AutoNation, Inc. — Form 10-Q Summary
Business Context and Reporting Period
AutoNation is a U.S. automotive retailer operating 344 new-vehicle franchises across 248 stores, plus collision centers, used-vehicle stores, auctions, parts distribution, auto finance, and mobile repair operations. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $6,398.7 million | $6,752.8 million | Down 5.2% |
| Gross profit | $1,286.4 million | $1,308.9 million | Down 1.7% |
| Gross margin | 20.1% | 19.4% | Up 70 bps |
| Operating income | $443.3 million | $519.0 million | Down 14.6% |
| Operating margin | 6.9% | 7.7% | Down 80 bps |
| Net income | $288.7 million | $362.1 million | Down 20.3% |
| Diluted EPS | $6.07 | $5.78 | Up 5.0% |
| Net cash from operating activities | $510.0 million | $643.2 million | Down $133.2 million |
Revenue mix was 45.8% new vehicles, 31.8% used vehicles, 17.0% parts and service, 5.2% finance and insurance, and 0.2% other. Parts and service generated 39.7% of gross profit, while finance and insurance generated 25.8%.
- New-vehicle revenue increased 4.4%, but gross profit declined 16.8%; gross profit per vehicle retailed fell 14.8% to $5,210 as supply improved.
- Used-vehicle revenue declined 21.0% and retail unit sales fell 15.3%, but used-vehicle gross profit increased 13.0% because gross profit per vehicle rose 35.2% to $2,117.
- Parts and service revenue increased 8.6% and gross profit increased 10.8%, with benefits from customer-pay and warranty service.
- Finance and insurance gross profit declined 8.7% because of lower vehicle unit volume, partially offset by higher gross profit per vehicle.
- SG&A increased 5.6% to $782.7 million, or 60.8% of gross profit versus 56.6% in the prior-year quarter.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $58.3 million at March 31, 2023, versus $72.6 million at December 31, 2022. Cash, cash equivalents, and restricted cash totaled $83.4 million.
- Operating cash flow was $510.0 million. Investing cash outflow was $305.9 million, including $191.0 million for acquisitions and $95.3 million for property and equipment. Financing cash outflow was $216.1 million, primarily reflecting $315.7 million of share repurchases and $67.3 million of non-trade floorplan repayments, partly offset by $235.0 million of commercial paper proceeds.
- Total vehicle floorplan payable was $2.19 billion, up from $2.11 billion at year-end. The weighted-average interest rate on new and used vehicle floorplan borrowings was 6.5%, versus 5.9% at December 31, 2022.
- Long-term debt, net of current maturities, was $3.58 billion. Commercial paper outstanding was $285.0 million at a weighted-average annual rate of 5.55%, with a weighted-average remaining term of three days.
- Non-recourse debt was $283.4 million, net of current maturities, secured by auto loans receivable. Auto loans receivable, net, totaled $326.9 million, with an allowance for expected credit losses of $61.3 million.
- Available liquidity included $58.3 million of cash, approximately $1.80 billion under the revolving credit facility, and $0.4 million of secured used-vehicle floorplan availability. The company reported compliance with its financial covenants; actual leverage was 1.82x versus a maximum of 3.75x, and actual capitalization was 61.3% versus a maximum of 70.0%.
Material Changes Versus the Prior Comparable Period
- Overall revenue and earnings declined, primarily due to lower used-vehicle volume, reduced new-vehicle gross profit per vehicle, lower finance and insurance gross profit, higher interest costs, and increased SG&A.
- Retail new-vehicle unit sales declined 2.4%, while used-vehicle unit sales declined 15.3%. New-vehicle inventory increased to 21,176 units from 9,055 a year earlier, but remained historically low because of manufacturer supply-chain disruptions.
- Floorplan interest expense increased to $27.1 million from $5.2 million, and other interest expense increased to $41.1 million from $29.6 million, reflecting higher rates and debt balances.
- AutoNation repurchased 2.4 million shares for $305.0 million at an average price of $126.37 per share. Repurchases reduced period-end shares outstanding to 45.6 million from 59.7 million a year earlier. Approximately $879.4 million remained authorized for future repurchases.
- The company acquired RepairSmith, a mobile automotive repair and maintenance business, and one store. The acquisitions were not material to reported results. Goodwill increased by $130.1 million, principally related to RepairSmith.
- Discontinued operations contributed $0.9 million of after-tax income, primarily from a real-estate sale related to a previously closed store.
Outlook, Management Commentary, Risks, and Unusual Items
Management stated that cash, operating cash flow, available revolving credit, commercial paper capacity, and floorplan facilities should be sufficient to fund working capital, debt service, taxes, commitments, and seasonal requirements for the foreseeable future. No quantitative earnings or revenue guidance was provided.
- Management expects to continue dealership acquisitions, expand AutoNation USA, invest in technology and strategic partnerships, and use RepairSmith to broaden the after-sales service network. The company is targeting more than 130 AutoNation USA stores and had over 20 under development.
- Industry new-vehicle retail unit sales increased 2% year over year in the quarter, but vehicle supply remained below historical levels. Rising interest rates and worsening economic conditions could reduce consumer demand.
- Interest-rate exposure is significant. A 100-basis-point change would affect annual floorplan interest expense by approximately $21.9 million and annual commercial-paper interest expense by approximately $2.9 million, based on March 31 balances.
- Auto finance credit risk increased in importance: the company recorded a $12.8 million provision for credit losses, and the allowance increased to $61.3 million from $57.5 million at year-end.
- Goodwill and franchise rights are subject to annual impairment testing scheduled for April 30, 2023. The filing notes that impairment testing depends on estimates of future revenue, margins, cash flows, discount rates, and market conditions.
- Key risks include vehicle manufacturer supply and financial health, economic and interest-rate conditions, used-vehicle availability, execution of AutoNation USA and other strategic investments, auto-loan losses, regulatory and legal matters, cybersecurity, leverage, and impairment of goodwill or intangible assets.
- The company reported no indication that legal proceedings would result in a material loss beyond accrued amounts, but stated that unfavorable outcomes could materially affect results, liquidity, or cash flows.
Important Facts Investors Should Verify
- Whether new-vehicle supply normalization further pressures gross profit per vehicle and overall margins.
- Whether used-vehicle volumes stabilize without sacrificing the improved used-vehicle gross profit per vehicle.
- The trajectory of floorplan, commercial-paper, and other interest costs as benchmark rates change.
- Auto finance delinquency, write-off, recovery, and allowance trends.
- Execution costs, store-level profitability, and capital requirements for AutoNation USA and RepairSmith.
- Results of the scheduled April 30, 2023 goodwill and franchise-rights impairment tests.
- Future capital allocation between share repurchases, acquisitions, capital expenditures, and debt reduction.