Business Context and Reporting Period
AutoNation, Inc. filed a Form 10-K for the fiscal year ended December 31, 2022; the filing is not a quarterly report. AutoNation operated 343 new-vehicle franchises across 247 stores, 55 collision centers, 13 AutoNation USA used-vehicle stores, four auctions, three parts distribution centers, and an auto finance company. Reportable segments were Domestic, Import, and Premium Luxury.
The filing was audited by KPMG LLP, which issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor excluded CIG Financial and four dealerships acquired in the fourth quarter from the 2022 internal-control assessment.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total revenue | $26.985 billion | $25.844 billion | +4.4% |
| Gross profit | $5.265 billion | $4.953 billion | +6.3% |
| Operating income | $2.025 billion | $1.903 billion | +6.4% |
| Net income | $1.377 billion | $1.373 billion | Approximately flat |
| Diluted EPS | $24.29 | $18.31 | +32.7% |
| Operating margin | 7.5% | 7.4% | +10 basis points |
| Gross margin | 19.5% | 19.2% | +30 basis points |
| Cash flow from operations | $1.668 billion | $1.628 billion | +2.5% |
- Revenue mix: new vehicles 43.6%, used vehicles 35.8%, parts and service 15.2%, and finance and insurance 5.3%.
- Gross-profit mix: new vehicles 26.0%, used vehicles 10.5%, parts and service 36.1%, and finance and insurance 27.3%.
- New-vehicle revenue declined 2.7% to $11.754 billion, while retail new-vehicle unit sales declined 12.4% to 229,971. Gross profit per new vehicle increased 29.8% to $5,942.
- Used-vehicle revenue increased 11.8% to $9.662 billion, but used-vehicle gross profit declined 19.6% to $553.1 million. Used-vehicle gross profit per vehicle declined 12.2% to $1,795.
- Parts and service revenue increased 10.6% to $4.101 billion, with gross profit up 13.6% to $1.900 billion and a 46.3% gross margin.
- Finance and insurance revenue and gross profit increased 3.8% to $1.437 billion; gross profit per vehicle retailed rose 11.1% to $2,713.
- SG&A increased 5.2% to $3.026 billion but declined to 57.5% of gross profit from 58.1% in 2021.
- Cash and cash equivalents were $72.6 million; cash, cash equivalents, and restricted cash totaled $95.4 million.
- Capital expenditures were $336.2 million. Investing cash outflows were $479.3 million and financing cash outflows were $1.154 billion.
- Total vehicle floorplan payable was $2.109 billion, compared with $1.458 billion in 2021. Non-vehicle long-term debt was $3.626 billion before discounts and current maturities; commercial paper outstanding was $50.0 million.
- Liquidity included $1.800 billion of availability under the revolving credit facility, $0.3 million of secured used-vehicle floorplan availability, and $72.6 million of cash. No borrowings were outstanding under the revolving credit facility at year-end.
- The company reported a 1.62x leverage ratio versus a maximum of 3.75x and a 59.9% capitalization ratio versus a maximum of 70.0%.
Material Changes Versus the Prior Comparable Period
- U.S. industry new-vehicle sales declined to 13.9 million from 15.1 million, while supply constraints and strong demand supported higher new-vehicle pricing and gross profit per vehicle.
- Same-store new-vehicle unit sales declined 14.6%, but same-store new-vehicle gross profit per vehicle increased 29.6% to $5,937.
- Same-store used-vehicle unit sales declined 5.3%, and same-store used-vehicle gross profit declined 22.1%, reflecting falling used-vehicle values and margin pressure.
- New-vehicle inventory increased to 18,136 units from 10,090, although the company stated that inventory remained significantly below historical levels. New-vehicle supply was 19 days versus nine days at year-end 2021.
- Floorplan interest expense increased to $41.4 million from $25.7 million, and other interest expense increased to $134.9 million from $93.0 million, reflecting higher rates and higher average debt balances.
- The company repurchased 15.6 million shares for $1.710 billion, reducing weighted-average diluted shares to 56.7 million from 75.0 million. Approximately $1.1 billion remained available under the repurchase authorization as of February 15, 2023. No cash dividends were paid or expected in the foreseeable future.
- AutoNation acquired CIG Financial in October 2022 for $83 million plus repayment of certain obligations totaling $21 million. The acquisition added auto-loan receivables and non-recourse funding and generated an initial after-tax credit-loss expense of $25.8 million; the filing also reports a $34.2 million initial credit-loss expense within AutoNation Finance operating results.
- Goodwill and franchise-rights impairment charges were zero in 2022 and 2021, compared with $318.3 million and $57.5 million, respectively, in 2020.
Outlook, Commentary, Risks, and Unusual Items
- Management expected reduced new-vehicle availability to continue into 2023, but stated that the duration and degree of elevated vehicle profitability remained uncertain.
- AutoNation opened four AutoNation USA stores in 2022, had more than 20 stores under development, and targeted more than 130 stores nationwide. Execution depends on customer adoption, used-vehicle availability, market conditions, construction costs, and suitable locations.
- On January 26, 2023, AutoNation acquired RepairSmith for approximately $190 million to expand mobile automotive repair and maintenance services. The company also acquired a minority stake in TrueCar in November 2022.
- Key risks include recessionary demand, inflation, rising interest rates, vehicle supply disruptions, used-vehicle price declines, manufacturer concentration and franchise restrictions, competition from online platforms and direct sales, auto-loan credit losses, regulatory and CFPB oversight, litigation, cybersecurity incidents, natural disasters, and potential goodwill or franchise-rights impairment.
- Variable-rate exposure was material: a 100-basis-point change in interest rates was estimated to change annual floorplan interest expense by approximately $21.1 million based on year-end 2022 balances.
- Legal proceedings, employment claims, customer and dealer litigation, and regulatory matters were ongoing. Management stated that no material loss beyond recorded accruals was reasonably possible at year-end, while acknowledging that adverse outcomes could materially affect results.
- Two multiemployer pension plans were in “red zone” status. Estimated withdrawal liabilities were approximately $16 million for one plan and $4 million for the other.
Important Facts for Investors to Verify
- Whether new-vehicle supply normalization causes the unusually high new-vehicle gross profit per vehicle to decline.
- Used-vehicle pricing, inventory aging, wholesale losses, and gross profit per vehicle.
- CIG Financial loan performance, allowance adequacy, credit losses, warehouse funding, and non-recourse debt.
- Debt maturities, refinancing requirements, variable-rate exposure, and compliance with leverage and capitalization covenants.
- Returns and execution of the AutoNation USA expansion, RepairSmith integration, TrueCar investment, and other strategic initiatives.
- Manufacturer franchise performance requirements, renewal terms, acquisition restrictions, and manufacturer concentration.
- Actual cash deployment among share repurchases, capital expenditures, acquisitions, and debt reduction.
- Potential effects of litigation, regulatory actions, cybersecurity events, environmental matters, and natural disasters.