AutoNation, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; comparative period is the three months ended March 31, 2011. Financial statements are unaudited. AutoNation operated 260 new-vehicle franchises across 215 stores, predominantly in U.S. Sunbelt markets, with Domestic, Import, and Premium Luxury reportable segments.
Financial Performance and Position
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $3,657.0 million | $3,311.1 million | 10.4% increase |
| Gross profit | $603.0 million | $566.2 million | 6.5% increase |
| Operating income | $148.7 million | $140.0 million | 6.2% increase |
| Income from continuing operations | $73.5 million | $70.3 million | 4.6% increase |
| Net income | $73.0 million | $69.4 million | 5.2% increase |
| Diluted EPS | $0.55 | $0.46 | 19.6% increase |
| Net cash from operating activities | $100.1 million | $153.5 million | Decrease of $53.4 million |
- Revenue growth was led by new vehicles of $1,994.3 million, used vehicles of $918.8 million, parts and service of $599.9 million, and finance and insurance of $130.2 million.
- Retail vehicle sales increased 10.1% to 107,632 units, including 61,516 new vehicles and 46,116 used vehicles. Same-store retail unit sales increased 8.2%.
- Gross margin was approximately 16.5%, compared with 17.1% in the prior-year quarter. Operating margin was approximately 4.1%, compared with 4.2%.
- Finance and insurance gross profit increased 17.6% and finance and insurance gross profit per vehicle increased to $1,210 from $1,132.
- New-vehicle gross profit per unit declined 3.2% to $2,178, while used-vehicle gross profit per unit declined 2.9% to $1,702. The prior-year new-vehicle results benefited from $4.6 million of performance-based premium-luxury manufacturer incentives.
- SG&A increased 6.2% to $432.9 million, but declined slightly as a percentage of gross profit to 71.8% from 72.0%.
- Cash and cash equivalents were $76.3 million at March 31, 2012, compared with $86.6 million at December 31, 2011. Inventory increased to $1,984.6 million from $1,809.2 million, while vehicle floorplan payable increased to $2,016.3 million from $1,898.8 million.
Cash Flow, Debt, and Liquidity
- Operating cash flow was $100.1 million. Working-capital use included a $175.4 million increase in inventory, partially offset by a $49.7 million increase in trade floorplan payable.
- Investing activities used $24.8 million, including $36.3 million of property and equipment purchases. No cash was used for acquisitions in Q1 2012, compared with $64.2 million used for an acquisition in Q1 2011.
- Financing activities used $85.6 million, including $400.5 million of share repurchases. The company issued $350.0 million of 5.5% Senior Notes due 2020, repaid $95.0 million net under its revolving credit facility, and received $67.8 million of net proceeds from non-trade vehicle floorplan borrowings.
- Total non-vehicle debt was $1,918.9 million at March 31, 2012, compared with $1,647.0 million at December 31, 2011. The increase primarily reflected the new 2020 notes and higher capital lease obligations, partly offset by lower revolving-facility borrowings.
- Available liquidity included $76.3 million of cash, $495.0 million of borrowing capacity under the revolving credit facility as limited by the leverage covenant, and $74.0 million of eligible capacity under secured used-vehicle floorplan facilities.
- The company was in compliance with its debt covenants. Actual leverage was 2.98x against a maximum of 3.75x, and actual capitalization was 56.0% against a maximum of 65.0%.
- Management projected approximately $145 million of 2012 capital expenditures, excluding land purchased for future sites and lease buy-outs and net of related asset sales. The company does not anticipate paying cash dividends for the foreseeable future.
Material Changes and Outlook
- U.S. industry new-vehicle sales were estimated at a 14.5 million annualized rate in Q1 2012, up from 13.0 million in Q1 2011. Management raised its 2012 industry forecast to the mid-14 million-unit range but expected sales to remain below pre-recession levels.
- Management expected new-vehicle gross profit per unit to remain relatively stable with Q1 2012 for the remainder of 2012, although below 2011 levels due to improved vehicle supply. The filing cautions that manufacturer incentives and market conditions could cause material quarterly variation.
- New-vehicle inventory increased to 54 days of supply from 50 days at both December 31, 2011 and March 31, 2011. Used-vehicle supply improved to 29 days from 33 days at March 31, 2011.
- Parts and service gross margin declined to 41.7% from 42.9%, partly because of a customer-retention strategy emphasizing lower-margin maintenance services. Management expected this margin to remain relatively stable for the remainder of 2012, but provided no assurance.
- The company repurchased 11.7 million shares for $405.4 million during the quarter. An additional 2.1 million shares were repurchased for $70.8 million between April 1 and April 24, 2012.
- AutoNation redeemed its remaining 7% Senior Notes due 2014 on April 16, 2012, paying $15.2 million including accrued interest.
- Goodwill and franchise rights were scheduled for annual impairment testing as of April 30, 2012. No impairment charges were recorded in Q1 2012.
Risks, Contingencies, and Unusual Items
- Results depend materially on U.S. vehicle sales, vehicle gross margins, consumer credit, manufacturer incentive programs, and the financial condition of franchised manufacturers.
- Substantial variable-rate exposure creates interest-rate risk. A 100-basis-point change was estimated to affect annual floorplan interest expense by approximately $20.2 million and other variable-rate debt expense by approximately $9.0 million.
- Debt agreements contain leverage, capitalization, collateral, and other operating restrictions. Noncompliance could permit acceleration, and cross-default provisions apply to other material indebtedness.
- Goodwill, franchise rights, and other long-lived assets represent significant assets and could require material non-cash impairment charges if operating or market conditions deteriorate.
- The company is involved in various legal proceedings, including customer, employment, class-action, and governmental matters. Management did not expect a material adverse outcome, but stated that adverse resolutions remain possible.
- Surety bonds, letters of credit, and cash deposits totaled $90.1 million at March 31, 2012, including $56.5 million of letters of credit. Estimated remaining rental payment obligations under assigned or subleased leases were approximately $61 million.
Investor Verification Items
- Verify the effect of the Q1 share repurchases and subsequent April repurchases on diluted share count, leverage, and liquidity.
- Monitor new-vehicle inventory levels, manufacturer incentives, and gross profit per vehicle as supply conditions normalize.
- Reconcile the increase in non-vehicle debt with the issuance of the 2020 notes and confirm the post-April redemption of the 2014 notes.
- Review compliance headroom under the 3.75x leverage and 65.0% capitalization covenants, particularly given vehicle floorplan growth and variable-rate exposure.
- Assess the April 30, 2012 goodwill and franchise-rights impairment testing results and any subsequent charges.
- Evaluate whether operating cash flow remains sufficient to fund capital expenditures, inventory requirements, debt service, and continued repurchases.