AutoNation, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer. As of June 30, 2015, it operated 237 stores with 293 new-vehicle franchises covering 35 brands, primarily in Sunbelt markets. The filing reports unaudited results for the three and six months ended June 30, 2015, compared with the prior-year periods.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $5,224.3 million | $4,788.5 million | $10,168.5 million | $9,152.0 million |
| Gross profit | $819.1 million | $744.9 million | $1,619.0 million | $1,452.3 million |
| Gross margin | 15.7% | 15.6% | 15.9% | 15.9% |
| Operating income | $222.1 million | $197.8 million | $437.0 million | $386.9 million |
| Net income | $115.1 million | $100.4 million | $226.6 million | $195.5 million |
| Diluted EPS | $1.00 | $0.83 | $1.97 | $1.61 |
| Operating cash flow | Not separately provided | Not separately provided | $242.3 million | $210.9 million |
Revenue increased 9.1% in the quarter and 11.1% year to date. Gross profit increased 10.0% and 11.5%, respectively, while operating income increased 12.3% and 12.9%. SG&A increased to $568.7 million in the quarter and $1,126.3 million year to date, but declined as a percentage of gross profit to 69.4% and 69.6%, respectively.
- New-vehicle revenue increased 8.4% in Q2 and 11.1% year to date; unit sales increased 5.8% and 7.9%.
- Used-vehicle revenue increased 12.4% in Q2 and 13.0% year to date; retail used-vehicle unit sales increased 9.0% and 10.7%.
- Parts and service revenue increased 10.4% in Q2 and 10.6% year to date, with gross margin improving to 43.4% and 43.2%.
- Finance and insurance gross profit increased 17.4% in Q2 and 18.9% year to date; gross profit per vehicle retailed increased 9.6% and 9.0%.
- Operating cash flow was $242.3 million, compared with $210.9 million in the prior-year period. Investing cash use increased to $190.0 million, including $135.2 million of property and equipment purchases and $73.1 million for acquisitions.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $65.3 million at June 30, 2015, compared with $75.4 million at December 31, 2014.
- Inventory increased to $3.23 billion from $2.90 billion, including $2.57 billion of new vehicles and $494.7 million of used vehicles.
- Vehicle floorplan payable totaled $3.32 billion, consisting of $2.29 billion of trade floorplan debt and $1.03 billion of non-trade floorplan debt.
- Non-vehicle debt totaled $1.83 billion, including $800.0 million drawn on the revolving credit facility, $747.5 million of senior notes, $180.7 million of mortgage debt, and $101.9 million of capital leases and other debt.
- Commercial paper outstanding was $298.5 million at a weighted-average annual rate of 0.85% and a weighted-average remaining term of 13 days.
- Revolving-credit availability was $954.1 million before considering the practical liquidity effect of outstanding commercial paper; secured used-vehicle floorplan availability was $85.5 million. Management stated that available liquidity and expected operating cash flow should fund working capital, debt service, taxes, commitments and seasonal needs for the foreseeable future.
- The company was in compliance with its debt covenants. Actual leverage was 2.18x versus a maximum of 3.75x, and capitalization was 58.8% versus a maximum of 70.0%.
Material changes versus the prior comparable period
- Same-store revenue increased 6.0% in Q2 and 8.3% year to date; same-store gross profit increased 6.7% and 8.5%.
- Volume growth and higher average selling prices drove vehicle revenue, but gross profit per new vehicle retailed declined 2.8% in Q2 and 1.3% year to date. Used-vehicle gross profit per retailed vehicle declined 5.5% and 3.5%.
- Finance and insurance performance improved due to greater product penetration, increased vehicle-service-contract contribution, higher financing revenue per transaction and more customers financing through AutoNation.
- Parts and service benefited from improved customer-pay execution, elevated manufacturer recall activity, higher vehicle volume and stronger collision activity.
- Premium Luxury was the fastest-growing segment, with Q2 revenue up 14.0% and segment income up 10.0%. Domestic revenue and segment income rose 9.9% and 20.4%; Import revenue and segment income rose 4.5% and 3.4%.
- The company repurchased 0.9 million shares for $59.1 million in the first six months, versus 3.6 million shares for $179.8 million in the prior-year period. Remaining authorization was $221.6 million.
- AutoNation purchased five stores during the first six months, including three in Q2, and divested two Import stores. The acquisitions were not material to consolidated results.
Guidance, outlook, commentary and risks
- Management expected 2015 U.S. industry new-vehicle sales to exceed 17 million units, supported by replacement demand, affordable credit, lower fuel prices, product availability and an aging vehicle fleet. Actual industry sales may differ materially.
- The company launched the AutoNation Vehicle Protection Plan in selected Domestic and Import markets and expected the rollout to be completed during the second half of 2015, with potential benefits to finance and insurance revenue and gross profit.
- Management anticipated approximately $235 million of 2015 capital expenditures, excluding land purchases for future sites and lease buy-outs and net of related asset sales.
- Key risks include sensitivity to economic conditions and U.S. vehicle sales, manufacturer financial health and incentives, competitive pressure on vehicle margins, interest-rate exposure, substantial floorplan and other debt, debt covenant restrictions, manufacturer concentration, legal and regulatory proceedings, information-system or cybersecurity failures, and impairment risk related to goodwill and franchise rights.
- A 100-basis-point change in interest rates would change annual interest expense by approximately $33.2 million on variable-rate vehicle floorplan debt, $8.0 million on other variable-rate debt and $3.0 million on commercial paper, based on balances at June 30, 2015.
- The filing disclosed California wage-and-hour class-action litigation involving automotive technicians and other ordinary-course legal matters. Management stated that probable and estimable losses were adequately accrued and that no material additional loss was reasonably possible, while noting that outcomes cannot be predicted with certainty.
- Unusual items included $5.8 million of property-disposition gains and a $1.7 million property impairment in Q2 2015. The prior-year periods included a $4.0 million legal-settlement gain and a larger gain from the divestiture of the customer lead distribution business.
Important facts for investors to verify
- Whether new-vehicle inventory of 63 days supply, up from 59 days a year earlier, leads to future pricing or carrying-cost pressure.
- Whether declining new- and used-vehicle gross profit per unit continues as volume grows.
- The sustainability of finance and insurance gains and the expected contribution from the AutoNation Vehicle Protection Plan.
- Commercial-paper refinancing and liquidity, including the short 13-day weighted-average remaining term and the interaction with revolving-credit availability.
- Progress toward the approximately $235 million 2015 capital-expenditure plan and the returns from recently acquired stores.
- Exposure to LIBOR movements, manufacturer concentration, recalls, legal proceedings and potential goodwill, franchise-rights or real-estate impairments.
- The July 2015 resignation and separation agreement of the Senior Vice President of Customer Care, including potential severance of up to $532,208.