AutoNation, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. AutoNation operated 361 new-vehicle franchises across 254 stores and 73 collision centers in the United States, primarily in Sunbelt markets.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $5,432.4 million | $5,567.5 million | $15,851.1 million | $16,128.5 million |
| Gross profit | $845.9 million | $836.4 million | $2,491.8 million | $2,504.1 million |
| Operating income | $211.2 million | $219.0 million | $614.1 million | $652.9 million |
| Net income | $97.5 million | $107.3 million | $283.3 million | $315.2 million |
| Diluted EPS | $1.00 | $1.05 | $2.82 | $3.02 |
| Operating margin | 3.9% | 3.9% | 3.9% | 4.0% |
| Gross margin | 15.6% | 15.0% | 15.7% | 15.5% |
- Q3 revenue declined 2.4%, while nine-month revenue declined 1.7%. Gross profit increased 1.1% in Q3 but declined 0.5% for the nine-month period.
- New-vehicle revenue declined 2.7% in Q3 and 2.6% year to date; new-vehicle gross profit declined 8.5% and 9.1%, respectively. New-vehicle unit sales declined 2.4% in Q3 and 4.4% year to date.
- Used-vehicle unit sales increased 6.4% in Q3 and 4.5% year to date, but used-vehicle gross profit per vehicle declined 6.9% and 16.0%, respectively.
- Parts and service gross profit increased 1.0% in Q3 and 3.3% year to date, with margins of 43.7% and 43.9%, respectively.
- Finance and insurance revenue and gross profit increased 5.2% in Q3 and 2.0% year to date. Gross profit per vehicle retailed increased 4.1% and 2.9%, respectively.
- SG&A increased 2.7% in Q3 and 2.8% year to date. SG&A represented 71.8% of gross profit in Q3 and 72.8% year to date, versus 70.7% and 70.5% in the comparable periods.
Cash flow, balance sheet, debt, and liquidity
- Nine-month operating cash flow was $457.0 million, compared with $478.8 million in 2016. Investing cash outflow was $206.2 million, including $227.6 million of property and equipment purchases. Financing cash outflow was $262.3 million, primarily reflecting share repurchases.
- Cash and cash equivalents were $53.3 million at September 30, 2017, compared with $64.8 million at December 31, 2016.
- Vehicle floorplan payable was $3.63 billion, down from $3.85 billion at year-end. Commercial paper outstanding was $995.0 million, compared with $942.0 million at year-end.
- Total debt before discounts and current classification was $1.87 billion. Current maturities increased to $566.9 million, including $400.0 million of senior notes due April 2018 and a $143.9 million mortgage balloon payment due November 2017.
- The revolving credit facility had $82.0 million drawn. Availability was $679.0 million under the applicable leverage limitation, reduced effectively to approximately $674.0 million by commercial paper backstop considerations. Secured used-vehicle floorplan availability was $0.5 million.
- At September 30, the leverage ratio was 3.03x versus a 3.75x covenant maximum, and the capitalization ratio was 63.4% versus a 70.0% maximum. The company reported compliance with its debt covenants.
- AutoNation repurchased 10.1 million shares for $434.9 million during the first nine months, leaving $113.7 million authorized for additional repurchases. No cash dividends were paid or expected in the foreseeable future.
Material changes and unusual items
- Hurricane Irma caused temporary store closures and unrecovered losses in Florida; management estimated an approximately $8 million after-tax, or $0.08 per share, adverse impact on Q3 continuing-operations net income. Total unrecovered hurricane-related losses were approximately $3 million.
- Store and property divestitures generated approximately $9.3 million of Q3 gains and $33.4 million of gains during the first nine months, contributing to operating income.
- The company purchased four collision centers and one Florida store during the first nine months; these acquisitions were not material. It divested three Import stores and one Domestic store.
- Management attributed weaker vehicle margins to competitive conditions, elevated new-vehicle inventories, manufacturer incentive programs, lower used-vehicle pricing, and implementation challenges with the One Price centralized used-vehicle pricing strategy.
- AutoNation adopted new share-based-payment accounting guidance in 2017. The company expects a $7 million to $10 million after-tax cumulative retained-earnings adjustment when adopting the new revenue-recognition standard on January 1, 2018.
- The new lease standard, effective January 1, 2019, is expected to add approximately $300 million to $400 million of operating lease liabilities and corresponding right-of-use assets.
- On October 19, 2017, after quarter-end, AutoNation amended its unsecured credit agreement, extending maturity to October 2022 and temporarily increasing the maximum leverage ratio to 4.25x, subject to step-downs to 3.75x.
Outlook and principal risks
Management expects cash on hand, operating cash flow, the revolving credit facility, commercial paper program, and floorplan facilities to fund working capital, debt service, taxes, capital expenditures, and other commitments for the foreseeable future. The filing provides no quantitative earnings or revenue guidance.
- Industry retail new-vehicle sales were relatively flat in Q3, while Florida industry sales declined 7%. Manufacturer incentives, leasing levels, inventory, off-lease supply, and interest rates may materially affect results.
- The company is exposed to changing LIBOR-based rates. A 100-basis-point increase would increase estimated annual floorplan interest expense by approximately $36.3 million and commercial-paper interest expense by approximately $10.0 million.
- AutoNation depends on the financial condition and franchise relationships of major manufacturers; approximately 93% of new-vehicle sales were associated with core brands from nine manufacturers.
- Other risks include natural disasters, legal and regulatory proceedings, information-system failures or cybersecurity breaches, debt covenants and refinancing needs, goodwill and franchise-right impairment, and execution risk associated with brand-extension initiatives.
- The company stated that accrued legal contingencies were not expected to have a material adverse effect, but acknowledged that unfavorable outcomes could materially affect results, financial condition, or cash flows.
Investor verification points
- Verify the refinancing or repayment of the $400.0 million 2018 senior notes and the $143.9 million mortgage balloon payment due in November 2017.
- Monitor commercial-paper access, revolving-credit availability, leverage-covenant headroom, and exposure to rising interest rates.
- Assess whether new- and used-vehicle gross-profit pressure persists, particularly in Domestic operations and following the One Price implementation.
- Evaluate the sustainability of parts-and-service and finance-and-insurance growth relative to declining vehicle margins and unit volumes.
- Track the impact of hurricanes, manufacturer incentives, vehicle inventory levels, and used-vehicle pricing on future results.
- Confirm the amount and timing of the revenue-recognition adoption adjustment and the balance-sheet impact of the 2019 lease standard.
- Review subsequent filings for share repurchases, acquisitions and divestitures, legal contingencies, and any goodwill or franchise-right impairment indicators.