AutoNation, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
AutoNation filed its annual report for the fiscal year ended December 31, 2017. The company operated 253 stores with 360 new-vehicle franchises across 16 states, 76 branded collision centers, and three reportable segments: Domestic, Import, and Premium Luxury.
AutoNation sells new and used vehicles, parts and service, collision and wholesale parts services, and finance and insurance products. New vehicles represented 56.6% of revenue but only 17.5% of gross profit; parts and service and finance and insurance together represented approximately 20% of revenue and 72% of gross profit.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $21,534.6 million | $21,609.0 million | (0.3%) |
| Gross profit | $3,359.0 million | $3,313.2 million | 1.4% |
| Gross margin | 15.6% | 15.3% | +30 bps |
| Operating income | $843.4 million | $889.5 million | (5.2%) |
| Operating margin | 3.9% | 4.1% | (20 bps) |
| Income from continuing operations | $435.0 million | $431.7 million | 0.8% |
| Net income | $434.6 million | $430.5 million | 1.0% |
| Diluted EPS from continuing operations | $4.43 | $4.16 | 6.5% |
| Net cash from operating activities | $540.1 million | $516.0 million | 4.7% |
Reported net margin was approximately 2.0%. Revenue from new vehicles declined 0.6% to $12,180.8 million, while used-vehicle revenue declined 2.3% to $4,878.4 million. Parts and service revenue increased 2.3% to $3,398.3 million, and finance and insurance revenue increased 5.0% to $939.2 million.
- Retail new-vehicle sales declined 2.5% to 329,116 units.
- Retail used-vehicle sales increased 3.7% to 234,148 units.
- New-vehicle gross profit per unit declined 5.0% to $1,788.
- Used-vehicle gross profit per unit declined 11.4% to $1,315.
- Finance and insurance gross profit per vehicle increased 5.0% to $1,667.
- Parts and service gross margin increased to 43.9% from 43.2%.
- SG&A increased 3.7% to $2,436.2 million and rose to 72.5% of gross profit from 70.9%.
Liquidity, cash flow, debt, and capital allocation
- Cash and cash equivalents were $69.2 million at year-end, compared with $64.8 million in 2016.
- Vehicle floorplan payable was $3,806.9 million, including $2,179.1 million of trade floorplan and $1,627.8 million of non-trade floorplan.
- Total non-vehicle debt, including commercial paper and capital leases, was approximately $2.7 billion; gross long-term debt and capital leases were $2,389.4 million.
- Commercial paper outstanding declined to $330.0 million from $942.0 million, with a weighted-average rate of 1.97% and remaining term of 24 days.
- Available liquidity included $1,378.6 million under the revolving credit facility, subject to covenant limitations, and $0.4 million of secured used-vehicle floorplan availability.
- The company reported a leverage ratio of 2.82x against a 4.25x maximum and a capitalization ratio of 62.4% against a 70.0% maximum; it was in compliance with its debt covenants.
- Capital expenditures were $332.9 million, up from $253.2 million. Acquisition spending was $76.8 million, while cash received from divestitures was $104.6 million.
- AutoNation repurchased 10.1 million shares for $434.9 million, or $42.99 per share. Approximately $113.7 million remained authorized for repurchases at year-end. The company paid no dividends and did not expect to pay dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue was essentially flat, but operating income fell because vehicle gross profit compression and higher SG&A more than offset growth in parts and service and finance and insurance.
- Domestic segment revenue declined 4.6% and segment income declined 17.4%, primarily due to lower new-vehicle volume and margins.
- Import segment revenue declined 0.2%, while segment income increased 2.1%.
- Premium Luxury revenue increased 2.5%, while segment income declined 0.4%.
- New-vehicle gross profit declined 7.5% and used-vehicle gross profit declined 0.8%, while parts and service gross profit increased 3.9% and finance and insurance gross profit increased 5.0%.
- Floorplan interest expense increased to $97.0 million from $76.5 million due primarily to higher average interest rates.
- The company issued $450.0 million of 3.5% senior notes due 2024 and $300.0 million of 3.8% senior notes due 2027, repaid its mortgage facility, and amended its revolving credit agreement.
Guidance, outlook, commentary, risks, and unusual items
- Management expected U.S. industry new-vehicle sales of approximately 16.8 million units in 2018, versus 17.2 million in 2017. This is industry guidance, not an AutoNation revenue or earnings forecast.
- Management estimated that U.S. tax reform would reduce the 2018 annual effective tax rate by approximately 12 to 13 percentage points.
- Tax reform generated a provisional fourth-quarter 2017 benefit of $41.3 million, or $0.45 per diluted share, from revaluation of deferred tax liabilities.
- 2017 results included net after-tax gains of $42.2 million related to business and property divestitures and a $6.7 million after-tax benefit from manufacturer-related legal settlement and franchise protest-right payments.
- During the fourth quarter, the company recorded $26.2 million of write-downs related to pending divestitures expected to close in the first half of 2018. It had signed agreements to sell seven Domestic stores, four Import stores, and one collision center.
- Hurricanes Harvey and Irma temporarily disrupted stores and resulted in approximately $3 million of unrecovered losses.
- Management continued investing in AutoNation Express, AutoNation Pre-Owned 360, branded parts and accessories, collision centers, auctions, and AutoNation USA stores. In 2017 it opened two auctions, three AutoNation USA stores, one collision center, and acquired seven collision centers.
- The company entered into a multi-year partnership with Waymo to maintain autonomous-vehicle fleet vehicles; management did not expect a material early-stage financial impact.
- Principal risks include economic and interest-rate sensitivity, manufacturer incentive programs and concentration, vehicle inventory and margin pressure, manufacturer franchise restrictions, substantial leverage and covenant compliance, cybersecurity, regulatory and legal exposure, severe weather, goodwill and franchise-right impairment, and execution risk from brand-extension initiatives.
- The company had $120.8 million of estimated finance and insurance chargeback liabilities and $78.2 million of estimated self-insurance obligations at year-end.
- The company expected adoption of the new revenue-recognition standard to produce a net after-tax reduction to retained earnings of approximately $9 million to $12 million on January 1, 2018. It expected the 2019 lease standard to add approximately $375 million to $475 million of operating lease liabilities and corresponding right-of-use assets.
Most important facts for investors to verify
- Whether lower new- and used-vehicle gross profit per unit stabilizes as manufacturer incentives, used-vehicle supply, and competitive pricing evolve.
- Whether parts and service and finance and insurance growth can offset vehicle-margin pressure and the higher SG&A burden.
- The refinancing or repayment plan for the $400.0 million of 6.75% senior notes maturing April 15, 2018, and ongoing commercial paper exposure.
- Compliance with leverage and capitalization covenants as earnings, interest rates, and floorplan balances change.
- The actual impact of 2018 tax reform, including any revisions to the provisional $41.3 million benefit.
- Completion and valuation of the pending store and collision-center divestitures.
- Execution and returns from AutoNation USA, collision centers, auctions, digital initiatives, and branded products.
- Potential liabilities from legal proceedings, regulatory investigations, environmental matters, chargebacks, self-insurance, and the red-zone multiemployer pension plan.