AutoNation, Inc. 2016 Form 10-K Summary
Business context and reporting period
AutoNation, Inc. filed its Form 10-K for the fiscal year ended December 31, 2016. The company was the largest U.S. automotive retailer, operating 260 stores and 371 new-vehicle franchises across 16 states and representing 35 brands. Reportable segments were Domestic, Import, and Premium Luxury.
AutoNation sells new and used vehicles, parts and service, collision and wholesale parts services, and finance and insurance products. The filing also provides unaudited fourth-quarter information; fourth-quarter 2016 revenue was $5.5 billion, gross profit was $809.1 million, operating income was $236.6 million, and net income was $115.3 million.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $21.609 billion | $20.862 billion | Up 3.6% |
| Gross profit | $3.313 billion | $3.262 billion | Up 1.6% |
| Operating income | $889.5 million | $873.1 million | Up 1.9% |
| Income from continuing operations | $431.7 million | $443.7 million | Down 2.7% |
| Net income | $430.5 million | $442.6 million | Down 2.7% |
| Diluted EPS | $4.15 | $3.89 | Up 6.7% |
| Operating margin | 4.1% | 4.2% | Down 10 basis points |
| Gross margin | 15.3% | 15.6% | Down 30 basis points |
- New-vehicle revenue increased 2.2% to $12.256 billion, while retail new-vehicle unit sales declined 0.4% to 337,622. New-vehicle gross profit per vehicle fell 5.1% to $1,883.
- Used-vehicle revenue rose 4.8% to $4.995 billion, but used-vehicle gross profit declined 10.2% to $317.6 million. Retail used-vehicle unit sales declined 0.7% to 225,713.
- Parts and service revenue increased 7.7% to $3.321 billion and gross profit increased 7.2% to $1.435 billion. Parts and service represented approximately 43% of total gross profit.
- Finance and insurance revenue and gross profit increased 3.0% to $894.6 million, with gross profit per retailed vehicle rising 3.5% to $1,588.
- Same-store total revenue declined 1.2% and same-store gross profit declined 2.5%, reflecting lower vehicle volumes and margin compression.
- Cash provided by operating activities was $516.0 million, compared with $507.2 million in 2015. Investing cash flow was negative $489.7 million, including $410.4 million for acquisitions and $244.5 million for property purchases, plus operating lease buy-outs.
- Capital expenditures, including operating lease buy-outs, were $253.2 million. The company acquired 20 stores and one collision center and divested 14 stores.
- Cash and cash equivalents were $64.8 million at year-end, compared with $74.1 million in 2015.
Debt, liquidity, and capital allocation
- Total non-vehicle debt, including mortgage debt and capital leases, was approximately $2.7 billion; vehicle floorplan financing was $3.849 billion.
- Commercial paper outstanding was $942.0 million at a weighted-average rate of 1.26% and a weighted-average remaining term of 24 days.
- Long-term debt, net of current maturities, was $1.611 billion. A $143.9 million balloon payment under the mortgage facility was due in November 2017, and $400 million of senior notes matured in April 2018.
- Available liquidity included $64.8 million of cash and approximately $1.059 billion of revolving-credit capacity as limited by the leverage covenant. After considering commercial paper and letters of credit, effective revolving-credit availability was approximately $813.9 million.
- The company was in compliance with its debt covenants at year-end, reporting a 2.70x leverage ratio against a 3.75x maximum and a 63.0% capitalization ratio against a 70.0% maximum.
- AutoNation repurchased 10.5 million shares for $497.0 million in 2016, leaving $298.6 million authorized for future repurchases. The company paid no cash dividends and did not expect to pay dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue and gross profit increased, but continuing-operations net income declined because of vehicle-margin pressure, higher selling, general and administrative expenses, and higher interest expense.
- Segment income declined across Domestic, Import, and Premium Luxury, primarily because of lower new- and used-vehicle gross profit per vehicle and higher costs. Reported revenue growth benefited materially from 2016 and 2015 acquisitions.
- Selling, general and administrative expenses increased 3.8% to $2.349 billion and rose to 70.9% of gross profit from 69.4%.
- Floorplan interest expense increased to $76.5 million from $58.3 million, while other interest expense increased to $115.5 million from $90.9 million.
- The net new-vehicle inventory carrying benefit declined to $52.5 million from $62.5 million because of higher floorplan interest expense.
- New-vehicle inventory decreased to $2.762 billion and 61 days of supply from $2.888 billion and 68 days. Used-vehicle inventory increased to $559.1 million and 44 days of supply from $539.7 million and 43 days.
- Share repurchases increased substantially from 3.9 million shares for $235.1 million in 2015 to 10.5 million shares for $497.0 million in 2016, reducing year-end shares outstanding to 100.7 million from 110.8 million.
Guidance, outlook, risks, and unusual items
- Management expected 2017 U.S. industry new-vehicle sales to remain above 17 million units, while noting that actual sales could differ materially.
- The company expected to spend more than $500 million over several years on its brand-extension strategy, including AutoNation USA used-vehicle centers, branded parts and accessories, collision centers, automotive auctions, digital capabilities, and the one-price used-vehicle model. Five AutoNation USA locations were expected to open in 2017, and the one-price model was planned for all stores by the end of the second quarter of 2017.
- Manufacturer stair-step incentive programs adversely affected 2016 new-vehicle volume and gross profit per vehicle. Continued or broader use of these programs could pressure results.
- The Takata airbag inflator recall reduced used-vehicle volume and gross profit by placing affected inventory on sales hold. Management could not predict the timing of replacement parts, future affected trade-ins, or manufacturer support, and expected the recall could continue to adversely affect operations.
- Unusual 2016 items included $61.8 million of net gains from divestitures, a $14.4 million gain related to a Volkswagen diesel-emissions legal settlement, $5.5 million from waived franchise protest rights, and $14.0 million of non-cash property impairments.
- Key risks include economic and interest-rate sensitivity, manufacturer concentration and control over franchise operations, vehicle incentive programs, natural disasters, regulatory and legal exposure, cybersecurity and information-system failures, goodwill and franchise-rights impairment, and substantial debt and floorplan financing.
- The company had numerous legal proceedings but stated that no material loss, or additional material loss, was reasonably possible based on information available at year-end. It also reported no material known environmental commitments or contingencies.
- Management and KPMG reported effective disclosure controls and internal control over financial reporting. The assessment excluded two stores and one collision center acquired in the fourth quarter, representing less than 0.6% of assets and less than 0.4% of revenue.
Most important facts for investors to verify
- Whether vehicle gross-profit compression, particularly from manufacturer incentives and competitive pricing, persists into 2017.
- Whether parts and service growth can offset weaker vehicle margins and whether the company can control SG&A growth.
- The refinancing or repayment plan for the November 2017 mortgage balloon payment, 2018 senior notes, and short-term commercial paper.
- The effect of rising interest rates on $3.849 billion of floorplan financing and $942.0 million of commercial paper.
- The ultimate operational and financial impact of the Takata recall and other open safety recalls.
- Returns and execution risk associated with the planned investment of more than $500 million in brand-extension and digital initiatives.
- The sustainability of share repurchases given leverage covenants, acquisition spending, capital expenditures, and liquidity needs.
- Potential exposure from manufacturer franchise requirements, legal proceedings, regulatory changes, cybersecurity incidents, and impairment testing assumptions.