Sonic Automotive(SAH) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Sonic Automotive, Inc. for Q1 2021 and 2020, reflecting a significant turnaround to $54.2M net income in Q1 2021 from a ($199.3M) net loss in Q1 2020 due to a large goodwill impairment charge in the prior year Condensed Consolidated Statements of Operations Q1 2021 vs Q1 2020 Statement of Operations Highlights | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :--- | :--- | :--- | | Total Revenues | $2,786.8M | $2,308.1M | | Gross Profit | $400.9M | $350.6M | | Impairment Charges | $0 | ($268.0M) | | Operating Income (Loss) | $87.9M | ($221.9M) | | Net Income (Loss) | $54.2M | ($199.3M) | | Diluted Earnings (Loss) Per Share ($) | $1.25 | ($4.68) | - The company reported a significant swing to profitability in Q1 2021, driven by a 20.7% increase in total revenues and the absence of the $268.0M impairment charge that was recorded in Q1 2020[13] Condensed Consolidated Balance Sheets Balance Sheet Summary | Metric | March 31, 2021 (Millions) | December 31, 2020 (Millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $77.2M | $170.3M | | Inventories | $1,232.3M | $1,247.3M | | Total Assets | $3,692.2M | $3,746.0M | | Total Current Liabilities | $1,781.3M | $1,831.4M | | Long-Term Debt | $637.4M | $651.8M | | Total Liabilities | $2,865.8M | $2,931.2M | | Total Stockholders' Equity | $826.5M | $814.8M | Condensed Consolidated Statements of Cash Flows Q1 2021 vs Q1 2020 Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $90.2M | ($47.2M) | | Net cash provided by (used in) investing activities | ($75.6M) | ($19.6M) | | Net cash provided by (used in) financing activities | ($107.7M) | $219.5M | - The company generated positive operating cash flow of $90.2M in Q1 2021, a significant improvement from the ($47.2M) used in Q1 2020. Cash was primarily used for investing activities, including $67.7M in property and equipment purchases, and financing activities, including $42.2M in treasury stock purchases[21][40] Notes to Unaudited Condensed Consolidated Financial Statements - The COVID-19 pandemic, which began impacting the business in March 2020, affected consumer demand and supply chains. While most operational restrictions had been relaxed by March 31, 2021, the ongoing effects continue to evolve[23][24][26] - In Q1 2020, the company recorded a non-cash goodwill impairment charge of $268.0M for the franchised dealership reporting unit due to the effects of the COVID-19 pandemic. No impairment charges were recorded in Q1 2021[43] Segment Revenues (Q1 2021 vs Q1 2020) | Segment | Q1 2021 Revenues (Millions) | Q1 2020 Revenues (Millions) | | :--- | :--- | :--- | | Franchised Dealerships | $2,279.7M | $1,976.3M | | EchoPark | $507.1M | $331.7M | | Total Consolidated | $2,786.8M | $2,308.1M | - Subsequent to the quarter end, on April 14, 2021, the company entered into a new credit agreement, replacing its 2016 facilities and increasing borrowing limits. The Board also approved an increase in the quarterly dividend to $0.12 per share and added $250.0M to the share repurchase authorization[85][86] Management's Discussion and Analysis of Financial Condition and Results of Operations Management reviews the company's Q1 2021 financial performance, highlighting a strong recovery with 20.7% total revenue growth driven by both Franchised Dealerships and EchoPark segments, alongside maintained liquidity and capital allocation Overview and Executive Summary - The company operates two reportable segments: the Franchised Dealerships Segment (84 stores) and the EchoPark Segment (21 stores)[91] - Sonic is pursuing an accelerated EchoPark growth plan, aiming to open 25 additional stores annually from 2021 to 2025 to build a 140-plus point nationwide network[92] - The U.S. retail new vehicle SAAR (Seasonally Adjusted Annual Rate) increased 23.3% to 14.3M vehicles in Q1 2021, providing a favorable market backdrop compared to the prior year[94] Results of Operations – Consolidated Consolidated New Vehicle Performance (Q1 2021 vs Q1 2020) | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,156.3M | $959.5M | +20.5% | | Gross Profit | $69.5M | $45.4M | +53.0% | | Unit Sales | 24,358 | 21,724 | +12.1% | | Gross Profit per Unit ($) | $2,852 | $2,091 | +36.4% | Consolidated Used Vehicle Performance (Q1 2021 vs Q1 2020) | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $1,090.1M | $850.1M | +28.2% | | Gross Profit | $30.9M | $32.1M | -3.9% | | Unit Sales | 46,906 | 40,024 | +17.2% | | Gross Profit per Unit ($) | $658 | $803 | -18.1% | Consolidated Fixed Operations Performance (Q1 2021 vs Q1 2020) | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $320.9M | $334.7M | -4.1% | | Total Gross Profit | $155.1M | $157.9M | -1.8% | | Gross Margin | 48.3% | 47.2% | +110 bps | Consolidated F&I Performance (Q1 2021 vs Q1 2020) | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Revenue | $144.7M | $115.3M | +25.5% | | Gross Profit per Retail Unit ($) | $2,045 | $1,885 | +8.5% | Results of Operations – Franchised Dealerships Segment - On a same-store basis, new vehicle revenue increased 21.6% and gross profit increased 52.8%, driven by a 13.8% increase in unit sales and a 34.4% increase in gross profit per unit to $2,831[122][123] - Same-store retail used vehicle revenue increased 18.0%, but gross profit decreased 5.8% due to an 11.3% decline in gross profit per unit, attributed to higher inventory costs[125] - Same-store Fixed Operations revenue decreased 4.7% and gross profit decreased 1.8%, primarily due to lower warranty repair activity as consumer driving habits were disrupted by the pandemic[131][132] - Same-store F&I revenue grew 18.7%, with gross profit per retail unit increasing by 8.1% to $1,807, driven by higher penetration rates for service and other aftermarket contracts[134] Results of Operations – EchoPark Segment - Total EchoPark revenues increased 52.9% and gross profit increased 44.3%, driven by the opening of ten new stores in the last year and strong sales volume[100] - On a same-market basis, total revenues increased 19.4% and total gross profit increased 19.3%[103] - Same-market combined used vehicle and F&I gross profit per unit increased by 1.8% to $2,336, reflecting maturing stores and improved F&I effectiveness[140] Selling, General & Administrative (SG&A) Expenses – Consolidated SG&A as a Percentage of Gross Profit | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | | :--- | :--- | :--- | | Total SG&A Expenses | $289.4M | $282.2M | | SG&A as % of Gross Profit | 72.2% | 80.5% | - SG&A as a percentage of gross profit improved significantly to 72.2% from 80.5% in the prior year, driven by higher gross profit levels and efficient cost management, particularly in advertising[154][155] Liquidity and Capital Resources Available Liquidity Resources | Resource | March 31, 2021 (Millions) | | :--- | :--- | | Cash and cash equivalents | $77.2M | | Availability under Revolving Credit Facility | $218.8M | | Other availability (Mortgage, Line of Credit, etc.) | $138.9M | | Total available liquidity resources | $434.9M | - Capital expenditures were $67.7M in Q1 2021, primarily for facility construction for both Franchised Dealerships ($46.2M) and EchoPark ($21.5M)[170] - The company repurchased approximately 1.0M shares of Class A Common Stock for $42.2M during Q1 2021. Subsequent to the quarter, the Board increased the share repurchase authorization by an additional $250.0M[172] - The Board of Directors approved a quarterly cash dividend of $0.10 per share during Q1 2021 and subsequently increased it to $0.12 per share for the next quarter[174] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable rate debt, where a 100 basis point increase would raise Q1 2021 interest expense by approximately $8.6M, alongside foreign currency risk - The company is exposed to interest rate risk from approximately $1.1B in variable rate debt as of March 31, 2021[190] - A hypothetical 100 basis point increase in interest rates would have resulted in an approximate $8.6M increase in interest expense for the first quarter of 2021[190] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2021, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[196] PART II – OTHER INFORMATION Legal Proceedings The company is involved in various ordinary course legal and administrative proceedings, with management believing accrued probable losses are immaterial - Sonic is involved in various legal proceedings arising from the ordinary course of business, but reserves for estimated probable losses are considered immaterial[66][201] Risk Factors No material changes to the company's risk factors were reported compared to its Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes in risk factors were reported compared to the Annual Report on Form 10-K for the year ended December 31, 2020[204] Unregistered Sales of Equity Securities and Use of Proceeds This section outlines the company's repurchase of 957,303 Class A Common Stock shares in Q1 2021, with $27.3M remaining under authorization, subsequently increased by an additional $250.0M Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | January 2021 | — | — | | February 2021 | 575,832 | $41.87 | | March 2021 | 381,471 | $47.10 | | Total | 957,303 | N/A | - As of March 31, 2021, $27.3M remained available for share repurchases. Subsequent to the quarter, the Board of Directors increased this authorization by an additional $250.0M[208][209] Exhibits This section outlines the exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, and Sarbanes-Oxley Act certifications