AutoNation, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 326 new-vehicle franchises across 239 stores, 83 collision centers, and more than 325 locations overall as of March 31, 2019. The company reports Domestic, Import, Premium Luxury, and Corporate and other activities. This unaudited filing covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $4,981.8 million | $5,259.9 million | (5.3%) |
| Gross profit | $849.2 million | $842.3 million | 0.8% |
| Gross margin | 17.0% | 16.0% | +100 bps |
| Operating income | $190.8 million | $185.8 million | 2.7% |
| Operating margin | 3.8% | 3.5% | +30 bps |
| Income from continuing operations | $92.1 million | $93.3 million | (1.3%) |
| Diluted EPS from continuing operations | $1.02 | $1.01 | Increase |
| Net cash from operating activities | $259.7 million | $198.7 million | Increase |
- New-vehicle revenue declined 10.9% to $2,496.7 million, and retail new-vehicle unit sales decreased 14.4% to 63,513. New-vehicle gross profit per vehicle increased 9.8% to $1,919.
- Used-vehicle revenue increased 0.7% to $1,339.6 million, while used-vehicle gross profit increased 5.5% to $90.5 million. Retail used-vehicle unit sales declined 1.7%, but gross profit per vehicle increased 4.6% to $1,378.
- Parts and service revenue increased 2.1% to $876.7 million, and gross profit increased 3.5% to $398.9 million. Finance and insurance revenue and gross profit declined 1.8% to $236.5 million, although gross profit per vehicle increased 7.4% to $1,897.
- Parts and service plus finance and insurance represented approximately 22% of revenue but approximately 75% of total gross profit.
- SG&A expense decreased 0.6% to $623.0 million and declined to 73.4% of gross profit from 74.4%. Depreciation and amortization increased to $44.1 million from $40.0 million.
- Net income was $92.0 million, compared with $93.7 million. Discontinued operations produced a $0.1 million loss versus $0.4 million of income in the prior-year quarter.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $48.7 million at March 31, 2019, compared with $48.6 million at December 31, 2018.
- Operating cash flow was $259.7 million. Investing activities used $48.6 million, including $60.0 million of property and equipment purchases. Financing activities used $210.9 million, including $160.0 million of commercial paper repayments and $33.4 million of share repurchases.
- Vehicle floorplan payable totaled $4,031.1 million, up from $3,997.7 million at year-end. Inventory totaled $3,771.4 million, including $3,040.9 million of new vehicles.
- Commercial paper outstanding declined to $470.0 million from $630.0 million, with a weighted-average rate of 2.97% and remaining term of six days at March 31, 2019.
- Debt classified as current increased to $393.5 million because the $350.0 million of 5.5% senior notes mature in February 2020. Long-term debt, net of current maturities, was $1,575.9 million.
- The revolving credit facility had no borrowings and $741.1 million of covenant-limited availability. Letters of credit totaled $41.7 million. Secured used-vehicle floorplan availability was limited to $0.6 million based on eligible collateral.
- The company reported compliance with its debt covenants: actual leverage ratio was 2.88x versus a maximum of 3.75x, and capitalization ratio was 59.8% versus a maximum of 70.0%.
- Shareholders’ equity increased to $2,785.8 million from $2,716.0 million. The company repurchased approximately 1.0 million shares for $33.5 million, with $230.2 million remaining under the authorization.
Material changes versus the prior comparable period
- Industry and company new-vehicle volume weakened materially. Management attributed the decline to higher consumer borrowing rates, rising vehicle prices, competitive conditions, and increased off-lease used-vehicle supply.
- Higher gross profit per vehicle, stronger used-vehicle and parts-and-service performance, lower SG&A, and lower other interest expense more than offset the volume decline at the operating-income level.
- Floorplan interest expense increased 37.8% to $39.0 million, reflecting higher average interest rates and vehicle floorplan balances. The company reported a $11.2 million net new-vehicle inventory carrying cost versus a $2.3 million benefit in Q1 2018.
- AutoNation adopted ASC Topic 842 lease accounting on January 1, 2019, without restating prior periods. Adoption added $344.6 million of operating right-of-use assets and $358.1 million of operating lease liabilities, with no retained-earnings adjustment.
- The company announced a restructuring and cost-savings plan in January 2019 targeting approximately $50 million of annual spending reductions. It recorded $3.6 million of restructuring expense in Q1 2019.
- AutoNation divested two Import stores and acquired two parts distribution centers during the quarter. These transactions were not material to consolidated results.
Guidance, outlook, commentary, and risks
- Management expected full-year 2019 U.S. industry retail new-vehicle unit sales to be in the high 16 million range, while noting that actual sales could differ materially.
- Management expected cash, future operating cash flow, the revolving facility, commercial paper program, and secured floorplan facilities to be sufficient for operating needs, debt service, capital expenditures, and contingencies for the foreseeable future.
- Management cautioned that continued interest-rate increases without offsetting manufacturer floorplan assistance or lower inventory could cause additional net new-vehicle inventory carrying costs.
- Key risks include economic conditions, interest rates, fuel prices, tariffs, manufacturer incentives and financial condition, vehicle pricing and demand, used-vehicle supply, execution of the brand-extension strategy, cybersecurity and information systems, regulatory compliance, litigation, debt covenants, refinancing needs, and impairment of goodwill or franchise rights.
- Goodwill and franchise rights were scheduled for annual impairment testing as of April 30, 2019. Goodwill totaled $1,509.8 million and franchise rights totaled $580.1 million at March 31, 2019.
- The company was involved in various legal proceedings but reported no indication of a reasonably possible material loss beyond accrued amounts. Tax years 2014 through 2017 were under examination by certain state jurisdictions.
Important facts for investors to verify
- Whether new-vehicle unit weakness and elevated inventory days supply, which increased to 77 days from 69 days, persist through 2019.
- Whether higher gross profit per vehicle and parts-and-service growth can offset lower vehicle volumes and rising floorplan interest costs.
- The outcome of the April 30, 2019 goodwill and franchise-rights impairment testing.
- Progress toward the targeted $50 million of annual cost savings and the recurring versus one-time nature of restructuring costs.
- Liquidity and refinancing plans for the $350.0 million senior notes maturing in February 2020, including compliance with leverage and capitalization covenants.
- Exposure to LIBOR-based financing: management estimated that a 100-basis-point annual rate increase would increase floorplan interest expense by approximately $40.3 million and commercial-paper interest expense by approximately $4.7 million.