AutoNation, Inc. Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer. For the quarter ended September 30, 2014, it operated 273 new-vehicle franchises across 229 stores, selling 34 brands primarily in Sunbelt markets. Reported results cover the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $4,909.0 million | $4,470.8 million | $14,061.0 million | $12,993.7 million |
| Gross profit | $752.9 million | $696.6 million | $2,205.2 million | $2,056.7 million |
| Operating income | $207.4 million | $187.2 million | $594.3 million | $537.5 million |
| Net income | $106.5 million | $92.6 million | $302.0 million | $265.5 million |
| Diluted EPS | $0.90 | $0.75 | $2.51 | $2.15 |
| Operating margin | 4.2% | 4.2% | 4.2% | 4.1% |
- Revenue increased 9.8% in Q3 and 8.2% for the first nine months. Growth was led by new vehicles, premium luxury operations, used vehicles, parts and service, and finance and insurance.
- Gross profit increased 8.1% in Q3 and 7.2% year to date. Parts and service and finance and insurance generated approximately 66% of nine-month gross profit despite representing approximately 19% of revenue.
- New-vehicle revenue increased 10.2% in Q3 and 9.2% year to date, while new-vehicle gross profit per retailed unit declined 7.1% and 3.4%, respectively.
- Used-vehicle revenue increased 9.9% in Q3 and 5.5% year to date; used-vehicle gross profit per retailed unit increased 6.2% and 6.5%.
- Parts and service revenue increased 9.7% in Q3 and 7.5% year to date, with gross margins of 42.3% and 42.6%, respectively.
- Finance and insurance revenue and gross profit increased 12.3% in Q3 and 9.9% year to date. Gross profit per vehicle retailed rose to $1,401 from $1,350 in Q3.
- SG&A increased 7.7% in Q3 and 6.5% year to date, but declined as a percentage of gross profit to 69.4% and 70.2%, respectively.
Cash flow, debt and liquidity
- Net cash provided by operating activities was $452.9 million for the first nine months, compared with $468.3 million in 2013. The decrease primarily reflected higher working-capital requirements, partly offset by higher earnings.
- Investing cash flow was $(149.2) million, including $151.9 million of property and equipment purchases and $13.3 million of net cash used for acquisitions.
- Financing cash flow was $(305.4) million, including $378.3 million of common-stock repurchases, $53.0 million of net payments on non-trade vehicle floorplan debt, and $110.0 million of net revolver borrowings.
- Cash and cash equivalents were $67.5 million at September 30, 2014, compared with $69.2 million at December 31, 2013.
- Non-vehicle debt totaled $1,933.0 million, including $410.0 million outstanding under the revolving credit facility. Total vehicle floorplan payable was $2,774.7 million.
- Available liquidity included $744.4 million under the revolving credit facility and $50.2 million under secured used-vehicle floorplan facilities.
- Debt covenants were satisfied at quarter-end: leverage ratio was 2.19x versus a maximum of 3.75x, and capitalization ratio was 57.1% versus a maximum of 65.0%.
- Management projected approximately $190 million of 2014 capital expenditures, excluding land purchases and lease buy-outs and net of related asset sales.
Material changes versus the prior comparable period
- Retail new-vehicle unit sales increased 8.8% in Q3 and 7.8% for the first nine months; same-store new-vehicle units increased 7.4% and 6.0%.
- Premium Luxury was the fastest-growing reportable segment, with revenue up 14.1% in Q3 and 13.6% year to date and segment income up 13.2% and 15.7%.
- Domestic segment income increased 19.5% in Q3 and 11.7% year to date. Import segment income increased only 6.1% and 1.6%, partly because of lower new-vehicle gross profit per unit.
- New-vehicle inventory declined to $2.1 billion and 57 days of supply from $2.3 billion and 62 days at December 31, 2013. Used-vehicle inventory increased to $394.7 million but days supply declined to 32 from 35.
- Share repurchases increased materially to $415.7 million for the first nine months, versus $4.9 million in 2013. The company repurchased an additional $68.5 million of shares through October 27, 2014.
- Operating results benefited from $8.1 million of net gains related to business and property dispositions, including the divestiture of the customer lead distribution business and an Import store, plus a $4.0 million legal-settlement gain.
Outlook, commentary, risks and unusual items
- Management expected 2015 U.S. industry new-vehicle sales to exceed 17 million units, supported by replacement demand, an aging vehicle fleet, affordable credit and new product offerings. Actual sales may differ materially.
- Management expected continued benefits to parts and service from manufacturer recalls, customer retention, growth in recent-model-year vehicles and manufacturer-paid maintenance.
- The company is investing more than $100 million over several years in digital traffic generation and an integrated in-store and digital customer experience.
- Interest-rate exposure is significant: a 100-basis-point change was estimated to affect annual floorplan interest expense by approximately $27.7 million and other variable-rate debt interest expense by approximately $9.1 million.
- Key risks include U.S. automotive demand and vehicle-margin volatility, dependence on manufacturers and their captive lenders, substantial indebtedness and covenant restrictions, interest-rate changes, goodwill and franchise-right impairment, legal proceedings, regulatory changes, cybersecurity, adverse weather and natural disasters.
- California wage-and-hour class actions and other litigation remain pending. Management believes probable and estimable losses are adequately accrued and does not currently expect a material adverse effect, but unfavorable outcomes could be material.
- Goodwill and franchise-right assessments did not identify impairment requiring a charge. The company recorded non-cash impairment charges of $0.3 million for continuing-operation assets held for sale and $0.2 million for discontinued-operation assets.
- The company did not pay cash dividends and did not anticipate paying dividends for the foreseeable future.
- Management concluded that disclosure controls were effective and identified no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether new-vehicle gross-profit compression persists as industry volumes grow.
- Whether parts and service gains from recalls and customer-pay operations are recurring or normalize.
- The effect of higher revolver borrowings, floorplan balances and future interest-rate increases on cash flow and margins.
- Compliance with leverage and capitalization covenants while continuing share repurchases, acquisitions and capital investment.
- The timing and terms of refinancing debt maturing in 2016 through 2020, including the $155.4 million mortgage balloon payment due in November 2017.
- Potential exposure from litigation, regulatory changes, manufacturer concentration and goodwill or franchise-right impairment.
- Execution and spending against the planned digital and technology investments and approximately $190 million 2014 capital-expenditure plan.