AutoNation, Inc. 2016 First-Quarter Form 10-Q Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 375 new-vehicle franchises at 265 stores as of March 31, 2016. Its businesses include new and used vehicles, parts and service, and finance and insurance products. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $5,119.6 million | $4,944.2 million | +3.5% |
| Gross profit | $825.9 million | $799.9 million | +3.3% |
| Gross margin | 16.1% | 16.2% | Down 10 bps |
| Operating income | $207.4 million | $214.9 million | -3.5% |
| Operating margin | 4.1% | 4.3% | Down 20 bps |
| Income from continuing operations | $96.2 million | $111.7 million | -13.9% |
| Net income | $95.9 million | $111.5 million | -14.0% |
| Diluted EPS | $0.89 | $0.97 | -8.2% |
| Net cash provided by operating activities | $198.2 million | $199.6 million | Down $1.4 million |
Parts and service generated $820.4 million of revenue and $354.7 million of gross profit, up 10.4% and 10.8%, respectively. Finance and insurance revenue and gross profit increased 7.5% to $223.1 million. New-vehicle revenue increased 1.1%, but gross profit declined 7.6%; used-vehicle revenue increased 4.1%, while gross profit declined 12.2%.
Retail unit sales were broadly flat at 79,007 new vehicles and 58,103 used vehicles. Total gross profit per retail vehicle declined to $3,399 from $3,438, as new-vehicle gross profit per vehicle fell 8.2% and used-vehicle gross profit per vehicle fell 7.7%; finance and insurance gross profit per vehicle rose 7.5% to $1,627.
At March 31, 2016, cash and cash equivalents were $47.8 million. Inventory was $3.93 billion, including $3.19 billion of new vehicles and $551.3 million of used vehicles. Total vehicle floorplan payable was $4.04 billion. Shareholders’ equity was $2.09 billion, compared with $2.35 billion at December 31, 2015.
Non-vehicle long-term debt, net of current maturities, was $1.74 billion, and commercial paper outstanding was $926.0 million at a weighted-average annual rate of 1.23% and weighted-average remaining term of 21 days. The revolving credit facility had no borrowings outstanding; availability was limited to $1.2 billion by the leverage covenant and effectively reduced to $829.9 million by commercial paper and letters of credit.
Material changes versus the prior comparable period
- Revenue increased $175.4 million, primarily from parts and service, finance and insurance, used vehicles, and acquisitions.
- Gross profit increased $26.0 million, led by parts and service growth, but vehicle gross profit declined because of elevated inventories, manufacturer incentive changes, and competitive pricing.
- SG&A increased 5.6% to $588.7 million. Store and corporate overhead was affected by acquisitions, approximately $6 million of severe-hail-storm losses, and an approximately $5 million shift in stock-based compensation expense into the quarter.
- Floorplan interest expense rose $5.7 million to $18.9 million, and other interest expense rose $6.9 million to $28.3 million, primarily because of higher debt and commercial paper borrowings.
- Same-store revenue declined 2.0%, same-store vehicle unit sales declined 5.6%, and same-store gross profit declined 2.0%. Same-store parts and service gross profit increased 5.3%, while finance and insurance gross profit increased 2.5%.
- New-vehicle inventory increased to 87,953 units, or 81 days of supply, from 65,993 units and 52 days at March 31, 2015. Used-vehicle supply increased to 39 days from 34 days.
- AutoNation acquired 12 Texas stores and divested two Import stores during the quarter. Acquisition cash outlays were $256.6 million, compared with $27.7 million in the prior-year quarter.
- The company repurchased 7.9 million shares for $370.6 million, compared with 0.2 million shares for $9.1 million in the prior-year quarter. Repurchase authorization remaining at quarter-end was $175.0 million.
Outlook, commentary, risks, contingencies, and unusual items
Management expected full-year 2016 U.S. industry new-vehicle unit sales to exceed 17 million but anticipated a relatively flat industry selling rate versus 2015. Management noted that increased manufacturer incentives, elevated inventory, leasing conditions, and competitive retail pricing could pressure new- and used-vehicle gross profit per vehicle. The company stated that it was taking steps to align inventory with market conditions.
Management identified continued growth in the recent-model-year vehicle population and customer retention as favorable factors for parts and service. Finance and insurance performance benefited from the rollout of the AutoNation Vehicle Protection Plan, higher product penetration, and increased customer financing.
Unusual items included $6.2 million of gains on store divestitures, $0.9 million of non-cash impairment charges for continuing-operations assets held for sale, and $0.2 million of impairment charges in discontinued operations. Legal proceedings are ongoing in the ordinary course; the company reported no indication of a reasonably possible material loss beyond accrued amounts, while noting that outcomes cannot be predicted with certainty.
Primary risks include economic sensitivity of vehicle demand, manufacturer incentives and financial condition, excess inventory, interest-rate exposure, debt covenant restrictions, dependence on commercial paper and floorplan financing, adverse weather, regulatory changes, litigation, information-system failures, and potential impairment of goodwill or franchise rights. A 100-basis-point interest-rate change would affect annual floorplan interest expense by approximately $40.4 million and annual commercial-paper interest expense by approximately $9.3 million.
The company reported leverage of 2.60x against a maximum of 3.75x and capitalization of 64.9% against a maximum of 70.0%, and stated that it was in compliance with its debt covenants. Management believed available cash, operating cash flow, revolving-credit capacity, commercial paper, and floorplan facilities would be sufficient for foreseeable requirements. No cash dividends were paid or anticipated in the foreseeable future.
Important facts for investors to verify
- Whether elevated new-vehicle inventory, particularly in Domestic and Premium Luxury brands, continues to pressure gross profit per vehicle and requires additional incentives or markdowns.
- Whether parts and service and finance and insurance growth can offset continuing vehicle-margin compression and higher operating expenses.
- The refinancing or repayment plan for the $926.0 million of short-term commercial paper and the $155.4 million balloon payment due under the mortgage facility in November 2017.
- Compliance with the 3.75x leverage and 70.0% capitalization covenants as inventory financing, acquisitions, and share repurchases continue.
- The results of the scheduled April 30, 2016 goodwill and franchise-rights impairment tests.
- The effect of interest-rate changes on approximately $4.0 billion of variable-rate vehicle floorplan payable.
- The final purchase-price allocation and operating contribution of the 12 acquired Texas stores.
- Potential exposure from legal proceedings, assigned lease obligations, environmental matters, and regulatory requirements.