Sonic Automotive, Inc. — Q1 2014 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2014, compared with Q1 2013. Sonic operated 123 franchises across 14 states, 21 collision repair centers and 102 stores. The company reports one operating segment. Management notes that Q1 typically contributes less operating profit than later quarters.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $2,136.4 million | $2,083.2 million | +2.6% |
| Gross profit | $329.0 million | $313.0 million | +5.1% |
| Gross margin | 15.4% | 15.0% | +0.4 percentage points |
| Operating income | $50.6 million | $55.0 million | -8.0% |
| Net income | $19.4 million | $21.3 million | -8.9% |
| Diluted EPS | $0.36 | $0.40 | -10.0% |
| Operating cash flow | $14.3 million | $88.8 million | Down $74.6 million |
Revenue growth reflected used vehicles, fixed operations and F&I, while new-vehicle revenue was nearly flat and wholesale revenue declined. Used-vehicle revenue grew 6.4% and gross profit 7.0%; same-store unit sales rose 2.5%. Fixed-operations revenue grew 7.5%, but its gross margin fell to 47.7% from 48.6%, primarily due to revenue mix. F&I revenue increased 6.2%; same-store F&I gross profit per retail unit rose 4.8%. Same-store new-vehicle unit sales declined 3.9%, partially offset by a 2.9% increase in revenue per unit.
SG&A rose 7.4% to $264.0 million, faster than gross profit; SG&A increased to 80.2% of gross profit from 78.5%. Higher compensation, customer-related costs, IT, contractors and initiative-related training contributed. Operating margin was approximately 2.4%, versus 2.6%.
Debt, liquidity and capital allocation
At March 31, 2014, cash was $2.1 million. Long-term debt, including current maturities, totaled $785.1 million, up from $748.4 million at year-end; this excludes floor-plan obligations. Floor-plan notes payable totaled approximately $1,177.7 million. Revolver availability was $117.8 million, with no revolver borrowings and $29.2 million in letters of credit. Reported total available liquidity resources were $255.3 million, including used-floor-plan availability and a $75.0 million floor-plan deposit.
Operating cash flow was substantially lower year over year. Sonic reported that combined trade and non-trade floor-plan financing used $74.0 million; reclassifying both types as operating cash flow would result in operating cash used of approximately $10.3 million in Q1 2014, compared with cash provided of $58.3 million in Q1 2013. Investing activities used $18.4 million, including $21.5 million of capital expenditures. Financing activities provided $3.3 million, including $40.4 million of mortgage-related debt issuance. The company repurchased approximately 378,000 shares for $8.4 million and declared a $0.025-per-share dividend.
Management reported compliance with debt covenants. Revolver availability and other liquidity measures should be read alongside the company’s substantial floor-plan financing and debt obligations.
Outlook, commentary and risks
- Management expects cash flow to be sufficient for debt service, working capital and operating needs over the next 12 months and foreseeable future; this is not a quantified earnings forecast.
- Management expects a 38%–40% effective tax rate for continuing operations in future periods.
- Sonic planned to launch a stand-alone pre-owned retail operation in Denver in late 2014 and was developing its “One-Sonic One-Experience” customer initiative. Management said the initiatives could support customer experience, pricing and market share; related costs were already contributing to SG&A.
- Risks include vehicle demand and pricing competition, manufacturer allocation and incentives, consumer credit availability, interest-rate exposure, legal proceedings, and the ability to fund investment and capital returns. A 100-basis-point rate increase was estimated to change quarterly interest expense by approximately $2.1 million after swaps.
- Pending legal and administrative matters include customer, employment, contractual and regulatory proceedings. Sonic could not estimate a reasonably possible loss range beyond accrued reserves. Certain sale-related indemnifications had maximum stated exposure of approximately $10.1 million at quarter-end; the estimated fair value was not material and no significant amount was recorded.
- One luxury franchise was acquired for approximately $2.6 million and one was disposed of, generating approximately $1.9 million net cash. Discontinued operations recorded a $0.6 million net loss for the quarter.
Important facts for investors to verify
- Whether lower new-vehicle unit volume and rising SG&A continue to pressure operating income despite growth in used vehicles and F&I.
- Drivers of the sharp year-over-year decline in operating cash flow, including floor-plan movements and working-capital changes.
- Debt maturities, variable-rate exposure, swap valuations and headroom under financial covenants; Sonic disclosed a $14.5 million net swap liability.
- Execution, costs and results of the planned Denver pre-owned launch and One-Sonic One-Experience initiative.
- Progress and potential financial effects of litigation, lease obligations, guarantees and indemnifications.
- Whether capital expenditures, repurchases and dividends remain consistent with liquidity, covenant requirements and management’s cash-flow outlook.