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AN > SEC Filings for AN > Form 10-Q on 19-Apr-2013All Recent SEC Filings

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Form 10-Q for AUTONATION, INC.


19-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our most recent Annual Report on Form 10-K.
Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of March 31, 2013, we owned and operated 263 new vehicle franchises from 222 stores located in the United States, predominantly in major metropolitan markets in the Sunbelt region. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 32 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 96% of the new vehicles that we sold during the three months ended March 31, 2013, are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, BMW, Chrysler, and Volkswagen. On January 31, 2013, we announced that we will be marketing our Domestic and Import stores under the AutoNation retail brand. The rebranding of these stores, which previously operated under various local market retail brands, commenced in the first quarter of 2013 and is expected to be completed in the second quarter of 2013.
We offer a diversified range of automotive products and services, including new vehicles, used vehicles, "parts and service," which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive "finance and insurance" products, which include vehicle service, insurance, and other products, as well as the arranging of financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging our market brands and advertising, improving asset management, implementing standardized processes, and increasing productivity across all of our stores. At March 31, 2013, we had three operating and reportable segments: (1) Domestic,
(2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Chrysler. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-Benz, BMW, and Lexus. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products. For the three months ended March 31, 2013, new vehicle sales accounted for approximately 55% of our total revenue, but approximately 21% of our total gross profit. Used vehicle sales accounted for approximately 25% of our total revenue, and approximately 13% of our total gross profit. Our parts and service and finance and insurance operations, while comprising approximately 19% of our total revenue for the three months ended March 31, 2013, contributed approximately 64% of our total gross profit for the same period.

Results of Operations
First Quarter 2013 compared to First Quarter 2012 During the three months ended March 31, 2013, we had net income from continuing operations of $83.2 million or $0.68 per share on a diluted basis, as compared to net income from continuing operations of $73.5 million or $0.56 per share on a diluted basis during the same period in 2012. Market Conditions
In the first quarter of 2013, U.S. industry new vehicle unit sales increased 6% compared to the first quarter of 2012, driven in part by replacement demand. Based on industry data, the average age of cars and trucks in the United States is at a record high of nearly 11 years compared to an average age of 9 years during the period from 2000 to 2007. A robust consumer credit environment and an increase in new product offerings from automotive manufacturers were also supportive of a strong selling environment.
We continue to anticipate full-year U.S. industry new vehicle unit sales will be at the mid-15 million unit level, an improvement compared to 2012 but still below pre-recession levels.


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After several years of decline, the number of recent-model-year vehicles in operation, our primary service base, has stabilized due to increases in the annual rate of new vehicle sales in the United States since 2009. As a result, our parts and service business has begun to benefit, and we expect that it will continue to benefit over the next several years as this service base is expected to gradually return to pre-recession levels. Inventory Management
Our new and used vehicle inventories are stated at the lower of cost or market on our consolidated balance sheets. We monitor our vehicle inventory levels closely based on current economic conditions and seasonal sales trends. We have generally not experienced losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We had 61,730 units in new vehicle inventory at March 31, 2013, 58,819 units at December 31, 2012, and 47,442 units at March 31, 2012.
We recondition the majority of used vehicles acquired for retail sale in our parts and service departments and capitalize the related costs to the used vehicle inventory. In general, used vehicles that are not sold on a retail basis are liquidated at wholesale auctions. We record estimated losses on used vehicle inventory. Our used vehicle inventory balance was net of cumulative write-downs of $0.9 million at March 31, 2013, and $1.2 million at December 31, 2012. Parts, accessories, and other inventory are carried at the lower of acquisition cost (first-in, first-out method) or market. We estimate the amount of potential obsolete inventory based upon past experience and market trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $3.1 million at March 31, 2013, and $3.2 million at December 31, 2012.

Critical Accounting Policies and Estimates We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For additional discussion of our critical accounting policies and estimates, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10?K. Goodwill
Goodwill for our Domestic, Import, and Premium Luxury reporting units is tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred.
Under accounting standards, we chose to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of our reporting units under the two-step goodwill impairment test. We completed our qualitative assessment of potential goodwill impairment as of April 30, 2012, and we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts.The fair values of the Domestic, Import, and Premium Luxury reporting units were substantially in excess of their carrying values as of April 30, 2011, the date of our most recent quantitative annual impairment test. We are scheduled to complete our annual test for impairment of goodwill as of April 30, 2013, and we will continue to monitor events or changes in circumstances in future periods to determine if additional asset impairment testing should be performed.
Other Intangible Assets
Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We are scheduled to complete our annual test for impairment of other intangible assets as of April 30, 2013, and we will continue to monitor events or changes in circumstances in future periods to determine if additional asset impairment testing should be performed.


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Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or changes in circumstances indicate that their carrying amounts may be impaired. Such events or changes may include a significant decrease in market value, a significant change in the business climate in a particular market, a current expectation that more-likely-than-not a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life, or a current-period operating or cash flow loss combined with historical losses or projected future losses.
When property and equipment is identified as held for sale, we reclassify the held for sale assets to Other Current Assets and cease recording depreciation. We measure each long-lived asset or disposal group at the lower of its carrying amount or fair value less cost to sell and recognize a loss for any initial adjustment of the long-lived asset's or disposal group's carrying amount to fair value less cost to sell in the period the "held for sale" criteria are met. We periodically evaluate the carrying value of assets held for sale to determine if, based on market conditions, the values of these assets should be adjusted. As of March 31, 2013, we had long-lived assets held for sale of $71.1 million in continuing operations and $36.7 million in discontinued operations. During the three months ended March 31, 2013 and 2012, no impairment charges were recorded for the carrying value of long-lived assets held and used in continuing operations, and no impairment charges were recorded for the carrying value of long-lived assets held for sale in continuing or discontinued operations.
The fair value measurements for our property and equipment and assets held for sale are based on Level 3 inputs, which considered information from third-party real estate valuation sources, or, in certain cases, pending agreements to sell the related assets. See Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our fair value measurement valuation process. Although we believe our property and equipment and assets held for sale are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets.


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Reported Operating Data
Historical operating results include the results of acquired businesses from the
date of acquisition.

                                                Three Months Ended March 31,
                                                                   Variance
($ in millions, except                                            Favorable /           %
per vehicle data)                  2013             2012         (Unfavorable)      Variance
Revenue:
New vehicle                   $    2,257.7     $    1,994.3     $       263.4            13.2
Used vehicle                       1,009.7            918.8              90.9             9.9
Parts and service                    636.6            599.9              36.7             6.1
Finance and insurance, net           155.6            130.2              25.4            19.5
Other                                 36.8             13.8              23.0
Total revenue                 $    4,096.4     $    3,657.0     $       439.4            12.0
Gross profit:
New vehicle                   $      141.7     $      134.0     $         7.7             5.7
Used vehicle                          86.0             81.1               4.9             6.0
Parts and service                    272.3            250.2              22.1             8.8
Finance and insurance                155.6            130.2              25.4            19.5
Other                                  8.4              7.5               0.9
Total gross profit                   664.0            603.0              61.0            10.1
Selling, general, and
administrative expenses              473.3            432.9             (40.4 )          (9.3 )
Depreciation and amortization         22.7             21.2              (1.5 )
Other expenses (income), net          (1.4 )            0.2               1.6
Operating income                     169.4            148.7              20.7            13.9
Non-operating income
(expense) items:
Floorplan interest expense           (12.9 )          (10.7 )            (2.2 )
Other interest expense               (22.3 )          (20.5 )            (1.8 )
Interest income                        0.1              0.1                 -
Other income, net                      1.6              2.0              (0.4 )
Income from continuing
operations before income
taxes                         $      135.9     $      119.6     $        16.3            13.6
Retail vehicle unit sales:
New vehicle                         67,159           61,516             5,643             9.2
Used vehicle                        50,505           46,116             4,389             9.5
                                   117,664          107,632            10,032             9.3
Revenue per vehicle retailed:
New vehicle                   $     33,617     $     32,419     $       1,198             3.7
Used vehicle                  $     17,804     $     17,371     $         433             2.5
Gross profit per vehicle
retailed:
New vehicle                   $      2,110     $      2,178     $         (68 )          (3.1 )
Used vehicle                  $      1,651     $      1,702     $         (51 )          (3.0 )
Finance and insurance         $      1,322     $      1,210     $         112             9.3


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                                                             Three Months Ended
                                                                 March 31,
                                                          2013 (%)       2012 (%)
Revenue mix percentages:
New vehicle                                                     55.1           54.5
Used vehicle                                                    24.6           25.1
Parts and service                                               15.5           16.4
Finance and insurance, net                                       3.8            3.6
Other                                                            1.0            0.4
Total                                                          100.0          100.0
Gross profit mix percentages:
New vehicle                                                     21.3           22.2
Used vehicle                                                    13.0           13.4
Parts and service                                               41.0           41.5
Finance and insurance                                           23.4           21.6
Other                                                            1.3            1.3
Total                                                          100.0          100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle                                                      6.3            6.7
Used vehicle - retail                                            9.3            9.8
Parts and service                                               42.8           41.7
Total                                                           16.2           16.5
Selling, general, and administrative expenses                   11.6           11.8
Operating income                                                 4.1            4.1
Operating items as a percentage of total gross profit:
Selling, general, and administrative expenses                   71.3           71.8
Operating income                                                25.5           24.7

                                                                 March 31,
                                                            2013           2012
Days supply:
New vehicle (industry standard of selling days,
including fleet)                                           63 days        54 days
Used vehicle (trailing calendar month days)                29 days        29 days

The following table details net new vehicle inventory carrying benefit, consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit.

                                                 Three Months Ended March 31,
(In millions)                                  2013           2012        Variance
Floorplan assistance                       $    18.6       $    17.2     $     1.4
Floorplan interest expense (new vehicles)      (12.3 )         (10.4 )        (1.9 )
Net new vehicle inventory carrying benefit $     6.3       $     6.8     $    (0.5 )


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Same Store Operating Data
We have presented below our operating results on a same store basis to reflect
our internal performance. The "Same Store" amounts presented below include the
results of our stores for the identical months in each period presented in the
comparison, commencing with the first full month in which the store was owned by
us.

                                               Three Months Ended March 31,
                                                                   Variance
($ in millions, except per                                       Favorable /            %
vehicle data)                   2013              2012          (Unfavorable)        Variance
Revenue:
New vehicle                $     2,188.5     $     1,994.3     $        194.2              9.7
Used vehicle                       975.2             918.8               56.4              6.1
Parts and service                  623.2             599.9               23.3              3.9
Finance and insurance, net         151.5             130.2               21.3             16.4
Other                               34.2              13.8               20.4
Total revenue              $     3,972.6     $     3,657.0     $        315.6              8.6
Gross profit:
New vehicle                $       136.9     $       134.0     $          2.9              2.2
Used vehicle                        83.4              81.1                2.3              2.8
Parts and service                  266.4             250.2               16.2              6.5
Finance and insurance              151.5             130.2               21.3             16.4
Other                                8.3               7.5                0.8
Total gross profit         $       646.5     $       603.0     $         43.5              7.2
Retail vehicle unit sales:
New vehicle                       65,292            61,516              3,776              6.1
Used vehicle                      49,201            46,116              3,085              6.7
                                 114,493           107,632              6,861              6.4
Revenue per vehicle
retailed:
New vehicle                $      33,519     $      32,419     $        1,100              3.4
Used vehicle               $      17,687     $      17,371     $          316              1.8
Gross profit per vehicle
retailed:
New vehicle                $       2,097     $       2,178     $          (81 )           (3.7 )
Used vehicle               $       1,646     $       1,702     $          (56 )           (3.3 )
Finance and insurance      $       1,323     $       1,210     $          113              9.3


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                                             Three Months Ended
                                                 March 31,
                                            2013 (%)    2012 (%)
Revenue mix percentages:
New vehicle                                      55.1       54.5
Used vehicle                                     24.5       25.1
Parts and service                                15.7       16.4
Finance and insurance, net                        3.8        3.6
Other                                             0.9        0.4
Total                                           100.0      100.0
Gross profit mix percentages:
New vehicle                                      21.2       22.2
Used vehicle                                     12.9       13.4
Parts and service                                41.2       41.5
Finance and insurance                            23.4       21.6
Other                                             1.3        1.3
Total                                           100.0      100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle                                       6.3        6.7
Used vehicle - retail                             9.3        9.8
Parts and service                                42.7       41.7
Total                                            16.3       16.5


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New Vehicle
                                                    Three Months Ended March 31,
                                                                      Variance
($ in millions, except per vehicle                                   Favorable /         %
data)                                    2013           2012        (Unfavorable)     Variance
Reported:
Revenue                              $  2,257.7     $  1,994.3     $       263.4         13.2
Gross profit                         $    141.7     $    134.0     $         7.7          5.7
Retail vehicle unit sales                67,159         61,516             5,643          9.2
Revenue per vehicle retailed         $   33,617     $   32,419     $       1,198          3.7
Gross profit per vehicle retailed    $    2,110     $    2,178     $         (68 )       (3.1 )
Gross profit as a percentage of
revenue                                     6.3 %          6.7 %
Days supply (industry standard of
selling days, including fleet)          63 days        54 days
                                                    Three Months Ended March 31,
                                                                      Variance
                                                                     Favorable /         %
                                         2013           2012        (Unfavorable)     Variance
Same Store:
Revenue                              $  2,188.5     $  1,994.3     $       194.2          9.7
Gross profit                         $    136.9     $    134.0     $         2.9          2.2
Retail vehicle unit sales                65,292         61,516             3,776          6.1
Revenue per vehicle retailed         $   33,519     $   32,419     $       1,100          3.4
Gross profit per vehicle retailed    $    2,097     $    2,178     $         (81 )       (3.7 )
Gross profit as a percentage of
revenue                                     6.3 %          6.7 %

First Quarter 2013 compared to First Quarter 2012 Same store new vehicle revenue increased during the three months ended March 31, 2013, as compared to the same period in 2012, as a result of an increase in same store unit volume and an increase in revenue per new vehicle retailed. The increase in same store unit volume was primarily due to replacement demand and improved market conditions, including increased consumer borrowing as compared to the prior year. An improved credit environment and an increase in new product offerings from automotive manufacturers also favorably impacted same store unit volume.
Same store revenue per new vehicle retailed during the three months ended March 31, 2013, benefited from an increase in the average selling prices for new vehicles in all three segments, as well as a shift in mix toward premium luxury vehicles, which have relatively higher average selling prices.
Same store gross profit per new vehicle retailed decreased during the three months ended March 31, 2013, as compared to the same period in 2012, primarily due to a decrease in gross profit per new vehicle retailed for import vehicles as a result of lower volume-based incentives as compared to the prior year, partially offset by a shift in mix toward premium luxury vehicles, which have a relatively higher gross profit per vehicle retailed. New Vehicle Inventories
Our new vehicle inventories were $2.0 billion or 63 days supply at March 31, 2013, as compared to new vehicle inventories of $1.9 billion or 55 days supply at December 31, 2012 and $1.6 billion or 54 days supply at March 31, 2012. We had 61,730 units in new vehicle inventory at March 31, 2013, 58,819 units at December 31, 2012, and 47,442 units at March 31, 2012.


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The following table details net new vehicle inventory carrying benefit, consisting of new vehicle floorplan interest expense, net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit.

                                                 Three Months Ended March 31,
(In millions)                                  2013           2012        Variance
Floorplan assistance                       $    18.6       $    17.2     $     1.4
Floorplan interest expense (new vehicles)      (12.3 )         (10.4 )        (1.9 )
Net new vehicle inventory carrying benefit $     6.3       $     6.8     $    (0.5 )

First Quarter 2013 compared to First Quarter 2012 The net new vehicle inventory carrying benefit decreased during the three months ended March 31, 2013, as compared to the same period in 2012 primarily due to an increase in floorplan interest expense, partially offset by an increase in . . .

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