AutoNation(AN) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents AutoNation, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, for Q1 2023 Unaudited Condensed Consolidated Balance Sheets As of March 31, 2023, total assets increased to $10.36 billion from $10.06 billion at year-end 2022, primarily driven by increases in inventory and goodwill Condensed Consolidated Balance Sheet Data (in millions) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $3,153.0 | $3,138.0 | | Inventory | $2,196.2 | $2,048.3 | | Goodwill | $1,450.2 | $1,320.1 | | Total Assets | $10,360.8 | $10,059.7 | | Total Current Liabilities | $3,780.8 | $3,405.7 | | Vehicle floorplan payable (trade & non-trade) | $2,185.7 | $2,109.3 | | Long-term debt, net | $3,584.7 | $3,586.9 | | Total Liabilities | $8,340.5 | $8,011.9 | | Total Shareholders' Equity | $2,020.3 | $2,047.8 | Unaudited Condensed Consolidated Statements of Income For the first quarter of 2023, total revenue decreased by 5.2% year-over-year to $6.40 billion, while diluted earnings per share increased to $6.07 Condensed Consolidated Statements of Income (in millions, except per share data) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Total Revenue | $6,398.7 | $6,752.8 | | New vehicle revenue | $2,931.9 | $2,807.2 | | Used vehicle revenue | $2,032.6 | $2,572.4 | | Parts and service revenue | $1,089.8 | $1,003.9 | | Total Gross Profit | $1,286.4 | $1,308.9 | | Operating Income | $443.3 | $519.0 | | Net Income | $288.7 | $362.1 | | Diluted EPS | $6.07 | $5.78 | | Diluted weighted average shares outstanding | 47.6 | 62.6 | Unaudited Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity decreased to $2.02 billion in Q1 2023, primarily due to common stock repurchases offsetting net income - Net income of $288.7 million was offset by $307.5 million in common stock repurchases (including excise tax) during Q1 2023[13] Unaudited Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $510.0 million in Q1 2023, while investing activities significantly increased due to acquisitions Summary of Cash Flows (in millions) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $510.0 | $643.2 | | Net cash used in investing activities | $(305.9) | $(59.0) | | Net cash used in financing activities | $(216.1) | $(36.5) | | Increase (Decrease) in Cash | $(12.0) | $547.7 | - Investing activities included $191.0 million used for business acquisitions, a significant increase from the prior year[15] - Financing activities were dominated by $315.7 million in common stock repurchases, partially offset by $235.0 million in net proceeds from commercial paper[17] Notes to Unaudited Condensed Consolidated Financial Statements The notes detail revenue disaggregation, debt instruments, goodwill allocation, and segment performance for Domestic, Import, and Premium Luxury segments - As of March 31, 2023, the company owned and operated 344 new vehicle franchises from 248 stores, primarily in the Sunbelt region, selling 33 different new vehicle brands[19] - In Q1 2023, the company acquired RepairSmith, a mobile automotive repair and maintenance business, which contributed to an increase in goodwill[52][76] - The company repurchased 2.4 million shares for $305.0 million in Q1 2023, with $879.4 million remaining available under the repurchase program as of March 31, 2023[73] Segment Revenue and Income - Q1 2023 (in millions) | Segment | Revenue | Segment Income | | :--- | :--- | :--- | | Domestic | $1,831.1 | $118.5 | | Import | $1,789.3 | $160.4 | | Premium Luxury | $2,484.9 | $226.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2023 financial results, including gross profit trends, market conditions, strategic initiatives, and capital allocation Results of Operations In Q1 2023, total revenue fell 5.2% to $6.4 billion, and operating income decreased 14.6% to $443.3 million compared to Q1 2022 Key Operating Metrics Variance (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | % Variance | | :--- | :--- | :--- | :--- | | Total Revenue | $6,398.7M | $6,752.8M | (5.2)% | | Total Gross Profit | $1,286.4M | $1,308.9M | (1.7)% | | Operating Income | $443.3M | $519.0M | (14.6)% | | New Vehicle Gross Profit PVR | $5,210 | $6,112 | (14.8)% | | Used Vehicle Gross Profit PVR | $2,117 | $1,566 | 35.2% | | Finance & Insurance PVR | $2,711 | $2,672 | 1.5% | - SG&A expenses increased 5.6% to $782.7 million, primarily due to acquisitions, new stores, and technology investments, rising to 60.8% of gross profit from 56.6% YoY[176][177] - Floorplan interest expense surged to $27.1 million from $5.2 million YoY, and other interest expense rose to $41.1 million from $29.6 million, both due to higher interest rates and debt balances[179][180] Segment Results In Q1 2023, Premium Luxury was the most resilient segment, while Domestic and Import segments experienced significant revenue and income declines Segment Performance (Q1 2023 vs Q1 2022, in millions) | Segment | Revenue (2023) | Revenue (2022) | % Change | Segment Income (2023) | Segment Income (2022) | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Domestic | $1,831.1 | $2,034.4 | (10.0)% | $118.5 | $149.4 | (20.7)% | | Import | $1,789.3 | $1,974.1 | (9.4)% | $160.4 | $186.2 | (13.9)% | | Premium Luxury | $2,484.9 | $2,478.7 | 0.3% | $226.8 | $229.5 | (1.2)% | Liquidity and Capital Resources AutoNation maintained strong liquidity in Q1 2023, focusing capital allocation on growth and shareholder returns through acquisitions and share repurchases Available Liquidity (in millions) | Source | March 31, 2023 | | :--- | :--- | | Cash and cash equivalents | $58.3 | | Revolving credit facility | $1,799.3 | Share Repurchases (Q1 2023) | Metric | Value | | :--- | :--- | | Shares repurchased (millions) | 2.4 | | Aggregate purchase price (millions) | $305.0 | | Average purchase price per share | $126.37 | | Remaining authorization (millions) | $879.4 | - The company is expanding its AutoNation USA used vehicle stores, targeting over 130 stores nationwide, and acquired RepairSmith, a mobile repair service, in Q1 2023[194][195] - The company was in compliance with its debt covenants, with a leverage ratio of 1.82x (requirement ≤ 3.75x) and a capitalization ratio of 61.3% (requirement ≤ 70.0%)[205] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risk from interest rate fluctuations on variable-rate debt and equity price changes in minority investments - A 100 basis point change in interest rates would result in an approximate change to annual floorplan interest expense of $21.9 million, based on the $2.2 billion of variable rate vehicle floorplan payable at March 31, 2023[225] - The company is subject to equity price risk from minority investments. A hypothetical 10% change in the price of its equity securities with readily determinable fair values ($14.3 million) would result in a $1.4 million gain/loss. A similar change in its investment without a readily determinable fair value ($56.7 million) would result in a $5.7 million gain/loss[229] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[230] - 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[231] PART II. OTHER INFORMATION Risk Factors This section refers to comprehensive risk factors from the 2022 Annual Report, including economic sensitivity, supply dependence, and regulatory impacts - The report refers to the risk factors detailed in the Annual Report on Form 10-K for the year ended December 31, 2022[234] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, AutoNation repurchased approximately 2.4 million shares for $305.0 million, with $879.4 million remaining for future repurchases Share Repurchase Activity (Q1 2023) | Period | Total Shares Purchased | Avg. Price Paid Per Share | Approx. Dollar Value Remaining (in millions) | | :--- | :--- | :--- | :--- | | Jan 2023 | 835,555 | $111.56 | $1,091.2 | | Feb 2023 | — | $— | $1,091.2 | | Mar 2023 | 1,577,918 | $134.22 | $879.4 | | Total | 2,413,473 | | $879.4 | Exhibits This section lists the exhibits filed with the Form 10-Q, including credit agreement amendments and CEO/CFO certifications - Filed exhibits include the Second Amendment to the Third Amended and Restated Credit Agreement, dated March 2, 2023[237] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) and 13a-14(b) of the Exchange Act were filed as exhibits[237]