Sonic Automotive, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 5, 2012. The filing also provides unaudited fourth-quarter results. Sonic operated 119 dealerships across 15 states and 23 collision repair centers, representing 30 vehicle brands. It reports one operating segment.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $7.871 billion | $6.881 billion |
| Gross profit / margin | $1.209 billion / 15.4% | $1.115 billion / 16.2% |
| Operating income | $214.8 million | $182.6 million |
| Income from continuing operations | $77.6 million | $95.9 million |
| Net income | $76.3 million | $89.9 million |
| Diluted EPS | $1.29 | $1.49 |
| Cash provided by operating activities | $153.6 million | $255.0 million |
For fourth-quarter 2011, revenue was $2.071 billion, gross profit $305.3 million, net income $20.5 million, and diluted EPS $0.35. The comparable fourth-quarter 2010 figures were $1.845 billion, $284.5 million, $64.4 million, and $1.00, respectively; the 2010 quarter included a $48.2 million tax valuation-allowance benefit.
Revenue rose 14.4% year over year, led by new vehicles (+16.8%), used vehicles (+14.7%) and finance, insurance and other (+20.7%). New and used unit sales increased 14.6% and 13.9%, respectively. Gross margin declined 80 basis points, reflecting lower vehicle margins and fixed-operations mix. SG&A increased 6.2% in dollars but improved to 78.8% of gross profit from 80.4%; operating margin was 2.7% in both years. Continuing-operations pretax income improved, but net income fell as 2011 included $48.4 million of income tax expense, versus a $17.5 million tax benefit in 2010.
Balance sheet, debt and liquidity
- At year-end, cash was $1.9 million, current assets $1.181 billion and current liabilities $1.157 billion, implying roughly $24 million of working capital and a 1.02 current ratio.
- Long-term debt, including current maturities, totaled $547.6 million. Floor-plan notes payable totaled $868.3 million; total debt including floor-plan financing was approximately $1.4 billion.
- Available borrowing under the revolving credit facility was $129.3 million at year-end. The facility matures in August 2016; new- and used-vehicle floor-plan facilities provide up to $500 million and $80 million, respectively.
- Operating cash flow declined to $153.6 million from $255.0 million. Investing used $157.0 million, mainly for capital expenditures; financing used $16.5 million. Cash fell by $19.9 million to $1.9 million. The filing notes that floor-plan financing classification can materially shift reported operating versus financing cash flow.
- Capital expenditures were $158.7 million, including $91.4 million for real estate acquisitions. Long-term lease obligations, net of sublease rentals, were $787.0 million in total contractual payments.
- Sonic reported compliance with debt and lease covenants at year-end. Actual liquidity, fixed-charge coverage and lease-adjusted leverage ratios were 1.13, 1.65 and 4.02, respectively; applicable thresholds were at least 1.05, at least 1.15 and no more than 5.50 through March 30, 2012. Management expected continued compliance.
Changes, outlook and notable items
- Industry U.S. new-vehicle sales increased 9.5% to 12.7 million in 2011. Management cited improving economic conditions and customer traffic. Industry expectations for 2012 were 13–14 million units; this is an industry forecast, not company-specific guidance.
- The Japan earthquake and tsunami, followed by Thailand flooding, reduced Japanese-brand vehicle allocations in later 2011 quarters, affecting new-vehicle sales and margins and the sourcing of used inventory. Inventory allocation was beginning to improve, but timing and effects into 2012 remained uncertain.
- In July 2011, Sonic refinanced its syndicated credit facilities, extended maturity from 2012 to 2016 and increased borrowing capacity by $234 million. It redeemed the remaining $42.9 million of 8.625% notes and repurchased $17.4 million of 5.0% convertible notes.
- Management said it was not pursuing significant acquisitions near term. It continued its strategy of property ownership, leverage reduction, standardized processes and higher-margin F&I and fixed operations. 2011 dividends totaled $0.10 per share; future dividends and repurchases remain subject to board discretion, liquidity and covenant restrictions.
- Unusual 2011 items included $6.8 million of lease adjustments and other accruals, $1.2 million of property impairment, and a $0.9 million loss on repurchase of convertible notes. Goodwill was $468.5 million; no goodwill impairment was recorded.
- A customer class-action dispute concerning an Etch product was subject to a settlement agreement reached at mediation in January 2012, pending formal documentation and court approval. The company had $7.3 million in legal reserves and said it could not estimate a reasonably possible loss range beyond recorded reserves.
- Management and the external auditor concluded internal control over financial reporting was ineffective at December 31, 2011 because of a material weakness in review of a period-end journal entry reclassifying negative book cash balances between cash and accounts payable. The adjustment was recorded in the 2011 statements; management reported remedial changes in February 2012. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements.
Key investor verification points
- Assess the cause and sustainability of the decline in operating cash flow, particularly working-capital movements, floor-plan financing presentation and low year-end cash.
- Review debt and lease covenant headroom, scheduled mortgage maturities, the 2014 put/redemption exposure on convertible notes, and the revolving facility’s springing-maturity provisions.
- Track vehicle allocation recovery and resulting sales, gross margins and used-inventory costs, especially for Japanese brands.
- Confirm completion and court approval of the Etch-related settlement and monitor other legal, tax, environmental and multi-employer pension exposures.
- Evaluate remediation and subsequent testing of the material weakness in financial-reporting controls.
- Distinguish the 2010 tax benefit from recurring performance when comparing earnings, and verify future capital spending, property purchases, dividends and buybacks against liquidity and covenants.