AutoNation, Inc. 2012 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 221 stores and 265 new-vehicle franchises across 15 states as of December 31, 2012. Its businesses include new and used vehicles, parts and service, collision and wholesale parts, and finance and insurance products. Reportable segments are Domestic, Import, and Premium Luxury. The filing covers the fiscal year ended December 31, 2012; quarterly data identifies the fourth quarter as the period ended December 31, 2012.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $15,668.8 million | $13,832.3 million | 13.3% increase |
| Gross profit | $2,486.4 million | $2,304.0 million | 7.9% increase |
| Operating income | $645.3 million | $572.0 million | 12.8% increase |
| Income from continuing operations | $317.3 million | $284.2 million | 11.6% increase |
| Net income | $316.4 million | $281.4 million | 12.4% increase |
| Diluted EPS from continuing operations | $2.52 | $1.93 | 30.6% increase |
| Net cash from operating activities | $316.6 million | $376.4 million | 15.9% decrease |
| Total assets | $7,203.0 million | $6,198.8 million | 16.2% increase |
| Long-term debt, net of current maturities | $2,066.3 million | $1,634.4 million | 26.4% increase |
Gross margin was approximately 15.9% of revenue, compared with 16.7% in 2011. Operating margin was approximately 4.1%, broadly unchanged from 2011. New vehicles generated 56.8% of revenue but only 23.3% of gross profit, while parts and service and finance and insurance generated approximately 64% of gross profit combined.
- Retail unit sales increased 13.6% to 448,783, consisting of 267,810 new vehicles and 180,973 used vehicles.
- New-vehicle revenue increased 18.8% to $8,906.9 million, while new-vehicle gross profit per unit declined 11.5% to $2,164.
- Used-vehicle revenue increased 5.7% to $3,714.7 million; used-vehicle gross profit per unit declined 1.0% to $1,623.
- Parts and service revenue increased 4.6% to $2,399.2 million, with a 42.0% gross margin.
- Finance and insurance revenue increased 20.4% to $571.2 million, and gross profit per vehicle increased 6.0% to $1,273.
- SG&A increased 6.1% to $1,749.5 million but declined to 70.4% of gross profit from 71.6%.
Material changes versus the prior comparable period
- U.S. industry new-vehicle sales increased to approximately 14.5 million units from 12.7 million in 2011. AutoNation benefited from replacement demand, improved consumer credit, stronger Japanese vehicle inventory, and new product offerings.
- Import segment revenue rose 18.2% and new-vehicle unit sales rose 26.1%, primarily as Japanese vehicle supply constraints eased.
- Domestic revenue increased 10.2% and Premium Luxury revenue increased 11.2%; all three segments reported higher segment income.
- New-vehicle gross profit per unit fell materially because 2011 benefited from tight Japanese supply and $7.0 million more in performance-based manufacturer incentives.
- Net operating cash flow declined because inventory and other working-capital requirements increased. Inventory rose to $2,396.9 million from $1,809.2 million, and new-vehicle inventory days increased to 55 from 50.
- The company acquired six stores on December 21, 2012, for aggregate consideration of $203.7 million, including $141.6 million paid at closing. The acquisitions contributed immaterial revenue and earnings in 2012.
- AutoNation issued $350.0 million of 5.5% senior notes due 2020 and redeemed its remaining 7% senior notes due 2014. Total non-vehicle long-term debt increased to $2,096.1 million from $1,647.0 million.
- The company repurchased 16.6 million shares for $580.6 million, reducing average shares outstanding and contributing to EPS growth. The remaining authorization was $319.2 million at year-end.
Guidance, outlook, risks, contingencies, and unusual items
- Management anticipated 2013 U.S. industry new-vehicle sales in the mid-15 million unit range, supported by replacement demand, attractive products, affordable credit, and improving housing conditions. The filing cautions that actual results may differ materially.
- Management expected parts and service demand to improve as the vehicle service base gradually returns toward pre-recession levels.
- AutoNation planned to rebrand its Domestic and Import stores under the AutoNation name during the first half of 2013 and expected approximately $18 million of primarily non-recurring incremental expenses.
- Year-end liquidity included $69.7 million of cash, $603.5 million of additional revolving-credit availability, and $92.9 million of eligible capacity under secured used-vehicle floorplan facilities.
- Debt covenant compliance was reported at year-end: leverage ratio of 2.82x versus a maximum of 3.75x and capitalization ratio of 59.1% versus a maximum of 65.0%.
- Vehicle floorplan debt totaled $2,540.2 million and is primarily variable-rate and collateralized by vehicle inventory. A 100-basis-point interest-rate increase would have increased estimated annual floorplan interest expense by approximately $25.4 million, before mitigation from manufacturer assistance. Other variable-rate debt exposure was approximately $1.0 billion.
- Unusual items included a $4.2 million pre-tax franchise-rights impairment charge, a $0.8 million long-lived-asset impairment charge, a favorable $5.1 million adjustment related to certain maintenance contracts, and a $0.9 million after-tax loss from discontinued operations.
- Legal proceedings, regulatory compliance, environmental matters, self-insurance, finance and insurance chargebacks, and tax audits could create additional costs. Management stated that no material loss was probable and reasonably estimable for the disclosed legal matters.
- Goodwill and franchise rights totaled approximately $1.5 billion at year-end and are subject to impairment testing based on projections and other judgmental assumptions.
- ESL Investments beneficially owned approximately 44% of outstanding shares as of filings through February 13, 2013, creating significant shareholder influence. Cascade Investment and related entities held additional substantial interests.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management excluded the six stores acquired on December 21, 2012 from its internal-control assessment, representing approximately 4% of consolidated assets.
Important facts for investors to verify
- Reconcile reported earnings growth with lower new-vehicle and used-vehicle gross profit per unit and the changing revenue mix.
- Assess inventory growth, floorplan borrowing, working-capital usage, and the effect of higher interest rates on cash flow and margins.
- Review debt maturities, the 2016 credit-facility maturity, the $155.4 million mortgage balloon payment due in 2017, and covenant headroom.
- Evaluate the performance and integration of the six December 2012 acquisitions, including the tentative purchase-price allocations and added capital-lease obligations.
- Monitor the cost and effectiveness of the 2013 rebranding initiative and its estimated $18 million incremental expense.
- Review the sustainability of finance and insurance margins, including the $56.0 million chargeback reserve and assumptions regarding customer cancellations and defaults.
- Consider manufacturer dependence, franchise-performance requirements, manufacturer incentives, potential franchise termination or compelled-sale rights, and concentration in Florida, Texas, and California.
- Track impairment risks for goodwill and franchise rights, as well as legal, regulatory, environmental, self-insurance, tax, pension, and severe-weather exposures.