AutoNation, Inc. 2010 Form 10-K Summary
Business context and reporting period
AutoNation is the largest U.S. automotive retailer, operating 206 stores and 242 new-vehicle franchises across 15 states as of December 31, 2010. Its business includes new and used vehicles, parts and service, and finance and insurance products. Reportable segments are Domestic, Import, and Premium Luxury. The filing covers the fiscal year ended December 31, 2010; fourth-quarter information is included but the filing is an annual Form 10-K.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $12,461.0 million | $10,666.0 million | 16.8% increase |
| Gross profit | $2,127.5 million | $1,909.8 million | 11.4% increase |
| Gross margin | 17.1% | 17.9% | Down 0.8 percentage points |
| Operating income | $496.6 million | $408.0 million | 21.7% increase |
| Operating margin | 4.0% | 3.8% | Up 0.2 percentage points |
| Net income | $226.6 million | $198.0 million | 14.4% increase |
| Net income from continuing operations | $235.3 million | $233.1 million | 0.9% increase |
| Diluted EPS from continuing operations | $1.48 | $1.31 | 13.0% increase |
| Cash flow from operating activities | $251.8 million | $369.3 million | 31.8% decrease |
| Capital expenditures | $161.8 million | $75.4 million | Increase |
| Cash and cash equivalents | $95.1 million | $173.5 million | Decrease |
New-vehicle revenue was $6.67 billion, used-vehicle revenue was $3.12 billion, parts and service revenue was $2.21 billion, and finance and insurance revenue was $418.9 million. Parts and service plus finance and insurance represented approximately 21% of revenue but approximately 65% of gross profit.
Retail unit sales totaled 366,582, including 206,456 new vehicles and 160,126 used vehicles. New-vehicle gross profit per unit increased to $2,185 from $2,108, while used-vehicle gross profit per unit declined to $1,612 from $1,670. Parts and service gross margin was 43.6%; used-vehicle retail gross margin was 9.3%.
Debt, liquidity, and balance sheet
- Long-term debt, net of current maturities, was $1.34 billion at year-end, compared with $1.11 billion in 2009.
- Total vehicle floorplan payable was $1.87 billion, up from $1.37 billion, reflecting higher inventory levels and sales activity.
- New-vehicle inventory was $1.48 billion, or 63 days of supply, versus $1.07 billion and 55 days in 2009. Used-vehicle inventory was $271.8 million, or 42 days of supply.
- Available revolver capacity was $398.9 million, and secured used-floorplan availability was $70.6 million.
- Debt refinancing in April 2010 included issuance of $400.0 million of 6.75% senior notes due 2018, repayment of $264.0 million of older notes, and amendment and extension of the credit facilities.
- At December 31, 2010, the company reported a 2.41x leverage ratio against a 3.25x maximum and a 47.2% capitalization ratio against a 60% maximum. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased 16.8%, driven by higher new- and used-vehicle volumes, improved credit availability, restored or expanded manufacturer leasing programs, and increased consumer confidence.
- New-vehicle units increased 13.3% and used-vehicle units increased 19.5%.
- Segment income increased 50.6% for Domestic, 13.7% for Import, and 18.7% for Premium Luxury.
- SG&A increased $105.2 million due primarily to higher volume-related compensation and advertising, but declined to 73.0% of gross profit from 75.8%.
- Operating cash flow declined because of higher working-capital requirements, particularly inventory investment, and refinancing-related cash payments.
- AutoNation repurchased 26.6 million shares for $523.7 million, compared with 7.7 million shares for $135.7 million in 2009. The company retired 30 million treasury shares without changing outstanding shares or total shareholders’ equity.
- The company acquired five automotive retail franchises for $73.1 million, compared with one acquisition for $0.2 million in 2009.
- No goodwill impairment was recorded in 2010, compared with substantial goodwill and franchise-rights impairment charges in 2008.
Guidance, outlook, risks, and unusual items
- Management expected U.S. industry new-vehicle sales of approximately 12.8 million units in 2011, while cautioning that the market would remain challenging and below historical levels.
- Management expected approximately $140 million of 2011 capital expenditures, excluding acquisition-related spending, land purchases, and lease buyouts.
- Management expected approximately $9 million of additional operating income from performance-based manufacturer incentives over the first two quarters of 2011. Fourth-quarter 2010 recognition of these incentives increased gross profit by $13.1 million and operating income by $11.8 million.
- The 2010 results included a $19.6 million pretax loss on debt extinguishment related to refinancing. Discontinued operations produced an $8.7 million after-tax loss.
- Key risks include weak economic conditions, unemployment, credit availability, interest rates, fuel prices, manufacturer incentives, supply and product mix, severe weather, manufacturer financial distress or bankruptcy, franchise restrictions, regulatory and legal exposure, and potential goodwill or franchise-rights impairment.
- Approximately $1.9 billion of vehicle floorplan debt and $713.4 million of other variable-rate debt were outstanding at year-end. A 100-basis-point rate increase was estimated to increase annual interest expense by approximately $18.7 million on floorplan debt and $7.1 million on other variable-rate debt.
- ESL Investments beneficially owned approximately 54% of the common stock as of February 8, 2011; ESL, Cascade Investment, and the Bill & Melinda Gates Foundation Trust collectively held approximately 70% of shares, creating significant shareholder-control and public-float risks.
- The company reported numerous legal proceedings but did not believe their ultimate resolution would materially affect results, while acknowledging that adverse outcomes remain possible. No material known environmental commitments or contingencies were reported.
Most important facts for investors to verify
- Reconcile the improvement in earnings with lower operating cash flow and substantially higher vehicle inventory and floorplan debt.
- Assess covenant headroom and refinancing needs, particularly maturities concentrated in 2014 and exposure to variable LIBOR-based rates.
- Evaluate whether the 2010 performance benefited disproportionately from temporary manufacturer incentives and improved credit conditions.
- Monitor used-vehicle margins, inventory days, and the effect of a reduced recent-model vehicle base on future parts and service revenue.
- Review manufacturer concentration, franchise renewal and performance requirements, and the consequences of a manufacturer or captive-finance-provider disruption.
- Test the valuation sensitivity of the $1.14 billion goodwill balance and $199.1 million of franchise rights to changes in revenue growth, margins, discount rates, and market conditions.
- Consider the effect of $523.7 million of share repurchases, concentrated ownership, and reduced public float on leverage, liquidity, and stock-market trading.