.2
Finance and insurance                                         16.7          21.8
Other                                                          1.6           1.5

Total                                                        100.0         100.0

Operating items as a percentage of revenue:
Gross profit:
New vehicle                                                    6.2           6.7
Used vehicle - retail                                         11.7          10.4
Parts and service                                             43.9          43.6
Total                                                         19.0          16.8
Selling, general and administrative expenses                  14.7          12.4
Operating income                                               3.6           3.8
Operating items as a percentage of total gross profit:
Selling, general and administrative expenses                  77.5          73.8
Operating income                                              18.9          22.6



                                                                March 31,           March 31,
                                                                   2009                2008
Days supply:
New vehicle (industry standard of selling days,
including fleet)                                                 66 days             57 days
Used vehicle (trailing 30 days)                                  36 days             40 days

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.

                                                         Three Months Ended March 31,
                                                       2009          2008        Variance
($ in millions)
Floorplan assistance                                 $   10.4      $   20.1      $  (9.7 )
Floorplan interest expense (new vehicles)                (9.6 )       (23.8 )       14.2


Net new vehicle inventory carrying benefit (cost)    $    0.8      $   (3.7 )    $   4.5

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Same Store Operating Data
   We have presented below our operating results on a same store basis to
reflect our internal performance. The "Same Store" amounts presented below
include the results of dealerships for the identical months in each period
presented in the comparison, commencing with the first full month in which the
dealership was owned by us.

($ in millions, except per                                        Three Months Ended March 31,
   vehicle data)                                                                       Variance
                                                                                      Favorable /            %
                                                  2009               2008            (Unfavorable)        Variance
Revenue:
New vehicle                                    $  1,203.7         $  2,115.1         $     (911.4 )         (43.1 )
Used vehicle                                        608.2              926.8               (318.6 )         (34.4 )
Parts and service                                   550.3              613.7                (63.4 )         (10.3 )
Finance and insurance, net                           78.3              139.5                (61.2 )         (43.9 )
Other                                                12.8               16.2                 (3.4 )

Total revenue                                  $  2,453.3         $  3,811.3         $   (1,358.0 )         (35.6 )

Gross profit:
New vehicle                                    $     74.9         $    141.1         $      (66.2 )         (46.9 )
Used vehicle                                         65.1               80.2                (15.1 )         (18.8 )
Parts and service                                   241.7              268.5                (26.8 )         (10.0 )
Finance and insurance                                78.3              139.5                (61.2 )         (43.9 )
Other                                                 7.1                9.5                 (2.4 )

Total gross profit                             $    467.1         $    638.8         $     (171.7 )         (26.9 )


Retail vehicle unit sales:
New vehicle                                        39,021             68,887              (29,866 )         (43.4 )
Used vehicle                                       35,149             47,947              (12,798 )         (26.7 )

                                                   74,170            116,834              (42,664 )         (36.5 )


Revenue per vehicle retailed:
New vehicle                                    $   30,847         $   30,704         $        143             0.5
Used vehicle                                   $   15,392         $   16,059         $       (667 )          (4.2 )
Gross profit per vehicle retailed:
New vehicle                                    $    1,919         $    2,048         $       (129 )          (6.3 )
Used vehicle                                   $    1,795         $    1,677         $        118             7.0
Finance and insurance                          $    1,056         $    1,194         $       (138 )         (11.6 )

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                                                         Three Months Ended
                                                              March 31,
                                                        2009 (%)       2008 (%)
        Revenue mix percentages:
        New vehicle                                         49.1          55.5
        Used vehicle                                        24.8          24.3
        Parts and service                                   22.4          16.1
        Finance and insurance, net                           3.2           3.7
        Other                                                0.5           0.4

        Total                                              100.0         100.0


        Gross profit mix percentages:
        New vehicle                                         16.0          22.1
        Used vehicle                                        13.9          12.6
        Parts and service                                   51.7          42.0
        Finance and insurance                               16.8          21.8
        Other                                                1.6           1.5

        Total                                              100.0         100.0


        Operating items as a percentage of revenue:
        Gross profit:
        New vehicle                                          6.2           6.7
        Used vehicle - retail                               11.7          10.4
        Parts and service                                   43.9          43.8
        Total                                               19.0          16.8

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New Vehicle

($ in millions, except per                                        Three Months Ended March 31,
   vehicle data)                                                                       Variance
                                                                                     Favorable /            %
                                                 2009               2008            (Unfavorable)         Variance
Reported:
Revenue                                       $  1,213.9         $  2,125.5         $      (911.6 )         (42.9 )
Gross profit                                  $     75.6         $    141.6         $       (66.0 )         (46.6 )
Retail vehicle unit sales                         39,220             69,254               (30,034 )         (43.4 )
Revenue per vehicle retailed                  $   30,951         $   30,691         $         260             0.8
Gross profit per vehicle retailed             $    1,928         $    2,045         $        (117 )          (5.7 )
Gross profit as a percentage of revenue               6.2%               6.7%
Days supply (industry standard of
selling days, including fleet)                     66 days            57 days



                                                                  Three Months Ended March 31,
                                                                                       Variance
                                                                                     Favorable /            %
                                                 2009               2008            (Unfavorable)         Variance
Same Store:
Revenue                                       $  1,203.7         $  2,115.1         $      (911.4 )         (43.1 )
Gross profit                                  $     74.9         $    141.1         $       (66.2 )         (46.9 )
Retail vehicle unit sales                         39,021             68,887               (29,866 )         (43.4 )
Revenue per vehicle retailed                  $   30,847         $   30,704         $         143             0.5
Gross profit per vehicle retailed             $    1,919         $    2,048         $        (129 )          (6.3 )
Gross profit as a percentage of revenue               6.2%               6.7%

Same store new vehicle revenue decreased $911.4 million or 43.1% during the three months ended March 31, 2009, as compared to the same period in 2008, primarily as a result of a decrease in same store unit volume of 43.4% partially offset by a slight increase in same store revenue per new vehicle retailed. The decrease in same store unit volume was primarily due to the challenging automotive retail environment. Results were adversely impacted by overall economic conditions, including reduced credit availability offered to consumers, the discontinuation or limitation of certain manufacturer leasing programs, and a decline in consumer confidence. Revenue per new vehicle retailed slightly benefited from a shift in mix toward premium luxury vehicles, which have a higher average selling price than domestic and import vehicles. This benefit was partially offset, however, by a decrease in the average revenue per new vehicle retailed for premium luxury vehicles. We expect that the automotive retail market will remain challenging in 2009.
Same store gross profit per new vehicle retailed decreased 6.3% during the three months ended March 31, 2009, as compared to the same period in 2008. The decrease was driven largely by compressed margins for import vehicles due to an oversupply of inventory in the market attributed in part to shifting consumer demand due to lower fuel prices, and an overall competitive retail environment. Gross profit per new vehicle retailed was also impacted by more stringent credit conditions in the automotive retail credit market.
Our new vehicle inventories were $1.2 billion or 66 days supply at March 31, 2009, as compared to new vehicle inventories of $1.5 billion or 83 days supply at December 31, 2008, and $1.8 billion or 57 days supply at March 31, 2008. We reduced our new vehicle inventory to 40,924 units at March 31, 2009, from 52,066 units at December 31, 2008, and 60,694 units at March 31, 2008.
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

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