Business Context and Reporting Period
AutoNation, Inc. is the largest U.S. automotive retailer, operating 307 new-vehicle franchises across 240 stores as of September 30, 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 unaudited Form 10-Q covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total revenue | $5,353.7 million | $4,909.0 million | $15,522.2 million | $14,061.0 million |
| Gross profit | $830.3 million | $752.9 million | $2,449.3 million | $2,205.2 million |
| Operating income | $235.7 million | $207.4 million | $672.7 million | $594.3 million |
| Net income | $118.5 million | $106.5 million | $345.1 million | $302.0 million |
| Diluted EPS | $1.04 | $0.90 | $3.01 | $2.51 |
| Operating margin | 4.4% | 4.2% | 4.3% | 4.2% |
- Q3 revenue increased 9.1%, gross profit increased 10.3%, operating income increased 13.6%, and net income increased 11.3% year over year. For the first nine months, revenue increased 10.4%, gross profit 11.1%, operating income 13.2%, and net income 14.3%.
- Q3 new-vehicle revenue rose 10.3% and unit sales increased 7.0%; used-vehicle revenue rose 5.0% and unit sales increased 1.4%. Finance and insurance revenue and gross profit increased 15.6%.
- Parts and service revenue increased 9.2% in Q3 and 10.1% for the first nine months, with gross margin of 43.7% and 43.4%, respectively. Elevated manufacturer recall activity supported warranty-related service results.
- Gross margin was 15.5% in Q3 and 15.8% for the first nine months. SG&A increased 8.9% in Q3 and 9.5% year over year, but declined as a percentage of gross profit to 68.5% and 69.2%, respectively.
- Cash provided by operating activities was $475.3 million for the first nine months, versus $452.9 million in 2014. Investing cash use was $252.9 million, including $179.5 million for property and equipment and $123.8 million for acquisitions. Financing cash use was $233.9 million.
- Cash and cash equivalents were $63.9 million at September 30, 2015, compared with $75.4 million at December 31, 2014.
Debt, Liquidity, and Capital Allocation
- Vehicle floorplan payable was $3,203.8 million, compared with $3,097.2 million at December 31, 2014. Inventory increased to $3,226.9 million from $2,899.0 million.
- Non-vehicle debt totaled $1,770.1 million at September 30, 2015, compared with $2,128.4 million at year-end 2014. The company issued $300.0 million of 3.35% Senior Notes due 2021 and $450.0 million of 4.5% Senior Notes due 2025, using proceeds partly to repay its revolving facility.
- Commercial paper outstanding was $435.0 million, with a weighted-average interest rate of 0.83% and remaining term of 11 days. The revolving credit facility had no borrowings, with approximately $1,553.1 million of availability after leverage limitations and commercial paper considerations.
- The company reported a 2.20x leverage ratio versus a 3.75x maximum and a 58.8% capitalization ratio versus a 70.0% maximum.
- AutoNation repurchased 3.5 million shares for $209.1 million during the first nine months. An additional $250.0 million repurchase authorization was approved in September; $297.2 million remained available as of October 26, 2015.
- Projected 2015 capital expenditures were approximately $235 million, excluding land purchases and lease buy-outs.
Material Changes Versus the Prior Comparable Period
- Growth was led by higher vehicle volumes, increased average selling prices, stronger finance and insurance performance, and parts and service gains. Same-store revenue increased 6.0% in Q3 and 7.5% for the first nine months.
- Same-store used-vehicle gross profit per vehicle declined 6.9% in Q3 and 4.7% for the first nine months, while new-vehicle gross profit per vehicle was broadly stable in Q3 and declined 2.5% for the first nine months.
- New-vehicle inventory increased to 69,694 units and 59 days of supply from 62,831 units and 57 days at September 30, 2014. Used-vehicle inventory reached 42 days of supply versus 32 days a year earlier.
- The company purchased eight stores during the first nine months of 2015, compared with one store in the prior-year period, and announced pending acquisitions of 13 stores in the Southeast and 12 stores in Texas.
- Interest expense was affected by higher floorplan balances, although other interest expense was slightly lower because of refinancing and lower-cost commercial paper.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected full-year 2015 U.S. industry new-vehicle sales to exceed 17 million units, supported by replacement demand, affordable credit, lower fuel prices, and an aging vehicle fleet. Actual results may differ materially.
- The AutoNation Vehicle Protection Plan was launched in selected Domestic and Import markets during the second quarter and was substantially rolled out by October 2015. Management expected it to benefit finance and insurance revenue and gross profit.
- Beginning in the third quarter, the company generally stopped selling, leasing, or wholesaling vehicles with open safety recalls. Management did not expect a material adverse effect on used-vehicle inventory value, but the policy contributed to lower same-store used-unit volume and higher used-vehicle days supply.
- In September 2015, Volkswagen issued a stop-sale order affecting certain diesel vehicles. Six AutoNation Volkswagen stores had fewer than 300 affected vehicles, representing less than 1% of consolidated new-vehicle unit sales for the first nine months.
- Q3 included $9.7 million of gains from property dispositions, partially offset by $2.7 million of non-cash property impairments. The first nine months also included $1.7 million of impairments on assets held and used and $2.8 million of impairments on assets held for sale in continuing operations.
- Key risks include sensitivity to U.S. vehicle sales and gross margins, manufacturer concentration and franchise restrictions, recalls and stop-sale orders, interest-rate exposure, substantial floorplan and other debt, covenant limitations, legal and regulatory proceedings, cybersecurity risks, and potential goodwill or franchise-rights impairments.
- Several California wage-and-hour class actions involving automotive technicians remain pending. Management believes probable and estimable losses are adequately accrued and did not identify a reasonable possibility of material additional loss, while noting that outcomes cannot be predicted with certainty.
Investor Verification Points
- Verify the sustainability of finance and insurance gains, including the effect of the AutoNation Vehicle Protection Plan and product penetration.
- Monitor used-vehicle inventory levels, recall-related holding periods, days supply, and declining used-vehicle gross profit per unit.
- Reconcile reported liquidity after considering $435.0 million of commercial paper, floorplan obligations, letters of credit, and covenant-based borrowing limits.
- Assess the funding and execution risk of the announced 13-store and 12-store acquisitions.
- Review exposure to manufacturer recalls, Volkswagen-related actions, manufacturer incentives, and changes in new-vehicle gross margins.
- Evaluate the timing of the $155.4 million mortgage-facility balloon payment due in November 2017 and the 2018 senior-notes maturity.
- Confirm the final amount and timing of 2015 capital expenditures, property dispositions, impairments, and share repurchases.