AutoNation, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; unaudited interim results. AutoNation operated 364 new-vehicle franchises across 258 U.S. stores and 72 branded collision centers.
Financial Performance and Position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $5,279.3 million | $5,441.4 million | $10,418.7 million | $10,561.0 million |
| Gross profit | $826.1 million | $841.8 million | $1,645.9 million | $1,667.7 million |
| Operating income | $196.2 million | $226.5 million | $402.9 million | $433.9 million |
| Net income | $87.7 million | $112.0 million | $185.8 million | $207.9 million |
| Diluted EPS | $0.86 | $1.08 | $1.83 | $1.97 |
| Operating margin | 3.7% | 4.2% | 3.9% | 4.1% |
| Gross margin | 15.6% | 15.5% | 15.8% | 15.8% |
- Parts and service revenue increased 2.7% in Q2 and 2.9% for the six-month period; gross profit increased 4.4% and 4.5%, respectively, with a 44.0% gross margin.
- Finance and insurance gross profit increased 1.5% in Q2 and 0.4% for the six-month period. Finance and insurance gross profit per vehicle retailed rose to $1,656 in Q2 and $1,640 year to date.
- New-vehicle revenue declined 4.6% in Q2 and 2.5% year to date. New-vehicle gross profit per vehicle retailed declined 9.0% in Q2 and 4.2% year to date.
- Used-vehicle revenue declined 4.6% in Q2 and 2.4% year to date, while used-vehicle gross profit declined 11.3% and 13.4%, respectively.
- Six-month operating cash flow was $238.7 million, compared with $228.2 million in the prior-year period. Capital expenditures, including operating lease buy-outs, were $168.7 million.
- Cash and cash equivalents were $52.5 million at June 30, 2017, versus $64.8 million at December 31, 2016. Total assets were $10.15 billion and shareholders’ equity was $2.50 billion.
Material Changes Versus the Prior Comparable Period
- Q2 revenue decreased 3.0%, operating income decreased 13.4%, and net income decreased 21.7%. For the six-month period, revenue decreased 1.3%, operating income decreased 7.1%, and net income decreased 10.6%.
- Retail new-vehicle unit sales decreased 6.7% in Q2 and 5.5% year to date; same-store new-vehicle unit sales declined 6.0% and 4.7%, respectively.
- Retail used-vehicle unit sales increased 2.9% in Q2 and 3.6% year to date, but lower gross profit per vehicle reduced used-vehicle profitability.
- Domestic segment income decreased 29.8% in Q2 and 25.5% year to date. Import segment income was broadly stable in Q2 but decreased 2.5% year to date. Premium Luxury segment income decreased 9.7% and 6.5%, respectively.
- SG&A increased 4.5% in Q2 and 2.8% year to date. SG&A represented 74.0% of gross profit in Q2 versus 69.5% in the prior year.
- Other income included approximately $19.8 million of Q2 net gains, largely from store divestitures, compared with $11.5 million of divestiture gains and property impairments in the prior-year quarter.
- The company repurchased 0.9 million shares for $34.9 million during the first six months, compared with 8.9 million shares for $420.6 million in the prior-year period. $263.7 million remained authorized for repurchases at June 30, 2017.
Debt, Liquidity, Outlook, and Risks
- Vehicle floorplan payable totaled $3.89 billion. Commercial paper outstanding was $790.0 million, with a 1.72% weighted-average rate and 15-day weighted-average remaining term.
- Non-vehicle debt totaled $1.79 billion before discounts and current-maturity reclassification. Current maturities increased to $562.0 million, including $400.0 million of senior notes due April 2018 and a $143.9 million mortgage balloon payment due November 2017.
- The company had no revolver borrowings, $1.04 billion of borrowing capacity subject to leverage limitations, and $961.0 million of effective revolver availability after considering commercial paper and letters of credit. Reported leverage was 2.67x versus a 3.75x maximum; capitalization was 61.5% versus a 70.0% maximum.
- Management stated that cash, future operating cash flow, and available borrowing facilities should fund working capital, debt service, taxes, commitments, and seasonal requirements for the foreseeable future. No earnings or revenue guidance was provided.
- Management expects brand-extension initiatives, including AutoNation USA stores, branded collision centers, auctions, and branded parts, to support growth, but acknowledged significant investment and execution risk. One Price used-vehicle pricing and appraisal implementation contributed to lower used-vehicle gross profit per vehicle.
- Market risks include weak or plateauing U.S. new-vehicle demand, elevated inventory and manufacturer incentives, exposure to Texas and Florida markets, interest-rate increases, manufacturer financial or operational problems, adverse weather, regulatory changes, information-security events, legal proceedings, and potential impairment of goodwill or franchise rights.
- The company adopted updated share-based payment accounting in 2017. It expects the 2018 revenue-recognition standard to have an uncertain impact, particularly for variable consideration associated with finance and insurance products. The 2019 lease standard is expected to add approximately $300 million to $400 million of operating lease liabilities and corresponding right-of-use assets.
Investor Verification Points
- Verify refinancing or repayment plans for the $400.0 million 2018 senior notes and the $143.9 million November 2017 mortgage balloon payment.
- Monitor new-vehicle inventory, gross profit per vehicle, manufacturer incentive programs, and demand trends in Texas and Florida.
- Assess whether One Price implementation improves used-vehicle margins without sacrificing unit growth.
- Evaluate the return on investment and execution progress of brand-extension initiatives and related SG&A spending.
- Track interest-rate sensitivity: management estimated that a 100-basis-point change would affect annual floorplan interest expense by approximately $38.9 million and commercial-paper interest expense by approximately $7.9 million.
- Review legal, regulatory, manufacturer-concentration, goodwill, franchise-rights, and lease-related exposures, including contingencies for which the filing does not provide a quantified potential loss.