AutoNation, Inc. — Fiscal 2019 Form 10-K Summary
Reporting period: Year ended December 31, 2019. The filing includes unaudited fourth-quarter information; it is an annual Form 10-K rather than a standalone quarterly filing. AutoNation operated 317 new-vehicle franchises across 231 U.S. stores, plus 81 collision centers, five AutoNation USA stores, four auction operations, and 17 parts distribution centers.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $21,335.7 million | $21,412.8 million | (0.4%) |
| Gross profit | $3,523.0 million | $3,397.3 million | +3.7% |
| Operating income | $823.6 million | $777.9 million | +5.9% |
| Income from continuing operations | $450.8 million | $395.9 million | +13.9% |
| Net income | $450.0 million | $396.0 million | +13.6% |
| Diluted EPS | $4.97 | $4.34 | +14.5% |
| Operating cash flow | $769.2 million | $511.0 million | +50.5% |
Revenue mix: New vehicles generated $11,166.5 million, used vehicles $5,466.5 million, parts and service $3,572.1 million, and finance and insurance $1,023.3 million. New vehicles represented approximately 52% of revenue but only 14% of gross profit, while parts and service and finance and insurance together represented approximately 22% of revenue and 75% of gross profit.
Margins: Gross margin was approximately 16.5%, compared with 15.9% in 2018. Operating margin was approximately 3.9%, compared with 3.6%. Net margin was approximately 2.1%, compared with 1.8%.
Unit volumes and per-unit economics: New-vehicle retail sales declined 9.1% to 282,602 units, while used-vehicle retail sales increased 3.5% to 246,113 units. New-vehicle gross profit per vehicle increased 7.4% to $1,783; used-vehicle gross profit per vehicle increased 2.2% to $1,409; and finance and insurance gross profit per vehicle increased 8.2% to $1,935.
Balance sheet and liquidity: Cash and cash equivalents were $42.0 million. Total assets were $10.54 billion and shareholders’ equity was $3.16 billion. Vehicle floorplan payable was $3.58 billion, compared with $4.00 billion in 2018. Non-vehicle debt, including commercial paper and finance leases, was approximately $2.1 billion. The company reported $1.42 billion of availability under its revolving credit facility, subject to covenant limitations, and $0.6 million of additional secured used-vehicle floorplan availability.
Debt covenants: AutoNation reported a 2.24x leverage ratio against a maximum of 3.75x and a 54.5% capitalization ratio against a maximum of 70.0%; it was in compliance at year-end. The company repaid its $350.0 million of 5.5% senior notes in February 2020 using commercial paper.
Capital allocation: Capital expenditures were $257.4 million. The company repurchased 1.3 million shares for $44.7 million, with $219.0 million remaining under the repurchase authorization. No cash dividends were paid, and management did not anticipate paying dividends for the foreseeable future.
Material Changes Versus 2018
- Revenue declined modestly as lower new-vehicle volume offset growth in used vehicles, parts and service, and finance and insurance.
- Gross profit increased 3.7%, driven principally by used vehicles, parts and service, finance and insurance, and higher new-vehicle gross profit per unit.
- Segment income increased in Domestic, Import, and Premium Luxury. Premium Luxury revenue increased 6.0% and segment income increased 11.8%.
- SG&A increased 1.9% to $2,558.6 million, primarily due to higher performance-based compensation and executive separation costs, partly offset by lower restructuring and overhead expenses.
- Floorplan interest expense increased to $138.4 million from $130.4 million because of higher average interest rates, although Federal Reserve rate cuts benefited the second half of 2019.
- Other interest expense declined to $106.7 million from $119.4 million due to lower average debt and the repayment of 6.75% senior notes in 2018.
- Operating cash flow improved substantially, aided by higher earnings and lower working-capital requirements, including a $296.0 million decrease in inventory.
- The company adopted ASC Topic 842 lease accounting on January 1, 2019, recognizing operating lease assets of $333.1 million and noncurrent operating lease liabilities of $305.0 million at year-end; prior periods were not restated.
Guidance, Outlook, Risks, and Unusual Items
- Management expected U.S. annual new-vehicle sales to remain in the high-16-million-unit range in 2020 and combined new- and used-vehicle industry sales to remain relatively stable, while cautioning that actual results could differ materially.
- Key sensitivities include economic conditions, interest rates, fuel prices, tariffs, credit availability, consumer confidence, manufacturer incentives, vehicle supply, competition from online platforms, and changing transportation technologies.
- Parts and service is viewed as a higher-margin and historically less cyclical business. AutoNation continued investing in branded parts, collision centers, AutoNation USA, digital capabilities, and strategic partnerships including Waymo and Vroom.
- The aftermarket collision-parts distribution business was not yet profitable at year-end, held approximately $36 million of inventory, and had approximately $14 million invested in equipment, systems, and other intangible assets. A logistics agreement carried an estimated early termination penalty of approximately $16 million.
- AutoNation recorded $9.6 million of noncash franchise-rights impairment charges and reported $29.7 million of net gains from store divestitures. It also recorded a $25.7 million unrealized gain on its Vroom investment, increasing the carrying value to $75.7 million.
- Fourth-quarter 2019 income benefited from $19.6 million after-tax of business and property divestiture gains and $19.5 million after-tax from the Vroom investment fair-value adjustment.
- Legal proceedings, regulatory compliance, environmental matters, self-insurance, finance-and-insurance chargebacks, and tax audits remain ongoing exposures. Management did not believe currently accrued matters would have a material adverse effect, but noted that unfavorable outcomes remain possible.
- Management disclosed that it was seeking to release subsidiaries from guarantees of the revolving credit facility, senior notes, and commercial paper program; there was no assurance that the release conditions would be satisfied.
Most Important Facts to Verify
- Whether used-vehicle, parts-and-service, and finance-and-insurance growth can offset continued pressure on new-vehicle unit volumes and margins.
- The sustainability of higher per-vehicle gross profit, finance-and-insurance penetration, and retrospective commission assumptions.
- Refinancing and interest-rate exposure related to floorplan debt, commercial paper, and other variable-rate obligations.
- Progress toward profitability of the aftermarket collision-parts business and the potential impact of inventory, lease, and termination commitments.
- Future valuation changes or impairment risk associated with the $75.7 million Vroom investment, goodwill, and $566.5 million of franchise rights.
- Compliance with debt covenants and the consequences of any proposed release of subsidiary guarantees.
- Exposure to manufacturer performance requirements, franchise renewal restrictions, recalls, supply disruptions, tariffs, litigation, cybersecurity incidents, and severe weather events.