AutoNation, Inc. 2014 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 276 new-vehicle franchises across 232 stores in 15 states as of December 31, 2014. 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, 2014; the filing also provides unaudited fourth-quarter information.
- 2014 segment revenue mix: Domestic 33%, Import 35%, and Premium Luxury 31%.
- Approximately 95% of new vehicles sold were from Toyota, Ford, Honda, Nissan, General Motors, Mercedes-Benz, Chrysler, BMW, and Volkswagen.
- 2014 retail vehicle sales totaled 532,918 units, including 318,008 new and 214,910 used vehicles.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|
| Revenue | $19,108.8 million | $17,517.6 million | 9.1% |
| Gross profit | $2,988.7 million | $2,759.9 million | 8.3% |
| Operating income | $820.8 million | $740.3 million | 10.9% |
| Income from continuing operations | $419.8 million | $375.8 million | 11.7% |
| Net income | $418.7 million | $374.9 million | 11.7% |
| Diluted EPS from continuing operations | $3.53 | $3.05 | 15.7% |
| Net cash from operating activities | $485.1 million | $484.1 million | Flat |
- Approximate margins: gross margin 15.6%, operating margin 4.3%, and net margin 2.2%.
- New-vehicle revenue was $10,972.2 million and represented approximately 57% of total revenue but only 22% of gross profit.
- Used-vehicle revenue was $4,385.7 million; parts and service revenue was $2,822.5 million; and finance and insurance revenue was $750.8 million.
- Parts and service and finance and insurance represented approximately 19% of revenue but contributed approximately 65% of gross profit.
- New-vehicle gross profit per unit declined to $2,044 from $2,104, while used-vehicle gross profit per unit increased to $1,690 from $1,590 and finance and insurance gross profit per vehicle increased to $1,409 from $1,355.
- At December 31, 2014, cash and cash equivalents were $75.4 million, total assets were $8,399.7 million, and shareholders’ equity was $2,072.1 million.
Fourth-quarter information
| Metric | Q4 2014 | Q4 2013 | Change |
|---|
| Revenue | $5,047.8 million | $4,523.9 million | 11.6% |
| Gross profit | $783.5 million | $703.2 million | 11.4% |
| Operating income | $226.5 million | $202.8 million | 11.7% |
| Income from continuing operations | $116.9 million | $109.7 million | 6.6% |
| Net income | $116.7 million | $109.4 million | 6.7% |
| Diluted EPS from continuing operations | $1.02 | $0.89 | 14.6% |
Material changes versus the prior comparable period
- U.S. industry new-vehicle sales increased to approximately 16.5 million from 15.6 million in 2013. AutoNation’s new-vehicle unit sales increased 8.6%, used-vehicle unit sales increased 5.1%, and total retail unit sales increased 7.1%.
- Premium Luxury was the fastest-growing segment: revenue increased 14.3% and segment income increased 13.9%. Domestic revenue and segment income increased 9.0% and 15.6%, respectively; Import revenue and segment income increased 5.4% and 4.0%.
- Parts and service gross profit increased 8.2%, supported by manufacturer recalls, warranty work, customer-pay service, vehicle preparation, and collision activity.
- Finance and insurance gross profit increased 11.4%, benefiting from higher unit volume, increased vehicle-service-contract penetration, and product mix.
- SG&A increased 7.5% to $2,079.6 million, but declined to 69.6% of gross profit from 70.1%, reflecting operating leverage and cost management.
- New-vehicle inventory declined to 67,424 units and 54 days of supply from 72,095 units and 62 days. Used-vehicle inventory increased to $437.6 million and 38 days of supply from $346.5 million and 35 days.
- AutoNation repurchased 9.4 million shares for $485.1 million during 2014, compared with 1.1 million shares for $53.5 million in 2013. The remaining authorization was $280.6 million at year-end.
- The company acquired five stores during 2014, divested two Import stores and its customer lead distribution business, and recorded gains related to those divestitures.
Debt, liquidity, cash flow, and capital allocation
- Non-vehicle long-term debt, including current maturities, was $2,128.4 million at year-end, compared with $1,839.9 million in 2013. Vehicle floorplan payable was $3,097.2 million, compared with $3,029.0 million.
- The December 2014 refinancing replaced a $500.0 million term loan and $1.2 billion revolving facility with a $1.8 billion revolving facility maturing December 3, 2019. Borrowings were $1.1 billion, leaving $644.4 million of availability after letters of credit.
- The company also had $75.4 million of cash and $50.2 million of availability under secured used-vehicle floorplan facilities.
- Debt covenant compliance was reported at year-end: leverage ratio was 2.30x against a 3.75x maximum, and capitalization ratio was 59.2% against a 70.0% maximum.
- 2014 investing cash outflow was $376.0 million, including $205.2 million for acquisitions and $209.2 million for property and equipment purchases. Financing cash outflow was $102.9 million, primarily reflecting share repurchases and debt activity.
- Management expects approximately $235 million of 2015 capital expenditures, excluding land purchases and lease buy-outs and net of related asset sales.
- No cash dividends were paid in the last two fiscal years, and management did not anticipate dividends in the foreseeable future.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2015 U.S. industry new-vehicle sales to exceed 17 million units, while cautioning that actual results could differ materially.
- Management expects parts and service performance to benefit from a growing population of recent-model-year vehicles, recall activity, and customer-retention initiatives.
- 2014 results included a $1.6 million pretax loss on debt extinguishment related to refinancing, a $13.8 million net gain on asset sales and dispositions, and $1.1 million of impairment charges related to assets held for sale. No goodwill impairment was recorded.
- Key risks include economic and interest-rate sensitivity, new-vehicle margin compression, manufacturer incentives and supply, dependence on major manufacturers and captive lenders, natural disasters, regulatory and consumer-finance oversight, litigation, cybersecurity, covenant compliance, and potential impairment of goodwill or franchise rights.
- Variable-rate exposure was significant: a 100-basis-point change in rates was estimated to affect annual floorplan interest expense by approximately $31.0 million and other variable-rate interest expense by approximately $11.1 million.
- The company was defending several purported California wage-and-hour class actions involving automotive technicians. Management believed probable and estimable contingencies were adequately accrued and did not expect currently identified matters to have a material adverse effect, although outcomes remain uncertain.
- One multiemployer pension plan was in “red zone” status; 2014 contributions to all participating plans totaled $1.1 million. The company disclosed potential withdrawal liability if participation ends.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether unit growth and the expected 2015 industry sales environment offset continued pressure on new-vehicle gross profit per unit.
- The sustainability and quality of growth in higher-margin parts and service and finance and insurance operations, including chargeback exposure, which increased to $84.9 million from $67.6 million.
- Liquidity and covenant headroom given $2.1 billion of non-vehicle debt, $3.1 billion of floorplan financing, and substantial variable-rate exposure.
- Execution and returns from acquisitions, facility investments, digital-channel initiatives, and the approximately $235 million 2015 capital-expenditure plan.
- Potential effects of manufacturer performance requirements, franchise restrictions, recalls, regulatory changes, litigation, cybersecurity events, and natural disasters.
- The effect of continued share repurchases on leverage, public float, per-share results, and remaining capital available for acquisitions or debt reduction.
