AutoNation, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 215 stores and 258 new-vehicle franchises across 15 states as of December 31, 2011. Its businesses include new and used vehicles, parts and service, and finance and insurance. Reportable segments are Domestic, Import, and Premium Luxury. The filing covers the fiscal year ended December 31, 2011; fourth-quarter results are included but the filing is an annual Form 10-K, not a quarterly filing.
- Approximately 400,000 new and used vehicles were retailed during 2011.
- Revenue mix: new vehicles 54%, used vehicles 25%, parts and service 17%, and finance and insurance 3%.
- Parts and service and finance and insurance generated approximately 63% of total gross profit despite representing approximately 20% of revenue.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $13,832.3 million | $12,461.0 million | +11.0% |
| Gross profit | $2,304.0 million | $2,127.5 million | +8.3% |
| Operating income | $572.0 million | $496.6 million | +15.2% |
| Income from continuing operations | $284.2 million | $235.3 million | +20.8% |
| Net income | $281.4 million | $226.6 million | +24.2% |
| Diluted EPS from continuing operations | $1.93 | $1.48 | +$0.45 |
| Net cash from operating activities | $376.4 million | $251.8 million | +$124.6 million |
| Capital expenditures | $158.1 million | $161.8 million | -$3.7 million |
Gross margin was approximately 16.7%, operating margin approximately 4.1%, and the continuing-operations net margin approximately 2.1%. SG&A increased to $1,649.4 million but declined to 71.6% of gross profit from 73.0% in 2010. New-vehicle gross profit per unit increased 11.9% to $2,445; used-vehicle gross profit per unit increased 1.7% to $1,640; and finance and insurance gross profit per vehicle increased 5.1% to $1,201.
- New-vehicle unit sales increased 8.5% to 224,034; used-vehicle unit sales increased 6.8% to 171,094.
- Operating cash flow exceeded investing cash outflows of $206.2 million but was more than offset by financing cash outflows of $178.7 million, including share repurchases.
- Cash and cash equivalents were $86.6 million at year-end versus $95.1 million in 2010.
- Total assets were $6.20 billion and shareholders’ equity was $1.89 billion at December 31, 2011.
Debt, liquidity, and capital allocation
- Non-vehicle long-term debt was $1.647 billion, including $500.0 million of term debt, $495.0 million drawn on the revolving facility, $395.0 million of 6.75% senior notes due 2018, and $211.5 million under the mortgage facility.
- Vehicle floorplan payable was $1.899 billion, consisting of $1.362 billion trade and $536.5 million non-trade financing.
- Additional revolving-credit capacity was $648.5 million at year-end; secured used-vehicle floorplan availability was $75.4 million.
- The December 2011 refinancing established a $500 million term loan and $1.2 billion revolving facility, both maturing December 7, 2016. The refinancing generated a $2.2 million pretax debt-extinguishment loss.
- Debt covenants were satisfied at year-end: leverage ratio was 2.59x versus a maximum of 3.75x, and capitalization ratio was 50.9% versus a maximum of 65.0%.
- AutoNation repurchased 17.1 million shares for $583.4 million in 2011 and paid no cash dividends. The filing states that $265.0 million remained available under the repurchase authorization as of February 8, 2012.
Material changes versus the prior comparable period
- Revenue, gross profit, operating income, continuing-operations income, and diluted EPS all increased materially, supported by higher vehicle volumes, improved market conditions, and stronger new-vehicle pricing and margins.
- New-vehicle inventory declined to $1.397 billion and 50 days of supply from $1.480 billion and 63 days; used-vehicle supply declined to 31 days from 34 days.
- Parts and service revenue increased 3.8%, but same-store parts and service gross profit decreased 1.3%, primarily because warranty gross profit declined $19.5 million.
- Finance and insurance revenue and gross profit increased 13.3%, aided by higher sales volume, greater financing penetration, and higher amounts financed per transaction.
- Operating cash flow increased substantially, principally because of higher earnings and lower working-capital requirements.
- Long-term debt increased from $1.341 billion to $1.634 billion, largely reflecting the new credit agreement and higher borrowings.
- Goodwill increased to $1.172 billion from $1.142 billion, and franchise rights increased to $212.6 million from $199.1 million. No goodwill or franchise-rights impairment was recorded in 2011.
Guidance, outlook, commentary, and risks
- Management expected U.S. industry new-vehicle sales to increase to approximately 14.0 million units in 2012, while cautioning that the market would remain challenging and below pre-recession levels.
- Management expected improving Japanese vehicle supply to reduce the elevated new-vehicle gross profit per unit achieved during 2011.
- Management forecast approximately $145 million of 2012 capital expenditures, excluding land purchases and lease buyouts.
- Parts and service demand may remain constrained by the smaller recent-model-year vehicle population in operation.
- Major risks include economic conditions, consumer credit availability, interest rates, fuel prices, manufacturer incentives and supply, severe weather, and dependence on franchisor manufacturers.
- Most vehicle floorplan and other debt carries variable interest rates. A 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $19.0 million on floorplan debt and $10.0 million on other variable-rate debt, based on year-end balances.
- The company is exposed to manufacturer franchise requirements, potential franchise termination or non-renewal, manufacturer bankruptcy, regulatory and legal proceedings, environmental liabilities, insurance claims, chargebacks, goodwill impairment, and cybersecurity or information-system failures.
- Estimated chargeback liabilities were $46.2 million and self-insurance reserves were $58.2 million at year-end. The company was involved in numerous legal proceedings but did not expect their resolution to have a material adverse effect, while acknowledging that outcomes cannot be predicted with certainty.
- ESL Investments beneficially owned approximately 51% of outstanding shares as of February 8, 2012, creating significant shareholder-control and public-float risks.
- Subsequent to year-end, AutoNation issued $350 million of 5.5% senior notes due 2020 and used net proceeds of $344 million to reduce revolving borrowings.
Most important facts for an investor to verify
- Whether 2012 vehicle volumes can offset the expected normalization of new-vehicle gross profit per unit.
- The sustainability of improved margins, particularly new-vehicle and finance-and-insurance margins.
- Compliance with leverage and capitalization covenants as debt, floorplan balances, and share repurchases change.
- Exposure to LIBOR-based interest-rate increases and the refinancing or maturity profile of debt due in 2016 and thereafter.
- Manufacturer franchise performance requirements, supply conditions, incentive programs, and concentration in major brands.
- The adequacy of chargeback, self-insurance, tax, legal, environmental, and held-for-sale reserves.
- The effect of continued share repurchases and ESL ownership on public float, governance, and stock liquidity.
- Management’s forecast of approximately $145 million in 2012 capital expenditures and the company’s capacity to fund acquisitions, investment, debt service, and repurchases concurrently.