AutoNation, Inc. 2013 Q2 Form 10-Q Summary
Business Context and Reporting Period
AutoNation is the largest U.S. automotive retailer. The filing covers the unaudited three and six months ended June 30, 2013, compared with the same periods in 2012. At June 30, 2013, the company operated 265 new-vehicle franchises at 224 stores, selling 32 brands primarily in Sunbelt markets.
The company reports Domestic, Import, and Premium Luxury segments. Its Domestic and Import stores completed a transition to the AutoNation retail brand during the second quarter.
Financial Performance and Key Metrics
| Metric | Q2 2013 | Q2 2012 | Six Months 2013 | Six Months 2012 |
|---|---|---|---|---|
| Total revenue | $4,426.5 million | $3,904.5 million | $8,522.9 million | $7,561.5 million |
| Gross profit | $696.1 million | $628.0 million | $1,360.1 million | $1,231.0 million |
| Operating income | $180.9 million | $164.2 million | $350.3 million | $312.9 million |
| Income from continuing operations | $90.1 million | $79.0 million | $173.3 million | $152.5 million |
| Net income | $89.9 million | $78.6 million | $172.9 million | $151.6 million |
| Diluted EPS | $0.73 | $0.64 | $1.40 | $1.18 |
- Q2 revenue increased 13.4%; six-month revenue increased 12.7%.
- Q2 gross profit margin was approximately 15.7%, compared with 16.1% in the prior-year quarter. Six-month gross margin was approximately 16.0%, compared with 16.3%.
- Q2 operating margin was approximately 4.1%, compared with 4.2%; six-month operating margin was approximately 4.1% in both periods.
- New-vehicle revenue increased 13.5% in Q2 and 13.4% for six months, while retail new-vehicle unit sales increased 11.0% and 10.1%, respectively.
- Used-vehicle revenue increased 11.5% in Q2 and 10.7% for six months. Parts and service revenue increased 8.9% and 7.5%, respectively.
- Finance and insurance revenue and gross profit increased 19.8% in Q2 and 19.7% for six months. Finance and insurance gross profit per vehicle rose 7.3% in Q2 and 8.3% for six months.
- New-vehicle gross profit per vehicle declined 7.6% in Q2 and 5.5% for six months, reflecting competitive pressure, particularly in the Import segment. Used-vehicle gross profit per vehicle declined 1.6% and 2.3%, respectively.
- Parts and service gross margin improved to 42.7% from 42.1% in Q2 and to 42.7% from 41.9% for six months.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Six-month operating cash flow was $278.8 million, versus $119.5 million in 2012. Continuing-operations operating cash flow was $273.1 million, primarily reflecting lower working-capital requirements.
- Investing cash outflow was $130.9 million, including $70.4 million of property and equipment purchases and $72.5 million used for acquisitions.
- Financing cash outflow was $147.9 million. The company repaid $140.0 million net under its revolving credit facility and repurchased $4.9 million of common stock.
- Cash and cash equivalents were $69.7 million at both June 30, 2013 and December 31, 2012.
- Vehicle floorplan payable totaled $2,748.1 million, consisting of $1,944.0 million trade and $804.1 million non-trade payable. Inventory totaled $2,625.2 million.
- Total debt was $1,936.8 million, including $400.0 million drawn on the revolving credit facility. Long-term debt, net of current maturities, was $1,907.2 million.
- Revolving-facility availability was $744.0 million after borrowings and letters of credit. Eligible borrowing capacity under secured used-vehicle floorplan facilities was $50.3 million.
- Contractual leverage was 2.51x against a 3.75x maximum, and capitalization was 57.9% against a 65.0% maximum. The company reported compliance with its debt covenants.
- Fixed-rate debt had a carrying value of $1,036.8 million and estimated fair value of $1,111.0 million.
Material Changes Versus the Prior Comparable Period
- Profitability increased despite lower vehicle margins: Q2 operating income rose 10.2% and six-month operating income rose 12.0%.
- The prior-year periods included a $4.2 million non-cash franchise-rights impairment charge; no comparable charge was recorded in 2013.
- SG&A increased 12.7% in Q2 and 11.0% for six months. Approximately $18 million of non-recurring SG&A, primarily advertising, was incurred during the first six months for the rebranding initiative.
- New-vehicle inventory increased to $2.1 billion and 67 days of supply at June 30, 2013, from $1.6 billion and 60 days at June 30, 2012. Used-vehicle inventory was $360.6 million and 30 days of supply, compared with $323.3 million and 31 days.
- Three stores were acquired in the second quarter: Don Davis Toyota in Dallas and SanTan Honda Superstore and Hyundai of Tempe in Phoenix. Management stated that the acquisitions were not material to consolidated results.
- Share repurchases fell substantially to $4.9 million in the first six months from $531.6 million in the prior-year period. Remaining authorization was $314.3 million.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management anticipated full-year U.S. industry new-vehicle sales at the mid-15 million-unit level, above 2012 but below pre-recession levels.
- Management expected parts and service results to benefit over the next several years as the recent-model-year vehicle service base gradually returns toward pre-recession levels.
- Capital expenditures for 2013 were projected at approximately $180 million, excluding land purchased for future sites and lease buy-outs and net of related asset sales.
- Management stated that cash, operating cash generation, revolving-credit availability, and secured floorplan facilities should fund foreseeable working-capital needs, debt service, taxes, commitments, and seasonal requirements.
- Key risks include sensitivity to U.S. vehicle sales and vehicle margins, manufacturer concentration and financial viability, substantial indebtedness and variable interest rates, covenant restrictions, goodwill and franchise-rights impairment, regulatory and CFPB scrutiny of dealer financing practices, higher health-care costs beginning in 2014, litigation, environmental liabilities, information-system failures, and adverse economic or weather conditions.
- A 100-basis-point interest-rate increase was estimated to increase annual floorplan interest expense by approximately $27.5 million and other variable-rate debt expense by approximately $9.0 million.
- The company had numerous legal proceedings but stated that it had adequately accrued probable and estimable losses and saw no indication of a reasonable possibility of a material additional loss. It also disclosed approximately $42 million of potential remaining rental obligations on assigned or sublet leases.
- Goodwill and franchise-rights qualitative impairment assessments as of April 30, 2013 indicated no impairment was more likely than not; no impairment charges were recorded in 2013.
Important Facts for Investors to Verify
- Whether new-vehicle margin compression, elevated 67-day inventory supply, and Import-segment competition persist.
- Whether finance and insurance gains continue despite potential changes to dealer-markup practices and CFPB-related regulation.
- Progress toward the approximately $180 million 2013 capital-expenditure plan and the contribution of the three acquired stores.
- Debt covenant headroom, variable-rate exposure, floorplan borrowing levels, and the $744.0 million revolving-credit availability.
- The recurring versus non-recurring nature of the $18 million rebranding expense and the effect of higher SG&A on operating leverage.
- Potential increases in employee health-care costs and compliance expenses beginning in 2014.
- Developments in legal proceedings, tax examinations, environmental matters, lease guarantees, and regulatory requirements.