Sonic Automotive(SAH) - 2022 Q3 - Quarterly Report

PART I Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2022, and 2021, detailing operations, balance sheets, equity, and cash flows Condensed Consolidated Statements of Operations Total revenues for Q3 2022 increased to $3.45 billion from $3.07 billion, with diluted EPS from continuing operations rising to $2.23 Q3 Financial Performance (Three Months Ended Sep 30) | Metric | 2022 (in millions) | 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3,448.1 | $3,072.8 | +12.2% | | Gross Profit | $580.7 | $472.0 | +23.0% | | Operating Income | $148.9 | $125.4 | +18.7% | | Net Income | $87.3 | $84.5 | +3.3% | | Diluted EPS (Continuing Ops) | $2.23 | $1.96 | +13.8% | Year-to-Date Financial Performance (Nine Months Ended Sep 30) | Metric | 2022 (in millions) | 2021 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $10,410.5 | $9,211.9 | +13.0% | | Gross Profit | $1,740.9 | $1,383.7 | +25.8% | | Operating Income | $458.1 | $378.7 | +21.0% | | Net Income | $279.4 | $252.6 | +10.6% | | Diluted EPS (Continuing Ops) | $6.90 | $5.81 | +18.8% | Condensed Consolidated Balance Sheets Total assets decreased to $4.83 billion as of September 30, 2022, from $4.98 billion at year-end 2021, primarily due to reduced cash and equivalents Key Balance Sheet Items (in millions) | Account | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $139.0 | $299.4 | | Inventories | $1,197.1 | $1,261.2 | | Total Assets | $4,828.3 | $4,975.1 | | Total Current Liabilities | $1,718.5 | $1,891.7 | | Long-Term Debt | $1,442.4 | $1,510.7 | | Total Liabilities | $3,721.4 | $3,898.7 | | Total Stockholders' Equity | $1,106.9 | $1,076.4 | Condensed Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $645.4 million for the first nine months of 2022, while investing and financing activities used $276.1 million and $529.7 million, respectively Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Cash Flow Category | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $645.4 | $266.4 | | Net cash used in investing activities | ($276.1) | ($237.5) | | Net cash provided by (used in) financing activities | ($529.7) | $20.9 | | Net (Decrease) Increase in Cash | ($160.4) | $49.8 | Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, $79.5 million in acquisitions, segment performance, $1.44 billion long-term debt, and a material weakness in revenue recognition controls - The COVID-19 pandemic and global automotive supply chain disruptions resulted in lower new vehicle inventory and a high-pricing environment[25] - The company acquired two franchised dealerships and one EchoPark business for approximately $79.5 million during the first nine months of 2022[35] - The company operates and reports on two segments: the Franchised Dealerships Segment and the EchoPark Segment[74] - On October 7, 2022, credit facilities were amended to replace the LIBOR-based interest rate with a rate based on Term SOFR[79] Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes Q3 and YTD 2022 financial performance, detailing segment results, supply chain impacts, SG&A, liquidity, and capital allocation Executive Summary The U.S. retail automotive industry faced supply chain disruptions, yet Franchised Dealerships saw 28% new vehicle gross profit per unit growth, and EchoPark improved profitability by 182% per unit - Industry retail new vehicle SAAR decreased by 3% YoY for Q3 2022 and 14% for the nine months ended September 30, 2022, due to inventory constraints[87] - Franchised Dealerships Segment same-store new vehicle gross profit per unit increased by $1,424 (28%) to $6,571 in Q3 2022, driven by high demand and low supply[92] - EchoPark Segment reported a 182% increase in combined retail used vehicle and F&I gross profit per unit to $2,880 in Q3 2022, due to strategic inventory sourcing and cost reduction[98] Results of Operations – Consolidated Consolidated Q3 2022 results show 23% new vehicle revenue growth, 194% used vehicle gross profit per unit surge, 19% fixed operations revenue growth, and 5% F&I gross profit per unit increase Consolidated Results for Q3 2022 vs. Q3 2021 | Category | Revenue Change | Gross Profit Change | Gross Profit Per Unit Change | | :--- | :--- | :--- | :--- | | Retail New Vehicle | +22% | +42% | +28% to $6,600 | | Retail Used Vehicle | +3% | +154% | +194% to $1,222 | | Fixed Operations | +19% | +17% | N/A | | F&I | +1% | +1% | +5% to $2,477 | Results of Operations – Franchised Dealerships Segment Franchised Dealerships segment in Q3 2022 saw 20% same-store new vehicle gross profit growth, 10% fixed operations growth, and 5% F&I gross profit per unit improvement despite volume declines Franchised Dealerships Same-Store Performance (Q3 2022 vs Q3 2021) | Metric | Revenue Change | Gross Profit Change | Unit Sales Change | Gross Profit Per Unit Change | | :--- | :--- | :--- | :--- | :--- | | Retail New Vehicles | +5% | +20% | -6% | +28% to $6,571 | | Retail Used Vehicles | -1% | -20% | -12% | -9% to $1,669 | | Fixed Operations | +10% | +10% | N/A | N/A | | F&I | -5% | -5% | -9% (total retail units) | +5% to $2,406 | Results of Operations – EchoPark Segment EchoPark segment prioritized profitability in Q3 2022, achieving a 182% surge in combined retail used vehicle and F&I gross profit per unit to $2,880 despite a 27% decline in unit sales EchoPark Segment Performance (Q3 2022 vs Q3 2021) | Metric | Reported | Same Market | | :--- | :--- | :--- | | Retail Used Vehicle Unit Sales Change | -27% | -44% | | Combined Retail Used & F&I GPU | $2,880 (+182%) | $2,361 (+130%) | | Wholesale Vehicle Gross Profit Change | -100% | -97% | SG&A, Interest, and Taxes Q3 2022 saw consolidated SG&A expenses rise 24% to $399.0 million, while floor plan interest and other interest expenses significantly increased due to higher rates and debt - Total SG&A expenses increased by 24% to $399.0 million in Q3 2022, primarily due to the RFJ Acquisition and higher gross profit levels[178][179] - Floor plan interest expense significantly increased to $9.6 million in Q3 2022 from $3.3 million in Q3 2021 due to rising interest rates[13][183] - Other interest expense, net, rose 134% to $22.9 million in Q3 2022, mainly due to the issuance of senior notes in late 2021[187] Liquidity and Capital Resources Total available liquidity decreased to $482.4 million as of September 30, 2022, driven by $152.1 million in share repurchases and $197.6 million in capital expenditures Available Liquidity Resources (in millions) | Resource | Sep 30, 2022 (in millions) | Dec 31, 2021 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $139.0 | $299.4 | | Availability under 2021 Revolving Credit Facility | $281.0 | $281.4 | | Availability under 2019 Mortgage Facility | $30.4 | $22.2 | | Total Available Liquidity | $482.4 | $702.8 | - In Q3 2022, the company repurchased approximately 3.1 million shares of Class A Common Stock for $152.1 million[198] - Capital expenditures for the nine months ended Sep 30, 2022, totaled $197.6 million, with $101.8 million allocated to the EchoPark Segment[196] Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on $1.3 billion in variable-rate debt and foreign currency risk from imported vehicles and parts, impacting pricing and demand - The company is exposed to interest rate risk on approximately $1.3 billion of variable-rate debt as of September 30, 2022[218] - A 100 basis point change in interest rate would have altered interest expense by approximately $13.3 million for the first nine months of 2022[218] - The company is subject to foreign currency risk, as exchange rate volatility can influence imported vehicle and parts prices, potentially affecting operating results[220] Controls and Procedures Management concluded disclosure controls were ineffective due to a material weakness in revenue recognition at an acquired dealership, leading to overstatements, with remediation expected by year-end 2022 - A material weakness was identified in internal controls over financial reporting related to revenue recognition at a dealership acquired in December 2021[224] - The weakness resulted in an overstatement of both new vehicle fleet revenues and fleet cost of sales for the same amount in Q3 2022[224] - Management has implemented a remediation plan and expects the material weakness to be resolved by December 31, 2022[226] PART II – OTHER INFORMATION Legal Proceedings Information regarding the company's legal proceedings is detailed in Note 7, 'Commitments and Contingencies,' within the unaudited condensed consolidated financial statements - For information regarding legal proceedings, the report refers to the discussion under 'Legal Matters' in Note 7 of the financial statements[230] Risk Factors There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - There have been no material changes in risk factors from those included in the Annual Report on Form 10-K for the year ended December 31, 2021[233] Unregistered Sales of Equity Securities and Use of Proceeds In Q3 2022, the company repurchased 3.1 million shares for $152.1 million, with $481.0 million remaining under its share repurchase authorization Issuer Purchases of Equity Securities (Q3 2022) | Month | Total Shares Purchased (millions) | Average Price Paid per Share | | :--- | :--- | :--- | | July 2022 | — | $— | | August 2022 | 2.1 | $48.76 | | September 2022 | 1.0 | $47.09 | | Total | 3.1 | N/A | - As of September 30, 2022, the company had $481.0 million remaining in its share repurchase authorization[238] Exhibits This section lists all exhibits filed with the Form 10-Q, including an amendment to the credit agreement and required Sarbanes-Oxley certifications - Filed exhibits include Amendment No. 2 to the Fifth Amended, Restated and Consolidated Credit Agreement, and certifications by the CEO and CFO pursuant to Sarbanes-Oxley Sections 302 and 906[241]