AutoNation, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Financial statements are unaudited and prepared under U.S. GAAP. AutoNation operated 336 new-vehicle franchises across 243 stores, plus 56 collision centers, 12 AutoNation USA used-vehicle stores, four auction operations, and three parts distribution centers.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $6,666.0 million | $6,379.5 million | $20,288.0 million | $19,261.7 million |
| Gross profit | $1,312.8 million | $1,271.9 million | $3,983.4 million | $3,631.0 million |
| Operating income | $522.5 million | $503.3 million | $1,599.6 million | $1,370.4 million |
| Net income | $352.6 million | $361.7 million | $1,091.0 million | $985.9 million |
| Diluted EPS | $6.31 | $5.12 | $18.52 | $12.62 |
| Net cash from operations | Not separately provided | Not separately provided | $1,443.3 million | $1,559.2 million |
- Q3 revenue increased 4.5%, gross profit increased 3.2%, and operating income increased 3.8%. Nine-month revenue increased 5.3%, gross profit increased 9.7%, and operating income increased 16.7%.
- Reported operating margin was approximately 7.8% in Q3 and 7.9% for the nine-month period, compared with 7.9% and 7.1%, respectively, in the comparable 2021 periods.
- Gross margin was approximately 19.7% in Q3 and 19.6% for the nine-month period, compared with 19.9% and 18.9% in the prior-year periods.
- Q3 net income declined 2.5%, but diluted EPS increased 23.2% because weighted-average diluted shares declined to 55.9 million from 70.7 million, primarily reflecting significant share repurchases.
- New-vehicle revenue increased 4.0% in Q3 but declined 6.1% for the nine months. New-vehicle unit sales declined 4.7% in Q3 and 17.0% for the nine months, while gross profit per vehicle retailed increased 8.2% and 49.3%, respectively.
- Used-vehicle gross profit declined 19.8% in Q3 and 16.3% for the nine months, reflecting declining used-vehicle values and margin pressure. Used-vehicle gross profit per vehicle retailed declined 11.1% in Q3 and 12.7% for the nine months.
- Parts and service gross profit increased 12.7% in Q3 and 14.0% for the nine months, with reported margins of 46.4% and 46.3%, respectively.
- Finance and insurance gross profit increased 3.4% in Q3 and 5.9% for the nine months. Gross profit per vehicle retailed increased 7.2% and 14.6%, respectively.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $442.9 million at September 30, 2022, compared with $60.4 million at December 31, 2021.
- Operating cash flow was $1,443.3 million for the nine months, down from $1,559.2 million, primarily because of higher working-capital requirements despite higher earnings.
- Investing cash use was $247.3 million, including $236.2 million of property and equipment purchases. Financing cash use was $813.6 million.
- Long-term debt, net of current maturities, was $3,532.8 million, up from $2,846.2 million at year-end 2021. The increase primarily reflects the issuance of $700.0 million of 3.85% Senior Notes due 2032.
- Vehicle floorplan payable was $1,624.8 million, up from $1,457.6 million. Commercial paper was zero at September 30, 2022, versus $340.0 million at year-end.
- The company had no borrowings under its $1.8 billion revolving credit facility; $39.8 million of letters of credit reduced available capacity to approximately $1.8 billion. Management stated that available liquidity should fund operating needs, debt service, taxes, commitments, and foreseeable seasonal requirements.
- The leverage ratio was 1.54x against a maximum of 3.75x, and the capitalization ratio was 56.0% against a maximum of 70.0%. The company reported compliance with its debt covenants.
- AutoNation repurchased 10.9 million shares for $1,213.1 million during the nine months. As of September 30, $681.5 million remained under the authorization; in October 2022, the board increased the authorization by $1.0 billion.
Material changes versus the prior comparable period
- Results benefited from higher new-vehicle gross profit per vehicle amid constrained supply and strong demand, but unit volumes remained depressed by manufacturer supply shortages.
- Used-vehicle profitability weakened materially as used-vehicle values declined. This was the principal offset to stronger new-vehicle, parts and service, and finance and insurance performance.
- Premium Luxury segment income increased 14.1% in Q3 and 22.3% for the nine months. Import segment income declined 10.2% in Q3 but increased 5.4% for the nine months; Domestic segment income declined 4.3% in Q3 but increased 2.0% for the nine months.
- SG&A increased 5.5% in Q3 and 6.6% for the nine months, driven by acquired and newly opened stores, technology and strategic initiatives, compensation, and inflationary pressures.
- Interest expense increased as a result of higher average debt balances and higher variable interest rates. Q3 floorplan interest expense increased to $10.7 million from $4.9 million.
- Q3 results included after-tax benefits of approximately $12.1 million from store and property divestitures and $4.9 million from a legal settlement. The filing also reported $16.1 million of pre-tax divestiture gains and a $6.3 million legal-settlement gain in operating income.
- In October 2022, AutoNation acquired CIG Financial for approximately $85 million plus repayment of certain obligations and announced an agreement to acquire four Colorado automotive retail stores. The CIG Financial acquisition was not material to the reported September 30 results.
Outlook, commentary, risks, and contingencies
- The filing does not provide a specific quantitative earnings or revenue forecast. Management expected new-vehicle availability constraints to continue through 2022, but stated that the duration and magnitude of elevated vehicle profitability were uncertain.
- Management cautioned that worsening economic conditions, higher interest rates, unemployment, reduced consumer confidence, fuel prices, tariffs, and declining vehicle demand could adversely affect sales volumes and margins.
- Key operating risks include manufacturer supply-chain disruptions, dependence on major vehicle manufacturers and their captive lenders, used-vehicle price declines, variable-rate floorplan and other debt costs, substantial indebtedness, and debt covenant requirements.
- AutoNation plans to expand AutoNation USA to more than 130 stores. Management identified customer adoption, market conditions, used-vehicle availability, construction costs, and the ability to secure suitable locations as risks to the plan. Initial capital investment was estimated at approximately $10 million to $12 million per new store.
- The acquisition of CIG Financial introduces risks related to auto-loan credit losses, securitized funding availability and cost, and extensive financial-services regulation.
- The company reported ongoing litigation and regulatory matters but stated that no material additional loss was reasonably possible based on information available at September 30, 2022. An unfavorable resolution could nevertheless materially affect results, liquidity, or cash flows.
- Goodwill and franchise-rights impairment testing involves significant assumptions regarding growth, margins, capital expenditures, working capital, and cost of capital. No material goodwill or franchise-rights impairment was recorded in the disclosed testing.
- A 100-basis-point change in interest rates would affect annual floorplan interest expense by approximately $16.2 million based on variable-rate floorplan debt outstanding at September 30, 2022.
Important facts for investors to verify
- Whether new-vehicle supply constraints and elevated gross profit per vehicle persist or normalize faster than expected.
- The pace and severity of used-vehicle price declines and their effect on retail and wholesale margins and inventory write-downs.
- Interest-rate sensitivity of floorplan borrowings, debt service, and finance and insurance demand.
- Post-period financial and regulatory performance of CIG Financial, including credit losses and funding costs.
- The scale, timing, and returns of the AutoNation USA expansion and the announced Colorado store acquisition.
- The sustainability of earnings per share growth given substantial share repurchases and increased debt balances.
- Compliance with debt covenants, available revolver capacity, and the effect of further repurchases or acquisitions on liquidity.
- Potential outcomes of litigation, regulatory proceedings, manufacturer relationships, and other contingencies disclosed in the filing.