AutoNation, Inc. Form 10-Q Summary
Business Context and Reporting Period
AutoNation, Inc. is a U.S. automotive retailer operating 312 new-vehicle franchises across 228 stores, 72 collision centers, six AutoNation USA used-vehicle stores, four auction operations, and three parts distribution centers as of June 30, 2021. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $6,978.4 million | $4,533.0 million | $12,882.2 million | $9,200.0 million |
| Gross profit | $1,326.3 million | $795.0 million | $2,359.1 million | $1,608.2 million |
| Operating income | $530.2 million | $201.4 million | $867.1 million | $(17.9) million |
| Net income | $384.8 million | $279.8 million | $624.2 million | $47.5 million |
| Diluted EPS | $4.83 | $3.18 | $7.63 | $0.53 |
| Gross margin | 19.0% | 17.5% | 18.3% | 17.5% |
| Operating margin | 7.6% | 4.4% | 6.7% | Not meaningful |
- Second-quarter revenue increased 53.9%; six-month revenue increased 40.0%.
- Second-quarter gross profit increased 66.8%; six-month gross profit increased 46.7%.
- Second-quarter SG&A was $748.9 million, or 56.5% of gross profit, compared with 68.9% in the prior-year quarter. Six-month SG&A was 59.2% of gross profit versus 71.4%.
- Six-month revenue mix was approximately 50% new vehicles, 31% used vehicles, 14% parts and service, and 5% finance and insurance. Parts and service and finance and insurance generated approximately 35% and 29% of gross profit, respectively.
- Retail unit sales increased 39.1% in the second quarter and 32.1% for the first six months, including new-vehicle increases of 41.6% and 31.7%, respectively.
Cash Flow, Debt, and Liquidity
- Six-month operating cash flow was $930.3 million, compared with $894.3 million in 2020. Investing cash flow was $(8.5) million, including $116.2 million of property and equipment purchases and $109.4 million of proceeds from an equity security sale.
- Financing cash flow was $(1,431.8) million, primarily reflecting $1,021.1 million of common-stock repurchases, repayment of $300.0 million of senior notes, and net payments of non-trade vehicle floorplan payable.
- Cash and cash equivalents declined to $59.5 million from $569.6 million at December 31, 2020. Including restricted cash, ending cash was $59.7 million.
- Vehicle floorplan payable was $1.571 billion, down from $2.760 billion at year-end 2020. New-vehicle floorplan capacity was approximately $4.7 billion, with approximately $1.0 billion borrowed.
- Long-term debt, net of current maturities, was $1.790 billion. AutoNation had no revolving-credit borrowings, $200.0 million of commercial paper outstanding, and approximately $1.760 billion available under its revolving credit facility after letters of credit.
- The company was in compliance with its debt covenants. Actual leverage was 1.17x versus a maximum of 3.75x, and actual capitalization was 43.3% versus a maximum of 70.0%.
- A 100-basis-point interest-rate increase would have increased annual floorplan interest expense by approximately $15.7 million and commercial-paper interest expense by approximately $2.0 million based on June 30 balances.
Material Changes Versus the Prior Comparable Period
- Results benefited from strong vehicle demand, historically low new-vehicle inventories, manufacturer supply shortages, higher revenue and gross profit per vehicle, and the unfavorable COVID-19-impacted comparison period in 2020.
- New-vehicle gross profit increased 168.0% in the quarter and 136.3% year to date; used-vehicle gross profit increased 73.2% and 64.9%, respectively; finance and insurance gross profit increased 49.8% and 41.4%; and parts and service gross profit increased 38.9% and 17.3%.
- New-vehicle inventory was 14 days of supply at June 30, 2021, compared with 49 days a year earlier. Used-vehicle inventory was 34 days versus 31 days.
- Operating income improved from a six-month loss of $17.9 million in 2020 to income of $867.1 million in 2021. The 2020 period included $318.3 million of goodwill impairment and $57.5 million of franchise-rights impairment charges; no comparable charges were recorded in 2021.
- Other income was substantially lower because the second quarter of 2020 included a $214.7 million equity-investment gain, compared with a $3.4 million unrealized gain in the second quarter of 2021. The six-month 2021 period also included a $7.5 million realized gain from selling the remaining Vroom investment.
- AutoNation repurchased 11.3 million shares for $1.042 billion during the first six months, including 7.5 million shares for $736.1 million in the second quarter. The company retired 16.0 million treasury shares during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that demand remained strong and exceeded supply, but component shortages were expected to constrain new-vehicle availability into 2022. The duration of elevated vehicle profitability remains uncertain.
- AutoNation plans to expand AutoNation USA and is targeting more than 130 stores by the end of 2026. It opened one store in the second quarter, expects four additional openings in the second half of 2021 and 12 in 2022, and estimates initial capital investment of approximately $10 million to $11 million per store.
- Key risks include prolonged semiconductor and vehicle-supply shortages, normalization of new- and used-vehicle margins, changing consumer demand and interest rates, COVID-19 disruption, dependence on major manufacturers and captive lenders, manufacturer franchise restrictions, regulatory and litigation exposure, cybersecurity, impairment of goodwill or franchise rights, and debt covenant or liquidity pressures.
- Legal proceedings are ongoing, but management reported no indication of a reasonable possibility of a material loss beyond accrued amounts as of June 30, 2021. The filing states that outcomes cannot be predicted with certainty.
- Tax years 2014 through 2019 were under examination by certain state jurisdictions; no IRS tax years were under examination at the reporting date.
- In July 2021, the board increased the share-repurchase authorization by $1.0 billion. As of July 19, 2021, $1.0 billion remained available.
- The filing does not provide formal earnings or revenue guidance for 2021.
Facts Investors Should Verify
- Whether elevated new- and used-vehicle gross profit per vehicle is sustainable as vehicle supply improves.
- The timing and financial impact of semiconductor shortages and broader manufacturer supply-chain normalization.
- Cash replenishment and liquidity after substantial share repurchases, including the effect of the $1.0 billion authorization increase.
- Exposure to variable interest rates on vehicle floorplan financing and commercial paper.
- Progress, capital requirements, and returns from the AutoNation USA expansion strategy.
- Future equity-investment valuation changes, particularly for investments without readily determinable fair values.
- Developments in manufacturer relationships, state tax examinations, legal proceedings, regulatory matters, and other contingencies.