AutoNation, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; financial statements are unaudited. AutoNation operated 260 new-vehicle franchises across 215 stores, primarily in Sunbelt markets, selling new and used vehicles, parts and service, and finance and insurance products.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenue | $3,904.5 million | $3,336.3 million | $7,561.5 million | $6,647.4 million |
| Gross profit | $628.0 million | $583.4 million | $1,231.0 million | $1,149.6 million |
| Operating income | $164.2 million | $144.4 million | $312.9 million | $284.4 million |
| Income from continuing operations | $79.0 million | $73.3 million | $152.5 million | $143.6 million |
| Net income | $78.6 million | $71.9 million | $151.6 million | $141.3 million |
| Diluted EPS | $0.64 | $0.48 | $1.18 | $0.94 |
Margins: Gross margin was 16.1% in Q2 and 16.3% for the first six months, compared with 17.5% and 17.3%, respectively, in the prior-year periods. Operating margin was 4.2% in Q2 and 4.1% year to date, versus 4.3% in both prior-year periods. The margin pressure primarily reflected lower new- and used-vehicle gross profit per unit as supply conditions normalized.
- Q2 revenue increased 17.0%; six-month revenue increased 13.8%.
- Q2 operating income increased 13.7%; six-month operating income increased 10.0%.
- New-vehicle unit sales increased 29.3% in Q2 and 19.5% year to date; used-vehicle unit sales increased 7.9% and 8.7%, respectively.
- Finance and insurance revenue and gross profit increased 24.0% in Q2 and 20.9% year to date. Q2 and year-to-date results included a $3.8 million favorable adjustment related to certain product maintenance contracts.
- New-vehicle gross profit per unit declined 17.7% in Q2 and 10.7% year to date. Used-vehicle gross profit per unit declined 9.8% and 6.4%, respectively.
Cash Flow, Liquidity and Capital Structure
- Cash provided by operating activities was $119.5 million for the first six months, compared with $125.1 million in 2011.
- Cash used in investing activities was $74.8 million, including $69.3 million of property and equipment purchases and $15.5 million of operating lease buy-outs.
- Cash used in financing activities was $69.2 million, principally reflecting $531.9 million of share repurchases, partly offset by debt issuance and borrowings.
- Cash and cash equivalents declined to $62.1 million from $86.6 million at December 31, 2011.
- Total non-vehicle debt was $2.03 billion at June 30, 2012, compared with $1.65 billion at year-end 2011. The increase primarily reflected issuance of $350.0 million of 5.5% Senior Notes due 2020 and higher revolving-credit borrowings.
- Vehicle floorplan payable was $2.12 billion, consisting of $1.48 billion trade and $639.4 million non-trade financing.
- Available revolving-credit capacity was $465.5 million after contractual leverage limitations; eligible used-vehicle floorplan capacity was $81.7 million.
- Leverage ratio was 3.05x versus a 3.75x maximum; capitalization ratio was 57.6% versus a 65.0% maximum. The company reported compliance with its debt covenants.
- Management expected approximately $155 million of 2012 capital expenditures, excluding land purchases and lease buy-outs and net of related asset sales. No cash dividends were expected for the foreseeable future.
Material Changes Versus Prior Comparable Period
- Improved Japanese-vehicle inventory availability, replacement demand, consumer credit, and new product introductions drove higher vehicle volumes compared with the supply-disrupted second quarter of 2011.
- Revenue growth was strongest in new vehicles and finance and insurance, while per-unit vehicle margins declined as prior-year supply constraints and related pricing benefits abated.
- Parts and service revenue rose 5.3% in both Q2 and the first six months, but gross margin declined to 42.1% from 42.9% in Q2 and to 41.9% from 42.9% year to date.
- SG&A increased 5.0% in Q2 and 5.6% year to date, but declined as a percentage of gross profit to 69.8% and 70.8%, respectively.
- Other interest expense increased by $6.6 million in Q2 and $10.8 million year to date because of higher debt balances.
- AutoNation repurchased 15.4 million shares for $531.6 million during the first six months, compared with 5.1 million shares for $169.7 million in 2011. The July 2012 authorization increased remaining repurchase capacity to $368.2 million.
- The company issued $350.0 million of 5.5% Senior Notes due 2020 and redeemed its remaining 7% Senior Notes due 2014 for $15.2 million, including accrued interest.
Guidance, Outlook, Risks and Unusual Items
- Management maintained a 2012 U.S. industry new-vehicle sales forecast at the mid-14 million-unit level, above 2011 but below pre-recession levels.
- Management expected new-vehicle gross profit per unit to remain relatively stable with the first half of 2012, but below 2011, subject to manufacturer incentives and market conditions.
- The company expected its primary service vehicle base to begin increasing in 2013, although a return to pre-recession levels could take several years.
- A $4.2 million non-cash impairment charge, or $2.6 million after tax, was recorded for a Premium Luxury franchise right. Goodwill was not impaired based on the April 30, 2012 qualitative assessment.
- Discontinued operations generated a $0.9 million loss for the first six months. Assets held for sale included $76.7 million in continuing operations and $49.4 million in discontinued operations.
- Legal proceedings include customer, employment, class-action, and governmental matters. Management did not expect a material adverse effect, but noted that unfavorable outcomes could be material.
- Key risks include economic sensitivity, vehicle manufacturer financial condition and incentives, substantial indebtedness, debt covenant restrictions, interest-rate exposure, impairment of goodwill or franchise rights, regulation, adverse weather or natural disasters, information-system failures, and concentration of voting influence among large stockholders.
- A 100-basis-point interest-rate change would affect annual floorplan interest expense by approximately $21.2 million and other variable-rate debt interest expense by approximately $10.3 million, based on June 30 balances.
Investor Verification Points
- Verify whether volume growth can offset continued pressure on new- and used-vehicle gross profit per unit.
- Monitor debt-funded share repurchases, liquidity after repurchases, and compliance headroom under the 3.75x leverage and 65.0% capitalization limits.
- Assess the sustainability of the $3.8 million finance and insurance favorable adjustment and the impact of higher finance and insurance penetration.
- Track new-vehicle inventory growth to 49,187 units and 60 days of supply, compared with 59 days a year earlier.
- Evaluate exposure to LIBOR-based floorplan and other variable-rate debt, manufacturer concentration, and potential franchise-rights or long-lived-asset impairments.
- Consider ownership and liquidity risks: as of July 18, 2012, ESL beneficially owned approximately 55% of common stock, while Cascade and the Gates Foundation Trust together held approximately 15%.