AutoNation, Inc. Form 10-Q Summary
Business Context and Reporting Period
AutoNation, Inc. is the largest U.S. automotive retailer, operating 267 new-vehicle franchises through 226 stores as of September 30, 2013. Its operations include new and used vehicles, parts and service, finance and insurance, and related businesses. The filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $4,470.8 million | $3,933.8 million | $12,993.7 million | $11,495.3 million |
| Gross profit | $696.6 million | $622.6 million | $2,056.7 million | $1,853.6 million |
| Operating income | $187.2 million | $163.7 million | $537.5 million | $476.6 million |
| Net income | $92.6 million | $81.6 million | $265.5 million | $233.2 million |
| Diluted EPS | $0.75 | $0.66 | $2.15 | $1.84 |
| Operating margin | 4.2% | 4.2% | 4.1% | 4.1% |
| Gross margin | 15.6% | 15.8% | 15.8% | 16.1% |
| Operating cash flow | Not separately provided | Not separately provided | $468.3 million | $311.7 million |
- Q3 revenue increased 13.7%; nine-month revenue increased 13.0%.
- Q3 operating income increased 14.4%; nine-month operating income increased 12.8%.
- Parts and service and finance and insurance generated approximately 19% of nine-month revenue but approximately 65% of gross profit.
- Q3 retail unit sales were 76,943 new vehicles and 52,659 used vehicles. Nine-month retail unit sales were 218,454 new vehicles and 155,280 used vehicles.
- Finance and insurance gross profit per vehicle increased to $1,350 in Q3 from $1,290 and to $1,350 for nine months from $1,261.
- Cash and cash equivalents were $68.3 million at September 30, 2013, versus $69.7 million at December 31, 2012.
- Inventory was $2,504.8 million, including $2,010.3 million of new vehicles and $350.4 million of used vehicles.
Debt, Liquidity, and Capital Allocation
- Total non-vehicle debt was $1,856.3 million, including $396.1 million of 6.75% senior notes due 2018, $350.0 million of 5.5% senior notes due 2020, a $500.0 million term loan, $320.0 million drawn on the revolving facility, and $196.9 million under a mortgage facility.
- Vehicle floorplan payable totaled $2,600.9 million, consisting of $1,837.9 million of trade floorplan and $763.0 million of non-trade floorplan financing.
- Revolving credit availability was $824.0 million after borrowings and letters of credit. Eligible availability under secured used-vehicle floorplan facilities was $47.6 million.
- The company reported a 2.37x leverage ratio against a 3.75x maximum and a 55.9% capitalization ratio against a 65.0% maximum; it was in compliance with its financial covenants.
- Nine-month investing cash outflows were $211.8 million, including $110.6 million of property and equipment purchases, $41.9 million of operating lease buy-outs, and $72.9 million for acquisitions.
- Nine-month financing cash outflows were $257.9 million, including $220.0 million of net revolving-credit repayments and $18.6 million of share repurchases and related activity.
- Management expected 2013 capital expenditures of approximately $145 million, excluding land purchases for future sites and lease buy-outs and net of related asset sales. No cash dividends were anticipated for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Growth was driven by higher new- and used-vehicle volumes, improved consumer borrowing and confidence, new product offerings, acquisitions, and stronger finance and insurance results.
- New-vehicle gross profit per vehicle declined 4.6% in Q3 and 5.2% for nine months, primarily due to pressure in the Import segment. Used-vehicle gross profit per vehicle also declined 3.8% in Q3 and 2.9% for nine months.
- Higher finance and insurance profitability and parts and service results offset vehicle-margin pressure. Parts and service gross profit increased 10.0% in Q3 and 9.8% for nine months.
- SG&A increased 11.3% in Q3 and 11.1% for nine months. The company incurred approximately $18 million of non-recurring SG&A, primarily advertising, for the AutoNation rebranding initiative.
- Gross margin decreased from 15.8% to 15.6% in Q3 and from 16.1% to 15.8% for nine months, while operating margin remained approximately stable.
- Operating cash flow increased by $156.6 million year over year, primarily due to higher earnings and lower working-capital requirements.
- Long-term debt declined by $240.0 million from December 31, 2012, primarily due to reduced revolving-credit borrowings.
- No franchise-rights impairment was recorded in 2013; the prior-year nine-month period included a $4.2 million non-cash franchise-rights impairment charge.
- Three stores were acquired during the first nine months of 2013: Don Davis Toyota, SanTan Honda Superstore, and Hyundai of Tempe. Management stated that these acquisitions were not material.
Guidance, Outlook, Commentary, and Risks
- Management continued to anticipate full-year U.S. industry new-vehicle sales at the mid-15 million unit level, compared with 14.5 million units in 2012.
- Management cited replacement demand, an aging U.S. vehicle fleet, improved consumer credit, new vehicle products, customer retention, recalls, and manufacturer-paid maintenance as supportive factors.
- Competition was pressuring new-vehicle margins, particularly in the Import segment. Used-vehicle margins were also affected by compressed margins on premium-luxury certified pre-owned vehicles.
- Key risks include sensitivity to U.S. economic conditions and vehicle sales levels, dependence on vehicle manufacturers and captive lenders, substantial indebtedness and covenant restrictions, LIBOR-based interest-rate exposure, goodwill and franchise-rights impairment, legal and regulatory proceedings, manufacturer incentives, adverse weather, information-system failures, and potential changes affecting finance and insurance activities.
- A 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $26.0 million and other variable-rate debt interest expense by approximately $8.2 million.
- The company disclosed ongoing legal proceedings and assigned-lease obligations but stated that no material loss was reasonably possible beyond accrued amounts based on information available at the filing date. It also disclosed approximately $91.1 million of surety bonds, letters of credit, and cash deposits.
- Management stated that cash, operating cash flow, revolving-credit availability, and secured floorplan facilities should be sufficient for foreseeable working-capital, debt-service, tax, capital-expenditure, and contingency requirements.
Investor Verification Checklist
- Verify whether vehicle-volume growth can continue without further erosion in new- and used-vehicle gross profit per unit.
- Assess the sustainability of finance and insurance gross profit per vehicle and the potential impact of dealer-markup regulation and lender policy changes.
- Monitor inventory levels, days supply, floorplan balances, and the sensitivity of earnings to LIBOR-based interest rates.
- Review debt maturities, covenant headroom, revolving-credit availability, and the November 2017 mortgage balloon payment.
- Determine the recurring versus non-recurring effect of the approximately $18 million rebranding expense and related advertising spending.
- Track integration and returns from the 2013 acquisitions and the proposed O’Hare Honda and O’Hare Hyundai acquisitions, which were subject to manufacturer approval and other closing conditions.
- Evaluate potential exposure from manufacturer concentration, legal proceedings, regulatory developments, assigned leases, and goodwill or franchise-rights impairment.