(Updates stock prices, comments from rating agency)
By Justin Hyde
DETROIT, Oct 24 (Reuters) - AutoNation Inc. , the nation's largest dealer of new and used cars and trucks, said on Thursday its profit rose 35 percent in the third quarter on strong sales and lower costs.
But the company warned that it could face a bill of up to $550 million to settle a dispute with U.S. tax authorities. It also said it expected U.S. new car sales to decline next year by 3 percent to 5 percent, but its 2003 earnings should surpass this year's total.
U.S. auto sales have been propped up to a large degree this year by rebates, interest-free financing and other consumer incentives, led by Detroit's Big Three automakers.
That helps dealers like AutoNation and Group 1 Automotive Inc. , since more of the cost of luring buyers into showrooms is carried by the automakers. Group 1 said on Thursday its third-quarter earnings increased 27 percent.
AutoNation said its net income rose to $106.7 million, or 33 cents per share, above its previous forecast, up from $79.2 million, or 24 cents per share, a year ago. The company had told analysts in July to expect earnings of 28 cents to 30 cents a share.
Revenues rose 4 percent over the third quarter of 2001 as unit retail sales of new vehicles, which account for about 60 percent of revenues, were up 2.3 percent. The company also sold more warranties on new and used vehicles, and low interest rates held down the costs of its inventories.
AutoNation said it expects fourth-quarter earnings per share to be in the range of 25 cents to 27 cents, and said its 2003 outlook calls for earnings per share of $1.25 to $1.30.
Analysts surveyed by Thompson First Call were on average expecting 27 cents a share for the fourth quarter and $1.27 for all of next year.
AutoNation's shares slipped 5 cents to $10.80 in afternoon trade on the New York Stock Exchange, off from an earlier high of $11.40. Since the start of the third quarter, the shares have trailed the Standard & Poor 500 index by about 16 percent.
A TAXING SCENARIO
The dispute with the U.S. Internal Revenue Service stems from a method AutoNation used in 1997 and 1999 to get about $680 million in tax deductions, stemming from accounting for employee benefits.
Craig Monaghan, AutoNation's chief financial officer, said in a conference call that under settlement rules proposed by the IRS, the company would face a bill of $500 million to $550 million. Monaghan said about $200 million to $400 million would be paid up front, with the rest able to be deferred for up to 15 years.
If AutoNation settles, the first payment would be due late next year, Monaghan said. He also said the company had $900 million in cash, credit and other liquid assets to cover the payments.
The final amounts would have to be worked out in negotiations between the IRS and AutoNation, but Monaghan said the estimates he gave were "the most likely scenario."
Despite the payment, Chief Executive Mike Jackson said AutoNation still planned to buy back up to $500 million of its own stock.
Standard & Poor's on Thursday reaffirmed its ratings on AutoNation's debt, and analyst Martin King said the tax payments had been factored into its ratings. But Moody's Investor Service changed the company's outlook to "negative" from "stable," saying the share buyback signaled a change in AutoNation's financial strategy.
AutoNation has been expanding in recent years, part of a trend among dealership conglomerates to grow by buying out smaller dealers. Through the third quarter, it had added dealerships with annual revenue of about $500 million, and Chief Operating Officer Mike Maroone said it was likely to add another $200 million in dealerships by the end of the year.
Jackson said consumers appeared to be "stable, but not booming," and that the company decided to base its forecasts on total U.S. new vehicle sales falling below this year's expected total of about 17 million.
"I think it (2003) will be the fifth year in a row over 16 million vehicles," he said. "Whether it will be able to equal this year, I don't know."