AutoNation, Inc. — Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 371 new-vehicle franchises across 261 stores as of September 30, 2016. The company sells new and used vehicles, parts and service, and finance and insurance products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $5,567.5 million | $5,353.7 million | $16,128.5 million | $15,522.2 million |
| Gross profit | $836.4 million | $830.3 million | $2,504.1 million | $2,449.3 million |
| Operating income | $219.0 million | $235.7 million | $652.9 million | $672.7 million |
| Net income | $107.3 million | $118.5 million | $315.2 million | $345.1 million |
| Diluted EPS | $1.05 | $1.04 | $3.02 | $3.01 |
| Operating margin | 3.9% | 4.4% | 4.0% | 4.3% |
| Gross margin | 15.0% | 15.5% | 15.5% | 15.8% |
Revenue increased 4.0% in the quarter and 3.9% for the nine months, while gross profit increased 0.7% and 2.2%, respectively. Higher SG&A, depreciation and amortization, floorplan interest, and other interest expense pressured profitability. SG&A was $591.3 million in Q3 and $1,765.2 million for the nine months, representing 70.7% and 70.5% of gross profit.
- Q3 revenue: new vehicles $3,195.9 million, used vehicles $1,276.8 million, parts and service $843.8 million, and finance and insurance $229.6 million.
- Q3 gross profit: new vehicles $158.2 million, used vehicles $77.2 million, parts and service $363.8 million, and finance and insurance $229.6 million.
- Retail new-vehicle unit sales declined 1.4% in Q3 and 0.1% for the nine months; used-vehicle retail unit sales declined 2.8% and 1.7%, respectively.
- Parts and service remained the strongest growth and margin contributor, with revenue up 7.7% in Q3 and 8.4% for the nine months.
- Finance and insurance gross profit per vehicle increased 3.1% in Q3 and 4.7% for the nine months.
Cash flow, balance sheet, debt, and liquidity
- Cash provided by operating activities was $478.8 million for the nine months, compared with $475.3 million in 2015.
- Investing cash use was $456.8 million, including $187.6 million of property and equipment purchases and $362.5 million of acquisitions, partly offset by $87.5 million from divestitures.
- Financing cash use was $33.9 million, including $470.6 million of share repurchases. Cash declined from $74.1 million at December 31, 2015 to $62.2 million at September 30, 2016.
- Long-term debt, net of current maturities, was $1,769.5 million; commercial paper outstanding was $975.0 million at a weighted-average rate of 1.31% and a weighted-average remaining term of 26 days.
- Vehicle floorplan payable was $3,539.5 million, consisting of $2,096.6 million trade and $1,442.9 million non-trade payable.
- Revolving-credit availability was limited to approximately $1.0 billion by the leverage covenant. After considering commercial paper and letters of credit, management reported approximately $780.9 million of effective revolving-facility liquidity, plus $62.2 million of cash.
- The leverage ratio was 2.75x versus a maximum of 3.75x, and the capitalization ratio was 62.6% versus a maximum of 70.0%; the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Reported revenue benefited from acquisitions, but same-store revenue declined 1.2% in both Q3 and the nine-month period.
- Same-store new-vehicle unit sales declined 6.2% in Q3 and 5.0% for the nine months, while same-store new-vehicle gross profit per vehicle declined 6.8% and 5.6%, respectively.
- Same-store used-vehicle unit sales declined 6.9% in Q3 and 6.3% for the nine months; same-store used-vehicle gross profit declined 10.7% and 13.1%.
- Manufacturer incentive and marketing programs increased competitive pressure and compressed new-vehicle margins. New-vehicle gross profit per vehicle declined 6.1% in Q3 and 5.5% for the nine months.
- AutoNation acquired 18 stores during the nine months, compared with eight stores in the prior-year period, and divested 11 stores. The acquisitions were not material individually or in the aggregate to reported financial condition or results.
- Share repurchases increased to $470.6 million for 9.9 million shares, compared with $209.1 million for 3.5 million shares in 2015. The weighted-average repurchase price declined to $47.48 from $60.54.
Guidance, outlook, commentary, risks, and unusual items
- Management expected full-year 2016 U.S. industry new-vehicle unit sales to exceed 17 million, with the industry selling rate relatively flat versus 2015. No formal earnings guidance was provided.
- Management expected SG&A as a percentage of gross profit to increase by approximately 100 basis points sequentially in Q4 2016 because of continued gross-profit pressure and brand-extension expenses.
- The company plans to invest potentially more than $500 million over several years in AutoNation USA used-vehicle centers, branded parts and accessories, collision centers, and automotive auctions. Five of 25 identified AutoNation USA sites were expected to open in 2017, and the one-price used-vehicle model was planned for all stores by the end of Q2 2017.
- The Takata airbag inflator recall was estimated to reduce Q3 results by approximately $10 million, or $6 million after tax and $0.06 per share. Approximately 20% of used-vehicle inventory was subject to the company’s open-recall policy at September 30, 2016.
- Q3 included $11.8 million of net gains from divestitures, $5.5 million of payments for waiving certain franchise protest rights, and $6.4 million of non-cash property impairments. Nine-month continuing-operations impairment charges on assets held for sale totaled $12.1 million.
- Key risks include U.S. vehicle demand and margins, manufacturer financial health and incentive programs, recalls, interest-rate exposure, substantial indebtedness, covenant limitations, acquisitions and strategic-investment execution, litigation, regulation, cybersecurity, weather events, and potential goodwill or franchise-rights impairment.
- A 100-basis-point change in rates was estimated to change annual floorplan interest expense by approximately $35.4 million and commercial-paper interest expense by approximately $9.8 million.
Important facts for investors to verify
- Whether new- and used-vehicle margin compression and manufacturer incentive programs persist.
- The duration, inventory impact, manufacturer support, and ultimate cost of the Takata recall and other open safety recalls.
- Execution, spending, returns, and customer adoption for the planned brand-extension initiatives.
- Commercial-paper refinancing capacity, short remaining maturities, interest-rate sensitivity, and the November 2017 mortgage-facility balloon payment of $155.4 million.
- Whether acquisitions offset same-store declines without further weakening leverage, liquidity, or SG&A efficiency.
- Potential impairment, legal, regulatory, environmental, and manufacturer-related contingencies; the filing states no material probable and estimable additional legal loss was indicated, but outcomes cannot be predicted with certainty.