AutoNation, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. AutoNation operated 331 new-vehicle franchises across 242 stores, 80 collision centers, and more than 325 locations overall. The filing is unaudited and was filed August 1, 2018.
Financial Performance
| Metric | Q2 2018 | Q2 2017 | Six Months 2018 | Six Months 2017 |
|---|---|---|---|---|
| Total revenue | $5,392.0 million | $5,279.3 million | $10,651.9 million | $10,418.7 million |
| Gross profit | $851.8 million | $826.1 million | $1,694.1 million | $1,645.9 million |
| Operating income | $191.2 million | $196.2 million | $377.0 million | $402.9 million |
| Net income | $97.6 million | $87.7 million | $191.3 million | $185.8 million |
| Diluted EPS | $1.07 | $0.86 | $2.08 | $1.83 |
| Operating margin | 3.5% | 3.7% | 3.5% | 3.9% |
| Gross margin | 15.8% | 15.6% | 15.9% | 15.8% |
- Q2 revenue increased 2.1%, while six-month revenue increased 2.2%.
- Q2 gross profit increased 3.1%; six-month gross profit increased 2.9%.
- Net income increased despite lower operating income, primarily reflecting a substantially lower effective tax rate of 24.8% in Q2 and 25.4% for six months, compared with 39.5% and 39.0%, respectively, in the prior-year periods.
- Used-vehicle gross profit increased 22.4% in Q2 and 16.8% for six months. Finance and insurance gross profit increased 8.3% and 8.5%, respectively. Parts and service gross profit increased 2.6% and 3.2%.
- New-vehicle gross profit declined 9.7% in Q2 and 9.9% for six months. New-vehicle gross profit per vehicle retailed declined to $1,579 from $1,730 in Q2 and to $1,661 from $1,815 for six months.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash provided by operating activities was $290.7 million for the six months, compared with $238.7 million in the prior year.
- Capital expenditures were $182.7 million, compared with $168.7 million. Investing cash use was $82.4 million, compared with $155.0 million, aided by $96.8 million of proceeds from business divestitures.
- Financing cash use was $225.6 million, including $100.0 million of share repurchases, repayment of $400.0 million of 6.75% senior notes, and $360.0 million of net commercial-paper proceeds.
- Cash and cash equivalents were $53.1 million at June 30, 2018, compared with $69.2 million at December 31, 2017.
- Vehicle floorplan payable totaled $3.84 billion, including $2.30 billion of trade floorplan and $1.54 billion of non-trade floorplan.
- Commercial paper outstanding was $690.0 million at a weighted-average rate of 2.64% and a weighted-average remaining term of nine days.
- Long-term debt, net of current maturities, was $1.96 billion. The company had no revolving-credit borrowings and reported approximately $1.1 billion of borrowing capacity limited by its leverage covenant.
- At June 30, 2018, the leverage ratio was 2.86x versus a 4.00x maximum, and the capitalization ratio was 61.5% versus a 70.0% maximum. The company was in compliance with its debt covenants.
- A 100-basis-point interest-rate increase would increase annual floorplan interest expense by approximately $38.4 million and commercial-paper interest expense by approximately $6.9 million.
Material Changes Versus Prior Comparable Period
- Operating income declined 2.5% in Q2 and 6.4% for six months, despite higher revenue and gross profit. SG&A increased 2.3% in Q2 and 3.8% for six months, driven by brand-extension investments and higher self-insurance costs.
- Floorplan interest expense increased to $32.4 million from $24.1 million in Q2 and to $60.7 million from $45.6 million for six months, primarily because of higher average interest rates.
- Retail new-vehicle unit sales declined 1.0% in Q2 and 1.6% for six months, while retail used-vehicle unit sales increased 3.1% and 2.9%, respectively.
- Same-store Q2 revenue increased 3.7% and gross profit increased 4.1%. Same-store used-vehicle gross profit increased 21.9%, while new-vehicle gross profit declined 8.7%.
- AutoNation adopted ASC Topic 606 on January 1, 2018, using the modified retrospective method. The adoption increased retained earnings by a net after-tax $10.1 million and modestly affected reported revenue, income, contract assets, and liabilities. Prior-year amounts were not restated.
- The company repurchased 2.1 million shares for $100.0 million during the first six months, with $263.7 million remaining under the authorization at June 30, 2018.
Outlook, Commentary, Risks, and Unusual Items
- Management continued to expect approximately 16.8 million U.S. industry retail new-vehicle sales for full-year 2018, while cautioning that actual sales may differ materially.
- Management cited competitive pricing, manufacturer incentives, high leasing levels, and increased off-lease late-model used-vehicle supply as pressures on new-vehicle margins. Higher off-lease supply may support used-vehicle volume but pressure new-vehicle sales.
- Parts and service warranty gross profit was adversely affected by lower manufacturer recall activity; customer-pay service benefited from mix improvements, pricing, and parts initiatives.
- The company continued its brand-extension strategy, including AutoNation-branded parts and accessories, auctions, AutoNation USA stores, and collision centers. It opened one auction, two AutoNation USA stores, and four collision centers during the first six months and acquired one collision center.
- Q2 included an $8.1 million pre-tax non-cash franchise-rights impairment charge, $8.6 million of net gains from business and property dispositions, and $6.0 million of gains from legal settlements.
- Three stores and two collision-related businesses were divested during Q2; eight Domestic stores, four Import stores, one Premium Luxury store, and one collision center were divested during the first six months.
- The company expects ASC Topic 842 lease adoption on January 1, 2019, to add approximately $375 million to $475 million of operating lease liabilities and similarly sized right-of-use assets.
- Key risks include economic and interest-rate sensitivity, dependence on vehicle manufacturers and their incentives, manufacturer concentration, changing automotive regulations, adverse weather, legal and regulatory proceedings, cybersecurity, debt covenants, liquidity and refinancing risk, and potential goodwill or franchise-rights impairments.
- The filing states that no material adverse legal loss was reasonably possible beyond accrued amounts at June 30, 2018, but litigation outcomes cannot be predicted with certainty.
Investor Verification Checklist
- Verify whether new-vehicle gross-profit pressure persists as manufacturer incentives and off-lease supply evolve.
- Monitor used-vehicle margins, inventory days, finance-and-insurance penetration, and chargeback liabilities, which totaled $125.5 million at June 30, 2018.
- Assess exposure to rising LIBOR-based floorplan and commercial-paper costs and the company’s ability to refinance short-term commercial paper.
- Review the effect of ASC Topic 842 lease adoption on reported assets, liabilities, leverage metrics, and covenant capacity.
- Evaluate returns from the brand-extension strategy and related increases in SG&A and capital expenditures.
- Reconcile reported earnings growth with lower operating income, unusual disposition and settlement gains, the franchise-rights impairment, and the reduced tax rate.
- Track manufacturer, geographic, legal, regulatory, cybersecurity, and impairment risks disclosed in the filing and the latest Form 10-K.