Sonic Automotive, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2015, compared with the same 2014 periods. Sonic operated 117 franchises in 13 states, 19 collision repair centers, and three EchoPark used-vehicle stores. Its reportable segments were Franchised Dealerships and EchoPark.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $2,423.7 million | $2,353.3 million | $4,659.3 million | $4,489.7 million |
| Gross profit | $355.6 million | $346.9 million | $690.5 million | $675.9 million |
| Operating income | $43.1 million | $63.6 million | $84.6 million | $114.2 million |
| Income from continuing operations | $15.1 million | $27.1 million | $29.5 million | $47.0 million |
| Net income | $14.8 million | $27.0 million | $28.7 million | $46.4 million |
| Diluted EPS | $0.29 | $0.51 | $0.56 | $0.87 |
| Operating cash flow | Not separately presented for the quarter | $54.1 million | $53.6 million |
Margins and drivers. Q2 gross margin was approximately 14.7% versus 14.7% a year earlier; operating margin was approximately 1.8% versus 2.7%. New-vehicle gross profit fell 12.5% in Q2 despite higher same-store unit sales, with gross profit per unit down 10.9%. Fixed Operations and F&I grew: same-store Fixed Operations revenue rose 7.0% and F&I revenue 8.5%. Used-vehicle revenue rose 9.1% reported, while wholesale vehicles generated a larger gross loss.
Cash, debt and liquidity. At June 30, cash was $3.6 million. Total debt was $819.4 million, including $780.9 million long-term debt; separate floor-plan liabilities were $1,309.4 million. Total available liquidity resources were $256.8 million, including $144.2 million revolver availability, $55.0 million used-floor-plan availability and a $54.0 million floor-plan deposit. Six-month investing cash outflow was $80.7 million, mainly capital expenditures of $82.9 million; financing cash inflow was $25.9 million. Cash declined $0.6 million from year-end.
Material changes and unusual items
- Revenue increased 3.0% in Q2 and 3.8% for six months, but net income declined 45.2% and 38.0%, respectively. Operating income fell 32.2% in Q2 and 25.9% for six months.
- Impairment charges were $10.5 million in Q2 and $16.7 million for six months, including write-offs related to a franchise disposal, website/software projects and abandoned construction projects.
- SG&A increased 5.9% in Q2 and 4.2% for six months. Management cited EchoPark, One Sonic-One Experience, higher IT and legal costs, and physical-damage costs from storms ($3.4 million in Q2; $3.5 million for six months).
- EchoPark generated Q2 revenue of $21.0 million and an operating loss of $4.1 million; six-month revenue was $36.7 million and operating loss $10.4 million, including a $1.4 million impairment charge.
- Capital expenditures rose to $82.9 million for six months from $48.6 million in 2014; construction commitments were approximately $31.0 million.
- On July 22, 2015, B. Scott Smith became CEO and O. Bruton Smith became Executive Chairman.
Outlook, risks and contingencies
- Management expected to generate sufficient cash flow for debt service, working capital and operations over the next 12 months and foreseeable future. It expected a 38%–40% effective tax rate, before valuation-allowance changes or unusual discrete tax items. No earnings guidance was provided.
- Sonic was in compliance with credit-facility covenants at quarter-end. Reported actual ratios were 1.19 versus a 1.05 minimum liquidity ratio, 1.75 versus a 1.20 minimum fixed-charge coverage ratio, and 4.24 versus a 5.50 maximum lease-adjusted leverage ratio.
- After swaps, variable-rate instruments totaled approximately $1.1 billion; a 100-basis-point rate change would have affected six-month interest expense by approximately $5.2 million, including $4.6 million from floor-plan facilities.
- Risks include vehicle demand and pricing competition, manufacturer relationships and incentives, consumer-credit availability, execution of EchoPark and One Sonic-One Experience, financing and covenant compliance, seasonality, interest rates, and legal proceedings. Sonic reported numerous legal and administrative matters; outcomes and potential losses beyond recorded reserves could not be estimated clearly.
Important facts for investors to verify
- Whether new-vehicle margin pressure and lower per-unit gross profit persist as the company pursues market-share growth.
- Whether EchoPark can improve profitability and whether planned investments and construction commitments remain within liquidity capacity.
- How much of reported liquidity is available for general corporate needs, given the inclusion of floor-plan availability and the manufacturer-affiliated deposit.
- Debt and floor-plan exposure, covenant headroom, interest-rate sensitivity, and the impact of swaps as they mature or take effect.
- Potential additional impairment, storm-related, litigation or other unusual costs; the filing does not quantify a clear range for possible litigation losses beyond recorded reserves.