AutoNation, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 339 new-vehicle franchises across 247 stores, plus collision centers, AutoNation USA used-vehicle stores, auction operations, and parts distribution centers. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $6,752.8 million | $5,903.8 million | 14.4% |
| Gross profit | $1,308.9 million | $1,032.8 million | 26.7% |
| Operating income | $519.0 million | $336.9 million | 54.1% |
| Net income | $362.1 million | $239.4 million | 51.2% |
| Diluted EPS | $5.78 | $2.85 | 102.8% |
| Operating cash flow | $643.2 million | $526.3 million | 22.2% |
- Revenue mix was 41.6% new vehicles, 38.1% used vehicles, 14.9% parts and service, and 5.4% finance and insurance.
- Gross margin was approximately 19.4%, versus 17.5% in the prior-year quarter. Operating margin was approximately 7.7%, versus 5.7%; net margin was approximately 5.4%, versus 4.1%.
- New-vehicle revenue declined 5.9% and retail new-vehicle unit sales declined 18.6%, but new-vehicle gross profit increased 81.6%. New-vehicle gross profit per vehicle retailed rose to $6,112 from $2,739.
- Used-vehicle revenue increased 47.1%, supported by an 11.1% increase in retail unit sales and a 30.9% increase in revenue per vehicle retailed. Used-vehicle gross profit declined 2.6%, and gross profit per vehicle retailed fell 10.2% to $1,566.
- Parts and service revenue increased 18.0% and gross profit increased 18.5%, with a 45.9% gross margin.
- Finance and insurance revenue and gross profit increased 16.3%; gross profit per vehicle retailed increased 20.5% to $2,672.
- SG&A increased 14.4% to $741.4 million, but declined to 56.6% of gross profit from 62.7% because of improved gross profit per vehicle and cost management.
- Cash and cash equivalents were $608.1 million at March 31, 2022, compared with $60.4 million at December 31, 2021. Total assets were $9.36 billion and shareholders’ equity was $2.35 billion.
- Long-term debt, net of current maturities, was $3.54 billion, compared with $2.85 billion at year-end 2021. Vehicle floorplan payable was $1.40 billion, compared with $1.46 billion.
- The company issued $700.0 million of 3.85% senior notes due 2032 in February 2022. It had no commercial paper outstanding at March 31, 2022, versus $340.0 million at December 31, 2021.
- Available liquidity included $608.1 million of cash, approximately $1.76 billion under the revolving credit facility, and $0.1 million of secured used-vehicle floorplan capacity. The company reported compliance with its debt covenants, including a 1.53x leverage ratio versus a maximum of 3.75x.
- Investing cash flow was negative $59.0 million, including $56.6 million of property and equipment purchases. Financing cash flow was negative $36.5 million, including $342.3 million of common-stock repurchases and debt-related activity.
Material changes versus the prior comparable period
- Results benefited from strong vehicle demand and historically low new-vehicle inventories caused largely by manufacturer supply-chain disruptions. New-vehicle inventory was 9,055 units, or 8 days of supply, versus 33,281 units and 29 days of supply a year earlier.
- New-vehicle volume declined substantially, but scarcity supported higher pricing and margins. Used-vehicle sales increased as customers faced limited new-vehicle availability.
- Used-vehicle values declined during the quarter, creating margin pressure and reducing used-vehicle gross profit per vehicle.
- Revenue and earnings also reflected the contribution of 20 stores and four collision centers acquired during the second half of 2021. These acquired operations contributed $237.8 million of revenue and $8.2 million of earnings in Q1 2022.
- Weighted-average diluted shares declined to 62.6 million from 83.9 million, primarily reflecting continued share repurchases. AutoNation repurchased 3.5 million shares for $380.9 million during the quarter, with $513.7 million remaining under the authorization at March 31, 2022.
- Other interest expense increased to $29.6 million from $21.2 million because of higher average debt balances. Q1 2021 also included a $7.5 million realized gain from the sale of a minority equity investment.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that reduced new-vehicle availability was expected to continue throughout 2022, but noted substantial uncertainty regarding when supply would improve and how long elevated vehicle profitability would persist.
- AutoNation plans to expand AutoNation USA and is targeting more than 130 stores by the end of 2026. Initial investment is expected to average approximately $10 million to $12 million per new store; the filing does not provide earnings guidance.
- Key risks include economic conditions, interest rates, fuel prices, consumer demand, manufacturer supply-chain disruptions, dependence on vehicle manufacturers and captive lenders, used-vehicle valuation declines, manufacturer restrictions, cybersecurity and information-system failures, regulatory and legal matters, and debt covenant or refinancing risk.
- Variable-rate exposure included approximately $1.4 billion of vehicle floorplan payable. A 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $14.0 million.
- The company had $72.9 million of continuing-operation assets held for sale at March 31, 2022. Annual goodwill and franchise-rights impairment testing was scheduled for April 30, 2022; no material impairment charge was reported for the quarter.
- Legal proceedings are ongoing, but management reported no indication of a reasonable possibility of a material loss beyond accrued amounts. The filing cautions that outcomes cannot be predicted with certainty.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether new-vehicle supply constraints and elevated new-vehicle gross profit per vehicle persist or normalize during the remainder of 2022.
- Whether used-vehicle values and used-vehicle gross margins continue to decline.
- The effect of higher interest rates on floorplan financing, other debt, vehicle affordability, and demand.
- Progress, capital requirements, and returns from the planned AutoNation USA expansion.
- The outcome of the April 30, 2022 goodwill and franchise-rights impairment tests.
- Future share repurchases, remaining authorization, and the effect of reduced share count on EPS relative to operating performance.
- Debt covenant compliance, refinancing requirements, credit ratings, and availability under revolving and floorplan facilities.
- Potential effects of pending litigation, regulatory matters, manufacturer relationships, and supply-chain disruptions.