Sonic Automotive(SAH) - 2022 Q2 - Quarterly Report

FORM 10-Q Filing Information This section details the administrative and identification information for Sonic Automotive, Inc.'s Form 10-Q filing for the quarter ended June 30, 2022 Registrant Information This section provides the basic identification details for Sonic Automotive, Inc.'s Form 10-Q filing, including its state of incorporation, address, and stock exchange listings - Filing is a Quarterly Report (Form 10-Q) for the period ended June 30, 2022[2] - Registrant: SONIC AUTOMOTIVE, INC., incorporated in Delaware[2] Outstanding Common Stock as of July 26, 2022 | Class | Shares Outstanding | | :---- | :----------------- | | Class A Common Stock | 27,236,398 | | Class B Common Stock | 12,029,375 | Filer Status Sonic Automotive, Inc. is classified as a 'Large accelerated filer' and has filed all required reports and interactive data files during the preceding 12 months - The registrant is a Large accelerated filer[4] - All required reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 have been filed during the preceding 12 months[3] - All Interactive Data Files required by Rule 405 of Regulation S-T have been submitted electronically during the preceding 12 months[3] Uncertainty of Forward-Looking Statements and Information This section outlines the cautionary statements regarding forward-looking information, emphasizing potential material differences from actual results due to various risks and uncertainties Forward-Looking Statements Disclaimer This section serves as a cautionary statement regarding forward-looking statements, indicating that actual results may differ materially from projections due to various risks and uncertainties - The report contains 'forward-looking statements' as defined by the Private Securities Litigation Reform Act of 1995, identifiable by words like 'may,' 'will,' 'expect,' 'estimate,' etc[5] - These statements are based on current estimates and assumptions, involve risks and uncertainties, and are not guarantees of future performance; actual results could differ materially[6] - The company undertakes no obligation to revise or update these statements, except as required by federal securities laws[7] Factors Affecting Future Results Key factors that could cause actual results to differ from projections include fluctuations in vehicle sales, ability to secure financing for expansion, business strategies, manufacturer relationships, legal proceedings, regulatory changes, supply chain disruptions, economic conditions, competition, and the integration of acquisitions - Factors include new and used vehicle sales volumes, ability to fund EchoPark expansion and other capital needs, and overall business and growth strategies[8] - Risks also involve vehicle manufacturer reputation, financial incentives, ability to deliver vehicles, and relationships with manufacturers affecting inventory and acquisitions[8] - General economic conditions (interest rates, inflation, consumer spending), high competition, and the severity/duration of the COVID-19 pandemic and its impact on supply chains are significant factors[8] PART I – FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Sonic Automotive, Inc. for the three and six months ended June 30, 2022 Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Sonic Automotive, Inc. for the three and six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Operations This section details the company's financial performance, highlighting revenue growth and varied income trends for the three and six months ended June 30, 2022 Key Financial Highlights (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Total Revenues | $3,652.8 | $3,352.2 | 9% | | Gross Profit | $588.8 | $510.8 | 15.3% | | Operating Income | $154.8 | $165.4 | (6.4%) | | Income from Continuing Operations | $94.8 | $114.0 | (16.8%) | | Net Income | $94.8 | $113.8 | (16.7%) | | Diluted EPS | $2.34 | $2.63 | (11.0%) | Key Financial Highlights (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Total Revenues | $7,239.4 | $6,139.0 | 18% | | Gross Profit | $1,160.1 | $911.7 | 27.2% | | Operating Income | $309.2 | $253.3 | 22.1% | | Income from Continuing Operations | $192.1 | $167.7 | 14.5% | | Net Income | $192.1 | $168.1 | 14.3% | | Diluted EPS | $4.67 | $3.87 | 20.7% | Condensed Consolidated Statements of Comprehensive Operations This section presents the company's comprehensive income, showing a decrease for the three months and an increase for the six months ended June 30, 2022 Comprehensive Income (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :------------------- | :-------------- | :-------------- | :--------- | | Net Income | $94.8 | $113.8 | (16.7%) | | Other Comprehensive Income (Loss) | $0.3 | $0.4 | (25.0%) | | Comprehensive Income | $95.1 | $114.2 | (16.7%) | Comprehensive Income (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | Change (%) | | :------------------- | :-------------- | :-------------- | :--------- | | Net Income | $192.1 | $168.1 | 14.3% | | Other Comprehensive Income (Loss) | $0.5 | $0.6 | (16.7%) | | Comprehensive Income | $192.6 | $168.7 | 14.2% | Condensed Consolidated Balance Sheets This section outlines the company's financial position, showing an increase in total assets and stockholders' equity as of June 30, 2022, compared to December 31, 2021 Key Balance Sheet Items (June 30, 2022 vs. December 31, 2021) | Metric | June 30, 2022 (Millions) | Dec 31, 2021 (Millions) | Change (%) | | :-------------------------- | :----------------------- | :---------------------- | :--------- | | Total Assets | $5,023.5 | $4,975.1 | 1.0% | | Total Current Assets | $2,070.9 | $2,084.1 | (0.6%) | | Total Liabilities | $3,853.5 | $3,898.7 | (1.2%) | | Total Stockholders' Equity | $1,170.0 | $1,076.4 | 8.7% | - Cash and cash equivalents increased to $327.1 million at June 30, 2022, from $299.4 million at December 31, 2021[17] - Inventories slightly decreased to $1,240.4 million at June 30, 2022, from $1,261.2 million at December 31, 2021[17] Condensed Consolidated Statements of Stockholders' Equity This section details the changes in stockholders' equity, which increased to $1,170.0 million by June 30, 2022, driven by net income and stock-based compensation, partially offset by treasury stock purchases and dividends Changes in Stockholders' Equity (Six Months Ended June 30, 2022) | Item | Amount (Millions) | | :------------------------------------ | :---------------- | | Balance at December 31, 2021 | $1,076.4 | | Shares awarded under stock compensation plans | $1.3 | | Purchases of treasury stock | $(93.1) | | Effect of cash flow hedge instruments, net of tax expense | $0.5 | | Restricted stock amortization and stock option amortization | $13.1 | | Net income | $192.1 | | Class A dividends declared | $(14.3) | | Class B dividends declared | $(6.0) | | Balance at June 30, 2022 | $1,170.0 | - Treasury stock purchases amounted to $93.1 million for the six months ended June 30, 2022[20] - Dividends declared for Class A and Class B Common Stock totaled $14.3 million and $6.0 million, respectively, for the six months ended June 30, 2022[20] Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash flow activities, showing a significant improvement in operating cash flow for the six months ended June 30, 2022, with net cash increasing by $27.7 million Cash Flow Summary (Six Months Ended June 30) | Activity | 2022 (Millions) | 2021 (Millions) | Change (Millions) | | :-------------------------------- | :-------------- | :-------------- | :---------------- | | Net cash provided by (used in) operating activities | $306.3 | $(34.6) | $340.9 | | Net cash used in investing activities | $(118.8) | $(129.2) | $10.4 | | Net cash provided by (used in) financing activities | $(159.8) | $233.1 | $(392.9) | | Net increase in cash and cash equivalents | $27.7 | $69.3 | $(41.6) | | Cash and cash equivalents, end of period | $327.1 | $239.6 | $87.5 | - Operating cash flow improvement was driven by net income, depreciation, and favorable changes in receivables and inventories, partially offset by changes in floor plan notes payable[22] - Cash paid for interest increased to $52.6 million in 2022 from $29.6 million in 2021, and income taxes paid increased to $59.0 million from $54.4 million[22] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements, covering significant accounting policies, business acquisitions, inventory breakdown, property and equipment, goodwill and intangible assets, long-term debt, commitments and contingencies, fair value measurements, segment information, and subsequent events 1. Summary of Significant Accounting Policies This section outlines the accounting principles used for the unaudited interim financial statements, highlighting the ongoing impact of the COVID-19 pandemic on the automotive supply chain and detailing revenue recognition policies - Unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information[23] - COVID-19 continues to disrupt the global automotive supply chain, causing lower new vehicle and parts inventory, strong consumer demand, and high vehicle pricing[24] - Material revenue streams include sales of new vehicles, retail used vehicles, wholesale used vehicles, arrangement of vehicle financing/insurance, and vehicle maintenance/repair services[29] 2. Business Acquisitions and Dispositions During the six months ended June 30, 2022, Sonic acquired one franchised dealership for approximately $20.9 million, including a $14.7 million post-close adjustment related to the RFJ Auto Partners, Inc. acquisition from December 2021 - Acquired one franchised dealership for approximately $20.9 million during the six months ended June 30, 2022, including a $14.7 million post-close adjustment for the RFJ Auto acquisition[35][37] - The acquisition's gross purchase price allocation included $3.1 million for inventory, $0.1 million for property and equipment, $2.5 million for franchise assets, and $0.5 million for goodwill[35] - No dispositions occurred in the first six months of 2022, compared to the disposition of one luxury franchised dealership for $3.8 million in the same period of 2021[36] 3. Inventories Net inventories decreased slightly to $1,240.4 million at June 30, 2022, from $1,261.2 million at December 31, 2021, primarily driven by a decrease in used vehicle inventory, partially offset by an increase in new vehicle inventory Inventories Breakdown (Millions) | Category | June 30, 2022 | December 31, 2021 | | :-------------------- | :-------------- | :---------------- | | New vehicles | $321.5 | $273.1 | | Used vehicles | $719.8 | $807.2 | | Service loaners | $118.8 | $106.3 | | Parts, accessories and other | $80.3 | $74.6 | | Net inventories | $1,240.4 | $1,261.2 | 4. Property and Equipment Net property and equipment increased to $1,491.6 million at June 30, 2022, from $1,458.8 million at December 31, 2021, with capital expenditures of $100.4 million primarily for real estate and construction Property and Equipment, Net (Millions) | Category | June 30, 2022 | December 31, 2021 | | :-------------------------- | :-------------- | :---------------- | | Land | $451.2 | $447.4 | | Buildings and improvements | $1,319.5 | $1,240.5 | | Furniture, fixtures and equipment | $485.0 | $451.2 | | Construction in progress | $37.9 | $68.1 | | Less accumulated depreciation | $(796.4) | $(746.2) | | Property and equipment, net | $1,491.6 | $1,458.8 | - Capital expenditures for the six months ended June 30, 2022, were $100.4 million, mainly for real estate, new store construction, and improvements[41] - No fixed asset impairment charges were recorded for the six months ended June 30, 2022 and 2021[42] 5. Goodwill and Intangible Assets Total goodwill increased to $423.5 million at June 30, 2022, from $416.4 million at December 31, 2021, with increases in both segments and no impairment charges recorded Goodwill Carrying Amount (Millions) | Segment | June 30, 2022 | December 31, 2021 | | :-------------------------- | :-------------- | :---------------- | | Franchised Dealerships Segment | $219.8 | $213.5 | | EchoPark Segment | $203.7 | $202.9 | | Total goodwill | $423.5 | $416.4 | - Indefinite-lived franchise assets were approximately $486.6 million at June 30, 2022, up from $480.2 million at December 31, 2021[44] - No impairment charges were recorded for goodwill or intangible assets as of June 30, 2022, or December 31, 2021[44] 6. Long-Term Debt Total long-term debt, net of current maturities, decreased to $1,462.0 million at June 30, 2022, and the company was in compliance with all financial covenants under its credit facilities and mortgage facility Long-Term Debt Breakdown (Millions) | Debt Instrument | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :-------------- | :---------------- | | 4.625% Senior Notes due 2029 | $650.0 | $650.0 | | 4.875% Senior Notes due 2031 | $500.0 | $500.0 | | 2019 Mortgage Facility | $84.5 | $90.0 | | Mortgage notes to finance companies (fixed rate) | $198.5 | $213.4 | | Mortgage notes to finance companies (variable rate) | $128.3 | $132.8 | | Total debt (net of issuance costs) | $1,538.5 | $1,561.3 | | Less current maturities | $(76.5) | $(50.6) | | Long-term debt | $1,462.0 | $1,510.7 | - As of June 30, 2022, the company had $269.3 million remaining borrowing availability under the 2021 Revolving Credit Facility and $27.7 million under the 2019 Mortgage Facility[48][56] - The company was in compliance with all financial covenants under its 2021 Credit Facilities and 2019 Mortgage Facility as of June 30, 2022, including liquidity, fixed charge coverage, and total lease adjusted leverage ratios[62] 7. Commitments and Contingencies This section outlines the company's various guarantees and indemnification obligations, primarily related to operating lease agreements, dealership dispositions, and legal matters, with reserves held for pending cases - The company generally indemnifies lessors for use of leased premises and buyers for liabilities post-sale, with environmental exposure for dispositions at $0 million as of June 30, 2022[65][67] - A guarantee of $4.3 million for the floor plan commitments of a 50%-owned joint venture was outstanding at June 30, 2022, and December 31, 2021[68] - Reserves for pending legal proceedings were approximately $1.6 million (current) and $0.3 million (long-term) as of June 30, 2022[70] 8. Fair Value Measurements The company's financial instruments generally approximate their carrying values, though significant fixed-rate long-term debt had fair values below carrying values at June 30, 2022, reflecting market conditions - Fair values of most financial instruments (receivables, floor plan notes, etc.) approximated their carrying values due to short maturities or variable interest rates[73] Fair Value vs. Carrying Value of Fixed Rate Long-Term Debt (Millions) | Debt Instrument | June 30, 2022 Fair Value | June 30, 2022 Carrying Value | Dec 31, 2021 Fair Value | Dec 31, 2021 Carrying Value | | :---------------- | :----------------------- | :--------------------------- | :---------------------- | :-------------------------- | | 4.875% Notes | $376.3 | $500.0 | $504.8 | $500.0 | | 4.625% Notes | $503.8 | $650.0 | $655.9 | $650.0 | 9. Segment Information Sonic Automotive operates two reportable segments: Franchised Dealerships and EchoPark, with the Franchised Dealerships Segment generating higher revenues and income, while EchoPark reported a loss for the three months ended June 30, 2022 - Sonic has two operating segments: Franchised Dealerships (new/used vehicles, parts, service, F&I) and EchoPark (pre-owned vehicle specialty retail)[76] Segment Revenues (Three Months Ended June 30, 2022 vs. 2021) | Segment | 2022 (Millions) | 2021 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | Franchised Dealerships Segment | $2,987.2 | $2,756.6 | 8% | | EchoPark Segment | $665.6 | $595.6 | 12% | | Total consolidated revenues | $3,652.8 | $3,352.2 | 9% | Segment Income (Loss) (Three Months Ended June 30, 2022 vs. 2021) | Segment | 2022 (Millions) | 2021 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | Franchised Dealerships Segment | $162.1 | $165.4 | (2%) | | EchoPark Segment | $(34.9) | $(14.4) | (142%) | | Income from continuing operations before taxes | $127.2 | $151.0 | (16%) | 10. Subsequent Events Subsequent to June 30, 2022, Sonic's Board of Directors increased the share repurchase authorization by $500.0 million, bringing the total remaining availability to approximately $633.1 million - Board of Directors increased share repurchase authorization by $500.0 million after June 30, 2022[82] - Current remaining share repurchase availability is approximately $633.1 million[82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Sonic Automotive, Inc.'s financial condition and results of operations for the three and six months ended June 30, 2022, highlighting the impact of acquisitions and supply chain disruptions Overview Sonic Automotive is a major U.S. automotive retailer operating two segments: Franchised Dealerships and EchoPark, with plans to expand its EchoPark network to reach 90% of the U.S. population by 2025 - Sonic Automotive is one of the largest automotive retailers in the U.S., with two reportable segments: Franchised Dealerships and EchoPark[87] - As of June 30, 2022, the company operated 111 Franchised Dealership stores (141 new vehicle franchises) and 50 EchoPark stores[87] - EchoPark growth plan aims to expand its nationwide distribution network to reach 90% of the U.S. population by 2025[87] Executive Summary The U.S. retail automotive industry experienced significant SAAR decreases in Q2 2022 due to ongoing COVID-19 impacts and supply chain disruptions, leading to low inventory and high vehicle pricing, with varied segment performance influenced by the RFJ Auto Acquisition U.S. Retail Automotive Industry SAAR (Millions of Vehicles) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | % Change | | :-------------------- | :------------------------------- | :------------------------------- | :--------- | | Retail new vehicle SAAR | 11.6 | 15.6 | (25.6%) | | Total new vehicle SAAR | 13.5 | 17.0 | (20.6%) | - COVID-19 and supply chain disruptions, especially semiconductor shortages, continue to cause low new vehicle inventory and high new/used vehicle pricing[91][92] - Franchised Dealerships Segment: Retail new vehicle gross profit per unit increased significantly (77% in Q2, 98% in H1) due to higher average selling prices from inventory shortages, despite lower unit sales volume[95] - EchoPark Segment: Total revenue increased (12% in Q2, 17% in H1) driven by network expansion and higher average retail used vehicle selling prices. Combined retail used vehicle and F&I gross profit per unit increased (82% in Q2, 44% in H1) due to strategic actions to reduce inventory acquisition costs[100][101] Results of Operations – Consolidated Consolidated results show a 9% increase in total revenues for Q2 2022 and an 18% increase for H1 2022, with new vehicle gross profit surging due to higher gross profit per retail unit despite lower unit sales New Vehicles – Consolidated Consolidated new vehicle revenue increased 3% in Q2 2022 and 15% in H1 2022, primarily due to higher average selling prices, with gross profit surging despite decreased unit sales Consolidated New Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Total new vehicle revenue | $1,510.7 | $1,462.9 | 3% | | Total new vehicle gross profit | $169.2 | $118.4 | 43% | | Retail new vehicle unit sales | 24,427 | 30,257 | (19%) | | Gross profit per new retail unit | $6,890 | $3,903 | 77% | Consolidated New Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Total new vehicle revenue | $3,010.6 | $2,619.2 | 15% | | Total new vehicle gross profit | $337.8 | $187.9 | 80% | | Retail new vehicle unit sales | 49,114 | 54,074 | (9%) | | Gross profit per new retail unit | $6,841 | $3,464 | 97% | - The brand mix of new vehicle revenues for the Franchised Dealerships Segment shifted, with Luxury brands decreasing (53.3% in Q2 2022 vs. 65.3% in Q2 2021) and Domestic brands increasing (26.4% in Q2 2022 vs. 9.1% in Q2 2021), largely due to the RFJ Acquisition[106] Used Vehicles – Consolidated Consolidated retail used vehicle revenue increased 13% in Q2 2022 and 18% in H1 2022, driven by higher revenue per unit, with gross profit per unit rising despite a 10% decrease in unit sales volume for both periods Consolidated Retail Used Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $1,449.4 | $1,281.2 | 13% | | Gross profit | $47.1 | $35.1 | 34% | | Unit sales | 44,764 | 49,811 | (10%) | | Gross profit per unit | $1,053 | $698 | 51% | Consolidated Retail Used Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $2,820.2 | $2,384.1 | 18% | | Gross profit | $95.2 | $65.7 | 45% | | Unit sales | 86,837 | 96,717 | (10%) | | Gross profit per unit | $1,097 | $679 | 62% | - Used vehicle prices reached an all-time high in Q1 2022 and remained elevated in Q2, influenced by low new vehicle inventory and high demand[114] Wholesale Vehicles – Consolidated Consolidated wholesale vehicle revenue increased significantly by 43% in Q2 2022 and 82% in H1 2022, driven by higher revenue per unit, but gross profit decreased significantly, reflecting market volatility Consolidated Wholesale Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $121.4 | $84.8 | 43% | | Gross profit (loss) | $1.2 | $4.5 | (73%) | | Unit sales | 8,545 | 9,631 | (11%) | | Gross profit (loss) per unit | $129 | $470 | (73%) | Consolidated Wholesale Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $290.2 | $159.6 | 82% | | Gross profit (loss) | $2.6 | $5.4 | (52%) | | Unit sales | 18,966 | 19,324 | (2%) | | Gross profit (loss) per unit | $139 | $278 | (50%) | - Wholesale vehicle prices and supply have experienced volatility since the COVID-19 pandemic, and the current pricing environment is not expected to be sustainable long-term[116] Fixed Operations – Consolidated Consolidated Fixed Operations revenue increased 15% in Q2 2022 and 19% in H1 2022, with gross profit increasing 13% in Q2 and 16% in H1, driven by strong customer pay growth Consolidated Fixed Operations Revenue (Three Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Customer pay | $168.0 | $152.1 | 10% | | Warranty | $54.7 | $58.2 | (6%) | | Wholesale parts | $50.2 | $39.6 | 27% | | Internal, sublet and other | $125.2 | $96.2 | 30% | | Total revenue | $398.1 | $346.1 | 15% | Consolidated Fixed Operations Gross Profit (Six Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Customer pay | $187.6 | $163.4 | 15% | | Warranty | $64.1 | $64.9 | (1%) | | Wholesale parts | $17.9 | $13.0 | 38% | | Internal, sublet and other | $115.2 | $89.5 | 29% | | Total gross profit | $384.8 | $330.8 | 16% | - The company expects continued optimization of service capacity and growth in parts and service business due to extended new vehicle warranty periods and certified pre-owned vehicle warranties[120] F&I – Consolidated Consolidated F&I revenue decreased 2% in Q2 2022 but increased 6% in H1 2022, with gross profit per retail unit increasing by 13% in Q2 and 17% in H1, despite lower unit sales volume Consolidated F&I Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $173.2 | $177.2 | (2%) | | Total combined new and used vehicle retail unit sales | 69,191 | 80,068 | (14%) | | Gross profit per retail unit (excludes fleet) | $2,503 | $2,214 | 13% | Consolidated F&I Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $339.7 | $321.9 | 6% | | Total combined new and used vehicle retail unit sales | 135,951 | 150,791 | (10%) | | Gross profit per retail unit (excludes fleet) | $2,499 | $2,135 | 17% | - F&I revenues are recognized net of actual and estimated future chargebacks, resulting in a 100% gross margin for F&I[123] Results of Operations – Franchised Dealerships Segment The Franchised Dealerships Segment reported increased total new vehicle revenue for Q2 and H1 2022, driven by acquisitions and higher gross profit per unit, despite decreased same-store retail new vehicle revenue and unit sales New Vehicles – Franchised Dealerships Segment Reported total new vehicle revenue increased 3% in Q2 2022 and 15% in H1 2022, largely due to acquisitions, while same-store retail new vehicle gross profit per unit surged by 77% in Q2 and 98% in H1 despite lower unit sales Franchised Dealerships Segment Same Store Retail New Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $1,126.3 | $1,447.5 | (22%) | | Gross profit | $139.0 | $117.4 | 18% | | Unit sales | 20,135 | 30,129 | (33%) | | Gross profit per new retail unit | $6,905 | $3,897 | 77% | Franchised Dealerships Segment Same Store Retail New Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $2,236.0 | $2,578.2 | (13%) | | Gross profit | $276.9 | $186.2 | 49% | | Unit sales | 40,418 | 53,865 | (25%) | | Gross profit per new retail unit | $6,851 | $3,458 | 98% | Used Vehicles – Franchised Dealerships Segment Reported retail used vehicle revenue increased 14% in Q2 2022 and 21% in H1 2022, primarily due to acquisitions, with same-store gross profit per unit showing mixed trends despite decreased unit sales Franchised Dealerships Segment Same Store Retail Used Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $751.5 | $758.8 | (1%) | | Gross profit | $38.2 | $54.5 | (30%) | | Unit sales | 23,555 | 28,429 | (17%) | | Gross profit per unit | $1,622 | $1,915 | (15%) | Franchised Dealerships Segment Same Store Retail Used Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $1,474.5 | $1,417.9 | 4% | | Gross profit | $77.5 | $89.0 | (13%) | | Unit sales | 46,272 | 55,549 | (17%) | | Gross profit per unit | $1,674 | $1,602 | 4% | - The segment aims to maintain used vehicle inventory days' supply in the 25- to 35-day range; it was approximately 31 days as of June 30, 2022 and 2021[97][142] Wholesale Vehicles – Franchised Dealerships Segment Reported wholesale vehicle revenue increased 26% in Q2 2022 and 56% in H1 2022, driven by higher revenue per unit, but reported gross profit decreased significantly, resulting in a gross loss Franchised Dealerships Segment Same Store Wholesale Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $55.4 | $62.7 | (12%) | | Gross profit (loss) | $(0.4) | $4.1 | (110%) | | Unit sales | 4,313 | 6,729 | (36%) | | Gross profit (loss) per unit | $(75) | $619 | (112%) | Franchised Dealerships Segment Same Store Wholesale Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $138.1 | $118.7 | 16% | | Gross profit (loss) | $(0.8) | $4.9 | (116%) | | Unit sales | 9,675 | 13,532 | (29%) | | Gross profit (loss) per unit | $(72) | $363 | (120%) | Fixed Operations – Franchised Dealerships Segment Reported Fixed Operations revenue increased 15% in Q2 2022 and 19% in H1 2022, with gross profit increasing 13% in Q2 and 16% in H1, driven by acquisitions and strong customer pay growth Franchised Dealerships Segment Same Store Fixed Operations Revenue (Three Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Customer pay | $171.0 | $151.0 | 13% | | Warranty | $51.7 | $57.8 | (11%) | | Wholesale parts | $46.5 | $39.4 | 18% | | Internal, sublet and other | $92.9 | $96.7 | (4%) | | Total revenue | $362.1 | $344.9 | 5% | Franchised Dealerships Segment Same Store Fixed Operations Gross Profit (Six Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Customer pay | $187.4 | $162.6 | 15% | | Warranty | $60.0 | $64.5 | (7%) | | Wholesale parts | $16.7 | $12.9 | 29% | | Internal, sublet and other | $86.8 | $88.8 | (2%) | | Total gross profit | $350.9 | $328.8 | 7% | - Fixed Operations activity, particularly customer pay repairs, has recovered above pre-pandemic levels, with elevated levels expected to continue in 2022[149][150] F&I – Franchised Dealerships Segment Reported F&I revenue increased 5% in Q2 2022 and 16% in H1 2022, driven by acquisitions, while same-store F&I gross profit per retail unit increased by 15% in Q2 and 19% in H1 despite lower retail unit sales volume Franchised Dealerships Segment Same Store F&I Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $106.6 | $123.7 | (14%) | | Total combined retail new and used vehicle unit sales | 43,690 | 58,558 | (25%) | | Gross profit per retail unit (excludes fleet) | $2,440 | $2,113 | 15% | Franchised Dealerships Segment Same Store F&I Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $209.1 | $221.0 | (5%) | | Total combined retail new and used vehicle unit sales | 86,690 | 109,414 | (21%) | | Gross profit per retail unit (excludes fleet) | $2,412 | $2,020 | 19% | - F&I gross profit per retail unit increased due to higher gross profit per finance contract and increased penetration rates for service and other aftermarket contracts[155][157][158] Results of Operations – EchoPark Segment The EchoPark Segment reported an 11% increase in retail used vehicle revenue for Q2 2022 and 14% for H1 2022, driven by new market expansion and higher revenue per unit, with combined used vehicle gross profit and F&I revenue increasing significantly Used Vehicles and F&I – EchoPark Segment Reported used vehicle revenue increased 11% in Q2 2022 and 14% in H1 2022, driven by new market expansion and higher revenue per unit, while combined used vehicle gross profit and F&I revenue increased significantly, with gross profit per retail unit surging due to strategic actions to reduce inventory acquisition costs EchoPark Segment Reported Used Vehicle and F&I Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Used vehicle revenue | $577.5 | $519.7 | 11% | | F&I revenue | $43.4 | $53.2 | (18%) | | Combined used vehicle gross profit and F&I revenue | $46.8 | $33.1 | 41% | | Total used vehicle and F&I gross profit per retail unit | $2,804 | $1,537 | 82% | EchoPark Segment Reported Used Vehicle and F&I Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :--------------------------------- | :-------------- | :-------------- | :--------- | | Used vehicle revenue | $1,094.5 | $961.0 | 14% | | F&I revenue | $83.5 | $100.3 | (17%) | | Combined used vehicle gross profit and F&I revenue | $88.1 | $78.9 | 12% | | Total used vehicle and F&I gross profit per retail unit | $2,774 | $1,922 | 44% | - EchoPark's operating strategy focuses on maximizing total used vehicle-related gross profit rather than traditional front-end retail used vehicle gross profit per unit[160] Wholesale Vehicles – EchoPark Segment Reported wholesale vehicle revenue increased 94% in Q2 2022 and 159% in H1 2022, driven by new market expansion and higher revenue per unit, though gross profit showed mixed trends EchoPark Segment Reported Wholesale Vehicle Performance (Three Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $42.2 | $21.8 | 94% | | Gross profit (loss) | $1.7 | $3.0 | (43%) | | Unit sales | 2,694 | 2,878 | (6%) | | Revenue per unit | $15,656 | $7,592 | 106% | EchoPark Segment Reported Wholesale Vehicle Performance (Six Months Ended June 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Revenue | $104.7 | $40.5 | 159% | | Gross profit (loss) | $3.5 | $3.2 | 9% | | Unit sales | 6,343 | 5,739 | 11% | | Revenue per unit | $16,502 | $7,049 | 134% | - The increase in revenue per wholesale unit was due to the stabilization of excess demand in the wholesale vehicle auction market, which drove record high wholesale vehicle pricing[171][172] Segment Results Summary This section summarizes the consolidated revenues and income (loss) from continuing operations before taxes for both the Franchised Dealerships and EchoPark segments, showing overall revenue growth but varied income trends Consolidated Revenues and Income (Loss) by Segment (Three Months Ended June 30) | Metric | Franchised Dealerships (Millions) | EchoPark (Millions) | Total Consolidated (Millions) | | :--------------------------------- | :------------------------------ | :------------------ | :---------------------------- | | Revenues | $2,987.2 | $665.6 | $3,652.8 | | Income (Loss) from continuing operations before taxes | $162.1 | $(34.9) | $127.2 | Consolidated Revenues and Income (Loss) by Segment (Six Months Ended June 30) | Metric | Franchised Dealerships (Millions) | EchoPark (Millions) | Total Consolidated (Millions) | | :--------------------------------- | :------------------------------ | :------------------ | :---------------------------- | | Revenues | $5,948.5 | $1,290.9 | $7,239.4 | | Income (Loss) from continuing operations before taxes | $326.0 | $(69.9) | $256.1 | - Total retail new and used vehicle unit sales volume decreased by 14% in Q2 2022 and 10% in H1 2022, with both segments contributing to the decline[175][177] Selling, General and Administrative (SG&A) Expenses – Consolidated Consolidated SG&A expenses increased by 26% in Q2 2022 and 29% in H1 2022, primarily due to the RFJ Acquisition and higher overall gross profit levels, with compensation and advertising expenses also rising Consolidated SG&A Expenses (Three Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Compensation | $266.4 | $213.8 | (25%) | | Advertising | $25.6 | $15.3 | (67%) | | Rent | $13.7 | $13.7 | 0% | | Other | $97.1 | $77.8 | (25%) | | Total SG&A expenses | $402.8 | $320.6 | (26%) | Consolidated SG&A Expenses as a % of Gross Profit (Six Months Ended June 30) | Category | 2022 (%) | 2021 (%) | Change (bps) | | :-------------------------- | :------- | :------- | :----------- | | Compensation | 44.7% | 44.1% | (60) | | Advertising | 4.5% | 3.0% | (150) | | Rent | 2.3% | 3.0% | 70 | | Other | 16.6% | 16.8% | 20 | | Total SG&A expenses as a % of gross profit | 68.1% | 66.9% | (120) | - The increase in SG&A was primarily due to the RFJ Acquisition and higher overall gross profit levels, with advertising expense increasing due to focused marketing at EchoPark[180][181] Impairment Charges – Consolidated No impairment charges were recorded for the three and six months ended June 30, 2022, or 2021 - No impairment charges were recorded for the three and six months ended June 30, 2022, or 2021[182] Depreciation and Amortization – Consolidated Depreciation and amortization expense increased by 26% for both the three and six months ended June 30, 2022, primarily due to acquisitions, completed construction projects, and purchases of fixed assets - Depreciation and amortization expense increased by approximately $6.4 million (26%) in Q2 2022 and $12.7 million (26%) in H1 2022[183] - The increase was primarily due to acquisitions and completed construction projects, along with purchases of fixed assets for franchised dealerships and EchoPark stores[183] Interest Expense, Floor Plan – Consolidated Floor plan interest expense for new vehicles decreased by 21% in Q2 2022 and 41% in H1 2022, mainly due to lower average interest rates, while used vehicle floor plan interest expense increased significantly by 112% in Q2 and 105% in H1 due to higher average interest rates and increased notes payable balances - New vehicle floor plan interest expense decreased by $0.5 million (21%) in Q2 2022, primarily due to a lower average interest rate (0.62% vs. 0.81%)[184] - Used vehicle floor plan interest expense increased by $2.3 million (112%) in Q2 2022, driven by a higher average interest rate (2.91% vs. 1.67%) and increased notes payable balance[185] - For H1 2022, new vehicle floor plan interest expense decreased by $2.3 million (41%), while used vehicle floor plan interest expense increased by $3.9 million (105%)[186][187] Interest Expense, Other, Net – Consolidated Other interest expense, net, increased significantly by 111% in Q2 2022 and 106% in H1 2022, primarily due to the issuance of Senior Notes in October 2021, increases in variable rate mortgage debt, and higher interest on finance lease liabilities Consolidated Interest Expense, Other, Net (Three Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Stated/coupon interest | $17.0 | $7.5 | (127%) | | Interest on finance lease liabilities | $2.9 | $1.7 | (71%) | | Total interest expense, other, net | $21.3 | $10.1 | (111%) | Consolidated Interest Expense, Other, Net (Six Months Ended June 30) | Category | 2022 (Millions) | 2021 (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :--------- | | Stated/coupon interest | $34.0 | $15.2 | (124%) | | Interest on finance lease liabilities | $5.6 | $3.3 | (70%) | | Total interest expense, other, net | $42.1 | $20.4 | (106%) | - The increases were primarily due to the issuance of the 4.625% and 4.875% Senior Notes in October 2021, increases on variable rate mortgage debt, and higher interest on finance lease liabilities due to a rising interest rate environment[189] Income Taxes The overall effective tax rate from continuing operations was 25.5% for Q2 2022 and 25.0% for H1 2022, showing a slight increase from the prior year's Q2 rate but remaining consistent for H1 Effective Tax Rate from Continuing Operations | Period | 2022 (%) | 2021 (%) | | :-------------------------- | :------- | :------- | | Three Months Ended June 30 | 25.5% | 24.5% | | Six Months Ended June 30 | 25.0% | 25.0% | - The effective tax rate varies based on taxable income levels, distribution of taxable income between states, and other tax adjustments[190] Liquidity and Capital Resources Sonic Automotive relies on cash flows from operations, credit facilities, mortgage financing, asset sales, and debt/equity offerings to fund its operations, with total available liquidity resources increasing to $749.6 million as of June 30, 2022 Available Liquidity Resources (Millions) | Resource | June 30, 2022 | December 31, 2021 | | :--------------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $327.1 | $299.4 | | Availability under 2021 Revolving Credit Facility | $269.3 | $281.4 | | Availability under 2019 Mortgage Facility | $27.7 | $22.2 | | Floor plan deposit balance | $125.5 | $99.8 | | Total available liquidity resources | $749.6 | $702.8 | - The company was in compliance with all restrictive covenants under its debt agreements as of June 30, 2022[191] - Approximately $367.6 million of net income and retained earnings were free of restrictions on dividend payments under debt agreements as of June 30, 2022[191] Floor Plan Facilities Sonic Automotive finances its new and certain used vehicle inventory through floor plan facilities, with the weighted-average interest rate increasing to 1.39% in Q2 2022, and manufacturer assistance totaling $12.7 million in Q2 2022 - New and certain used vehicle inventory is financed through floor plan facilities with variable interest rates based on LIBOR or prime[194] Weighted-Average Floor Plan Interest Rate | Period | 2022 (%) | 2021 (%) | | :-------------------------- | :------- | :------- | | Three Months Ended June 30 | 1.39% | 1.07% | | Six Months Ended June 30 | 1.24% | 1.20% | - Manufacturer assistance received for floor plans was approximately $12.7 million in Q2 2022 and $25.5 million in H1 2022, recorded as a reduction of cost of sales upon vehicle sale[195] Long-Term Debt and Credit Facilities This section refers to Note 6 for a detailed discussion of the company's long-term debt, mortgage notes, credit facilities, and compliance with debt covenants - Refer to Note 6 for detailed information on long-term debt, mortgage notes, credit facilities, and compliance with debt covenants[196] Capital Expenditures Capital expenditures for the six months ended June 30, 2022, totaled approximately $100.4 million, allocated between the Franchised Dealerships and EchoPark segments, primarily for facility construction, real estate acquisitions, and other fixed assets, all funded through cash from operations - Capital expenditures for H1 2022 were approximately $100.4 million, allocated between Franchised Dealerships ($52.0 million) and EchoPark ($48.4 million)[198] - Expenditures were primarily for facility construction projects ($59.0 million), real estate acquisitions ($19.1 million), and other fixed assets ($22.3 million)[198] - All capital expenditures in H1 2022 were funded through cash from operations, and commitments for future projects totaled approximately $22.0 million[199] Share Repurchase Program During Q2 2022, Sonic repurchased approximately 1.4 million shares of Class A Common Stock for $59.4 million, with the remaining share repurchase authorization subsequently increased to $633.1 million after the quarter end - Repurchased approximately 1.4 million shares of Class A Common Stock for $59.4 million in Q2 2022[200] - Remaining share repurchase authorization was $133.1 million as of June 30, 2022[200] - Subsequent to June 30, 2022, the Board of Directors increased the authorization by $500.0 million, bringing total availability to $633.1 million[200] Dividends A cash dividend of $0.25 per share on Class A and Class B Common Stock was approved for Q2 2022 and paid on July 15, 2022, with another $0.25 per share dividend approved for Q3 2022, subject to debt agreement restrictions and Board discretion - A cash dividend of $0.25 per share was approved for Q2 2022 and paid on July 15, 2022[202] - Another cash dividend of $0.25 per share was approved for Q3 2022, to be paid on October 14, 2022[202] - Dividend declarations are subject to debt agreement restrictions (e.g., no event of default, compliance with financial covenants) and the Board of Directors' business judgment[202] Cash Flows Net cash provided by operating activities was $306.3 million for H1 2022, a significant improvement from net cash used in the prior year, with investing activities using $118.8 million and financing activities using $159.8 million - Net cash provided by operating activities was $306.3 million in H1 2022, compared to net cash used of $34.6 million in H1 2021[203] - Net cash used in investing activities was $118.8 million in H1 2022, primarily for purchases of land, property, equipment, and businesses[204] - Net cash used in financing activities was $159.8 million in H1 2022, mainly due to net repayments on non-trade floor plan notes, treasury stock purchases, and long-term debt payments[205] - If all changes in floor plan notes payable were classified as an operating activity, net cash provided by operating activities would have been approximately $281.4 million in H1 2022[207] Adjusted EBITDA (Non-GAAP) Adjusted EBITDA, a non-GAAP financial measure, was $188.4 million for Q2 2022, a slight decrease from Q2 2021, but increased to $371.4 million for H1 2022, with the Franchised Dealerships Segment contributing positively while EchoPark reported negative Adjusted EBITDA Adjusted EBITDA by Segment (Three Months Ended June 30) | Segment | 2022 (Millions) | 2021 (Millions) | | :-------------------------- | :-------------- | :-------------- | | Franchised Dealerships Segment | $216.3 | $199.3 | | EchoPark Segment | $(27.9) | $(9.4) | | Total Adjusted EBITDA | $188.4 | $189.7 | Adjusted EBITDA by Segment (Six Months Ended June 30) | Segment | 2022 (Millions) | 2021 (Millions) | | :-------------------------- | :-------------- | :-------------- | | Franchised Dealerships Segment | $428.4 | $303.7 | | EchoPark Segment | $(57.0) | $(3.2) | | Total Adjusted EBITDA | $371.4 | $301.0 | - Adjusted EBITDA is used by management to measure operating performance for each reportable segment and on a consolidated basis[207] Future Liquidity Outlook The company anticipates its primary liquidity sources will continue to be cash flows from operations, borrowings under credit facilities, real estate mortgage financing, asset sales, and capital market offerings, with no materially negative changes to its cost of or access to capital expected - Primary liquidity sources include cash flows from operations, credit facilities, mortgage financing, asset sales, and capital market offerings[212] - No materially negative changes to the cost of or access to capital are anticipated over the next 12 months or after[213] Seasonality Historically, the first quarter has contributed less operating profit, while the fourth quarter has contributed the highest, but the abnormal effects of the COVID-19 pandemic on the automotive supply chain and inventory levels may disrupt this historical seasonality for 2022 - Historically, Q1 has lower operating profit, and Q4 has the highest operating profit[214] - COVID-19's impact on the automotive supply chain and inventory levels may disrupt historical seasonality for 2022[214] - Weather, manufacturer incentives, and model changeovers cause seasonality and can affect profitability, while parts and service demand typically remains stable[214] Off-Balance Sheet Arrangements The company has various off-balance sheet arrangements, primarily guarantees and indemnification obligations related to operating leases and dealership dispositions, including retaining responsibility for lease obligations and guaranteeing floor plan commitments for a 50%-owned joint venture - The company retains responsibility for certain lease obligations when subleasing properties to buyers of sold dealerships, with future gross minimum lease payments of approximately $12.0 million as of June 30, 2022[215] - Indemnifies buyers from certain liabilities and costs post-sale, including environmental exposure, with no material environmental exposure at June 30, 2022[216] - Guarantees $4.3 million in floor plan commitments for its 50%-owned joint venture as of June 30, 2022, and December 31, 2021[217] PART II – OTHER INFORMATION This part covers legal proceedings, risk factors, equity security sales, market risk disclosures, controls and procedures, and exhibits for the Form 10-Q filing Item 1. Legal Proceedings This section refers to Note 7, 'Commitments and Contingencies,' in the unaudited condensed consolidated financial statements for information regarding legal proceedings - Information on legal proceedings is provided in Note 7, 'Commitments and Contingencies,' of the financial statements[231] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes in risk factors from those included in the Annual Report on Form 10-K for the year ended December 31, 2021[234] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months ended