Sonic Automotive, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied filing text does not provide clear standalone fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
Sonic operates franchised dealerships and EchoPark used-vehicle stores. At year-end it had 110 franchised-dealership stores, 140 new-vehicle franchises and 17 collision centers, plus 46 EchoPark stores. EchoPark generated 18.9% of total revenue, compared with 14.5% in 2020.
On December 6, 2021, Sonic acquired RFJ Auto for approximately $950.2 million, adding 33 retail locations across seven states. The acquisition included 22 franchised stores and 11 Northwest Motorsport pre-owned stores; its purchase-price allocation remained preliminary.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $12,396.4 million | $9,767.0 million |
| Gross profit / gross margin | $1,914.3 million / 15.4% | $1,423.6 million / 14.6% |
| Operating income / margin | $538.4 million / 4.3% | $33.9 million / 0.3% |
| Income (loss) from continuing operations | $348.9 million | $(50.7) million |
| Net income (loss) | $348.9 million | $(51.4) million |
| Diluted earnings (loss) per share | $8.06 | $(1.21) |
| Cash provided by operating activities | $306.3 million | $281.1 million |
| Cash and cash equivalents at year-end | $299.4 million | $170.3 million |
Revenue rose 26.9%. Results benefited from stronger vehicle pricing and sales, higher fixed-operations and finance-and-insurance (F&I) results, and the RFJ acquisition. Gross profit increased 34.5%. The 2021 effective tax rate was 23.9%; the 2020 comparison was affected by a large goodwill impairment and tax items.
- Franchised Dealerships: Revenue was $10.05 billion, up 20.4%; segment income before taxes and impairment charges was $530.3 million versus $231.2 million. Same-store new-vehicle gross profit per unit rose 78.9% to $4,513; same-store used-vehicle gross profit per unit rose 38.6% to $1,763. Fixed-operations gross margin was 50.2%, and same-store F&I gross profit per retail unit increased 16.3% to $2,034.
- EchoPark: Revenue was $2.35 billion, up 65.3%, but segment loss before taxes and impairment charges was $72.0 million, versus $4.0 million of income. Combined used-vehicle and F&I gross profit per unit fell 10.9% to $1,779. Growth included new stores and the RFJ acquisition.
Liquidity, debt and capital allocation
Reported available liquidity resources totaled $702.8 million at year-end, comprising $299.4 million cash, $281.4 million available under the revolving credit facility, $22.2 million under the mortgage facility and $99.8 million of floor-plan deposits. Total outstanding indebtedness was approximately $2.8 billion, including about $1.3 billion of floor-plan notes; long-term debt was $1.56 billion before current maturities and debt issuance costs. Sonic reported compliance with debt covenants at December 31, 2021 and expected compliance for at least the following 12 months.
Investing activities used $1.30 billion, principally for acquisitions and capital expenditures. Capital expenditures were $298.2 million. Financing activities provided $1.12 billion, including proceeds from $650 million of 4.625% senior notes due 2029 and $500 million of 4.875% senior notes due 2031. The proceeds helped fund the RFJ acquisition and debt repayment; Sonic redeemed its 6.125% notes and recorded a $15.6 million loss on extinguishment. Cash flow presentation is affected by floor-plan financing classification: management said operating cash flow would have been $745.9 million in 2021 if all floor-plan changes were classified as operating activities.
Sonic repurchased approximately 2.0 million shares for $93.3 million in 2021 and paid $0.46 per share in dividends. Remaining repurchase authorization was $226.2 million at year-end. A subsequent $0.25-per-share dividend was approved for payment in April 2022, subject to applicable conditions.
Outlook, commentary and risks
- Management estimated 2022 U.S. new-vehicle SAAR of 15.0–15.5 million, versus 15.0 million in 2021. It expected vehicle and parts production to begin improving in the first half of 2022, while also warning inventory could remain low or worsen and vehicle supply was expected to remain constrained through 2022.
- Sonic planned to open 20–25 EchoPark stores annually through 2025, aiming for a network reaching 90% of the U.S. population. EchoPark’s 2021 segment loss and elevated inventory supply are relevant to assessing the cost and returns of that expansion.
- Semiconductor and other supply-chain disruptions, low vehicle inventories, volatile used-vehicle acquisition costs and pricing, inflation, higher interest rates, consumer credit availability, labor costs and pandemic developments could affect sales, margins and cash flows. Management cautioned that unusually high wholesale vehicle prices and related profits might normalize.
- Other material exposures include dependence on manufacturers and franchise agreements, competition and direct-to-consumer sales models, debt covenants and variable-rate borrowing, legal proceedings, environmental indemnities, and potential withdrawal liability from an underfunded multiemployer pension plan. Pending legal matters had $1.8 million of recorded reserves; the company could not estimate a reasonably possible loss range beyond accrued amounts.
- Unusual items include the $15.6 million debt-extinguishment loss, approximately $3.0 million of acquisition-related costs, and a $270.0 million goodwill impairment recorded in 2020. The RFJ purchase-price allocation included preliminary franchise-asset fair value of $398.2 million; valuation assumptions were identified as a critical audit matter.
Important facts for investors to verify
- Whether vehicle supply and pricing normalize as management expected, and the effect on new- and used-vehicle unit volumes, gross profit per unit and wholesale gains.
- EchoPark’s path to profitability, inventory days’ supply, store-opening pace and returns on expansion investment.
- RFJ integration results and final purchase-price adjustments and asset valuations; acquired operations contributed $215.7 million of revenue and $7.5 million of net income after acquisition through year-end.
- Debt maturities, variable-rate exposure and covenant headroom. A 100-basis-point rate increase was estimated to change 2021 interest expense by approximately $20.6 million.
- Cash generation after acquisition spending, capital expenditures, dividends and share repurchases; distinguish reported operating cash flow from management’s alternative floor-plan classification.
- Potential impacts of litigation, environmental matters and the underfunded pension plan. The auditor issued an unqualified opinion on the financial statements and internal controls, but the acquired RFJ operations were excluded from the 2021 internal-control assessment.