AutoNation(AN) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements AutoNation's unaudited condensed consolidated financial statements show asset growth, increased revenue, and a significant rise in diluted EPS driven by share repurchases Unaudited Condensed Consolidated Balance Sheets AutoNation's balance sheet as of September 30, 2022, shows increased total assets to $9.42 billion and liabilities, while shareholders' equity decreased due to share repurchases Condensed Consolidated Balance Sheet Data (in millions) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $442.9 | $60.4 | | Inventory | $1,851.3 | $1,847.9 | | Total Current Assets | $3,075.0 | $2,811.7 | | Goodwill | $1,233.3 | $1,235.3 | | Total Assets | $9,415.3 | $8,943.6 | | Liabilities & Equity | | | | Vehicle floorplan payable | $1,624.8 | $1,457.6 | | Total Current Liabilities | $2,935.4 | $3,059.8 | | Long-Term Debt, Net | $3,532.8 | $2,846.2 | | Total Liabilities | $7,160.1 | $6,566.6 | | Total Shareholders' Equity | $2,255.2 | $2,377.0 | Unaudited Condensed Consolidated Statements of Operations Q3 2022 operations show a 4.5% revenue increase to $6.67 billion, modest gross profit growth, and a significant rise in diluted EPS to $6.31 despite a slight net income decrease Q3 and Nine Months Performance Summary (in millions, except EPS) | Metric | Q3 2022 | Q3 2021 | 9 Months 2022 | 9 Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $6,666.0 | $6,379.5 | $20,288.0 | $19,261.7 | | New Vehicle Revenue | $2,863.9 | $2,753.8 | $8,606.9 | $9,164.4 | | Used Vehicle Revenue | $2,401.7 | $2,323.2 | $7,494.5 | $6,295.2 | | Parts and Service Revenue | $1,032.1 | $943.7 | $3,072.3 | $2,745.5 | | Total Gross Profit | $1,312.8 | $1,271.9 | $3,983.4 | $3,631.0 | | Operating Income | $522.5 | $503.3 | $1,599.6 | $1,370.4 | | Net Income | $352.6 | $361.7 | $1,091.0 | $985.9 | | Diluted EPS (Continuing Ops) | $6.31 | $5.12 | $18.53 | $12.63 | Unaudited Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $2.26 billion by Q3 2022, primarily due to $1.21 billion in common stock repurchases offsetting net income - For the nine months ended September 30, 2022, the company repurchased common stock totaling $1,213.1 million ($380.9 million in Q1, $403.9 million in Q2, $428.2 million in Q3)[13] - Total shareholders' equity declined from $2.38 billion at the start of the year to $2.26 billion at the end of Q3 2022, mainly due to share buybacks[13] Unaudited Condensed Consolidated Statements of Cash Flows Nine-month cash flow shows $1.44 billion from operations, $247.3 million used in investing, and $813.6 million used in financing, primarily for $1.18 billion in stock repurchases Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,443.3 | $1,559.2 | | Net cash used in investing activities | ($247.3) | ($225.5) | | Net cash used in financing activities | ($813.6) | ($1,831.3) | | Increase (Decrease) in Cash | $382.4 | ($497.6) | - Financing activities in the first nine months of 2022 included $1.18 billion for stock repurchases and $698.8 million in proceeds from new 3.85% Senior Notes, offset by a $340.0 million net payment of commercial paper[20] Notes to Financial Statements Notes detail AutoNation's operations, segment revenue, $700 million senior notes issuance, ongoing share repurchases, and the strategic acquisition of CIG Financial - As of September 30, 2022, the company operated 336 new vehicle franchises, 56 collision centers, and 12 AutoNation USA used vehicle stores[22] - In February 2022, the company issued $700 million of 3.85% Senior Notes due 2032[62] - As of September 30, 2022, $681.5 million remained available for share repurchases. In October 2022, the Board increased this authorization by an additional $1.0 billion[73] - In October 2022, the company acquired CIG Financial, an auto finance company, marking an expansion of its business model[80] Management's Discussion and Analysis (MD&A) MD&A highlights strong Q3 2022 operating income driven by high demand and record new vehicle gross profit, alongside strategic expansion and continued share repurchases Results of Operations Q3 2022 results show 4.5% revenue growth, record new vehicle gross profit per unit, declining used vehicle margins, and increased SG&A, leading to a 3.8% rise in operating income Key Performance Indicators (Q3 2022 vs Q3 2021) | Metric | Q3 2022 | Q3 2021 | % Change | | :--- | :--- | :--- | :--- | | New Vehicle GP per unit | $5,934 | $5,484 | 8.2% | | Used Vehicle GP per unit | $1,870 | $2,103 | (11.1%) | | F&I GP per unit | $2,755 | $2,569 | 7.2% | | New Vehicle Unit Sales | 55,565 | 58,277 | (4.7%) | | Used Vehicle Unit Sales | 75,355 | 77,553 | (2.8%) | - Market conditions in Q3 2022 continued to be defined by a shortage of new vehicles, leading to higher profitability on available units. U.S. industry retail new vehicle sales decreased 4% YoY[127] - SG&A as a percentage of gross profit increased to 58.1% in Q3 2022 from 56.9% in Q3 2021, driven by acquisitions, strategic investments, and gross margin pressure[207][208] Segment Results Q3 2022 segment results show strong Premium Luxury growth, Domestic segment income decline due to margin pressure, and significant revenue and income drops in the Import segment from inventory shortages Segment Income (Q3 2022 vs Q3 2021, in millions) | Segment | Q3 2022 Income | Q3 2021 Income | % Change | | :--- | :--- | :--- | :--- | | Domestic | $142.7 | $149.1 | (4.3%) | | Import | $180.3 | $200.7 | (10.2%) | | Premium Luxury | $235.2 | $206.1 | 14.1% | - The Premium Luxury segment's strong performance was driven by acquisitions and a 13.6% increase in new vehicle unit sales, benefiting from improving supply compared to other segments[197][198] - The Import segment was most affected by supply chain issues, with new vehicle unit sales plummeting 20.2% YoY, leading to lower revenue and income despite strong pricing[190][191][192] Liquidity and Capital Resources AutoNation maintains strong liquidity with $442.9 million cash and $1.76 billion credit, prioritizing share repurchases ($1.21 billion spent), and remains compliant with debt covenants Available Liquidity (as of Sep 30, 2022, in millions) | Source | Amount | | :--- | :--- | | Cash and cash equivalents | $442.9 | | Revolving credit facility | $1,760.2 | | Secured used vehicle floorplan facilities | $0.2 | Share Repurchases (Nine Months Ended Sep 30) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Shares repurchased (millions) | 10.9 | 19.2 | | Aggregate purchase price (billions) | $1.21 | $1.92 | | Average price per share | $110.96 | $100.13 | - The company is expanding its AutoNation USA used vehicle stores, targeting over 130 locations with an estimated capital investment of $10 million to $12 million per store[228] - The company was in compliance with its debt covenants, with a leverage ratio of 1.54x (vs. ≤ 3.75x limit) and a capitalization ratio of 56.0% (vs. ≤ 70.0% limit)[236] Quantitative and Qualitative Disclosures about Market Risk AutoNation's primary market risk is interest rate exposure on its $1.6 billion variable-rate vehicle floorplan debt, with a 100 basis point increase impacting annual interest expense by $16.2 million - The company is exposed to interest rate risk on its $1.6 billion of variable-rate vehicle floorplan payable[254] - A 100 basis point change in interest rates would change the annual floorplan interest expense by approximately $16.2 million as of September 30, 2022[254] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during Q3 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[256] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[257] PART II. OTHER INFORMATION Risk Factors Updated risk factors highlight new exposures from the CIG Financial acquisition, including potential credit losses, funding reliance on securitization markets, and extensive regulatory oversight - A new risk factor has been introduced following the acquisition of CIG Financial in October 2022, related to originating and servicing auto finance loans[259] - Key risks from the new financing business include greater credit losses than anticipated, reliance on securitization markets for funding, and extensive government regulation of finance companies[259][260][261] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2022, AutoNation repurchased 3.77 million shares for $428.2 million, with $681.5 million remaining under authorization, subsequently increased by $1.0 billion Share Repurchases (Q3 2022) | Period | Total Shares Purchased | Avg. Price Paid Per Share | | :--- | :--- | :--- | | July 2022 | 333,496 | $114.70 | | August 2022 | 983,569 | $123.10 | | September 2022 | 2,455,427 | $109.50 | | Total Q3 | 3,772,492 | N/A | - As of September 30, 2022, $681.5 million remained available for share repurchases, and in October 2022, the Board of Directors increased the authorization by an additional $1.0 billion[264] Exhibits This section lists exhibits filed with the Form 10-Q, including credit agreement amendments, employment agreements, and CEO/CFO certifications - Filed exhibits include an amendment to the credit agreement, an employment letter agreement, and CEO/CFO certifications pursuant to Sarbanes-Oxley[265]