AutoNation, Inc. Form 10-Q Summary
Business Context and Reporting Period
AutoNation is a U.S. automotive retailer operating 319 new-vehicle franchises across 233 stores, 82 collision centers, and more than 325 locations as of September 30, 2019. The company reports Domestic, Import, Premium Luxury, and Corporate and other activities. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $5,461.2 million | $5,349.2 million | $15,786.8 million | $16,001.1 million |
| Gross profit | $887.4 million | $855.3 million | $2,627.4 million | $2,549.4 million |
| Operating income | $193.5 million | $203.6 million | $587.8 million | $580.6 million |
| Net income | $99.5 million | $112.0 million | $292.3 million | $303.3 million |
| Diluted EPS | $1.10 | $1.23 | $3.23 | $3.31 |
- Q3 gross margin was approximately 16.2%, operating margin 3.5%, and net margin 1.8%. For the nine-month period, gross margin was approximately 16.6%, operating margin 3.7%, and net margin 1.9%.
- Q3 revenue increased 2.1%, while gross profit increased 3.8%; operating income declined 5.0% and net income declined 11.2%.
- Nine-month revenue declined 1.3%, but gross profit increased 3.1% and operating income increased 1.2%; net income declined 3.6%.
- Q3 new-vehicle revenue declined 2.0% and retail new-vehicle unit sales declined 6.4%. Used-vehicle revenue increased 9.5%, parts and service revenue increased 4.5%, and finance and insurance revenue increased 7.6%.
- For the nine months, new-vehicle unit sales declined 10.4%, while used-vehicle unit sales increased 2.4%. Finance and insurance gross profit per vehicle increased 8.1% to $1,917, and new-vehicle gross profit per vehicle increased 7.6% to $1,759.
- Parts and service produced $409.0 million of Q3 gross profit and $1,219.8 million for the nine months, with margins of 45.3% and 45.5%, respectively.
- Q3 selling, general, and administrative expense increased 4.4% to $653.8 million, including $11.0 million of severance and related costs associated with an executive separation.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Nine-month operating cash flow was $665.5 million, compared with $535.1 million in 2018. Investing cash flow was negative $113.5 million, including $186.3 million of property and equipment purchases. Financing cash flow was negative $555.9 million.
- Cash and cash equivalents were $45.0 million at September 30, 2019, versus $48.6 million at December 31, 2018.
- Inventory was $3.28 billion, down from $3.65 billion at year-end 2018. Vehicle floorplan payable was $3.48 billion, down from $4.00 billion.
- Non-vehicle debt totaled $1.98 billion before discounts and issuance costs. Current maturities increased to $394.1 million, primarily because the $350.0 million 5.5% Senior Notes mature on February 1, 2020. Commercial paper outstanding was $300.0 million, compared with $630.0 million at December 31, 2018.
- The company reported $948.4 million of borrowing capacity under its revolving credit facility after applying the leverage-ratio limitation, $0.6 million of secured used-vehicle floorplan availability, and $45.0 million of cash. The revolving facility had no borrowings outstanding and $41.7 million of letters of credit.
- Debt covenants were satisfied at September 30, 2019. Actual leverage was 2.65x against a maximum of 3.75x, and capitalization was 55.7% against a maximum of 70.0%.
- AutoNation adopted ASC 842 lease accounting on January 1, 2019, recognizing operating lease assets of $328.8 million and noncurrent operating lease liabilities of $302.5 million at September 30, 2019.
- The company repurchased 1.3 million shares for $44.7 million during the nine months and had $219.0 million remaining under its authorization.
Material Changes Versus the Prior Comparable Period
- The business shifted toward higher-margin used vehicles, parts and service, and finance and insurance, partially offsetting lower new-vehicle volume.
- Q3 new-vehicle volume declined as management prioritized gross profit per vehicle over unit volume. Same-store new-vehicle volume declined 4.6%, while same-store used-vehicle volume increased 7.3%.
- Premium Luxury was the strongest reportable segment in Q3, with revenue up 9.1% and segment income up 15.7%. Domestic revenue declined 3.4%, while Import revenue declined 2.7%; both segments nevertheless reported modest segment-income growth.
- Corporate and other expenses increased, contributing to lower Q3 operating income. Nine-month corporate and other expense was $223.5 million versus $193.1 million in 2018.
- Floorplan interest expense increased $16.0 million to $109.4 million for the nine months because of higher average interest rates and higher average floorplan balances. Other interest expense declined $8.8 million, primarily following repayment of the 6.75% Senior Notes in 2018.
- Net after-tax gains from store and property divestitures benefited continuing-operations earnings by approximately $4.6 million in Q3 2019 versus $13.7 million in Q3 2018.
- The company recorded $9.6 million of franchise-rights impairment in the first nine months of 2019, compared with $8.1 million in 2018.
Guidance, Outlook, Commentary, and Risks
- Management expected full-year 2019 U.S. industry retail new-vehicle unit sales of approximately 17 million, supported by higher fleet sales and lower-than-expected interest rates; actual results could differ materially.
- Management cited higher vehicle prices, borrowing costs, elevated manufacturer incentives and leasing, and increased off-lease used-vehicle supply as important market factors.
- Management expects retrospective finance and insurance commissions to continue declining relative to recent years because of higher claim activity.
- Strategic initiatives include AutoNation-branded parts and protection products, collision centers, auctions, AutoNation USA used-vehicle locations, parts distribution, a strategic investment in Vroom, and a partnership with Waymo.
- Key risks include economic sensitivity, interest-rate exposure, manufacturer incentives and financial condition, regulatory and legal matters, cybersecurity, natural disasters, execution of strategic initiatives, goodwill and franchise-rights impairment, and substantial debt and covenant restrictions.
- A 100-basis-point change in interest rates would affect annual floorplan interest expense by approximately $34.8 million based on September 30, 2019 balances; the corresponding commercial-paper sensitivity was approximately $3.0 million annually.
- Management stated that legal proceedings were accrued when probable and estimable and that there was no indication of a reasonable possibility of a material loss beyond accrued amounts, while noting that unfavorable outcomes remain possible.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Most Important Facts to Verify
- Verify the company’s ability to refinance or repay the $350.0 million of senior notes maturing in February 2020.
- Monitor new-vehicle unit trends, gross profit per vehicle, manufacturer incentives, and the effect of rising vehicle prices and interest rates.
- Assess whether used-vehicle, parts and service, and finance and insurance growth can continue to offset declining new-vehicle volume.
- Review the sustainability of finance and insurance margins in light of declining retrospective commissions and higher claim activity.
- Track floorplan balances, variable-rate exposure, covenant headroom, commercial-paper refinancing, and available revolving-credit capacity.
- Evaluate potential future impairment charges for franchise rights, goodwill, and other intangible assets.
- Consider the effect of executive separation costs, divestiture gains, restructuring actions, and other unusual items on recurring earnings.