AutoNation, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 254 stores and 342 new-vehicle franchises across 15 states as of December 31, 2015. The company sells new and used vehicles, parts and service, and finance and insurance products through Domestic, Import, and Premium Luxury segments. This filing covers the fiscal year ended December 31, 2015; quarterly information is provided, but the filing is an annual Form 10-K rather than a standalone fourth-quarter filing.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $20.862 billion | $19.109 billion | 9.2% increase |
| Gross profit | $3.262 billion | $2.989 billion | 9.1% increase |
| Operating income | $873.1 million | $820.8 million | 6.4% increase |
| Income from continuing operations | $443.7 million | $419.8 million | 5.7% increase |
| Net income | $442.6 million | $418.7 million | 5.7% increase |
| Diluted EPS | $3.89 | $3.52 | 10.5% increase |
| Operating cash flow | $507.2 million | $485.1 million | 4.6% increase |
| Total assets | $9.558 billion | $8.400 billion | 13.8% increase |
| Shareholders’ equity | $2.349 billion | $2.072 billion | 13.4% increase |
Operating margin was approximately 4.2%, compared with 4.3% in 2014. Gross margin was approximately 15.6% in both years. Retail vehicle unit sales increased 6.3% to 566,370, comprising 339,080 new vehicles and 227,290 used vehicles.
- New-vehicle revenue increased 9.3% to $11.995 billion, while gross profit increased 3.5% to $673.1 million. New-vehicle gross profit per vehicle declined 2.9% to $1,985.
- Used-vehicle revenue increased 8.7% to $4.769 billion, but gross profit declined 1.9% to $353.7 million. Used-vehicle gross profit per vehicle declined 6.7% to $1,577.
- Parts and service revenue increased 9.2% to $3.083 billion and gross profit increased 11.8% to $1.338 billion, with a 43.4% gross margin.
- Finance and insurance revenue and gross profit increased 15.7% to $868.7 million; finance and insurance gross profit per vehicle increased 8.9% to $1,534.
- SG&A increased 8.8% to $2.264 billion, but declined modestly to 69.4% of gross profit from 69.6%.
Liquidity, debt, capital allocation, and cash flow
- Cash and cash equivalents were $74.1 million at year-end. Operating cash flow was $507.2 million, compared with $509.4 million of investing cash outflow.
- Capital expenditures were $266.9 million, and cash used for acquisitions was $321.5 million. AutoNation purchased 22 stores and divested three Import stores.
- Non-vehicle debt totaled approximately $1.8 billion, including $1.0 billion of senior notes issued in September 2015. Vehicle floorplan payable was $3.727 billion, up from $3.097 billion.
- Commercial paper outstanding was $599.5 million at a weighted-average annual interest rate of 0.92%. The company had no borrowings under its revolving credit facility at year-end.
- Available liquidity included $74.1 million of cash, $1.463 billion of revolver capacity subject to covenant limitations, and $127.1 million of secured used-vehicle floorplan capacity.
- The company was in compliance with debt covenants: leverage ratio of 2.32x versus a maximum of 3.75x, and capitalization ratio of 61.0% versus a maximum of 70.0%.
- AutoNation repurchased 3.9 million shares for $235.1 million during 2015 and paid no cash dividends. From January 1 through February 8, 2016, it repurchased an additional 3.6 million shares for $160.3 million.
Material changes versus the prior comparable period
- Revenue and unit volumes grew strongly, supported by replacement demand, affordable credit, new product offerings, lower fuel prices, acquisitions, and improved consumer confidence.
- Profitability growth lagged revenue growth because new- and used-vehicle gross profit per vehicle compressed, particularly in Premium Luxury, amid higher inventory, manufacturer incentive changes, and competitive pricing.
- Year-end new-vehicle inventory rose to $2.888 billion and 68 days of supply from $2.294 billion and 54 days. Used-vehicle inventory rose to $539.7 million and 43 days from $437.6 million and 38 days.
- Parts and service and finance and insurance provided an increasing share of gross profit, partly offsetting vehicle-margin pressure.
- Long-term debt declined from $2.103 billion to $1.754 billion, while the company refinanced portions of its debt and established a commercial paper program.
- The company recorded a $15.4 million pre-tax, $9.6 million after-tax, non-cash impairment charge for Volkswagen franchise rights. It also recorded $6.1 million of property impairments, partially offset by gains on property dispositions and store divestitures.
Outlook, management commentary, risks, and unusual items
Management expected 2016 U.S. industry new-vehicle sales to remain above 17 million units but to be relatively flat compared with 2015. Management cautioned that excess production, manufacturer incentive changes, inventory levels, and competitive conditions could continue to pressure vehicle gross profit per vehicle.
- Volkswagen’s diesel-emissions issue resulted in a stop-sale order affecting approximately 400 vehicles at seven AutoNation Volkswagen stores at December 31, 2015. Volkswagen stores represented less than 1% of consolidated new-vehicle unit sales.
- AutoNation launched its branded Vehicle Protection Plan and continued investments in AutoNation Express and digital retail and service capabilities.
- The company’s policy prohibits retailing new or used vehicles with open safety recalls; approximately 17% of used inventory was subject to the policy at year-end.
- Major risks include economic sensitivity, interest rates, vehicle affordability, manufacturer financial health and incentives, franchise restrictions, excess inventory, natural disasters, regulatory and litigation exposure, cybersecurity, and reliance on manufacturer captive lenders.
- Variable-rate vehicle floorplan debt was approximately $3.7 billion; management estimated that a 100-basis-point rate increase would increase annual floorplan interest expense by approximately $37.3 million, before considering mitigating floorplan assistance.
- Estimated finance and insurance chargeback liabilities were $97.3 million, and self-insurance reserves were $74.8 million. The filing states that no material known environmental commitments or contingencies existed and that legal matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
Investor verification checklist
- Verify whether vehicle gross profit per vehicle stabilizes after the 2015 compression and elevated inventory levels.
- Monitor new- and used-vehicle days of supply, inventory write-downs, and the effect of manufacturer incentives.
- Assess refinancing and liquidity needs for the $599.5 million commercial paper balance and the $155.4 million mortgage-facility balloon payment due in November 2017.
- Track covenant headroom, variable-rate exposure, and the effect of higher interest rates on floorplan financing.
- Evaluate the financial contribution and integration of the 22 stores acquired in 2015 and the 12 stores acquired in February 2016.
- Review the continuing financial and operational effects of Volkswagen recalls and franchise-rights impairment risk.
- Confirm future share repurchase activity and its effect on leverage, liquidity, and diluted share count.
- Review legal, regulatory, consumer-finance, cybersecurity, self-insurance, chargeback, and manufacturer-franchise developments.