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AN > SEC Filings for AN > Form 10-Q on 18-Apr-2014All Recent SEC Filings

Show all filings for AUTONATION, INC.

Form 10-Q for AUTONATION, INC.


18-Apr-2014

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. Certain reclassifications of amounts previously reported have been made in order to maintain consistency and comparability between periods presented. Overview
AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of March 31, 2014, we owned and operated 269 new vehicle franchises from 228 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 33 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 95% of the new vehicles that we sold during the three months ended March 31, 2014, are manufactured by Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, Chrysler, BMW, and Volkswagen. On January 31, 2013, we announced that we would 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 was completed in the second quarter of 2013. We are investing significantly to enhance our ability to generate our own digital traffic and to build an end-to-end customer experience in-store and through our digital channels.
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 and other protection 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 the AutoNation retail brand and advertising, implementing standardized processes, and increasing productivity across all of our stores.
At March 31, 2014, 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, Lexus, and Audi. 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, 2014, new vehicle sales accounted for approximately 56% of our total revenue, but approximately 21% of our total gross profit. Used vehicle sales accounted for approximately 24% 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, 2014, contributed approximately 65% of our total gross profit for the same period.

Results of Operations
First Quarter 2014 compared to First Quarter 2013 During the three months ended March 31, 2014, we had net income from continuing operations of $95.5 million or $0.79 per share on a diluted basis, as compared to net income from continuing operations of $83.2 million or $0.68 per share on a diluted basis during the same period in 2013.
Results for the three months ended March 31, 2014, were favorably impacted by a net gain related to business/property dispositions of $8.0 million ($5.0 million after-tax, or $0.04 per share), primarily related to the divestiture of our customer lead distribution business.
Market Conditions
In the first quarter of 2014, U.S. industry new vehicle unit sales increased 1% compared to the first quarter of 2013, driven in part by replacement demand, partially offset by inclement weather conditions in certain parts of the United States. Based on industry data, the average age of cars and trucks in the United States is at a record high of 11.4 years compared to an


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average age of 9.8 years during the period from 2002 to 2007. While a robust consumer credit environment and an increase in new product offerings from automotive manufacturers were supportive of a strong selling environment, increased competition pressured new vehicle margins, particularly in the Import segment. New vehicle margin compression was partially offset by continued strength in finance and insurance gross profit per vehicle retailed. We continue to anticipate full-year U.S. industry new vehicle unit sales will increase to above 16 million units in 2014 driven by replacement need, attractive products, and continued access to affordable credit. We also believe that improved conditions in the housing market may be supportive of sales. However, actual sales may materially differ. While we expect that the annual rate of U.S. new vehicle unit sales will improve in 2014 as compared to 2013, we expect that the rate of growth for the industry selling rate will be lower as compared to recent years. If new vehicle production exceeds the new vehicle industry selling rate, our new vehicle margins could be adversely impacted by excess supply and any resulting changes in consumer incentive, marketing, and other programs of vehicle manufacturers.
After several years of decline, the number of recent-model-year vehicles in operation has begun to grow due to increases in the annual rate of new vehicle sales in the United States since 2009. The growth in that portion of our service base, together with our customer retention efforts, has benefited the customer-pay service and warranty components of our parts and service business, and we believe that it will continue to benefit those components for the next several years. While the number of older vehicles in operation is expected to decline over the next few years, we believe that overall our parts and service business will benefit from the mix shift in our service base toward newer vehicles.
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 67,330 units in new vehicle inventory at March 31, 2014, 72,095 units at December 31, 2013, and 61,730 units at March 31, 2013.
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 $2.7 million at March 31, 2014, and $1.8 million at December 31, 2013. 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 $3.6 million at March 31, 2014 and December 31, 2013.

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 10K. 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, 2013, 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.


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We are scheduled to complete our annual test for impairment of goodwill as of April 30, 2014 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. Under accounting standards, we chose to make a qualitative evaluation about the likelihood of franchise rights impairment to determine whether it was necessary to perform a quantitative impairment test. We completed our qualitative assessment of franchise rights impairment as of April 30, 2013 and we determined that it was not more likely than not that the fair values of our franchise rights were less than their carrying amounts.
We are scheduled to complete our annual test for impairment of franchise rights as of April 30, 2014 and we will continue to monitor events or changes in circumstances in future periods to determine if additional asset impairment testing should be performed.
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, 2014, we had long-lived assets held for sale of $60.2 million in continuing operations and $34.5 million in discontinued operations. During the three months ended March 31, 2014, no impairment charges were recorded for the carrying value of long-lived assets held and used in continuing operations. We recorded a $0.3 million non-cash impairment charge during the three months ended March 31, 2014, associated with assets held for sale in continuing operations to reduce the carrying value of these assets to fair value less cost to sell. This charge is recorded as a component of Other Income, Net (within Operating Income) in the Unaudited Condensed Consolidated Statements of Income.
During the three months ended March 31, 2014, no impairment charges were recorded for the carrying value of long-lived assets held for sale in 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 13 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 per vehicle                                                      Favorable /             %
data)                                       2014                    2013               (Unfavorable)        Variance
Revenue:
New vehicle                          $     2,428.6           $     2,257.7           $         170.9             7.6
Retail used vehicle                          945.8                   899.2                      46.6             5.2
Wholesale                                    103.9                   110.5                      (6.6 )          (6.0 )
Used vehicle                               1,049.7                 1,009.7                      40.0             4.0
Finance and insurance, net                   172.4                   155.6                      16.8            10.8
Total variable operations(1)               3,650.7                 3,423.0                     227.7             6.7
Parts and service                            671.0                   636.6                      34.4             5.4
Other                                         41.8                    36.8                       5.0
Total revenue                        $     4,363.5           $     4,096.4           $         267.1             6.5
Gross profit:
New vehicle                          $       145.9           $       141.7           $           4.2             3.0
Retail used vehicle                           92.8                    83.4                       9.4            11.3
Wholesale                                      1.5                     2.6                      (1.1 )
Used vehicle                                  94.3                    86.0                       8.3             9.7
Finance and insurance                        172.4                   155.6                      16.8            10.8
Total variable operations(1)                 412.6                   383.3                      29.3             7.6
Parts and service                            286.7                   272.3                      14.4             5.3
Other                                          8.1                     8.4                      (0.3 )
Total gross profit                           707.4                   664.0                      43.4             6.5
Selling, general, and administrative
expenses                                     500.7                   473.3                     (27.4 )          (5.8 )
Depreciation and amortization                 25.6                    22.7                      (2.9 )
Other income, net                             (8.0 )                  (1.4 )                     6.6
Operating income                             189.1                   169.4                      19.7            11.6
Non-operating income (expense)
items:
Floorplan interest expense                   (13.2 )                 (12.9 )                    (0.3 )
Other interest expense                       (21.6 )                 (22.3 )                     0.7
Interest income                                  -                     0.1                      (0.1 )
Other income, net                              1.5                     1.6                      (0.1 )
Income from continuing operations
before income taxes                  $       155.8           $       135.9           $          19.9            14.6
Retail vehicle unit sales:
New vehicle                                 71,223                  67,159                     4,064             6.1
Used vehicle                                52,136                  50,505                     1,631             3.2
                                           123,359                 117,664                     5,695             4.8
Revenue per vehicle retailed:
New vehicle                          $      34,099           $      33,617           $           482             1.4
Used vehicle                         $      18,141           $      17,804           $           337             1.9
Gross profit per vehicle retailed:
New vehicle                          $       2,048           $       2,110           $           (62 )          (2.9 )
Used vehicle                         $       1,780           $       1,651           $           129             7.8
Finance and insurance                $       1,398           $       1,322           $            76             5.7
Total variable operations(2)         $       3,333           $       3,235           $            98             3.0

(1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results.
(2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales.


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                                                              Three Months Ended
                                                                  March 31,
                                                          2014 (%)         2013 (%)
Revenue mix percentages:
New vehicle                                                     55.7             55.1
Used vehicle                                                    24.1             24.6
Parts and service                                               15.4             15.5
Finance and insurance, net                                       4.0              3.8
Other                                                            0.8              1.0
Total                                                          100.0            100.0
Gross profit mix percentages:
New vehicle                                                     20.6             21.3
Used vehicle                                                    13.3             13.0
Parts and service                                               40.5             41.0
Finance and insurance                                           24.4             23.4
Other                                                            1.2              1.3
Total                                                          100.0            100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle                                                      6.0              6.3
Used vehicle - retail                                            9.8              9.3
Parts and service                                               42.7             42.8
Total                                                           16.2             16.2
Selling, general, and administrative expenses                   11.5             11.6
Operating income                                                 4.3              4.1
Operating items as a percentage of total gross profit:
Selling, general, and administrative expenses                   70.8             71.3
Operating income                                                26.7             25.5

                                                                  March 31,
                                                            2014             2013
Days supply:
New vehicle (industry standard of selling days) (1)        61 days          62 days
Used vehicle (trailing calendar month days)                31 days          29 days

(1) As of December 31, 2013, we have revised our method of calculating new vehicle days supply to exclude fleet sales and in-transit inventory. We have revised prior periods to conform to our revised method of calculation.


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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)                         2014               2013          (Unfavorable)      Variance
Revenue:
New vehicle                      $     2,388.2      $     2,257.7     $       130.5            5.8
Retail used vehicle                      931.5              899.2              32.3            3.6
Wholesale                                102.0              110.5              (8.5 )         (7.7 )
Used vehicle                           1,033.5            1,009.7              23.8            2.4
Finance and insurance, net               170.0              155.6              14.4            9.3
Total variable operations(1)           3,591.7            3,423.0             168.7            4.9
Parts and service                        660.5              636.6              23.9            3.8
Other                                     40.6               36.8               3.8
Total revenue                    $     4,292.8      $     4,096.4     $       196.4            4.8
Gross profit:
New vehicle                      $       143.6      $       141.7     $         1.9            1.3
Retail used vehicle                       91.4               83.4               8.0            9.6
Wholesale                                  1.4                2.6              (1.2 )
Used vehicle                              92.8               86.0               6.8            7.9
Finance and insurance                    170.0              155.6              14.4            9.3
Total variable operations(1)             406.4              383.3              23.1            6.0
Parts and service                        282.3              272.3              10.0            3.7
Other                                      8.0                8.4              (0.4 )
Total gross profit               $       696.7      $       664.0     $        32.7            4.9
Retail vehicle unit sales:
New vehicle                             69,724             67,159             2,565            3.8
Used vehicle                            51,111             50,505               606            1.2
                                       120,835            117,664             3,171            2.7
Revenue per vehicle retailed:
New vehicle                      $      34,252      $      33,617     $         635            1.9
Used vehicle                     $      18,225      $      17,804     $         421            2.4
Gross profit per vehicle
retailed:
New vehicle                      $       2,060      $       2,110     $         (50 )         (2.4 )
Used vehicle                     $       1,788      $       1,651     $         137            8.3
Finance and insurance            $       1,407      $       1,322     $          85            6.4
Total variable operations(2)     $       3,352      $       3,235     $         117            3.6

(1) Total variable operations includes new vehicle, used vehicle (retail and wholesale), and finance and insurance results.
(2) Total variable operations gross profit per vehicle retailed is calculated by dividing the sum of new vehicle, retail used vehicle, and finance and insurance gross profit by total retail vehicle unit sales.


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                                             Three Months Ended
                                                 March 31,
                                            2014 (%)    2013 (%)
Revenue mix percentages:
New vehicle                                      55.6       55.1
Used vehicle                                     24.1       24.6
Parts and service                                15.4       15.5
Finance and insurance, net                        4.0        3.8
Other                                             0.9        1.0
Total                                           100.0      100.0
Gross profit mix percentages:
New vehicle                                      20.6       21.3
Used vehicle                                     13.3       13.0
Parts and service                                40.5       41.0
Finance and insurance                            24.4       23.4
Other                                             1.2        1.3
Total                                           100.0      100.0
Operating items as a percentage of revenue:
Gross profit:
New vehicle                                       6.0        6.3
Used vehicle - retail                             9.8        9.3
Parts and service                                42.7       42.8
Total                                            16.2       16.2


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