Regarding the cost structure, AutoNation is on track to achieve the $100 million in annualized cost savings under the previously-announced cost reduction plan, and the company will continue driving efficiencies beyond that point.
AutoNation has put in place $86 million in annualized savings since the starting of the initiative.
In the third quarter SG&A decreased $54 million versus Q3 2007.
SG&A as a percentage of gross profit increased to 76.5% from 71% a year ago reflecting the deleveraging of the cost structure partially offset by the cost savings initiatives.
Regarding cash flow, through a disciplined management of cap ex and working capital AutoNation generated sufficient funds to reduce non-vehicle debt by $362 million and floor plan by $227 million for a total of $589 million on a year-to-date basis. AutoNation drove $104 million of non-vehicle debt reduction and $332 million of floor plan reduction in the third quarter. Additionally, the company committed to repurchase an additional $26 million of debt which settled in early October.
During the third quarter AutoNation did not repurchase any shares of the common stock.
At September 30 the non-vehicle debt was $1.4 billion. Of the $700 million revolver AutoNation had covenant limited availability of $197 million. Additionally, the company had cash on hand of about $61 million for a total liquidity of approximately $258 million.
Despite the impairment charges, AutoNation remains in compliance with all the covenants under its debt agreements. The consolidated leverage ratio at September 30 which measures non-vehicle debt to EBITDA was 2.65 versus the covenant limit of 3.0. The capitalization ratio which measures floor plan plus non-vehicle debt divided by total book capitalization was 61.5% at September 30 versus the 65% cap.
At September 30 AutoNation had reduced new vehicle inventory levels by approximately 6,600 units from June 30.
As compared to prior year, the net inventory carrying cost for new vehicles was $5 million lower in Q3 primarily due to lower floor plan interest rates partially offset by a decrease in floor plan assistance. As AutoNation continues to reduce inventory it expects net inventory carrying costs to decrease.
Other interest expense was $8.7 million lower in Q3 versus last year.
The favorable variance is the result of interest rates on the term loan facility, mortgage debt and floating rate senior notes, and a decrease in the debt level associated with the revolving credit facility partially offset by an increase in mortgage debt. The ongoing deleveraging actions will contribute to lower other interest expense going forward. A one-notch reduction in our debt rating would increase credit facility costs by about $2 million annually.
During the quarter AutoNation recorded a gain of $12 million before tax or $7 million after tax on the repurchase of $88 million of principal of its senior notes.
Excluding the impairment charges, the gain on the debt repurchase and certain favorable tax adjustments in prior year AutoNation reported third quarter earnings from continuing operations of $0.25 per share versus $0.37 per share a year ago.
For Q3 2008 AutoNation had an effective income tax rate of 15.8% versus a prior year effective rate of 37.6%.
The rate for the third quarter of 2008 reflects the fact that a significant portion of the impairment charges was not deductible for tax purposes. The Q3 2007 rate benefited from adjustments for the resolution of various tax matters which resulted in an EPS benefit of $0.02. AutoNation expects its ongoing rate to be about 40% excluding the impact of any potential tax adjustments in the future.
AutoNation reinvested $55.7 million in the business through capital expenditures during the quarter.
The company expects full-year 2008 capital expenditures to be approximately $125 million. Excluding acquisition related spending, land purchased for future sites and lease buyouts, cap ex will be approximately $70 million.
The third quarter was marked by extreme economic volatility.
In addition to the ongoing drastic changes in gas prices, new developments affecting auto retail were the pullback on leasing and the tightening of credit by traditional auto lenders from raising credit standards to providing lower loan-to-value advances, both of which put increasing pressure on consumers particularly those with negative equity issues.
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