AutoNation, Inc. 2020 Q1 Form 10-Q Summary
Business Context and Reporting Period
AutoNation, Inc. is a U.S. automotive retailer operating 317 new-vehicle franchises across 231 stores as of March 31, 2020, together with collision centers, AutoNation USA stores, auction operations, and parts distribution centers. The unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $4,667.0 million | $4,981.8 million | Down 6.3% |
| Gross profit | $813.2 million | $849.2 million | Down 4.2% |
| Gross margin | 17.4% | 17.0% | Up 40 bps |
| Operating income (loss) | $(219.3) million | $190.8 million | Down $410.1 million |
| Income (loss) from continuing operations | $(232.2) million | $92.1 million | Declined $324.3 million |
| Net income (loss) | $(232.3) million | $92.0 million | Declined $324.3 million |
| Diluted EPS | $(2.58) | $1.01 | Declined $3.59 |
| Operating cash flow | $113.7 million | $259.7 million | Down $146.0 million |
| Capital expenditures | $42.2 million | $60.0 million | Down $17.8 million |
New-vehicle revenue declined 8.6% and used-vehicle revenue declined 6.8%. Retail vehicle unit sales decreased 9.5% to 112,888 units. New-vehicle gross profit per vehicle declined 11.5% to $1,699, while used-vehicle gross profit per vehicle increased 7.9% to $1,487 and finance and insurance gross profit per vehicle increased 10.1% to $2,089. Parts and service revenue was essentially flat, but gross profit declined 2.5%.
Parts and service and finance and insurance represented approximately 24% of revenue but contributed approximately 77% of total gross profit. SG&A declined 3.6% to $600.7 million, although SG&A increased to 73.9% of gross profit from 73.4%.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $411.0 million at March 31, 2020, compared with $42.0 million at December 31, 2019.
- Vehicle floorplan payable increased to $3.68 billion from $3.58 billion, supported by inventory of $3.68 billion.
- Total debt, including current maturities and the revolving facility, was approximately $2.39 billion before discounts and issuance costs, compared with $1.94 billion at year-end.
- AutoNation repaid its $350.0 million 5.5% Senior Notes due 2020 and borrowed $790.0 million under its revolving credit facility during the quarter.
- The amended revolving credit facility matures March 26, 2025. Borrowing capacity was limited to $822.4 million under the applicable leverage covenant, with $39.7 million of letters of credit outstanding.
- Commercial paper outstanding was $140.0 million, with a weighted-average interest rate of 3.30% and a weighted-average remaining term of one day.
- Management reported approximately $1.2 billion of available liquidity, primarily cash of $411.0 million and revolver availability of $822.4 million. Available secured used-vehicle floorplan capacity was $0.6 million.
- At March 31, 2020, the leverage ratio was 2.83x versus a maximum of 3.75x, and the capitalization ratio was 56.7% versus a maximum of 70.0%. The company stated it was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- COVID-19 significantly affected activity late in the quarter. Vehicle unit sales declined approximately 50% year over year during the last two weeks of March, and parts and service operations were below full capacity.
- AutoNation recorded $318.3 million of non-cash goodwill impairment charges and $57.5 million of franchise-rights impairment charges. It also recorded $8.5 million of other non-cash asset impairment charges.
- The impairment charges primarily reflected lower operating expectations and the decline in AutoNation’s stock price and market capitalization. Goodwill was fully impaired for the Collision Centers and Parts Centers reporting units and partially impaired for Premium Luxury.
- New-vehicle inventory days increased to 98 from 77, and used-vehicle inventory days increased to 48 from 30.
- Cash flow from operations declined despite working-capital benefits from a $403.4 million decrease in receivables, partly because of the net loss and higher inventory.
- AutoNation repurchased 2.5 million shares for $80.0 million during the quarter, then suspended the repurchase program at quarter-end due to COVID-19.
- In March 2020, the company invested $50.0 million in Waymo, representing less than 1% ownership.
- After quarter-end, Cheryl Miller took a leave of absence as CEO and President; Mike Jackson assumed those roles, and James R. Bender became President and Chief Operating Officer.
Guidance, Outlook, Commentary and Risks
Management did not provide quantitative earnings or revenue guidance. It stated that the pandemic was expected to have a significant adverse effect on second-quarter 2020 results and possibly later periods, but that the ultimate impact could not be estimated.
- Approximately 7,000 employees were placed on unpaid leave in April 2020; executive and associate base-pay reductions, a corporate hiring freeze, reduced advertising, lower discretionary spending, and postponement of more than $50 million of capital expenditures were implemented.
- Management expected its liquidity resources to fund operations and obligations for the foreseeable future, while acknowledging that the situation was evolving rapidly and additional financing might be required if conditions worsened.
- Additional goodwill or franchise-rights impairment charges remain possible if cash flows, revenue expectations, operating performance, or market capitalization deteriorate. The company scheduled its annual impairment testing for April 30, 2020.
- A 50-basis-point increase in the goodwill discount rate would have increased the impairment charge by approximately $100 million, according to the filing.
- Interest-rate exposure is substantial: a 100-basis-point change would affect annual floorplan interest expense by approximately $36.8 million based on the March 31, 2020 balance.
- Key risks include COVID-19 and economic conditions, vehicle demand and margins, manufacturer health and incentives, covenant compliance, interest rates, liquidity and capital-market access, legal and regulatory matters, cybersecurity, and the valuation of goodwill, franchise rights, and minority equity investments.
- Legal proceedings were described as routine for the business; no material probable and reasonably estimable loss beyond recorded accruals was identified, although unfavorable outcomes could still be material.
Important Facts for Investors to Verify
- Verify the duration and financial impact of COVID-19 restrictions, including subsequent-quarter unit sales, service volumes, margins, staffing, and store operating capacity.
- Review second-quarter 2020 impairment testing and determine whether additional goodwill, franchise-rights, or other asset write-downs were recorded.
- Monitor cash balances, operating cash flow, vehicle inventory levels, floorplan borrowings, commercial paper refinancing, and revolver availability.
- Reassess compliance with leverage and capitalization covenants, particularly under further declines in earnings or market conditions.
- Track the January 2021 maturity of the $300.0 million 3.35% Senior Notes and the company’s refinancing plans.
- Evaluate the effect of the CEO transition and cost-reduction measures on operations and internal controls.
- Assess potential valuation changes or impairments related to the $125.7 million portfolio of equity investments without readily determinable fair values.