AutoNation, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed October 21, 2011. AutoNation operated 257 new-vehicle franchises across 214 stores, primarily in U.S. Sunbelt markets. The financial statements are unaudited.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $3,506.5 million | $3,273.9 million | $10,153.9 million | $9,214.8 million |
| Gross profit | $575.2 million | $545.4 million | $1,724.8 million | $1,583.0 million |
| Operating income | $144.1 million | $120.9 million | $428.5 million | $361.9 million |
| Net income | $70.7 million | $56.9 million | $212.0 million | $159.3 million |
| Diluted EPS | $0.48 | $0.38 | $1.42 | $0.99 |
| Operating margin | 4.1% | 3.7% | 4.2% | 3.9% |
- Q3 revenue increased 7.1%, gross profit 5.5%, operating income 19.2%, and net income 24.2% year over year.
- For the first nine months, revenue increased 10.2%, gross profit 9.0%, operating income 18.4%, and net income 33.1%.
- New-vehicle gross profit increased 23.5% in Q3 and 23.6% for the nine months, supported by constrained Japanese-vehicle supply. New-vehicle gross profit per unit rose to $2,454 in Q3 from $1,994.
- Used-vehicle revenue increased 12.2% in Q3 and 13.0% for the nine months, but Q3 gross profit declined 3.9% because of lower wholesale results and a greater mix of value-priced vehicles.
- Parts and service revenue rose 2.5% in Q3 and 4.3% for the nine months, while Q3 gross profit declined 1.5% and the gross margin fell to 41.9% from 43.5%. Warranty-related gross profit was weaker.
- Finance and insurance revenue and gross profit increased 8.9% in Q3 and 12.1% for the nine months; Q3 gross profit per vehicle increased to $1,213 from $1,130.
- SG&A increased 2.1% in Q3 and 6.7% for the nine months, but declined as a percentage of gross profit to 71.5% and 71.7%, respectively.
Cash flow, balance sheet, debt, and liquidity
- Nine-month operating cash flow was $311.1 million, compared with $197.7 million in 2010. Investing cash use was $174.7 million, including $113.8 million of property and equipment purchases and $64.2 million for one franchise acquisition. Financing cash use was $164.2 million.
- Cash decreased to $67.3 million at September 30, 2011, from $95.1 million at December 31, 2010.
- Total vehicle floorplan payable was $1.511 billion, down from $1.866 billion at year-end. New-vehicle inventory was $1.174 billion, or 45 days of supply, compared with 63 days at year-end and 57 days at September 30, 2010.
- Total non-vehicle debt was $1.487 billion, including $1.395 billion of long-term debt net of current maturities. Current maturities increased to $93.2 million from $8.1 million at year-end.
- Revolving-credit availability was $278.9 million after borrowings and letters of credit. Secured used-floorplan availability was $99.5 million based on eligible collateral.
- At September 30, 2011, the leverage ratio was 2.38x against a 3.25x maximum, and the capitalization ratio was 45.9% against a 60.0% maximum. The company reported compliance with its debt covenants.
- Variable-rate exposure included $1.5 billion of vehicle floorplan debt and $833.4 million of other variable-rate debt. A 100-basis-point rate increase would raise estimated annual interest expense by approximately $15.1 million and $8.3 million, respectively.
Material changes and unusual items
- Results benefited from the absence of the $19.6 million pretax loss on debt extinguishment recorded in the first nine months of 2010.
- Japanese earthquake and tsunami-related supply constraints reduced Q3 import-vehicle unit sales but increased average selling prices and margins. Management expected improving Japanese supply in Q4 to reduce those margin benefits.
- Performance-based manufacturer incentives related to premium-luxury vehicles previously sold increased first-nine-month gross profit and operating income by $6.0 million; remaining incentives were expected in Q4.
- AutoNation repurchased 10.8 million shares for $365.6 million during the first nine months, leaving $117.6 million authorized at September 30. Through October 19, it repurchased another 1.5 million shares and had $315.7 million available after an additional $250 million authorization.
- Discontinued operations produced a $2.3 million nine-month loss, primarily from expected real-estate losses and carrying costs. Assets held for sale included $81.9 million in continuing operations and $49.5 million in discontinued operations.
Outlook, risks, and contingencies
- Management maintained a 2011 U.S. industry new-vehicle sales assumption in the mid-12-million-unit range and expected lower Japanese-vehicle margins as supply normalized.
- Management projected approximately $145 million of 2011 capital expenditures, excluding acquisition-related spending, land purchases, and lease buy-outs.
- Management believed cash, operating cash flow, revolving facilities, and used-floorplan facilities would fund working capital, debt service, taxes, commitments, and seasonal needs. It was monitoring debt markets for potential refinancing but provided no assurance that a transaction would occur.
- Key risks include economic and consumer-demand weakness, manufacturer production disruptions or financial distress, manufacturer incentive changes, interest-rate increases, substantial indebtedness and covenant restrictions, goodwill or franchise-rights impairment, adverse weather or natural disasters, legal proceedings, and regulatory changes.
- The company was involved in ordinary-course litigation and regulatory matters and did not expect a material adverse effect, although unfavorable resolutions could be material. Assigned or sublet lease obligations were estimated at approximately $65 million through 2034.
- No goodwill or franchise-rights impairment was recorded in 2011. The company stated that actual results could differ materially from estimates used for impairment, taxes, self-insurance, legal matters, and other contingencies.
Investor verification points
- Verify whether Japanese-vehicle supply normalization reduced new-vehicle gross profit per unit after Q3 and whether the remaining manufacturer incentives were recognized in Q4.
- Monitor new- and used-vehicle volumes, inventory days, wholesale used-vehicle pricing, and the sustainability of elevated vehicle margins.
- Assess cash generation after share repurchases, capital expenditures, acquisitions, and required debt maturities.
- Review refinancing needs for the 2012 and 2014 credit-facility tranches and compliance headroom under the 3.25x leverage and 60.0% capitalization limits.
- Evaluate exposure to LIBOR-based floorplan and other variable-rate debt, manufacturer concentration, goodwill and franchise-rights valuation, litigation, and lease or regulatory contingencies.