Sonic Automotive, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited, compared with Q1 2012. Sonic operated 111 dealerships across 14 states and 20 collision repair centers, managed as one operating segment.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / prior balance | Change |
|---|---|---|---|
| Total revenue | $2,083.2 million | $1,927.1 million | +8.1% |
| Gross profit | $313.0 million | $303.8 million | +3.1% |
| Operating income | $55.0 million | $55.7 million | -1.2% |
| Continuing-operations income | $21.7 million | $21.1 million | +2.6% |
| Net income | $21.3 million | $20.5 million | +3.9% |
| Diluted EPS | $0.40 | $0.35 | +14.3% |
| Gross margin | 15.0% | 15.8% | -0.7 percentage points |
| Operating margin | 2.6% | 2.9% | -0.3 percentage points |
| Cash from operating activities | $88.8 million | Cash used: $39.2 million | Improved |
- Revenue growth reflected vehicle sales and F&I gains. New-vehicle revenue rose 10.8%; used-vehicle revenue rose 4.8%; fixed operations revenue rose 1.4%; F&I revenue rose 13.7%.
- New-vehicle unit sales increased 6.3%, but gross profit per unit fell 1.9%. Used-vehicle unit sales increased 3.9%, while gross profit per unit fell 7.1%. Wholesale operations shifted to a $1.2 million gross loss from $0.2 million profit.
- Fixed operations gross profit increased 1.0% as reported; adjusted for two fewer selling days, revenue increased 4.6% and gross profit 4.2%. F&I gross profit per retail unit rose 7.6%.
- SG&A increased 3.7% to $245.8 million and rose to 78.5% of gross profit from 78.1%. Floor-plan interest expense increased 25.5%; other interest expense declined 12.5%.
- Capital expenditures were $59.3 million, including $32.7 million of real estate acquisitions. Investing cash outflow was $59.2 million; financing cash outflow was $28.8 million. Ending cash was $4.2 million.
- At March 31, total debt was $639.3 million, excluding floor-plan payables; long-term debt was $619.7 million. Floor-plan payables totaled approximately $1.107 billion ($613.1 million trade and $493.5 million non-trade). Debt increased from $629.4 million at year-end 2012.
- Current assets were $1.475 billion and current liabilities $1.406 billion. Revolver borrowing availability was approximately $101.6 million after letters of credit. A $20.0 million lender deposit was included in other current assets and had withdrawal restrictions.
Material changes, outlook and risks
- Q1 2013 operating cash flow benefited from lower receivables and inventory, while the prior-year period used cash largely due to inventory purchases. Sonic cautions that trade and non-trade floor-plan cash flows are classified differently; combined floor-plan financing was a $72.7 million cash use in Q1 2013.
- Management expected a 38%–40% effective tax rate and said it expected sufficient cash flow to fund debt service, working capital and operating needs for the next 12 months and foreseeable future. Results are seasonal; Q1 normally contributes less operating profit than later quarters. No earnings or revenue guidance was provided.
- Credit-facility covenants were met at quarter-end. Actual liquidity, fixed-charge coverage and lease-adjusted leverage ratios were 1.12, 1.68 and 3.90, respectively, against required minimums of 1.05 and 1.20 and a maximum of 5.50. Revolving facilities mature August 2016.
- Variable-rate instruments, net of swaps, totaled approximately $753.4 million; a 100-basis-point rate increase would have raised Q1 interest expense by approximately $1.9 million. Swap fair value was a $31.2 million liability.
- Internal disclosure controls were deemed ineffective because of a previously reported material weakness. Remediation was underway, including added personnel, training, policy revisions and third-party assistance. Management nevertheless concluded the financial statements fairly presented the company’s position and results.
- Pending legal and administrative matters include customer, employment, contract, class-action and regulatory proceedings. The company could not estimate reasonably possible losses beyond recorded reserves of approximately $2.3 million combined. An unfavorable resolution could materially affect results or financial condition.
- Other exposures include lease obligations retained after dealership dispositions (approximately $113.9 million at December 31, 2012), franchise-sale indemnifications with maximum exposure of $19.3 million, and a $2.8 million guarantee of a joint venture’s floor-plan commitments. Lease-exit accruals were $31.6 million at quarter-end; construction commitments were $35.1 million.
- There were no dealerships held for sale at March 31, 2013. Discontinued operations produced a $0.4 million after-tax loss, compared with a $0.6 million loss in Q1 2012; that comparison included a prior-year $5.7 million disposal gain and continuing lease-exit charges.
- The board authorized an additional $100 million share-repurchase program; remaining authorization was $140.5 million at quarter-end. The company repurchased 392,000 shares for $9.1 million. A $0.025-per-share dividend was declared, subject to covenant and indenture restrictions.
Important facts for investors to verify
- Whether unit growth and improved F&I performance can offset lower vehicle gross profit per unit and margin pressure.
- Progress in remediating the material weakness and whether disclosure controls are later deemed effective.
- Cash-flow trends, floor-plan funding availability, and the ability to maintain covenant compliance while funding capital projects, buybacks and dividends.
- Exposure to higher interest rates, swap obligations, debt maturities and refinancing needs.
- Developments in legal proceedings, retained lease obligations and other indemnification commitments.
- The effects of seasonality, consumer credit availability, manufacturer incentives and vehicle inventory on future sales and profitability.