AutoNation, Inc. Form 10-Q Summary
Business Context and Reporting Period
AutoNation is the largest U.S. automotive retailer, operating 251 new-vehicle franchises across 206 stores, primarily in Sunbelt markets. It sells new and used vehicles, parts and service, and finance and insurance products. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenue | $3,273.9 million | $2,891.0 million | $9,214.8 million | $7,872.0 million |
| Gross profit | $545.4 million | $509.6 million | $1,583.0 million | $1,436.7 million |
| Gross margin | 16.7% | 17.6% | 17.2% | 18.3% |
| Operating income | $120.9 million | $118.0 million | $361.9 million | $314.3 million |
| Operating margin | 3.7% | 4.1% | 3.9% | 4.0% |
| Net income | $56.9 million | $65.0 million | $159.3 million | $136.3 million |
| Diluted EPS | $0.38 | $0.36 | $0.99 | $0.76 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $197.7 million | $348.7 million |
Q3 continuing-operations net income was $58.5 million, or $0.39 diluted EPS. Nine-month continuing-operations net income was $167.2 million, or $1.04 diluted EPS. The nine-month 2010 results include a $19.6 million pretax loss on debt extinguishment; management reported adjusted diluted EPS from continuing operations of $1.11 excluding this item.
- New-vehicle revenue increased 9.7% in Q3 and 18.5% for the first nine months; used-vehicle revenue increased 27.5% and 25.6%, respectively.
- Parts and service revenue increased 6.3% in Q3 and 3.3% year to date, with gross margins of approximately 43.5% and 43.8%.
- Finance and insurance revenue increased 17.8% in Q3 and 20.0% year to date.
- New-vehicle unit sales rose 3.0% in Q3 and 12.9% year to date; used-vehicle unit sales rose 25.4% and 18.9%, respectively.
- Cash and cash equivalents were $84.5 million at September 30, 2010, versus $173.5 million at December 31, 2009.
- Inventory was $1,739.8 million, including $1,323.2 million of new vehicles and $306.0 million of used vehicles.
Material Changes Versus Prior Comparable Period
- Revenue growth was broad-based, but Q3 gross margin declined to 16.7% from 17.6%. New-vehicle gross profit per unit fell 8.5% and used-vehicle gross profit per unit fell 6.3%, partly reflecting unusually favorable supply-demand conditions and the 2009 Cash for Clunkers program.
- Q3 operating income increased only 2.5% despite 13.2% revenue growth. SG&A rose 7.3%, including higher compensation and advertising costs.
- Q3 net income declined 12.5%, primarily because of higher interest expense and the absence of favorable 2009 items, while the reduced share count supported higher diluted EPS.
- Nine-month operating income increased 15.1%, while net income increased 16.9%. The comparison was affected by the 2010 debt-extinguishment charge and favorable 2009 gains on asset dispositions and senior-note repurchases.
- Operating cash flow fell 43.3% to $197.7 million, primarily due to higher working-capital needs, increased inventory, and refinancing-related cash payments.
- Investing cash flow was an outflow of $133.3 million versus an inflow of $44.8 million in 2009, reflecting $80.3 million of capital expenditures and $73.1 million spent on acquisitions.
- AutoNation repurchased 25.9 million shares for approximately $506.6 million during the first nine months, compared with 3.7 million shares for $65.8 million in 2009. Approximately $250.3 million remained available under the repurchase program as of October 27, 2010.
Debt, Liquidity, Outlook, and Risks
- Non-vehicle debt totaled $1,380.6 million at September 30, 2010, including $394.2 million of 6.75% senior notes due 2018, $533.4 million of term loans, $210.0 million of revolving borrowings, and $221.0 million of mortgage debt. Long-term debt, net of current maturities, was $1,372.6 million.
- The company refinanced debt in April 2010 by issuing $400.0 million of 6.75% senior notes due 2018, repaying or tendering $264.0 million of older notes, reducing the term loan facility, and extending portions of its credit facilities.
- Available liquidity at September 30, 2010 included $84.5 million of cash, $317.0 million of revolving-credit capacity limited by covenants, and $72.6 million of secured used-floorplan capacity.
- The company was in compliance with its debt covenants. Actual leverage was 2.64x against a 3.25x maximum, and capitalization was 46.1% against a 60% maximum.
- Management stated that cash, future operating cash flow, and available credit should be sufficient for working capital, debt service, taxes, commitments, and seasonal requirements for the foreseeable future. No formal earnings guidance was provided.
- Management expected improving automotive retail conditions over the next several years but noted that unemployment, depressed housing markets, historically low industry sales rates, and reduced recent-model vehicles in operation could pressure results, particularly parts and service.
- The company expects approximately $20 million of pretax performance-based manufacturer incentives to be recognized over the next two to three quarters, primarily related to previously sold premium-luxury vehicles. It also projected approximately $150 million of 2010 capital expenditures.
- Key risks include dependence on U.S. vehicle sales and manufacturer viability, substantial indebtedness, variable-rate exposure, debt covenant restrictions, manufacturer incentives and franchise controls, goodwill and franchise-right impairment, legal and regulatory proceedings, adverse economic or weather conditions, and potential future regulation of automotive finance activities.
- Discontinued operations produced a $7.9 million after-tax loss for the first nine months of 2010, with one store remaining unsold or unopened at September 30, 2010.
Important Facts for Investors to Verify
- Reconcile reported and adjusted EPS, particularly the $19.6 million debt-extinguishment charge and the favorable 2009 comparison items.
- Assess whether new- and used-vehicle volume growth can offset declining per-unit margins and higher inventory carrying costs.
- Monitor inventory levels, floorplan borrowings, LIBOR exposure, and the approximately $16.3 million annual interest sensitivity to a 100-basis-point change in floorplan rates.
- Review debt maturities, covenant headroom, and the $317.0 million of covenant-limited revolver availability.
- Evaluate the sustainability of $506.6 million of share repurchases relative to operating cash flow, acquisitions, capital expenditures, and debt obligations.
- Track the expected manufacturer incentives, remaining discontinued-operation assets, legal contingencies, and potential impairment of goodwill, franchise rights, or held-for-sale assets.