Sonic Automotive, Inc. — Q2 2012 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2012, compared with the same 2011 periods. Sonic operated 116 dealerships in 15 states and 24 collision repair centers.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $2,185.2m | $1,946.0m | $4,173.1m | $3,764.3m |
| Gross profit | $320.8m | $305.9m | $632.6m | $593.2m |
| Operating income | $59.8m | $59.1m | $113.1m | $107.4m |
| Net income | $28.2m | $21.4m | $48.7m | $36.3m |
| Diluted EPS | $0.47 | $0.35 | $0.81 | $0.61 |
- Revenue grew 12.3% in Q2 and 10.9% for the half year. Higher vehicle sales drove growth: new-vehicle revenue rose 19.1% and 14.4%, respectively. Q2 U.S. industry new-vehicle sales also increased 16.5%.
- Q2 gross profit increased 4.8%, slower than revenue growth. New-vehicle gross profit per unit fell 11.6% to $1,981; used-vehicle gross profit per unit fell 8.4% to $1,334. Fixed Operations gross margin declined 40 basis points to 48.9%. F&I revenue rose 18.0%, with gross profit per retail unit up 4.7% to $1,055.
- SG&A was $249.5m in Q2, up 5.2%; at 77.8% of gross profit, it increased 30 basis points year over year. Six-month SG&A was $497.0m, or 78.6% of gross profit, unchanged year over year.
- Cash and cash equivalents were $5.9m at June 30, versus $1.9m at year-end 2011. Six-month operating cash flow was negative $47.9m, primarily reflecting a $180.8m inventory cash use. Investing cash flow was negative $9.5m; financing cash flow was positive $61.4m. Management notes that classifying all floor-plan borrowing changes as operating cash flow would yield $40.4m operating cash provided.
- Total debt was $537.6m, excluding floor-plan payables; total indebtedness including floor-plan and short-term debt was approximately $1.5bn. Current assets were $1,323.7m and current liabilities $1,262.0m. Revolver availability was approximately $135.8m after letters of credit. The company reported compliance with credit covenants; actual liquidity, fixed-charge coverage and lease-adjusted leverage ratios were 1.16, 1.56 and 3.88, respectively, against required levels of at least 1.05, at least 1.20 and no more than 5.50.
Changes, outlook and notable items
- New-vehicle unit sales rose 19.0% in Q2, led by Honda, Toyota, Lexus and Mercedes; management attributed part of the increase to recovery in Japanese-brand inventory after 2011 supply disruptions. Used-vehicle volume rose 2.7%, although per-unit gross profit weakened.
- Sonic sold five dealerships in the first half, receiving approximately $23.6m and recognizing a $5.3m disposal gain. Discontinued operations contributed $1.7m of first-half net income versus a $2.4m loss in 2011.
- A $3.6m state tax examination settlement benefit reduced the 2012 effective tax rate. Management expects a continuing-operations effective tax rate of 38%–40% in future periods.
- On July 2, Sonic issued $200m of 7.0% senior subordinated notes due 2022, with proceeds intended primarily to fund an exchange offer for its 5.0% convertible notes. If at least $80m of convertibles were not accepted by October 23, 2012, the new notes would be subject to mandatory redemption. The exchange offer was scheduled to expire July 27, 2012, subject to extension or termination.
- After quarter-end, the board authorized an additional $100m of share repurchases, bringing stated available authorization to approximately $130.7m. Quarterly dividends were $0.025 per share, subject to debt covenants and board discretion.
- Risks include substantial indebtedness, interest-rate and vehicle-demand exposure, manufacturer relationships, covenant compliance, and litigation. The Etch-product class dispute had a settlement preliminarily approved, but final court approval remained outstanding. Sonic recorded $7.3m of reserves for pending proceedings and said it could not estimate additional reasonably possible losses.
Investor verification points
- Confirm subsequent results for the 5.0% convertible-note exchange, the $200m note financing and any mandatory-redemption trigger.
- Assess whether inventory growth and negative reported operating cash flow persisted, while accounting for floor-plan cash-flow classification.
- Track vehicle gross profit per unit, used-vehicle margins, and whether F&I and Fixed Operations gains offset margin pressure.
- Verify covenant headroom, revolver availability, swap-related liabilities and the effects of debt and repurchase activity on liquidity.
- Check final approval and cost of the Etch settlement, and developments in other legal proceedings and indemnification obligations.