AutoNation, Inc. — Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer. As of September 30, 2012, it operated 261 new-vehicle franchises across 215 stores, primarily in Sunbelt metropolitan markets. The company sells new and used vehicles, parts and service, and finance and insurance products through Domestic, Import, and Premium Luxury segments. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $3,933.8 million | $3,506.5 million | $11,495.3 million | $10,153.9 million |
| Gross profit | $622.6 million | $575.2 million | $1,853.6 million | $1,724.8 million |
| Operating income | $163.7 million | $144.1 million | $476.6 million | $428.5 million |
| Net income | $81.6 million | $70.7 million | $233.2 million | $212.0 million |
| Diluted EPS | $0.66 | $0.48 | $1.84 | $1.42 |
| Gross margin | 15.8% | 16.4% | 16.1% | 17.0% |
| Operating margin | 4.2% | 4.1% | 4.1% | 4.2% |
Q3 revenue increased 12.2%, gross profit 8.2%, operating income 13.6%, and net income 15.4% year over year. Nine-month revenue increased 13.2%, gross profit 7.5%, operating income 11.2%, and net income 10.0%. The nine-month effective tax rate was 38.6%, compared with 38.5% in 2011.
New-vehicle revenue increased 19.1% in Q3 and 18.8% for nine months, driven primarily by higher unit volume. New-vehicle units rose 21.4% in Q3 and 20.1% for nine months, while new-vehicle gross profit per unit declined 13.7% and 11.8%, respectively. Finance and insurance gross profit increased 20.6% in Q3 and 20.8% for nine months. Parts and service gross margin was 42.2% in Q3 and 42.0% for nine months.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $311.7 million for the first nine months of 2012, essentially unchanged from $311.1 million in 2011.
- Investing cash outflow was $113.8 million, compared with $174.7 million in 2011, primarily reflecting lower acquisition activity. Capital expenditures, including operating lease buy-outs, were $122.8 million.
- Financing cash outflow was $185.9 million, including $538.3 million of share repurchases, net repayments of $100.0 million on the revolving credit facility, and $104.9 million of net proceeds from non-trade vehicle floorplan borrowings.
- Cash increased to $98.6 million at September 30, 2012, from $86.6 million at December 31, 2011.
- Total vehicle floorplan payable was $2.20 billion, up from $1.90 billion at year-end 2011. Inventory was $2.14 billion, including $1.72 billion of new vehicles.
- Total non-vehicle debt was $1.89 billion, versus $1.65 billion at year-end 2011. The increase primarily reflects the $350.0 million issuance of 5.5% senior notes due 2020, partly offset by redemption of the $14.7 million 7% senior notes due 2014 and lower revolving borrowings.
- Revolving-credit availability was $694.9 million, limited by the leverage covenant. Secured used-vehicle floorplan availability was $93.0 million. Including cash, disclosed liquidity sources totaled approximately $886.5 million.
- The company was in compliance with debt covenants: leverage ratio was 2.74x versus a maximum of 3.75x, and capitalization ratio was 56.4% versus a maximum of 65.0%.
Material changes versus the prior comparable period
- Industry U.S. new-vehicle sales increased to a 14.5 million-unit seasonally adjusted annual rate from 12.6 million units, aided by replacement demand, improved Japanese-brand inventory, consumer credit, and new product introductions.
- Import new-vehicle units increased 34.7% in Q3 and 27.0% for nine months; Import revenue increased 20.1% and 18.2%, respectively.
- New-vehicle days supply increased to 58 days from 45 days a year earlier, and new-vehicle inventory units increased to 51,656 from 33,914.
- New-vehicle gross margin declined to 6.5% in Q3 from 7.3%, reflecting lower pricing and the absence of prior-year benefits from constrained Japanese-brand supply. Nine-month margin also declined to 6.6% from 7.4%.
- SG&A increased 5.9% in Q3 and 5.7% for nine months, but declined as a percentage of gross profit to 70.0% and 70.5%, respectively, from 71.5% and 71.7%.
- The company repurchased 15.4 million shares for $531.6 million during the first nine months, compared with 10.8 million shares for $365.6 million in 2011. No shares were repurchased under the authorization during Q3; $368.2 million remained available at September 30.
- Shareholders’ equity declined to $1.64 billion from $1.89 billion at year-end, primarily due to share repurchases.
Guidance, outlook, risks, and unusual items
- Management maintained its 2012 industry new-vehicle sales forecast at the mid-14 million-unit level, above 2011 but below pre-recession levels. Fourth-quarter demand could be affected by U.S. economic uncertainty and the potential “fiscal cliff.”
- Management expects the company’s primary service base to begin increasing in 2013, but noted that a return to pre-recession levels could take several years.
- Management projected approximately $155 million of 2012 capital expenditures, excluding land purchases for future sites and lease buy-outs and net of related asset sales.
- The company recorded a $4.2 million non-cash franchise-rights impairment charge during the first nine months, or $2.6 million after tax. It also recorded $0.3 million of impairment on long-lived assets held and used and $0.1 million related to discontinued operations.
- Finance and insurance results included favorable adjustments of $1.3 million in Q3 and $5.1 million for nine months related to certain product maintenance contracts.
- Discontinued operations generated losses of $0.3 million in Q3 and $1.2 million for nine months. Assets held for sale included $77.4 million in continuing operations and $49.4 million in discontinued operations.
- Key risks include economic sensitivity of vehicle demand and margins, manufacturer concentration and incentives, high vehicle floorplan and other debt, variable interest rates, covenant restrictions, impairment of goodwill or franchise rights, litigation, regulatory changes, adverse weather or natural disasters, and information-system or data-security failures.
- A 100-basis-point interest-rate increase would increase estimated annual interest expense by approximately $22.0 million on vehicle floorplan payable and $9.0 million on other variable-rate debt.
- Management stated that cash, operating cash flow, revolving-credit availability, and used-vehicle floorplan capacity should be sufficient for foreseeable working-capital, debt-service, tax, capital-expenditure, and other requirements.
Most important facts for investors to verify
- Whether higher new-vehicle volume can offset lower new-vehicle gross profit per unit and elevated 58-day inventory supply.
- The sustainability of the unusually strong finance and insurance growth, including the $5.1 million favorable maintenance-contract adjustment for the first nine months.
- Debt and liquidity capacity after substantial share repurchases, including compliance with the 3.75x leverage and 65.0% capitalization limits.
- Exposure to LIBOR-based floorplan and corporate debt and the effect of future interest-rate changes.
- Potential additional impairment of franchise rights, goodwill, or real estate held for sale.
- Resolution and potential financial impact of disclosed litigation, tax examinations, lease guarantees, regulatory matters, and manufacturer-related concentration risks.
- Execution of the approximately $155 million 2012 capital-spending plan and the timing of service-base recovery.