AutoNation, Inc. 2020 Q2 Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 315 new-vehicle franchises across 230 stores, plus collision centers, AutoNation USA used-vehicle stores, auction operations, and parts distribution centers. The filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, including government stay-at-home orders, reduced vehicle demand, manufacturer plant closures, inventory shortages, and lower service activity.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Year-over-year change | Six months ended June 30, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $4,533.0 million | (15.2%) | $9,200.0 million | (10.9%) |
| Gross profit | $795.0 million | (10.8%) | $1,608.2 million | (7.6%) |
| Gross margin | 17.5% | Up from 16.7% | 17.5% | Up from 16.9% |
| Operating income (loss) | $201.4 million | (1.0%) | $(17.9) million | Compared with $394.3 million income |
| Net income | $279.8 million | Compared with $100.8 million | $47.5 million | Compared with $192.8 million |
| Diluted EPS | $3.18 | Compared with $1.12 | $0.53 | Compared with $2.13 |
| Cash flow from operations | Source text does not provide a quarterly value | $894.3 million | Compared with $425.5 million |
Second-quarter earnings benefited from a $214.7 million unrealized gain on the Company’s Vroom equity investment and a $3.2 million legal-settlement gain. The Vroom gain contributed approximately $160.5 million after tax. Six-month results included $318.3 million of goodwill impairment charges and $57.5 million of franchise-rights impairment charges, both primarily triggered by the COVID-19-related decline in market capitalization and operating outlook.
- New-vehicle revenue declined 18.4% in the second quarter and 13.7% for the first six months. Retail new-vehicle unit sales declined 22.7% and 17.0%, respectively.
- Used-vehicle revenue declined 4.0% in the second quarter and 5.4% for the first six months, while used-vehicle gross profit increased 20.9% and 11.1%, respectively, due to higher gross profit per vehicle.
- Parts and service revenue declined 23.5% in the second quarter and 11.9% for the first six months; gross profit declined 24.4% and 13.6%, respectively.
- Finance and insurance revenue declined 3.4% in the second quarter and 1.9% for the first six months, while gross profit per vehicle increased 13.1% and 11.6%, respectively.
- SG&A expense declined 14.0% in the second quarter and 8.8% for the first six months, reflecting workforce, compensation, advertising, and discretionary-spending reductions.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $257.3 million at June 30, 2020, compared with $42.0 million at December 31, 2019.
- Total assets were $9.45 billion and shareholders’ equity was $3.14 billion at June 30, 2020.
- Vehicle floorplan payable was $2.52 billion, down from $3.58 billion at year-end 2019, reflecting lower inventory and reduced vehicle volume.
- Gross non-vehicle debt was $2.11 billion, including $300.0 million of 3.35% senior notes due January 2021 and $500.0 million of 4.75% senior notes due 2030. Long-term debt, net of current maturities, was $1.78 billion.
- AutoNation repaid $350.0 million of 5.5% senior notes in February 2020 and issued $500.0 million of 4.75% senior notes in May 2020.
- The amended revolving credit facility matures in March 2025. No borrowings were outstanding at June 30, 2020; availability was approximately $1.32 billion after covenant limitations and letters of credit.
- Total stated available liquidity was approximately $1.6 billion, consisting primarily of $257.3 million of cash and $1.32 billion of revolving-credit availability.
- Operating cash flow was $894.3 million, investing cash flow was $(124.7) million, and financing cash flow was $(554.7) million for the first six months.
- Capital expenditures were $54.6 million for the first six months, and management planned to defer approximately $100 million of additional capital expenditures during the remainder of 2020.
- The leverage ratio was 2.31x against a 3.75x maximum, and the capitalization ratio was 47.9% against a 70.0% maximum.
Material changes, outlook, and risks
Management reported that sales and service volumes improved in May and June after severe April disruption, but remained below prior-year levels through June 30. New-vehicle inventory shortages were expected to continue into the third quarter. The Company placed approximately 7,000 employees on unpaid leave, temporarily reduced pay, froze corporate hiring, reduced second-quarter advertising expense by approximately 40%, and postponed more than $40 million of capital expenditures. More than half of the employees on leave had returned by quarter-end, and temporary pay reductions ended May 1.
Management expected available liquidity to fund operations, debt service, taxes, commitments, and seasonal requirements for the foreseeable future, while acknowledging that the duration and resurgence of COVID-19 could materially adversely affect future results. The Company suspended share repurchases through the second quarter; $139.0 million remained authorized for future repurchases.
AutoNation announced on July 14, 2020 that Michael J. Jackson became Chairman and Chief Executive Officer and that Cheryl Miller resigned as CEO, President, and a director. The Company also planned at least 20 additional AutoNation USA stores over three years, with anticipated aggregate investment exceeding $200 million.
- Potential future goodwill or franchise-rights impairments remain a risk if cash flows, revenues, market capitalization, or operating expectations deteriorate. Management stated that a 50-basis-point increase in the goodwill discount rate would have increased the first-quarter goodwill impairment charge by approximately $100 million.
- At June 30, 2020, the Vroom investment had a fair value of $290.5 million; a hypothetical 10% change in its share price would change unrealized gain or loss by approximately $29.0 million.
- Interest-rate exposure primarily relates to variable-rate vehicle floorplan borrowings. A 100-basis-point change was estimated to affect annual floorplan interest expense by approximately $25.2 million at June 30, 2020.
- The Company remains exposed to manufacturer concentration, economic conditions, interest rates, inventory availability, regulatory requirements, legal proceedings, information-system risks, debt covenants, and the performance of its strategic initiatives.
- Management stated that no material loss was reasonably possible beyond accrued legal contingencies at quarter-end, although unfavorable litigation outcomes could still materially affect results.
Most important facts for investors to verify
- Whether vehicle and parts-and-service volumes recover after COVID-19 disruptions and whether new-vehicle inventory shortages persist.
- Whether higher used-vehicle and finance-and-insurance gross profit per vehicle can offset lower unit volumes.
- The sustainability of earnings excluding the $214.7 million pre-tax Vroom mark-to-market gain and the effect of future Vroom price changes.
- Compliance with debt covenants and the Company’s ability to refinance or repay the $300.0 million of notes maturing in January 2021.
- Potential additional goodwill, franchise-rights, or other asset impairments if operating conditions or market capitalization weaken.
- Progress, required investment, and profitability of the planned AutoNation USA expansion and aftermarket collision-parts operations.