AutoNation, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. The filing is unaudited and reflects AutoNation’s U.S. automotive retail operations, including 315 new-vehicle franchises, 78 collision centers, five AutoNation USA used-vehicle stores, four auction operations, and 16 parts distribution centers.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $5,404.9 million | $5,461.2 million | $14,604.9 million | $15,786.8 million |
| Gross profit | $971.5 million | $887.4 million | $2,579.7 million | $2,627.4 million |
| Operating income | $271.7 million | $193.5 million | $253.8 million | $587.8 million |
| Net income | $182.6 million | $99.5 million | $230.1 million | $292.3 million |
| Diluted EPS | $2.05 | $1.10 | $2.59 | $3.23 |
| Operating margin | 5.0% | 3.5% | 1.7% | 3.7% |
| Gross margin | 18.0% | 16.2% | 17.7% | 16.6% |
| Net cash from operating activities | Not separately provided | Not separately provided | $1,164.3 million | $665.5 million |
- Q3 revenue declined 1.0%, while gross profit increased 9.5%. New-vehicle gross profit rose 40.6% and used-vehicle gross profit rose 59.2%, reflecting constrained new-vehicle supply and strong used-vehicle demand.
- Q3 SG&A declined 1.9% to $641.4 million, and SG&A as a percentage of gross profit improved to 66.0% from 73.7%.
- Nine-month revenue decreased 7.5% and operating income decreased 56.8%, primarily because of COVID-19-related volume declines, $318.3 million of goodwill impairment, and $57.5 million of franchise-rights impairment.
- Parts and service revenue declined 9.8% for the nine months, and related gross profit declined 11.8%, partly due to lower service and collision volumes and a $20.6 million inventory valuation adjustment associated with closing the aftermarket collision parts business.
- Cash and cash equivalents were $350.5 million at September 30, 2020, compared with $42.0 million at December 31, 2019. Total assets were $9.57 billion and shareholders’ equity was $3.36 billion.
- Operating cash flow benefited from working-capital reductions, including decreases in receivables and inventory. Investing cash outflow was $151.6 million, including $113.1 million of property and equipment purchases and a $50.0 million investment in Waymo.
Debt and Liquidity
- Vehicle floorplan payable declined to $2.31 billion from $3.58 billion at year-end 2019.
- Long-term debt, net of current maturities, was $1.78 billion; current debt maturities were $307.7 million, including $300.0 million of 3.35% senior notes due January 2021.
- AutoNation issued $500.0 million of 4.75% senior notes due 2030 and repaid $350.0 million of 5.5% senior notes due 2020. The revolving credit facility was extended to March 2025.
- No commercial paper or revolving-credit borrowings were outstanding at September 30, 2020. Available revolving-credit capacity was approximately $1.76 billion, and available secured used-vehicle floorplan capacity was $251.1 million.
- The company reported compliance with its debt covenants: leverage ratio of 1.99x versus a maximum of 3.75x and capitalization ratio of 46.3% versus a maximum of 70.0%.
Material Changes Versus the Prior Comparable Period
- New-vehicle retail unit sales declined 11.0% in Q3 and 14.9% for the nine months, while new-vehicle gross profit per vehicle increased 58.0% in Q3 to $2,533.
- Used-vehicle retail unit sales increased 1.6% in Q3 but declined 4.0% for the nine months; used-vehicle gross profit per vehicle increased 44.7% in Q3 to $1,994.
- Finance and insurance gross profit per vehicle increased 11.4% in Q3 and 11.6% for the nine months.
- Segment income increased 54.1% in Q3 and 19.5% for the nine months, despite lower segment revenue, due to higher vehicle margins, cost controls, and lower floorplan interest expense.
- Interest expense declined due to lower rates, lower floorplan balances, and repayment of the 5.5% senior notes.
- The company repurchased 2.5 million shares for $80.0 million during the nine months. In October 2020, the board increased the repurchase authorization to $500 million.
Outlook, Commentary, Risks, and Unusual Items
- Management expected new-vehicle inventory shortages to continue into the first half of 2021. A potential resurgence of COVID-19, renewed government restrictions, recessionary conditions, unemployment, consumer-confidence changes, interest rates, and fuel prices could materially affect results.
- AutoNation plans to build approximately 50 additional AutoNation USA used-vehicle stores by the end of 2025, with aggregate capital investment expected to exceed $500 million. Execution depends on customer adoption, market conditions, inventory availability, and suitable locations.
- The company decided to close its aftermarket collision parts business by the end of 2020. Total pre-tax charges are expected to be $43.7 million, of which $36.5 million was incurred in Q3 and the remainder was expected primarily in Q4.
- AutoNation recorded a $212.7 million unrealized gain on its Vroom investment for the nine months, followed by a $2.0 million unrealized loss in Q3. The Vroom investment had a $288.5 million carrying value at September 30, 2020; a hypothetical 10% price change would affect value by approximately $28.8 million.
- Goodwill totaled $1.19 billion after COVID-19-related impairment charges. Management stated that future declines in cash flows, revenue, or market capitalization could result in additional impairment charges.
- Legal proceedings, manufacturer and lender concentration, franchise restrictions, regulatory compliance, information-security risks, interest-rate exposure, debt covenants, and the financial condition of vehicle manufacturers remain material risks. Management reported no indication of a reasonably possible material legal loss beyond accrued amounts, but outcomes cannot be predicted with certainty.
- Management stated that cash, operating cash generation, credit facilities, the commercial-paper program, and floorplan facilities should be sufficient for foreseeable liquidity needs. No formal quantitative earnings guidance was provided.
Important Facts for Investors to Verify
- Whether new-vehicle shortages and elevated vehicle gross profit per vehicle persist after the anticipated first half of 2021.
- The remaining timing and amount of ACP closure charges and whether further impairment or restructuring charges arise.
- The January 2021 maturity of the $300.0 million 3.35% senior notes and the company’s refinancing or repayment plan.
- The market value volatility and accounting impact of the Vroom investment, as well as the carrying value and impairment indicators for the Waymo investment.
- Whether COVID-19-related service, collision, and vehicle-volume declines reverse or become more persistent.
- Progress, capital requirements, and returns from the planned AutoNation USA expansion and digital initiatives.
- Compliance with leverage and capitalization covenants if operating performance or vehicle margins weaken.