AutoNation, Inc. — Fiscal 2018 Form 10-K Summary
Business Context and Reporting Period
AutoNation is the largest U.S. automotive retailer, operating 326 new-vehicle franchises across 239 stores, 85 branded collision centers, and more than 325 locations as of December 31, 2018. Its business includes new and used vehicles, parts and service, collision and wholesale parts operations, automotive auctions, AutoNation USA locations, and finance and insurance products. Reportable segments are Domestic, Import, and Premium Luxury.
This filing covers the fiscal year ended December 31, 2018. The filing is an annual Form 10-K rather than a quarterly filing; fourth-quarter results are separately disclosed in the selected quarterly information.
Financial Performance and Key Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $21.413 billion | $21.535 billion | (0.6%) |
| Gross profit | $3.397 billion | $3.359 billion | +1.1% |
| Gross margin | 15.9% | 15.6% | +30 bps |
| Operating income | $777.9 million | $843.4 million | (7.8%) |
| Operating margin | 3.6% | 3.9% | (30 bps) |
| Income from continuing operations | $395.9 million | $435.0 million | (9.0%) |
| Diluted EPS from continuing operations | $4.34 | $4.43 | (2.0%) |
| Net cash from operating activities | $511.0 million | $540.1 million | (5.4%) |
- New-vehicle revenue was $11.752 billion, down 3.5%; retail new-vehicle units declined 5.6% to 310,839. New-vehicle gross profit fell 12.3% to $516.1 million, and gross profit per vehicle declined 7.2% to $1,660.
- Used-vehicle revenue increased 5.0% to $5.123 billion, with retail used units up 1.5% to 237,722. Used-vehicle gross profit increased 8.4% to $341.7 million.
- Parts and service revenue increased 1.5% to $3.448 billion, while gross profit rose 4.3% to $1.555 billion. Finance and insurance gross profit increased 4.5% to $981.4 million.
- Parts and service and finance and insurance generated approximately 21% of revenue but approximately 75% of gross profit, supporting the company’s relatively diversified and higher-margin earnings mix.
- SG&A increased 3.0% to $2.510 billion, or 73.9% of gross profit versus 72.5% in 2017. Drivers included brand-extension investments, self-insurance costs, hail-related losses, and fourth-quarter restructuring expense.
- Capital expenditures, including operating lease buy-outs, were $393.6 million, up from $332.9 million. Net cash used in investing activities was $295.3 million.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $48.6 million at year-end, compared with $69.2 million in 2017.
- Vehicle floorplan payable was $3.998 billion, up from $3.807 billion. Total non-vehicle debt, including commercial paper and capital leases, was approximately $2.6 billion.
- Long-term debt, net of current maturities, was $1.926 billion. Commercial paper outstanding was $630.0 million, with a weighted-average rate of 3.22% and a remaining term of 21 days.
- Available liquidity was $588.0 million under the revolving credit facility, subject to the leverage covenant, plus $0.5 million of secured used-vehicle floorplan capacity. The company also had $48.6 million of cash.
- Debt covenants were satisfied at year-end. The leverage ratio was 3.06x versus a maximum of 3.75x, and the capitalization ratio was 60.6% versus a maximum of 70.0%.
- Interest expense was material and rising: floorplan interest expense increased to $130.4 million from $97.0 million, primarily because of higher interest rates. A 100-basis-point rate increase would have increased annual floorplan interest expense by approximately $40.0 million based on year-end balances.
- The company repurchased 2.1 million shares for $100.0 million in 2018; $263.7 million remained available under the repurchase authorization. No cash dividends were paid or anticipated for the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Revenue declined modestly, but gross profit increased as used vehicles, parts and service, and finance and insurance offset weaker new-vehicle results.
- Profitability declined because of lower new-vehicle margins and volume, increased SG&A, higher floorplan interest, and greater corporate and strategic-investment costs.
- Domestic revenue declined 4.3% and segment income declined 3.0%; Import revenue declined 1.3% while segment income increased 0.5%; Premium Luxury revenue increased 2.6% while segment income declined 2.3%.
- The company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method, resulting in a $10.1 million after-tax cumulative increase to retained earnings. The filing states that reported 2018 net income was $4.8 million higher than it would have been without adoption.
- In 2018, AutoNation divested 17 stores and one collision center, acquired one Premium Luxury store and two collision centers, and opened nine collision centers, one auction, and two AutoNation USA stores.
- AutoNation invested $50.0 million in Vroom, representing approximately 7% ownership at the time, and entered into a partnership with Fair. Management did not expect these initiatives to materially affect near-term financial results.
- Fourth-quarter 2018 included $9.4 million of restructuring expense. The company expects the restructuring plan to reduce annual spending by approximately $50 million, with additional expenses expected in the first quarter of 2019.
Guidance, Outlook, Commentary, and Risks
- Management expected 2019 U.S. new-vehicle industry sales to decline to the high-16-million-unit level from 17.3 million in 2018, although actual results could differ materially.
- Management cited a challenging 2019 automotive retail environment, competitive manufacturer incentive programs, elevated leasing and incentives, higher interest rates, and growing off-lease used-vehicle supply.
- Key risks include sensitivity to economic conditions, fuel prices, interest rates, tariffs, vehicle affordability, manufacturer production and incentives, and competition from online and mobile platforms.
- AutoNation is dependent on the financial condition and performance of its franchising manufacturers. Approximately 92% of 2018 new-vehicle sales came from brands manufactured by nine major manufacturers.
- Approximately 62% of revenue was generated in Florida, Texas, and California, exposing the company to regional economic conditions and natural disasters.
- Legal, regulatory, consumer-protection, employment, environmental, privacy, cybersecurity, and manufacturer-franchise risks could adversely affect results. Management did not believe existing legal proceedings or environmental matters would have a material adverse effect, but unfavorable outcomes remain possible.
- Franchise rights impairment charges were $8.1 million in 2018. Goodwill and franchise rights totaled approximately $2.1 billion at year-end and remain subject to impairment risk.
- Operating lease accounting adoption on January 1, 2019 was expected to add approximately $325 million to $400 million of operating lease liabilities and corresponding right-of-use assets.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion from KPMG LLP.
Most Important Facts for Investors to Verify
- Whether new-vehicle gross profit per vehicle and overall new-vehicle volume continue to deteriorate under competitive manufacturer incentive programs.
- Whether the restructuring produces the targeted approximately $50 million of annual savings and the amount of related 2019 charges.
- Current availability under the revolving credit facility and compliance with the 3.75x leverage and 70.0% capitalization covenants.
- Refinancing requirements for the $630.0 million commercial paper balance and senior notes maturing in 2020 and 2021.
- Exposure to further interest-rate increases, particularly the approximately $40 million annual floorplan-interest sensitivity per 100 basis points.
- Progress and returns from investments in Vroom, Fair, AutoNation USA, collision centers, branded parts, and other digital initiatives.
- Changes in chargeback liabilities, self-insurance reserves, legal proceedings, franchise-rights valuations, and manufacturer receivables.
- The balance-sheet impact and future expense implications of ASC Topic 842 lease adoption.