Sonic Automotive, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; unaudited. Amounts below are in millions of dollars unless stated otherwise. Sonic operates franchised dealerships and stand-alone pre-owned stores, including EchoPark.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,505.7 | $2,557.9 | $7,199.3 | $7,174.9 |
| Gross profit | $362.6 | $359.1 | $1,073.6 | $1,057.5 |
| Operating income | $55.8 | $50.9 | $134.4 | $150.3 |
| Continuing-operations income | $19.7 | $19.0 | $32.0 | $56.5 |
| Net income | $19.4 | $18.1 | $31.0 | $55.6 |
| Diluted EPS | $0.44 | $0.40 | $0.70 | $1.20 |
- Q3 gross profit rose despite lower revenue; operating income and net income also increased. Q3 pretax continuing income included an approximately $8.5 million dealership-disposal gain, partly offset by about $3.0 million of storm damage and $1.0 million of legal and other charges.
- Nine-month pretax continuing income fell 41.7%. Results included a $14.6 million loss on extinguishing the 7.0% notes, approximately $10.0 million of storm damage and $3.3 million of impairment charges, partly offset by the $8.5 million dealership-disposal gain.
- Q3 revenue decreased 2.0%; nine-month revenue increased 0.3%. The pre-owned stores segment grew revenue 30.8% in Q3 and 52.2% year to date, but recorded segment losses of $4.5 million and $17.4 million, respectively. Nine-month franchised-dealership segment income declined 11.1%.
- Reported new-vehicle gross profit was $66.2 million in Q3, up 6.2%, and $187.0 million for nine months, up 0.2%. Same-store used-vehicle gross profit declined 3.4% in Q3 and 0.5% year to date. Wholesale vehicle gross losses widened to $3.3 million in Q3 and $6.4 million year to date.
- Fixed Operations gross margin increased to 48.2% in Q3 and 48.1% year to date. Same-store F&I revenue increased 2.7% in Q3 and 1.1% year to date; F&I gross profit per retail unit rose to $1,404 and $1,381, respectively.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $188.1 million, down from $241.5 million. Investing cash use was $235.5 million, including $181.9 million of capital expenditures and $76.6 million for a pre-owned business acquisition; financing cash flow was $57.7 million. Ending cash was $13.4 million.
- At September 30, total debt was $1,075.9 million, including $59.5 million of current maturities; long-term debt was $1,016.4 million. Floor-plan notes totaled approximately $1,319.3 million ($719.0 million trade and $600.4 million non-trade).
- Cash, revolving-facility availability and used-vehicle floor-plan availability totaled $113.2 million of liquidity at quarter-end. Sonic reported liquidity of approximately $135.0 million on October 12, up $21.8 million from quarter-end.
- The company issued $250 million of 6.125% notes due 2027 and used the proceeds to repurchase all $200 million of 7.0% notes, recognizing the $14.6 million extinguishment loss. Revolving-facility availability at quarter-end was approximately $84.0 million.
- Sonic reported compliance with debt covenants. Actual liquidity ratio was 1.12 against a 1.05 minimum; fixed-charge coverage was 1.75 against a 1.20 minimum; lease-adjusted leverage was 4.84 against a 5.75 maximum.
- It repurchased approximately 2.0 million shares for $37.3 million in the first nine months and declared quarterly dividends of $0.05 per share. Remaining repurchase authorization was $107.7 million at September 30.
Outlook, risks and notable items
- Management estimated 2017 U.S. new-vehicle SAAR at 16.8–17.0 million. It expected to break ground on approximately 10 EchoPark locations in Florida, Georgia, North Carolina, South Carolina and Texas by the end of 2018; management cautioned that EchoPark expansion and the One Sonic-One Experience initiative may weigh on near-term results.
- Management expected a future effective tax rate of 38%–40%, before potential valuation-allowance changes or discrete items.
- Hurricanes Harvey and Irma temporarily closed or impaired stores in Houston and parts of Alabama, Florida and Georgia; Ohio hail damage also affected results. Storm-related charges were approximately $3.0 million in Q3 and $10.0 million year to date. The company said affected businesses were operating by mid-September, with some still limited by damage and recovery work.
- Interest-rate exposure is material: a 100-basis-point increase was estimated to change nine-month interest expense by approximately $11.5 million, including about $10.0 million from floor-plan facilities. Swaps and caps partly mitigate variable-rate exposure.
- Pending legal and administrative matters are not predictable; reserves totaled approximately $3.2 million at September 30, and Sonic could not estimate potential losses beyond accrued reserves. An acquisition earnout may reach $80 million over 10 years; its fair value had not yet been determined.
- Management anticipated that adoption of the lease-accounting standard in 2019 would materially affect balance-sheet presentation, primarily through recognition of right-of-use assets and lease liabilities. It did not expect the 2018 revenue-recognition standard to materially affect reported results.
Investor verification priorities
- Assess how much Q3 and year-to-date earnings depended on the dealership-disposal gain, and distinguish that gain from recurring operating performance.
- Review the impact and insurance recovery of hurricane and hail damage, along with the condition and reopening status of affected locations.
- Track EchoPark unit economics, losses, inventory acquisition costs and the pace and funding of planned expansion.
- Monitor liquidity, covenant headroom, floor-plan costs and sensitivity to interest rates; assess planned capital spending against cash generation.
- Follow legal exposure and the valuation and possible payments under the acquisition earnout.
- Verify future share repurchases and dividends against cash needs, debt restrictions and covenant compliance.