AutoNation, Inc. — Form 10-Q Summary
Business Context and Reporting Period
AutoNation, Inc. is the largest U.S. automotive retailer, operating 363 new-vehicle franchises across 257 stores and 35 brands as of June 30, 2016. The filing covers the three and six months ended June 30, 2016, compared with the same periods in 2015. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $5,441.4 million | $5,224.3 million | $10,561.0 million | $10,168.5 million |
| Gross profit | $841.8 million | $819.1 million | $1,667.7 million | $1,619.0 million |
| Operating income | $226.5 million | $222.1 million | $433.9 million | $437.0 million |
| Net income | $112.0 million | $115.1 million | $207.9 million | $226.6 million |
| Diluted EPS | $1.08 | $1.00 | $1.97 | $1.97 |
| Operating margin | 4.2% | 4.3% | 4.1% | 4.3% |
| Gross margin | 15.5% | 15.7% | 15.8% | 15.9% |
Revenue increased 4.2% in the quarter and 3.9% year to date. Gross profit increased 2.8% and 3.0%, respectively. Parts and service contributed $361.6 million of Q2 gross profit and $716.3 million year to date, while finance and insurance contributed $225.4 million and $448.5 million, respectively. Together, these higher-margin businesses generated approximately 70% of year-to-date gross profit while representing approximately 20% of revenue.
Retail new-vehicle unit sales increased 0.5% in Q2 and 0.5% year to date; used-vehicle retail unit sales declined 1.3% and 1.1%, respectively. New-vehicle gross profit per vehicle declined to $1,901 in Q2 and $1,895 year to date, while used-vehicle gross profit per vehicle declined to $1,531 and $1,572. Finance and insurance gross profit per vehicle increased to $1,584 in Q2 and $1,605 year to date.
Net cash provided by operating activities was $228.2 million for the first six months, compared with $242.3 million in 2015. Investing cash use increased to $325.9 million, primarily because of $262.9 million spent on acquisitions. Capital expenditures were $112.4 million. Financing activities provided $78.3 million, including $358.6 million of net commercial paper proceeds and $144.8 million of net proceeds from non-trade vehicle floorplan payable, offset by $422.3 million of share repurchases. Cash declined from $74.1 million at year-end 2015 to $54.7 million at June 30, 2016.
Balance Sheet, Debt, and Liquidity
- Total assets were $9.8 billion at June 30, 2016, compared with $9.5 billion at December 31, 2015.
- Vehicle floorplan payable totaled $3.8 billion, consisting of $2.3 billion trade and $1.5 billion non-trade payable.
- Commercial paper outstanding increased to $958.1 million from $599.5 million, with a 1.29% weighted-average rate and 23-day weighted-average remaining term.
- Long-term debt, net of current maturities, was $1.738 billion. The company had no borrowings under its $1.8 billion revolving credit facility, although availability was limited to $1.1 billion by the leverage covenant and reduced by letters of credit.
- Available liquidity included $54.7 million of cash, $1.126 billion of revolving-credit availability and $0.2 million of secured used-vehicle floorplan availability. Commercial paper effectively reduced revolving-credit liquidity to approximately $797.8 million.
- The company was in compliance with its debt covenants: leverage ratio was 2.65x versus a 3.75x maximum, and capitalization ratio was 63.8% versus a 70.0% maximum.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by acquisitions, higher parts and service revenue, and higher finance and insurance revenue. The company acquired 12 Texas stores during the first six months of 2016, compared with five stores in the 2015 period.
- Reported operating income increased modestly in Q2 but declined 0.7% year to date. Year-to-date net income declined 8.3%, primarily reflecting higher interest expense, lower vehicle gross profit and higher expenses.
- Other interest expense increased to $57.0 million from $43.0 million year to date, driven by higher average debt balances related primarily to acquisitions and share repurchases. Floorplan interest expense increased to $38.2 million from $27.4 million.
- Same-store total revenue declined 0.9% in Q2 and 1.2% year to date, while same-store gross profit declined 1.7% in both periods. Same-store new-vehicle and used-vehicle unit sales declined, but parts and service performance improved.
- New-vehicle inventory days supply increased to 73 days from 63 days a year earlier; used-vehicle supply increased to 44 days from 36 days.
- Share repurchases increased substantially: 8.9 million shares for $420.6 million year to date versus 0.9 million shares for $59.1 million in the prior-year period. Remaining authorization was $125.0 million.
Outlook, Commentary, Risks, and Unusual Items
Management expected full-year 2016 U.S. industry new-vehicle sales to exceed 17 million units but anticipated a relatively flat industry selling rate versus 2015. The filing does not provide formal earnings or revenue guidance.
Management cited elevated inventories, challenging manufacturer volume incentives, and competitive retail conditions as causes of vehicle gross-profit-per-vehicle compression. The company also identified historically high leasing levels and the risk that reduced manufacturer leasing support could weaken industry and company sales.
The Takata airbag inflator recall disrupted operations because affected new and used vehicles were placed on retail sales hold. Approximately 19% of used inventory was subject to the company’s recall policy at June 30, 2016. Management expected parts availability to improve during the second half of 2016 but could not predict future affected vehicles or manufacturer support.
Q2 included an $11.5 million net gain from divesting one Domestic and six Import stores, partially offset by $6.7 million of non-cash property impairments. Year-to-date non-cash impairment charges totaled $7.8 million, and assets held for sale totaled $52.2 million in continuing operations and $21.5 million in discontinued operations. No goodwill impairment was identified, and quantitative testing of certain franchise rights produced no impairment charge.
Legal proceedings, regulatory compliance, manufacturer concentration, interest-rate exposure, inventory levels, debt covenants, information-system risks, weather events and potential goodwill or franchise-rights impairment remain material risks. Management stated that no material loss beyond accrued amounts was reasonably possible as of June 30, 2016, but unfavorable litigation outcomes could still materially affect results.
Investor Verification Checklist
- Verify whether elevated new- and used-vehicle inventory levels normalize and whether vehicle gross profit per unit continues to decline.
- Monitor Takata recall inventory, parts availability and the sustainability of manufacturer financial support.
- Reconcile acquisition-related revenue and earnings contributions with same-store trends.
- Track commercial paper refinancing, revolving-credit availability, the November 2017 mortgage balloon payment and compliance with leverage and capitalization covenants.
- Assess the effect of continued share repurchases on liquidity, leverage and per-share results.
- Review parts and service growth and finance-and-insurance per-vehicle performance as offsets to vehicle-margin pressure.
- Evaluate exposure to manufacturer health, leasing-program changes, interest rates, legal proceedings and potential asset impairments.