AutoNation, Inc. 2014 Q2 Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 270 new-vehicle franchises across 229 stores and 33 brands as of June 30, 2014. The filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Revenue is generated primarily from new and used vehicles, parts and service, and finance and insurance products.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $4,788.5 million, up 8.2% | $9,152.0 million, up 7.4% |
| Gross profit | $744.9 million, up 7.0% | $1,452.3 million, up 6.8% |
| Gross margin | 15.6%, versus 15.7% | 15.9%, versus 16.0% |
| Operating income | $197.8 million, up 9.3% | $386.9 million, up 10.4% |
| Operating margin | 4.1%, versus 4.1% | 4.2%, versus 4.1% |
| Net income | $100.4 million, versus $89.9 million | $195.5 million, versus $172.9 million |
| Diluted EPS | $0.83, versus $0.73 | $1.61, versus $1.40 |
- Six-month revenue included $5,165.5 million from new vehicles, $2,132.0 million from used vehicles, $1,375.8 million from parts and service, and $357.8 million from finance and insurance.
- Six-month vehicle retail unit sales increased 5.1% to 256,569, including a 7.3% increase in new-vehicle units and a 2.1% increase in used-vehicle units.
- Parts and service gross profit increased 6.3% to $587.5 million, with a 42.7% margin. Finance and insurance gross profit increased 8.6% to $357.8 million.
- Cash provided by operating activities was $210.9 million, compared with $278.8 million in the prior-year period. Capital expenditures were $87.8 million, and net cash used in investing activities was $95.3 million.
- Cash and cash equivalents were $68.5 million at June 30, 2014, compared with $69.2 million at December 31, 2013.
Debt, liquidity, and capital allocation
- Total non-vehicle debt was $1,883.2 million, including $365.0 million drawn on the revolving credit facility, $500.0 million under the term loan, $746.7 million of senior notes, $190.1 million of mortgage debt, and $81.4 million of capital leases and other debt.
- Vehicle floorplan payable totaled $2,869.1 million, consisting of $1,977.7 million of trade floorplan debt and $891.4 million of non-trade floorplan debt.
- Available revolving-credit capacity was $789.4 million, and available capacity under secured used-vehicle floorplan facilities was $50.6 million.
- The company reported compliance with its debt covenants. Actual leverage was 2.19x versus a 3.75x maximum, and capitalization was 56.6% versus a 65.0% maximum.
- AutoNation repurchased 3.6 million shares for $179.8 million during the first six months, with $335.9 million remaining under the authorization. No cash dividends were declared or paid.
Material changes versus the prior comparable period
- Revenue and operating income increased, supported by higher new-vehicle volume, improved used-vehicle gross profit per unit, stronger finance and insurance performance, and growth in parts and service.
- Premium Luxury was the strongest segment: six-month revenue increased 13.4% and segment income increased 17.0%. Domestic revenue and segment income increased 6.4% and 7.7%, respectively. Import revenue increased 4.3%, while Import segment income declined 0.7% because of higher variable expenses and lower new-vehicle gross profit per unit.
- SG&A increased 6.0% to $1,025.3 million, but declined to 70.6% of gross profit from 71.1%. The company continued investing in its retail brand and online capabilities.
- Operating cash flow declined $67.9 million, primarily because of higher working-capital requirements, including a $152.4 million reduction in trade floorplan payable, partially offset by higher earnings and favorable inventory and receivables changes.
- The company repurchased substantially more stock than in the prior-year period, when only $4.9 million was spent on repurchases.
Guidance, outlook, commentary, risks, and unusual items
- Management anticipated U.S. industry new-vehicle unit sales growth of 3% to 5% for 2014, implying more than 16 million industry units, while noting that actual results could differ materially.
- Management expected approximately $180 million of 2014 capital expenditures, excluding land purchases and lease buyouts and net of related asset sales.
- Management expected investments in digital traffic generation and the end-to-end customer experience to exceed $100 million in aggregate over several years.
- The company recorded an $8.4 million pre-tax gain, primarily from divesting its customer lead distribution business, and a $4.0 million gain related to a legal settlement during the second quarter. It also recorded $0.3 million of non-cash impairment charges on continuing-operations assets held for sale and $0.2 million related to discontinued operations.
- AutoNation identified sensitivity to U.S. economic conditions, vehicle sales volumes, manufacturer incentives and viability, interest rates, debt covenants, goodwill and franchise-rights impairment, legal and regulatory matters, cybersecurity, natural disasters, and reliance on major manufacturers and captive finance companies.
- A 100-basis-point change in interest rates would have changed estimated annual floorplan interest expense by approximately $28.7 million and other variable-rate debt expense by approximately $8.7 million at June 30, 2014.
- The company was defending several California wage-and-hour class actions and other legal matters. Management stated that probable and estimable losses were adequately accrued and that no material additional loss was reasonably possible, while noting that an unfavorable resolution could materially affect results.
- One store and related assets were acquired in Mobile, Alabama on July 10, 2014, after quarter-end; management stated the acquisition was not expected to materially change reported historical results on a pro forma basis.
Important facts for investors to verify
- Whether new-vehicle industry volume achieves the company’s 3%–5% full-year expectation and whether new-vehicle margins remain under pressure.
- Whether the recent improvement in used-vehicle, finance and insurance, parts and service, and Premium Luxury performance is sustained.
- The effect of continued digital and facility investments on SG&A, capital expenditures, operating cash flow, and returns on invested capital.
- Liquidity and covenant headroom in light of $2.9 billion of floorplan debt, $1.9 billion of non-vehicle debt, variable-rate exposure, and continued share repurchases.
- Potential outcomes of legal proceedings, regulatory changes affecting automotive finance and insurance products, and manufacturer concentration risks.
- Future impairment risk for $1,257.8 million of goodwill and $335.0 million of net intangible assets, as well as the carrying value of assets held for sale.