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SAH > SEC Filings for SAH > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for SONIC AUTOMOTIVE INC

Form 10-K for SONIC AUTOMOTIVE INC


3-Mar-2014

Annual Report


Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Sonic Automotive, Inc. and Subsidiaries Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Annual Report on Form 10-K. The financial and statistical data contained in the following discussion for all periods presented reflects our December 31, 2013 classification of dealerships between continuing and discontinued operations in accordance with "Presentation of Financial Statements" in the Accounting Standards Codification (the "ASC").

2013 Events

On May 9, 2013, we issued $300.0 million in aggregate principal amount of unsecured senior subordinated 5.0% Notes which mature on May 15, 2023 and repurchased the remaining outstanding principal amount of the 9.0% Senior Subordinated Notes due in 2018 (the "9.0% Notes"). See Note 6, "Long-Term Debt," to the accompanying Consolidated Financial Statements for further discussion of the 5.0% Notes and 9.0% Notes. During the year ended December 31, 2013, we recorded a loss on extinguishment of debt of approximately $28.2 million related to the 9.0% Notes, recorded in other income (expense), net, in the accompanying Consolidated Statements of Income. In addition to the loss on debt extinguishment, we incurred a charge of approximately $0.8 million recorded in interest expense, other, net, related to the incremental interest incurred while both the 9.0% Notes and 5.0% Notes were outstanding.

In the third quarter ended September 30, 2013, we acquired two luxury franchise operations and underlying assets, including real estate, for an aggregate purchase price, net of cash acquired, of $88.2 million. See Note 2, "Business Acquisitions and Dispositions," to the accompanying Consolidated Financial Statements for further discussion of these acquisitions.

During the fourth quarter of 2013, we announced that we plan to augment our manufacturer-franchised dealership operations with stand-alone pre-owned specialty retail sales locations. This pre-owned business will operate independently from the existing new and used dealership sales operations and introduce consumers to an exciting shopping and buying experience. The first target market is planned for Denver, Colorado, and we expect operations to begin in late 2014.

In the fourth quarter of 2013, we also announced our customer experience initiative known as "One Sonic-One Experience." This initiative includes several new processes and proprietary technologies from inventory management and pricing tools to a fully developed "customer-centric" Customer Relationship Management ("CRM") tool. The development of these processes and tools will allow us to better serve our customers across our entire platform of stores. Our goal is to allow our guests to control the buying process and move at their pace so that once the vehicle has been selected our team can go to work using these processes and technologies to get our guests on the road in their new vehicle in less than an hour.

Overview

We are one of the largest automotive retailers in the United States. As of December 31, 2013, we operated 123 franchises in 14 states (representing 25 different brands of cars and light trucks) and 21 collision repair centers. For management and operational reporting purposes, we group certain franchises together that share management and inventory (principally used vehicles) into "stores." As of December 31, 2013, we operated 102 stores. As a result of the way we manage our business, we have a single operating segment for purposes of reporting financial condition and results of operations.


Table of Contents

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Our dealerships provide comprehensive services including sales of both new and used cars and light trucks, sales of replacement parts, performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair services, and arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products for our customers. Although vehicle sales and sales of associated finance, insurance and other aftermarket products are cyclical and are affected by many factors, including overall economic conditions, consumer confidence, levels of discretionary personal income, interest rates and available credit, our parts, service and collision repair services are not closely tied to vehicle sales and are not as dependent upon near-term sales volume.

The United States retail automotive industry's new vehicle seasonally adjusted annual rate of sales ("SAAR") in 2013 increased by 7.6%, to 15.5 million vehicles, from 14.4 million vehicles in 2012, according to Bloomberg Financial Markets, via Stephens Inc. From an industry perspective, new vehicle unit sales on a year-over-year basis increased 6.4% for import brands and 8.8% for domestic brands. For 2014, the average industry expectations for new vehicle SAAR is between 15.5 million and 16.5 million vehicles, an increase of up to 6.5% from the SAAR in 2013. We estimate the 2014 new vehicle SAAR will be between 15.75 million and 16.25 million vehicles. Changes in consumer confidence, availability of consumer financing or changes in the financial stability of the automotive manufacturers could cause actual 2014 new vehicle SAAR to vary from expectations. Many factors such as brand and geographic concentrations have caused our past results to differ from the industry's overall trend.

Results of Operations

The following table summarizes the percentages of total revenues represented by certain items reflected in our Consolidated Statements of Income:

                                                                Percentage of Total Revenue
                                                                  Year Ended December 31,
                                                            2013             2012           2011
Revenues:
New vehicles                                                   56.4 %          56.4 %         54.4 %
Used vehicles                                                  24.6 %          24.5 %         25.7 %
Wholesale vehicles                                              2.0 %           2.2 %          2.2 %
Parts, service and collision repair                            13.9 %          13.9 %         15.0 %
Finance, insurance and other, net                               3.1 %           3.0 %          2.7 %

Total revenues                                                100.0 %         100.0 %        100.0 %
Cost of Sales(1)                                               85.3 %          85.2 %         84.6 %

Gross profit                                                   14.7 %          14.8 %         15.4 %
Selling, general and administrative expenses                   11.3 %          11.3 %         12.0 %
Impairment charges                                              0.1 %           0.0 %          0.0 %
Depreciation and amortization                                   0.6 %           0.6 %          0.5 %

Operating income (loss)                                         2.7 %           2.9 %          2.9 %
Interest expense, floor plan                                    0.2 %           0.2 %          0.2 %
Interest expense, other, net                                    0.6 %           0.7 %          0.9 %
Other (income) expense, net                                     0.4 %           0.3 %          0.0 %

Income (loss) from continuing operations before taxes           1.5 %           1.7 %          1.8 %

Provision for income taxes - (benefit) expense                  0.5 %           0.6 %          0.7 %

Income (loss) from continuing operations                        1.0 %           1.1 %          1.1 %


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

(1) The cost of sales line item includes the cost of new and used vehicles, vehicle parts and all costs directly linked to servicing customer vehicles.

As of December 31, 2013, we had no dealerships held for sale. We did not dispose of any dealerships during the years ended December 31, 2013 or 2011. We terminated or disposed of ten dealerships during the year ended December 31, 2012. The results of operations of these dealerships, including gains or losses on disposition, are included in discontinued operations on the accompanying Consolidated Statements of Income for all periods presented.

Unless otherwise noted, all discussion of increases or decreases are compared to the same prior year period, as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair and finance, insurance and other are on a same store basis, except where otherwise noted. All continuing operations stores are included within the same store group in the first full month following the first anniversary of the store's opening or acquisition. During the year ended December 31, 2013, we acquired two luxury franchise operations which are included in reported figures but are excluded from same store reporting. There were no franchise acquisitions during the years ended December 31, 2012 or 2011.

New Vehicles

New vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues can be influenced by manufacturer incentives for consumers, which vary from cash-back incentives to low interest rate financing. New vehicle revenues are also dependent on manufacturers providing adequate vehicle allocations to our dealerships to meet customer demands and the availability of consumer credit.

The automobile manufacturing industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand. As an automotive retailer, we seek to mitigate the effects of this cyclicality by maintaining a diverse brand mix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower priced, or economy vehicles, to luxury vehicles. For the year ended December 31, 2013, 84.9% of our new vehicle revenue was generated by mid-line import and luxury dealerships, compared to 85.5% and 83.3% for the years ended December 31, 2012 and 2011, respectively.

The automobile retail industry uses the SAAR to measure the amount of new vehicle unit sales activity within the United States market. The SAAR averages below reflect a blended average of all brands marketed or sold in the United States market. The SAAR includes brands we do not sell and markets in which we do not operate.

Year Ended December 31, Year Ended December 31, (in millions of vehicles) 2013 2012 %Change 2012 2011 %Change SAAR 15.5 14.4 7.6 % 14.4 12.8 12.5 %

Source: Bloomberg Financial Markets, via Stephens Inc.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

According to public sources, average industry volume expectations for the year ending December 31, 2014 are currently between 15.5 million and 16.5 million vehicles, which would be an increase of up to 6.5% from the industry volume for the year ended December 31, 2013. Following is information related to our new vehicle sales:

                                         Year Ended December 31,                   Better / (Worse)
                                        2013                2012             Change               % Change
                                                 (In thousands, except units and per unit data)
Reported:
Revenue                              $ 4,989,185         $ 4,715,924        $ 273,261                   5.8 %
Gross profit                         $   289,603         $   278,349        $  11,254                   4.0 %
Unit sales                               138,274             134,564            3,710                   2.8 %
Revenue per unit                     $    36,082         $    35,046        $   1,036                   3.0 %
Gross profit per unit                $     2,094         $     2,069        $      25                   1.2 %
Gross profit as a % of revenue               5.8 %               5.9 %            (10 )bps

                                         Year Ended December 31,                   Better / (Worse)
                                        2012                2011             Change               % Change
                                                 (In thousands, except units and per unit data)
Reported:
Revenue                              $ 4,715,924         $ 4,088,098        $ 627,826                  15.4 %
Gross profit                         $   278,349         $   261,359        $  16,990                   6.5 %
Unit sales                               134,564             117,072           17,492                  14.9 %
Revenue per unit                     $    35,046         $    34,920        $     126                   0.4 %
Gross profit per unit                $     2,069         $     2,232        $    (163 )                (7.3 %)
Gross profit as a % of revenue               5.9 %               6.4 %            (50 )bps




                                         Year Ended December 31,                   Better / (Worse)
                                        2013                2012             Change               % Change
                                                 (In thousands, except units and per unit data)
Same Store:
Revenue                              $ 4,954,737         $ 4,715,924        $ 238,813                   5.1 %
Gross profit                         $   287,394         $   279,648        $   7,746                   2.8 %
Unit sales                               137,649             134,564            3,085                   2.3 %
Revenue per unit                     $    35,995         $    35,046        $     949                   2.7 %
Gross profit per unit                $     2,088         $     2,078        $      10                   0.5 %
Gross profit as a % of revenue               5.8 %               5.9 %            (10 )bps

                                         Year Ended December 31,                   Better / (Worse)
                                        2012                2011             Change               % Change
                                                 (In thousands, except units and per unit data)
Same Store:
Revenue                              $ 4,715,924         $ 4,088,098        $ 627,826                  15.4 %
Gross profit                         $   279,648         $   261,022        $  18,626                   7.1 %
Unit sales                               134,564             117,072           17,492                  14.9 %
Revenue per unit                     $    35,046         $    34,920        $     126                   0.4 %
Gross profit per unit                $     2,078         $     2,230        $    (152 )                (6.8 %)
Gross profit as a % of revenue               5.9 %               6.4 %            (50 )bps

The increase in new vehicle revenue for the year ended December 31, 2013 was driven by a 2.3% increase in our new unit sales volume and a 2.7% increase in our new vehicle price per unit as compared to the prior year.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Our increase in new unit sales lagged the industry new unit sales volume increase of 7.6% compared to the prior year, due primarily to differences in brand mix between our dealership portfolio and the industry, particularly impacted by brands which we do not sell. Excluding fleet volume, our retail new vehicle volume growth increased 2.4% during the year ended December 31, 2013. The incremental unit sales volume contributed to additional F&I gross profit for the year ended December 31, 2013, discussed under the heading "Finance, Insurance and Other, Net ("F&I")" below.

Our new unit volume increase for the year ended December 31, 2013 was led by our Ford and Audi dealerships, which experienced volume growth increases of 16.7% and 11.7%, respectively. Gross profit per new unit increased 0.5% during the year ended December 31, 2013, primarily due to increases in gross profit per new unit at many of our luxury brand stores, partially offset by declines in gross profit per new unit at a number of our mid-line import and domestic brand stores. Combined, our Ford and Audi dealerships contributed $4.1 million of additional new vehicle gross profit for the year ended December 31, 2013, accounting for 52.8% of the year-over-year increase.

Total gross profit dollars increased 2.8% during the year ended December 31, 2013. This increase is due primarily to a shift in brand mix towards our luxury dealerships, which experienced a 5.3% increase in new unit sales during the year ended December 31, 2013. Our luxury dealerships (which include Cadillac) typically experience higher gross profit margins than our mid-line import or domestic dealerships.

Implementation of our True Price® strategy was rolled out throughout the year ended December 31, 2013. True Price® provides consumers with market-based pricing to create transparency and limit negotiation. This strategy requires different processes to be followed in order to price our vehicles effectively to increase our retail vehicle unit volume and total gross profit. We believe that the initial transition to this new strategy contributed to lower retail vehicle unit sales volume and gross profit per unit (as compared to the industry results) in the first six months of 2013. Unit volume and gross profit per unit have since normalized to historical levels as the processes were more fully implemented in the second half of 2013.

Our luxury dealerships (which include Cadillac) experienced a 6.8% increase in new vehicle revenue in the year ended December 31, 2013, compared to the prior year, primarily due to a 5.3% increase in new unit sales volume. New vehicle gross profit increased 7.9% compared to the prior year, primarily due to new unit sales volume increases at our Audi, BMW and Lexus dealerships. Luxury store gross profit per new unit increased 2.5% overall during the year ended December 31, 2013, driven primarily by increases in gross profit per new unit at our Mercedes and Audi dealerships.

Our mid-line import dealerships experienced a 0.6% increase in new vehicle revenue during the year ended December 31, 2013 overcoming a 1.4% decline in new unit volume. The new vehicle revenue increase was driven primarily by new vehicle model mix and price levels at our Honda and Toyota/Scion dealerships, which experienced a 2.7% and 1.3% increase, respectively, in new vehicle revenue per unit in the year ended December 31, 2013. Gross profit decreased 8.9% during the year ended December 31, 2013 at our mid-line import dealerships, due in part to higher gross profit per unit in the year ended December 31, 2012 due to reduced inventory availability in our Japanese brands.

Excluding fleet sales, our domestic dealerships experienced a 9.8% increase in new retail vehicle revenue, a 4.1% increase in new retail vehicle gross profit and a 6.1% increase in new retail unit sales volume during the year ended December 31, 2013, compared to the prior year. New retail unit sales volume at our Ford dealerships increased 14.8%, driving a 17.8% increase in new retail vehicle revenue and a 14.4% increase in new retail vehicle


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

gross profit. Our General Motors ("GM") dealerships (excluding Cadillac) experienced a 0.7% increase in new retail vehicle revenue in spite of a 3.5% decrease in new retail unit sales volume as a result of increased pricing that drove a 4.4% increase in revenue per unit. These GM dealerships experienced a 6.7% decrease in new retail vehicle gross profit, due to a 3.3% decrease in gross profit per new retail unit and a decrease in new vehicle unit sales volume. Including fleet sales, our domestic dealerships experienced a 9.3% increase in new vehicle revenue in the year ended December 31, 2013 due primarily to a 6.4% increase in unit sales volume. Total fleet revenue and unit sales volume was flat and fleet gross profit per unit decreased 9.2% compared to the prior year.

The increase in total new vehicle revenue for the year ended December 31, 2012 was primarily driven by a 14.9% increase in our new unit sales volume. Our new unit volume increase for the year ended December 31, 2012 was led by our Honda, Toyota/Scion, and Lexus dealerships, which combined to account for 78.7% of the increase compared to the prior year. Our major Japanese brands (Honda, Toyota/Scion and Lexus) suffered in the year ended December 31, 2011 as a result of inventory supply reductions caused by the impact of the earthquake, tsunami and severe flooding that struck Japan in March 2011. As production returned to normal levels in 2012, we saw these brands make significant contributions to our new unit sales growth. Gross profit per new unit decreased 6.8% during the year ended December 31, 2012, primarily due to declines in gross profit per new unit at our Honda and Toyota/Scion dealerships. Our Honda and Toyota/Scion dealerships experienced high gross profit per unit during the year ended December 31, 2011 due to lack of available inventory as a result of the natural disasters in Japan during 2011. As new vehicle inventory in these brands returned to normal levels in early 2012, gross profit per unit also returned to normal levels, resulting in the decrease in our gross profit per new unit during the year ended December 31, 2012, compared to the prior year.

Our luxury dealerships' (including Cadillac) new vehicle revenue increased 13.0% primarily due to an 11.1% increase in new unit sales volume for the year ended December 31, 2012, compared to the prior year. New vehicle gross profit increased 8.4% due primarily to higher unit sales volume, compared to the year ended December 31, 2011. The increase in gross profit for the year ended December 31, 2012 was led by our Mercedes, Lexus and BMW dealerships, which combined to account for 72.0% of the increase in gross profit from our luxury dealerships.

For the year ended December 31, 2012, our mid-line import dealerships experienced a 27.6% increase in new unit sales volume, which resulted in a 27.8% increase in new vehicle revenue compared to the prior year. New vehicle inventory availability for our major Japanese brands (Honda and Toyota/Scion) has recovered from the effects of inventory supply reductions caused by the natural disasters in Japan during 2011, which was a primary contributor to the unit sales volume increases in 2012 discussed above. Mid-line import gross profit per new unit decreased 15.9% during the year ended December 31, 2012, however, as a result of increased new unit sales volume, total mid-line import new vehicle gross profit increased 7.3% for the year ended December 31, 2012, compared to the prior year.

Excluding fleet sales, our domestic dealerships experienced a 10.5% increase in new retail vehicle revenue, a 9.8% increase in new retail vehicle gross profit and a 7.8% increase in new retail unit sales volume during the year ended December 31, 2012, compared to the prior year. New retail unit sales volume at our Ford dealerships increased 14.5%, driving a 17.9% increase in new retail vehicle revenue and an 11.2% increase in new retail vehicle gross profit. Our General Motors dealerships (excluding Cadillac) experienced a 3.3% increase in new retail revenue, driven by a 1.3% increase in new retail unit sales and a 2.0% in new retail revenue per unit. These GM dealerships experienced an 8.3% increase in new retail gross profit. Including fleet sales, our domestic dealerships experienced a 0.4% increase in new vehicle revenue in the year ended December 31, 2012 driven by a 6.4% increase in new vehicle price per unit, partially offset by a 5.6% decrease new unit sales volume. Total fleet unit sales volume decreased by 30.3% compared to the prior year, partially offset by a 10.7% increase in price per unit, resulting in a decrease in total fleet revenue of 22.9%.


Table of Contents

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Used Vehicles

Used vehicle revenues are directly affected by a number of factors including the
level of manufacturer incentives on new vehicles, the number and quality of
trade-ins and lease turn-ins, the availability and pricing of used vehicles
acquired at auction and the availability of consumer credit. Following is
information related to our used vehicle sales:



                                         Year Ended December 31,                   Better / (Worse)
                                        2013                2012             Change               % Change
                                                 (In thousands, except units and per unit data)
Reported:
Revenue                              $ 2,176,034         $ 2,053,477        $ 122,557                   6.0 %
Gross profit                         $   150,400         $   143,454        $   6,946                   4.8 %
Unit sales                               107,054             102,556            4,498                   4.4 %
Revenue per unit                     $    20,327         $    20,023        $     304                   1.5 %
Gross profit per unit                $     1,405         $     1,399        $       6                   0.4 %
Gross profit as a % of revenue               6.9 %               7.0 %            (10 )bps

                                         Year Ended December 31,                   Better / (Worse)
                                        2012                2011             Change               % Change
                                                 (In thousands, except units and per unit data)
Reported:
Revenue                              $ 2,053,477         $ 1,930,852        $ 122,625                   6.4 %
Gross profit                         $   143,454         $   139,858        $   3,596                   2.6 %
Unit sales                               102,556              96,355            6,201                   6.4 %
. . .
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