Sonic Automotive, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results. Sonic operates franchised dealerships and EchoPark used-vehicle stores.
Business context and performance
At year-end, Sonic operated 86 franchised-dealership stores, comprising 99 new-vehicle franchises and 15 collision repair centers, plus nine EchoPark stores across 12 states. EchoPark generated 11.1% of consolidated revenue. Sonic opened one EchoPark store in 2019 and expected to open three more during 2020.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $10.454 billion | $9.952 billion | +5.1% |
| Gross profit | $1.521 billion | $1.446 billion | +5.2% |
| Operating income | $307.7 million | $177.7 million | +73.2% |
| Income from continuing operations | $144.5 million | $52.4 million | +175.9% |
| Net income | $144.1 million | $51.7 million | +179.0% |
| Diluted EPS | $3.30 | $1.20 | +175.0% |
| Operating cash flow | $170.9 million | $143.7 million | +$27.2 million |
Gross margin remained 14.5%; operating margin increased to 2.9% from 1.8%, and continuing-operations net margin rose to 1.4% from 0.5%. SG&A fell to 72.3% of gross profit from 79.2%. Adjusted EBITDA, a non-GAAP measure, was $308.5 million versus $259.3 million.
Revenue mix and material changes
- Used-vehicle revenue rose 17.4% to $3.490 billion; reported unit sales increased 16.1%. However, reported used-vehicle gross profit per unit declined 11.2% to $909.
- New-vehicle revenue declined 1.7% to $4.889 billion and unit sales fell 7.0%, partly reflecting dealership dispositions. On a same-store basis, revenue rose 4.2%, unit sales rose 0.6%, and gross profit per unit was nearly flat at $2,083.
- Fixed Operations revenue increased 1.0% to $1.395 billion; same-store revenue increased 5.0% and gross profit increased 6.0%. Reported gross margin was 47.9%, down from 48.3%.
- Finance, insurance and other revenue rose 17.6% to $477.0 million; reported gross profit per retail unit increased 11.9% to $1,743.
- EchoPark revenue grew 66.0% to $1.162 billion. Segment income before taxes and impairment charges was $9.1 million, compared with a $52.6 million loss in 2018. Same-store retail used-vehicle sales rose 45.7%, and combined used-vehicle and F&I gross profit per unit increased 14.6% to $2,187.
- Franchised-dealership segment income before taxes and impairment charges increased 34.2% to $211.3 million. Results included a $76.0 million net gain on dealership disposals.
Fourth quarter: Revenue was $2.748 billion, gross profit $393.9 million, net income $46.3 million, and diluted EPS $1.04. Q4 net income included approximately $29.3 million of pre-tax dealership-disposal gains, offset by $17.7 million of impairment charges and $7.2 million of debt-extinguishment costs, including double-carry interest.
Cash flow, debt and liquidity
- Cash from operations was $170.9 million. Investing activities provided $136.8 million, principally from dealership and property sales; financing activities used $284.4 million. Year-end cash was $29.1 million, up from $5.9 million.
- Capital expenditures were $125.6 million, funded from operating cash flow; $18.0 million of construction commitments remained at year-end. Dealership dispositions generated approximately $250.7 million in net cash proceeds.
- Total outstanding indebtedness was approximately $2.2 billion, including floor-plan financing. Balance-sheet long-term debt, including current maturities, was $706.9 million; floor-plan notes payable totaled approximately $1.539 billion.
- Reported available liquidity resources totaled $280.0 million: $29.1 million cash, $230.7 million available under the revolving facility, $3.1 million under the mortgage facility and $17.1 million under used-vehicle floor-plan facilities.
- Sonic repurchased all remaining 5.0% notes, approximately $289.3 million principal, for about $295.9 million including premium and accrued interest. It recorded a $6.7 million extinguishment loss and had $250 million of 6.125% notes due 2027 outstanding.
- ASC 842 adoption brought lease assets and liabilities onto the balance sheet. At year-end, operating and finance lease liabilities totaled approximately $385 million; 2019 lease expense, net of sublease income, was $66.2 million.
- The company was in compliance with debt and lease covenants. Actual liquidity, fixed-charge coverage and lease-adjusted leverage ratios were 1.11, 1.60 and 3.21, respectively, against required levels of at least 1.05 and 1.20, and no more than 5.75.
Outlook, risks and unusual items
- Management estimated 2020 U.S. new-vehicle SAAR at 16.5–17.0 million; analyst expectations cited in the filing ranged from 16.0–17.0 million. These are estimates, not company revenue or earnings guidance.
- Management emphasized EchoPark expansion, higher-margin F&I and Fixed Operations, customer satisfaction, and disciplined used-inventory management. It generally targeted 30–35 days of used-vehicle supply.
- The filing identified significant leverage, variable-rate debt, refinancing and covenant risks; manufacturer and consumer-financing dependence; vehicle-market cyclicality and competition; used-inventory sourcing and depreciation; litigation and regulatory exposure; cybersecurity; and environmental liabilities. A 100-basis-point increase in rates was estimated to raise 2019 interest expense by approximately $16.4 million, before considering other effects.
- Goodwill was $475.8 million, including $60.0 million for EchoPark. No goodwill impairment was recorded in the annual test, but the auditor identified the EchoPark goodwill valuation as a critical audit matter because it depends on projected earnings, growth and discount-rate assumptions. Separately, Sonic recorded $20.8 million of impairment charges, including $19.7 million for former EchoPark properties held for sale and software.
- Pending legal proceedings had $1.5 million in recorded reserves; the company could not estimate a reasonably possible loss range beyond amounts accrued. Five Northern California dealerships contributed to a multiemployer pension plan in critical status, projected by its actuary to become insolvent in 2031; withdrawal liability could be substantial.
- The filing noted the early-2020 coronavirus outbreak and related supply-chain uncertainty, but stated that its impact was unclear as of the report date. Sonic also cited uncertainty from the planned transition away from LIBOR after 2021.
Investor facts to verify
- How much of the 2019 earnings improvement reflects recurring operations versus disposal gains, impairments and debt-extinguishment costs?
- Can EchoPark sustain unit growth and per-unit profitability while expanding, and what are its future capital and cash needs?
- How do floor-plan obligations, lease commitments, 2020 debt maturities and refinancing needs affect liquidity under weaker vehicle demand or higher rates?
- What are the latest operating and financial trends after year-end, including the effects of the coronavirus outbreak and manufacturer supply conditions?
- Are legal, environmental, tax, insurance-reserve and multiemployer-pension exposures adequately reflected in recorded liabilities?