Sonic Automotive, Inc. — FY2015 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Sonic operated 114 franchises across 13 states, 18 collision repair centers, and three EchoPark pre-owned stores. Its two reporting segments are Franchised Dealerships and EchoPark.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $9.624 billion | $9.197 billion |
| Gross profit | $1.415 billion; 14.7% margin | $1.366 billion; 14.9% margin |
| Operating income | $217.3 million; 2.3% of revenue | $233.6 million; 2.5% of revenue |
| Income from continuing operations | $88.1 million | $98.6 million |
| Net income | $86.3 million; diluted EPS $1.70 | $97.2 million; diluted EPS $1.84 |
| Cash from operating activities | $69.5 million | $160.7 million |
| Capital expenditures | $173.2 million | $146.4 million |
- Revenue rose 4.6%, but operating income fell 7.0% and net income fell 11.2%. Higher impairment charges, lower new-vehicle profitability, and investment costs weighed on earnings.
- Same-store new-vehicle revenue increased 4.5%, while gross profit declined 5.8%; gross profit per unit fell 8.4% to $1,916. Same-store used-vehicle revenue rose 8.3%, but gross profit per unit fell 3.5% to $1,398.
- Same-store Fixed Operations revenue increased 6.8% and gross profit 8.4%; margin improved to 48.8% from 48.1%, supported largely by manufacturer warranty work. Same-store F&I revenue increased 9.7%; F&I per retail unit reached $1,288.
- Wholesale vehicle gross loss widened to $7.4 million from $3.6 million, reflecting higher used-inventory acquisition costs and lower-quality vehicles sent to auction.
- Reported operating cash flow fell partly because inventory increased $291.1 million. Management says operating cash flow would have been $143.7 million if all floor-plan borrowing changes were classified as operating activities; classification shifts can materially affect reported cash flows.
Debt and liquidity
- Total outstanding indebtedness was approximately $2.3 billion, including $1.519 billion in floor-plan notes and $814.6 million in long-term debt, including current maturities. Cash was $3.6 million.
- Reported available liquidity was $279.9 million: $181.1 million of revolving-credit availability, $21.2 million of used-vehicle floor-plan availability, and a $74.0 million floor-plan deposit, in addition to cash. The deposit is classified in other current assets and is not cash on hand.
- At year-end, the company reported compliance with debt and lease covenants. Key credit-facility ratios were: liquidity 1.19 versus a 1.05 minimum; fixed-charge coverage 1.78 versus a 1.20 minimum; lease-adjusted leverage 4.08 versus a 5.50 maximum.
- Future minimum operating lease payments, net of sublease rentals, were $427.1 million. The company also disclosed $64.8 million of construction commitments.
Outlook, commentary, and risks
- Management estimated 2016 U.S. new-vehicle SAAR of 17.3–17.6 million units; the analyst average cited was about 17.7 million. It expected new-vehicle gross-margin pressure to continue, and anticipated opening two more EchoPark stores in Colorado in 2016.
- EchoPark generated $77.1 million revenue and a $17.7 million operating loss in 2015, including a $1.4 million impairment charge. Management cautioned that EchoPark and the One Sonic-One Experience initiative could weigh on near-term results as they require capital and management resources.
- Unusual items included $18.0 million of impairment charges, versus $6.6 million in 2014; $3.5 million of storm-related damage and $1.7 million of legal and severance costs in SG&A; and a $3.3 million net gain on franchise dispositions. Four franchises were sold in 2015, generating about $8.0 million of net cash.
- Material risks include high leverage and covenant headroom, variable interest rates, reliance on vehicle manufacturers and floor-plan lenders, competition and pricing pressure, and the cyclical nature of vehicle demand. The company disclosed a $10.0 million net liability on interest-rate swaps; a 100-basis-point rate change would have changed 2015 interest expense by about $10.3 million before considering other effects.
- Volkswagen/Audi emissions concerns affected five Volkswagen and five Audi dealerships, which generated about $620.5 million, or 6.4%, of 2015 revenue. Sonic stated its dealerships believed they were entitled to manufacturer indemnification for related claims.
- The filing describes numerous legal proceedings but says it could not estimate reasonably possible losses beyond recorded reserves. Other contingencies include a $7.4 million California tax assessment for 2006–2008 returns, with later years also under audit, and potential liability related to an underfunded multi-employer pension plan.
- Management expected a 38%–40% effective tax rate before unusual discrete items. It reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the decline in earnings and reported operating cash flow with inventory growth, floor-plan financing classifications, impairments, and ongoing strategic investment.
- Assess covenant cushion and refinancing exposure, including mortgage maturities beginning in 2016, variable-rate borrowing, and substantial lease commitments.
- Track new-vehicle gross profit per unit, used-inventory pricing and wholesale losses, and whether Fixed Operations and F&I gains persist.
- Evaluate EchoPark’s path to profitability, planned expansion costs, and measurable results from the One Sonic-One Experience initiative.
- Monitor Volkswagen/Audi developments, tax examinations, litigation, environmental and lease-sublease exposures, and multi-employer pension-plan risk.
- Consider capital returns alongside liquidity needs: Sonic repurchased about 1.5 million shares for $34.5 million in 2015; after year-end it authorized additional repurchases and bought back about 4.0 million shares for approximately $72.0 million. A $0.05-per-share dividend was also approved for payment in April 2016.