AutoNation, Inc. — Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 263 new-vehicle franchises across 222 stores as of March 31, 2013. It sells new and used vehicles, parts and service, and finance and insurance products. This filing covers the three months ended March 31, 2013, compared with the first quarter of 2012. The financial statements are unaudited.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $4,096.4 million | $3,657.0 million | 12.0% |
| Gross profit | $664.0 million | $603.0 million | 10.1% |
| Operating income | $169.4 million | $148.7 million | 13.9% |
| Income from continuing operations | $83.2 million | $73.5 million | 13.2% |
| Net income | $83.0 million | $73.0 million | 13.7% |
| Diluted EPS | $0.67 | $0.55 | 21.8% |
| Operating cash flow | $235.1 million | $100.1 million | 135.0% |
- Revenue increased across all major categories: new vehicles rose 13.2%, used vehicles 9.9%, parts and service 6.1%, and finance and insurance 19.5%.
- Retail vehicle sales increased 9.3% to 117,664 units, including 67,159 new vehicles and 50,505 used vehicles.
- Gross margin was approximately 16.2%, operating margin approximately 4.1%, and net margin approximately 2.0%, based on reported revenue.
- Parts and service and finance and insurance represented approximately 19% of revenue but approximately 64% of gross profit, underscoring their importance to profitability.
- Cash flow from investing activities was negative $39.8 million, including $37.2 million of property and equipment purchases and $2.8 million used for acquisitions.
- Cash flow from financing activities was negative $218.7 million, primarily reflecting a $120.0 million net repayment under the revolving credit facility and $68.3 million of net payments on non-trade vehicle floorplan borrowings.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $46.3 million at March 31, 2013, down from $69.7 million at December 31, 2012.
- Inventory was $2.50 billion, including $2.03 billion of new vehicles and $327.3 million of used vehicles. New-vehicle inventory represented 63 days of supply, up from 54 days at March 31, 2012.
- Total vehicle floorplan payable was $2.54 billion, consisting of $1.84 billion of trade floorplan payable and $699.3 million of non-trade payable.
- Total debt before current maturities was $1.96 billion; long-term debt, net of current maturities, was $1.94 billion. Debt included $395.8 million of 6.75% Senior Notes due 2018, $350.0 million of 5.5% Senior Notes due 2020, a $500.0 million term loan, and $420.0 million drawn on the revolving facility.
- Revolving credit availability was $724.0 million after borrowings and letters of credit. Eligible availability under secured used-vehicle floorplan facilities was $109.1 million.
- The company reported compliance with its debt covenants: leverage ratio of 2.59x versus a 3.75x maximum and capitalization ratio of 57.6% versus a 65.0% maximum.
- Shareholders’ equity increased to $1.79 billion from $1.69 billion at year-end 2012. The company repurchased approximately 0.1 million shares for $2.2 million during the quarter.
Material changes versus the prior comparable period
- Operating performance improved, supported by higher vehicle volumes, better consumer credit conditions, replacement demand, new product offerings, and fourth-quarter 2012 acquisitions.
- Finance and insurance gross profit per vehicle increased 9.3% to $1,322, while new-vehicle gross profit per vehicle declined 3.1% to $2,110 and used-vehicle gross profit per vehicle declined 3.0% to $1,651.
- Parts and service gross margin improved to 42.8% from 41.7%, benefiting from higher warranty, vehicle-preparation, and customer-pay service gross profit.
- SG&A increased 9.3% to $473.3 million, but declined to 71.3% of gross profit from 71.8%. The quarter included $6.5 million of incremental, non-recurring rebranding costs.
- Floorplan interest expense increased to $12.9 million from $10.7 million, and other interest expense increased to $22.3 million from $20.5 million.
- Net new-vehicle inventory carrying benefit declined to $6.3 million from $6.8 million as higher floorplan interest expense more than offset increased manufacturer floorplan assistance.
- Shares outstanding declined, with weighted-average diluted shares falling to 123.0 million from 132.3 million, contributing to EPS growth.
Guidance, outlook, commentary, and risks
- Management expected full-year U.S. industry new-vehicle sales to be at the mid-15-million-unit level, above 2012 but below pre-recession levels.
- Management expected parts and service demand to benefit over the next several years as the recent-model-year vehicle service base gradually returns toward pre-recession levels.
- The rebranding of Domestic and Import stores under the AutoNation name began in the first quarter and was expected to be completed in the second quarter. Approximately $11.5 million of additional rebranding costs were expected in the second quarter.
- Management projected approximately $170 million of 2013 capital expenditures, excluding land purchased for future sites and lease buy-outs and net of related asset sales.
- AutoNation had agreements to acquire three dealerships, subject to manufacturer approval and customary closing conditions, with expected completion in the second quarter of 2013.
- Key risks include sensitivity to U.S. economic conditions, vehicle sales volumes and gross margins; dependence on major manufacturers and their incentive programs; substantial indebtedness and variable-rate floorplan and credit facilities; covenant restrictions; goodwill and franchise-right impairment risk; legal and regulatory proceedings; manufacturer concentration; natural disasters; and information-system or security failures.
- A 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $25.4 million and annual interest expense on other variable-rate debt by approximately $9.2 million.
- Legal proceedings are routine to the business. Management stated that probable and reasonably estimable losses were adequately accrued and that no material additional loss was reasonably possible based on information available at quarter-end, although outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Confirm the outcome of the April 30, 2013 annual impairment tests for goodwill and franchise rights, given the significant balances of goodwill and intangible assets.
- Monitor new-vehicle inventory days and floorplan borrowings, which increased alongside higher sales volumes.
- Assess whether the planned second-quarter rebranding costs remained within the approximately $11.5 million estimate and whether the initiative produced expected benefits.
- Review completion and financing of the three planned dealership acquisitions.
- Track covenant headroom, variable interest rates, debt maturities, and the company’s ability to maintain liquidity while funding capital expenditures and acquisitions.
- Evaluate sustainability of earnings growth given declining new- and used-vehicle gross profit per unit and the increased contribution from finance and insurance.