Sonic Automotive, Inc. — Q2 2013 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2013; comparisons are with the same 2012 periods. Sonic operated 111 dealerships across 14 states and 20 collision repair centers, organized as 100 stores, and reported one operating segment. Dollar figures below are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $2,202.4 | $2,121.9 | $4,285.6 | $4,049.0 |
| Gross profit | $323.8 | $312.9 | $636.8 | $616.6 |
| Operating income | $62.5 | $61.9 | $117.6 | $117.6 |
| Continuing-operations income | $8.7 | $29.0 | $30.4 | $50.1 |
| Net income | $8.9 | $28.2 | $30.2 | $48.7 |
| Diluted EPS | $0.17 | $0.47 | $0.57 | $0.81 |
| Operating cash flow | — | $30.3 | $(47.9) |
- Revenue rose 3.8% in Q2 and 5.8% for the first half. Gross profit increased 3.5% and 3.3%, respectively. Gross margin was approximately 14.7% in Q2 versus 14.7% a year earlier; first-half gross margin was approximately 14.9% versus 15.2%.
- Q2 net income fell chiefly because Sonic recorded a $28.2 million loss on repurchasing its 9.0% notes. The first-half comparison also reflects this charge. A $3.6 million state-tax-settlement benefit had boosted Q2 2012 results.
- New-vehicle revenue increased 5.2% in Q2, but gross profit declined 3.1%; gross profit per unit fell 4.9%. Used-vehicle gross profit rose 5.3% in Q2. Wholesale vehicle losses widened to $1.9 million from $1.2 million.
- Fixed Operations revenue grew 4.0% and gross profit 4.5% in Q2. Finance, insurance and other revenue rose 8.6%; gross profit per retail unit increased 7.4% to $1,148.
Balance sheet, debt and liquidity
- At June 30, cash was $3.2 million; total assets were $2,871.5 million and stockholders’ equity was $552.9 million. Inventories were $1,249.8 million.
- Long-term debt, including current maturities but excluding floor-plan financing, totaled $733.5 million, up from $629.4 million at year-end. Floor-plan payables totaled about $1,188.8 million. Floor-plan balances finance vehicle inventory and are distinct from the long-term debt total.
- In May, Sonic issued $300 million of 5.0% senior subordinated notes due 2023 and used proceeds to repurchase all $210 million of 9.0% notes, paying approximately $237.2 million including accrued interest. The refinancing reduced the coupon on that principal but generated the $28.2 million extinguishment loss.
- Revolver borrowing availability was approximately $107 million after letters of credit. Sonic reported compliance with credit-facility and note covenants; its actual liquidity ratio was 1.17 against a 1.05 minimum, fixed-charge coverage 1.71 against 1.20, and lease-adjusted leverage 4.07 against a 5.50 maximum.
- Operating cash flow was $30.3 million, investing cash outflow $88.4 million, and financing cash inflow $57.9 million for the first half. Capital expenditures were $89.1 million; cash and equivalents declined $0.2 million to $3.2 million.
Outlook, risks and unusual items
- Management expects a 38%–40% effective tax rate in future periods and stated it expects sufficient cash flow to fund debt service, working capital and operating needs for the next 12 months and foreseeable future. No earnings or revenue guidance was provided in the filing.
- Management said the initial transition to its “True Price” market-based pricing strategy contributed to retail unit sales and gross profit underperforming industry results. The company cited continued growth in fixed operations and F&I, while noting weaker new-vehicle unit profitability and lower collision repair revenue, partly related to a center closure.
- Interest-rate exposure remains material: variable-rate instruments, after swaps, totaled approximately $835 million; a 100-basis-point rate change would have affected first-half interest expense by about $3.6 million. Interest-rate swaps had a net fair-value liability of approximately $20.7 million.
- Liquidity depends substantially on dealership subsidiary cash generation, floor-plan financing and access to credit and mortgage financing. Vehicle demand, consumer credit, manufacturer allocations and incentives, competition, interest rates, and seasonality may affect results. The company also disclosed ongoing legal and administrative proceedings; it could not estimate reasonably possible losses beyond recorded reserves.
- Disclosure controls and procedures were deemed ineffective at June 30 because of a previously reported material weakness in internal control over financial reporting. Management said remediation was in progress, including additional personnel, training and policy changes.
- Other notable capital actions: Sonic repurchased approximately 0.6 million shares for $14.2 million in the first half; $135.4 million remained under its repurchase authorization. The quarterly dividend was $0.025 per share.
Important facts for investors to verify
- Whether the material weakness is remediated and disclosure controls are subsequently judged effective.
- Whether operating cash generation and available revolver capacity remain adequate alongside substantial floor-plan and long-term debt obligations.
- How the True Price transition affects retail volumes, per-unit gross profit and total profitability in later periods.
- Whether the 5.0% notes refinancing produces sustained interest savings after considering issuance costs, swaps and other debt.
- Developments in legal proceedings, interest-rate exposure, construction commitments and the company’s stated liquidity outlook.