Sonic Automotive, Inc. — FY 2016 Form 10-K
Business context and reporting period
Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Sonic operated 116 franchised dealerships across 13 states, 18 collision repair centers and five EchoPark used-vehicle stores. Its two segments are Franchised Dealerships and EchoPark; EchoPark generated 1.3% of FY 2016 revenue.
Key financial metrics
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $9.732 billion | $9.624 billion | +1.1% |
| Gross profit | $1.429 billion | $1.415 billion | +1.0% |
| Operating income | $232.9 million | $217.3 million | +7.2% |
| Continuing-operations income | $94.5 million | $88.1 million | +7.3% |
| Net income | $93.2 million | $86.3 million | +8.0% |
| Diluted EPS | $2.03 | $1.70 | +19.4% |
| Operating cash flow | $216.4 million | $69.7 million | Higher by $146.7 million |
| Capital expenditures | $206.2 million | $173.2 million | Higher by $33.0 million |
Gross margin was 14.7% (unchanged); operating margin was 2.4%, versus 2.3%. Continuing-operations net margin was 1.0%, versus 0.9%. Fourth-quarter 2016 revenue was $2.557 billion, gross profit $371.7 million, net income $37.6 million and diluted EPS $0.83.
At year-end, cash and cash equivalents were $3.1 million. Reported available liquidity resources totaled $266.6 million: $207.1 million under the revolving facility, $46.4 million of floor-plan availability and a $10.0 million floor-plan deposit balance. Total indebtedness was approximately $2.4 billion, including floor-plan notes; long-term debt on the balance sheet, including current maturities, was $882.7 million. Total assets were $3.639 billion and stockholders’ equity was $725.2 million.
Material changes versus the prior comparable period
- Revenue and operating income rose modestly, while net income increased faster; lower weighted-average shares following repurchases contributed to EPS growth.
- Same-store retail new-vehicle revenue was essentially flat, but unit sales fell 2.3% and gross profit declined 2.8%. Management cited pricing competition, higher inventory and weakness in Houston’s energy-exposed market.
- Same-store used-vehicle revenue increased 0.9% and units rose 2.0%, but gross profit fell 3.0%; gross profit per unit declined 4.9% to $1,331.
- Same-store Fixed Operations revenue grew 4.3% and gross profit 2.2%, but its gross margin declined 100 basis points to 47.8%. Same-store F&I revenue increased 4.7%; gross profit per retail unit rose 5.1% to $1,346.
- EchoPark revenue rose 67.7% to $129.2 million, while its segment loss narrowed to $12.1 million from $17.3 million. It remained loss-making as the company expanded.
- Operating cash flow increased substantially, but its year-over-year comparison was affected by working capital and floor-plan financing movements. Investing cash outflow increased to $220.8 million, chiefly reflecting property and equipment spending.
Outlook, risks, contingencies and unusual items
- Management estimated 2017 U.S. new-vehicle industry sales of 17.0–17.5 million units; analyst expectations cited were 17.4–17.5 million. Management cautioned that consumer confidence, financing availability and manufacturer conditions could change results.
- Management expected new-vehicle gross-margin pressure to continue into 2017. EchoPark expansion into Colorado was planned for the first half of 2017, with North Carolina, South Carolina and Texas operations expected in 2017–2018. Management warned that EchoPark and the One Sonic-One Experience initiative could weigh on near-term results and require capital and management resources.
- FY 2016 included a $14.8 million pre-tax benefit from an OEM-related settlement, recognized in SG&A. Fourth-quarter results also included impairment, lease-exit and storm-damage-related items; the filing reports a net pre-tax benefit of approximately $0.4 million from lease-exit and storm-damage accrual adjustments, offset in part by other charges.
- Safety-recall stop-sale inventory affected sales and carrying costs: at December 31, Sonic reported approximately 400 new and 600 used stop-sale vehicles. The used-vehicle inventory days’ supply was about 34 days excluding stop-sale units.
- Debt and liquidity are material risks. Sonic renewed its credit facilities in November 2016, extending maturity to November 30, 2021. It reported compliance with covenants, but actual liquidity and fixed-charge coverage ratios were 1.17 versus a 1.05 minimum and 1.92 versus a 1.20 minimum, respectively; lease-adjusted leverage was 4.08 versus a 5.75 maximum.
- Variable-rate exposure remained significant: a 100-basis-point rate change was estimated to affect 2016 interest expense by approximately $11.7 million after swaps. Future lease payments, net of sublease rentals, totaled approximately $402.0 million; the company may remain responsible where buyers or sublessees fail to perform.
- Other disclosed exposures include ongoing legal proceedings (approximately $0.5 million accrued, with potential additional losses not estimable), the California tax-method dispute involving a $7.4 million assessment, and possible multiemployer pension withdrawal liability. The AI Pension Plan was in critical and declining status; the ultimate impact on Sonic is uncertain.
- The board authorized an additional $100 million of share repurchases after year-end, bringing stated remaining authorization to approximately $145 million before subsequent repurchases. FY 2016 repurchases were approximately $100 million; dividends declared were $0.20 per share. Future distributions remain subject to board discretion and debt restrictions.
Important facts for investors to verify
- Whether revenue and earnings growth persist without the $14.8 million OEM settlement benefit, and how margins trend in new and used vehicles.
- EchoPark’s path to profitability, store-opening costs, capital needs and performance in new markets.
- Stop-sale vehicle counts, recall repair timing, inventory days’ supply and related floor-plan interest costs.
- Debt maturities, covenant headroom, interest-rate sensitivity, refinancing needs and liquidity after capital expenditures, repurchases and dividends.
- Resolution and potential financial effects of the California tax assessment, legal proceedings, pension-plan exposure and lease/sublease obligations.
- Cash-flow comparability: floor-plan financing changes can shift amounts between operating and financing cash flows without changing overall liquidity; reported operating cash flow should be assessed alongside combined floor-plan movements.