Sonic Automotive, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Sonic operated 113 dealerships in 15 states and 23 collision repair centers.
Financial results
Amounts are in millions, except per-share data. Year-over-year comparisons are with the same 2011 period.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $2,152.2 | $1,926.1 | $6,247.4 | $5,616.4 |
| Gross profit | $307.7 | $293.4 | $930.4 | $875.5 |
| Operating income | $57.6 | $54.6 | $174.2 | $163.5 |
| Income from continuing operations | $11.8 | $20.1 | $61.5 | $59.1 |
| Net income | $10.0 | $19.4 | $58.7 | $55.7 |
| Diluted EPS | $0.18 | $0.33 | $1.00 | $0.94 |
| Operating cash flow per cash flow statement | Not provided | Not provided | $35.4 | $167.3 |
- Revenue increased 11.7% in Q3 and 11.2% year to date. New-vehicle sales growth was the main driver: units rose 21.0% and 15.7%, respectively. Total gross profit increased more slowly, 4.9% in Q3 and 6.3% year to date.
- Gross margin was approximately 14.3% in Q3 versus 15.2% in 2011, and 14.9% year to date versus 15.6%. New-vehicle gross profit per unit declined 16.3% in Q3 and 9.1% year to date, partly reversing unusually high 2011 margins when Japanese-brand inventory was constrained.
- Fixed Operations gross profit rose 1.7% in Q3 and 2.7% year to date; F&I revenue increased 18.0% and 19.1%, supported by higher retail volume and improved product penetration and pricing. Used-vehicle gross profit rose 7.1% in Q3 and 3.3% year to date. Wholesale vehicles generated a gross loss in both periods.
- Q3 net income and diluted EPS declined materially, despite higher revenue and operating income. The principal unusual item was the convertible-note repurchase charge: other expense was $17.3 million in Q3 and $19.8 million year to date. Year-to-date net income rose 5.4%.
Liquidity, debt and capital
- At September 30, cash was $62.5 million; current assets were $1,355.2 million and current liabilities $1,224.2 million. Inventory was $1,033.3 million.
- Reported debt included $969.9 million of trade and non-trade floor-plan notes and $611.2 million of total long-term debt, including current maturities. The risk-factor section states total indebtedness of approximately $1.6 billion, including floor-plan and short-term debt.
- Revolver borrowing availability was approximately $126.3 million after letters of credit. Sonic reported covenant compliance; actual ratios were 1.21 liquidity, 1.66 fixed-charge coverage and 4.01 lease-adjusted leverage, against required 1.05 minimum, 1.20 minimum and 5.50 maximum, respectively.
- Q3 issuance of $200 million of 7.0% notes due 2022 helped fund the repurchase of all 5.0% convertible notes. The company paid approximately $137.1 million cash and issued 4,074,905 Class A shares; the transaction generated a reported $19.9 million debt-retirement charge for the nine-month period.
- Cash flow statement reported $35.4 million operating cash flow, $3.5 million net investing cash outflow and $28.8 million financing cash inflow for the first nine months. Cash increased to $62.5 million. The filing’s MD&A gives different cash-flow totals, noted below.
- Capital expenditures were $55.2 million year to date, with $33.5 million of contractor commitments for facility projects. Sonic repurchased approximately 910,000 shares for $16.4 million year to date; remaining authorization was $116.2 million. Quarterly dividends were $0.025 per share, subject to debt and credit-facility restrictions.
Outlook, risks and unusual items
- No earnings or revenue guidance is provided. Management expects a 38%–40% effective tax rate in future periods and identifies operating cash flow, floor-plan and revolver availability, mortgage financing, asset sales and capital-market access as sources of liquidity.
- Management cites seasonality, with Q1 normally contributing less operating profit than later quarters. Vehicle demand and profitability may be affected by weather, manufacturer incentives, model changeovers, economic conditions, interest rates and consumer credit availability.
- Variable-rate debt exposure, after swaps, was approximately $573.3 million; a 100-basis-point rate change was estimated to change nine-month interest expense by approximately $4.3 million. Interest-rate swaps had a $37.3 million net liability at quarter-end.
- Sonic sold eight dealerships during the first nine months for approximately $51.9 million; three were sold in Q3. Two additional post-quarter sales generated approximately $21.0 million. No dealerships were held for sale at September 30.
- A customer class-action matter involving finance-and-insurance products was settled and became effective October 2, 2012; management said it would not have a material adverse effect. Other legal and administrative proceedings remain, with $7.3 million of reserves; the company could not estimate additional reasonably possible losses.
- Guarantees and indemnities include up to $15.9 million of exposure associated with franchise-sale indemnifications at September 30, plus a $4.5 million guarantee of a joint venture’s floor-plan commitments. Lease-related obligations and covenant restrictions are also material considerations.
Important facts for investors to verify
- Reconcile the cash-flow figures: the cash-flow statement reports $35.4 million operating and $28.8 million financing cash flow, while MD&A cites approximately $30.9 million and $33.2 million, respectively; MD&A also presents alternative floor-plan-adjusted operating cash flow.
- Assess the sustainability of new-vehicle unit growth against declining per-unit gross profit, and monitor vehicle and brand mix, especially Japanese-brand comparisons with the supply-disrupted 2011 period.
- Review the economics and ongoing effects of the debt exchange, including the large one-time retirement charge, increased share count, 7.0% coupon and debt-covenant limitations on dividends and repurchases.
- Monitor covenant headroom, revolving availability, floor-plan balances, interest-rate sensitivity and the $33.5 million construction commitments.
- Confirm subsequent dealership dispositions, the final status and costs of the effective settlement, and developments in other proceedings and indemnification exposures.