AutoNation, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 282 new-vehicle franchises across 232 stores as of March 31, 2015. The company sells new and used vehicles, parts and service, and finance and insurance products through Domestic, Import, Premium Luxury, and corporate operations. This filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Financial statements are unaudited.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $4,944.2 million | $4,363.5 million | +13.3% |
| Gross profit | $799.9 million | $707.4 million | +13.1% |
| Operating income | $214.9 million | $189.1 million | +13.6% |
| Net income | $111.5 million | $95.1 million | +17.2% |
| Net income from continuing operations | $111.7 million | $95.5 million | +17.0% |
| Diluted EPS | $0.97 | $0.78 | +24.4% |
| Operating cash flow | $199.6 million | $215.6 million | -7.4% |
Gross margin was approximately 16.2% in both periods, while operating margin was approximately 4.3% in both periods. SG&A was $557.6 million, or 69.7% of gross profit, versus 70.8% in Q1 2014. The effective income tax rate was 38.5%, compared with 38.7%.
- New-vehicle revenue increased 14.0% to $2,769.6 million; retail unit sales increased 10.3% to 78,560.
- Used-vehicle revenue increased 13.7% to $1,193.2 million; retail unit sales increased 12.4% to 58,624.
- Parts and service revenue increased 10.8% to $743.4 million, with gross profit up 11.6% to $320.0 million.
- Finance and insurance revenue and gross profit increased 20.4% to $207.6 million.
- Total retail vehicle sales increased 11.2% to 137,184 units.
- New-vehicle gross profit per retailed unit rose slightly to $2,056, while used-vehicle gross profit per unit declined 1.8% to $1,748. Finance and insurance gross profit per unit increased 8.2% to $1,513.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $74.1 million at March 31, 2015, compared with $75.4 million at December 31, 2014.
- Net cash used in investing activities was $79.6 million, including $66.4 million of property and equipment purchases and $27.7 million of acquisition spending, partially offset by $15.7 million of divestiture proceeds.
- Net cash used in financing activities was $121.3 million, including $75.0 million of net revolver repayments, $54.1 million of net payments on non-trade vehicle floorplan payable, and $9.6 million of share repurchases.
- Total vehicle floorplan payable was $3.002 billion, consisting of $2.041 billion of trade and $961.1 million of non-trade financing.
- Non-vehicle debt totaled $2.056 billion, including $1.035 billion outstanding under the revolving credit facility. Long-term debt, net of current maturities, was $2.031 billion.
- Revolver availability was $719.1 million after $45.9 million of outstanding letters of credit. Additional liquidity from secured used-vehicle floorplan facilities was $107.1 million based on eligible collateral.
- The company reported a leverage ratio of 2.15x versus a 3.75x maximum and a capitalization ratio of 57.5% versus a 70.0% maximum. It was in compliance with its debt covenants.
- AutoNation expected 2015 capital expenditures of approximately $235 million, excluding land purchases for future sites and lease buy-outs and net of related asset sales. The company does not anticipate paying cash dividends for the foreseeable future.
Material changes versus the prior comparable period
- Results benefited from stronger U.S. vehicle demand, replacement demand, increased consumer borrowing and confidence, lower fuel prices, and new manufacturer product offerings. U.S. industry new-vehicle unit sales increased 6% in Q1 2015.
- Same-store revenue increased 10.8%, same-store gross profit increased 10.4%, and same-store retail vehicle unit sales increased 9.7%.
- Premium Luxury revenue increased 19.7%, supported by a 27.3% increase in new-vehicle unit sales; Domestic and Import segment income increased 24.3% and 14.7%, respectively.
- Parts and service benefited from elevated manufacturer recall activity, higher vehicle preparation volume, improved customer-pay service performance, and increased collision volume.
- Finance and insurance results benefited from greater product penetration, a favorable mix toward vehicle service contracts, higher amounts financed, and increased financing-related revenue.
- Q1 2014 included an $8.0 million pre-tax gain, primarily from the divestiture of the customer lead distribution business. Q1 2015 included a $1.4 million pre-tax gain from divesting two Import stores.
- The company acquired a Mercedes-Benz store in Reno, Nevada, and a Volkswagen store in Atlanta, Georgia. These acquisitions were not material to reported results. Two additional stores were acquired in April 2015.
- New-vehicle inventory days supply declined to 52 days from 61 days at March 31, 2014, while used-vehicle inventory days supply increased to 34 days from 31 days.
Guidance, outlook, commentary, and risks
Management expected continued growth in 2015 U.S. industry new-vehicle sales, with full-year industry volume above 17 million units, but cautioned that actual results may differ materially. Management also expected parts and service to benefit over the next several years from a growing recent-model-year vehicle base, customer retention initiatives, and the service mix shift toward newer vehicles.
Key risks include sensitivity to U.S. economic conditions, vehicle sales volumes and gross margins; dependence on manufacturers, captive lenders, and supplier financial health; manufacturer incentive programs and franchise restrictions; interest-rate exposure on approximately $3.0 billion of variable-rate floorplan debt and $1.0 billion of other variable-rate debt; substantial indebtedness and covenant restrictions; legal and regulatory proceedings; information-system failures or data breaches; natural disasters; and potential impairment of goodwill and indefinite-lived franchise rights. Annual impairment testing was scheduled for April 30, 2015.
The company was defending several purported California wage-and-hour class actions involving automotive technicians. Management believed probable and reasonably estimable losses were adequately accrued and stated there was no indication of a reasonable possibility of a material additional loss, while noting that outcomes cannot be predicted with certainty.
There were no significant impairment charges in either comparable quarter. Long-lived assets held for sale totaled $68.7 million in continuing operations and $23.2 million in discontinued operations at March 31, 2015.
Important facts for investors to verify
- Whether the favorable vehicle demand environment and expected industry sales above 17 million units persisted through the remainder of 2015.
- Whether used-vehicle gross profit per unit and new-vehicle gross margins stabilize or continue to compress.
- Execution of the approximately $235 million 2015 capital expenditure plan and the financial contribution from recent and April 2015 acquisitions.
- Available revolver and floorplan capacity, variable-rate exposure, debt maturities, and continued compliance with leverage and capitalization covenants.
- Cash conversion, particularly the decline in operating cash flow despite higher earnings and the effect of inventory and working-capital requirements.
- Results of the April 30, 2015 goodwill and franchise-rights impairment tests.
- Developments in California wage-and-hour litigation and other legal, regulatory, environmental, and lease-related contingencies.