AutoNation, Inc. 2013 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 269 new-vehicle franchises across 228 stores in 15 states as of December 31, 2013. Its business includes new and used vehicle sales, parts and service, and finance and insurance products. Reportable segments are Domestic, Import, and Premium Luxury. This filing covers the fiscal year ended December 31, 2013; fourth-quarter information is presented where disclosed.
- 2013 revenue mix: new vehicles 56.8%, used vehicles 23.6%, parts and service 14.8%, finance and insurance 3.8%, and other 1.0%.
- Parts and service and finance and insurance represented approximately 19% of revenue but approximately 65% of gross profit.
- Domestic and Import stores were transitioned to the AutoNation retail brand during the first half of 2013; Premium Luxury stores retained existing brands.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $17,517.6 million | $15,667.5 million | +11.8% |
| Gross profit | $2,759.9 million | $2,486.2 million | +11.0% |
| Operating income | $740.3 million | $645.3 million | +14.7% |
| Income from continuing operations | $375.8 million | $317.3 million | +18.4% |
| Net income | $374.9 million | $316.4 million | +18.5% |
| Diluted EPS from continuing operations | $3.05 | $2.52 | +21.0% |
| Cash flow from operating activities | $484.1 million | $316.6 million | +52.8% |
- Gross margin was approximately 15.8%, operating margin approximately 4.2%, and net margin approximately 2.1%.
- Retail vehicle unit sales increased 10.9% to 497,494, comprising 292,922 new vehicles and 204,572 used vehicles.
- New-vehicle revenue increased 11.7%, while new-vehicle gross profit increased 6.4%; gross profit per new vehicle declined 2.8% to $2,104.
- Used-vehicle revenue increased 11.1% and gross profit increased 10.2%; used-vehicle gross profit per vehicle declined 2.0% to $1,590.
- Finance and insurance revenue and gross profit increased 18.0% to $674.0 million, with gross profit per vehicle increasing 6.4% to $1,355.
- Parts and service revenue increased 8.3% to $2,597.4 million and gross profit increased 9.7% to $1,105.8 million; the gross margin was 42.6%.
- Fourth-quarter revenue was $4,523.9 million, gross profit was $703.2 million, operating income was $202.8 million, and net income was $109.4 million.
Balance sheet, debt, liquidity, and capital allocation
- Cash and cash equivalents were $69.2 million at December 31, 2013.
- Total assets were $7.9 billion and shareholders’ equity was $2.1 billion.
- Non-vehicle long-term debt was $1.84 billion, including $300.0 million drawn on the revolving credit facility; vehicle floorplan payable was $3.03 billion.
- Available revolving-credit capacity was $854.4 million after borrowings and letters of credit. Available secured used-vehicle floorplan capacity was $50.0 million.
- The company reported a 2.25x leverage ratio versus a 3.75x maximum and a 57.6% capitalization ratio versus a 65.0% maximum; it was in compliance with debt covenants at year-end.
- Capital expenditures were $207.2 million, cash used for acquisitions was $87.9 million, and five stores were acquired. Management expected approximately $180 million of 2014 capital expenditures, excluding certain land purchases and lease buy-outs.
- AutoNation repurchased 1.1 million shares for $53.5 million in 2013. In January 2014, the board authorized an additional $250 million of repurchases; $400.0 million remained available as of February 12, 2014.
- The company paid no cash dividends and did not anticipate paying dividends for the foreseeable future.
Material changes versus the prior comparable period
- Improved U.S. industry demand supported higher unit volumes: industry new-vehicle sales increased to 15.6 million from 14.5 million in 2012.
- Same-store revenue increased 7.6%, same-store gross profit increased 7.4%, and same-store retail vehicle unit sales increased 6.8%.
- Growth was supported by replacement demand, improved consumer credit and confidence, new product offerings, acquisitions, and higher finance and insurance penetration.
- New-vehicle margins compressed, particularly in the Import segment, while finance and insurance gross profit per vehicle and parts and service performance improved.
- SG&A increased 10.6% to $1,935.0 million but declined to 70.1% of gross profit from 70.4%. Approximately $18 million of non-recurring SG&A was incurred for the 2013 rebranding initiative.
- Net debt-related cash use increased primarily because the company repaid $240.0 million of revolving-credit borrowings, while share repurchases declined sharply from $580.6 million in 2012 to $53.5 million.
- 2013 included a $7.2 million pre-tax net gain related to property dispositions, a $3.4 million favorable tax adjustment, and $0.7 million of non-cash long-lived-asset impairment charges. There was no franchise-rights impairment charge, compared with a $4.2 million charge in 2012.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2014 U.S. industry new-vehicle sales to exceed 16 million units, supported by replacement demand, attractive products, affordable credit, and improving housing conditions. It expected the growth rate to be lower than in recent years.
- Excess vehicle production, manufacturer incentive changes, competition, fuel prices, interest rates, credit availability, consumer confidence, and severe weather could pressure sales and margins.
- Most vehicle floorplan and other borrowings carry variable interest rates. A 100-basis-point increase was estimated to raise annual floorplan interest expense by approximately $30.3 million and other variable-rate interest expense by approximately $8.0 million.
- Finance and insurance operations face potential chargebacks; the estimated chargeback liability was $67.6 million at year-end, and a 10% change in estimated cancellation rates would have changed the liability by approximately $6.8 million.
- Key risks include dependence on vehicle manufacturers and their captive lenders, manufacturer control over franchises and acquisitions, debt covenant compliance, goodwill and franchise-rights impairment, regulatory and consumer-finance scrutiny, litigation, environmental obligations, cybersecurity, and natural disasters.
- The company was involved in numerous legal proceedings but stated that no material loss was probable and reasonably estimable and that it did not expect existing matters to have a material adverse effect.
- A multiemployer pension plan covering certain employees was in red-zone status; AutoNation reported $1.1 million of 2013 contributions and stated it had no current plans that would trigger withdrawal liability.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective as of December 31, 2013.
Important facts for investors to verify
- Whether 2014 vehicle volumes and industry sales exceeded the company’s expectation while new-vehicle and used-vehicle gross profit per unit remained under pressure.
- Progress in parts and service growth, finance and insurance penetration, and the sustainability of the 2013 increase in finance and insurance gross profit per vehicle.
- New-vehicle inventory levels, which increased to 62 days of supply from 54 days, and the related floorplan financing and interest-rate exposure.
- Debt maturities, covenant headroom, revolving-credit availability, and the company’s ability to fund capital expenditures, acquisitions, and share repurchases.
- Potential changes in CFPB, DOJ, FTC, consumer-finance, advertising, employment, environmental, and data-security requirements.
- The adequacy of chargeback, self-insurance, tax, legal, and environmental reserves, as well as the valuation of goodwill and franchise rights.
- The effect of the first-quarter 2014 divestiture of the customer lead distribution business, for which the company expected approximately $11 million of consideration and an approximately $8 million pre-tax gain.