AutoNation, Inc. Form 10-Q Summary
Business Context and Reporting Period
AutoNation is a U.S. automotive retailer operating 331 new-vehicle franchises across 239 stores as of September 30, 2021, plus 72 collision centers, 7 AutoNation USA used-vehicle stores, 4 auction operations, and 3 parts distribution centers. The filing covers the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $6,379.5 million | $5,404.9 million | $19,261.7 million | $14,604.9 million |
| Gross profit | $1,271.9 million | $971.5 million | $3,631.0 million | $2,579.7 million |
| Operating income | $503.3 million | $271.7 million | $1,370.4 million | $253.8 million |
| Net income | $361.7 million | $182.6 million | $985.9 million | $230.1 million |
| Diluted EPS | $5.12 | $2.05 | $12.62 | $2.59 |
| Operating margin | 7.9% | 5.0% | 7.1% | 1.7% |
- Q3 gross profit increased 30.9%; nine-month gross profit increased 40.8%.
- Q3 gross profit margin was approximately 19.9%, compared with 18.0% in the prior-year quarter. Nine-month gross profit margin was approximately 18.9%, compared with 17.7%.
- Q3 SG&A was $723.7 million, up from $641.4 million, but declined to 56.9% of gross profit from 66.0%. Nine-month SG&A was $2,120.5 million, or 58.4% of gross profit, versus 69.4%.
- Nine-month operating cash flow was $1,559.2 million, compared with $1,164.3 million. Investing cash flow was $(225.5) million, including $209.1 million for acquisitions and $161.3 million of property and equipment purchases. Financing cash flow was $(1,831.3) million.
- Cash and cash equivalents were $72.0 million at September 30, 2021, versus $569.6 million at December 31, 2020.
- Vehicle floorplan payable declined to $1,248.4 million from $2,759.9 million at year-end 2020. New-vehicle inventory was $387.5 million, compared with $1,761.9 million, while used-vehicle inventory increased to $898.1 million from $648.4 million.
- Long-term debt, net of current maturities, was $2,673.1 million, compared with $1,792.6 million at December 31, 2020. The company had no revolving-credit borrowings or commercial paper outstanding and had approximately $1.8 billion of revolving-credit capacity available, net of letters of credit.
- The company repurchased 19.2 million shares for $1,921.4 million during the nine months. Shares outstanding declined to 65.5 million from 87.8 million at September 30, 2020. The October 2021 authorization increase added $1.0 billion of repurchase capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18.0% in Q3 and 31.9% for the nine months. Q3 new-vehicle revenue was nearly flat despite an 11.7% decline in new-vehicle retail units, reflecting higher revenue per vehicle and constrained supply.
- Used-vehicle revenue increased 53.2% in Q3 and 53.9% for the nine months, supported by higher unit volume and revenue per vehicle.
- New-vehicle gross profit increased 91.1% in Q3 and 116.6% for the nine months. New-vehicle gross profit per vehicle retailed increased to $5,484 in Q3 from $2,533.
- Parts and service gross profit increased 13.2% in Q3 and 15.9% for the nine months. Finance and insurance gross profit increased 24.1% and 35.0%, respectively.
- Operating income benefited from the absence of 2020 non-cash goodwill impairment charges of $318.3 million and franchise-rights impairment charges of $57.5 million, as well as the absence of $36.5 million of 2020 third-quarter charges related to closing the aftermarket collision-parts business.
- 2020 other income included significant equity-investment gains; nine-month other income was $218.2 million in 2020 versus a $19.1 million gain in 2021, reducing the year-over-year benefit to pretax income.
- AutoNation issued $400.0 million of 1.95% senior notes due 2028 and $450.0 million of 2.4% senior notes due 2031, and repaid $300.0 million of 3.35% senior notes due 2021.
- The company acquired 11 stores and one collision center during the nine months and divested two stores and three collision centers.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management reported strong vehicle demand but historically low new-vehicle supply caused primarily by manufacturer component shortages. Reduced availability was expected to continue well into 2022, although the duration of elevated profitability was uncertain.
- AutoNation plans to expand AutoNation USA to more than 130 stores by the end of 2026. It expected two additional openings before year-end 2021 and 12 additional openings in 2022, with average initial capital investment of approximately $10 million to $11 million per store.
- In October 2021, the company announced an agreement to acquire Priority 1 Automotive Group in Maryland and an agreement to sell up to 17 collision centers. Both transactions were subject to customary closing conditions and expected to close in the fourth quarter of 2021.
- Mike Manley was appointed CEO effective November 1, 2021, succeeding Michael J. Jackson, who was scheduled to retire from the CEO and board positions.
- Key risks include vehicle supply shortages, changes in consumer demand and interest rates, dependence on manufacturers and their captive lenders, COVID-19 and other disruptions, execution risk related to AutoNation USA expansion, regulatory and litigation exposure, cybersecurity, goodwill and franchise-rights impairment, and restrictions under debt agreements.
- The company was in compliance with debt covenants at September 30, 2021. The actual leverage ratio was 1.40x against a maximum of 3.75x, and the capitalization ratio was 48.6% against a maximum of 70.0%.
- Variable-rate vehicle floorplan payable was approximately $1.2 billion. A 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $12.5 million.
- Management stated that no material loss or additional material loss was reasonably possible from disclosed legal proceedings, but adverse outcomes remain possible. Tax years 2014 through 2019 were under examination by certain state jurisdictions.
Most Important Facts for Investors to Verify
- Whether elevated new- and used-vehicle gross profit per vehicle remains sustainable as vehicle supply normalizes.
- The effect of semiconductor and other supply-chain constraints on new-vehicle unit volume and future inventory levels.
- Cash liquidity after substantial share repurchases, acquisitions, capital expenditures, and debt issuance.
- The pace, capital requirements, and returns of the AutoNation USA store expansion.
- Completion and financial impact of the Priority 1 acquisition and planned collision-center divestitures.
- Future interest expense and covenant headroom given higher long-term debt and exposure to variable floorplan rates.
- The impact of CEO transition, COVID-19 developments, manufacturer relationships, regulatory matters, and potential impairment charges.