AutoNation, Inc. 2020 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 315 new-vehicle franchises across 230 stores, plus 74 collision centers, five AutoNation USA used-vehicle stores, four auction operations, and three parts distribution centers as of December 31, 2020. The filing covers the fiscal year ended December 31, 2020; it is not a quarterly filing, although fourth-quarter information is included in the annual report.
The company reports Domestic, Import, and Premium Luxury segments. Its operations were materially affected by COVID-19, including temporary restrictions, lower vehicle and service volumes, manufacturer plant closures, and reduced new-vehicle inventory.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $20.390 billion | $21.336 billion | Down 4.4% |
| Gross profit | $3.566 billion | $3.523 billion | Up 1.2% |
| Operating income | $563.2 million | $823.6 million | Down 31.6% |
| Income from continuing operations | $381.8 million | $450.8 million | Down 15.3% |
| Net income | $381.6 million | $450.0 million | Down 15.2% |
| Diluted EPS | $4.30 | $4.98 | Down 13.7% |
| Cash flow from operations | $1.208 billion | $769.2 million | Up $438.4 million |
- New-vehicle revenue declined 6.7% to $10.419 billion, while retail new-vehicle unit sales fell 11.7% to 249,654. Gross profit per new vehicle increased 31.2% to $2,340.
- Used-vehicle revenue increased 2.5% to $5.601 billion despite a 2.0% decline in retail used-vehicle units. Used-vehicle gross profit increased 24.7% to $459.0 million, and gross profit per vehicle increased 22.0% to $1,719.
- Parts and service revenue decreased 8.8% to $3.257 billion and gross profit decreased 10.0% to $1.461 billion, primarily because COVID-19 reduced service, collision, and warranty volumes.
- Finance and insurance revenue and gross profit increased 3.5% to $1.059 billion. Gross profit per retailed vehicle increased 11.5% to $2,158.
- Gross margin was approximately 17.5%, compared with 16.5% in 2019. SG&A declined to $2.422 billion, and SG&A as a percentage of gross profit improved to 67.9% from 72.6%.
- Year-end cash and cash equivalents were $569.6 million, compared with $42.0 million in 2019. Total assets were $9.887 billion and shareholders’ equity was $3.236 billion.
Debt, liquidity, and capital allocation
- Total non-vehicle debt was approximately $2.1 billion and vehicle floorplan financing was $2.8 billion at December 31, 2020.
- Available liquidity included $569.6 million of cash, approximately $1.760 billion of availability under the revolving credit facility, and $0.3 million of secured used-vehicle floorplan availability. No commercial paper was outstanding at year-end.
- The company’s leverage ratio was 1.82x against a maximum of 3.75x, and its capitalization ratio was 49.0% against a maximum of 70.0%; the company was in compliance with its debt covenants.
- AutoNation issued $500 million of 4.75% senior notes due 2030, repaid $350 million of 5.5% senior notes due 2020, and amended its revolving credit agreement to extend maturity to March 2025. It repaid the remaining $300 million of 3.35% senior notes in January 2021.
- Capital expenditures were $137.2 million, down from $257.4 million, following the postponement of more than $130 million of planned expenditures during the pandemic.
- The company repurchased 7.2 million shares for $382.3 million in 2020. It paid no cash dividends and does not anticipate paying dividends for the foreseeable future. The board increased the repurchase authorization by $1 billion in February 2021.
Material changes versus the prior comparable period
- COVID-19 reduced vehicle unit sales, parts and service activity, and first-half operating performance; the second half showed improved vehicle demand, particularly for used vehicles.
- New-vehicle inventory shortages reduced volume but supported higher new-vehicle pricing and margins. New-vehicle days supply declined to 42 days from 52 days.
- Used-vehicle demand and pricing strengthened, supported by affordability and limited new-vehicle availability. The used-to-new retail unit ratio increased to 96.6% from 86.9%.
- Total reportable-segment income increased 27.4% to $1.220 billion, but consolidated operating income declined because of corporate and other losses, including impairment and closure charges.
- SG&A reductions reflected unpaid leave, temporary compensation reductions, hiring and discretionary-spending controls, lower advertising, and a June 2020 workforce restructuring.
Guidance, outlook, unusual items, and risks
- Management expected the U.S. annual new-vehicle sales rate to approach 16 million units in 2021, versus 14.6 million units in 2020, but cautioned that actual results may differ materially. New-vehicle inventory shortages were expected to continue into 2021.
- AutoNation plans to build more than 100 AutoNation USA used-vehicle stores, with approximately 50 targeted by the end of 2025. The company expects aggregate capital investment for the planned 50 stores to exceed $500 million.
- The company recorded $318.3 million of non-cash goodwill impairment and $57.5 million of franchise-rights impairment in 2020, primarily following COVID-19-related market and valuation declines. These charges reduced reported earnings but did not affect debt-covenant calculations.
- AutoNation closed its aftermarket collision parts business, recording $36.7 million of pre-tax exit charges. The business represented less than 1% of 2020 parts and service gross profit.
- Other income included a $131.5 million gain on the Vroom investment, consisting of realized and unrealized gains. The remaining Vroom shares were sold in the first quarter of 2021 for $109.4 million of proceeds.
- Key risks include COVID-19 and economic conditions, interest rates, vehicle affordability, manufacturer supply and franchise requirements, inventory availability, regulatory and legal exposure, cybersecurity, natural disasters, impairment of goodwill or franchise rights, and substantial variable-rate floorplan debt.
- The company had $102.4 million of surety bonds, letters of credit, and cash deposits supporting insurance and other obligations. It reported no material known environmental contingencies and no significant off-balance-sheet arrangements.
- The company participates in underfunded multiemployer pension plans and estimated potential withdrawal liabilities of approximately $18 million in aggregate.
Facts investors should verify
- Whether new-vehicle inventory shortages, manufacturer production levels, and used-vehicle pricing support or pressure margins in 2021 and thereafter.
- Whether parts and service volumes recover to pre-pandemic levels and offset the company’s lower-margin vehicle-volume exposure.
- The sustainability of elevated vehicle gross profit per vehicle and finance-and-insurance performance after market supply conditions normalize.
- Execution, capital requirements, and returns from the planned AutoNation USA expansion and broader digital and brand-extension initiatives.
- Future impairment risk for the $1.185 billion goodwill balance and $509.0 million of franchise rights, particularly in Premium Luxury operations.
- Liquidity and covenant headroom after the January 2021 debt repayment, continued share repurchases, and planned growth investments.
- Exposure to variable interest rates, manufacturer concentration, legal proceedings, chargebacks, self-insurance obligations, cybersecurity events, and adverse weather.