AutoNation, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2019. AutoNation is a U.S. automotive retailer operating 324 new-vehicle franchises across 237 stores, 83 collision centers, and more than 325 total locations. Reportable segments are Domestic, Import, and Premium Luxury.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $5,343.8 million | $5,392.0 million | $10,325.6 million | $10,651.9 million |
| Gross profit | $890.8 million | $851.8 million | $1,740.0 million | $1,694.1 million |
| Operating income | $203.5 million | $191.2 million | $394.3 million | $377.0 million |
| Net income | $100.8 million | $97.6 million | $192.8 million | $191.3 million |
| Diluted EPS | $1.12 | $1.07 | $2.13 | $2.08 |
| Operating margin | 3.8% | 3.5% | 3.8% | 3.5% |
| Gross margin | 16.7% | 15.8% | 16.9% | 15.9% |
Q2 net margin was approximately 1.9%; six-month net margin was approximately 1.9%. Parts and service and finance and insurance represented approximately 22% of six-month revenue but contributed approximately 75% of gross profit.
- Q2 new-vehicle revenue declined 6.1%, while used-vehicle revenue increased 6.2%, parts and service revenue increased 5.2%, and finance and insurance revenue increased 3.0%.
- Q2 new-vehicle unit sales decreased 10.8%; used-vehicle retail unit sales increased 3.8%. New-vehicle gross profit per retailed vehicle increased 12.7% to $1,780, and finance and insurance gross profit per vehicle increased 7.9% to $1,921.
- Six-month operating cash flow was $425.5 million, compared with $290.7 million in the prior-year period. Investing cash outflow was $96.8 million, including $122.7 million of property and equipment purchases. Financing cash outflow was $326.2 million.
- Cash and cash equivalents were $51.1 million at June 30, 2019, compared with $48.6 million at December 31, 2018.
- Vehicle floorplan payable was $3,731.2 million, down from $3,997.7 million at year-end. Commercial paper outstanding was $470.0 million, versus $630.0 million at year-end.
- Long-term debt, net of current maturities, was $1,576.2 million. Current maturities increased to $393.9 million because the $350.0 million of 5.5% Senior Notes due February 2020 was reclassified as current.
- The company had no borrowings under its $1.8 billion revolving credit facility. Availability was limited by leverage requirements to $784.6 million, with $41.7 million of letters of credit outstanding.
Material changes versus the prior comparable period
- Revenue declined 0.9% in Q2 and 3.1% for the first six months, primarily from lower new-vehicle volume, partially offset by growth in used vehicles, parts and service, and finance and insurance.
- Gross profit increased 4.6% in Q2 and 2.7% year to date. Operating income increased 6.4% in Q2 and 4.6% year to date, reflecting improved gross profit and expense management.
- Floorplan interest expense increased to $37.4 million in Q2 and $76.4 million for the first six months, compared with $32.4 million and $60.7 million, respectively, primarily because of higher interest rates and, year to date, higher average floorplan balances.
- SG&A increased 1.9% in Q2 but declined 0.6% year to date. SG&A as a percentage of gross profit improved to 71.5% in Q2 from 73.4%.
- AutoNation adopted ASC 842 lease accounting on January 1, 2019, recognizing $336.0 million of operating lease assets and $308.8 million of noncurrent operating lease liabilities at June 30, 2019. Comparative periods were not restated.
- The company repurchased 1.3 million shares for $44.7 million during the first six months, compared with 2.1 million shares for $100.0 million in the prior-year period. Remaining authorization was $219.0 million.
Guidance, outlook, commentary, risks, and unusual items
- Management expected full-year 2019 U.S. industry retail new-vehicle sales to be in the high-16-million-unit range, while noting that actual results could differ materially.
- Management cited higher consumer borrowing rates, rising vehicle prices, competitive conditions, and elevated off-lease used-vehicle supply as pressures on new-vehicle volume and pricing. Used-vehicle demand benefited from affordability and increased late-model supply.
- Management continues to invest in its brand-extension strategy, including branded parts and accessories, customer financial services, collision centers, auctions, AutoNation USA locations, and parts distribution. Strategic relationships include investments in Vroom and a partnership with Waymo.
- The company recorded a $9.6 million non-cash franchise-rights impairment charge in Q2 and year to date, compared with $8.1 million in Q2 and year to date 2018.
- Q2 included $4.2 million of net gains related to store and property divestitures, partially offset by a $0.4 million asset impairment. The prior-year quarter included larger divestiture gains and $6.0 million of legal settlement gains.
- AutoNation appointed Cheryl Miller as Chief Executive Officer and President and James R. Bender as Chief Operating Officer on July 22, 2019, after the reporting period.
- Interest-rate exposure is significant: a 100-basis-point change would affect annual floorplan interest expense by approximately $37.3 million and commercial-paper interest expense by approximately $4.7 million, based on June 30 balances.
- Management reported compliance with debt covenants at June 30, 2019. Actual leverage was 2.84x versus a 3.75x maximum, and capitalization was 58.0% versus a 70.0% maximum.
- Legal proceedings, regulatory compliance, manufacturer dependence, economic conditions, cybersecurity, weather events, impairment testing, and substantial indebtedness remain material risks. Management stated that no material adverse legal loss was reasonably possible beyond accrued amounts, while noting that outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the refinancing or repayment plan for the $350.0 million of senior notes maturing in February 2020.
- Monitor new-vehicle unit trends, manufacturer incentives, pricing, and floorplan interest rates.
- Assess whether used-vehicle, parts and service, and finance and insurance growth can offset continued new-vehicle weakness.
- Evaluate the effect of lease adoption, franchise-rights impairment sensitivity, and the concentration of goodwill and intangible assets.
- Review liquidity under the leverage-limited revolving facility, commercial-paper maturities, floorplan availability, and covenant headroom.
- Track execution and returns from the brand-extension strategy, Vroom investment, Waymo partnership, acquisitions, divestitures, and the post-quarter executive transition.