Sonic Automotive(SAH) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Sonic Automotive, Inc. reported increased revenues but significantly decreased net income and negative operating cash flow in Q1 2023 Condensed Consolidated Statements of Operations Q1 2023 vs Q1 2022 Statement of Operations Highlights | Metric | Q1 2023 (in millions) | Q1 2022 (in millions) | Change (%) | | :--- | :--- | :--- | :--- | | Total Revenues | $3,491.2 | $3,456.2 | +1.0% | | Gross Profit | $553.5 | $571.3 | -3.1% | | Operating Income | $106.4 | $154.4 | -31.1% | | Net Income | $47.7 | $97.3 | -51.0% | | Diluted EPS | $1.29 | $2.33 | -44.6% | - The decline in profitability was driven by a decrease in gross profit from $571.3 million to $553.5 million, coupled with an increase in SG&A expenses from $387.0 million to $412.8 million and higher interest expenses[14] Condensed Consolidated Balance Sheets Balance Sheet Highlights (as of March 31, 2023 vs Dec 31, 2022) | Account | March 31, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | Cash and cash equivalents | $160.2 | $229.2 | | Inventories | $1,462.6 | $1,216.8 | | Total Assets | $5,148.0 | $4,978.3 | | Total Current Liabilities | $2,057.0 | $1,845.4 | | Long-Term Debt | $1,650.8 | $1,672.2 | | Total Liabilities | $4,293.2 | $4,083.1 | | Total Stockholders' Equity | $854.8 | $895.2 | - Inventories increased significantly by $245.8 million, while cash and cash equivalents decreased by $69.0 million from the end of 2022[19] Condensed Consolidated Statements of Cash Flows Q1 2023 vs Q1 2022 Cash Flow Summary | Cash Flow Activity | Q1 2023 (in millions) | Q1 2022 (in millions) | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(34.0) | $252.5 | | Net cash used in investing activities | $(107.5) | $(80.3) | | Net cash provided by (used in) financing activities | $72.5 | $(111.4) | | Net (Decrease) Increase in Cash | $(69.0) | $60.8 | - The significant shift in operating cash flow from positive $252.5 million in Q1 2022 to negative $34.0 million in Q1 2023 was primarily due to a $234.6 million increase in inventories, compared to a $72.2 million decrease in the prior-year period[23] - Financing activities provided cash, mainly from net borrowings on non-trade floor plan notes ($188.8 million), which was partially offset by purchases of treasury stock ($90.7 million)[23] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail a goodwill impairment test date change, a powersports acquisition, financial covenant compliance, and segment performance, highlighting EchoPark's loss - The company voluntarily changed the date of its annual goodwill and other intangible assets impairment test from October 1 to April 30 to better align with the availability of prospective financial information[26] - During Q1 2023, Sonic acquired one powersports business (five locations) for an aggregate gross purchase price of approximately $75.1 million[35] Segment Income (Loss) Before Taxes (Q1 2023 vs Q1 2022) | Segment | Q1 2023 (in millions) | Q1 2022 (in millions) | | :--- | :--- | :--- | | Franchised Dealerships | $109.8 | $163.8 | | EchoPark | $(46.8) | $(35.3) | | Powersports | $0.6 | $0.4 | | Total Income Before Taxes | $63.6 | $128.9 | - As of March 31, 2023, the company was in compliance with all financial covenants under its 2021 Credit Facilities and 2019 Mortgage Facility, with a Consolidated Total Lease Adjusted Leverage Ratio of 2.58 against a maximum of 5.75[60] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2023 performance to a mixed industry, with slight revenue growth but declining profitability from margin pressure in Franchised Dealerships and EchoPark losses Executive Summary - The U.S. retail automotive industry's total new vehicle unit sales volume increased by 7% in Q1 2023 compared to Q1 2022, reaching approximately 15.3 million vehicles (SAAR)[88] - Franchised Dealerships Segment: Same-store retail new vehicle revenue increased 5%, but gross profit per unit decreased 17% to $5,434 due to higher inventory costs and price competition[92][95](index=95&type=chunk] Fixed Operations revenue grew 11%[95] - EchoPark Segment: Reported total revenue increased 5%, but total gross profit decreased 9%[98](index=98&type=chunk] Combined retail used vehicle and F&I gross profit per unit fell 28% to $1,906 due to higher inventory acquisition costs[99] - Powersports Segment: In Q1 2023, the newly expanded segment generated $34.0 million in total revenue and $9.8 million in gross profit, following the acquisition of a business with five locations[102] Results of Operations – Consolidated Consolidated Reported Results by Category (Q1 2023 vs Q1 2022) | Category | Revenue (in millions) | Gross Profit (in millions) | | :--- | :--- | :--- | | New Vehicles | | | | Q1 2023 | $1,461.6 | $139.0 | | Q1 2022 | $1,369.5 | $168.5 | | Used Vehicles (Retail) | | | | Q1 2023 | $1,344.9 | $30.0 | | Q1 2022 | $1,370.1 | $47.8 | | Fixed Operations | | | | Q1 2023 | $430.5 | $212.9 | | Q1 2022 | $381.2 | $186.9 | | F&I, net | | | | Q1 2023 | $168.6 | $168.6 | | Q1 2022 | $166.6 | $166.6 | - Consolidated new vehicle gross profit per unit decreased by 21% to $5,325, while retail used vehicle gross profit per unit fell 42% to $660[114][117] - Fixed Operations showed strong performance with a 13% revenue increase and a 14% gross profit increase, driven by a 15% rise in customer pay revenue[123] Results of Operations by Segment Franchised Dealerships saw pre-tax income decline from margin pressure, EchoPark's loss widened, and the new Powersports segment contributed a small profit Segment Performance Summary (Q1 2023) | Segment | Revenues (in millions) | Income (Loss) Before Taxes (in millions) | | :--- | :--- | :--- | | Franchised Dealerships | $2,806.7 | $109.8 | | EchoPark | $650.5 | $(46.8) | | Powersports | $34.0 | $0.6 | - Franchised Dealerships (Same Store): Retail new vehicle gross profit per unit decreased by $1,104 (17%) to $5,434[131][134](index=134&type=chunk] Retail used vehicle gross profit per unit decreased by $208 (12%) to $1,560[134] - EchoPark (Same Market): Combined retail used vehicle and F&I gross profit per unit decreased by $862 (31%) to $1,940, primarily due to higher inventory acquisition costs[155][156] Selling, General and Administrative (SG&A) Expenses - Total SG&A expenses increased by 7% to $412.8 million in Q1 2023 from $387.0 million in Q1 2022[179] - As a percentage of gross profit, SG&A increased significantly from 67.7% to 74.6%, indicating pressure on operating leverage[179] - The increase was primarily driven by higher compensation expense due to wage inflation and a 22% increase in 'Other' SG&A, which includes higher IT and customer-related costs[179][180] Liquidity and Capital Resources Available Liquidity Resources | Resource | March 31, 2023 (in millions) | | :--- | :--- | | Cash and cash equivalents | $160.2 | | Floor plan deposit balance | $272.0 | | Availability under 2021 Revolving Credit Facility | $294.0 | | Availability under 2019 Mortgage Facility | $166.4 | | Total available liquidity resources | $892.6 | - The company repurchased approximately 1.6 million shares of Class A Common Stock for $90.7 million during Q1 2023[198](index=198&type=chunk] As of March 31, 2023, the remaining share repurchase authorization was approximately $373.6 million[198] - A cash dividend of $0.28 per share was approved for Q1 2023, and a dividend of $0.29 per share was approved for Q2 2023[200] - Capital expenditures for Q1 2023 were $37.2 million, primarily for facility construction projects and real estate acquisitions[196] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate fluctuations impacting interest expense and foreign currency exchange rates affecting manufacturer pricing - The company's primary market risk is interest rate risk, stemming from variable rate debt including floor plan facilities, the 2021 Revolving Credit Facility, and the 2019 Mortgage Facility[218] - A hypothetical 100 basis point change in the underlying interest rate would have caused a change in interest expense of approximately $4.7 million for the three months ended March 31, 2023[218] - Foreign currency risk could adversely affect operating results if exchange rate volatility impacts manufacturers' ability to provide products at competitive prices in the U.S.[220] Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting during the quarter - Based on an evaluation as of March 31, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[223] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, internal controls[224] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not expect them to have a material adverse effect on its financial position or results - The company is involved in various legal proceedings but does not expect them to have a material adverse effect on its financial condition or results[67][228] Item 1A. Risk Factors No material changes to the previously disclosed risk factors were reported in the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes in risk factors were reported compared to those in the Annual Report on Form 10-K for the year ended December 31, 2022[231] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, Sonic Automotive repurchased 1.6 million shares for $90.7 million, with $373.6 million remaining under its share repurchase authorization Share Repurchases in Q1 2023 | Month | Total Shares Purchased (in millions) | Average Price Paid per Share | | :--- | :--- | :--- | | January 2023 | 0.2 | $49.15 | | February 2023 | 0.3 | $57.21 | | March 2023 | 1.1 | $55.14 | | Total | 1.6 | N/A | - As of March 31, 2023, the remaining availability under the share repurchase program was $373.6 million[233] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications required by Sarbanes-Oxley Act - The exhibits include the company's articles of incorporation, bylaws, and certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906[236]