Sonic Automotive, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Sonic operated 118 franchises, 19 collision repair centers, and three EchoPark stores across 13 states. Comparisons below are with Q1 2014 unless noted.
Financial performance
Amounts are in millions, except per-share data and percentages.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $2,235.5 | $2,136.4 | +4.6% |
| Gross profit | $335.0 | $329.0 | +1.8% |
| Operating income | $41.5 | $50.6 | -18.1% |
| Continuing-operations income | $14.4 | $20.0 | -28.0% |
| Net income | $14.0 | $19.4 | -28.0% |
| Diluted EPS | $0.27 | $0.36 | Down $0.09 |
| Operating cash flow | $44.1 | $14.3 | +$29.8 |
| Capital expenditures | $46.8 | $21.5 | More than doubled |
- Gross margin was approximately 15.0%, versus 15.4% a year earlier; operating margin was approximately 1.9%, versus 2.4%.
- Vehicle revenue increased, but vehicle gross profit was pressured: new-vehicle gross profit fell 5.0% and used-vehicle gross profit rose only 0.4%. Parts, service and collision repair revenue grew 1.4%, with gross profit up 2.8%; finance, insurance and other revenue increased 7.2%.
- Discontinued operations recorded a $0.4 million loss, compared with a $0.6 million loss in Q1 2014.
Balance sheet, debt and liquidity
- At March 31, cash was $4.0 million and total assets were $3,122.3 million. Stockholders’ equity was $672.1 million.
- Long-term debt, including current maturities, was $794.6 million, up from $773.4 million at year-end. Separately, floor-plan notes payable totaled approximately $1,191.5 million.
- Reported available liquidity resources were $237.9 million: $4.0 million cash, $156.3 million revolving-credit availability, $21.6 million used-floor-plan availability and a $56.0 million floor-plan deposit balance.
- The company reported compliance with credit-facility covenants. Actual fixed-charge coverage was 1.64 against a 1.20 minimum; total lease-adjusted leverage was 4.16 against a 5.50 maximum; liquidity ratio was 1.21 against a 1.05 minimum.
- Operating cash flow was partly supported by changes in receivables and inventories. Combined trade and non-trade floor-plan financing used $71.2 million of cash; the filing cautions that floor-plan classification can materially affect reported operating and financing cash flows.
Material changes and operating developments
- Franchised Dealerships revenue increased 3.9%, while segment income declined 9.7% to $43.1 million. EchoPark, a new segment, generated $15.7 million revenue and a $6.4 million operating loss, including a $1.4 million software impairment charge.
- New retail unit sales grew, but new-vehicle gross profit per unit declined 7.3% on a same-store basis. Sonic said it was reducing low-margin fleet sales; domestic fleet unit volume fell 84.8%.
- Same-store used-vehicle revenue rose 6.5%, while same-store gross profit increased 1.9%. Wholesale vehicles generated a gross loss of $0.2 million, worse than the prior-year loss.
- Same-store fixed-operations revenue increased 3.2% and gross profit rose 4.9%, supported particularly by warranty activity. Same-store finance and insurance revenue grew 8.9%, with per-retail-unit gross profit up 4.2%.
- SG&A increased 2.6% to $270.9 million and rose to 80.9% of gross profit from 80.2%. Management attributed cost pressure partly to EchoPark, One Sonic-One Experience, centralization initiatives, severance, medical claims, IT and contractor costs.
- Impairment charges were $6.2 million, versus nominal charges a year earlier, primarily from abandoned website, software and construction projects. Capital spending increased to $46.8 million; facility-construction commitments were $40.2 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected sufficient cash flow to fund debt service, working capital and operating needs for the next 12 months and foreseeable future, while identifying operating cash flow, credit facilities and real-estate financing as key liquidity sources.
- Management described the first quarter as seasonally weaker than the second through fourth quarters. It was testing True Price vehicle pricing and preparing a national One Sonic-One Experience launch; management believed these initiatives could support market share and sales, but outcomes are uncertain.
- The effective tax rate was 39.0%; management expected a 38%–40% range before unusual tax items or valuation-allowance changes.
- Variable-rate instruments, after swaps, totaled approximately $1.0 billion. A 100-basis-point rate increase would have raised quarterly interest expense by approximately $2.5 million. Interest-rate swaps had a net liability fair value of approximately $12.5 million.
- Sonic disclosed numerous legal and administrative proceedings, including customer, employment, contractual, class-action and governmental matters. It could not estimate a reasonably possible loss range beyond recorded reserves of approximately $1.8 million. Certain sale-related indemnifications had stated maximum exposure of $16.8 million; the company also guaranteed $2.8 million of a 50%-owned joint venture’s floor-plan commitments.
- Other material risks include vehicle demand and pricing, manufacturer relationships and incentives, consumer credit availability, competition, economic conditions, interest rates, capital needs, and execution of EchoPark and other strategic initiatives.
Investor verification priorities
- Determine whether revenue growth can translate into higher operating income, given declining new-vehicle margins, higher SG&A and impairment costs.
- Track EchoPark’s losses, store expansion, sales volumes and capital requirements against management’s expected strategic benefits.
- Assess the sustainability and quality of operating cash flow, including working-capital movements and floor-plan financing classifications, alongside elevated capital spending.
- Monitor available liquidity, covenant headroom, debt maturities and exposure to variable interest rates as swaps change or expire.
- Review legal proceedings, indemnification obligations and any developments that could increase losses beyond recorded reserves.