AutoNation, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2018; filed October 30, 2018. AutoNation operated 329 new-vehicle franchises across 242 stores, 82 collision centers, and more than 325 total locations. The company reported three segments: Domestic, Import, and Premium Luxury.
Financial Performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $5,349.2 million | $5,432.4 million | $16,001.1 million | $15,851.1 million |
| Gross profit | $855.3 million | $845.9 million | $2,549.4 million | $2,491.8 million |
| Operating income | $203.6 million | $211.2 million | $580.6 million | $614.1 million |
| Net income | $112.0 million | $97.5 million | $303.3 million | $283.3 million |
| Diluted EPS | $1.23 | $1.00 | $3.31 | $2.82 |
| Operating margin | 3.8% | 3.9% | 3.6% | 3.9% |
| Gross margin | 16.0% | 15.6% | 15.9% | 15.7% |
- New-vehicle revenue declined 5.6% in the quarter and 1.7% for nine months; new-vehicle gross profit declined 13.4% and 11.1%, respectively.
- Used-vehicle gross profit increased 6.2% in the quarter and 13.0% for nine months.
- Parts and service gross profit increased 6.3% in the quarter and 4.2% for nine months, with margins of 45.2% and 45.1%, respectively.
- Finance and insurance gross profit increased 2.4% in the quarter and 6.4% for nine months; F&I gross profit per vehicle retailed increased 6.7% and 7.7%, respectively.
- SG&A increased 3.1% in the quarter and 3.5% for nine months, reflecting brand-extension investments, acquisitions, new locations, and higher self-insurance costs.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Operating cash flow was $535.1 million for the first nine months, compared with $457.0 million in the prior-year period.
- Investing cash outflow was $172.2 million, including $283.2 million of property and equipment purchases, $67.9 million of acquisition spending, and $144.2 million of proceeds from divestitures.
- Financing cash outflow was $380.7 million, including repayment of $400.0 million of 6.75% senior notes, $100.0 million of share repurchases, and $147.6 million of net payments on non-trade vehicle floorplan financing. Commercial paper provided $270.0 million of net proceeds.
- Cash and cash equivalents were $52.6 million at September 30, 2018, compared with $69.2 million at December 31, 2017. Total cash, cash equivalents, and restricted cash were $53.3 million.
- Vehicle floorplan payable was $3.603 billion, down from $3.807 billion at year-end 2017. Commercial paper outstanding was $600.0 million, with a weighted-average rate of 2.77% and remaining term of eight days.
- Long-term debt, net of current maturities, was $1.962 billion. The company had no revolving-credit borrowings and reported approximately $1.125 billion of revolver availability after covenant limitations and letters of credit.
- At September 30, 2018, the leverage ratio was 2.79x versus a 4.00x requirement, and the capitalization ratio was 59.6% versus a 70.0% maximum. The company stated that it was in compliance with its debt covenants.
- A 100-basis-point increase in rates would increase annual interest expense by approximately $36.0 million on vehicle floorplan debt and $6.0 million on commercial paper, based on period-end balances.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined 1.5%, but gross profit increased 1.1% and net income increased 14.9%, helped by lower effective taxes and stronger used-vehicle, parts-and-service, and F&I performance.
- Nine-month revenue increased 0.9%, while operating income declined 5.5% because of lower new-vehicle profitability, higher SG&A, higher floorplan interest, and an $8.1 million franchise-rights impairment charge.
- Retail new-vehicle unit sales declined 8.1% in the quarter and 3.9% for nine months. Retail used-vehicle unit sales increased 1.9% and 2.5%, respectively.
- New-vehicle gross profit per vehicle retailed declined to $1,583 in the quarter and $1,634 for nine months, while used-vehicle gross profit per vehicle increased to $1,446 and $1,403, respectively.
- The company repurchased 2.1 million shares for $100.0 million during the first nine months, compared with 10.1 million shares for $434.9 million in the prior-year period. Repurchase authorization remaining was $263.7 million.
- AutoNation adopted ASC Topic 606 using the modified retrospective method on January 1, 2018, recording a $10.1 million after-tax cumulative effect adjustment to retained earnings. Comparative periods were not restated.
Outlook, Commentary, Risks, and Unusual Items
- Management expected full-year 2018 U.S. industry new-vehicle sales of approximately 17.0 million units, while noting that actual results could differ materially.
- Management cited a plateauing new-vehicle market, disruptive manufacturer incentives, increased off-lease used-vehicle supply, and rising interest rates as pressures on unit sales, affordability, margins, and floorplan costs.
- The company continued its brand-extension strategy, including branded parts and accessories, customer financial services, collision centers, auctions, and AutoNation USA locations. In October 2018, it invested $50 million in Vroom for an approximately 7% ownership stake; management did not expect a material near-term financial effect.
- During the first nine months, AutoNation divested eight Domestic stores, five Import stores, two Premium Luxury stores, and one collision center. Divestitures generated net gains, including $18.1 million in the third quarter.
- The company recorded an $8.1 million non-cash franchise-rights impairment charge in the second quarter. It also reported a $5.0 million tax benefit related to finalizing its 2017 federal tax return and Tax Cuts and Jobs Act estimates.
- AutoNation expected ASC Topic 842 lease adoption on January 1, 2019, to add approximately $325 million to $425 million of operating lease liabilities and similarly sized right-of-use assets.
- Risks include economic and interest-rate sensitivity, dependence on manufacturers and their incentive programs, adverse weather, regulatory and legal matters, cybersecurity, covenant restrictions, manufacturer concentration, and possible impairment of goodwill or franchise rights.
- The filing states that no material adverse legal loss was reasonably possible beyond accrued amounts, although litigation outcomes cannot be predicted with certainty.
Investor Verification Points
- Verify whether new-vehicle unit declines and lower gross profit per vehicle persist as manufacturer incentives and off-lease supply evolve.
- Monitor used-vehicle, parts-and-service, and F&I growth to determine whether these higher-margin businesses offset new-vehicle margin pressure.
- Reconcile liquidity after considering $600.0 million of commercial paper, floorplan obligations, short commercial-paper maturities, and revolver covenant availability.
- Assess sensitivity to LIBOR and other interest-rate increases, including the estimated $36.0 million annual impact per 100 basis points on vehicle floorplan debt.
- Review the execution and returns from the brand-extension initiatives, Vroom investment, acquisitions, and ongoing divestitures.
- Evaluate the assumptions supporting franchise-rights, goodwill, and other intangible-asset valuations, including the disclosed impairment sensitivity.
- Track the financial statement impact of ASC Topic 842 lease adoption and any subsequent changes to Tax Cuts and Jobs Act provisional amounts.