AutoNation, Inc. 2017 First-Quarter Form 10-Q Summary
Business context and reporting period
AutoNation is a U.S. automotive retailer operating 372 new-vehicle franchises across 259 stores and 70 branded collision centers as of March 31, 2017. The unaudited filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Reportable segments are Domestic, Import, and Premium Luxury.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $5,139.4 million | $5,119.6 million | 0.4% |
| Gross profit | $819.8 million | $825.9 million | (0.7%) |
| Operating income | $206.7 million | $207.4 million | (0.3%) |
| Income from continuing operations | $98.2 million | $96.2 million | 2.1% |
| Net income | $98.1 million | $95.9 million | 2.3% |
| Diluted EPS | $0.97 | $0.89 | Increase |
| Operating cash flow | $185.6 million | $198.2 million | Decrease |
Gross margin was approximately 16.0% of revenue versus 16.1% in the prior-year quarter. Operating margin was approximately 4.0% versus 4.1%; net margin was approximately 1.9% in both periods. Parts and service generated $845.1 million of revenue and $371.0 million of gross profit, up 3.0% and 4.6%, respectively. Finance and insurance revenue and gross profit declined 0.7% to $221.6 million.
Retail new-vehicle unit sales declined 4.1% to 75,798, while retail used-vehicle unit sales increased 4.3% to 60,608. New-vehicle gross profit per vehicle rose 0.8% to $1,904, but used-vehicle gross profit per vehicle declined 23.4% to $1,236. Total variable-operations gross profit per vehicle declined 4.9% to $3,232.
Cash and cash equivalents were $56.3 million at March 31, 2017, compared with $64.8 million at December 31, 2016. Cash used in investing activities was $76.0 million, including $90.1 million of property and equipment purchases. Cash used in financing activities was $118.1 million, primarily reflecting a $177.0 million net reduction in commercial paper.
Total vehicle floorplan payable was $3.87 billion. Commercial paper outstanding was $765.0 million, with a weighted-average interest rate of 1.44% and remaining term of nine days. Long-term debt, net of current maturities, was $1.62 billion. Available revolving-credit capacity was $1.19 billion before considering the commercial-paper backstop effect, and approximately $986.5 million after that effect. The company reported a 2.56x leverage ratio and 61.7% capitalization ratio, within maximum requirements of 3.75x and 70.0%.
Material changes versus the prior comparable period
- Revenue increased modestly, but gross profit and operating income were essentially flat.
- New-vehicle volume weakened amid competitive conditions, elevated inventory, and manufacturer marketing and incentive programs.
- Used-vehicle volume improved, but margins declined as the company implemented its One Price strategy and sold more older-model inventory previously held for recalls.
- Parts and service performance improved, benefiting from higher warranty volume, customer-pay service, and operational execution.
- SG&A increased to $595.3 million from $588.7 million, and SG&A as a percentage of gross profit increased to 72.6% from 71.3%.
- Operating cash flow declined by $12.6 million, while investing cash use improved substantially because Q1 2016 included $256.6 million of acquisition spending versus $5.8 million in Q1 2017.
- No shares were repurchased under the authorization in Q1 2017; $298.6 million remained available. The prior-year quarter included $370.6 million of repurchases.
- Q1 2017 included gains of $9.8 million from manufacturer-related settlement and franchise protest-right payments, $5.6 million from a property disposition, and $4.3 million from a store divestiture. Q1 2016 included $6.2 million of store-divestiture gains and $0.9 million of property impairment charges.
Guidance, outlook, commentary, and risks
Management expects full-year 2017 U.S. industry new-vehicle unit sales to exceed 17 million but anticipates a relatively flat industry selling rate versus 2016. Management expects sequential improvement in Q2 2017 used-vehicle volume and gross profit per vehicle. The company continues to invest in AutoNation USA used-vehicle and service centers, branded parts and accessories, collision centers, auctions, and related customer-focused initiatives.
Key risks include sensitivity to economic conditions and U.S. vehicle demand; manufacturer incentives, inventory levels, franchise restrictions, and manufacturer financial health; pressure on new- and used-vehicle margins; interest-rate exposure; substantial vehicle floorplan and other debt; refinancing and commercial-paper availability; covenant compliance; goodwill and franchise-right impairment; legal and regulatory proceedings; information-security failures; and the success of brand-extension initiatives.
The company was in compliance with its debt covenants at March 31, 2017. A mortgage facility had $150.7 million outstanding and required a $143.9 million balloon payment in November 2017. A 100-basis-point increase in interest rates would increase estimated annual floorplan interest expense by approximately $38.7 million and commercial-paper interest expense by approximately $7.7 million.
Legal proceedings were accrued when probable and reasonably estimable; management reported no indication of a reasonable possibility of a material loss beyond accrued amounts, while noting that adverse outcomes remain possible. The company expects future lease-accounting adoption to add approximately $300 million to $400 million of operating liabilities and corresponding right-of-use assets. The company also expects to adopt the new revenue-recognition standard on January 1, 2018, but had not quantified any potential cumulative effect.
Important facts for investors to verify
- Whether used-vehicle gross profit per vehicle and overall variable-operations margins recover following the One Price rollout and recall-related inventory normalization.
- The sustainability of parts and service growth and its ability to offset vehicle-margin pressure.
- Refinancing or repayment plans for the $143.9 million mortgage balloon payment due in November 2017 and the $400 million senior notes due in April 2018.
- Commercial-paper rollover capacity, revolving-credit availability, interest-rate movements, and compliance with leverage and capitalization covenants.
- The results of the scheduled April 30, 2017 goodwill and franchise-rights impairment tests.
- The financial impact of manufacturer-related settlement and disposition gains, which are unusual and may not recur.
- Implementation effects from the 2018 revenue-recognition and 2019 lease-accounting standards.
- Progress, required investment, and returns from AutoNation’s brand-extension and digital/customer-focused initiatives.