UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016

2019

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number:File Number:  1-13395


SONIC AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

Delaware

56-2010790

Delaware

56-2010790
(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

4401 Colwick Road

Charlotte, North Carolina

28211

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (704) 566-2400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock,Common Stock, par value $0.01 par value

per share

SAH

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☒

☒

Accelerated filer☐

Non-accelerated filer☐(Do not check if a smaller reporting company)

☐

Smaller reporting company☐

Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ☐  Yes    ☒  No

The aggregate market value of the voting common stockequity held by non-affiliates of the registrant was approximately $554.9$682.4 million based upon the closing sales price of the registrant’s Class A common stockCommon Stock on June 30, 201628, 2019 of $17.11$23.35 per share.

The registrant has no non-voting common equity.

As of February 21, 2017,12, 2020, there were 32,855,850 30,532,640shares of Class A common stock,Common Stock, par value $0.01 per share, and 12,029,375 shares of Class B common stock,Common Stock, par value $0.01 per share, outstanding.

Documents incorporated by reference.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement forproxy statement to be filed with the 2017Securities and Exchange Commission in connection with the registrant's 2020 Annual Meeting of Stockholders to be held April 18, 2017 are incorporated by reference intoin Part III of this Annual Report Form 10-K.

10-K to the extent described herein.



UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

This Annual Report on Form 10-K contains, and written or oral statements made from time to time by us or by our authorized officers may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our future objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, results and events, and can generally be identified by words such as “may,” “will,” “should,” “could,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee” and other similar words or phrases.

These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K and elsewhere in this report,herein, as well as:

•the number of new and used vehicles sold in the United States as compared to our expectations and the expectations of the market;

•

our ability to generate sufficient cash flows or obtain additional financing to fund our EchoPark® expansion, our One Sonic-One Experience initiative, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities;

•our ability to generate sufficient cash flows or to obtain additional financing to fund our EchoPark expansion, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities;

•

our business and growth strategies, including, but not limited to, our EchoPark® initiative and our One Sonic-One Experience initiative;

•our business and growth strategies, including, but not limited to, our EchoPark store operations;

•the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives vehicle manufacturers offer and their ability to design, manufacture, deliver and market their vehicles successfully;

•our relationships with manufacturers, which may affect our ability to obtain desirable new vehicle models in inventory or to complete additional acquisitions;

acquisitions or dispositions;

•

adverse resolution of one or more significant legal proceedings against us or our dealerships or EchoPark®  stores;

•the adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or EchoPark stores;

•changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements and environmental laws;

•changes in vehicle and parts import quotas, duties, tariffs or other restrictions;

•general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level of consumer spending and consumer credit availability;

•high levels of competition in the retail automotive retailing industry, which not only createscreate pricing pressures on the products and services we offer, but also on businesses we may seek to acquire;

•our ability to successfully integrate potential future acquisitions; and

•the rate and timing of overall economic recoveryexpansion or decline.

contraction.

These forward-looking statements speak only as of the date of this reportAnnual Report on Form 10-K or when made, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission.


SONIC AUTOMOTIVE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016

2019

TABLE OF CONTENTS

PAGE

PAGE

Item 1.

1

Item 1A.

9

Item 1B.

23

25

Item 2.

23

26

Item 3.

23

26

Item 4.

23

26

Item 5.

24

27

Item 6.

25

28

Item 7.

27

29

Item 7A.

61

66

Item 8.

62

68

Item 9.

62

68

Item 9A.

62

68

Item 9B.

63

68

Item 10.

64

69

Item 11.

64

69

Item 12.

64

69

Item 13.

64

69

Item 14.

64

69

Item 15.

65

70

Item 16.

71

74

72

75

EXHIBIT INDEX

73

F-1 F-4



SONIC AUTOMOTIVE, INC.

PART

PART I

Item 1.  Business.

Business.

Sonic Automotive, Inc. was incorporated in Delaware in 1997. References to “Sonic,” the “Company,” “we,” “us” or “our” used throughout this Annual Report on Form 10-K refer to Sonic Automotive, Inc. and its subsidiaries. We are one of the largest automotive retailers in the United States (as measured by total revenue). As a result of the way we manage our business, we had two reportable segments as of December 31, 2016, we operated 116 franchises in 13 states (representing 25 different brands of cars2019: (1) the Franchised Dealerships Segment and light trucks) and 18 collision repair centers.(2) the EchoPark Segment. For management and operational reporting purposes, we group certain franchisesbusinesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2016,2019, we operated 107 franchised dealership86 stores in the Franchised Dealerships Segment and fivenine stores in the EchoPark® stores.

Our franchised dealerships provide Segment. The Franchised Dealerships Segment consists of 99 new vehicle franchises (representing 21 different brands of cars and light trucks) and 15 collision repair centers in 12 states.

The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our customers.

The EchoPark® provides the same services (excluding new vehicle Segment sells used cars and light trucks and arranges F&I product sales and manufacturer warranty repairs)for our customers in unique stand-alonepre-owned vehicle specialty retail locations. Our EchoPark® business operates independently from our franchised new and used dealership sales operations.dealerships business. Sales operations in our first EchoPark® market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2016,2019, we had fivethree EchoPark® stores in operation in Colorado, four in Texas, one in North Carolina and one in California. By the end of 2020, we expect to open another store in Colorado in the first half of 2017. During the second quarter of 2016, we announced that we have begun the process of expandingthree additional EchoPark® operations into additional markets in North Carolina, South Carolina and Texas with operations in these markets expected to begin in 2017 and 2018. stores. We believe that the continued expansion of our EchoPark® business will provide long-term benefits to us,the Company, our stockholders and guests. However, in the short term, this initiative may negatively impact our overall operating results as we allocate management and capital resources to this business.

References to “Sonic,” the “Company,” “we,” “us,” and “our” used throughout this Annual Report on Form 10-K refer to Sonic Automotive, Inc. and its subsidiaries.

guests.

The following charts depict the multiple sources of continuing operations revenue and gross profit for the year ended December 31, 2016:

2019 (“2019”):


sah-20191231_g1.jpgsah-20191231_g2.jpg




1

SONIC AUTOMOTIVE, INC.

As of December 31, 2016,2019, we operated in the following states:

Market

 

Number of

Franchises

 

 

Percent of

2016 Total

Revenue

 

MarketNumber of Franchised StoresNumber of EchoPark Stores
Percent of
2019 Total
Revenue

California

 

 

24

 

 

 

30.3

%

California22  1  28.2 %

Texas

 

 

29

 

 

 

25.0

%

Texas16  4  27.2 %
ColoradoColorado4  3  9.1 %

Tennessee

 

 

11

 

 

 

7.3

%

Tennessee11  —  7.2 %

Florida

 

 

9

 

 

 

6.1

%

Florida9  —  5.7 %

Alabama

 

 

13

 

 

 

5.3

%

Alabama10  —  5.3 %

Colorado

 

 

4

 

 

 

4.7

%

North CarolinaNorth Carolina4  1  4.1 %

Georgia

 

 

4

 

 

 

3.5

%

Georgia4  —  3.2 %

North Carolina

 

 

4

 

 

 

3.2

%

Virginia

 

 

2

 

 

 

2.9

%

Virginia1  —  1.9 %

Ohio

 

 

5

 

 

 

2.7

%

Maryland

 

 

3

 

 

 

2.7

%

Maryland1  —  1.8 %
NevadaNevada2  —  1.7 %

South Carolina

 

 

5

 

 

 

2.4

%

South Carolina2  —  1.6 %

Nevada

 

 

3

 

 

 

2.1

%

Disposed franchises and holding companies

 

 

-

 

 

 

0.5

%

Total Franchised Dealerships

 

 

116

 

 

 

98.7

%

 

 

 

 

 

 

 

 

EchoPark® - Colorado

 

 

5

 

 

 

1.3

%

Disposed stores and holding companiesDisposed stores and holding companies—  —  3.0 %

Total

 

 

121

 

 

 

100.0

%

Total86  9  100.0 %

In the future, we may purchaseacquire dealerships andor open new stores that we believe will enrich our portfolio and divest dealerships or close stores that we believe will not yield acceptable returns over the long term. The retail automotive retailing industry remains highly fragmented, and we believe that further consolidation may occur. We believe that attractive acquisition opportunities continue to exist for dealership groups with the capital and experience to identify, acquire and professionally manage dealerships. Our ability to complete acquisitions and open new stores in the future will depend on many factors, including the availability of financing and the existence of any contractual provisions that may restrict our acquisition activity.

See “Item 77. Management’s Discussion and Analysis of Financial Condition and Results of Operations –- Liquidity and Capital Resources,”Resources” for a discussion of our plans for the use of capital generated from operations.

Operating

Reportable Segments

As of December 31, 2016,2019, we had two operatingreportable segments: (1) the Franchised Dealerships Segment and (2) the EchoPark®. Segment. The Franchised Dealerships segmentSegment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repairmaintenance, warranty and maintenancerepair services, and arrange finance and insurance products. The EchoPark® segment Segment is comprised of stand-alonepre-owned vehicle specialty retail locations that provide customers an opportunity to search buy, service,our nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell pre-owned vehicles.

their current vehicle to us.

For the year ended December 31, 2016,2019, EchoPark® Segment revenue represented approximately 1.3%11.1% of total revenue. See Note 14, “Segment Information,” to the accompanying consolidated financial statements for additional financial information regarding our two operatingreportable segments.

Unless otherwise noted, the following discussion of our business is presented on a consolidated basis.

Business Strategy

Execute our Stand-Alone Pre-Owned Store Initiative. EchoPark Expansion Plan. We have augmented our manufacturer-franchised dealership operations with our EchoPark® stand-alone pre-owned vehicle specialty retail locations. Our EchoPark® business operates independently from our franchised new and used dealership sales operations and offers customers an exciting shopping and buying experience.dealerships business. Sales operations for our EchoPark® initiative began in Denver, Colorado in the fourth quarter of 2014. As of December 31, 2016,2019, we had fivethree EchoPark® stores in operation in Colorado, four in Texas, one in North Carolina and one in California. We expect to open anthree additional EchoPark® store stores during 2020.
Improve Capital Structure. As we generate cash through operations, we may opportunistically repurchase our Class A Common Stock or our outstanding subordinated notes in Colorado in the first half of 2017.

Executeopen-market or structured transactions and may sell our Customer Experience Initiative. Our One Sonic-One Experience (“OSOE”) initiative includes severalClass A Common Stock to reduce debt.

Maintain Diverse Revenue Streams. We have multiple revenue streams. In addition to new processesvehicle sales, our revenue sources include used vehicle sales, which we believe are less sensitive to economic cycles and proprietary technologies from inventory management, electronic desking and pricing tools to a fully developed “customer-centric” Customer Relationship Management tool. We believeseasonal influences that the development of these processes and technologies

affect

2

SONIC AUTOMOTIVE, INC.

will allow us to better serve our customers across our entire platform of stores.

new vehicle sales. Our goal is to allow our guests to control the buying processFixed Operations sales carry a higher gross margin than new and move at their pace so that once the vehicle has been selected our team can utilize these processes and technologies to allow our guests to complete a new or pre-ownedused vehicle sales transactionand, in less than an hour. During the latter halfpast, have not been as sensitive to economic conditions as new vehicle sales. We also offer customers assistance in obtaining financing and a range of 2014automobile-related warranty, aftermarket and throughout 2015, we rolled out the OSOE initiative at our dealerships in Charlotte, North Carolina. In 2016, we introduced the technology component of the initiative to 14 additional stores in our Alabama, Tennessee and California markets.

insurance products.

Achieve High Levels of Customer Satisfaction.We focus on maintaining high levels of customer satisfaction. Our personalized sales process is designed to satisfy customers by providing high-quality vehicles and service in a positive, “consumer friendly” buying environment. Several manufacturers offer specific financial incentives on a per vehicle basis if certain Customer Satisfaction Index (“CSI”) levels (which vary by manufacturer) are achieved by a dealership. In addition, all manufacturers consider CSI scores in approving acquisitions or awarding new dealership open points. In order toTo keep dealership and executive management focused on customer satisfaction, we include CSI results as a component of our incentive-based compensation programs for certain groups of associates.

associates and executive management.

Invest in Dealership Properties.Historically, we have operated our dealerships primarily on property financed through long-term operating leases. As these leases mature, or as we have an opportunity to purchase the underlying real estate prior to renewal, we take actions to own more of our dealership properties when the effect is financially or operationally favorable to us. We remain opportunistic in purchasing existing properties or relocating dealership operations to owned real estate where the returns are favorable. We believe owning our properties where feasible and financially and strategically advantageous will, over the long term, strengthen our balance sheet and reduce our overall cost of operating and financing our facilities.

Improve Capital Structure. As we generate cash through operations, we will opportunistically repurchase our Class A common stock in open-market or structured transactions.

Maximize Asset Returns Through Process Execution.We have developed standardized operating processes that are documented in operating playbooks for our dealerships.stores. Through the continued implementation of our operating playbooks, we believe organic growth opportunities exist by offering a more favorable buying experience to our customers and creating efficiencies in our business processes. We believe the development, refinement and implementation of these operating processes will enhance the customer experience, make us more competitive in the markets we serve and drive profit growth across each of our revenue streams.

Maintain Diverse Revenue Streams. We have multiple revenue streams. In addition to new vehicle sales, our revenue sources include used vehicle sales, which we believe are less sensitive to economic cycles and seasonal influences that exist with new vehicle sales. Our Fixed Operations sales carry a higher gross margin than new and used vehicle sales and, in the past, have not been as economically sensitive as new vehicle sales. We also offer customers assistance in obtaining financing and a range of automobile related warranty, aftermarket and insurance products.

Manage Portfolio.Our long-term growth and acquisition strategy is focused on large metropolitan markets, predominantly in the Southeast, Southwest, MidwestTexas and California. We seek to add like-branded dealerships to our portfolio that exist in regions in which we already operate; however, we may look outside of our existing geographic footprint when considering the location of new EchoPark® stores. A majority of our franchised dealerships are either luxury or mid-line import brands. For the year ended December 31, 2016,2019, approximately 88.1%90.4% of our total new vehicle revenue was generated by luxury and mid-line import dealerships, which usually have higher operating margins, more stable Fixed Operations departments, lower associate turnover and lower inventory levels.

3

SONIC AUTOMOTIVE, INC.

The following table depicts the breakdown of our new vehicle revenues from continuing operations by brand:

 

Percentage of New Vehicle Revenue

 

Percentage of New Vehicle Revenues

 

Year Ended December 31,

 

Year Ended December 31,

Brand

 

2016

 

 

2015

 

 

2014

 

Brand201920182017

Luxury:

 

 

 

 

 

 

 

 

 

 

 

 

Luxury:

BMW

 

 

20.2

%

 

 

21.7

%

 

 

21.8

%

BMW24.0 %19.8 %19.6 %

Mercedes

 

 

10.6

%

 

 

9.7

%

 

 

9.6

%

Mercedes12.1 %10.7 %10.7 %
AudiAudi6.9 %6.5 %6.0 %

Lexus

 

 

5.9

%

 

 

5.6

%

 

 

5.2

%

Lexus4.9 %6.1 %5.8 %

Audi

 

 

5.3

%

 

 

4.8

%

 

 

5.0

%

Land Rover

 

 

3.3

%

 

 

4.0

%

 

 

2.8

%

Land Rover4.3 %4.4 %3.2 %
PorschePorsche2.8 %2.7 %2.4 %

Cadillac

 

 

3.3

%

 

 

3.2

%

 

 

4.1

%

Cadillac2.3 %2.3 %2.7 %

Porsche

 

 

2.3

%

 

 

2.5

%

 

 

2.4

%

MINI

 

 

1.6

%

 

 

1.9

%

 

 

2.1

%

MINI1.3 %1.3 %1.3 %

Other luxury (1)

 

 

3.0

%

 

 

3.1

%

 

 

3.1

%

Other luxury (1)2.7 %2.8 %2.9 %

Total Luxury

 

 

55.5

%

 

 

56.5

%

 

 

56.1

%

Total Luxury61.3 %56.6 %54.6 %

Mid-line Import:

 

 

 

 

 

 

 

 

 

 

 

 

Mid-line Import:

Honda

 

 

16.8

%

 

 

15.5

%

 

 

14.9

%

Honda15.3 %17.2 %17.3 %

Toyota

 

 

11.4

%

 

 

11.1

%

 

 

10.4

%

Toyota9.7 %10.2 %11.9 %
HyundaiHyundai1.5 %1.6 %1.5 %

Volkswagen

 

 

1.5

%

 

 

1.7

%

 

 

1.9

%

Volkswagen1.4 %2.0 %1.8 %

Hyundai

 

 

1.2

%

 

 

1.4

%

 

 

1.6

%

Other imports (2)

 

 

1.7

%

 

 

1.6

%

 

 

2.3

%

Other imports (2)1.2 %1.8 %1.7 %

Total Mid-line Import

 

 

32.6

%

 

 

31.3

%

 

 

31.1

%

Total Mid-line Import29.1 %32.8 %34.2 %

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

Domestic:

Ford

 

 

6.8

%

 

 

6.8

%

 

 

7.3

%

Ford4.9 %5.7 %6.8 %

General Motors (3)

 

 

5.1

%

 

 

5.4

%

 

 

5.5

%

General Motors (“GM”) (3)General Motors (“GM”) (3)4.7 %4.9 %4.4 %

Total Domestic

 

 

11.9

%

 

 

12.2

%

 

 

12.8

%

Total Domestic9.6 %10.6 %11.2 %

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Total100.0 %100.0 %100.0 %

(1) Includes Volvo, Acura, Infiniti, Jaguar, Smart and Smart.

Volvo.

(2) Includes Kia, Nissan, Kia, Scion and Subaru.

(3) Includes Buick, Chevrolet and GMC.

Expand our eCommerceOmni-Channel Capabilities. Automotive customers have become increasingly more comfortable using technology to research their vehicle buying alternatives, and communicate with dealership personnel.store personnel and, to a lesser extent, complete a vehicle purchase online. The internet presents a marketing, advertising and automotive sales channel that we will continue to utilize to drive value for our dealershipsstores and enhance the customer experience. Our technology platforms give us the ability to leverage technology to efficiently integrate systems, customize our dealership websites and use our data to improve the effectiveness of our advertising and interaction with our customers. These platforms also allow us to market all of our products and services to a national audience and, at the same time, support the local market penetration of our individual dealerships.

stores.

Train, Develop and Retain Associates.We believe our associates are the cornerstone of our business and crucial to our financial success. Our goal is to develop our associates and foster an environment where our associates can contribute and grow with the Company. Associate satisfaction is very important to us, and we believe a high level of associate satisfaction reduces associate turnover and enhances our customers’ experience at our dealershipsstores by pairing our customers with well-trained associates. We believe that our comprehensive training of all employees provides us with a competitive advantage over other dealership groups.

Increase Sales of Higher-Margin Products and Services.We continue to pursue opportunities to increase our sales of higher-margin products and services by expanding the following:

Finance, Insurance and Other Aftermarket Products. Each sale of a new or used vehicle gives us an opportunity to provide our customers with financing and insurance options and earn financing fees and insurance and other aftermarket product commissions. We also offer our customers the opportunity to purchase extended warranties, service contracts and other aftermarket products.products from third-party providers whereby we earn a commission for arranging the contract sale. We currently offer a wide range of non-recourse financing, leasing, other aftermarket products, extended warranties, service contracts and insurance

4

SONIC AUTOMOTIVE, INC.

insurance products to our customers. We emphasize menu-selling techniques and other best practices to increase our sales of F&I products at our dealerships.

franchised dealerships and EchoPark stores.

Parts, Service and Collision Repair. Each of our franchised dealerships offers a fully integrated service and parts department. Manufacturers permit warranty work to be performed only at franchised dealerships such as ours. As a result, our franchised dealerships are uniquely qualified and positioned to perform work covered by manufacturer warranties on increasingly complex vehicles. We believe we can continue to grow our profitable parts and service business over the long term by increasing service capacity, investing in sophisticated equipment and well-trained technicians, using variable rate pricing structures, focusing on customer service and efficiently managing our parts inventory. In addition, we believe our emphasis on selling extended service contracts and maintenance contracts associated with retail new and used vehicle retail sales will drive further service and parts business in our franchised dealerships as we increase the potential to retain current customers beyond the term of the standard manufacturer warranty period.

Certified Pre-Owned Vehicles. Various manufacturers provide franchised dealers the opportunity to sell certified pre-owned (“CPO”) vehicles. This certification process extends the standard manufacturer warranty on the CPO vehicle, which we believe increases our potential to retain the pre-owned purchaser as a future parts and service customer. SinceAs CPO vehicles can only be sold by franchised dealerships and CPO warranty work can only be performed at franchised dealerships, we believe CPO warranty work addsvehicles add additional stabilitysales volume and will increase our Fixed Operations business.

business over the long-term.

Relationships with Manufacturers

Each of our dealerships operates under a separate franchise or dealer agreement that governs the relationship between the dealership and the manufacturer. Each franchise or dealer agreement specifies the location of the dealership for the sale of vehicles and for the performance of certain approved services in a specified market area. The designation of such areas generally does not guarantee exclusivity within a specified territory. In addition, most manufacturers allocate vehicles on a “turn and earn” basis that rewards high unit sales volume. A franchise or dealer agreement incentivizes the dealer to meet specified standards regarding showrooms, facilities and equipment for servicing vehicles, inventories, minimum net working capital, personnel training and other aspects of the business. Each franchise or dealer agreement also gives the related manufacturer the right to approve the dealer operator and any material change in management or ownership of the dealership. Each manufacturer may terminate a franchise or dealer agreement under certain circumstances, such as a change in control of the dealership without manufacturer approval, the impairment of the reputation or financial condition of the dealership, the death, removal or withdrawal of the dealer operator, the conviction of the dealership or the dealership’s owner or dealer operator of certain crimes, the failure to adequately operate the dealership or maintain new vehicle inventory or financing arrangements, insolvency or bankruptcy of the dealership or a material breach of other provisions of the applicable franchise or dealer agreement.

Many automobile manufacturers have developed and implemented policies regarding public ownership of dealerships, which include the ability to force the sale of their respective franchises:

•upon a change in control of our companythe Company or a material change in the composition of our Board of Directors;

•if an automobile manufacturer or distributor acquires more than 5% of the voting power of our securities; and

or

•if an individual or entity (other than an automobile manufacturer or distributor) acquires more than 20% of the voting power of our securities, and the manufacturer disapproves of such individual’s or entity’s ownership interest.

To the extent that new or amended manufacturer policies restrict the number of dealerships that may be owned by a dealership group or the transferability of our common stock, such policies could have a material adverse effect on us. We believe that we will be able to renew at expiration all of our existing franchise and dealer agreements.

Many states have placed limitations upon manufacturers’ and distributors’ ability to sell new motor vehicles directly to customers in their respective states in an effort to protect dealers from practices they believe constitute unfair competition. In general, these statutes make it unlawful for a manufacturer or distributor to compete with a new motor vehicle dealer in the same brand operating under an agreement or franchise from the manufacturer or distributor in the relevant market area. Certain states, including Florida, Georgia, North Carolina, South Carolina and Virginia, limit the amount of time that a manufacturer or distributor may temporarily operate a dealership.

 These statutes have been increasingly challenged by new entrants into the retail automotive industry and, to the extent that these statutes are repealed or weakened, such changes could have a material adverse effect on our business.



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In addition, all of the states in which our dealerships currently do business require manufacturers or distributors to show “good cause” for terminating or failing to renew a dealer’s franchise or dealer agreement. Further, each of thethese states provides some method for dealers to challenge manufacturer attempts to establish dealerships of the same brand in their relevant market area.

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While in any individual period conditions may vary, over the past 10 fiscal years, we have acquired a significant percentage of our retail used vehicle inventory directly from consumers through our appraisal process, in addition to vehicle auctions. We also acquire used vehicle inventory from wholesalers, franchised and independent dealers and fleet owners, such as leasing companies and rental companies. The used vehicle inventory we acquire directly from consumers through our appraisal process helps provide an inventory of makes and models that reflects consumer preferences in each market. The supply of late-model used vehicles is influenced by a variety of factors, including the total number of vehicles in operation; the volume of new vehicle sales, which in turn generate used car trade-ins; and the number of used vehicles sold or remarketed through retail channels, wholesale transactions and automotive auctions. According to industry sources, there were approximately 275 million light vehicles in operation in the United States as of December 31, 2018. During calendar year 2019, it is estimated that approximately 17 million new cars and 40 million used cars were sold at retail, many of which were accompanied by trade-ins. Based on the large number of vehicles remarketed each year, consumer acceptance of our appraisal process, our experience and success in acquiring vehicles from auctions and other sources, and the large size of the U.S. auction market relative to our needs, we believe that sources of used vehicles will continue to be sufficient to meet our current and future needs.
Competition

The retail automotive industry is highly competitive. Depending on the geographic market, we compete both with dealers offering the same brands and product lines as ours and dealers offering other manufacturers’ vehicles. We also compete for vehicle sales with auto brokers, leasing companies and services offered on the internet that provide customer referrals to other dealerships, or who broker vehicle sales between customers and other dealerships.dealerships or sell vehicles directly to customers via online purchase transactions and delivery. We compete with small, local dealerships and with large multi-franchise and pre-owned automotive dealership groups.

We believe that the principal competitive factors in vehicle sales are the customer experience provided, the location of dealerships, the marketing campaigns conducted by manufacturers, the ability of dealerships to offer an attractive selection of the most popular vehicles and the quality of services andat competitive market pricing (including manufacturer rebates and other special offers)., the marketing campaigns conducted by manufacturers and the quality of services and customer experience at our dealerships. In particular, pricing has become more important as a result of price-savvywell-informed customers using a variety of sources available on the internet to determine current market retail prices. Other competitive factors include customer preference for makes of automobiles and coverage under manufacturer warranties.

In addition to competition for vehicle sales, we also compete with other auto dealers, service stores,and repair centers, auto parts retailers and independent mechanics in providing vehicle parts and service.service work. We believe that the principal competitive factors in parts and service sales are price, the use of factory-approved replacement parts, factory-trained technicians, the familiarity with a manufacturer’s makes and models and the quality of customer service. A number of regional and national chains offer selected parts and services at prices that may be lower than our prices.

In arranging or providing financing for our customers’ vehicle purchases, we compete with a broad range of financial institutions. In addition, certain financial institutions are now offering financing and other F&I products directly to consumers through the internet. We believe that the principal competitive factors in providing financing are convenience, interest rates and contract terms.

Our success depends, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitive pressures. Conditions and competitive pressures affecting the markets in which we operate, such as price-cutting by dealers in these areas, or in any new markets we enter, could adversely affect us, even though the retail automobileautomotive industry as a whole might not be affected.

Governmental Regulations and Environmental Matters

Numerous federal, state and statelocal regulations govern our business of marketing, selling, financing and servicing automobiles. We are also subject to laws and regulations relating to business corporations.

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Under the laws of the states in which we currently operate, as well as the laws of other states into which we may expand, we must obtain a license in order to establish, operate or relocate a franchised dealership or EchoPark store or to operate an automotive service and repair service.center. These laws also regulate our conduct of business, including our sales, operating, advertising, financing and employment practices, including federal and state wage-hour, anti-discrimination and other employment practices laws.

Our financing activities with customers are subject to federal truth-in-lending, consumer privacy, consumer leasing and equal credit opportunity regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws. Some states regulate finance fees that may be paid as a result of vehicle sales.

Federal, state and local environmental regulations, including regulations governing air and water quality, the clean-up of contaminated property and the use, storage, handling, recycling and disposal of gasoline, oil and other materials, also apply to us and our franchised dealership and EchoPark properties.

As with automobile dealerships generally, and service, parts and body shopcollision repair operations in particular, our business involves the use, storage, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes and other environmentally sensitive materials. Our business also involves the past and current operation and/or removal of above ground and underground storage tanks containing such substances, wastes or materials. Accordingly, we are subject to regulation by federal, state and local authorities that establish health and environmental quality standards, provide for liability related to those standards and provide penalties for violations of those standards. We are also subject to laws, ordinances and regulations governing remediation of contamination at facilities we own or operate or to which we send hazardous or toxic substances or wastes and other environmentally sensitive materials for treatment, recycling or disposal.

We do not have any known material environmental liabilities, and we believe that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material adverse effect on our results of operations, financial condition

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and cash flows. However, soil and groundwater contamination is known to exist at certain properties owned and used by us. Further, environmental laws and regulations are complex and subject to frequent change. In addition, in connection with our past or future acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material.

Information About Our Executive Officers of the Registrant

Our executive officers as of the date of this Annual Report on Form 10-K are as follows:

Name

Age

NameAgePosition(s) with Sonic

O. Bruton Smith

92 

89

Executive Chairman and Director

B. ScottDavid Bruton Smith

45 

49

Chief Executive Officer and Director

Jeff Dyke52 President and Director

David Bruton Smith

42

Vice Chairman and Director

Heath R. Byrd

53 

50

Executive Vice President and Chief Financial Officer

Jeff Dyke

49

Executive Vice President of Operations

O. Bruton Smith is the Founder of Sonic and has served as Sonic’sits Executive Chairman since July 2015. Prior to his appointmentelection as Executive Chairman, Mr. Smith had served as Chairman and Chief Executive Officer of the Company since its organization in January 1997. Mr. Smith has also served as a director of Sonic since its organization in January 1997. Mr. Smith is also a director of many of Sonic’s subsidiaries. Mr. Smith has worked in the retail automobileautomotive industry since 1966. Mr. Smith is also the Executive Chairman and a director of Speedway Motorsports, LLC f/k/a Speedway Motorsports, Inc. (“SMI”Speedway Motorsports”), which is controlled by Mr. Smith and his family. SMI isSpeedway Motorsports was a public company until September 2019, whose shares arewere traded on the New York Stock Exchange (the “NYSE”). Among other things, SMISpeedway Motorsports owns and operates the following Speedways:speedways: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Kentucky Speedway, Las Vegas Motor Speedway, New Hampshire Motor Speedway, Sonoma Raceway and Texas Motor Speedway. HeMr. Smith is also a director of most of SMI’sSpeedway Motorsports’ operating subsidiaries.

B. Scott Smith issubsidiaries and a director and an officer of Sonic Financial Corporation (“SFC”), the Co-Founderlargest stockholder of Sonic. He is also Chief Executive Officer, Presidentthe father of Mr. David Bruton Smith and a director of Sonic.  Prior to his appointmentMr. Marcus G. Smith.

David Bruton Smith was elected as Chief Executive Officer in July 2015, Mr. Smith had served as President and Chief Strategic Officer of Sonic since March 2007.in September 2018. Prior to that,his election as Chief Executive Officer, Mr. Smith served as Sonic’s Executive Vice Chairman and Chief Strategic Officer from October 2002March 2018 to September 2018, as Sonic’s Vice Chairman from March 2013 to March 20072018 and as an Executive Vice President and Chief Operating Officer from April 1997 to October 2002.  Mr. Smith has been a director of Sonic since its organization in January 1997.  Mr. Smith also serves as a director and executive officer of many of Sonic’s subsidiaries.  Mr. Smith, who is the son of O. Bruton Smith and the brother of David Bruton Smith, has been an executive officer of Town & Country Ford since 1993, and was a minority owner of both Town & Country Ford and Fort Mill Ford before Sonic’s acquisition of those dealerships in 1997.  Mr. Smith became the General Manager of Town & Country Ford in November 1992 where he remained until his appointment as President and Chief Operating Officer of Sonic in April 1997.  Mr. Smith has over 27 years of experience in the automobile dealership industry.

David Bruton Smith was appointedfrom October 2008 to the office of Vice Chairman in March 2013. He has served as Executive Vice President andbeen a director of Sonic since October 2008 and has served in Sonic’s organization since 1998. Prior to being named a director andan Executive Vice President and a director in October 2008, Mr. Smith had served as Sonic’s Senior Vice President of Corporate Development.Development since March 2007. Mr. Smith served as Sonic’s Vice President of Corporate Strategy

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from October 2005 to March 2007, and also served prior to that time as Dealer Operator and General Manager of several Sonic dealerships. Mr. Smith is also a director and an officer of SFC, the largest stockholder of Sonic.He is the son of Mr. O. Bruton Smith and the brother of Mr. B. ScottMarcus G. Smith.

Jeff Dyke was elected to the office of President of Sonic in September 2018 and is responsible for direct oversight for all of Sonic’s retail automotive operations. In addition, Mr. Dyke has served as a director of Sonic since July 2019. Mr. Dyke served as Sonic’s Executive Vice President of Operations from October 2008 to September 2018. From March 2007 to October 2008, Mr. Dyke served as Sonic’s Division Chief Operating Officer - Southeast Division, where he oversaw retail automotive operations for the states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. Mr. Dyke first joined Sonic in October 2005 as Sonic’s Vice President of Retail Strategy, a position that he held until April 2006, when he was promoted to Division Vice President - Eastern Division, a position he held from April 2006 to March 2007. Prior to joining Sonic, Mr. Dyke worked in the retail automotive industry at AutoNation, Inc. from 1996 to 2005, where he held several positions in divisional, regional and dealership management with that company.
Heath R. Byrd has served as Sonic’s Executive Vice President and Chief Financial Officer since April 2013. Mr. Byrd was previously a Vice President and Sonic’s Chief Information Officer from December 2007 to March 2013, and has served our organization since 2007. Prior to joining Sonic, Mr. Byrd served in a variety of management positions at HR America, Inc., a workforce management firm that provided customized human resource and workforce development through co-sourcing arrangements, including as a director, as President and Chief Operating Officer and as Chief Financial Officer and Chief Information Officer. Prior to HR America, Mr. Byrd served as a Manager in the Management Consulting Division of Ernst & Young LLP.

Jeff Dyke has served as Sonic’s Executive Vice President of Operations since October 2008 and is responsible for direct oversight for all of Sonic’s retail automotive operations. From March 2007 to October 2008, Mr. Dyke served as our Division Chief Operating Officer – Southeast Division, where he oversaw retail automotive operations for the states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. Mr. Dyke first joined Sonic in October 2005 as our Vice President of Retail Strategy, a position that he held until April 2006, when he was promoted to Division Vice President – Eastern Division, a position he held from April 2006 to March 2007. Prior to joining Sonic, Mr. Dyke worked in the automotive retail industry at AutoNation, Inc. from 1996 to 2005, where he held several positions in divisional, regional and dealership management with that company.

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Employees

As of December 31, 2016,2019, we employed approximately 9,8009,300 associates. We believe that our relationships with our associates are good. Approximately 275270 of our associates, primarily service technicians in our nothernnorthern California, markets, are represented by a labor union. Although only a small percentage of our associates is represented by a labor union, we may be affected by labor strikes, work slowdowns and walkouts at automobile manufacturers’ manufacturing facilities.

Company Information

Our website is locatedcan be accessed at www.sonicautomotive.com.www.sonicautomotive.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements and other information we file with, or furnish to, the Securities and Exchange Commission (the “SEC”) are available free of charge on our website.website as well as the website of the SEC, www.sec.gov. We make these documents available as soon as reasonably practicable after we electronically transmit them to the SEC. Except as otherwise stated in these documents, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we transmit to the SEC.


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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS


Item 1A.  Risk Factors.

Factors.

Our business, financial condition, results of operations, cash flows and prospects and the prevailing market price and performance of our Class A common stockCommon Stock may be adversely affected by a number of factors, including the material risks noted below. Our stockholders and prospective investors should consider these risks, uncertainties and other factors prior to making an investment decision.

Risks Related to Our Sources of Financing and Liquidity

Our significant indebtedness could materially adversely affect our financial health, limit our ability to finance future acquisitions, expansion plans and capital expenditures and prevent us from fulfilling our financial obligations.

As of December 31, 2016,2019, our total outstanding indebtedness was approximately $2.4$2.2 billion, which includes floor plan notes payable, long-term debt and short-term debt.

We have up to $250.0 million of maximum borrowing availability under a syndicated revolving credit facility (the “2016 Revolving Credit Facility”) and up to $1.0 billion of maximum borrowing availability for combined syndicated new and used vehicle inventory floor plan financing (the “2016 Floor Plan Facilities”). We refer to the 2016 Revolving Credit Facility and the 2016 Floor Plan Facilities collectively as ourthe “2016 Credit Facilities.” Based on balances asAs of December 31, 2016,2019, we had approximately $207.0$230.7 million available for additional borrowings under the 2016 Revolving Credit Facility based on the borrowing base calculation, which is affected by numerous factors, including eligible asset balances. We are able to borrow under ourthe 2016 Revolving Credit Facility only if, at the time of the borrowing, we have met all representations and warranties and are in compliance with all financial and other covenants contained therein. We also have capacity to finance new and used vehicle inventory purchases under floor plan agreements with various manufacturer-affiliated finance companies and other lending institutions (the “Silo Floor Plan Facilities”) as well as ourthe 2016 Floor Plan Facilities. We have up to $112.2 million of maximum borrowing availability under our delayed draw-term loan credit agreement entered into in November 2019 (the “2019 Mortgage Facility”), which varies in borrowing limit based on the appraised value of the collateral underlying the 2019 Mortgage Facility. As of December 31, 2019, we had approximately $3.1 million available for additional borrowings under the 2019 Mortgage Facility based on the borrowing base calculation. In addition, the indentures relating to our 5.0%6.125% Senior Subordinated Notes due 20232027 (the “5.0% Notes”), our 7.0% Senior Subordinated Notes due 2022 (the “7.0%“6.125% Notes”) and our other debt instruments allow us to incur additional indebtedness, including secured indebtedness, as long as we comply with the terms thereunder.

In addition, the

The majority of our dealership properties are leased undersubject to long-term operating lease arrangements that commonly have initial terms of fifteen10 to twenty20 years with renewal options generally ranging from five to ten10 years. These operating leases require compliance with financial and operating covenants similar to those under ourthe 2016 Credit Facilities, and monthly payments of rent that may fluctuate based on interest rates and local consumer price indices. The total future minimum lease payments related to these operating leases and certain equipment leases are significant and are disclosed in Note 12, “Commitments and Contingencies,” to the accompanying consolidated financial statements.

Our failure to comply with certain covenants in these agreements or indentures could materially adversely affect our ability to access our borrowing capacity, subject us to acceleration of our outstanding debt, result in a cross default on other indebtedness and could have a material adverse effect on our ability to continue our business.

An acceleration of our obligation to repay all or a substantial portion of our outstanding indebtedness or lease obligations would have a material adverse effect on our business, financial condition or results of operations.

Our

The 2016 Credit Facilities, the indentures2019 Mortgage Facility, the indenture governing the 5.0% Notes and the 7.0%6.125% Notes and many of our operating leases contain numerous financial and operating covenants. A breach of any of these covenants could result in a default under the applicable agreement or indenture.agreement. In addition, a default under one agreement or indenture could result in a cross default and acceleration of our repayment obligations under the other agreements or indentures, including the indentures governing our outstanding 5.0% Notes and 7.0% Notes.agreements. If a default or cross default were to occur, we may not be able to pay our debts or to borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. If a default were to occur, we may be unable to adequately finance our operations because of acceleration and cross-default provisions and the value of our common stock would be materially adversely affected because of acceleration and cross-default provisions.affected. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with the covenants in these agreements and indentures.

agreements.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS


Our ability to make interest and principal payments when due to holders of our debt securities depends upon our future performance and our receipt of sufficient funds from our subsidiaries.

Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business, domestic and foreign economic conditions, the regulatory environment and other factors, many of which we are unable to control. Substantially all of our consolidated assets are held by our subsidiaries and substantially all of our consolidated cash flow and net income are generated by our subsidiaries. Accordingly, our cash flow and ability to service debt depend to a substantial degree on the results of operations of our subsidiaries and upon the ability of our subsidiaries to provide us with cash. We may receive cash from our subsidiaries in the form of dividends, loans or distributions. We may use this cash to service our debt obligations or for working capital. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to distribute cash to us or to make funds available to service debt.

If our cash flow is not sufficient to service our debt as it becomes due, we may be required to refinance the debt, sell assets or sell shares of our common stock on terms that we do not find attractive. Further, our failure to comply with the financial and other restrictive covenants relating to the 2016 Credit Facilities, the 2019 Mortgage Facility and the indentures pertaining to our outstanding notesgoverning the 6.125% Notes could result in a default under these agreements and indentures that would prevent us from borrowing under the 2016 Credit Facilities or the 2019 Mortgage Facility, which could materially adversely affect our business, financial condition and results of operations. If a default and acceleration of repayment were to occur, we may be unable to adequately finance our operations and the value of our Class A common stockCommon Stock could be materially adversely affected.

We have financed the purchase and improvement of certain dealership properties with mortgage notes that require balloon payments at the end of the notes’ terms.

Many of our mortgage notes’ principal and interest payments are based on an amortization period longer than the actual terms (maturity dates) of the notes. We will be required to repay or refinance the remaining principal balances for certain of our mortgages with balloon payments at the notes’ maturity dates, which range from 20172020 to 2033. The amounts to be repaid or refinanced at the maturity dates could be significant. We may not have sufficient liquidity to make such payments at the notes’ maturity dates. In the event we do not have sufficient liquidity to completely repay the remaining principal balances at maturity, we may not be able to refinance the notes at interest rates that are acceptable to us or, depending on market conditions, refinance the notes at all. Our inability to repay or refinance these notes could have a material adverse effect on our business, financial condition and results of operations.

We depend on the performance of subleases to offset costs related to certain of our lease agreements.

In many cases, when we sell a dealership, the buyer of the dealership will sublease the dealership property from us, but we are not released from the underlying lease obligation to the primary landlord. We rely on the sublease income from the buyer to offset the expense incurred related to our obligation to pay the primary landlord. We also rely on the buyer to maintain the property in accordance with the terms of the sublease (which in most cases mirror the terms of the lease we have with the primary landlord). Although we assess the financial condition of a buyer at the time we sell the dealership, and seek to obtain guarantees of the buyer’s sublease obligation from the stockholders or affiliates of the buyer, the financial condition of the buyer and/or the sublease guarantors may deteriorate over time. In the event the buyer does not perform under the terms of the sublease agreement (due to the buyer’s financial condition or other factors), we may not be able to recover amounts owed to us under the terms of the sublease agreement or the related guarantees. Our operating results, financial condition and cash flows may be materially adversely affected if sublessees do not perform their obligations under the terms of the sublease agreements.

Our use of hedging transactions could limit our financial gains or result in financial losses.

To reduce our exposure to fluctuations in cash flow due to interest rate fluctuations, we have entered into, and in the future expect to enter into, certain derivative instruments (or hedging agreements). No hedging activity can completely insulate us from the risks associated with changes in interest rates. As of December 31, 2016,2019, we had interest rate swapcap agreements related to effectively convert a portion of our LIBOR-basedLondon InterBank Offered Rate (“LIBOR”)-based variable rate debt to a fixed rate.limit our exposure to rising interest rates. See the heading “Derivative Instruments and Hedging Activities” under Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements. We intend to hedge as much of theour interest rate risk as management determines is in our best interests given the cost of such hedging transactions.

Our hedging transactions expose us to certain risks and financial losses, including, among other things:

•counterparty credit risk;

•available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;

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RISK FACTORS


•the duration or the amount of the hedge may not match the duration or the amount of the related liability;

•the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value, downward adjustments or “mark-to-market losses,” which would affect our recorded stockholders’ equity;equity amounts; and

•all of our hedging instruments contain terms and conditions with which we are required to meet. In the event those terms and conditions are not met, we may be required to settle the instruments prior to the instruments’ maturity with cash payments, which could significantly affect our liquidity.

A failure on our part to effectively hedge against interest rate changes may adversely affect our financial condition and results of operations.

Reforms to and uncertainty regarding the LIBOR may adversely affect our business, financial condition and results of operations.
The United Kingdom Financial Conduct Authority (the “FCA”) announced in July 2017 that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021 (the “FCA Announcement”). This announcement, in conjunction with financial benchmark reforms more generally and changes in the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices which have historically been used as interest rate “benchmarks” in our financial contracts, including, but not limited to, floor plan notes payable, variable-rate mortgage notes payable, interest rate swap agreements, interest rate cap agreements and certain dealership operating lease agreements. As of December 31, 2019, approximately $189.7 million of our outstanding variable-rate mortgage notes payable and $250.0 million notional amount of our interest rate cap agreements extend beyond 2021. In addition, certain of our dealership operating lease agreements contain LIBOR-based rent adjustments if LIBOR rises above a specified minimum LIBOR floor. The FCA Announcement and uncertainties surrounding LIBOR and other financial benchmarks may have the effect of triggering future changes in the rules or methodologies used to calculate benchmarks or lead to the discontinuation or unavailability of benchmarks. Additionally, there can be no assurance that we and other market participants will be adequately prepared for an actual discontinuation of LIBOR or other benchmarks, that existing assets and liabilities based on or linked to discontinued benchmarks will transition successfully to alternative reference rates or benchmarks or of the timing of adoption and degree of integration of such alternative reference rates or benchmarks in the markets. The discontinuation of LIBOR or other benchmarks, may have an unpredictable impact on the contractual mechanics of financial contracts (including, but not limited to, interest rates to be paid to or by us), require renegotiation of outstanding financial assets and liabilities, cause significant disruption to financial markets that are relevant to our business, increase the risk of litigation and/or increase expenses related to the transition to alternative reference rates or benchmarks, among other adverse consequences. Additionally, any transition from current benchmarks may alter the Company’s risk profiles and models, valuation tools, cost of financing and effectiveness of hedging strategies. Reforms to and uncertainty regarding transitions from current benchmarks may adversely affect our business, financial condition and results of operations.

We may not be able to satisfy our debt obligations upon the occurrence of a change of control.

Upon the occurrence of a change of control as(as defined in the 5.0% Notes andindenture governing the 7.0% Notes,6.125% Notes), holders of these instrumentsthe 6.125% Notes will have the right to require us to purchase all or any part of such holders’ notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. The events that constitute a change of control under these indenturesthe indenture governing the 6.125% Notes may also constitute a default under ourthe 2016 Credit Facilities. AnyFacilities and the 2019 Mortgage Facility. The agreements or instruments governing any future debt instruments that we may incur may contain similar provisions regarding repurchases in the event of a change of control triggering event. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under these debt instruments in the event of a change of control. In the event we were unable to satisfy these obligations, it could have a material adverse impact on our business and our stockholders.

Risks Related to Our Relationships with Vehicle Manufacturers

Our operations may be adversely affected if one or more of our manufacturer franchise or dealer agreements is terminated or not renewed.

Each of our dealerships operates under a separate franchise or dealer agreement with the applicable automobile manufacturer. Without a franchise or dealer agreement, we cannot obtain new vehicles from a manufacturer or advertise as an authorized factory service center. As a result, we are significantly dependent on our relationships with the manufacturers.

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RISK FACTORS

Moreover, manufacturers exercise a great degree of control over the operations of our dealerships through the franchise and dealer agreements. The franchise and dealer agreements govern, among other things, our ability to purchase vehicles from the manufacturer and to sell vehicles to customers. Each of our franchise or dealer agreements provides for termination or non-renewal for a variety of causes, including certain changes in the financial condition of the dealerships and any unapproved change of ownership or management. Manufacturers may also have a right of first refusal if we seek to sell dealerships.

We cannot guarantee that any of our existing franchise and dealer agreements will be renewed or that the terms and conditions of such renewals will be favorable to us. Actions taken by manufacturers to exploit their superior bargaining position in negotiating the terms of franchise and dealer agreements or renewals of these agreements or otherwise could also have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our failure to meet a manufacturer’s customer satisfaction, financial and sales performance andor facility requirements may adversely affect our profitability and our ability to acquire new dealerships.

A manufacturer may condition its allotment of vehicles, our participation in bonus programs or our acquisition of additional franchises upon our compliance with its brand and facility standards. These standards may require investments in technology and facilities that we otherwise would not make. This may put us in a competitive disadvantage with other competing dealerships and may ultimately result in our decision to sell a franchise when we believe it may be difficult to recover the cost of the required investment to reach the manufacturer’s brand and facility standards.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

In addition, many manufacturers attempt to measure customers’ satisfaction with their sales and warranty service experiences through manufacturer-determined CSI scores. The components of CSI vary by manufacturer and are modified periodically. Franchise and dealer agreements may also impose financial and sales performance standards. Under our agreements with certain manufacturers, a dealership’s CSI scores, and financial and sales performance standards may be considered as factors in evaluating applications for additional dealership acquisitions. From time to time, some of our dealerships have had difficulty meeting various manufacturers’ CSI requirements or performance standards. We cannot assure you that our dealerships will be able to comply with these requirements or performance standards in the future. A manufacturer may refuse to consent to anour acquisition of one of its franchises if it determines our dealerships do not comply with its CSI requirements or performance standards, which could impair the execution of our acquisition strategy. In addition, we receive incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline.

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise and dealer agreements.

State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise or dealer agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Some state dealer laws allow dealers to file protests or petitions or to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Manufacturers’ lobbying efforts (including those of Tesla) may lead to the repeal or revision of state dealer laws. If dealer laws are repealed or weakened in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, it may also be more difficult for our dealerships to renew their franchise or dealer agreements upon expiration.

The ability of a manufacturer to grant additional franchises is based on several factors which are not within our control. If manufacturers grant new franchises in areas near or within our existing markets, this could significantly impact our revenues and/or profitability. In addition, current state dealer laws generally restrict the ability of automobile manufacturers to enter the retail market and sell directly to consumers. However, if manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on us.

Our sales volume and profit margin on each sale may be materially adversely affected if manufacturers discontinue or change their incentive programs.

Our dealerships depend on the manufacturers for certain sales incentives, warranties and other programs that are intended to promote and support dealership new vehicle sales. Manufacturers routinely modify their incentive programs in response to changing market conditions. Some of the key incentive programs include:

•customer rebates or below market financing on new and used vehicles;

•employee pricing;
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employee pricing;

•dealer incentives on new vehicles;

•manufacturer floor plan interest and advertising assistance;

•warranties on new and used vehicles; and

•sponsorship of certified pre-ownedCPO vehicle sales by authorized new vehicle dealers.

Manufacturers frequently offer incentives to potential customers. A reduction or discontinuation of a manufacturer’s incentive programs may materially adversely impact vehicle demand and affect our results of operations.

Our sales volume may be materially adversely affected if manufacturer captives change their customer financing programs or are unable to provide floor plan financing.

One of the primary finance sources used by consumers in connection with the purchase of a new or used vehicle is the manufacturer captive finance companies. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financing programs. In addition, the captive finance companies will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio. A limitation or reduction of available consumer financing for these or other reasons could affect consumers’ ability to purchase a vehicle and, thus, could have a material adverse effect on our sales volume.

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Our parts and service sales volume and margins are dependent on manufacturer warranty programs.

Franchised automotive retailers perform factory authorized service work and sell original replacement parts on vehicles covered by warranties issued by the automotive manufacturer. Dealerships which perform work covered by a manufacturer warranty are reimbursed at rates established by the manufacturer. For the year ended December 31, 2016,2019, approximately 17.1%18.5% of our parts, service and collision repair revenuerevenues was for work covered by manufacturer warranties.warranties and complimentary maintenance programs. To the extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty work, our parts and service sales volume and margins could be adversely affected.

Adverse conditions affecting one or more key manufacturers or lenders may negatively impact our results of operations.

Our results of operations depend on the products, services, and financing and incentive programs offered by major automobile manufacturers, and could be negatively impacted by any significant changes to these manufacturers’ financial condition, marketing strategy, vehicle design, production capabilities, management, reputation or labor relations or negative publicity concerning a particular manufacturer or vehicle model, production capabilities, management, reputation and labor relations.

model.

Events such as labor strikes or other disruptions in production, including those caused by natural disasters, that may adversely affect a manufacturer may also adversely affect us. In particular, labor strikes at a manufacturer that continue for a substantial period of time could have a material adverse effect on our business. Similarly, the delivery of vehicles from manufacturers at a time later than scheduled, which may occur during critical periods of new product introductions, could limit sales of those vehicles during those periods. This has been experienced at some of our dealerships from time to time. Adverse conditions affecting these and other important aspects of manufacturers’ operations and public relations may adversely affect our ability to sell their automobiles and, as a result, significantly and detrimentally affect our business and results of operations.

Moreover, our business could be materially adversely impacted by the bankruptcy of a major vehicle manufacturer or related lender. For example:

•a manufacturer in bankruptcy could attempt to terminate all or certain of our franchises, in which case we may not receive adequate compensation for our franchises;

•consumer demand for such manufacturer’s products could be substantially reduced;

•a lender in bankruptcy could attempt to terminate our floor plan financing and demand repayment of any amounts outstanding;

•we may be unable to arrange financing for our customers for their vehicle purchases and leases through such lender, in which case we would be required to seek financing with alternate financing sources, which may be difficult to obtain on similar terms, if at all;

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•we may be unable to collect some or all of our significant receivables that are due from such manufacturer or lender, and we may be subject to preference claims relating to payments made by such manufacturer or lender prior to bankruptcy; and

•such manufacturer may be relieved of its indemnification obligations with respect to product liability claims.

Additionally, any such bankruptcy may result in us being required to incur impairment charges with respect to the inventory, fixed assets and intangible assets related to certain dealerships, which could adversely impact our results of operations and financial condition and our ability to remain in compliance with the financial ratios contained in our debt agreements.

Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise or dealer agreements or to issue additional equity.

Some of our franchise and dealer agreements prohibit transfers of any ownership interests of a dealership and, in some cases, its parent, without prior approval of the applicable manufacturer. Our existing franchise and dealer agreements could be terminated if a person or entity acquires a substantial ownership interest in us or acquires voting power above certain levels without the applicable manufacturer’s approval. While the holders of our Class B common stockCommon Stock currently maintain voting control of Sonic, their future investment decisions as well as those of holders of our Class A common stockCommon Stock are generally outside of our control and could result in the termination or non-renewal of existing franchise or dealer agreements or impair our ability to negotiate new franchise or dealer agreements for dealerships we acquire in the future. In addition, if we cannot obtain any requisite approvals on a timely basis, we may not be able to issue additional equity or otherwise raise capital on terms acceptable to us. These restrictions may also prevent or deter a prospective acquirer from acquiring control of us.

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We depend on manufacturers to supply us with sufficient numbers of popular new models.

Manufacturers typically allocate their vehicles among dealerships based on the sales history of each dealership. Supplies of popular new vehicles may be limited by the applicable manufacturer’s production capabilities. Popular new vehicles that are in limited supply typically produce the highest profit margins. We depend on manufacturers to provide us with a desirable mix of popular new vehicles. Our operating results may be materially adversely affected if we do not obtain a sufficient supply of these vehicles on a timely basis.

A decline in the quality of vehicles we sell, or consumers’ perception of the quality of those vehicles, may adversely affect our business.

Our business is highly dependent on consumer demand and preferences. Events such as manufacturer recalls and negative publicity or legal proceedings related to these events may have a negative impact on the products we sell. If such events are significant, the profitability of our dealerships related to those manufacturers could be adversely affected and we could experience a material adverse effect on our overall results of operations, financial position and cash flows.

For instance, negative publicity and legal proceedings related to events such as the well-known Volkswagen/Audi emissions issue may have a negative impact on the products we sell and the profitability of our dealerships related to those manufacturers could be adversely affected. Depending on the ultimate outcome of the Volkswagen/Audi emissions issue and whether or not other manufacturers have implemented similar technologies, the resulting impact could result in a material adverse effect on our overall results of operations, financial position and cash flows. As of December 31, 2016, we operated five Volkswagen and five Audi franchised dealerships. During the year ended December 31, 2016, these dealerships generated revenues of approximately $647.3 million, representing approximately 6.7% of our total revenues.

In the event that consumer or other related lawsuits are filed against our Volkswagen and Audi dealerships related to this issue, we believe that our dealerships are entitled to indemnification and assumption of defense from Volkswagen Group of America, Inc. related to such claims.

Risks Related to Our Growth Strategy

Our investment in new business strategies, services and technologies is inherently risky, and could disrupt our ongoing business or have a material adverse effect on our overall business and results of operations.

We have invested and expect to continue to invest in new business strategies, services and technologies, including our EchoPark® stores and our OSOE initiative. stores. Such endeavors may involve significant risks and uncertainties, including allocating management resources away from current operations, insufficient revenues to offset expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not have a material adverse effect on our reputation, financial condition and operating results.

Our ability to make acquisitions, execute our stand-alone pre-owned store initiativegrowth strategy for our EchoPark business and grow organically may be restricted by the terms and limits of the 2016 Credit Facilities.

Facilities, the 2019 Mortgage Facility and the indenture which governs the 6.125% Notes.

The amount of capital available to us is limited to the liquidity available under ourthe 2016 Credit Facilities and capitalthe 2019 Mortgage Facility and cash flows generated through operating activities. Pursuant to the 2016 Credit Facilities, we are restricted from making dealership acquisitions in any fiscal year if the aggregate cost of all such acquisitions is in excess of certain amounts, without the written consent of the required lendersRequired Lenders (as that term is defined in the 2016 Credit Facilities). Our pace
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and scale of growing our stand-alone pre-owned store initiativeEchoPark business may be limited in the event other sources of capital are unavailable. These restrictions may limit our growth strategy.

We may not be able to capitalize on future real estate and dealership acquisition opportunities because our ability to obtain capital to fund these acquisitions is limited.

We intend to finance future real estate and dealership acquisitions with cash generated from operations, through issuances of our stock or debt securities and through borrowings under credit arrangements. We may not be able to obtain additional financing by issuing stock or debt securities due to the market price of our Class A common stock,Common Stock, overall market conditions or covenants under ourthe 2016 Credit Facilities and the 2019 Mortgage Facility that restrict our ability to issue additional indebtedness, or the need for manufacturer consent to the issuance of equity securities. Using cash to complete acquisitions could substantially limit our operating orand financial flexibility.

In addition, we are dependent to a significant extent on our ability to finance our new and certain of our used vehicle inventory under the 2016 Floor Plan Facilities or the Silo Floor Plan Facilities (“floor plan financing”(collectively, “Floor Plan Financing”). Floor plan financingPlan Financing arrangements allow

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us to borrow money to buy a particular new vehicle from the manufacturer or a used vehicle on trade-in or at auction and pay off the loan when we sell that particular vehicle. We must obtain floor plan financingFloor Plan Financing or obtain consents to assume existing floor plan financingnotes payable in connection with our acquisition of dealerships. In the event that we are unable to obtain such financing, our ability to complete dealership acquisitions could be limited.

Substantially all of the assets of our dealerships are pledged to secure the indebtedness under ourthe 2016 Credit Facilities and the Silo Floor Plan Facilities and the 2016 Credit Facilities. These pledges may impede our ability to borrow from other sources. Moreover, because certain lending institutions are either owned by or affiliated with an automobile manufacturer, any deterioration of our relationship with the particular manufacturer-affiliated finance subsidiary could adversely affect our relationship with the affiliated manufacturer, and vice-versa.

vice versa.

Manufacturers’ restrictions on acquisitions could limit our future growth.

We are required to obtain the approval of the applicable manufacturer before we can acquire an additional franchise of that manufacturer. In determining whether to approve an acquisition, manufacturers may consider many factors, such as our financial condition and CSI scores.

Certain manufacturers also limit the number of its dealerships that we may own our national market share of that manufacturer’s sales of new vehicles orin total, the number of dealerships we may own in a particular geographic area.area, or our national market share of that manufacturer’s sales of new vehicles. In addition, under an applicable franchise or dealer agreement or under state law, a manufacturer may have a right of first refusal to acquire a dealership that we seek to acquire.

A manufacturer may condition approval of an acquisition on the implementation of material changes in our operations or extraordinary corporate transactions, facilities improvements or other capital expenditures. If we are unable or unwilling to comply with these conditions, we may be required to sell the assets of that manufacturer’s dealerships or terminate our franchise or dealer agreement. We cannot assure you that manufacturers will approve future acquisitions or do so on a timely basis, which could impair the execution of our acquisition strategy.

Failure to effectively integrate acquired dealerships with our existing operations could adversely affect our future operating results.

Our future operating results depend on our ability to integrate the operations of acquired dealerships with our existing operations. In particular, we need to integrate our management information systems, procedures and organizational structures, which can be difficult. Our growth strategy has focused on the pursuit of strategic acquisitions or brand development that either expand or complement our business.

We cannot assure you that we will effectively and profitably integrate the operations of these dealerships without substantial costs, delays or operational or financial problems, due to:

•the difficulties of managing operations located in geographic areas where we have not previously operated;

•the management time and attention required to integrate and manage newly acquired dealerships;

•the difficulties of assimilating and retaining employees;

•the challenges of keeping customers; and

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•the challenge of retaining or attracting appropriate dealership management personnel.

These factors could have a material adverse effect on our financial condition and results of operations.

We may not adequately anticipate all of the demands that growth through acquisitions or brand development will impose.

We face risks growing through acquisitions or expansion. These risks include, but are not limited to:

•incurring significantly higher capital expenditures and operating expenses;

•failing to assimilate the operations and personnel of acquired dealerships;

•entering new markets with which we are unfamiliar;

•incurring potential undiscovered liabilities and operational difficulties at acquired dealerships;

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•disrupting our ongoing business;

•diverting our management resources;

•failing to maintain uniform standards, controls and policies;

•impairing relationships with employees, manufacturers and customers as a result of changes in management;

•incurring increased expenses for accounting and computer systems, as well as integration difficulties;

failure•failing to obtain a manufacturer’s consent to the acquisition of one or more of its franchises or to renew the franchise or dealer agreement on terms acceptable to us; and

•incorrectly valuing entities to be acquired or assessing markets entered.

We may not adequately anticipate all of the demands that growth will impose on our business.

We may not be able to execute our growth strategy without the costs escalating.

We have grown our franchised dealerships business primarily through acquisitions in the past. We may not be able to consummate any future acquisitions at acceptable prices and terms or identify suitable candidates. In addition, increased competition for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions or growth opportunities will depend upon various factors, including:

•the availability of suitable acquisition candidates;

•competition with other dealer groups or institutional investors for suitable acquisitions;

•the negotiation of acceptable terms with the seller and with the manufacturer;

•our financial capabilities and ability to obtain financing on acceptable terms;

•our stock price; and

•the availability of skilled employees to manage the acquired companies.

We may not be able to determine the actual financial condition of dealerships we acquire until after we complete the acquisition and take control of the dealerships.

The operating and financial condition of acquired businesses cannot be determined accurately until we assume control. Although we conduct what we believe to be a prudent level of investigationdue diligence regarding the operating and financial condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Similarly, many of the dealerships we acquire, including some of our largest acquisitions, do not have financial statements audited or prepared in accordance with U.S. generally accepted accounting principles.principles (“U.S. GAAP”). We may not have an accurate understanding of the historical financial condition and performance of our acquired entities. Until we actually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations.

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Risks Related to the Retail Automotive Retail Industry

Our facilities and operations are subject to extensive governmental laws and regulations. If we are found to be in violation of, or subject to liabilities under, any of these laws or regulations or if new laws or regulations are enacted that adversely affect our operations, then our business, operating results, financial condition, cash flows and prospects could suffer.

The retail automotive retail industry, including our facilities and operations, is subject to a wide range of federal, state and local laws and regulations, such as those relating to motor vehicle sales, retail installment sales, leasing, sales of finance, insurance and vehicle protection products, licensing, consumer protection, consumer privacy, employment practices, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety. With respect to motor vehicle sales, retail installment sales, leasing, and sales of finance, insurance and vehicle protection products at our dealerships and stores, we are subject to various laws and regulations, the violation of which could subject us to consumer class action or other lawsuits or governmental investigations and adverse publicity, in addition to administrative, civil or criminal sanctions. With respect to employment practices, we are subject to various laws and regulations, including complex federal, state, and local wage and hour and anti-discrimination laws. We are also subject to lawsuits and governmental investigations alleging violations of these laws and regulations, including purported class action lawsuits, which could result in significant liability, fines and penalties. The violation of other laws and regulations to which we are

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subject also can result in administrative, civil or criminal sanctions against us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business, as well as significant liability, fines and penalties. We currently devote significant resources to comply with applicable federal, state and local regulation of health, safety, environmental, zoning and land use regulations, and we may need to spend additional time, effort and money to keep our operations and existing or acquired facilities in compliance. In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able to satisfy them. Failure to comply with applicable laws and regulations may have an adverse effect on our operations, business, operating results, financial condition, cash flows and prospects.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, established the Consumer Financial Protection Bureau (the “CFPB”), a new independent federal agency funded by the U.S. Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress. Although automotive dealers are generally excluded, the Dodd-Frank Act has led to additional, indirect regulation of automotive dealers, in particular, their sale and marketing of finance and insurance products, through its regulation of automotive finance companies and other financial institutions. In March 2013, the CFPB issued supervisory guidance highlighting its concern that the practice of automotive dealers being compensated for arranging customer financing through discretionary markup of wholesale rates offered by financial institutions (“dealer markup”) results in a significant risk of pricing disparity in violation of Thethe Equal Credit Opportunity Act (the “ECOA”). The CFPB recommended that financial institutions under its jurisdiction take steps to ensure compliance with the ECOA, which may include imposing controls on dealer markup, monitoring and addressing the effects of dealer markup policies and eliminating dealer discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to certain groups of consumers. In addition, we believe that the Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, has increased and will continue to increase our annual employee health care costs that we fund, and has also increased our cost of compliance and compliance risk related to offering health care benefits.

Furthermore, we expect that new laws and regulations, particularly at the federal level, in other areas such as a proposed “border adjustment tax” on imported goods, may be enacted, which could also materially adversely impact our business. TheFor example, the labor policy of the prior administration led to increased unionization efforts for U.S. companies, which could lead to higher labor costs for our company,the Company, disrupt our store operations and adversely affect our results of operations.

Climate change legislation or regulations restricting emission of greenhouse gases could result in increased operating costs and reduced demand for the vehicles we sell.

The U.S. Environmental Protection Agency has adopted rules under existing provisions of the federal Clean Air Act that require (1) a reduction in emissions of greenhouse gases from motor vehicles, requirevehicles; (2) certain construction and operating permit reviews for greenhouse gas emissions from certain large stationary sources and require(3) monitoring and reporting of greenhouse gas emissions from specified sources on an annual basis. The adoption of any laws or regulations requiring significant increases in fuel economy requirements or new federal or state restrictions on emissions of greenhouse gases from our operations or on vehicles and automotive fuels in the United States could adversely affect demand for those vehicles and require us to incur costs to reduce emissions of greenhouse gases associated with our operations.

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Increasing competition among automotive retailers and the use of the internet reduces our profit margins on vehicle sales and related businesses.

Automobile

Automotive retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are larger and have greater financial and marketing resources than we do. Many of our competitors sell the same or similar makes and models of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to economies of scale or otherwise. We typically rely on advertising, merchandising, sales expertise, customer service reputation and dealership location to sell new vehicles. Our revenues and profitability could be materially adversely affected if certain state dealer franchise laws are relaxed to permit manufacturers to enter the retail market directly.

Our F&I business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition from various financial institutions and other third parties.

Moreover, customers are using the internet to compare pricing for vehicles and related F&I services, which may further reduce margins for new and used vehicles and profits for related F&I services. If internetinternet-based new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our business could be materially adversely affected. In addition, other dealership

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groups have aligned themselves with services offered on the internet or are investing heavily in the development of their own internet sales capabilities, which could materially adversely affect our business.

business, financial condition and the results of operations.

Our franchise and dealer agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.

We may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where we do not have a leading position.

The effect of companies entering into the automotive space may affect our ability to grow or maintain the business over the long-term.

long term.

Large and well-capitalized technologytechnology-focused companies have beguncontinued to enter into the automotive space in recent years. Companies such asincluding, but not limited to, Amazon, Apple, Google, Apple,Lyft, Tesla Uber and LyftUber may challenge the existing automotive manufacturing, retail sales, maintenance and repair, and transportation and retail models. For example, Tesla has been challenging state dealer franchise laws in many states with mixed results, but its business model hasand vehicles have been accepted by many consumers.consumers, even in states where dealer franchise laws appear to preclude Tesla vehicle sales. Although Tesla’s participation in the competitive landscape has had minimal impact on the overall retail automotive space thus far, these other large technologytechnology-based companies may continue to change consumers’ view on how automobiles should be manufactured, equipped, usedretailed, maintained and retailedutilized in the future. Because these companies have the ability to connect with each individual consumer easily through their existing or future technology platforms, we may ultimately be at a competitive disadvantage in marketing, selling, financing selling and servicing vehicles.

 In addition, certain automobile manufacturers have expressed interest in or begun selling directly to customers. The franchised dealer’s participation in that potential future transaction type is unclear and our operations and financial results may be negatively impacted if the role of franchised dealers diminishes.

Our dealers depend upon new vehicle sales and, therefore, their success depends in large part upon customer demand for the particular vehicles they carry.

The success of our dealerships depends in large part on the overall success of the vehicle lines they carry. New vehicle sales generate the majority of our total revenue and lead to sales of higher-margin products and services such as finance, insurance, vehicle protection products and other aftermarket products, and parts and service operations. Our new vehicle sales operations are comprised primarily of luxury and mid-line import brands, which exposes us to manufacturer concentration risks. Although our parts and service operations and used vehicle salesbusiness may serve to offset some of this risk, changes in automobile manufacturers’ vehicle models and customer demand for particular vehicles may have a material adverse effect on our business.

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Our business is dependent upon access to quality sources of used vehicle inventory. Our business sales and results of operations could be materially adversely affected by obstacles that prevent the efficient acquisition and liquidation of used vehicle inventory.
A reduction in the availability of, or access to, sources of desirable used vehicle inventory could have a material adverse effect on our business, sales and results of operations at both our franchised dealerships and EchoPark locations. Although the supply of desirable, high-quality used vehicle inventory has not historically been a material issue, there can be no assurance that this trend will continue in the markets which we operate, particularly those of our EchoPark locations which rely heavily upon access and availability to high-quality used vehicle inventory.
We obtain a significant percentage of our used vehicle inventory through our proprietary appraisal system as this sourcing outlet is generally more profitable and more convenient for our customers and potential customers. Accordingly, if we fail to make appraisal offers in line with broader market trade-in offer trends, or fail to recognize those trends, it could adversely affect our ability to acquire used vehicle inventory and increase the risk of loss of customer to our competitors. Our ability to source used vehicle inventory through our proprietary appraisal system could also be affected by competition and through third parties driving appraisal traffic to those competing dealers. Loss of sale, involving trades and insufficient levels of inventory could also force us to purchase a greater percentage of used vehicle inventory from third-party auctions, which is generally less profitable due to high bidding costs and additional costs associated with transporting the acquired used vehicles to our store locations. Our inability to source high-quality used vehicle inventory from third-party auctions could reduce the demand for our used vehicle inventory offerings. See “Item 1A. Risk Factors - Increasing competition among automotive retailers and the use of the internet reduces our profit margins on vehicle sales and related businesses” for further discussion.
Used vehicle inventory is subject to depreciation risk. Accordingly, if we develop excess inventory, the inability to liquidate such inventory at prices that allow us to meet desirable profit margins or to recover our costs could have a material adverse effect on our results of operations.

Our business will be harmed if overall consumer demand suffers from a severe or sustained downturn.

Our business is heavily dependent on consumer demand and preferences. Retail new vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent oncorrelated with changes in overall economic conditions, consumer confidence, the level of discretionary personal income and credit availability. Deterioration in any of these conditions may have a material adverse effect on our retail business, particularly sales of new and used automobiles.

In addition, severe or sustained changes in gasoline prices may lead to a shift in consumer buying patterns. Availability of preferred models may not exist in sufficient quantities to satisfy consumer demand and allow our stores to meet sales expectations.

A decline of available financing in the lending market may adversely affect our vehicle unit sales volume.

A significant portion of vehicle buyers particularly in the used car market, finance their purchases of automobiles. Sub-prime lenders have historically provided financing for consumers who, for a variety of reasons including poor credit histories and lack of down payment, do not have access to more traditional finance sources. In the event lenders tighten their credit standards or there is a decline in the availability of credit in the lending market, the ability of these consumers to purchase vehicles could be limited, which could have a material adverse effect on our business, revenues and profitability.

Our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably.

A significant portion of our new vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to risks of importing merchandise, including fluctuations in the relative values of currencies, import duties or tariffs, exchange controls, trade restrictions, work stoppages, and general political and socio-economicsocioeconomic conditions in other countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.

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prices, which may negatively affect affordability to consumers of certain new vehicles and reduce demand for certain vehicle makes and models.
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Natural disasters, and adverse weather and other events can disrupt our business.

Our dealerships are concentrated in certain states, and regions in the United States, including California, Colorado, Florida and Texas, in which actual or threatened natural disasters and severe weather events (such as earthquakes, wildfires, landslides, hail storms, floods hurricanes, earthquakes, fires and landslides)hurricanes) may disrupt our store operations, which may adversely impact our business, financial condition, results of operations and cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property values at store locations. Although we have substantial insurance, subject to certain deductibles, limitations and exclusions, we may be exposed to uninsured or underinsuredunder insured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

In addition, the automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters, and adverse weather and other events may affect the flow of inventory or parts to us or our manufacturing partners. For example, in early 2020, the outbreak of a novel coronavirus in Wuhan, China lead to quarantines of a significant number of Chinese cities and widespread disruptions to travel and economic activity in the region. At this time, it is unclear what effect, if any, the outbreak and resulting disruptions may have on the automotive manufacturing supply chain. Such disruptions could have a material adverse effect on our business, financial condition, results of operations or cash flows.


Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

We have invested in internal and external business applications to execute our strategy of employing technology to benefit our business. In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees. Although we have attempted to mitigate the cyber-security risk of both our internal and outsourced functions by implementing various cyber-security controls, we remain subject to cyber-security risks.

These cyber-security risks include:

•vulnerability to cyber-attack of our internal or externally hosted business applications;

•interruption of service or access to systems may affect our ability to deliver vehicles or complete transactions with customers;

•unauthorized access or theft of customer or employee personal confidential information, including financial information, or strategically sensitive data;

•disruption of communications (both internally and externally) that may affect the quality of information used to make informed business decisions; and

•damage to our reputation as a result of a breach in security that could affect the financial security of our customers.

Moreover, significant technology-related business functions of ours are outsourced, including:

•payroll and human resources management systems, including expense reimbursement management;

•customer relationship management, ecommercee-commerce hosting and marketing campaign management;

•dealer management, inventory management and financial reporting systems;

•consumer credit application management, fund transfers/ACH/online banking; and

•IP telephony and WAN/LAN administration (switch & router configuration).

Despite our considerable investment in security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties or damage to our reputation, and cause a loss of confidence in our services, which could materially adversely affect our competitive position, results of operations and financial condition.

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General Risks Related to Investing in Our Securities

Concentration of voting power and anti-takeover provisions of our charter, our bylaws, Delaware law and our franchise and dealer agreements may reduce the likelihood of a potential change of control from a third party. At the same time, such voting power concentration also could increase the likelihood of a change of control notwithstanding other factors.

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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

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Our common stock is divided into two classes with different voting rights. This dual class stock ownership allows the present holders of the Class B common stockCommon Stock to control us. Holders of Class A common stockCommon Stock have one vote per share on all matters. Holders of Class B common stockCommon Stock have 10 votes per share on all matters, except that they have only one vote per share on any transaction proposed or approved by theour Board of Directors or a Class B common stockholder or otherwise benefiting the Class B common stockholders constituting a:

•“going private” transaction;

•disposition of all or substantially all of our assets;

•transfer resulting in a change in the nature of our business; or

•merger or consolidation in which current holders of our common stock would own less than 50% of the common stock following such transaction.

The holders of Class B common stockCommon Stock (which include Mr. O. Bruton Smith, Sonic’s Executive Chairman and Director,a director, and an entity Mr. Smith and his family members and entities they control) currently hold less than a majority of our outstanding common stock, but a majority of our voting power. As a result, the holders of Class B common stockCommon Stock may be able to control fundamental corporate matters and transactions, subject to the above limitations. The concentration of voting power may also discourage, delay or prevent a change of control of us from a third party even if the action was favored by holders of Class A common stock.Common Stock. In addition, a sale or transfer of shares by one or more of the holders of Class B common stockCommon Stock could result in a change of control or put downward pressure on the market price of our Class A common stock.Common Stock. The perception among the public that these sales or transfers will occur could also contribute to a decline in the market price of our Class A common stock.

Common Stock.

Our charter and bylaws make it more difficult for our stockholders to take corporate actions at stockholders’ meetings. In addition, stock options, restricted stock and restricted stock units granted under the Sonic Automotive, Inc. 20042012 Stock Incentive Plan or the Sonic Automotive, Inc. 2012 Formula Restricted Stock Incentiveand Deferral Plan for Non-Employee Directors and other obligations become immediately exercisable or automatically vest upon a change in control. Delaware law also makes it difficult for stockholders who have recently acquired a large interest in a company to consummate a business combination transaction with the company against its directors’ wishes. Finally, restrictions imposed by our franchise and dealer agreements may impede or prevent any potential takeover bid. Our franchise and dealer agreements allow the manufacturers the right to terminate the agreements upon a change of control of our companythe Company and impose restrictions upon the transferability of any significant percentage of our stock to any one person or entity that may be unqualified, as defined by the manufacturer, to own one of its dealerships. The inability of a person or entity to qualify with one or more of our manufacturers may prevent or seriously impede a potential takeover bid. In addition, there may be provisions of our lending arrangements that create an event of default upon a change in control. These agreements, corporate governance documents and laws may have the effect of discouraging, delaying or preventing a change in control or preventing stockholders from realizing a premium on the sale of their shares if we were acquired.

The outcome of legal and administrative proceedings we are or may become involved in could have a material adverse effect on our future business, financial condition, results of operations, cash flows or prospects.

We are involved, and expect to continue to be involved, in numerousvarious legal and administrative proceedings arising out of the conduct of our business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified.

Although we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.

21
SONIC AUTOMOTIVE, INC.
RISK FACTORS

Our business may be adversely affected by claims alleging violations of laws and regulations in our advertising, sales and finance and insurance activities.

Our business is highly regulated. In the past several years, private plaintiffs and state attorneys general have increased their scrutiny of advertising, sales and finance and insurance activities in the sale and leasing of motor vehicles. The conduct of our business is subject to numerous federal, state and local laws and regulations regarding unfair, deceptive and/or fraudulent trade practices (including advertising, marketing, sales, insurance, repair and promotion practices), truth-in-lending, consumer leasing, fair credit practices, equal credit opportunity, privacy, insurance, motor vehicle finance, installment finance, closed-end credit, usury and other installment sales. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealers by

20

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchise or dealer agreements to conduct dealership operations.

Our business may be adversely affected by unfavorable conditions in our local markets, even if those conditions are not prominent nationally.

Our performance is subject to local economic, competitive, weather and other conditions prevailing in geographic areas where we operate. We may not be able to expand geographically and any geographic expansion may not adequately insulate us from the adverse effects of local or regional economic conditions. In addition, due to the provisions and terms contained in our franchise or dealer agreements or operating lease agreements, we may not be able to relocate a dealership operation to a more favorable location without incurring significant costs or penalties.

penalties, if permitted at all.

The loss of key personnel and limited management and personnel resources could adversely affect our operations and growth.

Our success depends to a significant degree upon the continued contributions of our management team, particularly our senior management, and service and sales personnel. Additionally, franchise or dealer agreements may require the prior approval of the applicable manufacturer before any change is made in dealership general managers. We do not have employment agreements with most members of our senior management team, our dealership general managers and other key dealership personnel. Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on our results of operations.

In addition, as we expand, we may need to hire additional managers. The market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managers could have a material adverse effect on our results of operations. In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions.

Potential conflicts of interest between us and our officers or directors could adversely affect our future performance.

Mr. O. Bruton Smith serves as the Executive Chairman of SMI.Speedway Motorsports and is also a director of most of Speedway Motorsports’ operating subsidiaries. Accordingly, we compete with SMISpeedway Motorsports for the management time of Mr. Smith.

We have in the past and will likely in the future enter into transactions with Mr. Smith, entities controlled by Mr. Smith and his family or our other affiliates. We believe that all of our existing arrangements with affiliates are as favorable to us as if the arrangements were negotiated between unaffiliated parties, although the majority of these transactions have neither been verified by third parties in that regard nor are likely to be so verified in the future. Potential conflicts of interest could arise in the future between us and our officers or directors in the enforcement, amendment or termination of arrangements existing between them.

We may be subject to substantial withdrawal liability assessments in the future related to a multiemployer pension plan to which certain of our dealerships make contributions pursuant to collective bargaining agreements.

Six

Five of our dealership subsidiaries in northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”) pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists (the “IAM”) and the International Brotherhood of Teamsters (the “IBT”). The AI Pension Plan is a “multiemployer plan” as defined under the Employee Retirement Income Security Act of 1974, as amended,
22
SONIC AUTOMOTIVE, INC.
RISK FACTORS

and our sixfive dealership subsidiaries are among approximately 149188 employers that are obligated to make contributions to the AI Pension Plan pursuant to collective bargaining agreements with the IAM, the IBT and other unions. In March 2008, the Board of Trustees of the AI Pension Plan notified participants, participating employers and local unions that the AI Pension Plan’s actuary, in accordance with the requirements of the federal Pension Protection Act of 2006, issued a certification that the AI Pension Plan was in critical status effective with the plan year commencing January 1, 2008. In conjunction with the AI Pension Plan’s critical status, the Board of Trustees of the AI Pension Plan implemented a requirement on all participating employers to increase employer contributions to the AI Pension Plan for a seven-year period commencingwhich commenced in 2013. As of April 2015, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in critical status for the plan year commencing January 1, 2015. According to publicly available information, in September 2016, the AI Pension Plan made a formal application for approval of suspension of benefits with the U.S. Treasury Department, which, if approved by the U.S. Treasury Department, would implementhave implemented a benefit reduction effective July 1, 2017 for participants in the AI Pension Plan. The filing included an Actuarial Certification of Plan Status as of January 1, 2016 that the AI Pension Plan previously filed with the U.S. Internal Revenue Service on March 30, 2016, which reported that the AI Pension Plan was in critical and declining status as of January 1, 2016 and further notified that the AI Pension Plan is making the scheduled progress in meeting the requirements of the plan’s previously-adopted Rehabilitation Plan.previously adopted rehabilitation plan. The September 2016 filing with the U.S. Treasury Department also included an Actuarial Certification of Plan Solvency as of July 1, 2016 with the actuarial firm’s projection that the proposed suspensions of benefits are reasonably estimated to enable the AI Pension Plan to avoid insolvency assuming the proposed

21

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

RISK FACTORS

suspensions of benefits continue indefinitelyindefinitely. In May 2017, the U.S. Treasury Department denied the application to suspend benefits but noted that it remains willing to discuss the issues presented in the September 2016 formal application for suspension of benefits. As of April 2019, the AI Pension Plan's actuary certified that the AI Pension Plan remained in critical status for the plan year commencing January 1, 2019 and the benefit accrual reduction becomes effective upon the proposed July 1, 2017 suspension effective date.is projected to become insolvent in 2031. Under applicable federal law, any employer contributing to a multiemployer pension plan that completely ceases participating in the plan while the plan is underfunded is subject to payment of such employer’s assessed share of the aggregate unfunded vested benefits of the plan. In certain circumstances, an employer can be assessed withdrawal liability for a partial withdrawal from a multiemployer pension plan. If any of these adverse events were to occur in the future, it could result in a substantial withdrawal liability assessment that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Tax positions may exist related to our tax filings that could be challenged by governmental agencies and result in higher income tax expenses and affect our overall liquidity if we are unable to successfully defend these tax positions.

The California Franchise Tax Board examined our 2006 – 2008 California combined

We are subject to audits by federal and state governmental income tax agencies on a continual basis. During the course of those audits, the agencies may disagree with or challenge tax positions taken on tax returns filed for Sonic and challengedits subsidiaries. As a result of these audits, the “Method of Filing” of Sonic Automotive, Inc., Sonic Financial Corporation, SPR, LLC (i.e., Speedway Motorsports, Inc.), Oil-Chem Research Corporation (a privately held entity)agencies may issue assessments and Sold, Inc. (a privately held entity) and asserted that all these companies should be filing one combined California tax return. In conjunction with this challenge, the State of California issued an assessment for eachpenalties based on their understanding of the three years totaling $7.4 million. During 2012underlying facts and 2013,circumstances. In the event we responded on behalf of Sonic Automotive, Inc. and noted thatare not able to arrive at an agreeable resolution, we disagreed with the adjustments, amounts, facts, legal analysis and conclusion listed in the State’s assessment. We believe the State of California’s argument does not have merit and we will vigorously fight this through both the State’s administrative levels and through judicial means. However, ifmay be forced to litigate these matters. If we are unsuccessful in litigation, our defense, it could result in a substantial tax charge that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

and financial position may be negatively impacted.

A change in historical experienceexperiences and/or assumptions used to estimate reserves could have a material impact on our earnings.

As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –- Use of Estimates and Critical Accounting Policies,” management relies on estimates in various areas of accounting and financial reporting. For example, our estimates for finance, insurance and service contractsF&I chargeback reserves and insurance reserves are based on historical experience and assumptions. Differences between actual results and our historical experiences and/or our assumptions could have a material impact on our earnings in the period of the change and in periods subsequent to the change.

Our internal control over financial reporting may not be effective.

If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could incur remediation costs, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls, or we could fail to meet our reporting obligations under SEC regulations and the terms of our debt agreements on a timely basis and there could be a material adverse effect on the price of our Class A common stock.

Common Stock.

Impairment of our goodwill could have a material adverse impact on our earnings.

Pursuant to applicable accounting pronouncements, we evaluate goodwill for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its
23
SONIC AUTOMOTIVE, INC.
RISK FACTORS

carrying amount. We describe the process for testing goodwill more thoroughly in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Use of Estimates and Critical Accounting Policies.” If we determine that the amount of our goodwill is impaired at any point in time, we are required to reduce goodwill on our balance sheet. If goodwill is impaired based on a future impairment test, we will be required to record a significant non-cash impairment charge that may also have a material adverse effect on our results of operations for the period in which the impairment of goodwill occurs. As of December 31, 2016,2019, our balance sheet reflected a carrying amount of approximately $472.4$475.8 million in goodwill.

22


24

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Item 1B.  Unresolved Staff Comments.

None.

25
SONIC AUTOMOTIVE, INC.
Item 2.  Properties.

Our principal executive offices are located at a property owned by us at 4401 Colwick Road, Charlotte, North Carolina 28211, and our telephone number at that location is (704) 566-2400.

Our dealerships are generally located along major U.S. or interstate highways. One of the principal factors we consider in evaluating a potential acquisition is its location. We prefer to acquire dealerships or build dealership facilities located along major thoroughfares, which can be easily visited by prospective customers.

We lease the majoritya significant number of the properties utilized by our dealership operations from affiliates of Capital Automotive REITReal Estate Services, Inc. and other individuals and entities. Under the terms of our franchise and dealer agreements, each of our dealerships must maintain an appropriate appearance and design of its dealership facility and is restricted in its ability to relocate. The properties utilized by our dealership operations that are owned by us or one of our subsidiaries are pledged as security for ourthe 2016 Credit Facilities and the 2019 Mortgage Facility or other mortgage financing arrangements. We believe that our facilities are adequate for our current needs.

Item 3.  Legal Proceedings.

We are involved, and expect to continue to be involved, in numerousvarious legal and administrative proceedings arising out of the conduct of our business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. Similarly, except as reflected in reserves weAn unfavorable resolution of one or more of these matters could have provided fora material adverse effect on our business, financial condition, results of operations, cash flows or prospects.
Included in other accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheets,sheet as of December 31, 2019 were approximately $1.2 million and $0.3 million, respectively, in reserves that we were holding for pending proceedings. Except as reflected in such reserves, we are currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings. An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. Included in other accrued liabilities and other long-term liabilities at December 31, 2016 was approximately $0.3 million and $0.2 million, respectively, in reserves that we were holding for pending proceedings.

Item 4.  Mine Safety Disclosures.

Not applicable.

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26

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

PART

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Class A common stockCommon Stock is currently traded on the NYSE under the symbol “SAH.” Our Class B common stockCommon Stock is not traded on a public market.

As of February 21, 2017,12, 2020, there were 32,855,85030,532,640 shares of our Class A common stockCommon Stock and 12,029,375 shares of our Class B common stockCommon Stock outstanding. As of February 21, 2017,12, 2020, there were 831,090 record holders of the Class A common stockCommon Stock and four record holders of the Class B common stock.Common Stock. The closing stock price for the Class A common stockCommon Stock on February 21, 201712, 2020 was $25.95.

$32.09.

Our Board of Directors approved four quarterly cash dividends on all outstanding shares of common stock totaling approximately $0.20$0.40 per share, during the year ended December 31, 2016$0.24 per share and $0.11 and $0.10$0.20 per share during the years ended December 31, 20152019, 2018 and 2014,2017, respectively. Subsequent to December 31, 2016,2019, our Board of Directors approved a cash dividend on all outstanding shares of common stock of $0.05$0.10 per share for stockholders of record on March 15, 201713, 2020 to be paid on April 14, 2017.15, 2020. The declaration and payment of any future dividend is subject to the business judgment of our Board of Directors, taking into consideration our historic and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, current economic environment and other factors considered by our Board of Directors to be relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors determines our future dividend policy. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –- Liquidity and Capital Resources” for additional discussion of dividends and for a description of restrictions on the payment of dividends.

The following table sets forth the high and low closing sales prices for our Class A common stock for each calendar quarter during the periods indicated as reported by the NYSE Composite Tape and the dividends declared during such periods:

 

 

Market Price

 

 

Cash Dividend

 

 

 

High

 

 

Low

 

 

Declared

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

24.00

 

 

$

16.90

 

 

$

0.050

 

Third Quarter

 

$

19.19

 

 

$

16.68

 

 

$

0.050

 

Second Quarter

 

$

19.04

 

 

$

16.15

 

 

$

0.050

 

First Quarter

 

$

22.35

 

 

$

15.91

 

 

$

0.050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Fourth Quarter

 

$

25.30

 

 

$

20.73

 

 

$

0.038

 

Third Quarter

 

$

24.78

 

 

$

20.35

 

 

$

0.025

 

Second Quarter

 

$

25.37

 

 

$

23.25

 

 

$

0.025

 

First Quarter

 

$

26.74

 

 

$

23.16

 

 

$

0.025

 


24

27

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

Issuer Purchases of Equity Securities

The following table sets forth information about the shares of Class A common stock we repurchased during the three months ended December 31, 2016:

 

 

Total

Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares Purchased

as Part of Publicly

Announced Plans

or Programs (1)

 

 

Approximate Dollar

Value of Shares

that May Yet Be

Purchased Under

the Plans or Programs

 

 

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October 2016

 

 

-

 

 

$

-

 

 

 

-

 

 

$

47,518

 

November 2016

 

 

147

 

 

$

16.90

 

 

 

147

 

 

$

45,033

 

December 2016

 

 

-

 

 

$

-

 

 

 

-

 

 

$

45,033

 

Total

 

 

147

 

 

 

 

 

 

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)On January 20, 2016, we announced that our Board of Directors had increased the dollar amount authorized for us to repurchase shares of our Class A common stock pursuant to our previously announced share repurchase program. Our share repurchase program does not have an expiration date and current remaining availability under the program is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

January 2016 authorization

 

 

$

100,000

 

Total active program repurchases prior to December 31, 2016

 

 

 

(54,967

)

Current remaining availability as of December 31, 2016

 

 

$

45,033

 

Subsequent to December 31, 2016, our Board of Directors authorized an additional $100.0 million to repurchase shares of our Class A common stock, increasing our remaining repurchase authorization to approximately $145.0 million before including the effect of any share repurchases subsequent to December 31, 2016.

Item 6. Selected Financial Data.

This selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.

25

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

We have accounted for all of our dealership acquisitions using the purchase method of accounting and, as a result, we do not include in our consolidated financial statements the results of operations of these dealerships prior to the date we acquired them. Our selected consolidated financial data reflects the results of operations and financial positionsposition of each of our dealerships acquired prior to December 31, 2016.2019. As a result of the effects of ourany acquisitions and other potential factors in the future, the historical consolidated financial information described in the selected consolidated financial data is not necessarily indicative of the results of our operations and financial position in the future or the results of our operations and financial position that would have resulted had such acquisitions occurred at the beginning of the periods presented in the selected consolidated financial data.

 

Year Ended December 31,

 

Year Ended December 31,

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

20192018201720162015

 

(In millions, except per share data)

 

(In millions, except per share data)

Income Statement Data (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data (1):

Total revenues

 

$

9,731.8

 

 

$

9,624.3

 

 

$

9,197.1

 

 

$

8,843.2

 

 

$

8,365.5

 

Total revenues$10,454.3  $9,951.6  $9,867.2  $9,731.8  $9,624.3  

Impairment charges

 

$

8.1

 

 

$

18.0

 

 

$

6.6

 

 

$

9.9

 

 

$

0.4

 

Impairment charges$20.8  $29.5  $9.4  $8.1  $18.0  

Income (loss) from continuing operations before taxes

 

$

155.2

 

 

$

145.2

 

 

$

161.7

 

 

$

129.0

 

 

$

141.2

 

Income (loss) from continuing operations before taxes$199.6  $75.3  $108.1  $155.2  $145.2  

Income (loss) from continuing operations

 

$

94.5

 

 

$

88.1

 

 

$

98.6

 

 

$

84.7

 

 

$

91.3

 

Income (loss) from continuing operations$144.5  $52.4  $94.2  $94.5  $88.1  

Basic earnings (loss) per share from continuing operations

 

$

2.07

 

 

$

1.74

 

 

$

1.89

 

 

$

1.60

 

 

$

1.68

 

Basic earnings (loss) per share from continuing operations$3.36  $1.23  $2.14  $2.07  $1.74  

Diluted earnings (loss) per share from continuing operations

 

$

2.06

 

 

$

1.73

 

 

$

1.87

 

 

$

1.59

 

 

$

1.56

 

Diluted earnings (loss) per share from continuing operations$3.31  $1.22  $2.12  $2.06  $1.73  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (1)(2):Balance Sheet Data (1)(2):

Total assets

 

$

3,639.3

 

 

$

3,562.4

 

 

$

3,168.3

 

 

$

3,036.8

 

 

$

2,762.7

 

Total assets$4,071.0  $3,796.8  $3,818.5  $3,639.3  $3,562.4  

Current maturities of long-term debt

 

$

43.0

 

 

$

33.4

 

 

$

30.8

 

 

$

18.2

 

 

$

18.6

 

Current maturities of long-term debt$69.9  $26.3  $61.3  $43.0  $33.4  

Total long-term debt

 

$

882.7

 

 

$

814.6

 

 

$

758.5

 

 

$

734.0

 

 

$

615.4

 

Total long-term liabilities (including long-term debt)

 

$

1,020.3

 

 

$

952.1

 

 

$

885.3

 

 

$

846.9

 

 

$

730.6

 

Total long-term debt (including current maturities of long-term debt)Total long-term debt (including current maturities of long-term debt)$706.9  $945.1  $1,024.7  $882.7  $814.6  
Total long-term liabilities (including current maturities of long-term debt)Total long-term liabilities (including current maturities of long-term debt)$1,130.0  $1,054.1  $1,138.2  $1,020.3  $952.1  

Cash dividends declared per common share

 

$

0.20

 

 

$

0.11

 

 

$

0.10

 

 

$

0.10

 

 

$

0.10

 

Cash dividends declared per common share$0.40  $0.24  $0.20  $0.20  $0.11  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) As discussed in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Notes 2, 5 and 6 to the accompanying consolidated financial statements, impairment charges, business combinations and dispositions and debt refinancings have had a material impact on our reported historical consolidated financial information.

 

 

 

26

(1) As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 2, “Business Acquisitions and Dispositions,” Note 4, “Property and Equipment,” Note 5, “Intangible Assets and Goodwill,” and Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements, impairment charges, gains and losses from business combinations and dispositions, debt refinancing charges and certain other charges have had a material impact on our reported historical consolidated financial information.
(2) As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting Pronouncements” and Note 16, “Leases” to the accompanying consolidated financial statements, the adoption of Accounting Standard Codification, Topic 842, “Leases” as of January 1, 2019 had a material effect on our consolidated balance sheet.

28

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Item

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and the related notes thereto and “Item 1A. Risk Factors” included 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, 20162019 classification of dealerships between continuing and discontinued operations in accordance with “Presentation of Financial Statements” in the Accounting Standards Codification (the “ASC”).

Except to the extent that differences among operating segments are material to an understanding For comparison and discussion of our business taken as a whole,results of operations for the year ended December 31, 2018 (“2018”) compared to our results of operations for the year ended December 31, 2017 (“2017”), please refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for 2018.

Unless otherwise noted, we present the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis.

To the extent that differences among reportable segments are material to an understanding of our business taken as a whole, the differences are discussed separately.

Unless otherwise noted, all discussion of increases or decreases are for the year ended December 31, 2019 (“2019”) compared to the same prior year period, as applicable.2018. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net are on a same store basis, except where otherwise noted. All continuing operationscurrently operating stores (both our franchised dealerships and EchoPark stores) are included within the same store group inas of the first full month following the first anniversary of the store’s opening or acquisition. During the year ended December 31, 2016,2019, we acquired three stand-alone used vehicle stores, opened two new manufacturer-awarded open point franchised dealerships and opened twoone new EchoPark® stores, store, which areis included in reported figuresamounts for 2016,2019, but areis excluded from same store reporting for all periods. During the year ended December 31, 2015,2018, we opened one EchoPark® store,new manufacturer-awarded open point franchised dealership, which is included in reported figuresamounts for all periods2019 and same store reporting for 2016 compared to 2015,2018, but is excluded from same store reporting for 2015 compared to 2014. During the year ended December 31, 2014, we acquired one mid-line import franchise and two luxury franchises, which are included in both reported figures and same store reporting for all periods. During the year ended December 31, 2014,In addition, during 2018, we opened twothree new EchoPark® stores, which are included in reported figuresamounts for all periods and two of which are included in same store reporting for 20162019 compared to 2015, but are excluded from same store reporting for 2015 compared to 2014.

2018.

We did not disposedisposed of anyone luxury franchised dealership franchises during the year ended December 31, 2016 and wenine mid-line import franchised dealerships in 2019, and had no franchises held for sale as of December 31, 2016.2019. We disposed of four franchises during the year ended December 31, 2015. We disposed of ninetwo luxury franchised dealerships and five mid-line import franchised dealerships, terminated one luxury franchised dealership franchises during the year ended December 31, 2014.and closed three EchoPark stores and one previously acquired pre-owned vehicle store in 2018. The results of operations of these disposed dealership franchises and closed stores are included in reported amounts below and in continuing operations on the accompanying consolidated statements of income for all periods presented. We elected to adopt and apply the guidance of Accounting Standards Update (“ASU”) 2014-08 beginning with our Quarterly Report on Form 10-Q for the period ended June 30, 2014. Dealership franchises disposed ofDispositions that occurred subsequent to March 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-08.for reclassification under U.S. GAAP. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for tabular disclosure of the effects of disposed storesdealership franchises that remain in continuing operations.

Overview

We are one of the largest automotive retailers in the United States (as measured by total revenue). As a result of the way we manage our business, we had two reportable segments as of December 31, 2016, we operated 116 franchises in 13 states (representing 25 different brands of cars2019: (1) the Franchised Dealerships Segment and light trucks) and 18 collision repair centers.(2) the EchoPark Segment. For management and operational reporting purposes, we group certain franchisesbusinesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2016,2019, we operated 107 franchised dealership86 stores and five EchoPark® stores.

As a result ofin the way we manage our business, as of December 31, 2016, we had two operating segments: Franchised Dealerships Segment and nine stores in the EchoPark®. Our franchised dealerships provide Segment. The Franchised Dealerships Segment consists of 99 new vehicle franchises (representing 21 different brands of cars and light trucks) and 15 collision repair centers in 12 states.

The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our customers. The EchoPark® provides the same services (excluding new vehicles Segment sells used cars and light trucks and arranges F&I product sales and manufacturer warranty repairs)for our customers in unique stand-alonepre-owned vehicle specialty retail locations. Our EchoPark® business operates independently from our franchised new and used dealership sales operations and offers customers an exciting shopping and buying experience.dealerships business. Sales operations in our first EchoPark® market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2016,2019, we had fivethree EchoPark® stores in operation in Colorado, four in Texas, one in North Carolina and one in California. By the end of 2020, we expect to open another store in Colorado in the first half of 2017. During the second quarter of 2016, we announced that we have begun the process of expandingthree additional EchoPark® operations into additional markets in North Carolina, South Carolina and Texas with operations in these markets expected to begin in 2017 and 2018. stores. We believe that the continued expansion of our EchoPark® business will provide long-term benefits to us,the Company, our stockholders and our guests. However,
Executive Summary
The U.S. retail automotive industry’s total new vehicle unit sales volume was approximately 17.0 million vehicles and 17.2 million vehicles in 2019 and 2018, respectively, according to the short term, this initiative may negatively impact our overall operating results as we allocate management and capital resources to this business.

27

Power Information Network (“PIN”) from J.D. Power.
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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

In the fourth quarter of 2013, we announced a new customer experience initiative known as “One Sonic-One Experience” (“OSOE”). This initiative includes several new processes and proprietary technologies from inventory management, electronic desking and pricing tools to a fully developed “customer-centric” Customer Relationship Management tool. We believe that the development of these processes and technologies 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 utilize these processes and technologies to allow our guests to complete a new or pre-owned vehicle sales transaction in less than an hour. During the latter half of 2014 and throughout 2015, we rolled out the OSOE initiative at our dealerships in Charlotte, North Carolina. During 2016, we introduced the technology component of the initiative to 14 additional stores in our Alabama, Tennessee and California markets. Additional market implementations will continue upon completion of migration activities and required market/brand specific technology modifications. We believe that our OSOE initiative will provide long-term benefits to us, our stockholders and guests. However, in the short term, this initiative may negatively impact our overall operating results as we allocate management and capital resources to this initiative.

Executive Summary

The U.S. retail automotive industry’s new vehicle unit sales volume increased 0.6% to 17.5 million vehicles in 2016, from 17.4 million vehicles in 2015, according to Bloomberg Financial Markets, via Stephens Inc.

For 2017,2020, analysts’ average industry expectation for the new vehicle seasonally adjusted annual rate of sales (“SAAR”) is approximately 17.4range from 16.0 million to 17.517.0 million vehicles, a decrease of 4.8% or flat, respectively, compared to the industry volume level in 2016.2019. We estimate the 20172020 new vehicle SAAR will be between 17.016.5 million and 17.517.0 million vehicles. Changes in consumer confidence, replacement demand as a result of natural disasters, availability of consumer financing, manufacturer inventory production levels or changes in the financial stability of theincentive levels from automotive manufacturers could cause actual 2017the 2020 new vehicle SAAR to vary from expectations. Many factors, such asincluding brand and geographic concentrations have caused our past results to differ from the industry’s overall trend, as well as the industry sales mix between retail and fleet new vehicle unit sales volume. volume, have caused our past results to differ from the industry’s overall trend. Our current operational goal focuses on growing our retail new vehicle sales, as opposed to fleet new vehicle sales, and, as a result, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle SAAR (which excludes fleet new vehicle sales). According to PIN from J.D. Power, industry retail new vehicle unit sales volume decreased 0.7%3.6%, to 14.113.5 million vehicles, in 2016,2019, from 14.214.0 million vehicles in 2015.

Our2018.

On September 16, 2019, the United Auto Workers union began a strike at General Motors’ manufacturing facilities. The strike ended on October 25, 2019 and had minimal impact on our operations. The strike did not limit the rate of new vehicle sales and Fixed Operations revenues at our General Motors franchises. As of December 31, 2019, we operated nine General Motors franchises.
As a result of the disposition, termination or closure of several franchised dealership stores since December 31, 2018, the change in consolidated reported amounts from period to period may not be indicative of the future operational or financial performance of our current group of operating stores. Unless otherwise noted, all discussion of increases or decreases are for 2019 compared to 2018. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a same store retail newbasis, except where otherwise noted. All currently operating stores (both our franchised dealerships and EchoPark stores) are included within the same store group as of the first full month following the first anniversary of the store’s opening or acquisition.
Franchised Dealerships Segment
New vehicle revenue was flat during 2016increased 4.2% in spite of2019, due to higher average selling prices and a 2.3% decrease0.6% increase in retail new vehicle unit sales volume. Retail newNew vehicle gross profit decreased 2.8% on lower retailincreased 1.0% in 2019 due to the 0.6% increase in new vehicle unit sales volume and lower retailan increase in new vehicle gross profit per unit, which decreased $11increased $8 per unit, or 0.6%0.4%, to $1,936$2,083 per unit. We believe that lower gross margins on retail new vehicles are a result of downward pressure on pricing due toWhile the availability of vehicle pricing information to consumers, increased competition for sales between similar branded dealerships and higher overall inventory levels. We anticipatelevels have resulted in downward pressure on new vehicle pricing, we believe that this trend may continue into 2017 and continue to impact new vehicle gross margins.

Our same storeprofit per unit has stabilized.

Retail used vehicle revenue increased 8.8% in 2019, driven by a 7.7% increase in retail used vehicle unit volume increased 2.0% during 2016, driving a 0.9% increase insales volume. Retail used vehicle revenue. Used vehicle gross profit decreased 3.0%, driven byincreased 5.8% in 2019, despite a decrease in retail used vehicle gross profit per unit of $69$23 per unit, or 4.9%1.8%, to $1,331$1,272 per unit. Our same store wholesale vehicle gross loss increaseddecreased approximately $0.1$6.8 million, or 1.3%66.0%, during 2016,2019, primarily driven by reaffirming our policy of wholesaling aged or undesirable units at auction in a 16.5% increase intimelier manner, thereby reducing the risk of wholesale unit volume. Our used vehicle inventories were elevated during much of 2016, due to a significant number of vehicles held ingross loss and improving inventory as a result of open safety recalls on certain models where the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale” vehicles increased our inventory on-handlevels and associated floor plan interest expense and negatively affected our retail used vehicle unit volume and gross profit per unit and may continue to negatively affect our dealerships’ results of operations until warranty replacement parts become available or as additional models and model years become included in these safety recalls. As of December 31, 2016, we had approximately 600 “stop-sale” used vehicles in our inventory, which increased our used vehicle days’ supply by approximately two days.quality. We generally focus on maintaining used vehicle inventory days’ supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. Adjusted for “stop-sale” vehicles, ourOur reported franchised dealerships used vehicle inventory days’ supply was approximately 3428 and 30 days as of December 31, 2016.

Our same store 2019 and 2018, respectively.

Fixed Operations revenue increased 4.3% during 2016, driving a 2.2% increase in5.0% and Fixed Operations gross profit impacted by a 100 basis point decrease in theincreased 6.0%. Fixed Operations gross margin rate. Our same storeincreased 50 basis points, to 48.9%, in 2019, driven primarily by higher levels of customer pay warrantyrevenue and internal, sublet and otheran increase in customer pay gross profit increased on higher activity levels in our service bays and increased used vehicle reconditioning volume during 2016, offset partially by a decrease in our wholesale parts business. 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. However, significant changes to the level of manufacturer recall and warranty activity could negatively impact our Fixed Operations results in the future.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Our same store margin.

F&I revenue increased 4.7% during 2016,10.3% in 2019, driven by a 5.1%an increase in F&I gross profit per retail unit. F&I gross profit per retail unit which increased $65$96 per unit, or 6.5%, to $1,346$1,583 per unit, offsetting the effect of flat combined retail new and used vehicle unit sales volume.in 2019. We believe that ourour proprietary software applications, playbook processes and customer-centric selling approach drove increases inenable us to optimize F&I gross profit per F&I contract and penetration rates (the number of F&I products sold per vehicle) across our finance contract and service contractF&I product lines. We believe that we will continue to improveincrease revenue in this area as we refine our processes, train our associates and continue to sell a high levelsvolume of retail new and used vehicles at our stores.

EchoPark Segment
Retail used vehicle revenue increased 43.0% and F&I revenue increased 61.9% in 2019, driven primarily by a 45.7% increase in retail used vehicle unit sales volume in 2019. Combined retail used vehicle and F&I gross profit per unit increased
30
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$279 per unit, or 14.6%, to $2,187 per unit in 2019. The growth in combined retail used vehicle and F&I gross profit per unit was primarily due to increased F&I product penetration rates.
Wholesale vehicle gross loss increased approximately $0.8 million, or 156.8%, in 2019, primarily due to a shift in our strategy around wholesaling vehicles that we obtain via trade-in from customers. We generally focus on maintaining used vehicle inventory days’ supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. Our used vehicle inventory days’ supply at our EchoPark stores was approximately 33 and 34 days as of December 31, 2019 and 2018, respectively.
Fixed Operations revenue increased approximately $8.4 million, or 58.2%, in 2019, primarily due to higher vehicle unit sales volume (and resulting inventory reconditioning requirements). Fixed Operations gross profit decreased approximately $2.6 million, or 141.6%, in 2019, due to a shift in inventory strategy during the second quarter of 2018 resulting in less internal reconditioning work per vehicle and the decision to no longer provide customer pay parts and service work at our EchoPark stores.
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 Revenues

 

Percentage of Total Revenues

 

Year Ended December 31,

 

Year Ended December 31,

 

2016

 

 

2015

 

 

2014

 

201920182017

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

New vehicles

 

 

53.8

%

 

 

54.7

%

 

 

55.7

%

New vehicles46.8 %50.0 %53.7 %

Used vehicles

 

 

26.0

%

 

 

26.1

%

 

 

25.1

%

Used vehicles33.4 %29.9 %26.6 %

Wholesale vehicles

 

 

2.2

%

 

 

1.6

%

 

 

1.8

%

Wholesale vehicles1.9 %2.2 %1.7 %

Parts, service and collision repair

 

 

14.5

%

 

 

14.2

%

 

 

14.1

%

Parts, service and collision repair13.3 %13.9 %14.4 %

Finance, insurance and other, net

 

 

3.5

%

 

 

3.4

%

 

 

3.3

%

Finance, insurance and other, net4.6 %4.1 %3.6 %

Total revenues

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Total revenues100.0 %100.0 %100.0 %

Cost of sales

 

 

85.3

%

 

 

85.3

%

 

 

85.1

%

Cost of sales85.5 %85.5 %85.2 %

Gross profit

 

 

14.7

%

 

 

14.7

%

 

 

14.9

%

Gross profit14.5 %14.5 %14.8 %

Selling, general and administrative expenses

 

 

11.4

%

 

 

11.5

%

 

 

11.6

%

Selling, general and administrative expenses10.5 %11.5 %11.6 %

Impairment charges

 

 

0.1

%

 

 

0.2

%

 

 

0.1

%

Impairment charges0.2 %0.3 %0.1 %

Depreciation and amortization

 

 

0.8

%

 

 

0.7

%

 

 

0.7

%

Depreciation and amortization0.9 %0.9 %1.0 %

Operating income (loss)

 

 

2.4

%

 

 

2.3

%

 

 

2.5

%

Operating income (loss)2.9 %1.8 %2.1 %

Interest expense, floor plan

 

 

0.3

%

 

 

0.2

%

 

 

0.2

%

Interest expense, floor plan0.5 %0.5 %0.4 %

Interest expense, other, net

 

 

0.5

%

 

 

0.6

%

 

 

0.6

%

Interest expense, other, net0.5 %0.5 %0.5 %

Other (income) expense, net

 

 

0.0

%

 

 

0.0

%

 

 

(0.1

%)

Other (income) expense, net0.1 %0.0 %0.1 %

Income (loss) from continuing operations before taxes

 

 

1.6

%

 

 

1.5

%

 

 

1.8

%

Income (loss) from continuing operations before taxes1.9 %0.8 %1.1 %

Provision for income taxes for continuing operations - (benefit) expense

 

 

0.6

%

 

 

0.6

%

 

 

0.7

%

Provision for income taxes for continuing operations - (benefit) expense0.5 %0.2 %0.1 %

Income (loss) from continuing operations

 

 

1.0

%

 

 

0.9

%

 

 

1.1

%

Income (loss) from continuing operations1.4 %0.5 %1.0 %


Results of Operations - Consolidated
New Vehicles

- Consolidated

New vehicle revenues include the sale of new vehicles to retail customers, (“retail new vehicles”), as well as the sale of fleet vehicles. New vehicle revenues and gross profit can be influenced by vehicle manufacturer incentives to consumers which(which vary from cash-back incentives to low interest rate financing, among other things. New vehicle revenuesthings), the availability of consumer credit and gross profit are also dependent on vehiclethe level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventory allocations to our dealerships to meet customer demands and the availability of consumer credit.demands. The automobile manufacturing industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand.demand, both within specific brands and in the industry as a whole. As an automotive retailer, we seek to mitigate the effects of this cyclicalitysales cycle by maintaining a diverse brand mix of dealerships. Our brand
31
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
diversity allows us to offer a broad range of products at a wide range of prices from lower priced, or lower-priced/economy vehicles to luxury vehicles.

The U.S. retail automotive industry’s new vehicle unit sales volume below reflects all brands marketed or sold in the United States. This industry sales volume includes brands we do not sell and markets in which we do not operate, therefore our new vehicle unit sales volume may not trend directly in line with the industry unit sales volume. We believe that the retail unit sales volumenew vehicle SAAR is a more meaningful metric for comparing our new vehiclesvehicle unit sales volume to the industry due to our minimal fleet vehicle business.

Year Ended December 31,
(In millions of vehicles)20192018% Change
U.S. industry volume - Retail (1)13.5  14.0  (3.6)% 
U.S. industry volume - Fleet3.5  3.2  9.4%  
U.S. industry volume - Total (1)17.0  17.2  (1.2)% 

29

(1) Source: PIN from J.D. Power
For 2020, analysts’ industry expectations for the new vehicle SAAR range from 16.0 million to 17.0 million vehicles, a decrease of 4.8% or flat, respectively, compared to the industry volume level in 2019.
The following table provides a reconciliation of consolidated reported basis and same store basis for total new vehicles (combined retail and fleet data):
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total new vehicle revenue:
Same store$4,691,795  $4,504,210  $187,585  4.2 %
Acquisitions, open points and dispositions197,376  469,887  (272,511) NM  
Total as reported$4,889,171  $4,974,097  $(84,926) (1.7)%
Total new vehicle gross profit:
Same store$224,526  $222,335  $2,191  1.0 %
Acquisitions, open points and dispositions8,561  19,167  (10,606) NM  
Total as reported$233,087  $241,502  $(8,415) (3.5)%
Total new vehicle unit sales:
Same store107,803  107,149  654  0.6 %
Acquisitions, open points and dispositions6,328  15,568  (9,240) NM
Total as reported114,131  122,717  (8,586) (7.0)%
NM = Not Meaningful
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

 

Year Ended December 31,

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

(In millions of vehicles)

 

2016

 

 

2015

 

 

% Change

 

 

2015

 

 

2014

 

 

% Change

 

U.S. industry volume - Retail (1)

 

 

14.1

 

 

 

14.2

 

 

 

(0.7

%)

 

 

14.2

 

 

 

13.6

 

 

 

4.4

%

U.S. industry volume - Fleet

 

 

3.4

 

 

 

3.2

 

 

 

6.3

%

 

 

3.2

 

 

 

2.8

 

 

 

14.3

%

U.S. industry volume  - Total (2)

 

 

17.5

 

 

 

17.4

 

 

 

0.6

%

 

 

17.4

 

 

 

16.4

 

 

 

6.1

%

(1)

Source: PIN from J.D. Power

(2)

Source: Bloomberg Financial Markets, via Stephens Inc.

According to public sources, average industry volume expectations for the year ending December 31, 2017Our consolidated reported new vehicle results (combined retail and fleet data) are approximately 17.4 million to 17.5 million vehicles, which would be virtually flat compared to the industry volume for the year ended December 31, 2016.

The following tables provide a reconciliation ofas follows:

Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue$4,889,171  $4,974,097  $(84,926) (1.7)%
Gross profit$233,087  $241,502  $(8,415) (3.5)%
Unit sales114,131  122,717  (8,586) (7.0)%
Revenue per unit$42,838  $40,533  $2,305  5.7 %
Gross profit per unit$2,042  $1,968  $74  3.8 %
Gross profit as a % of revenue4.8 %4.9 %(10) bps
Our consolidated same store basis and reported basis for total new vehicles (retailvehicle results (combined retail and fleet sales):

data) are as follows:

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

(In thousands, except unit data)

 

Total new vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

5,214,210

 

 

$

5,221,517

 

 

$

(7,307

)

 

 

(0.1

%)

Acquisitions and dispositions

 

20,295

 

 

 

43,884

 

 

 

(23,589

)

 

 

(53.8

%)

Total as reported

$

5,234,505

 

 

$

5,265,401

 

 

$

(30,896

)

 

 

(0.6

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total new vehicle gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

259,403

 

 

$

266,632

 

 

$

(7,229

)

 

 

(2.7

%)

Acquisitions and dispositions

 

1,191

 

 

 

1,297

 

 

 

(106

)

 

 

(8.2

%)

Total as reported

$

260,594

 

 

$

267,929

 

 

$

(7,335

)

 

 

(2.7

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total new vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

135,605

 

 

 

138,901

 

 

 

(3,296

)

 

 

(2.4

%)

Acquisitions and dispositions

 

398

 

 

 

1,100

 

 

 

(702

)

 

 

(63.8

%)

Total as reported

 

136,003

 

 

 

140,001

 

 

 

(3,998

)

 

 

(2.9

%)

Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue$4,691,795  $4,504,210  $187,585  4.2 %
Gross profit$224,526  $222,335  $2,191  1.0 %
Unit sales107,803  107,149  654  0.6 %
Revenue per unit$43,522  $42,037  $1,485  3.5 %
Gross profit per unit$2,083  $2,075  $8  0.4 %
Gross profit as a % of revenue4.8 %4.9 %(10) bps

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands, except unit data)

 

Total new vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

5,187,076

 

 

$

4,965,615

 

 

$

221,461

 

 

 

4.5

%

Acquisitions and dispositions

 

78,325

 

 

 

158,414

 

 

 

(80,089

)

 

 

(50.6

%)

Total as reported

$

5,265,401

 

 

$

5,124,029

 

 

$

141,372

 

 

 

2.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total new vehicle gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

264,124

 

 

$

280,264

 

 

$

(16,140

)

 

 

(5.8

%)

Acquisitions and dispositions

 

3,805

 

 

 

8,362

 

 

 

(4,557

)

 

 

(54.5

%)

Total as reported

$

267,929

 

 

$

288,626

 

 

$

(20,697

)

 

 

(7.2

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total new vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

137,884

 

 

 

134,062

 

 

 

3,822

 

 

 

2.9

%

Acquisitions and dispositions

 

2,117

 

 

 

4,355

 

 

 

(2,238

)

 

 

(51.4

%)

Total as reported

 

140,001

 

 

 

138,417

 

 

 

1,584

 

 

 

1.1

%

For further analysis of new vehicle results, see the tables and discussion under the heading “New Vehicles - Franchised Dealerships Segment” in the Franchised Dealerships Segment section below.

30

33

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Our reported new vehicle results (including fleet) are as follows:

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported new vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,234,505

 

 

$

5,265,401

 

 

$

(30,896

)

 

 

(0.6

%)

Gross profit

 

$

260,594

 

 

$

267,929

 

 

$

(7,335

)

 

 

(2.7

%)

Unit sales

 

 

136,003

 

 

 

140,001

 

 

 

(3,998

)

 

 

(2.9

%)

Revenue per unit

 

$

38,488

 

 

$

37,610

 

 

$

878

 

 

 

2.3

%

Gross profit per unit

 

$

1,916

 

 

$

1,914

 

 

$

2

 

 

 

0.1

%

Gross profit as a % of revenue

 

 

5.0

%

 

 

5.1

%

 

 

(10

)

 

bps

 

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported new vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,265,401

 

 

$

5,124,029

 

 

$

141,372

 

 

 

2.8

%

Gross profit

 

$

267,929

 

 

$

288,626

 

 

$

(20,697

)

 

 

(7.2

%)

Unit sales

 

 

140,001

 

 

 

138,417

 

 

 

1,584

 

 

 

1.1

%

Revenue per unit

 

$

37,610

 

 

$

37,019

 

 

$

591

 

 

 

1.6

%

Gross profit per unit

 

$

1,914

 

 

$

2,085

 

 

$

(171

)

 

 

(8.2

%)

Gross profit as a % of revenue

 

 

5.1

%

 

 

5.6

%

 

 

(50

)

 

bps

 

Our same store new vehicle results (including fleet) are as follows:

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same store new vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,214,210

 

 

$

5,221,517

 

 

$

(7,307

)

 

 

(0.1

%)

Gross profit

 

$

259,403

 

 

$

266,632

 

 

$

(7,229

)

 

 

(2.7

%)

Unit sales

 

 

135,605

 

 

 

138,901

 

 

 

(3,296

)

 

 

(2.4

%)

Revenue per unit

 

$

38,451

 

 

$

37,592

 

 

$

859

 

 

 

2.3

%

Gross profit per unit

 

$

1,913

 

 

$

1,920

 

 

$

(7

)

 

 

(0.4

%)

Gross profit as a % of revenue

 

 

5.0

%

 

 

5.1

%

 

 

(10

)

 

bps

 

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same store new vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,187,076

 

 

$

4,965,615

 

 

$

221,461

 

 

 

4.5

%

Gross profit

 

$

264,124

 

 

$

280,264

 

 

$

(16,140

)

 

 

(5.8

%)

Unit sales

 

 

137,884

 

 

 

134,062

 

 

 

3,822

 

 

 

2.9

%

Revenue per unit

 

$

37,619

 

 

$

37,040

 

 

$

579

 

 

 

1.6

%

Gross profit per unit

 

$

1,916

 

 

$

2,091

 

 

$

(175

)

 

 

(8.4

%)

Gross profit as a % of revenue

 

 

5.1

%

 

 

5.6

%

 

 

(50

)

 

bps

 

31

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

During the year ended December 31, 2016, we believe our retail new vehicle unit sales volume was negatively affected by “stop-sale” vehicles held in inventory as a result of open safety recalls on certain models where the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale” vehicles increased our inventory on-hand and associated floor plan interest expense and may continue to negatively affect our dealerships’ results of operations until warranty replacement parts become available or as additional models and model years are included in these safety recalls. As of December 31, 2016, we had approximately 400 “stop-sale” new vehicles in our inventory, which increased our new vehicle days’ supply by approximately one day.

2016 Compared to 2015

Excluding fleet sales, our retail new vehicle revenue was flat and our retail new vehicle unit sales volume decreased 2.3% driven primarily by decreases in retail new vehicle unit sales volume at our BMW, Toyota, Ford, MINI and Land Rover dealerships, offset partially by increases in retail new vehicle unit sales volume at our Honda dealerships. Our retail new vehicle gross profit decreased approximately $7.6 million, or 2.8%, primarily driven by decreases in retail new vehicle gross profit at our Land Rover, Ford, Porsche, General Motors (excluding Cadillac) and MINI dealerships, offset partially by increases in retail new vehicle gross profit at our Honda, Audi and Jaguar dealerships. Our gross profit per retail new unit decreased $11 per unit, or 0.6%, to $1,936 per unit, primarily driven by decreases in gross profit per retail new unit at our Land Rover, Porsche and Ford dealerships, offset partially by increases in gross profit per retail new unit at our Honda, Audi and Jaguar dealerships.

We believe the decline in retail new vehicle gross profit per unit is primarily due to downward pricing pressure in the Houston market as a result of a downturn in the energy sector and its effect on the local economy in addition to a higher supply of certain luxury models, including Land Rover, and downward pressure on pricing due to the availability of pricing information to consumers, increased competition for sales between similar branded dealerships and higher overall inventory levels. We anticipate that this trend may continue into 2017 and continue to impact new vehicle gross margins.

2015 Compared to 2014

Excluding fleet sales, our retail new vehicle revenue increased 4.9% and our retail new vehicle unit sales volume increased 3.4% driven primarily by increases in retail new vehicle unit sales volume at our Toyota, Honda, Land Rover and Mercedes dealerships, offset partially by decreases in retail new vehicle unit sales volume at our MINI, Volkswagen and Hyundai dealerships. Excluding fleet sales, our retail new vehicle gross profit decreased approximately $14.5 million, or 5.2%, primarily driven by decreases in retail new vehicle gross profit at our Toyota and Honda dealerships, offset partially by increases in retail new vehicle gross profit at our Land Rover and Lexus dealerships. Our gross profit per retail new unit decreased $176 per unit, or 8.3%, to $1,943 per unit, primarily driven by decreases in gross profit per retail new unit at our BMW, Audi, Toyota and Honda dealerships, offset partially by increases in gross profit per retail new unit at our Land Rover dealerships.

32

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Used Vehicles

- Consolidated

Used vehicle revenues are directly affected by a number of factors, including the pricing and 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.

The following tables providetable provides a reconciliation of same storeconsolidated reported basis and reportedsame store basis for retail used vehicles:

 

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

 

(In thousands, except unit data)

 

(In thousands, except unit data)

Total used vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle revenue:

Same store

 

$

2,502,267

 

 

$

2,481,090

 

 

$

21,177

 

 

 

0.9

%

Same store$3,191,404  $2,759,003  $432,401  15.7 %

Acquisitions and dispositions

 

 

30,855

 

 

 

30,934

 

 

 

(79

)

 

 

(0.3

%)

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions298,568  214,495  84,073  NM  

Total as reported

 

$

2,533,122

 

 

$

2,512,024

 

 

$

21,098

 

 

 

0.8

%

Total as reported$3,489,972  $2,973,498  $516,474  17.4 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle gross profit:

Same store

 

$

156,841

 

 

$

161,743

 

 

$

(4,902

)

 

 

(3.0

%)

Same store$131,695  $124,304  $7,391  5.9 %

Acquisitions and dispositions

 

 

1,744

 

 

 

299

 

 

 

1,445

 

 

 

483.3

%

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions15,701  18,684  (2,983) NM  

Total as reported

 

$

158,585

 

 

$

162,042

 

 

$

(3,457

)

 

 

(2.1

%)

Total as reported$147,396  $142,988  $4,408  3.1 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle unit sales:Total used vehicle unit sales:

Same store

 

 

117,814

 

 

 

115,549

 

 

 

2,265

 

 

 

2.0

%

Same store146,456  126,415  20,041  15.9 %

Acquisitions and dispositions

 

 

1,360

 

 

 

1,574

 

 

 

(214

)

 

 

(13.6

%)

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions15,693  13,190  2,503  NM  

Total as reported

 

 

119,174

 

 

 

117,123

 

 

 

2,051

 

 

 

1.8

%

Total as reported162,149  139,605  22,544  16.1 %

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except unit data)

 

Total used vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

$

2,394,454

 

 

$

2,211,513

 

 

$

182,941

 

 

 

8.3

%

Acquisitions and dispositions

 

 

117,570

 

 

 

98,734

 

 

 

18,836

 

 

 

19.1

%

Total as reported

 

$

2,512,024

 

 

$

2,310,247

 

 

$

201,777

 

 

 

8.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

$

155,448

 

 

$

152,355

 

 

$

3,093

 

 

 

2.0

%

Acquisitions and dispositions

 

 

6,594

 

 

 

4,891

 

 

 

1,703

 

 

 

34.8

%

Total as reported

 

$

162,042

 

 

$

157,246

 

 

$

4,796

 

 

 

3.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total used vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

 

111,212

 

 

 

105,161

 

 

 

6,051

 

 

 

5.8

%

Acquisitions and dispositions

 

 

5,911

 

 

 

4,952

 

 

 

959

 

 

 

19.4

%

Total as reported

 

 

117,123

 

 

 

110,113

 

 

 

7,010

 

 

 

6.4

%

NM = Not Meaningful 

33

Our consolidated reported retail used vehicle results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue$3,489,972  $2,973,498  $516,474  17.4 %
Gross profit$147,396  $142,988  $4,408  3.1 %
Unit sales162,149  139,605  22,544  16.1 %
Revenue per unit$21,523  $21,299  $224  1.1 %
Gross profit per unit$909  $1,024  $(115) (11.2)%
Gross profit as a % of revenue4.2 %4.8 %(60) bps
34

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Our reportedconsolidated same store retail used vehicle results are as follows:

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

Year Ended December 31,Better / (Worse)

 

(In thousands, except units and per unit data)

 

20192018Change% Change

Reported used vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except unit and per unit data)
Same store used vehicle:Same store used vehicle:

Revenue

 

$

2,533,122

 

 

$

2,512,024

 

 

$

21,098

 

 

 

0.8

%

Revenue$3,191,404  $2,759,003  $432,401  15.7 %

Gross profit

 

$

158,585

 

 

$

162,042

 

 

$

(3,457

)

 

 

(2.1

%)

Gross profit$131,695  $124,304  $7,391  5.9 %

Unit sales

 

 

119,174

 

 

 

117,123

 

 

 

2,051

 

 

 

1.8

%

Unit sales146,456  126,415  20,041  15.9 %

Revenue per unit

 

$

21,256

 

 

$

21,448

 

 

$

(192

)

 

 

(0.9

%)

Revenue per unit$21,791  $21,825  $(34) (0.2)%

Gross profit per unit

 

$

1,331

 

 

$

1,384

 

 

$

(53

)

 

 

(3.8

%)

Gross profit per unit$899  $983  $(84) (8.5)%

Gross profit as a % of revenue

 

 

6.3

%

 

 

6.5

%

 

 

(20

)

 

bps

 

Gross profit as a % of revenue4.1 %4.5 %(40) bps

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported used vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,512,024

 

 

$

2,310,247

 

 

$

201,777

 

 

 

8.7

%

Gross profit

 

$

162,042

 

 

$

157,246

 

 

$

4,796

 

 

 

3.0

%

Unit sales

 

 

117,123

 

 

 

110,113

 

 

 

7,010

 

 

 

6.4

%

Revenue per unit

 

$

21,448

 

 

$

20,981

 

 

$

467

 

 

 

2.2

%

Gross profit per unit

 

$

1,384

 

 

$

1,428

 

 

$

(44

)

 

 

(3.1

%)

Gross profit as a % of revenue

 

 

6.5

%

 

 

6.8

%

 

 

(30

)

 

bps

 

Our same storeFor further analysis of used vehicle results, see the tables and discussion under the headings “Used Vehicles - Franchised Dealerships Segment” and “Used Vehicles and F&I - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

Wholesale Vehicles - Consolidated
Wholesale vehicle revenues are as follows:

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same store used vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,502,267

 

 

$

2,481,090

 

 

$

21,177

 

 

 

0.9

%

Gross profit

 

$

156,841

 

 

$

161,743

 

 

$

(4,902

)

 

 

(3.0

%)

Unit sales

 

 

117,814

 

 

 

115,549

 

 

 

2,265

 

 

 

2.0

%

Revenue per unit

 

$

21,239

 

 

$

21,472

 

 

$

(233

)

 

 

(1.1

%)

Gross profit per unit

 

$

1,331

 

 

$

1,400

 

 

$

(69

)

 

 

(4.9

%)

Gross profit as a % of revenue

 

 

6.3

%

 

 

6.5

%

 

 

(20

)

 

bps

 

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same store used vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,394,454

 

 

$

2,211,513

 

 

$

182,941

 

 

 

8.3

%

Gross profit

 

$

155,448

 

 

$

152,355

 

 

$

3,093

 

 

 

2.0

%

Unit sales

 

 

111,212

 

 

 

105,161

 

 

 

6,051

 

 

 

5.8

%

Revenue per unit

 

$

21,531

 

 

$

21,030

 

 

$

501

 

 

 

2.4

%

Gross profit per unit

 

$

1,398

 

 

$

1,449

 

 

$

(51

)

 

 

(3.5

%)

Gross profit as a % of revenue

 

 

6.5

%

 

 

6.9

%

 

 

(40

)

 

bps

 

During the year ended December 31, 2016, manufacturer “stop-sale” instructions for safety recalls on certain models increased our inventory on-handaffected by approximately 1,600 vehicles at March 31, 2016 , approximately 4,200 vehicles at June 30, 2016, approximately 1,800 vehicles at September 30, 2016,retail new and approximately 600 vehicles at December 31, 2016, primarily in certain BMW, Honda and Mercedes models. We believe the “stop-sale” inventory negatively affected both our retail unit sales volume and

34

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

gross profit per unit during the year ended December 31, 2016 due to the inability to retail these units, which typically are in higher demand and can yield higher gross profit per unit.

In addition to the factors discussed below, incremental used vehicle unit sales volume during the year ended December 31, 2016 contributed to additional Fixed Operations gross profit (via reconditioning) and F&I gross profit as discussed under the headings “Parts, Service and Collision Repair (“Fixed Operations”)” and “Finance, Insurance and Other, Net (“F&I”)” below.

2016 Compared to 2015

Retail used vehicle revenue increased 0.9%, driven primarily by a 2.0% increase in retail used vehicle unit sales volume. This increase in retail used vehicle unit sales volume was primarily driven by increases in retail used vehicle unit sales volume at our BMW, Mercedes and Toyota dealerships and EchoPark® stores, offset partially by decreases in retail used vehicle unit sales volume at our Honda, Ford and General Motors (excluding Cadillac) dealerships. Retail used vehicle gross profit decreased approximately $4.9 million, or 3.0%, driven primarily by lower retail used vehicle unit sales volume and retail used vehicle gross profit per unit at our dealerships in the Houston market as a result of ongoing economic challenges in that market. Retail used vehicle gross profit per unit decreased $69 per unit, or 4.9%, driven primarily by lower retail used vehicle gross profit per unit at our Honda, General Motors (excluding Cadillac) and Mercedes dealerships. We believe that the decrease in overall retail used vehicle gross profit per unit is due in part to the positive effects of newly redesigned models in certain brands on new vehicle demand, which, in turn, put downward pricing pressure on similar pre-owned models in those brands. In addition, our Houston dealerships, particularly our General Motors (excluding Cadillac), Ford, Volkswagen and BMW dealerships, experienced significant decreases in retail used vehicle gross profit per unit based on both “stop-sale” vehicles in inventory and their exposure to the Houston energy market.

2015 Compared to 2014

Retail used vehicle revenue increased 8.3%, driven primarily by a 5.8% increase in retail used vehicle unit sales volume. This increase in retail used vehicle unit sales volume was primarily driven by increases in retail used vehicle unit sales volume at our BMW, Audi and Honda dealerships. Retail used vehicle gross profit increased approximately $3.1 million, or 2.0%, driven primarily by higher retail used vehicle unit sales volume, offset partially by a $51 per unit decrease in retail used vehicle gross profit per unit, driven primarily by lower retail used vehicle gross profit per unit at our Mercedes, Ford and Toyota dealerships. We believe that the decrease in overall retail used vehicle gross profit per unit is due in part to the positive effects of newly redesigned models in certain brands on new vehicle demand, which, in turn, put downward pricing pressure on similar pre-owned models in those brands. In addition, our Houston dealerships, particularly our Ford, General Motors (excluding Cadillac), BMW and Jaguar dealerships, experienced significant decreases in retail used vehicle gross profit per unit based on their exposure to the Houston energy market.

35

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Wholesale Vehicles

Wholesale vehicle revenues are highly correlated with new and used vehicle retail sales and the associated trade-in volume. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicle inventory.

inventory and minimize inventory carrying risks.


The following tables providetable provides a reconciliation of same storeconsolidated reported basis and reportedsame store basis for wholesale vehicles:

 

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

 

(In thousands, except unit data)

 

(In thousands, except unit data)

Total wholesale vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle revenue:

Same store

 

$

209,323

 

 

$

153,705

 

 

$

55,618

 

 

 

36.2

%

Same store$191,431  $195,743  $(4,312) (2.2)%

Acquisitions and dispositions

 

 

1,725

 

 

 

1,634

 

 

 

91

 

 

 

5.6

%

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions11,515  21,882  (10,367) NM

Total as reported

 

$

211,048

 

 

$

155,339

 

 

$

55,709

 

 

 

35.9

%

Total as reported$202,946  $217,625  $(14,679) (6.7)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle gross profit (loss):

Same store

 

$

(7,062

)

 

$

(6,969

)

 

$

(93

)

 

 

(1.3

%)

Same store$(3,808) $(9,792) $5,984  61.1 %

Acquisitions and dispositions

 

 

(254

)

 

 

(399

)

 

 

145

 

 

 

36.3

%

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions(624) (1,457) 833  NM

Total as reported

 

$

(7,316

)

 

$

(7,368

)

 

$

52

 

 

 

0.7

%

Total as reported$(4,432) $(11,249) $6,817  60.6 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle unit sales:Total wholesale vehicle unit sales:

Same store

 

 

34,798

 

 

 

29,869

 

 

 

4,929

 

 

 

16.5

%

Same store31,016  29,245  1,771  6.1 %

Acquisitions and dispositions

 

 

300

 

 

 

299

 

 

 

1

 

 

 

0.3

%

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions3,137  4,922  (1,785) NM

Total as reported

 

 

35,098

 

 

 

30,168

 

 

 

4,930

 

 

 

16.3

%

Total as reported34,153  34,167  (14) — %

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except unit data)

 

Total wholesale vehicle revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

$

149,330

 

 

$

160,343

 

 

$

(11,013

)

 

 

(6.9

%)

Acquisitions and dispositions

 

 

6,009

 

 

 

5,815

 

 

 

194

 

 

 

3.3

%

Total as reported

 

$

155,339

 

 

$

166,158

 

 

$

(10,819

)

 

 

(6.5

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

$

(6,689

)

 

$

(3,303

)

 

$

(3,386

)

 

 

(102.5

%)

Acquisitions and dispositions

 

 

(679

)

 

 

(313

)

 

 

(366

)

 

 

(116.9

%)

Total as reported

 

$

(7,368

)

 

$

(3,616

)

 

$

(3,752

)

 

 

(103.8

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale vehicle units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

 

 

28,723

 

 

 

28,968

 

 

 

(245

)

 

 

(0.8

%)

Acquisitions and dispositions

 

 

1,445

 

 

 

978

 

 

 

467

 

 

 

47.8

%

Total as reported

 

 

30,168

 

 

 

29,946

 

 

 

222

 

 

 

0.7

%

NM = Not Meaningful

36

35

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Our consolidated reported wholesale vehicle results are as follows:

 

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

 

(In thousands, except units and per unit data)

 

(In thousands, except unit and per unit data)

Reported wholesale vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported wholesale vehicle:

Revenue

 

$

211,048

 

 

$

155,339

 

 

$

55,709

 

 

 

35.9

%

Revenue$202,946  $217,625  $(14,679) (6.7)%

Gross profit (loss)

 

$

(7,316

)

 

$

(7,368

)

 

$

52

 

 

 

0.7

%

Gross profit (loss)$(4,432) $(11,249) $6,817  60.6 %

Unit sales

 

 

35,098

 

 

 

30,168

 

 

 

4,930

 

 

 

16.3

%

Unit sales34,153  34,167  (14) — %

Revenue per unit

 

$

6,013

 

 

$

5,149

 

 

$

864

 

 

 

16.8

%

Revenue per unit$5,942  $6,369  $(427) (6.7)%

Gross profit (loss) per unit

 

$

(208

)

 

$

(244

)

 

$

36

 

 

 

14.8

%

Gross profit (loss) per unit$(130) $(329) $199  60.5 %

Gross profit (loss) as a % of revenue

 

 

(3.5

%)

 

 

(4.7

%)

 

 

120

 

 

bps

 

Gross profit (loss) as a % of revenue(2.2)%(5.2)%300  bps

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported wholesale vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

155,339

 

 

$

166,158

 

 

$

(10,819

)

 

 

(6.5

%)

Gross profit (loss)

 

$

(7,368

)

 

$

(3,616

)

 

$

(3,752

)

 

 

(103.8

%)

Unit sales

 

 

30,168

 

 

 

29,946

 

 

 

222

 

 

 

0.7

%

Revenue per unit

 

$

5,149

 

 

$

5,549

 

 

$

(400

)

 

 

(7.2

%)

Gross profit (loss) per unit

 

$

(244

)

 

$

(121

)

 

$

(123

)

 

 

(101.7

%)

Gross profit (loss) as a % of revenue

 

 

(4.7

%)

 

 

(2.2

%)

 

 

(250

)

 

bps

 

Our consolidated same store wholesale vehicle results are as follows:

 

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

 

(In thousands, except units and per unit data)

 

(In thousands, except unit and per unit data)

Same store wholesale vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store wholesale vehicle:

Revenue

 

$

209,323

 

 

$

153,705

 

 

$

55,618

 

 

 

36.2

%

Revenue$191,431  $195,743  $(4,312) (2.2)%

Gross profit (loss)

 

$

(7,062

)

 

$

(6,969

)

 

$

(93

)

 

 

(1.3

%)

Gross profit (loss)$(3,808) $(9,792) $5,984  61.1 %

Unit sales

 

 

34,798

 

 

 

29,869

 

 

 

4,929

 

 

 

16.5

%

Unit sales31,016  29,245  1,771  6.1 %

Revenue per unit

 

$

6,015

 

 

$

5,146

 

 

$

869

 

 

 

16.9

%

Revenue per unit$6,172  $6,693  $(521) (7.8)%

Gross profit (loss) per unit

 

$

(203

)

 

$

(233

)

 

$

30

 

 

 

12.9

%

Gross profit (loss) per unit$(123) $(335) $212  63.3 %

Gross profit (loss) as a % of revenue

 

 

(3.4

%)

 

 

(4.5

%)

 

 

110

 

 

bps

 

Gross profit (loss) as a % of revenue(2.0)%(5.0)%300  bps

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same store wholesale vehicle:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

149,330

 

 

$

160,343

 

 

$

(11,013

)

 

 

(6.9

%)

Gross profit (loss)

 

$

(6,689

)

 

$

(3,303

)

 

$

(3,386

)

 

 

(102.5

%)

Unit sales

 

 

28,723

 

 

 

28,968

 

 

 

(245

)

 

 

(0.8

%)

Revenue per unit

 

$

5,199

 

 

$

5,535

 

 

$

(336

)

 

 

(6.1

%)

Gross profit (loss) per unit

 

$

(233

)

 

$

(114

)

 

$

(119

)

 

 

(104.4

%)

Gross profit (loss) as a % of revenue

 

 

(4.5

%)

 

 

(2.1

%)

 

 

(240

)

 

bps

 

37

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Wholesale vehicle revenue and unit sales volume fluctuations are typically a result of retail new and used vehicle unit sales volumes that generate additional trade-in vehicle volume that we are not always able to sell as retail used vehicles and choose to sell at auction. Whenever possible, we prefer to sell a used vehicle through retail channels rather than wholesaling the vehicle at auction.

2016 Compared to 2015

Wholesale vehicle revenue, gross loss and unit sales volume increased due to higher levelsFor further analysis of wholesale activity as a result of elevated inventory levels duringvehicle results, see the first quarter of 2016. Wholesale vehicle unit sales volume as a percentage of total used vehicle unit sales volume (retail plus wholesale) increased 230 basis points as we optimized our used vehicle inventory for current consumer demand heading intotables and discussion under the fourth quarter.

2015 Compared to 2014

Wholesale vehicle revenueheadings “Wholesale Vehicles - Franchised Dealerships Segment” and unit sales volume decreased, while wholesale gross loss increased due to changes“Wholesale Vehicles - EchoPark Segment” in auction pricesthe Franchised Dealerships Segment and vehicle model mix. Wholesale vehicle unit sales volume as a percentage of total used vehicle unit sales volume (retail plus wholesale) decreased 110 basis points.

Parts, Service and Collision Repair (“EchoPark Segment sections, respectively, below.

Fixed Operations”)

Operations - Consolidated

Parts, service and collision repair revenue consistsrevenues consist of customer requested repair orders (“customer pay”), warranty repairs, wholesale parts and internal, sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, manufacturer recalls, customer loyalty and manufacturer prepaid or manufacturer-paid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles that are later sold to customers. When that work is performed by one of our dealerships or stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.

We believe that, over time, vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualified technicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that, over the long term, we have the ability to continue to add service capacity at our dealerships and stores to further increase Fixed Operations revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-ownedCPO vehicles, should facilitate long-term growth in our serviceparts and partsservice business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future warranty relatedcustomer pay or warranty-related revenues.

The following tables provide a reconciliation of same store basis and reported basis for Fixed Operations:

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

(In thousands)

 

Total Fixed Operations revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

1,405,928

 

 

$

1,348,457

 

 

$

57,471

 

 

 

4.3

%

Acquisitions and dispositions

 

3,891

 

 

 

16,490

 

 

 

(12,599

)

 

 

(76.4

%)

Total as reported

$

1,409,819

 

 

$

1,364,947

 

 

$

44,872

 

 

 

3.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fixed Operations gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

671,573

 

 

$

657,374

 

 

$

14,199

 

 

 

2.2

%

Acquisitions and dispositions

 

2,553

 

 

 

8,047

 

 

 

(5,494

)

 

 

(68.3

%)

Total as reported

$

674,126

 

 

$

665,421

 

 

$

8,705

 

 

 

1.3

%

36

38

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands)

 

Total Fixed Operations revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

1,335,084

 

 

$

1,249,756

 

 

$

85,328

 

 

 

6.8

%

Acquisitions and dispositions

 

29,863

 

 

 

46,814

 

 

 

(16,951

)

 

 

(36.2

%)

Total as reported

$

1,364,947

 

 

$

1,296,570

 

 

$

68,377

 

 

 

5.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Fixed Operations gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

651,228

 

 

$

600,585

 

 

$

50,643

 

 

 

8.4

%

Acquisitions and dispositions

 

14,193

 

 

 

22,964

 

 

 

(8,771

)

 

 

(38.2

%)

Total as reported

$

665,421

 

 

$

623,549

 

 

$

41,872

 

 

 

6.7

%

The following table provides a reconciliation of consolidated reported basis and same store basis for Fixed Operations:

Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total Fixed Operations revenue:
Same store$1,350,858  $1,279,373  $71,485  5.6 %
Acquisitions, open points and dispositions44,445  101,514  (57,069) NM  
Total as reported$1,395,303  $1,380,887  $14,416  1.0 %
Total Fixed Operations gross profit:
Same store$648,544  $614,547  $33,997  5.5 %
Acquisitions, open points and dispositions19,471  52,814  (33,343) NM  
Total as reported$668,015  $667,361  $654  0.1 %
NM = Not Meaningful
Our consolidated reported Fixed Operations results are as follows:

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

(In thousands)

 

(In thousands)

Reported Fixed Operations:

 

 

Reported Fixed Operations:

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

Customer pay

$

582,557

 

 

$

577,265

 

 

$

5,292

 

 

 

0.9

%

Customer pay$561,422  $560,037  $1,385  0.2 %

Warranty

 

240,415

 

 

 

228,093

 

 

 

12,322

 

 

 

5.4

%

Warranty272,389  266,644  5,745  2.2 %

Wholesale parts

 

176,870

 

 

 

181,296

 

 

 

(4,426

)

 

 

(2.4

%)

Wholesale parts157,603  161,066  (3,463) (2.2)%

Internal, sublet and other

 

409,977

 

 

 

378,293

 

 

 

31,684

 

 

 

8.4

%

Internal, sublet and other403,889  393,140  10,749  2.7 %

Total revenue

$

1,409,819

 

 

$

1,364,947

 

 

$

44,872

 

 

 

3.3

%

Total revenue$1,395,303  $1,380,887  $14,416  1.0 %

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

Customer pay

$

314,791

 

 

$

316,026

 

 

$

(1,235

)

 

 

(0.4

%)

Customer pay$304,950  $299,617  $5,333  1.8 %

Warranty

 

129,924

 

 

 

126,571

 

 

 

3,353

 

 

 

2.6

%

Warranty150,984  150,746  238  0.2 %

Wholesale parts

 

30,754

 

 

 

32,249

 

 

 

(1,495

)

 

 

(4.6

%)

Wholesale parts27,187  27,746  (559) (2.0)%

Internal, sublet and other

 

198,657

 

 

 

190,575

 

 

 

8,082

 

 

 

4.2

%

Internal, sublet and other184,894  189,252  (4,358) (2.3)%

Total gross profit

$

674,126

 

 

$

665,421

 

 

$

8,705

 

 

 

1.3

%

Total gross profit$668,015  $667,361  $654  0.1 %

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

Customer pay

 

54.0

%

 

 

54.7

%

 

 

(70

)

 

bps

 

Customer pay54.3 %53.5 %80  bps

Warranty

 

54.0

%

 

 

55.5

%

 

 

(150

)

 

bps

 

Warranty55.4 %56.5 %(110) bps

Wholesale parts

 

17.4

%

 

 

17.8

%

 

 

(40

)

 

bps

 

Wholesale parts17.3 %17.2 %10  bps

Internal, sublet and other

 

48.5

%

 

 

50.4

%

 

 

(190

)

 

bps

 

Internal, sublet and other45.8 %48.1 %(230) bps

Total gross profit as a % of revenue

 

47.8

%

 

 

48.8

%

 

 

(100

)

 

bps

 

Total gross profit as a % of revenue47.9 %48.3 %(40) bps

39

37

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands)

 

Reported Fixed Operations:

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

$

577,265

 

 

$

565,144

 

 

$

12,121

 

 

 

2.1

%

Warranty

 

228,093

 

 

 

194,468

 

 

 

33,625

 

 

 

17.3

%

Wholesale parts

 

181,296

 

 

 

188,687

 

 

 

(7,391

)

 

 

(3.9

%)

Internal, sublet and other

 

378,293

 

 

 

348,271

 

 

 

30,022

 

 

 

8.6

%

Total revenue

$

1,364,947

 

 

$

1,296,570

 

 

$

68,377

 

 

 

5.3

%

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

$

316,026

 

 

$

309,885

 

 

$

6,141

 

 

 

2.0

%

Warranty

 

126,571

 

 

 

106,298

 

 

 

20,273

 

 

 

19.1

%

Wholesale parts

 

32,249

 

 

 

32,633

 

 

 

(384

)

 

 

(1.2

%)

Internal, sublet and other

 

190,575

 

 

 

174,733

 

 

 

15,842

 

 

 

9.1

%

Total gross profit

$

665,421

 

 

$

623,549

 

 

$

41,872

 

 

 

6.7

%

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

54.7

%

 

 

54.8

%

 

 

(10

)

 

bps

 

Warranty

 

55.5

%

 

 

54.7

%

 

 

80

 

 

bps

 

Wholesale parts

 

17.8

%

 

 

17.3

%

 

 

50

 

 

bps

 

Internal, sublet and other

 

50.4

%

 

 

50.2

%

 

 

20

 

 

bps

 

Total gross profit as a % of revenue

 

48.8

%

 

 

48.1

%

 

 

70

 

 

bps

 

Our consolidated same store Fixed Operations results are as follows:

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

(In thousands)

 

(In thousands)

Same store Fixed Operations:

 

 

Same store Fixed Operations:

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

Customer pay

$

581,642

 

 

$

569,924

 

 

$

11,718

 

 

 

2.1

%

Customer pay$547,826  $517,152  $30,674  5.9 %

Warranty

 

240,065

 

 

 

225,572

 

 

 

14,493

 

 

 

6.4

%

Warranty264,282  250,750  13,532  5.4 %

Wholesale parts

 

176,850

 

 

 

178,958

 

 

 

(2,108

)

 

 

(1.2

%)

Wholesale parts154,166  152,030  2,136  1.4 %

Internal, sublet and other

 

407,371

 

 

 

374,003

 

 

 

33,368

 

 

 

8.9

%

Internal, sublet and other384,584  359,441  25,143  7.0 %

Total revenue

$

1,405,928

 

 

$

1,348,457

 

 

$

57,471

 

 

 

4.3

%

Total revenue$1,350,858  $1,279,373  $71,485  5.6 %

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

Customer pay

$

314,342

 

 

$

311,926

 

 

$

2,416

 

 

 

0.8

%

Customer pay$297,916  $275,484  $22,432  8.1 %

Warranty

 

129,721

 

 

 

125,255

 

 

 

4,466

 

 

 

3.6

%

Warranty146,644  140,305  6,339  4.5 %

Wholesale parts

 

30,752

 

 

 

31,770

 

 

 

(1,018

)

 

 

(3.2

%)

Wholesale parts26,542  25,972  570  2.2 %

Internal, sublet and other

 

196,758

 

 

 

188,423

 

 

 

8,335

 

 

 

4.4

%

Internal, sublet and other177,442  172,786  4,656  2.7 %

Total gross profit

$

671,573

 

 

$

657,374

 

 

$

14,199

 

 

 

2.2

%

Total gross profit$648,544  $614,547  $33,997  5.5 %

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit as a % of revenue

Customer pay

 

54.0

%

 

 

54.7

%

 

 

(70

)

 

bps

 

Customer pay54.4 %53.3 %110  bps

Warranty

 

54.0

%

 

 

55.5

%

 

 

(150

)

 

bps

 

Warranty55.5 %56.0 %(50) bps

Wholesale parts

 

17.4

%

 

 

17.8

%

 

 

(40

)

 

bps

 

Wholesale parts17.2 %17.1 %10  bps

Internal, sublet and other

 

48.3

%

 

 

50.4

%

 

 

(210

)

 

bps

 

Internal, sublet and other46.1 %48.1 %(200) bps

Total gross profit as a % of revenue

 

47.8

%

 

 

48.8

%

 

 

(100

)

 

bps

 

Total gross profit as a % of revenue48.0 %48.0 %—  bps

40

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands)

 

Same store Fixed Operations:

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

$

566,939

 

 

$

545,349

 

 

$

21,590

 

 

 

4.0

%

Warranty

 

224,478

 

 

 

187,094

 

 

 

37,384

 

 

 

20.0

%

Wholesale parts

 

178,113

 

 

 

181,878

 

 

 

(3,765

)

 

 

(2.1

%)

Internal, sublet and other

 

365,554

 

 

 

335,435

 

 

 

30,119

 

 

 

9.0

%

Total revenue

$

1,335,084

 

 

$

1,249,756

 

 

$

85,328

 

 

 

6.8

%

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

$

310,297

 

 

$

299,075

 

 

$

11,222

 

 

 

3.8

%

Warranty

 

124,675

 

 

 

102,376

 

 

 

22,299

 

 

 

21.8

%

Wholesale parts

 

31,599

 

 

 

31,300

 

 

 

299

 

 

 

1.0

%

Internal, sublet and other

 

184,657

 

 

 

167,834

 

 

 

16,823

 

 

 

10.0

%

Total gross profit

$

651,228

 

 

$

600,585

 

 

$

50,643

 

 

 

8.4

%

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

54.7

%

 

 

54.8

%

 

 

(10

)

 

bps

 

Warranty

 

55.5

%

 

 

54.7

%

 

 

80

 

 

bps

 

Wholesale parts

 

17.7

%

 

 

17.2

%

 

 

50

 

 

bps

 

Internal, sublet and other

 

50.5

%

 

 

50.0

%

 

 

50

 

 

bps

 

Total gross profit as a % of revenue

 

48.8

%

 

 

48.1

%

 

 

70

 

 

bps

 

2016 Compared to 2015

OurFor further analysis of Fixed Operations customer pay revenue increased approximately $11.7 million, or 2.1%. Customer pay gross profit increased approximately $2.4 million, or 0.8%, driven primarily by increases at our Audi, Lexus, Hondaresults, see the tables and Land Rover dealerships, offset partially by a decrease at our BMW dealerships. Warranty revenue increased approximately $14.5 million, or 6.4%, driven primarily by increases at our Toyota, Hondadiscussion under the headings “Fixed Operations - Franchised Dealerships Segment” and Mercedes dealerships, offset partially by decreases at our Lexus and Volkswagen dealerships. Warranty gross profit increased approximately $4.5 million, or 3.6%, driven primarily by increases at our Toyota, Honda, Mercedes and Land Rover dealerships, offset partially by a decrease at our Lexus dealerships. Wholesale parts revenue decreased approximately $2.1 million, or 1.2%, and wholesale parts gross profit decreased approximately $1.0 million, or 3.2%, driven primarily by a decrease at our BMW dealerships. Internal, sublet and other revenue increased approximately $33.4 million, or 8.9%, and internal, sublet and other gross profit increased approximately $8.3 million, or 4.4%, on higher levels of used vehicle reconditioning and hail damage repairs.

The increase in Fixed“Fixed Operations revenue contributed approximately $28.0 million in additional gross profit, offset partially by a 100 basis point decrease- EchoPark Segment” in the gross margin rate, which reduced the revenue impact by approximately $13.8 million, for a net $14.2 million increase in Fixed Operations gross profit. The gross margin rate decreased primarily due to a customer pay gross margin decrease at our BMW dealershipsFranchised Dealerships Segment and a shift in revenue mix from higher margin customer pay work to lower margin sublet business as a result of hail damage repairs and cost associated with loaner vehicles related to customer vehicles subject to safety recalls.

2015 Compared to 2014

Our Fixed Operations customer pay revenue increased approximately $21.6 million, or 4.0%, and customer pay gross profit increased approximately $11.2 million, or 3.8%, driven primarily by increases at our BMW, Audi, Mercedes and Porsche dealerships. Warranty revenue increased approximately $37.4 million, or 20.0%, and warranty gross profit increased approximately $22.3 million, or 21.8%, led by increases in warranty activity at our BMW, Honda, Cadillac and Audi dealerships. Wholesale parts revenue decreased approximately $3.8 million, or 2.1%, and wholesale parts gross profit increased approximately $0.3 million, or 1.0%, driven primarily by higher levels of sales activity and gross margin rate at our Audi dealerships. Internal, sublet and other revenue increased approximately increased $30.1 million, or 9.0%, and internal, sublet and other gross profit increased approximately $16.8 million, or 10.0%, on higher levels of used vehicle reconditioning.

41

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The increase in Fixed Operations revenue contributed approximately $41.0 million in additional gross profit, which, combined with $9.6 million of additional gross profit due to a 70 basis point increase in the gross margin rate, resulted in a net $50.6 million increase in Fixed Operations gross profit. The gross margin rate increased primarily due to a shift in revenue mix away from lower margin wholesale parts to higher margin warranty work compared to the prior year.

Finance, Insurance and Other, Net (“EchoPark Segment sections, respectively, below.

F&I”)

&I - Consolidated

Finance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties and service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts.contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&I revenues are drivenaffected by the level of new and used vehicle unit sales, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives, and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.

Rate

38
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a reconciliation of consolidated reported basis and same store basis and for F&I:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Total F&I revenue:
Same store$426,441  $360,317  $66,124  18.4 %
Acquisitions, open points and dispositions50,510  45,206  5,304  NM
Total as reported$476,951  $405,523  $71,428  17.6 %
Total F&I gross profit per retail unit (excludes fleet):
Same store$1,695  $1,555  $140  9.0 %
Reported$1,743  $1,557  $186  11.9 %
Total combined new and used retail unit sales:
Same store251,585  231,711  19,874  8.6 %
Acquisitions, open points and dispositions22,021  28,713  (6,692) NM  
Total as reported273,606  260,424  13,182  5.1 %
NM = Not Meaningful
Our consolidated reported F&I results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported F&I:
Revenue$476,951  $405,523  $71,428  17.6 %
Unit sales273,606  260,424  13,182  5.1 %
Gross profit per retail unit (excludes fleet)$1,743  $1,557  $186  11.9 %
Our consolidated same store F&I results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store F&I:
Revenue$426,441  $360,317  $66,124  18.4 %
Unit sales251,585  231,711  19,874  8.6 %
Gross profit per retail unit (excludes fleet)$1,695  $1,555  $140  9.0 %
For further analysis of F&I results, see the tables and discussion under the headings “F&I - Franchised Dealerships Segment” and “Used Vehicles and F&I - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.

New Vehicles - Franchised Dealerships Segment
New vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues and gross profit can be influenced by vehicle manufacturer incentives to consumers (which vary from cash-back incentives to low interest rate financing, among other things), the availability of consumer credit and the level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventory allocations to our dealerships to meet customer demands. The automobile manufacturing industry is cyclical and historically has experienced periodic downturns characterized by oversupply and weak demand, both within specific brands and in the industry as a whole. As an automotive retailer, we seek to mitigate the effects of this sales cycle by maintaining a diverse brand mix of dealerships. Our brand
39
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
diversity allows us to offer a broad range of products at a wide range of prices from lower-priced/economy vehicles to luxury vehicles.
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for total new vehicles (combined retail and fleet data):
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total new vehicle revenue:
Same store$4,691,795  $4,504,210  $187,585  4.2 %
Acquisitions, open points and dispositions197,376  469,887  (667,263) NM
Total as reported$4,889,171  $4,974,097  $(84,926) (1.7)%
Total new vehicle gross profit:
Same store$224,526  $222,335  $2,191  1.0 %
Acquisitions, open points and dispositions8,561  19,167  (10,606) NM
Total as reported$233,087  $241,502  $(8,415) (3.5)%
Total new vehicle unit sales:
Same store107,803  107,149  654  0.6 %
Acquisitions, open points and dispositions6,328  15,568  (9,240) NM
Total as reported114,131  122,717  (8,586) (7.0)%
NM = Not Meaningful
Our Franchised Dealerships Segment reported new vehicle results (combined retail and fleet data) are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported new vehicle:
Revenue$4,889,171  $4,974,097  $(84,926) (1.7)%
Gross profit$233,087  $241,502  $(8,415) (3.5)%
Unit sales114,131  122,717  (8,586) (7.0)%
Revenue per unit$42,838  $40,533  $2,305  5.7 %
Gross profit per unit$2,042  $1,968  $74  3.8 %
Gross profit as a % of revenue4.8 %4.9 %(10) bps
Our Franchised Dealerships Segment same store new vehicle results (combined retail and fleet data) are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store new vehicle:
Revenue$4,691,795  $4,504,210  $187,585  4.2 %
Gross profit$224,526  $222,335  $2,191  1.0 %
Unit sales107,803  107,149  654  0.6 %
Revenue per unit$43,522  $42,037  $1,485  3.5 %
Gross profit per unit$2,083  $2,075  $8  0.4 %
Gross profit as a % of revenue4.8 %4.9 %(10) bps
40
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New vehicle revenue increased 4.2% and new vehicle unit sales volume increased 0.6%, driven primarily by increases in new vehicle unit sales volume at our BMW, Mercedes and Lexus dealerships, offset partially by decreases in new vehicle unit sales volume at our Ford, GM and Honda dealerships. New vehicle gross profit increased approximately $2.2 million, or 1.0%, primarily driven by increases in new vehicle gross profit at our Mercedes, BMW and Honda dealerships, offset partially by decreases in new vehicle gross profit at our Land Rover, Ford and Porsche dealerships. New vehicle gross profit per unit increased $8 per unit, or 0.4%, to $2,083 per unit, primarily driven by increases in new vehicle gross profit per unit at our Mercedes, BMW and Honda dealerships, offset partially by decreases in new vehicle gross profit per unit at our Land Rover, Ford and Porsche dealerships.
Our reported franchised dealerships new vehicle inventory days’ supply was approximately 53 and 59 days as of December 31, 2019 and 2018, respectively, in line with our seasonally-adjusted targets.
Used Vehicles - Franchised Dealerships Segment
Used vehicle revenues are directly affected by a number of factors, including the pricing and 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.
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for retail used vehicles:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total used vehicle revenue:
Same store$2,394,077  $2,201,382  $192,695  8.8 %
Acquisitions, open points and dispositions99,390  169,417  (70,027) NM
Total as reported$2,493,467  $2,370,799  $122,668  5.2 %
Total used vehicle gross profit:
Same store$136,077  $128,648  $7,429  5.8 %
Acquisitions, open points and dispositions11,464  19,702  (8,238) NM
Total as reported$147,541  $148,350  $(809) (0.5)%
Total used vehicle unit sales:
Same store106,998  99,335  7,663  7.7 %
Acquisitions, open points and dispositions5,631  10,833  (5,202) NM
Total as reported112,629  110,168  2,461  2.2 %
NM = Not Meaningful
Our Franchised Dealerships Segment reported retail used vehicle results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported used vehicle:
Revenue$2,493,467  $2,370,799  $122,668  5.2 %
Gross profit$147,541  $148,350  $(809) (0.5)%
Unit sales112,629  110,168  2,461  2.2 %
Revenue per unit$22,139  $21,520  $619  2.9 %
Gross profit per unit$1,310  $1,347  $(37) (2.7)%
Gross profit as a % of revenue5.9 %6.3 %(40) bps
41
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Franchised Dealerships Segment same store retail used vehicle results are as follows: 
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store used vehicle:
Revenue$2,394,077  $2,201,382  $192,695  8.8 %
Gross profit$136,077  $128,648  $7,429  5.8 %
Unit sales106,998  99,335  7,663  7.7 %
Revenue per unit$22,375  $22,161  $214  1.0 %
Gross profit per unit$1,272  $1,295  $(23) (1.8)%
Gross profit as a % of revenue5.7 %5.8 %(10) bps
Retail used vehicle revenue increased 8.8%, driven primarily by a 7.7% increase in retail used vehicle unit sales volume. This increase in retail used vehicle unit sales volume was primarily driven by increases in retail used vehicle unit sales volume at our Honda, BMW and Ford dealerships. Retail used vehicle gross profit increased approximately $7.4 million, or 5.8%, driven primarily by increases in retail used vehicle gross profit at our BMW, Toyota and Audi dealerships. Retail used vehicle gross profit per unit decreased $23 per unit, or 1.8%, to $1,272 per unit, in line with our target range.
Wholesale Vehicles - Franchised Dealerships Segment
Wholesale vehicle revenues are affected by retail new and used vehicle unit sales volume and the associated trade-in volume. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicle inventory and minimize inventory carrying risks.
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for wholesale vehicles:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store$172,985  $179,895  $(6,910) (3.8)%
Acquisitions, open points and dispositions7,035  17,288  (10,253) NM
Total as reported$180,020  $197,183  $(17,163) (8.7)%
Total wholesale vehicle gross profit (loss):
Same store$(3,508) $(10,320) $6,812  66.0 %
Acquisitions, open points and dispositions(592) (1,459) 867  NM
Total as reported$(4,100) $(11,779) $7,679  65.2 %
Total wholesale vehicle unit sales:
Same store26,341  26,583  (242) (0.9)%
Acquisitions, open points and dispositions2,038  4,032  (1,994) NM
Total as reported28,379  30,615  (2,236) (7.3)%
NM = Not Meaningful
42
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Franchised Dealerships Segment reported wholesale vehicle results are as follows: 
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue$180,020  $197,183  $(17,163) (8.7)%
Gross profit (loss)$(4,100) $(11,779) $7,679  65.2 %
Unit sales28,379  30,615  (2,236) (7.3)%
Revenue per unit$6,343  $6,441  $(98) (1.5)%
Gross profit (loss) per unit$(144) $(385) $241  62.6 %
Gross profit (loss) as a % of revenue(2.3)%(6.0)%370  bps
Our Franchised Dealerships Segment same store wholesale vehicle results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue$172,985  $179,895  $(6,910) (3.8)%
Gross profit (loss)$(3,508) $(10,320) $6,812  66.0 %
Unit sales26,341  26,583  (242) (0.9)%
Revenue per unit$6,567  $6,767  $(200) (3.0)%
Gross profit (loss) per unit$(133) $(388) $255  65.7 %
Gross profit (loss) as a % of revenue(2.0)%(5.7)%370  bps
Wholesale vehicle gross loss and wholesale vehicle gross loss per unit decreased by 66.0% and 65.7%, respectively, primarily driven by our policy of wholesaling aged or undesirable units at auction in a more timely manner, thereby reducing the risk of wholesale vehicle gross loss and improving inventory levels and quality. We generally focus on maintaining used vehicle inventory days’ supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. Our reported franchised dealerships used vehicle inventory days’ supply was approximately 28 and 30 days as of December 31, 2019 and 2018, respectively.
Fixed Operations - Franchised Dealerships Segment
Parts, service and collision repair revenues consist of customer pay repairs, warranty repairs, wholesale parts and internal, sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, manufacturer recalls, customer loyalty and prepaid or manufacturer-paid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning work performed on vehicles that are later sold to customers. When that work is performed by one of our dealerships, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.
We believe that, over time, vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualified technicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that, over the long term, we have the ability to continue to add service capacity at our dealerships to further increase revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. These factors, over the long term, combined with the extended manufacturer warranties on CPO vehicles, should facilitate long-term growth in our parts and service business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future customer pay or warranty-related revenues.
43
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for Fixed Operations:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total Fixed Operations revenue:
Same store$1,327,906  $1,264,865  $63,041  5.0 %
Acquisitions, open points and dispositions38,644  99,694  (61,050) NM
Total as reported$1,366,550  $1,364,559  $1,991  0.1 %
Total Fixed Operations gross profit:
Same store$649,312  $612,702  $36,610  6.0 %
Acquisitions, open points and dispositions19,646  52,515  (32,869) NM
Total as reported$668,958  $665,217  $3,741  0.6 %
NM = Not Meaningful
Our Franchised Dealerships Segment reported Fixed Operations results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Reported Fixed Operations:
Revenue
Customer pay$560,734  $559,027  $1,707  0.3 %
Warranty272,389  266,644  5,745  2.2 %
Wholesale parts157,603  161,066  (3,463) (2.2)%
Internal, sublet and other375,824  377,822  (1,998) (0.5)%
Total revenue$1,366,550  $1,364,559  $1,991  0.1 %
Gross profit
Customer pay$304,927  $299,360  $5,567  1.9 %
Warranty150,984  150,746  238  0.2 %
Wholesale parts27,187  27,746  (559) (2.0)%
Internal, sublet and other185,860  187,365  (1,505) (0.8)%
Total gross profit$668,958  $665,217  $3,741  0.6 %
Gross profit as a % of revenue
Customer pay54.4 %53.6 %80  bps
Warranty55.4 %56.5 %(110) bps
Wholesale parts17.3 %17.2 %10  bps
Internal, sublet and other49.5 %49.6 %(10) bps
Total gross profit as a % of revenue49.0 %48.7 %30  bps
44
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Franchised Dealerships Segment same store Fixed Operations results are as follows: 
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Same store Fixed Operations:
Revenue
Customer pay$547,344  $516,572  $30,772  6.0 %
Warranty264,282  250,750  13,532  5.4 %
Wholesale parts154,166  152,030  2,136  1.4 %
Internal, sublet and other362,114  345,513  16,601  4.8 %
Total revenue$1,327,906  $1,264,865  $63,041  5.0 %
Gross profit
Customer pay$297,894  $275,387  $22,507  8.2 %
Warranty146,644  140,305  6,339  4.5 %
Wholesale parts26,542  25,972  570  2.2 %
Internal, sublet and other178,232  171,038  7,194  4.2 %
Total gross profit$649,312  $612,702  $36,610  6.0 %
Gross profit as a % of revenue
Customer pay54.4 %53.3 %110  bps
Warranty55.5 %56.0 %(50) bps
Wholesale parts17.2 %17.1 %10  bps
Internal, sublet and other49.2 %49.5 %(30) bps
Total gross profit as a % of revenue48.9 %48.4 %50  bps
Fixed Operations revenue increased approximately $63.0 million, or 5.0%, and Fixed Operations gross profit increased approximately $36.6 million, or 6.0%, driven primarily by an increase in customer pay gross profit of approximately $22.5 million, or 8.2%, as a result of a strategic emphasis on maximizing growth opportunities in the customer pay business. In addition, warranty gross profit increased approximately $6.3 million, or 4.5%, driven primarily by our Honda, Audi and Mercedes dealerships. Warranty revenue typically represents approximately 20% of our Fixed Operations revenue. As such, significant changes to the level of manufacturer recall and warranty repair activity could create volatility in our Fixed Operations results in future periods.
F&I - Franchised Dealerships Segment
Finance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties and service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&I revenues are affected by the level of new and used vehicle unit sales, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.
Yield spread premium is another term for the commission earned by our dealerships for arranging vehicle financing for consumers. The amount of the commission could be zero, a flat fee or an actual spread between the interest rate charged to the consumer and the interest rate provided by the direct financing source (bank,(e.g., a commercial bank, credit union or manufacturers’manufacturer captive finance company). We have established caps on the potential rateyield spread premium our dealerships can earn with all
45
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
finance sources. We believe the rateyield spread premium we earn for arranging vehicle financing represents value to the consumer in numerous ways, including the following:

•lower cost, below-market financing is often available only from the manufacturers’ captives and franchised dealers;

•generally easy access to multiple high-quality lending sources;

•lease-financing alternatives are largely available only from manufacturers’ captives or other indirect lenders;

•customers with substandard credit frequently do not have direct access to potential sources of sub-prime financing; and

•customers with significant “negative equity” in their current vehicle (i.e., the customer’s current vehicle is worth less than the balance of their vehicle loan or lease obligation) frequently are unable to pay off the loan on their current vehicle and finance the purchase or lease of a replacement new or used vehicle without the assistance of a franchised dealer.

The following tables providetable provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis and reported basis for F&I:

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

(In thousands, except per unit data)

 

(In thousands, except unit and per unit data)

Total F&I revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total F&I revenue:

Same store

$

338,733

 

 

$

323,556

 

 

$

15,177

 

 

 

4.7

%

Same store$335,756  $304,293  $31,463  10.3 %

Acquisitions and dispositions

 

4,552

 

 

 

3,032

 

 

 

1,520

 

 

 

50.1

%

Acquisitions, open points and dispositionsAcquisitions, open points and dispositions27,361  40,521  (13,160) NM

Total as reported

$

343,285

 

 

$

326,588

 

 

$

16,697

 

 

 

5.1

%

Total as reported$363,117  $344,814  $18,303  5.3 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total F&I gross profit per retail unit (excludes fleet):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total F&I gross profit per retail unit (excludes fleet):

Same store

$

1,346

 

 

$

1,281

 

 

$

65

 

 

 

5.1

%

Same store$1,583  $1,487  $96  6.5 %

Total as reported

$

1,354

 

 

$

1,279

 

 

$

75

 

 

 

5.9

%

Total as reported$1,620  $1,493  $127  8.5 %
Total combined new and used retail unit sales:Total combined new and used retail unit sales:
Same storeSame store212,127  204,631  7,496  3.7 %
Acquisitions, open points and dispositionsAcquisitions, open points and dispositions11,959  26,356  (14,397) NM
Total as reportedTotal as reported224,086  230,987  (6,901) (3.0)%

NM = Not Meaningful

42

Our Franchised Dealerships Segment reported F&I results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported F&I:
Revenue$363,117  $344,814  $18,303  5.3 %
Total combined new and used retail unit sales224,086  230,987  (6,901) (3.0)%
Gross profit per retail unit (excludes fleet)$1,620  $1,493  $127  8.5 %
46

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands, except per unit data)

 

Total F&I revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

318,476

 

 

$

290,368

 

 

$

28,108

 

 

 

9.7

%

Acquisitions and dispositions

 

8,112

 

 

 

9,727

 

 

 

(1,615

)

 

 

(16.6

%)

Total as reported

$

326,588

 

 

$

300,095

 

 

$

26,493

 

 

 

8.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total F&I gross profit per retail unit (excludes fleet):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same store

$

1,288

 

 

$

1,227

 

 

$

61

 

 

 

5.0

%

Total as reported

$

1,279

 

 

$

1,220

 

 

$

59

 

 

 

4.8

%

Our Franchised Dealerships Segment same store F&I results are as follows:

2016 Compared to 2015

Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store F&I:
Revenue$335,756  $304,293  $31,463  10.3 %
Total combined new and used retail unit sales212,127  204,631  7,496  3.7 %
Gross profit per retail unit (excludes fleet)$1,583  $1,487  $96  6.5 %
F&I revenues increased approximately $15.2$31.5 million, or 4.7%10.3%, and F&I gross profit per retail unit increased $65$96 per unit, or 5.1%6.5%, to $1,346$1,583 per unit. The growth in F&I revenues and F&I gross profit is attributedper retail unit was due to improvedincreases in gross profit per contract and higher penetration rates on finance and service contracts as a result of increased visibility into performance drivers provided by our proprietary internal software applications, which more than offset the impact of lower combined retail new and used vehicle unit sales volume.across all F&I products. Finance contract revenuegross profit increased 2.5%12.5% primarily due to a 290 basis point7.0% increase in penetration rate and a 3.6% increase in finance contract volume, partially offset by a 1.0% decrease in gross profit per finance contract.  Finance contract, gross profit, particularly onas well as a 120-basis point increase in the combined new vehicles, may be under pressure in future periods if manufacturers offer attractive financing rates from their captiveand used vehicle finance affiliates because we tend to earn lower commissions under these programs.contract penetration rate. Service contract gross profit increased 12.3%11.5% due primarily to a 210 basis point increase in penetration rate, driving a 5.8% increase in service contract volume, in addition to a 6.2%5.2% increase in gross profit per service contract.contract, as well as a 70-basis point increase in the service contract penetration rate. Other aftermarket contract gross profit increased 0.3%13.9%, partially offsetdriven primarily by a 1,000 basis point decrease6.5% increase in penetration rate. Finance, service andgross profit per other aftermarket contract and a 430-basis point increase in the other aftermarket contract penetration rates were positively impacted by a strengthening economyrate.
Results of Operations - EchoPark Segment
EchoPark Segment same store results consist of the results of seven EchoPark stores, three in Colorado, three in Texas and increasing consumer confidence, combined with continued positiveone in North Carolina for 2019 compared to 2018. Due to the ongoing expansion of our EchoPark Segment, same store results may vary significantly from ourreported results due to stores that began operations in the last 13 months.
Used Vehicles and F&I playbook processes and customer-centric selling approach.

2015 Compared to 2014

F&I revenues increased approximately $28.1 million, or 9.7%, primarily due to- EchoPark Segment

Based on the way we manage the EchoPark Segment, our operating strategy focuses on maximizing total used-related gross profit (based on a 4.4% increase in totalcombination of retail (excluding fleet) new and used vehicle unit sales volume, front-end retail used vehicle gross profit per unit and F&I gross profit per unit) rather than realizing traditional levels of front-end retail used vehicle gross profit per unit. As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is a 5.0% increase incombined total gross profit per unit, which includes both front-end retail used vehicle gross profit and F&I gross profit per unit to $1,288 per unit. Finance contract gross profit increased 9.4%, due tosold.
See the discussion in Franchised Dealerships Segment Results of Operations for a 240discussion of the macro drivers of used vehicle revenues and F&I revenues.
The following table provides a reconciliation of EchoPark Segment reported basis point increase in penetration rate, driving an 8.0% increase in finance contract volume and a 1.3% increase in gross profit per finance contract. Service contract gross profit increased 7.0%, due to a 100same store basis point increase in penetration rate, driving a 7.6% increase in service contract volume, partially offset by a 0.6% decrease in gross profit per service contract. Other aftermarket contract gross profit increased 12.1% due to a 440 basis point increase in penetration rate, driving a 7.8% increase in aftermarket contract volume and a 3.9% increase in gross profit per aftermarket contract.

43

for retail used vehicles:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total used vehicle revenue:
Same store$797,327  $557,620  $239,707  43.0 %
Store openings and closures199,178  45,079  154,099  NM
Total as reported$996,505  $602,699  $393,806  65.3 %
Total used vehicle gross profit (loss):
Same store$(4,382) $(4,344) $(38) (0.9)%
Store openings and closures4,236  (1,018) 5,254  NM
Total as reported$(146) $(5,362) $5,216  (97.3)%
Total used vehicle unit sales:
Same store39,458  27,080  12,378  45.7 %
Store openings and closures10,062  2,357  7,705  NM
Total as reported49,520  29,437  20,083  68.2 %
47

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

NM = Not Meaningful
The following table provides a reconciliation of EchoPark Segment reported basis and same store basis for F&I:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total F&I revenue:
Same store$90,684  $56,023  $34,661  61.9 %
Store openings and closures23,150  4,686  18,464  NM
Total as reported$113,834  $60,709  $53,125  87.5 %
NM = Not Meaningful
Our EchoPark Segment reported retail used vehicle and F&I results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported used vehicle and F&I:
Used vehicle revenue$996,505  $602,699  $393,806  65.3 %
Used vehicle gross profit (loss)$(146) $(5,362) $5,216  97.3 %
Used vehicle unit sales49,520  29,437  20,083  68.2 %
Used vehicle revenue per unit$20,123  $20,474  $(351) (1.7)%
F&I revenue$113,834  $60,709  $53,125  87.5 %
Combined used vehicle gross profit and F&I revenue$113,688  $55,347  $58,341  105.4 %
Total used vehicle and F&I gross profit per unit$2,296  $1,880  $416  22.1 %
Our EchoPark Segment same store retail used vehicle and F&I results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store used vehicle and F&I:
Used vehicle revenue$797,327  $557,620  $239,707  43.0 %
Used vehicle gross profit (loss)$(4,382) $(4,344) $(38) (0.9)%
Used vehicle unit sales39,458  27,080  12,378  45.7 %
Used vehicle revenue per unit$20,207  $20,592  $(385) (1.9)%
F&I revenue$90,684  $56,023  $34,661  61.9 %
Combined used vehicle gross profit and F&I revenue$86,302  $51,679  $34,623  67.0 %
Total used vehicle and F&I gross profit per unit$2,187  $1,908  $279  14.6 %
Retail used vehicle revenue increased approximately $239.7 million, or 43.0%, and F&I revenue increased approximately $34.7 million, or 61.9%. Combined used vehicle gross profit and F&I revenue increased approximately $34.6 million, or 67.0%, due primarily to a 45.7% increase in retail used vehicle unit sales volume. Combined retail used vehicle and F&I gross profit per unit increased approximately $279 per unit, or 14.6%, to $2,187 per unit, driven primarily by higher penetration rates across all F&I products. Finance contract gross profit increased 49.0%, primarily due to a 420-basis point increase in the finance contract penetration rate. Service contract gross profit increased 65.0% due primarily to a 5.9% increase in gross profit per service contract and a 350-basis point increase in the service contract penetration rate. Other aftermarket contract gross profit increased 55.4%, driven primarily by a 1,050-basis point increase in the other aftermarket contract penetration rate. F&I penetration rates are generally higher in our EchoPark Segment than for used vehicle sales in our Franchised Dealerships Segment.
48
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Vehicles - EchoPark Segment
See the discussion in Franchised Dealerships Segment Results

of Operations for a discussion of the macro drivers of wholesale vehicle revenues.

The following table provides a reconciliation of EchoPark Segment reported basis and same store basis for wholesale vehicles:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Total wholesale vehicle revenue:
Same store$18,446  $15,848  $2,598  16.4 %
Store openings and closures4,480  4,594  (114) NM
Total as reported$22,926  $20,442  $2,484  12.2 %
Total wholesale vehicle gross profit (loss):
Same store$(300) $528  $(828) (156.8)%
Store openings and closures(32) 2  (34) NM
Total as reported$(332) $530  $(862) (162.6)%
Total wholesale vehicle unit sales:
Same store4,675  2,662  2,013  75.6 %
Store openings and closures1,099  890  209  NM
Total as reported5,774  3,552  2,222  62.6 %
NM = Not Meaningful
Our EchoPark Segment reported wholesale vehicle results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Reported wholesale vehicle:
Revenue$22,926  $20,442  $2,484  12.2 %
Gross profit (loss)$(332) $530  $(862) (162.6)%
Unit sales5,774  3,552  2,222  62.6 %
Revenue per unit$3,971  $5,755  $(1,784) (31.0)%
Gross profit (loss) per unit$(57) $149  $(206) (138.3)%
Gross profit (loss) as a % of revenue(1.4)%2.6 %(400) bps
Our EchoPark Segment same store wholesale vehicle results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit and per unit data)
Same store wholesale vehicle:
Revenue$18,446  $15,848  $2,598  16.4 %
Gross profit (loss)$(300) $528  $(828) (156.8)%
Unit sales4,675  2,662  2,013  75.6 %
Revenue per unit$3,946  $5,953  $(2,007) (33.7)%
Gross profit (loss) per unit$(64) $198  $(262) (132.3)%
Gross profit (loss) as a % of revenue(1.6)%3.3 %(490) bps
49
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale vehicle revenue and wholesale vehicle unit sales volume increased by 16.4% and 75.6%, respectively, while wholesale gross loss and wholesale vehicle gross loss per unit increased by 156.8% and 132.3%, respectively. Wholesale vehicle gross loss increased as a result of the evolution of our customer trade-in vehicle appraisal strategy, which has enabled us to trade for more customer vehicles. Given EchoPark’s retail inventory mix, the majority of vehicles acquired from customers on trade-ins cannot ultimately be sold as retail at our EchoPark stores and are subsequently sold at auction, affecting our wholesale gross profit (loss). However, a successful acquisition of a customer’s trade-in vehicle often facilitates a retail used vehicle sale transaction that otherwise may not have occurred, driving higher overall gross profit. Our overall EchoPark inventory acquisition and pricing strategy reduces the risk of aged inventory that must be sold at auction (which would typically have a higher gross loss per unit) and increases the volume of trade-ins that we obtain from customers. We generally focus on maintaining used vehicle inventory days’ supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. Our used vehicle inventory days’ supply at our EchoPark stores was approximately 33 and 34 days as of December 31, 2019 and 2018, respectively.
Fixed Operations - EchoPark Segment
Parts, service and collision repair revenues primarily consist of internal, sublet and other work related to inventory preparation and reconditioning performed on vehicles that are later sold to customers. When that work is performed by one of our stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet. Our EchoPark stores do not currently perform warranty or customer pay repairs or maintenance work.
The following table provides a reconciliation of EchoPark Segment reported basis and same store basis for Fixed Operations:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total Fixed Operations revenue:
Same store$22,952  $14,508  $8,444  58.2 %
Store openings and closures5,801  1,820  3,981  NM
Total as reported$28,753  $16,328  $12,425  76.1 %
Total Fixed Operations gross profit:
Same store$(768) $1,845  $(2,613) (141.6)%
Store openings and closures(175) 299  (474) NM
Total as reported$(943) $2,144  $(3,087) (144.0)%
NM = Not Meaningful
Our EchoPark Segment reported Fixed Operations results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total reported Fixed Operations:
Revenue$28,753  $16,328  $12,425  76.1 %
Gross profit (loss)$(943) $2,144  $(3,087) (144.0)%
Gross profit (loss) as a % of revenue(3.3)%13.1 %(1,640) bps  
50
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our EchoPark Segment same store Fixed Operations results are as follows:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Total same store Fixed Operations:
Revenue$22,952  $14,508  $8,444  58.2 %
Gross profit (loss)$(768) $1,845  $(2,613) (141.6)%
Gross profit (loss) as a % of revenue(3.3)%12.7 %(1,600) bps  
Fixed Operations revenue increased approximately $8.4 million, or 58.2%, in 2019, primarily due to higher vehicle unit sales volume (and resulting inventory reconditioning requirements). Fixed Operations gross profit decreased approximately $2.6 million, or 141.6%, in 2019, due to a shift in inventory strategy during the second quarter of 2018 resulting in less internal reconditioning work per vehicle and the decision to no longer provide customer pay parts and service work at our EchoPark stores.
Segment Results Summary
In the following table of financial data, total segment income of the operatingreportable segments is reconciled to consolidated operating income less floor plan interest expense.

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

 

(In thousands, except unit data)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

9,602,562

 

 

$

9,547,236

 

 

$

55,326

 

 

 

0.6

%

EchoPark®

 

 

129,217

 

 

 

77,063

 

 

 

52,154

 

 

 

67.7

%

Total consolidated revenues

 

$

9,731,779

 

 

$

9,624,299

 

 

$

107,480

 

 

 

1.1

%

Segment income (loss) (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

217,306

 

 

$

213,224

 

 

$

4,082

 

 

 

1.9

%

EchoPark®

 

 

(12,113

)

 

 

(17,257

)

 

 

5,144

 

 

 

29.8

%

Total segment income (loss)

 

 

205,193

 

 

 

195,967

 

 

 

9,226

 

 

 

4.7

%

Interest expense, other, net

 

 

(50,106

)

 

 

(50,910

)

 

 

804

 

 

 

1.6

%

Other income (expense), net

 

 

125

 

 

 

99

 

 

 

26

 

 

 

26.3

%

Income (loss) from continuing operations before taxes

 

$

155,212

 

 

$

145,156

 

 

$

10,056

 

 

 

6.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail new and used vehicle unit sales volume:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

 

248,597

 

 

 

252,027

 

 

 

(3,430

)

 

 

(1.4

%)

EchoPark®

 

 

4,865

 

 

 

3,225

 

 

 

1,640

 

 

 

50.9

%

Total retail new and used vehicle unit sales volume

 

 

253,462

 

 

 

255,252

 

 

 

(1,790

)

 

 

(0.7

%)

(loss) from continuing operations before taxes and impairment charges. See above for tables and discussion of results by reportable segment.

(1)

Segment income (loss) for each segment is defined as operating income less floor plan interest expense.

Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands, except unit data)
Franchised Dealerships Segment revenues
New vehicles$4,889,171  $4,974,097  $(84,926) (1.7)%
Used vehicles2,493,467  2,370,799  122,668  5.2 %
Wholesale vehicles180,020  197,184  (17,164) (8.7)%
Parts, service and collision repair1,366,550  1,364,559  1,991  0.1 %
Finance, insurance and other, net363,117  344,814  18,303  5.3 %
Franchised Dealerships Segment revenues$9,292,325  $9,251,453  $40,872  0.4 %
EchoPark Segment revenues
Used vehicles$996,504  $602,698  $393,806  65.3 %
Wholesale vehicles22,927  20,443  2,484  12.2 %
Parts, service and collision repair28,753  16,327  12,426  76.1 %
Finance, insurance and other, net113,834  60,709  53,125  87.5 %
EchoPark Segment revenues$1,162,018  $700,177  $461,841  66.0 %
Total revenues$10,454,343  $9,951,630  $502,713  5.1 %
Segment income (loss) (1)
Franchised Dealerships Segment (2)$211,267  $157,413  $53,854  34.2 %
EchoPark Segment (3)9,146  (52,587) 61,733  117.4 %
Total segment income (loss)$220,413  $104,826  $115,587  110.3 %
Impairment charges (4)(20,768) (29,514) 8,746  29.6 %
Income (loss) from continuing operations before taxes$199,645  $75,312  $124,333  165.1 %
Retail new and used vehicle unit sales volume:
Franchised Dealerships Segment226,760  232,885  (6,125) (2.6)%
EchoPark Segment49,520  29,437  20,083  68.2 %
Total retail new and used vehicle unit sales volume276,280  262,322  13,958  5.3 %

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands, except unit data)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

9,547,236

 

 

$

9,191,661

 

 

$

355,575

 

 

 

3.9

%

EchoPark®

 

 

77,063

 

 

 

5,438

 

 

 

71,625

 

 

 

1317.1

%

Total consolidated revenues

 

$

9,624,299

 

 

$

9,197,099

 

 

$

427,200

 

 

 

4.6

%

Segment income (loss) (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

213,224

 

 

$

230,733

 

 

$

(17,509

)

 

 

(7.6

%)

EchoPark®

 

 

(17,257

)

 

 

(15,913

)

 

 

(1,344

)

 

 

(8.4

%)

Total segment income (loss)

 

 

195,967

 

 

 

214,820

 

 

 

(18,853

)

 

 

(8.8

%)

Interest expense, other, net

 

 

(50,910

)

 

 

(53,190

)

 

 

2,280

 

 

 

4.3

%

Other income (expense), net

 

 

99

 

 

 

97

 

 

 

2

 

 

 

2.1

%

Income (loss) from continuing operations before taxes

 

$

145,156

 

 

$

161,727

 

 

$

(16,571

)

 

 

(10.2

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail new and used vehicle unit sales volume:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

 

252,027

 

 

 

245,833

 

 

 

6,194

 

 

 

2.5

%

EchoPark®

 

 

3,225

 

 

 

212

 

 

 

3,013

 

 

 

1421.2

%

Total retail new and used vehicle unit sales volume

 

 

255,252

 

 

 

246,045

 

 

 

9,207

 

 

 

3.7

%

(1)Segment income (loss) for each segment is defined as operating income less floor plan interest expense.

 

 

 

51

44

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Franchised Dealerships

See

(1) Segment income (loss) for each segment is defined as income (loss) from continuing operations before taxes and impairment charges.
(2) For 2019, the previous headings “New Vehicles,” “Used Vehicles,” “Wholesale Vehicles,” “Parts, Serviceabove amount includes approximately $76.0 million of pre-tax net gain on the disposal of franchised dealerships, offset partially by approximately $7.2 million of pre-tax loss on the extinguishment of debt, approximately $6.3 million of pre-tax executive transition costs and Collision Repair (“Fixed Operations”)”approximately $1.1 million of pre-tax impairment charges. For 2018, the above amount includes approximately $38.9 million of pre-tax net gain on the disposal of franchised dealerships, offset partially by approximately $27.9 million of pre-tax impairment charges, approximately $4.0 million of pre-tax storm-related physical damage costs, approximately $1.7 million of pre-tax legal costs, approximately $1.6 million of pre-tax executive transition costs and “Finance, Insuranceapproximately $1.4 million of pre-tax lease exit charges.
(3) For 2019, the above amount includes approximately $19.7 million of pre-tax impairment charges related to building and Other, Net (“F&I”)”land held for further discussionsale at former EchoPark locations. For 2018, the above amount includes approximately $32.5 million of pre-tax long-term compensation-related charges and approximately $1.6 million of pre-tax impairment charges.
(4) For 2019, the operating resultsabove amount includes approximately $1.1 million of ourpre-tax impairment charges for the Franchised Dealerships segment. The previous analysesSegment and discussion include operating results for our EchoPark® segment as the results for EchoPark® are not material to the combined operating results.  

EchoPark®

We opened the first two EchoPark® locations in November and December 2014, and we opened the third location in January 2015 and the fourth and fifth locations in June 2016. We expect to open an additional EchoPark® store in Colorado in the first half of 2017, and have begun the process of expanding EchoPark® operations into additional markets in North Carolina, South Carolina and Texas with operations in these markets expected to begin in 2017 and 2018. Our EchoPark® business operates independently from our franchised new and used dealership sales operations and offers customers an exciting shopping and buying experience.

During the year ended December 31, 2016, EchoPark® generated approximately $129.2$19.7 million of revenue, up $52.2pre-tax impairment charges for the EchoPark Segment. For 2018, the above amount includes approximately $27.9 million or 67.7%, fromof pre-tax impairment charges for the prior year,Franchised Dealerships Segment and gross profitapproximately $1.6 million of approximately $15.7 million, up $6.0 million, or 61.8%, frompre-tax impairment charges for the prior year. EchoPark® retail used vehicle unit sales volume was 4,865 units, up 1,640 units, or 50.9%, from the prior year, and retail used vehicle gross profit per unit was $1,133 per unit, a decrease of $208 per unit, or 15.5%, from the prior year, due primarily to the costs of acquiring sufficient inventory for two additional store openings in 2016. EchoPark® F&I gross profit per unit was $1,339 per unit, up $396 per unit, or 42.0%, from the prior year, as our training and playbook processes enabled our customer experience guides to more effectively provide F&I products to our customers. EchoPark® incurred a $12.7 million operating loss during the year ended December 31, 2016, compared to a $17.7 million operating loss in the prior year, which includes the effects of a $1.4 million impairment charge in 2015.

Segment.

Selling, General and Administrative (“SG&A”) Expenses

- Consolidated

Consolidated SG&A expenses are comprised ofcomprises four major groups: compensation expense, advertising expense, rent expense and other expense. Compensation expense primarily relates to dealershipstore personnel who are paid a commission or a salary plus commission and support personnel who are paid a fixed salary. Commissions paid to dealershipstore personnel typically vary depending on gross profits realized and sales volume objectives. Due to the salary component for certain dealershipstore and corporate personnel, gross profits and compensation expense do not change in direct proportion to one another. Advertising expense and other expense vary based on the level of actual or anticipated business activity and the number of dealerships in operation. Rent expense typically varies with the number of dealershipsstore locations owned, investments made for facility improvements and interest rates. Other expense includes various fixed and variable expenses, including gain on disposal of franchises, certain customer-related costs such as gasoline and service loaners and insurance, training, legal and IT expenses, which may not change in proportion to gross profit levels.

The following tables settable sets forth information related to our consolidated reported SG&A expenses:

Year Ended December 31,

 

 

Better / (Worse)

 

Year Ended December 31,Better / (Worse)

2016

 

 

2015

 

 

Change

 

 

% Change

 

20192018Change% Change

(In thousands)

 

(In thousands)

SG&A expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A expenses:

Compensation

$

674,617

 

 

$

666,668

 

 

$

(7,949

)

 

 

(1.2

%)

Compensation$733,925  $725,022  $(8,903) (1.2)%

Advertising

 

61,674

 

 

 

61,630

 

 

 

(44

)

 

 

(0.1

%)

Advertising60,831  63,134  2,303  3.6 %

Rent

 

73,903

 

 

 

73,539

 

 

 

(364

)

 

 

(0.5

%)

Rent54,611  64,204  9,593  14.9 %

Other

 

300,662

 

 

 

308,728

 

 

 

8,066

 

 

 

2.6

%

Other250,007  292,965  42,958  14.7 %

Total SG&A expenses

$

1,110,856

 

 

$

1,110,565

 

 

$

(291

)

 

 

(0.0

%)

Total SG&A expenses$1,099,374  $1,145,325  $45,951  4.0 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A expenses as a % of gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A expenses as a % of gross profit:

Compensation

 

47.2

%

 

 

47.1

%

 

 

(10

)

 

bps

 

Compensation48.3 %50.1 %180  bps

Advertising

 

4.3

%

 

 

4.4

%

 

 

10

 

 

bps

 

Advertising4.0 %4.4 %40  bps

Rent

 

5.2

%

 

 

5.2

%

 

 

-

 

 

bps

 

Rent3.6 %4.4 %80  bps

Other

 

21.0

%

 

 

21.8

%

 

 

80

 

 

bps

 

Other16.4 %20.3 %390  bps

Total SG&A expenses as a % of gross profit

 

77.7

%

 

 

78.5

%

 

 

80

 

 

bps

 

Total SG&A expenses as a % of gross profit72.3 %79.2 %690  bps

45

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

(In thousands)

 

SG&A expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

$

666,668

 

 

$

638,875

 

 

$

(27,793

)

 

 

(4.4

%)

Advertising

 

61,630

 

 

 

57,437

 

 

 

(4,193

)

 

 

(7.3

%)

Rent

 

73,539

 

 

 

73,707

 

 

 

168

 

 

 

0.2

%

Other

 

308,728

 

 

 

297,414

 

 

 

(11,314

)

 

 

(3.8

%)

Total SG&A expenses

$

1,110,565

 

 

$

1,067,433

 

 

$

(43,132

)

 

 

(4.0

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A expenses as a % of gross profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

47.1

%

 

 

46.8

%

 

 

(30

)

 

bps

 

Advertising

 

4.4

%

 

 

4.2

%

 

 

(20

)

 

bps

 

Rent

 

5.2

%

 

 

5.4

%

 

 

20

 

 

bps

 

Other

 

21.8

%

 

 

21.7

%

 

 

(10

)

 

bps

 

Total SG&A expenses as a % of gross profit

 

78.5

%

 

 

78.1

%

 

 

(40

)

 

bps

 

2016 Compared to 2015

Overall SG&A expenses were flat in dollar amount and decreased 80 basis points as a percentage of gross profit, primarily due to an original equipment manufacturer (“OEM”) legal settlement benefit, offset partially by higher compensation and employee benefit-related expenses and IT expenses. Compensation costs increased both in dollar amount and as a percentage of gross profit, primarily due to a reduction in other variable expense, fixed compensation expense, rent expense, and other fixed SG&A expense, offset partially by higher variable compensation expense. Compensation costs increased in dollar amount but decreased as a percentage of

52
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
gross profit primarily due to increases in variable compensation expense related to higher levels of employee benefit-related expenses, Fixed Operations compensationsales activity and F&I compensation, offset partially by lower medical insurance costs.related gross profit. Advertising expense was relatively flatdecreased both in dollar amount and as a percentage of gross profit as we focused on targeted advertising where we would expectdue primarily to the best returns for our business.disposition of several franchised dealerships and higher levels of gross profit. Rent expense was relatively flatdecreased both in dollar amount and as a percentage of gross profit due primarily due to our strategy to own morethe disposition of our dealership properties, offset byseveral franchised dealerships and higher rent expense for additional inventory storage needs.levels of gross profit. Other SG&A expenses decreased both in dollar amount and as a percentage of gross profit, primarily due to a $14.8higher net gain on the disposal of franchised dealerships in 2019 and physical damage and legal charges in 2018.
SG&A expenses for 2019 include approximately $76.0 million benefit as a result of an OEM-related settlement,net gain on the disposal of franchised dealerships, offset partially by higher IT expenses, repairs and maintenance expenses and a net gain on disposalapproximately $6.3 million of franchises in the prior year. On an adjusted basis,executive transition costs. SG&A expenses as a percentage of gross profit were 78.5%, flat compared to the prior year. For the year ended December 31, 2016, adjusted SG&A expenses exclude an OEM legal settlement benefit offor 2018 include approximately $14.8 million, offset partially by charges of approximately $3.0 million related to hail damage and approximately $0.3$32.5 million of lease exit and other charges. For the year ended December 31, 2015, adjusted SG&A expenses excludelong-term compensation-related charges, of approximately $3.5$4.0 million related toof storm-related physical damage andcosts, approximately $1.7 million of legal costs, approximately $1.6 million of executive transition costs and severance expenses,approximately $1.4 million of lease exit charges, offset partially by aapproximately $38.9 million of net gain on the disposal of franchises offranchised dealerships.
Impairment Charges - Consolidated
Impairment charges were approximately $3.3 million.

2015 Compared to 2014

Overall SG&A expenses increased both$20.8 million and $29.5 million in dollar amount2019 and as a percentage of gross profit, due in part to costs related to our EchoPark®, OSOE and other strategic initiatives, among other cost drivers as discussed below. Overall SG&A expenses as a percentage of gross profit increased 40 basis points. Excluding the effect of EchoPark® expenses, total SG&A expenses as a percentage of gross profit increased 50 basis points. Compensation costs increased both in dollar amount and as a percentage of gross profit, primarily due to lower gross margins on new vehicles, increased headcount related to EchoPark® staffing and higher medical insurance costs. Advertising expense increased both in dollar amount and as a percentage of gross profit due to increased advertising programs2018, respectively. Impairment charges for expansion at EchoPark® and our OSOE initiative. Rent expense decreased both in dollar amount and as a percentage of gross profit, primarily due to higher gross profit levels and the purchase of certain properties that were previously leased. Other SG&A expenses increased both in dollar amount and as a percentage of gross profit, primarily due to a gain on disposal of franchises in the prior year, increases in IT expenses related to EchoPark® and our OSOE initiative, legal fees and real estate taxes.

On an adjusted basis, SG&A expenses as a percentage of gross profit were 78.4%, down 20 basis points from the prior year. For the year ended December 31, 2015, adjusted SG&A expenses exclude charges of2019 include approximately $3.5$19.7 million related to storm-related physical damagebuilding and approximately $1.7 million of legal and severance expenses, offset partially by a net gain on disposal of franchises of approximately $3.3 million. For the year ended December 31, 2014, adjusted SG&A expenses exclude a net gain on

46

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

disposal of franchises of approximately $10.7 million, offset partially by charges of approximately $4.0 million related to storm-related physical damageland held for sale at former EchoPark locations and approximately $1.1 million of legal settlement and environmental expense.

Impairment Charges

Impairment charges decreased approximately $9.9 million for the year ended December 31, 2016 comparedrelated to the prior year.  Impairment charges increased $11.4 million for the year ended December 31, 2015 compared to the prior year.software impairment. Impairment charges for the year ended December 31, 20162018 include approximately $8.1$27.4 million of property and equipment charges due to the abandonment of certain construction projects and internally developed software development projectsapplications, as well as our estimate that certain dealerships would not be able to recover theserecorded balances through operating activities.  Impairment charges for the year ended December 31, 2015 include $5.2activities, in addition to approximately $2.1 million of franchise asset impairment chargescharges.

Depreciation and Amortization - Consolidated
Depreciation expense decreased approximately $4.8$0.5 million, of goodwill and franchise asset impairment chargesor 0.5%, in 2019 primarily related to lower depreciation expense as a result of the disposition of a dealership franchise, $0.9 million of franchise asset impairment charges and $7.1 million of property and equipment charges due to the abandonment of construction and software development projects as well as our estimate that certainseveral franchised dealerships, would not be able to recover these balances through operating activities. Impairment charges for the year ended December 31, 2014 include $2.2 million of franchise asset impairment charges and approximately $4.4 million of property and equipment charges due to the abandonment of construction and software development projects as well as our estimate that certain dealerships would not be able to recover these balances through operating activities.

Depreciation and Amortization

Depreciationoffset partially by higher depreciation expense increased approximately $8.6 million, or 12.6%, in the year ended December 31, 2016, compared to the prior year, and $10.5 million, or 18.1%, in the year ended December 31, 2015, compared to the prior year. The increases were primarily related to continuing operations net additions to gross property and equipment (excluding land and construction in progress) of approximately $144.1 million and $140.7 million in the years ended December 31, 2016 and 2015, respectively.

additional EchoPark locations.

Interest Expense, Floor Plan

2016 Compared to 2015

- Consolidated

Interest expense, floor plan for new vehicles incurred by continuing operations increaseddecreased approximately $5.5$0.8 million, or 27.8%1.9%. The average new vehicle floor plan notes payable balance for continuing operations increased approximately $137.5$5.6 million, resulting in an increase in new vehicle floor plan interest expense of approximately $2.2$0.2 million. The average new vehicle floor plan effective interest rate incurred by continuing operations dealerships was 1.85%3.03%, down from 3.10% in the prior year, which resulted in a decrease in interest expense of approximately $1.0 million.
Interest expense, floor plan for used vehicles increased approximately $0.9 million, or 16.8%. The average used vehicle floor plan notes payable balance increased approximately $22.3 million, resulting in an increase in used vehicle floor plan interest expense of approximately $0.7 million. The average used vehicle floor plan effective interest rate was 3.10%, up from 1.61%2.98% in the prior year, which resulted in an increase in interest expense of approximately $3.3$0.2 million.

Interest Expense, Other, Net - Consolidated
Interest expense, floor plan for used vehicles incurred by continuing operations increasedother, net is summarized in the table below:
Year Ended December 31,Better / (Worse)
20192018Change% Change
(In thousands)
Stated/coupon interest$49,291  $51,018  $1,727  3.4 %
Deferred loan cost amortization2,478  2,418  (60) (2.5)%
Interest rate hedge expense (benefit)(2,876) (462) 2,414  522.5 %
Capitalized interest(1,583) (1,515) 68  4.5 %
Interest on finance lease liabilities5,097  —  (5,097) (100.0)%
Other interest546  2,600  2,054  79.0 %
Total interest expense, other, net$52,953  $54,059  $1,106  2.0 %
Interest expense, other, net decreased approximately $0.9$1.1 million, or 54.7%. The average used vehicle floor plan notes payable balance for continuing operations increased approximately $49.3 million, resulting inprimarily due to an increase in new vehicle floor plan interest expense of approximately $0.8 million. The average used vehicle floor plannet interest rate incurred by continuing operations dealerships was 1.78%, up from 1.72% in the prior year, which resulted in an increase inhedge receipts and lower stated/coupon interest expense of approximately $0.1 million.

2015 Comparedrelated to 2014

Interest expense, floor plan for new vehicles incurred by continuing operations increased approximately $2.1 million, or 11.8%. The average new vehicle floor plan notes payable balance for continuing operations increased approximately $101.4 million, resulting in an increase in new vehicle floor plan interest expense of approximately $1.6 million. The average new vehicle floor plan interest rate incurred by continuing operations dealerships was 1.61%, up from 1.57% in the prior year, which resulted in an increase in interest expense of approximately $0.5 million.

Interest expense, floor plan for used vehicles incurred by continuing operations increased approximately $0.5 million, or 37.7%. The average used vehicle floor plan notes payable balance for continuing operations increased approximately $30.4 million, resulting in an increase in new vehicle floor plan interest expense of approximately $0.6 million. The average used vehicle floor plan interest rate incurred by continuing operations dealerships was 1.72%, down from 1.80% in the prior year, which resulted in a decrease in interest expense of approximately $0.1 million, partially offsetting the impact of the higher average floor planmortgage notes payable balances, discussed above.

47

offset partially by an
53

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Interest Expense, Other, Net

Interest expense, other, net is summarized in the tables below:

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2016

 

 

2015

 

 

Change

 

 

% Change

 

 

 

(In thousands)

 

Stated/coupon interest

 

$

44,689

 

 

$

42,321

 

 

$

(2,368

)

 

 

(5.6

%)

Discount/premium amortization

 

 

163

 

 

 

152

 

 

 

(11

)

 

 

(7.2

%)

Deferred loan cost amortization

 

 

2,641

 

 

 

2,489

 

 

 

(152

)

 

 

(6.1

%)

Cash flow swap interest

 

 

4,934

 

 

 

7,178

 

 

 

2,244

 

 

 

31.3

%

Capitalized interest

 

 

(2,750

)

 

 

(1,912

)

 

 

838

 

 

 

43.8

%

Other interest

 

 

429

 

 

 

682

 

 

 

253

 

 

 

37.1

%

Total interest expense, other, net

 

$

50,106

 

 

$

50,910

 

 

$

804

 

 

 

1.6

%

 

 

Year Ended December 31,

 

 

Better / (Worse)

 

 

 

2015

 

 

2014

 

 

Change

 

 

% Change

 

 

 

(In thousands)

 

Stated/coupon interest

 

$

42,321

 

 

$

41,456

 

 

$

(865

)

 

 

(2.1

%)

Discount/premium amortization

 

 

152

 

 

 

141

 

 

 

(11

)

 

 

(7.8

%)

Deferred loan cost amortization

 

 

2,489

 

 

 

2,675

 

 

 

186

 

 

 

7.0

%

Cash flow swap interest

 

 

7,178

 

 

 

10,125

 

 

 

2,947

 

 

 

29.1

%

Capitalized interest

 

 

(1,912

)

 

 

(1,921

)

 

 

(9

)

 

 

(0.5

%)

Other interest

 

 

682

 

 

 

714

 

 

 

32

 

 

 

4.5

%

Total interest expense, other, net

 

$

50,910

 

 

$

53,190

 

 

$

2,280

 

 

 

4.3

%

2016 Compared to 2015

Interest expense, other, net decreased approximately $0.8 million, primarily due to a $2.2 million decrease in cash flow swap interest as a result of the expiration of several interest rate cash flow swaps that were replaced with cash flow swaps at a lower fixed rate and a $0.8 million decrease in capitalized interest associated with construction and software development projects, offset partially by a $2.4 million increase in stated/coupon interest expense related to finance leases (known as a resultcapital leases prior to the adoption of additional mortgage notes payable.

2015 Compared to 2014

Interest expense, other, net decreased approximately $2.3 million, primarily due to a $2.9 million decrease in cash flow swap interest as a result of the expiration of several interest rate cash flow swaps that were replaced with cash flow swaps at a lower fixed rate, offset partially by a $0.9 million increase in stated/coupon interest as a result of additional mortgage notes payable.

ASC 842, “Leases,” on January 1, 2019).

Provision for Income Taxes

- Consolidated

The overall effective tax rate from continuing operations was 39.1%, 39.3%27.6% and 39.1%30.4% for 2019 and 2018, respectively. Income tax expense for 2019 includes the years ended December 31, 2016, 2015effect of a $1.5 million discrete charge for non-deductible executive officer compensation related to executive transition costs, a $0.4 million discrete charge related to tax return to provision adjustments and 2014, respectively.a state income tax rate reduction, a $0.2 million discrete charge related to changes in uncertain tax positions and a $0.2 million discrete charge related to vested or exercised stock compensation awards, offset partially by a $1.3 million discrete benefit related to the favorable resolution of certain tax matters. Our effective tax rate varies from year to year based on the distribution of taxable income between states in which we operate and other tax adjustments. We expect the effective tax rate in future periods to fall within a range of 38.0%26.0% to 40.0%29.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets, non-deductible compensation or unusual discrete tax adjustments. The effective tax rate in the future will be impacted by the required adoption of ASU 2016-09 which will require all book-tax differences related to the exercise of stock options or vesting of restricted stock to flow through the provision for income taxes rather than possibly be applied directly to equity.

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OPERATIONS

Discontinued Operations

The pre-tax losses

Income (loss) from discontinued operations and the sale of dealerships werebefore taxes is as follows:

 

Year Ended December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

(In thousands)

 

Income (loss) from operations

$

(1,100

)

 

$

(1,421

)

 

$

(2,515

)

Gain (loss) on disposal

 

(1

)

 

 

-

 

 

 

199

 

Lease exit accrual adjustments and charges

 

(1,020

)

 

 

(1,462

)

 

 

152

 

Pre-tax income (loss)

$

(2,121

)

 

$

(2,883

)

 

$

(2,164

)

Total revenues

$

-

 

 

$

-

 

 

$

-

 

Year Ended December 31,
201920182017
(In thousands)
Income (loss) from discontinued operations$(554) $(610) $(735) 
Lease exit accrual adjustments and charges—  (407) (1,207) 
Income (loss) from discontinued operations before taxes$(554) $(1,017) $(1,942) 

In the year ended December 31, 2014, lease exit accrual adjustments and charges includes a benefit of approximately $1.4 million related to the extension of a sublease, offsetting expense amounts related to ongoing lease exit accrual activity.

We do not expect significant activity in discontinued operations in the future due to the change in the definition of a discontinued operation as a result of ASUAccounting Standards Update (“ASU”) 2014-08. The results of operations for those dealershipsdealership and franchises that were classified as discontinued operations as of March 31, 2014 will continue to be reported within discontinued operations in the future. See the discussion of our adoption of ASU 2014-08 in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.

Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United StatesU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the datedates of the financial statements and the reported amounts of revenues and expenses during the reporting period.periods. Actual results could differ from those estimates.

Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations and require the most subjective and complex judgments. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for additional discussion regarding our critical accounting policies and estimates.

Goodwill and Franchise Assets
In accordance with ASC Topic 350, “Intangibles - Goodwill and Other,” we test goodwill for impairment at least annually (as of October 1 of each year), or more frequently if indications of impairment exist. The ASC also states that if an entity determines, based on an assessment of certain qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative goodwill impairment test is unnecessary.
For purposes of goodwill impairment testing, we have two reporting units, which consist of (1) our traditional franchised dealerships and (2) our EchoPark stores (these reporting units also represent our reportable segments). The carrying value of our goodwill totaled approximately $475.8 million at December 31, 2019, $415.8 million of which was related to our franchised dealerships reporting unit and $60.0 million of which was related to our EchoPark reporting unit. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of the required goodwill impairment. For each reporting unit, we utilized the Discounted Cash Flows (“DCF”) method to estimate its enterprise value as of October 1, 2019. The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs) and residual growth rates. To the extent the reporting unit’s earnings decline
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significantly or there are changes in one or more of these assumptions that would result in lower valuation results, it could cause the carrying value of the reporting unit to exceed its fair value and thus require us to record goodwill impairment.
Based on the results of our goodwill impairment test as of October 1, 2019, each reporting unit’s fair value exceeded its carrying value, and as such, no impairment was required. Our DCF model is dependent on the assumptions used and is sensitive to changes in those assumptions. In order to determine the effects of changes in our assumptions on our DCF model, and, consequently our goodwill valuation, we ran multiple scenarios adjusting our assumed earnings before interest and taxes (“EBIT”) growth factors and discount rate assumptions. Although we assumed a 1.0% residual EBIT growth factor in our model, in the event the residual EBIT growth rate decreased by 100 basis points, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2019 would change by approximately $260.2 million and $28.4 million for our franchised dealerships and EchoPark reporting units, respectively. In the event the discount rate increased by 100 basis points, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2019 would change by approximately $318.9 million and $38.0 million for our franchised dealerships and EchoPark reporting units, respectively. In the event the residual EBIT growth rate decreased by 100 basis points and the discount rate increased by 100 basis points, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2019 would change by approximately $508.0 million and $61.6 million for our franchised dealerships and EchoPark reporting units, respectively. Based on our DCF model, if any of the realistic scenarios described above were realized, the reporting unit's fair value remains substantially in excess of the carrying value.
In accordance with ASC Topic 350, “Intangibles - Goodwill and Other,” we evaluate franchise assets for impairment annually (as of October 1 of each year) or more frequently if indicators of impairment exist. We estimate the fair value of our franchise assets using a DCF model. The DCF model used contains inherent uncertainties, including significant estimates and assumptions related to projected revenue, projected operating margin, a discount rate (and estimates in the discount rate inputs) and residual growth rates. We are subject to financial risk to the extent that our franchise assets become impaired due to deterioration of the underlying businesses. The risk of a franchise asset impairment charge may increase to the extent the underlying businesses’ actual earnings or projected earnings experience a significant decline. As a result of our impairment testing as of October 1, 2019, each of our franchise assets’ fair values exceeded its carrying value and no franchise asset impairment charges were recorded in the accompanying consolidated statements of income. The carrying value of our franchise assets totaled approximately $64.3 million at December 31, 2019, and is included in other intangible assets, net in the accompanying consolidated balance sheets.

Finance, Insurance and Service Contracts

We arrange financing for customers through various financial institutions and receive a commission from the lenderfinancial institution either in a flat fee amount or in an amount equal to the difference between the actual interest rates charged to customers and the predetermined interest rates set by the financial institution. We also receive commissions from the sale of various insurance contracts and non-recourse third-party extended service contracts to customers. Under these contracts, the applicable manufacturer or third-party warranty company is directly liable for all warranties provided within the contract.

In the event a customer terminates a financing, insurance or extended service contract prior to the original terminationscheduled maturity date, we may be required to return a portion of the commission revenue originally recorded as income by Sonic to the third-party provider (“chargebacks”(known as a “chargeback”). The commission revenue for the sale of these products and services is recorded net of estimated chargebacks at the time of sale. Our estimate of future chargebacks is established based on our historical chargeback rates, termination provisions of the applicable contracts and industry data. While chargeback rates vary depending on the type of contract sold, a 100 basis100-basis point change in the estimated chargeback rates used in determining our estimates of future chargebacks would have changed our estimated reserve for chargebacks at December 31, 20162019 by approximately $1.4$3.2 million. Our estimate of chargebacks (approximately $19.2$32.0 million as of December 31, 2016)2019) is influenced by the number of early contract termination events, such as vehicle repossessions, refinancingsloan refinancing and early pay-offs. If these factors negatively change,events become more or less common, the resulting impact would affect our future estimate for chargebacks and could have a material adverse impact on our operations, financial position and cash flows. Our actual chargeback experience has not been materially different from our recorded estimates.

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OPERATIONS

Goodwill and Franchise Assets

In accordance with “Intangibles – Goodwill and Other” in the ASC, we test goodwill for impairment at least annually, or more frequently when events or circumstances indicate that impairment might have occurred. The ASC also states that if an entity determines, based on an assessment of certain qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary. For our annual impairment assessment as of October 1, 2016, we elected to perform a quantitative step-one assessment.

For purposes of goodwill impairment testing, we have two reporting units, which consist of our traditional franchised dealerships and EchoPark®. The carrying value of our goodwill (all of which is associated with our franchised dealerships reporting unit) totaled approximately $472.4 million at December 31, 2016. We utilized the Market Price (“MP”) method to estimate our reporting unit’s enterprise value. The significant inputs in our MP method include debt value, stock price and control premium. To the extent there are changes in one or more of these inputs that would result in lower valuation results, it could cause the carrying value of the reporting unit to exceed its fair value and thus require us to conduct the second step of the impairment test described under the heading “Goodwill,” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.

Based on the results of our step-one test as of October 1, 2016, our reporting unit’s fair value exceeded its carrying value. Our MP method is dependent on the inputs used and is sensitive to changes in those inputs. In order to determine the effects of changes in our inputs on our MP method and, consequently, our goodwill valuation, we ran multiple scenarios adjusting the debt value, stock price and control premium. In the event our debt value decreased by 10 percent, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2016 would change by approximately $88.6 million. In the event our stock price decreased by 20 percent, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2016 would change by approximately $185.6 million. Although we assumed a 10.0% control premium in our method, in the event of no control premium, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2016 would change by approximately $84.4 million. Based on our MP method, none of the scenarios tested, if realized, would have resulted in lowering the fair value of the reporting unit below the reporting unit’s carrying value. As such, we were not required to complete step two of the impairment evaluation according to “Intangibles – Goodwill and Other” in the ASC. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for further discussion.

In accordance with “Intangibles – Goodwill and Other” in the ASC, we evaluate franchise assets for impairment annually (as of October 1) or more frequently if indicators of impairment exist. We estimate the fair value of our franchise assets using a discounted cash flow (“DCF”) model. The DCF model used contains inherent uncertainties, including significant estimates and assumptions related to growth rates, projected earnings and cost of capital. We are subject to financial risk to the extent that our franchise assets become impaired due to deterioration of the underlying businesses. The risk of a franchise asset impairment loss may increase to the extent the underlying businesses’ earnings or projected earnings decline. As a result of our impairment testing as of October 1, no impairment charges were recorded for franchise assets in the year ended December 31, 2016.     


Insurance Reserves

We have various self-insured and high deductible retentioncasualty and other insurance policies thatprograms which require us to make estimates in determining the ultimate liability we may incur for claims arising under these policies.programs. We accrue for insurance reserves throughout the year based on current information available. As of December 31, 2016,2019, we estimated the ultimate liability under these programs to be between $21.2$21.8 million and $23.4$24.1 million, and had approximately $22.7$23.1 million reserved for
55
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
such programs. Changes in significant assumptions used in the development of the ultimate liability for these programs could have a material impact on the level of reserves and our operating results, financial position and cash flows. These significant assumptions could include the volume of claims, medical cost trends, claims handling and reporting patterns, historical claims experience, the effect of related court rulings, current or projected changes in state laws or an assumed discount rate. From a sensitivity analysis perspective, it is difficult to quantify the effect of changes in any of these significant assumptions with the exception of the volume of claims. We believe a 10% change in the volume of claims would have a proportional effect on our reserves. Our actual loss experience has not been materially different from our recorded estimates.

Lease Exit Accruals

The majority of our dealership properties are leased under long-term operating lease arrangements. When leased properties are no longer utilized in operations, we record lease exit accruals. These situations could include the relocation of an existing facility or the sale of a dealership where the buyer will not be subleasing the property for either the remaining term of the lease or for an amount equal to our obligation under the lease, or situations where a store is closed as a result of the associated franchise being terminated by

50

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

us or the manufacturer and no other operations continue on the leased property. The lease exit accruals represent the present value of the lease payments, net of estimated sublease rentals, for the remaining life of the operating leases and other accruals necessary to satisfy lease commitments to the landlords. As of December 31, 2016, we had approximately $9.8 million accrued for lease exit costs. In addition, based on the terms and conditions negotiated in the sale of dealerships in the future, additional accruals may be necessary if the purchaser of the dealership does not assume any associated lease, or we are unable to negotiate a sublease with the buyer of the dealership on terms that are identical to or better than those associated with the original lease.

A summary of the activity of these operating lease exit accruals consists of the following:

 

 

(In thousands)

 

Balance at December 31, 2015

 

$

14,527

 

Lease exit expense (1)

 

 

1,386

 

Payments (2)

 

 

(6,123

)

Balance at December 31, 2016

 

$

9,790

 

(1)

Expense of approximately $0.1 million is recorded in interest expense, other, net and expense of approximately $0.3 million is recorded in selling, general and administrative expenses in the accompanying consolidated statements of income. In addition, expense of approximately $1.0 million is recorded in income (loss) from discontinued operations in the accompanying consolidated statements of income.

(2)

Amount is recorded as an offset to rent expense in selling, general and administrative expenses, with approximately $0.7 million in continuing operations and approximately $5.4 million in income (loss) from discontinued operations, in the accompanying consolidated statements of income.


Legal Proceedings

We are involved, and expect to continue to be involved, in numerousvarious legal and administrative proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actionsregulatory investigations and private civil actions brought by governmental authorities. As of December 31, 2016, we had accrued approximately $0.5 million in legal reserves.plaintiffs purporting to represent a potential class or for which a class has been certified. Although we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty.

An unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects.

As of December 31, 2019, we had accrued approximately $1.5 million in legal reserves. Although we vigorously defend ourselves in all legal proceedings, the outcomes of pending and future proceedings arising out of the conduct of our business cannot be predicted with certainty.
Income Taxes

As a matter of course, we are regularly audited by various taxing authorities and, from time to time, these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We believe that our tax positions comply, in all material respects, with applicable tax law and that we have adequately provided for any reasonably foreseeable outcome related to these matters. From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and disposals, including consideration paid or received in connection with such transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that does not meet the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is likely to be realized upon ultimate settlement. We adjust our estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent.

At December 31, 2016,2019, there waswere approximately $5.2$4.4 million in reserves that we havehad provided for these matters (including estimates related to possible interest and penalties) with approximately $0.5 million included in other accrued liabilities and approximately $4.7$3.9 million recorded in other long-term liabilities in the accompanying consolidated balance sheets. The effects on our consolidated financial statements of income tax uncertainties are discussed in Note 7, “Income Taxes,” to the accompanying consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

We periodically review all deferred tax asset positions (including state net operating loss carryforwards) to determine whether it is more likely than not that the deferred tax assets will be realized. Certain factors considered in evaluating the potential for realization of deferred tax assets include the time remaining until expiration (related to state net operating loss carryforwards) and various sources of taxable income that may be available under the tax law to realize a tax benefit related to a deferred tax asset. This evaluation requires management to make certain assumptions about future profitability, the execution of tax strategies that may be available to us and the likelihood that these assumptions or execution of tax strategies would occur. This evaluation is highly judgmental. The results of future operations, regulatory framework of these taxing authorities and other related matters cannot be predicted with certainty. Therefore, actual realization of these deferred tax assets may be materially different from management’s estimate.

As of December 31, 20162019 and 2015,2018, we had recorded a valuation allowance recorded totalingamount of approximately $7.2$7.8 million and $5.9$8.1 million, respectively, related to certain state net operating loss carryforwards becausecarryforward deferred tax assets as we concludeddetermined that we
56
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
would not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.

We accruemake certain estimates, judgments and assumptions in the calculation of our provision for income taxes, on a pro-rata basis throughoutin the year based onresulting tax liabilities and in the expected year-end liability.recoverability of deferred tax assets. These estimates, judgments and assumptions are updated quarterly by our management based on available information and take into consideration estimated income taxes based on prior year income tax returns, changes in income tax law, our income tax strategies and other factors. If our management receives information which causes us to change our estimate of the year-end liability, the amount of expense or expense reduction required to be recorded in any particular quarter could be material to our operating results, financial position and cash flows.

Recent Accounting Pronouncements

In November 2015, the FASB issued ASU 2015-17 to simplify the presentation of deferred income taxes. The amendments in this ASU require deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity must be netted and presented as a single amount is not affected by this ASU. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15,February 2016, and interim periods within those annual periods (early adoption is permitted). We adopted this ASU prospectively effective October 1, 2016, and prior periods were not retrospectively adjusted. Accordingly, as of December 31, 2016, a deferred tax asset of approximately $2.4 million and deferred tax liability of approximately $76.4 million are included in other assets and deferred income taxes, respectively, in the accompanying consolidated balance sheets. We did not adjust prior periods retrospectively for the new ASU, therefore, as of December 31, 2015, a current deferred tax asset of approximately $13.6 million, a current deferred tax liability of approximately $0.1 million, a noncurrent deferred tax asset of approximately $2.8 million and a noncurrent deferred tax liability of approximately $73.3 million are included in other current assets, other accrued liabilities, other assets and deferred income taxes, respectively, in the accompanying consolidated balance sheets.

In May 2014, the Financial Accounting Standards Board (the “FASB”) issuedestablished ASC Topic 842, “Leases,” by issuing ASU 2014-09 to amend the accounting guidance on revenue recognition. The2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10 and ASU 2018-11) in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this ASU will be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). This ASU is effective for reporting periods beginning after December 15, 2017. Earlier application is permitted only as of reporting periods beginning after December 15, 2016. We plan to adopt this ASU effective January 1, 2018. While we are still evaluating the method of adoption and the impact of the provisions of this ASU, we expect similar performance obligations to result under this update as compared with deliverables and separate units of accounting currently identified. As a result, we expect the timing of our revenue recognition to generally remain the same.

In February 2016, the FASB issued ASU 2016-02order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendmentsnew lease standard was effective for us on January 1, 2019. Prior to adoption of the new lease standard, only leases classified as capital leases under ASC 840, “Leases,” were recorded in this ASU require thatthe consolidated balance sheets. Under ASC 842, “Leases,” we classify leases are classified as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset and lease liability isare required to be recognized in the statement of financial position,consolidated balance sheets for both finance and repayments are classified within operating activities in the statement of cash flows.leases with a term longer than 12 months. The amendments in this ASU are to be applied usingnew lease standard required a modified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or (2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. We adopted the new lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosures required under the new lease standard are effectivenot provided for fiscal years,dates and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We planprior to adopt this ASU effective January 1, 2019. WhileThe new lease standard provides for a number of optional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, lease classification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accounting policy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the use of hindsight in estimating lease term or assessing impairment of right-of-use assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We elected all of the practical expedients permitted under the transition guidance within the new lease standard. The new lease standard also provides practical expedients for ongoing accounting. We elected the short-term lease recognition exemption for our real estate and equipment leases, which means that for those leases that qualify, we are still evaluatingdo not recognize right-of-use assets or lease liabilities. We have also elected the impactpractical expedient that allows us not to separate non-lease components of adoptingan agreement from lease components (for certain asset classes). See Note 16, “Lease Accounting,” to the provisions of this ASU, we expect that upon

52

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

adoption of this ASU, the presentation of certain items in ouraccompanying consolidated financial position, cash flows and other disclosures will be materially impacted, primarily due to the recognition of a right-of-use asset and an associated liability.

statements for further discussion on leases.

In March 2016,August 2017, the FASB issued ASU 2016-092017-12, which amends the hedge accounting recognition and presentation requirements in ASC Topic 815, “Derivatives and Hedging.” This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify several aspectsthe application of the accounting for share-based payment transactions.current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 (early adoption is permitted). We plan to adopt this ASU effective January 1, 2017. Upon2018. The adoption of this ASU interim period and annual period income tax expense will be affected by stock option exercises and restricted stock vesting activity, potentially creating volatility indid not materially impact our effective income tax rate from period to period.

consolidated financial statements.

In August 2016,February 2018, the FASB issued ASU 2016-15 related2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of 2017, from accumulated other comprehensive income to the classification of certain cash receipts and cash payments on the statement of cash flows.retained earnings. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (early adoption is permitted). We plan to adopt this ASU effective January 1, 2018. UponThe adoption of this ASU did not materially impact our consolidated financial statements.
In June 2018, the presentationFASB issued ASU 2018-07 to expand the scope of certain itemsASC Topic 718, “Compensation - Stock Compensation,” to include share-based payment transactions for acquiring goods and services from non-employees. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this ASU did not materially impact our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendment in this update replaced the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and
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SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019. We adopted this ASU as of January 1, 2020 and the effects of the adoption of this ASU are not expected to materially impact our cash flows and other disclosures may be impacted.

consolidated financial statements.


Liquidity and Capital Resources

We require cash to fund debt service, operating lease obligations, working capital requirements, facility improvements and other capital improvements, and dividends on our common stock and to finance acquisitions and otherwise invest in our business. We rely on cash flows from operations, borrowings under our revolving credit and floor plan borrowing arrangements, real estate mortgage financing, asset sales and offerings of debt and equity securities to meet these requirements. We closely monitor our available liquidity and projected future operating results in order to remain in compliance with restrictive covenants under ourthe 2016 Credit Facilities, the 2019 Mortgage Facility, the indenture governing the 6.125% Notes and other debt obligations and lease arrangements. However, our liquidity could be negatively affected if we fail to comply with the financial covenants in our existing debt or lease arrangements. There are noAfter giving effect to the applicable restrictions on the payment of dividends under our borrowing arrangements ondebt agreements, as of December 31, 2019, we had at least $259.9 million of net income and retained earnings or net income.free of such restrictions. Cash flows provided by our dealerships are derived from various sources. The primary sources include individual consumers, automobile manufacturers, automobile manufacturers’ captive finance subsidiaries and finance companies.other financial institutions. Disruptions in these cash flows could have a material and adverse impact on our operations and overall liquidity.

Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and ability to service our obligations depend to a substantial degree on the cash generated from theresults of operations of these dealership subsidiaries.

subsidiaries and their ability to provide us with cash.

We had the following liquidity resources available as of December 31, 20162019 and 2015:

2018:

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Cash and cash equivalents

 

$

3,108

 

 

$

3,625

 

Availability under our revolving credit facility

 

 

207,053

 

 

 

181,058

 

Availability under our new and used vehicle floor plan facilities

 

 

46,423

 

 

 

21,192

 

Floor plan deposit balance

 

 

10,000

 

 

 

74,000

 

     Total available liquidity resources

 

$

266,584

 

 

$

279,875

 

December 31, 2019December 31, 2018
(In thousands)
Cash and cash equivalents$29,103  $5,854  
Availability under the 2016 Revolving Credit Facility230,689  223,922  
Availability under the 2019 Mortgage Facility3,090  —  
Availability under our used vehicle floor plan facilities17,090  1,979  
Total available liquidity resources$279,972  $231,755  

We participate in a program with two of our manufacturer-affiliated finance companies (the floor plan deposit balance in the table above) wherein we maintain a deposit balance with the lender that earns interest based on the agreed upon rate. This deposit balance is not designated as a pre-payment of notes payable – floor plan, nor is it our intent to use this amount to offset principal amounts owed under notes payable – floor plan in the future, although we have the right and ability to do so. The deposit balance of $10.0 million and $74.0 million as of December 31, 2016 and 2015, respectively, is classified in other current assets in the accompanying consolidated balance sheets. Please see the discussion under the heading “Concentrations of Credit and Business Risk” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for further information.

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OPERATIONS


Long-Term Debt and Credit Facilities

2014 Credit Facilities

Prior to November 30, 2016, we had a syndicated revolving credit facility (the “2014 Revolving Credit Facility”) and syndicated new and used vehicle floor plan credit facilities (the “2014 Floor Plan Facilities” and, together with the 2014 Revolving Credit Facility, the “2014 Credit Facilities”), which were scheduled to mature on August 15, 2019. On November 30, 2016, we amended and restated the 2014 Credit Facilities to, among other things, extend the maturity to November 30, 2021. See the heading “2016 Credit Facilities” below for additional information.

2016 Credit Facilities

On November 30, 2016, we entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 Revolving Credit Facility, the “2016 Credit Facilities”), which are scheduled to mature on November 30, 2021.

The amendment and restatement of the 2016 Credit Facilities extended the scheduled maturity date, increased availability under the 2016 Revolving Credit Facility by $25.0 million and increased availability under the 2016 Floor Plan Facilities by $215.0 million, among other things.

Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving Borrowing Base”). The 2016 Revolving Credit Facility may be increased at our option up to $300.0 million upon satisfaction of certain conditions. Based on balances as of December 31, 2016,2019, the 2016 Revolving Borrowing Base was approximately $228.5$245.3 million. As of December 31, 2016, Sonic2019, we had no outstanding borrowings and approximately $21.4$14.6 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in total borrowing availability of $207.1approximately $230.7 million under the 2016 Revolving Credit Facility.

The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2016 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2016 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount of up to $1.015 billion. We may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.265 billion, which shall be allocated between the 2016
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as we request, with no more than 30% of the aggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility.

Outstanding obligations under the 2016 Floor Plan Facilities are guaranteed by us and certain of our subsidiaries and are secured by a pledge of substantially all of our assets and our subsidiaries’ assets. The amounts outstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.

We agreed under the 2016 Credit Facilities not to pledge any assets to any third party (other than those explicitly allowed underto be pledged by the amended terms of the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2016 Credit Facilities permit cash dividends on our Class A and Class B common stockCommon Stock so long as no event of default (as defined in the 2016 Credit Facilities) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2016 Credit Facilities.

7.0%

5.0% Notes

On July 2, 2012,May 9, 2013, we issued $200.0$300.0 million in aggregate principal amount of 7.0%unsecured 5.0% Senior Subordinated Notes due May 15, 2023 (the “5.0% Notes”). During the year ended December 31, 2016, we repurchased approximately $10.7 million of the 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto. On December 30, 2019, we repurchased all of the remaining 5.0% Notes outstanding, totaling approximately $289.3 million aggregate principal amount, using cash on hand, net proceeds from the disposition of several franchised dealerships and proceeds from borrowings under the 2019 Mortgage Facility. We paid approximately $295.9 million in cash, including an early redemption premium of 1.667% and accrued and unpaid interest, to extinguish the 5.0% Notes. In conjunction with the redemption of the 5.0% Notes, we recognized a loss on debt extinguishment of approximately $6.7 million, recorded in other income (expense), net in the accompanying consolidated statements of income. In addition, we recognized approximately $0.5 million of double-carry interest in interest expense, other, net in the accompanying consolidated statements of income for the period during which both the 5.0% Notes and the 2019 Mortgage Facility had outstanding balances. On December 30, 2019, after the repurchase of all of the outstanding 5.0% Notes, there were no notes outstanding under the indenture which governed the 5.0% Notes, and the indenture was discharged at that time.
6.125% Notes
On March 10, 2017, we issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes which mature on JulyMarch 15, 2022.2027. The 7.0%6.125% Notes were issued at a price of 99.11%100.0% of the principal amount thereof, resulting inthereof. We used the net proceeds from the issuance of the 6.125% Notes to repurchase all of the outstanding 7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”) on March 27, 2017. Remaining proceeds from the issuance of the 6.125% Notes were used for general corporate purposes. Balances outstanding under the 6.125% Notes are guaranteed by all of our domestic operating subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic operating subsidiary that is not a yieldguarantor is considered to maturity of 7.125%.be minor. Interest on the 6.125% Notes is payable semi-annually in arrears on JanuaryMarch 15 and JulySeptember 15 of each year. We may redeem the 7.0%6.125% Notes, in whole or in part, at any time on or after JulyMarch 15, 20172022 at the following redemption prices, in the following table, which are expressed as percentages of the principal amount. 

amount:

Redemption

Price

Redemption
Price
Beginning on JulyMarch 15, 2017

2022

103.063 

103.500

%

Beginning on JulyMarch 15, 2018

2023

102.042 

102.333

%

Beginning on JulyMarch 15, 2019

2024

101.021 

101.167

%

Beginning on JulyMarch 15, 20202025 and thereafter

100.000 

100.000

%

54

Before March 15, 2022, we may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the principal amount of the 6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and any accrued and unpaid interest, if any, to the redemption date. In addition, on or before March 15, 2020, we may redeem up to 35% of the aggregate principal amount of the 6.125% Notes at a redemption price equal to 106.125% of the par value of the 6.125% Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date with proceeds from certain equity offerings. The indenture governing the 6.125% Notes also provides that holders of the 6.125% Notes may require us to repurchase the 6.125% Notes at a purchase price equal to 101.0% of the par value of the 6.125% Notes, plus
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

In addition, the indenture provides that holders of the 7.0% Notes may require us to repurchase the 7.0% Notes at a purchase price equal to 101% of the par value of the 7.0% Notes, plus

accrued and unpaid interest, if any, to the date of purchase if we undergo a changeChange of controlControl (as defined in the indenture)indenture governing the 6.125% Notes).

The indenture governing the 7.0%6.125% Notes contains certain specified restrictive covenants. We have agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 7.0%6.125% Notes limits our ability to pay quarterly cash dividends on our Class A and Class B common stockCommon Stock in excess of $0.10$0.12 per share. We may only pay quarterly cash dividends on our Class A and Class B common stockCommon Stock if we comply with the terms of the indenture governing the 7.0%6.125% Notes.

We were in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as of December 31, 2019.

Our obligations under the 7.0%6.125% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 7.0%6.125% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of our covenants under the 7.0% Notes; and (3) certain defaults under other agreements under which we or our subsidiaries have outstanding indebtedness in excess of $35.0 million. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for further discussion of the 7.0% Notes.

5.0 % Notes

On May 9, 2013, we issued $300.0 million in aggregate principal amount of 5.0% Notes which mature on May 15, 2023. The 5.0% Notes were issued at a price of 100.0% of the principal amount thereof. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. During the year ended December 31, 2016, Sonic repurchased approximately $10.7 million of its outstanding 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto.

We may redeem the 5.0% Notes in whole or in part at any time on or after May 15, 2018 at the redemption prices in the following table, which are expressed as percentages of the principal amount.

Redemption

Price

Beginning on May 15, 2018

102.500

%

Beginning on May 15, 2019

101.667

%

Beginning on May 15, 2020

100.833

%

Beginning on May 15, 2021 and thereafter

100.000

%

In addition, before May 15, 2018, we may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of the principal amount of the 5.0% Notes redeemed plus an applicable premium (as defined in the indenture) and any accrued and unpaid interest as of the redemption date. The indenture also provides that holders of the 5.0% Notes may require us to repurchase the 5.0% Notes at a purchase price equal to 101% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if we undergo a change of control (as defined in the indenture).

The indenture governing the 5.0% Notes contains certain specified restrictive covenants. We have agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 5.0% Notes limits our ability to pay quarterly cash dividends on our Class A and Class B common stock in excess of $0.10 per share. We may only pay quarterly cash dividends on our Class A and Class B common stock if we comply with the terms of the indenture governing the 5.0% Notes.

Our obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of our covenants under the 5.0%6.125% Notes; and (3) certain defaults under other agreements under which we or our subsidiaries have outstanding indebtedness in excess of $50.0 million. See Note 6, “Long-Term Debt,”Debt”, to the accompanying consolidated financial statements for further discussion of the 5.0%6.125% Notes.

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OPERATIONS

2019 Mortgage Notes

DuringFacility

On November 22, 2019, we entered into a delayed draw-term loan credit agreement, which is scheduled to mature on November 22, 2024 (the “2019 Mortgage Facility”).
Under the year ended2019 Mortgage Facility, Sonic has a maximum borrowing limit of $112.2 million, which varies based on the value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraisal value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. Based on balances as of December 31, 2016,2019, we obtainedhad approximately $103.4$109.1 million of outstanding borrowings, resulting in mortgage financing relatedtotal remaining borrowing availability of approximately $3.1 million under the 2019 Mortgage Facility.
Amounts outstanding under the 2019 Mortgage Facility bear interest at (i) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to ten2.75% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of the last day of the immediately preceding fiscal quarter (the “Performance Grid”); or (ii) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid. Interest on the 2019 Mortgage Facility is paid monthly in arrears calculated using the Base Rate plus the Applicable Rate (as defined in the 2019 Mortgage Facility) according to the Performance Grid. Repayment of principal is paid quarterly commencing on March 31, 2020 through September 30, 2024 at a rate of 2.5% of the aggregate initial principal amount. A balloon payment of the remaining balance will be due at the November 22, 2024 maturity date. Prior to the November 22, 2024 maturity date, the Company reserves the right to prepay the principal amount outstanding at any time without premium or penalty provided the prepayment amount exceeds $0.5 million.
The 2019 Mortgage Facility contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including covenants which could restrict or prohibit indebtedness, liens, payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other usual and customary covenants and default provisions. Specifically, the 2019 Mortgage Facility permits quarterly cash dividends on our dealership properties. Class A and Class B Common Stock up to $0.10 per share so long as no Event of Default (as defined in the 2019 Mortgage Facility) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2019 Mortgage Facility.
Mortgage Notes to Finance Companies
As of December 31, 2016,2019, the weighted average interest rate of other mortgage notes, excluding the 2019 Mortgage Facility, was 3.74%4.36% and the total outstanding mortgage principal balance of these notes was approximately $403.7 million, related to approximately 45% of our operating locations.$355.9 million. These mortgage notes require monthly payments of principal and interest through maturity,their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 20172020 and 2033.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating Leases

We lease facilities for the

The majority of our dealership operations underproperties are subject to long-term operating lease arrangements. These facility lease arrangements normally have fifteen-10- to twenty-year20-year initial terms with one or twomore five- to ten-year10-year renewal options and do not contain provisions for contingent rent related to the dealership’s operations. Many of the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. Approximately 10%Certain of these facility leases have payments that vary based on interest rates. See the table under the heading “Future Liquidity Outlook” below for our future minimum lease payment obligations, net of sublease proceeds.

In 2019, the majority of these operating leases are recorded on the consolidated balance sheet in accordance with ASC 842.

Floor Plan Facilities

We finance our new and certain of our used vehicle inventory through standardized floor plan facilities with manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. These floor plan facilities are due on demand and bear interest at variable rates based on LIBOR andor prime. The weighted average interest rate for our new and used floor plan facilities was 3.04% and 3.09% for continuing operations was 1.84%, 1.62%2019 and 1.58% for the years ended December 31, 2016, 2015 and 2014,2018, respectively. We receive floor plan assistance from certain manufacturers. Floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated inventory is sold. We received approximately $45.3 million, $42.3$41.1 million and $39.0$41.7 million in the years ended December 31, 2016, 2015manufacturer assistance in 2019 and 2014,2018, respectively, and recognized in cost of sales for continuing operations approximately $45.0 million, $42.1$41.5 million and $39.7$42.2 million in the years ended December 31, 2016, 2015manufacturer assistance in 2019 and 2014, respectively, in manufacturer assistance.2018, respectively. Interest payments under each of our floor plan facilities are due monthly and we are generally not required to make principal repayments prior to the sale of the vehicles.

Covenants and Default Provisions

Non-compliance with covenants, including a failure to make any payment when due, under ourthe 2016 Credit Facilities, Silothe 2019 Mortgage Facility, our floor plan agreements with various manufacturer-affiliated finance companies and other lending institutions (the “Silo Floor Plan Facilities,Facilities”), operating lease agreements, mortgage notes 5.0% Notesto finance companies and 7.0%the 6.125% Notes (collectively, our “Significant Debt Agreements”) could result in a default and an acceleration of our repayment obligation under ourthe 2016 Credit Facilities. A default under ourthe 2016 Credit Facilities or the 2019 Mortgage Facility would constitute a default under ourthe Silo Floor Plan Facilities and could entitle these lenders to accelerate our repayment obligations under one or more of the floor plan facilities. Certain defaults under ourthe 2016 Credit Facilities, the 2019 Mortgage Facility and one or more of the Silo Floor Plan Facilities or certain other debt obligations would not result in a default under the 5.0% Notes or the 7.0%6.125% Notes unless our repayment obligations under the 2016 Credit Facilities, the 2019 Mortgage Facility and/or one or more of the Silo Floor Plan Facilities or such other debt obligations were accelerated. An acceleration of our repayment obligation under any of ourthe Significant Debt Agreements could result in an acceleration of our repayment obligations under our other Significant Debt Agreements. The failure to repay principal amounts of the Significant Debt Agreements when due would create cross-default situations related to other indebtedness. The 2016 Credit Facilities and the 2019 Mortgage Facility include the following financial covenants:

 

Covenant

 

 

Minimum

Consolidated

Liquidity

Ratio

 

 

Minimum

Consolidated

Fixed Charge

Coverage

Ratio

 

 

Maximum

Consolidated

Total Lease

Adjusted Leverage

Ratio

 

Covenant

 

 

 

 

 

 

 

 

 

 

 

 

Minimum
Consolidated
Liquidity
Ratio
Minimum
Consolidated
Fixed Charge
Coverage
Ratio
Maximum
Consolidated
Total Lease
Adjusted Leverage
Ratio

Required ratio

 

 

1.05

 

 

 

1.20

 

 

 

5.75

 

Required ratio1.05  1.20  5.75  

December 31, 2016 actual

 

 

1.17

 

 

 

1.92

 

 

 

4.08

 

December 31, 2019 actualDecember 31, 2019 actual1.11  1.60  3.21  

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In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2016 Credit Facilities and the 2019 Mortgage Facility with the exception of one additional financial covenant related to the ratio of EBTDAR to rent (as such term is defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of December 31, 2016,2019, the ratio was 4.015.57 to 1.00.

We were in compliance with all of the restrictive and financial covenants onin all of our floor plan, long-term debt facilities and lease agreements as of December 31, 2016.2019. After giving effect to the applicable restrictions on the payment of dividends and certain other transactions under our debt agreements, as of December 31, 2016,2019, we had at least $127.4$259.9 million of net income and retained earnings free of such restrictions. Please refer toSee Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for further discussion of the 2016 Credit Facilities.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Acquisitions and Dispositions

During the year ended December 31, 2016, Sonic acquired three stand-alone used vehicle dealership businesses and real estate for approximately $15.9 million.  Sonic2019, we did not disposeacquire any businesses. We disposed of any franchises during the year ended December 31, 2016.one luxury franchised dealership and nine mid-line import franchised dealerships in 2019, which generated net cash from dispositions of approximately $250.7 million. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for further discussion.


Under the 2016 Credit Facilities, we are restricted from making dealership acquisitions in any fiscal year if the aggregate cost of all such acquisitions occurring in any fiscal year is above specific amounts without the written consent of the required lendersRequired Lenders (as that term is defined in the 2016 Credit Facilities).

Capital Expenditures

Our capital expenditures include the purchase of land and buildings, construction of new franchised dealerships, EchoPark®EchoPark stores and collision repair centers, building improvements and equipment purchased for use in our franchised dealerships and EchoPark®EchoPark stores. We selectively construct or improve new franchised dealership facilities to maintain compliance with manufacturers’ image requirements. We typically finance these projects through cash flows from operations, new mortgages or alternatively, through our credit facilities. We also fund these improvements
Capital expenditures for 2019 were approximately $125.6 million, including approximately $89.3 million related to our Franchised Dealerships Segment and approximately $36.3 million related to our EchoPark Segment, all of which was funded through cash flows from operations.

Capital expenditures for the year ended December 31, 2016 were approximately $206.2 million. Of this amount, approximately $123.1$79.5 million was related to facility construction projects, $51.2approximately $27.1 million was related to real estate acquisitions and $31.9approximately $19.0 million was for other fixed assets utilized in our dealership operations. Of the capital expenditures in the year ended December 31, 2016, approximately $103.4 million was funded through mortgage financing and approximately $102.8 million was funded through cash from operations and use of our credit facilities. We expect to receive approximately $70.1 million of additional mortgage funding in the year ending December 31, 2017 related to capital expenditures that occurred prior to December 31, 2017. As of December 31, 2016,2019, commitments for facilitiesfacility construction projects totaled approximately $56.5$18.0 million. We expect investments related to capital expenditures to be partly dependent upon the availability of mortgage financing to fund significant capital projects.

Stock

Share Repurchase Program

Our Board of Directors has authorized us to repurchase shares of our Class A common stock.Common Stock. Historically, we have used our share repurchase authorization to offset dilution caused by the exercise of stock options or the vesting of equity compensation awards and to maintain our desired capital structure. During the year ended December 31, 2016,2019, we repurchased approximately 5.60.2 million shares of our Class A common stockCommon Stock for approximately $100.0$2.4 million in open-market transactions at prevailing market prices including two separate private block trades, and in connection with tax withholdings on the vesting of equity compensation awards. As of December 31, 2016,2019, our total remaining repurchase authorization was approximately $45.0$81.2 million. Under ourthe 2016 Credit Facilities, share repurchases are permitted to the extent that no event of default exists and we do not exceed the restrictions set forth in theour debt agreements. After giving effect to the applicable restrictions on share repurchases and certain other transactions under our debt agreements, as of December 31, 2016,2019, we had at least $127.4$259.9 million of net income and retained earnings free of such restrictions.

Subsequent to December 31, 2016, our Board of Directors authorized an additional $100.0 million to repurchase shares of our Class A common stock, increasing our remaining repurchase authorization to approximately $145.0 million before including the effect of any share repurchases subsequent to December 31, 2016.

Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our historical and projected results of operations, financial condition,

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OPERATIONS

cash flows, capital requirements, covenant compliance, current economic environment and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors and management determine our share repurchase policy in the future.

Dividends

Our Board of Directors approved four quarterly cash dividends on all outstanding shares of Class A and Class B common stockCommon Stock totaling approximately $0.20$0.40 per share during the year ended December 31, 2016.2019. Subsequent to December 31, 2016,2019, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B common stockCommon Stock of $0.05$0.10 per share for stockholders of record on March 15, 201713, 2020 to be paid on April 14, 2017.15, 2020. Under ourthe 2016 Credit Facilities, dividends are permitted to the extent that no event of default exists and we are in compliance with the financial covenants contained therein. The indenturesindenture governing our outstanding 5.0% Notes and 7.0%the 6.125% Notes also containcontains restrictions on our ability to pay dividends. After giving effect to the applicable restrictions on share repurchases and certain other transactions under our debt agreements, as of December 31, 2016,2019, we had at least $127.4$259.9 million of net income and retained earnings free of such restrictions. The payment of any future dividend is subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, current economic environment and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors determines our future dividend policy. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for a description of restrictions on the payment of dividends.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cash Flows

Cash Flows from Operating Activities -Net cash provided by operating activities was approximately $216.4$170.9 million, $69.7$143.7 million and $161.1$162.9 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. The netprovision of cash provided by operations for the year ended December 31, 20162019 consisted primarily of net income (less non-cash items), an increase in notes payable - floor plan - trade and a decrease in receivables, offset partially by an increase in inventories. The provision of cash by operations for 2018 consisted primarily of net income (less non-cash items), an increase in notes payable - floor plan - trade and a decrease in receivables, offset partially by an increase in inventories. The provision of cash by operations for 2017 consisted primarily of net income (less non-cash items) and a decrease in inventory and other assets,inventories, offset partially by an increase in receivables and a decrease in notes payable - floor plan - trade. The net cash provided by operations for the years ended December 31, 2015 and 2014 consisted primarily of net income (less non-cash items) and an increase in notes payable - floor plan – trade, offset partially by an increase in inventory.

We arrange our inventory floor plan financing through both manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. Our floor plan financed with manufacturer captives is recorded as trade floor plan liabilities (with the resulting change being reflected as operating cash flows). Our dealerships that obtain floor plan financing from a syndicate of manufacturer-affiliated finance companies and commercial banks record their obligation as non-trade floor plan liabilities (with the resulting change being reflected as financing cash flows).

Due to the presentation differences for changes in trade floor plan financing and non-trade floor plan financing in the consolidated statements of cash flows, decisions made by us to move dealership floor plan financing arrangements from one finance source to another may cause significant variations in operating and financing cash flows without affecting our overall liquidity, working capital or cash flow.

flows.

Net cash used in combined trade and non-trade floor plan financing was approximately $5.1 million and $12.6 million for 2019 and 2017, respectively. Net cash provided by combined trade and non-trade floor plan financing was approximately $7.1 million, $256.1 million and $11.0$20.7 million for the years ended December 31, 2016, 2015 and 2014, respectively.2018. Accordingly, if all changes in floor plan notes payable were classified as an operating activity, the result would have been net cash provided by operating activities of approximately $266.4$136.2 million, $144.0$147.5 million and $141.5$196.6 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.

Cash Flows from Investing Activities -CashNet cash provided by investing activities during 2019 was approximately $136.8 million. Net cash used in investing activities during the years ended December 31, 2016, 20152018 and 20142017 was approximately $220.8 million, $163.9$15.3 million and $108.4$272.1 million, respectively. The provision of cash during 2019 was comprisedprimarily of proceeds from the sale of 10 franchised dealerships and proceeds from the sale of property and equipment, offset partially by purchases of land, property and equipment. The use of cash during the year ended December 31, 20162018 was comprised primarily comprised ofpurchases of land, property and equipment and the acquisition of three stand-alone pre-owned automobile dealership businesses. The use of cash during the year ended December 31, 2015 was primarily comprised of the purchases of land, property and equipment, offset partially by proceeds from salesthe sale of seven franchised dealerships. The use of cash during the year ended December 31, 2014 2017 was comprised primarily comprised of purchases of land, property and equipment and the acquisition of four dealership franchise operations,one pre-owned vehicle store, offset partially by proceeds from salesthe sale of dealerships.

three franchised dealerships.

The significant components of capital expenditures relate primarily to dealership renovations, the purchase of certain existing dealership facilities which had previously been financed under long-term operating leases, and the purchase and development of new

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SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

real estate parcels for the relocation of existing dealerships and the construction of EchoPark® stores. During the years ended December 31, 2016, 20152019, 2018 and 2014,2017, we generated net proceeds from mortgage financing in the amount of approximately $103.4$109.1 million, $69.1$21.1 million and $44.5$52.5 million, respectively, to purchase certain existing dealership facilities and to fund certain capital expenditures.

Cash Flows from Financing Activities -Net cash used in financing activities was approximately $284.4 million and $128.8 million for 2019 and 2018, respectively. Net cash provided by financing activities was approximately $3.9 million and $93.6$112.5 million for the years ended December 31, 2016 and 2015, respectively. Net2017. For 2019, cash used in financing activities was approximately $51.5 million forcomprised primarily of the year ended December 31, 2014.extinguishment of the 5.0% Notes, scheduled principal payments and repayments of long-term debt and net repayments on notes payable - floor plan - non-trade, offset partially by proceeds from mortgage notes and the 2019 Mortgage Facility. For the year ended December 31, 20162018, cash used in financing activities was comprised primarily of net repayments on revolving credit facilities, scheduled principal payments and 2015,repayments of long-term debt and repurchases of treasury stock, offset partially by proceeds from mortgage notes. For 2017, cash provided by financing activities was comprised primarily of proceeds from the issuance of the 6.125% Notes, net borrowings on notes payable - floor plan - non-trade and proceeds from mortgage notes, offset partially by the extinguishment of the 7.0% Notes, repurchases of treasury stock and scheduled principal payments and repayments of long-term debt. During the year ended December 31, 2014, cash used in financing activities was comprised primarily of net repayments on notes payable - floor plan - non-trade, scheduled principal payments on term notes and repurchases of treasury stock, offset partially by proceeds from mortgage notes.

Cash Flows from Discontinued Operations –-The accompanying consolidated statements of cash flows include both continuing and discontinued operations. Net cash flows from operating activities associated with discontinued operations for the years ended December 31, 2016, 20152019, 2018 and 20142017 were not material to total cash flows.

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SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
One factor that management uses to measure cash flow generation or use is Adjusted EBITDA, a non-GAAP financial measure, for each of our reportable segments. That measure is provided and reconciled to the nearest comparable GAAP financial measure in the table below:

Year Ended December 31, 2019Year Ended December 31, 2018
Franchised Dealerships SegmentEchoPark SegmentDiscontinued OperationsTotalFranchised Dealerships SegmentEchoPark SegmentDiscontinued OperationsTotal
(In thousands)
Net income (loss)$144,137  $51,650  
Provision for income taxes54,954  22,645  
Income (loss) before taxes$210,167  $(10,522) $(554) $199,091  $129,481  $(54,169) $(1,017) $74,295  
Non-floor plan interest (1)48,774  1,701  —  50,475  50,000  1,641  408  52,049  
Depreciation & amortization (2)85,093  10,553  —  95,646  88,857  7,795  —  96,652  
Stock-based compensation expense10,797  —  —  10,797  11,853  —  —  11,853  
Loss (gain) on exit of leased dealerships(170) —  —  (170) 1,281  20  408  1,709  
Asset impairment charges1,101  19,667  —  20,768  27,931  1,583  —  29,514  
Loss (gain) on debt extinguishment6,690  —  —  6,690  —  —  —  —  
Long-term compensation-related charges—  —  —  —  —  32,522  —  32,522  
Loss (gain) on franchise disposals(74,812) —  —  (74,812) (39,307) —  —  (39,307) 
Adjusted EBITDA (3)$287,640  $21,399  $(554) $308,485  $270,096  $(10,608) $(201) $259,287  
(1) Includes interest expense, other, net, in the accompanying consolidated statements of income, net of any amortization of debt issuance costs or net debt discount/premium included in (2) below.
(2) Includes the following line items from the accompanying consolidated statements of cash flows: depreciation and amortization of property and equipment; debt issuance cost amortization; and debt discount amortization, net of premium amortization.
(3) Adjusted EBITDA is a non-GAAP financial measure.

Future Liquidity Outlook

Our future contractual obligations are as follows:

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

 

 

(In thousands)

 

Floor Plan Facilities

 

$

1,525,890

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,525,890

 

Long-Term Debt (1)

 

 

43,127

 

 

 

55,986

 

 

 

19,605

 

 

 

51,523

 

 

 

45,434

 

 

 

681,589

 

 

 

897,264

 

Letters of Credit

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Estimated Interest Payments on Floor Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facilities (2)

 

 

5,272

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,272

 

Estimated Interest Payments on Long-Term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt (3)

 

 

48,820

 

 

 

46,015

 

 

 

42,938

 

 

 

39,272

 

 

 

37,062

 

 

 

57,723

 

 

��

271,830

 

Operating Leases (Net of Sublease Rentals)

 

 

87,663

 

 

 

79,585

 

 

 

64,550

 

 

 

41,319

 

 

 

32,217

 

 

 

96,657

 

 

 

401,991

 

Construction Contracts

 

 

56,525

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56,525

 

Other Purchase Obligations (4)

 

 

9,075

 

 

 

8,000

 

 

 

1,800

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

18,875

 

FIN 48 Liability (5)

 

 

500

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,697

 

 

 

5,197

 

Total

 

$

1,776,872

 

 

$

189,586

 

 

$

128,893

 

 

$

132,114

 

 

$

114,713

 

 

$

840,666

 

 

$

3,182,844

 

(1)

Long-term debt amounts consist only of principal obligations.

(2)

Floor plan facilities balances are correlated with the amount of vehicle inventory and are generally due at the time that a vehicle is sold. Estimated interest payments were calculated using the December 31, 2016 floor plan facilities balance, the weighted average interest rate for the fourth quarter ended December 31, 2016 of 2.07% and the assumption that floor plan balances at December 31, 2016 would be relieved within 60 days in connection with the sale of the associated vehicle inventory.

20202021202220232024ThereafterTotal
(In thousands)
Floor plan facilities$1,539,094  $—  $—  $—  $—  $—  $1,539,094  
Long-term debt (1)69,908  63,274  50,241  68,857  108,462  354,226  714,968  
Letters of credit14,636  —  —  —  —  —  14,636  
Estimated interest payments on floor plan facilities (2)6,967  —  —  —  —  —  6,967  
Estimated interest payments on long-term debt (3)33,529  31,032  28,719  26,007  23,096  42,544  184,927  
Operating leases (net of sublease rentals)64,577  58,093  51,337  49,689  44,012  215,240  482,948  
Construction contracts18,039  —  —  —  —  —  18,039  
Other purchase obligations (4)9,708  8,770  329  329  27  —  19,163  
Liability for uncertain tax positions (5)500  —  —  —  —  3,859  4,359  
Total$1,756,958  $161,169  $130,626  $144,882  $175,597  $615,869  $2,985,101  

(3)

Estimated interest payments include payments related to interest rate swaps.

(1) Long-term debt amounts consist only of principal obligations.

(4)

Other purchase obligations include contracts for real estate purchases, office supplies, utilities and various other items or other services.

(2) Floor plan facility balances are correlated with the amount of vehicle inventory and are generally due at the time that a vehicle is sold. Estimated interest payments were calculated using the December 31, 2019 floor plan facility balance, the weighted average interest rate for the three months ended December 31, 2019 of 2.69% and the assumption that floor plan

(5)

Amount represents recorded liability, including interest and penalties, related to “Accounting for Uncertain Income Tax Positions” in the ASC.  See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 7, “Income Taxes,” to the accompanying consolidated financial statements.

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SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
balances at December 31, 2019 would be relieved within 60 days in connection with the sale of the associated vehicle inventory.
(3) Estimated interest payments include receipts related to interest rate caps.
(4) Other purchase obligations include contracts for real estate purchases, office supplies, utilities, acquisition-related obligations and various other items or other services.
(5) Amount represents recorded liability, including interest and penalties, related to “Accounting for Uncertain Income Tax Positions” in the ASC. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 7, “Income Taxes,” to the accompanying consolidated financial statements.

We believe our best sources of liquidity for operations and debt service remain cash flows generated from operations combined with ourthe availability of borrowings under our floor plan facilities (or any replacements thereof), ourthe 2016 Credit Facilities (or any replacements thereof), the 2019 Mortgage Facility, real estate mortgage financing, selected dealership and other asset sales and our ability to raise funds in the capital markets through offerings of debt or equity securities. Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our

59

SONIC AUTOMOTIVE, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

cash flows from operations are generated by these subsidiaries. As a result, our cash flows and ability to service our obligations depend to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash.

Seasonality

Our operations are subject to seasonal variations. The first quarter normally contributes less operating profit than the second and third andquarters, while the fourth quarters.quarter normally contributes the highest operating profit of any quarter. Weather conditions, the timing of manufacturer incentive programs and model changeovers cause seasonality and may adversely affect vehicle demand and, consequently, our profitability. Comparatively, parts and service demand remains more stable throughout the year.

Off-Balance Sheet Arrangements

Guarantees and Indemnification Obligations

In connection with the operation and disposition of our dealerships, we have entered into various guarantees and indemnification obligations. When we sell dealerships, we attempt to assign any related lease to the buyer of the dealership to eliminate any future liability. However, if we are unable to assign the related leases to the buyer, we will attempt to sublease the leased properties to the buyer at a rate equal to the terms of the original leases. In the event we are unable to sublease the properties to the buyer with terms at least equal to our lease,leases, we may be required to record lease exit accruals. As of December 31, 2016,2019, our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled approximately $51.6$38.5 million. Future sublease payments expected to be received related to these lease payments were approximately $37.7$37.4 million at December 31, 2016.

2019.

In accordance with the terms of agreements entered into for the sale of our dealerships, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the agreement. While our exposure with respect to environmental remediation and repairs is difficult to quantify, our maximum exposure associated with these general indemnifications was approximately $0.5$46.5 million at December 31, 2016.2019. These indemnifications expire within a period of one to threetwo years following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for this contingency was not significant at December 31, 2016. 2019.
We also guarantee the floor plan commitments of our 50%-owned joint venture, the amount of which was approximately $2.8$4.3 million at December 31, 2016.2019. We expect the aggregate amount of the obligations we guarantee to fluctuate based on dealership disposition activity. Although we seek to mitigate our exposure in connection with these matters, these guarantees and indemnification obligations, including environmental exposures and the financial performance of lease assignees and sublessees, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on our liquidity and capital resources. See Note 12, “Commitments and Contingencies,” to the accompanying consolidated financial statements for further discussion regarding these guarantees and indemnification obligations.

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65

SONIC AUTOMOTIVE, INC.

Item

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our variable rate floor plan facilities, the 2019 Mortgage Facility, the 2016 Revolving Credit Facility borrowings and our other variable rate notes expose us to risks caused by fluctuations in the applicable interest rates. The total outstanding balance of such variable instruments after considering the effect of our interest rate swaps (see below)outstanding cash flow hedge instruments was approximately $1.2 billion at December 31, 20162019 and 2015.approximately $0.9 billion at December 31, 2018. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $11.7$16.4 million in the year ended December 31, 20162019 and approximately $10.3$11.5 million in the year ended December 31, 2015.2018. Of the total change in interest expense, approximately $10.0$14.1 million and $9.2$9.1 million in the year ended December 31, 20162019 and 2015,2018, respectively, would have resulted from theour floor plan facilities.

In addition to our variable rate debt, as of December 31, 20162019 and 2015,2018, certain of our dealership lease facilities had monthly lease payments that fluctuated based on LIBOR interest rates. An increase in interest rates of 100 basis points would not have had a significant impact on rent expense in the year ended December 31, 20162019 and 20152018 due to the leases containing LIBOR floors which were above the LIBOR rate during the year ended2019 and 2018.
As of both December 31, 20162019 and 2015.

We also have various cash flow swaps2018, we had interest rate cap agreements to effectively convert a portion oflimit our LIBOR-based variable rate debtexposure to a fixed rate.increases in LIBOR rates above certain levels. Under the terms of these cash flow swaps,the interest rate cap agreements, interest rates reset monthly. The fair value of these swapthe interest rate cap positions at December 31, 20162019 was a net liability of approximately $3.7 million, with $4.1 million included in other accrued liabilities and $2.4 million included in other long-term liabilities, offset partially by an asset of approximately $2.8$0.1 million, included in other assets in the accompanying consolidated balance sheets. The fair value of these swapthe interest rate cap positions at December 31, 20152018 was a liabilitynet asset of approximately $10.0$4.8 million, with $5.1approximately $3.0 million included in other accrued liabilitiesassets and $4.9approximately $1.8 million included in other long-term liabilitiescurrent assets in the accompanying consolidated balance sheets. WeUnder the terms of these agreements, we will receive and pay interest based on the following:

Notional

Amount

 

 

Pay

Rate

 

 

Receive Rate (1)

 

Maturing Date

(In millions)

 

 

 

 

 

 

 

 

 

$

2.3

 

 

 

7.100%

 

 

one-month LIBOR + 1.50%

 

July 10, 2017

$

7.3

 

 

 

4.655%

 

 

one-month LIBOR

 

December 10, 2017

$

6.6

 

(2)

 

6.860%

 

 

one-month LIBOR + 1.25%

 

August 1, 2017

$

6.0

 

(2)

 

6.410%

 

 

one-month LIBOR + 1.25%

 

September 12, 2017

$

100.0

 

 

 

2.065%

 

 

one-month LIBOR

 

June 30, 2017

$

100.0

 

 

 

2.015%

 

 

one-month LIBOR

 

June 30, 2017

$

50.0

 

 

 

1.320%

 

 

one-month LIBOR

 

July 1, 2017

$

250.0

 

(3)

 

1.887%

 

 

one-month LIBOR

 

June 30, 2018

$

25.0

 

 

 

2.080%

 

 

one-month LIBOR

 

July 1, 2017

$

100.0

 

 

 

1.560%

 

 

one-month LIBOR

 

July 1, 2017

$

125.0

 

 

 

1.303%

 

 

one-month LIBOR

 

July 1, 2017

$

125.0

 

(4)

 

1.900%

 

 

one-month LIBOR

 

July 1, 2018

$

50.0

 

(5)

 

2.320%

 

 

one-month LIBOR

 

July 1, 2019

$

200.0

 

(5)

 

2.313%

 

 

one-month LIBOR

 

July 1, 2019

$

100.0

 

(6)

 

1.384%

 

 

one-month LIBOR

 

July 1, 2020

$

125.0

 

(5)

 

1.158%

 

 

one-month LIBOR

 

July 1, 2019

$

150.0

 

(6)

 

1.310%

 

 

one-month LIBOR

 

July 1, 2020

$

125.0

 

(4)

 

1.020%

 

 

one-month LIBOR

 

July 1, 2018

(1)

The one-month LIBOR rate was approximately 0.772% at December 31, 2016.

(2)

Changes in fair value are recorded through earnings.

Notional
Amount		Cap Rate (1)Receive Rate (1) (2)Start DateMaturing Date
(In millions)
$312.5  2.000%  one-month LIBORJuly 1, 2019June 30, 2020
$250.0  3.000%  one-month LIBORJuly 1, 2019June 30, 2020
$225.0  3.000%  one-month LIBORJuly 1, 2020June 30, 2021
$150.0  2.000%  one-month LIBORJuly 1, 2020July 1, 2021
$250.0  3.000%  one-month LIBORJuly 1, 2021July 1, 2022

(3)

The effective date of this forward-starting swap is July 3, 2017.

(1) Under these interest rate caps, no payment from the counterparty will occur unless the stated receive rate exceeds the stated cap rate. If this occurs, a net payment to us from the counterparty based on the spread between the receive rate and the cap rate will be recognized as a reduction of interest expense, other, net in the accompanying consolidated statements of income.

(4)

The effective date of these forward-starting swaps is July 1, 2017.

(5)

The effective date of these forward-starting swaps is July 2, 2018.

(6)

The effective date of these forward-starting swaps is July 1, 2019.

During the year ended(2) The one-month LIBOR rate was approximately 1.763% at December 31, 2016, we entered into four forward-starting interest rate cash flow swap agreements.2019. These interest rate swapscaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these swapsinterest rate caps are recorded in total other comprehensive income (loss) before taxes in the accompanying consolidated statements of comprehensive income.

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66

SONIC AUTOMOTIVE, INC.

Absent the acceleration of payments of principal that may result from non-compliance with financial and operational covenants under our various indebtedness, future principal maturities of variable and fixed rate debt and related interest rate swapscaps are as follows:

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

 

Liability Fair Value

 

 

 

(In thousands)

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate maturities

 

$

18,744

 

 

$

33,938

 

 

$

8,056

 

 

$

12,945

 

 

$

8,443

 

 

$

587,796

 

 

$

669,922

 

 

 

 

 

Fixed rate outstanding (1)

 

$

669,922

 

 

$

651,178

 

 

$

617,240

 

 

$

609,184

 

 

$

596,239

 

 

$

587,796

 

 

 

 

 

 

$

685,970

 

Average rate on fixed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

outstanding debt (1)

 

 

5.57

%

 

 

5.60

%

 

 

5.64

%

 

 

5.65

%

 

 

5.87

%

 

 

5.68

%

 

 

 

 

 

 

 

 

Variable rate maturities

 

$

24,383

 

 

$

22,048

 

 

$

11,549

 

 

$

38,578

 

 

$

36,991

 

 

$

93,793

 

 

$

227,342

 

 

 

 

 

Variable rate outstanding (1)

 

$

227,342

 

 

$

202,959

 

 

$

180,911

 

 

$

169,362

 

 

$

130,784

 

 

$

93,793

 

 

 

 

 

 

$

228,203

 

Average rate on variable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

outstanding debt (1)

 

 

2.92

%

 

 

2.99

%

 

 

3.02

%

 

 

3.03

%

 

 

3.08

%

 

 

3.18

%

 

 

 

 

 

 

 

 

Cash flow interest rate swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable to fixed maturities

 

$

515,524

 

 

$

506,646

 

 

$

375,000

 

 

$

250,000

 

 

$

-

 

 

$

-

 

 

$

1,647,170

 

 

 

 

 

Variable to fixed outstanding (1)

 

$

506,646

 

 

$

375,000

 

 

$

250,000

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

3,709

 

Average rate on outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

swaps (1)

 

 

1.71

%

 

 

1.93

%

 

 

1.34

%

 

 

1.34%

 

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

(1)

Based on amounts outstanding at December 31 of each respective period.

20202021202220232024ThereafterTotal
Asset
(Liability) Fair Value
(In thousands)
Long-term debt:
Fixed rate maturities$17,881  $13,389  $23,877  $21,062  $31,349  $336,977  $444,535  
Fixed rate outstanding (1)$444,535  $426,654  $413,265  $389,387  $368,325  $(457,212) 
Average rate on fixed outstanding debt (1)5.51 %5.56 %5.58 %5.63 %6.24 %5.75 %
Variable rate maturities$52,027  $49,885  $26,364  $47,795  $77,113  $17,249  $270,433  
Variable rate outstanding (1)$270,433  $218,407  $168,522  $142,159  $94,364  $(271,808) 
Average rate on variable outstanding debt (1)3.35 %3.29 %3.24 %3.21 %3.02 %4.66 %
Cash flow hedge instruments:
Interest rate cap notional maturities$562,500  $375,000  $250,000  $—  $—  $—  
Interest rate cap notional outstanding (1)$562,500  $375,000  $250,000  $—  $—  $—  $246  
Average interest income rate on interest rate cap notional outstanding (1)— %— %— %— %— %N/A  

(1) Based on amounts outstanding at January 1 of each respective period.
Foreign Currency Risk

We purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. Dollars, our business is subject to foreign exchange rate risk that may influence automobile manufacturers’ ability to provide their products at competitive prices in the United States. To the extent that we cannot recapture this exchange rate volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results.

67
SONIC AUTOMOTIVE, INC.
Item 8.  Financial Statements and Supplementary Data.

Our consolidated financial statements and the related notes begin on page F-1F-3 herein.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.  Controls and Procedures.

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2016.2019. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2016.

2019.

Our CEO and CFO have each concluded that the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with U.S. generally accepted accounting principles.

GAAP.

Management’s Report on Internal Control overOver Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20162019 based on the framework inInternal Control - Integrated Frameworkpublished in 2013 by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of

62

SONIC AUTOMOTIVE, INC.

December 31, 2016.2019. The attestation report of our independent registered public accounting firm on the Company’s internal control over financial reporting is set forth in Part II, ‘‘Item 8. Financial Statements and Supplementary Data’’ in this Annual Report on Form 10-K.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. In addition, any evaluation of the effectiveness of internal controlscontrol over financial reporting in future periods is subject to risk that those internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting. There has been no change in Sonic’sWe implemented the new lease standard as of January 1, 2019. As a result, we made significant modifications to internal control over financial reporting during the first quarter of 2019, including changes to accounting policies and procedures, operational processes and documentation practices.
There has been no change during the fourth quarter ended December 31, 2016,2019, that has materially affected, or is reasonably likely to materially affect, Sonic’sour internal control over financial reporting.

Item 9B.  Other Information.

None.

63

68

SONIC AUTOMOTIVE, INC.

PART

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

The information required by this item with respect to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading “Executive Officers of the Registrant.”“Information About Our Executive Officers” and is incorporated herein by reference. The other information required by this item is furnished by incorporation by reference to the information under the headings “Election of Directors,” “Corporate Governance and Board of Directors,” “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” and “Additional Corporate Governance and Other Information –- Corporate Governance Guidelines, Code of Business Conduct and Ethics and Committee Charters” in the definitive Proxy Statementproxy statement (to be filed hereafter) for our 20172020 Annual Meeting of Stockholders (the “Proxy Statement”).

Item 11.  Executive Compensation.

The information required by this item is furnished by incorporation by reference to the information under the headings “Executive Compensation” and “Director Compensation” in the Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item is furnished by incorporation by reference to the information under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

The information required by this item is furnished by incorporation by reference to the information under the headings “Corporate Governance and Board of Directors –- Director Independence,” “Corporate Governance and Board of Directors - Policies and Procedures for Review, Approval or Ratification of Transactions with Affiliates,” “Corporate Governance and Board of Directors – Transactions with Affiliates” and “Corporate Governance and Board of Directors - Director Independence”Transactions with Affiliates” in the Proxy Statement.

Item 14.  Principal Accountant Fees and Services.

The information required by this item is furnished by incorporation by reference to the information under the heading “Ratification of the Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.

64


69

SONIC AUTOMOTIVE, INC.

PART

PART IV

Item 15.  Exhibits and Financial Statement Schedules.

The exhibits and other documents filed as a part of this Annual Report on Form 10-K, including those exhibits that are incorporated by reference herein, are:

(1)

Financial Statements: consolidated balance sheets as of December 31, 2016 and 2015. Consolidated statements of income for the Years Ended December 31, 2016, 2015 and 2014. Consolidated statements of comprehensive income for the Years Ended December 31, 2016, 2015 and 2014. Consolidated statements of stockholders’ equity for the Years Ended December 31, 2014, 2015 and 2016. Consolidated statements of cash flows for the Years Ended December 31, 2016, 2015 and 2014.

1.Financial Statements: Consolidated balance sheets as of December 31, 2019 and 2018; consolidated statements of income for the years ended December 31, 2019, 2018 and 2017; consolidated statements of comprehensive income for the years ended December 31, 2019, 2018 and 2017; consolidated statements of stockholders’ equity for the years ended December 31, 2019, 2018 and 2017; and consolidated statements of cash flows for the years ended December 31, 2019, 2018 and 2017.
2.Financial Statement Schedules: No financial statement schedules are required to be filed (no respective financial statement captions) as part of this Annual Report on Form 10-K.
3.Exhibits: Exhibits required in connection with this Annual Report on Form 10-K are listed below. Certain of such exhibits are hereby incorporated by reference to other documents on file with the SEC with which they are physically filed, to be a part hereof as of their respective dates.

(2)

Financial Statement Schedules: No financial statement schedules are required to be filed (no respective financial statement captions) as part of this Annual Report on Form 10-K.

(3)

Exhibits: Exhibits required in connection with this Annual Report on Form 10-K are listed below. Certain of such exhibits are hereby incorporated by reference to other documents on file with the SEC with which they are physically filed, to be a part hereof as of their respective dates.

EXHIBIT NO.

DESCRIPTION

3.1

EXHIBIT NO.

DESCRIPTION
3.1 

3.2 

3.2

3.3 

3.3

Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 19982017 (File No. 001-13395)).

3.4 

3.4

3.5 

4.1* 

4.1

4.2 

4.3 

4.2

4.3

Indenture, dated as of July 2, 2012, by and among Sonic Automotive, Inc., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed July 9, 2012 (File No. 001-13395)).

4.4

Form of 7.0% Senior Subordinated Notes due 2022 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed July 9, 2012 (File No. 001-13395)).

4.5

Registration Rights Agreement, dated as of May 9, 2013,March 10, 2017, by and among Sonic Automotive, Inc., the guarantors set forth on the signature pages thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed May 13, 2013March 14, 2017 (File No. 001-13395)).

4.4

4.6

4.5

4.7

10.1

65

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.1

ThirdFourth Amended and Restated Credit Agreement, dated as of July 23, 2014,November 30, 2016, among Sonic Automotive, Inc.; each lender a party thereto; Bank of America, N.A., as administrative agent, swing line lender and an l/c issuer; and Wells Fargo Bank, National Association, as an l/c issuer (incorporated by reference to Exhibit 10.210.11 to the QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended September 30, 2014December 31, 2016 (File No. 001-13395)).

10.2

10.2

10.3

10.3

Third

10.4

10.4

Third

70
SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.5

Third

10.6

10.6

Third

10.7

10.7

Second

10.8

10.8

10.9

10.9

Second

10.10

66

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.10

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

SecondThird Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014,November 30, 2016, by the subsidiaries of Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.1110.20 to the QuarterlyAnnual Report on Form 10-Q10-K for the quarteryear ended September 30, 2014December 31, 2016 (File No. 001-13395)).

Fourth Amended and Restated

10.11*
10.12*
10.13*
Form of Promissory Note, dated November 30, 2016,22, 2019, executed by Sonic Automotive, Inc., as borrower, in favor of

each of the lenders to the Fourth Amended and Restated Credit Agreement.

Fourth Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of

Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the

lenders.

Fourth Amended and Restated Securities Pledge Agreement, dated as of November 30, 2016, among Sonic

Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as

administrative agent for the lenders.

Fourth Amended and Restated Escrow and Security Agreement, dated as of November 30, 2016, among Sonic

Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as

administrative agent for the lenders.

Fourth Amended and Restated Security Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc.,

the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the

lenders.

Third Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated as of November

30, 2016, among Sonic Automotive, Inc.; the subsidiaries of Sonic Automotive, Inc. named therein; each lender a party

thereto; Bank of America, N.A., as administrative agent, new vehicle swing line lender and used vehicle swing line

lender; and Bank of America, N.A., as revolving administrative agent.

Form of Promissory Note, dated November 30, 2016, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic

Automotive, Inc. named therein, as borrowers, in favor of each of the lenders to the Third Amended and Restated

Syndicated New and Used Vehicle Floorplan Credit Agreement.

Third Amended and Restated Company Guaranty Agreement, dated as of November 30, 2016, by Sonic Automotive,

Inc. to Bank of America, N.A., as administrative agent for the lenders.

Third Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of

Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the

lenders.

10.14

10.21

10.15

10.22

10.16

10.23

10.17

10.24

67

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.18

10.25

10.19

10.26

10.20

10.27

10.21

10.28

Sonic Automotive, Inc. 1997 Stock Option Plan, amended and restated as of April 22, 2003 (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-13395)). (1)

10.29

Sonic Automotive, Inc. 2004 Stock Incentive Plan, amended and restated as of February 11, 2009 (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 filed June 2, 2009 (File No. 333-159674)). (1)

10.30

Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1)

10.31

Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1)

10.32

Sonic Automotive, Inc. Incentive Compensation Plan, amended and restated as of October 16, 2013 (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed March 4, 2014 (File No. 001-13395)). (1)

10.33

71
SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.34

10.22

10.23

10.35

10.24

10.36

10.25

10.37

10.26

10.27

10.38

10.28

10.39

10.29

10.40

68

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.30

10.41

10.31

10.42

10.32

10.43

10.33

10.44

10.34

10.45

10.35

10.46

10.36

10.37

10.47

Director Compensation Policy

10.38

10.48

10.39

10.40

10.49

10.41

72
SONIC AUTOMOTIVE, INC.

12.1*

EXHIBIT NO.

Computation of Ratio of Earnings to Fixed Charges.

DESCRIPTION

21.1*

10.42

21.1*

23.1*

23.1*

31.1*

31.2*

31.2*

32.1**

32.1**

32.2**

32.2**

101.INS*

101.INS*

Inline XBRL Instance Document.

101.SCH*

101.SCH*

Inline XBRL Taxonomy Extension Schema Document.

101.CAL*

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104*Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

69


*Filed herewith.
**Furnished herewith.
(1) Indicates a management contract or compensatory plan or arrangement.

73

SONIC AUTOMOTIVE, INC.

*

Filed herewith.

**

Furnished herewith.

Item 16.  Form 10-K Summary.

(1)

Indicates a management contract or compensatory plan or arrangement.

None.


70

74

SONIC AUTOMOTIVE, INC.

Item 16.  Form 10-K Summary.

None.

71

SONIC AUTOMOTIVE, INC.

SIGNATURES

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SONIC AUTOMOTIVE, INC.

February 21, 2020

BY

By:

/s/ HEATH R. BYRD

Mr.

Heath R. Byrd

Executive Vice President and Chief Financial Officer

Date: February 24, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date

Signature

Title		Date

/s/ O. BRUTON SMITH

Executive Chairman and Director

February 24, 2017

21, 2020

O. Bruton Smith

/s/ B. SCOTTDAVID BRUTON SMITH

President, Chief Executive Officer (principal

and Director

February 24, 2017

21, 2020

B. ScottDavid Bruton Smith

executive officer)(Principal Executive Officer)

/s/ JEFF DYKEPresident and Director

February 21, 2020

Jeff Dyke

/s/ HEATH R. BYRD

Executive Vice President and Chief Financial Officer

February 24, 2017

21, 2020

Heath R. Byrd

(principal financial officerPrincipal Financial Officer and principal accounting officer)

Principal Accounting Officer)

/s/ DAVID BRUTON SMITH

Vice Chairman and Director

February 24, 2017

David Bruton Smith

/s/ WILLIAM I. BELK

Director

February 24, 2017

21, 2020

William I. Belk

/s/ WILLIAM R. BROOKS

Director

February 24, 2017

21, 2020

William R. Brooks

/s/ VICTOR H. DOOLAN

Director

February 13, 2017

21, 2020

Victor H. Doolan

/s/ JOHN W. HARRIS III

Director

February 13, 2017

21, 2020

John W. Harris III

/s/ H. ROBERT HELLER

Director

February 24, 2017

21, 2020

H. Robert Heller

/s/ MARCUS G. SMITH

DirectorFebruary 21, 2020
Marcus G. Smith
/s/ R. EUGENE TAYLOR

Director

February 24, 2017

21, 2020

R. Eugene Taylor

72

SONIC AUTOMOTIVE, INC.

EXHIBIT INDEX

EXHIBIT NO.

DESCRIPTION

3.1

Amended and Restated Certificate of Incorporation of Sonic Automotive, Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed August 8, 1997 (File No. 333-33295)).

3.2

Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Sonic Automotive, Inc.  (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-13395)).

3.3

Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 001-13395)).

3.4

Amended and Restated Bylaws of Sonic Automotive, Inc., as of February 13, 2017 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed February 16, 2017 (File No. 001-13395)).

4.1

Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1/A filed October 17, 1997 (File No. 333-33295)).

4.2

Registration Rights Agreement, dated as of July 2, 2012, by and among Sonic Automotive, Inc., the guarantors set forth on the signature pages thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed July 9, 2012 (File No. 001-13395)).

4.3

Indenture, dated as of July 2, 2012, by and among Sonic Automotive, Inc., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed July 9, 2012 (File No. 001-13395)).

4.4

Form of 7.0% Senior Subordinated Notes due 2022 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed July 9, 2012 (File No. 001-13395)).

4.5

Registration Rights Agreement, dated as of May 9, 2013, by and among Sonic Automotive, Inc., the guarantors set forth on the signature pages thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed May 13, 2013 (File No. 001-13395)).

4.6

Indenture, dated as of May 9, 2013, by and among Sonic Automotive, Inc., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed May 13, 2013 (File No. 001-13395)).

4.7

Form of 5.0% Senior Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filed May 13, 2013 (File No. 001-13395)).

10.1

Third Amended and Restated Credit Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc.; each lender a party thereto; Bank of America, N.A., as administrative agent, swing line lender and an l/c issuer; and Wells Fargo Bank, National Association, as an l/c Issuer (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.2

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc., as borrower, in favor of each of the lenders to the Third Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.3

Third Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.4

Third Amended and Restated Securities Pledge Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

73

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.5

Third Amended and Restated Escrow and Security Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.6

Third Amended and Restated Security Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.7

Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc.; the subsidiaries of Sonic Automotive, Inc. named therein; each lender a party thereto; Bank of America, N.A., as administrative agent, new vehicle swing line lender and used vehicle swing line lender; and Bank of America, N.A. as revolving administrative agent (incorporated by reference to Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.8

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic Automotive, Inc. named therein, as borrowers, in favor of each of the lenders to the Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

10.9

Second Amended and Restated Company Guaranty Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc. to Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

74

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.10

10.11*

10.12*

10.13*

10.14*

10.15*

10.16*

10.17*

10.18*

10.19*

10.20*

Second Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.11 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 (File No. 001-13395)).

Fourth Amended and Restated Credit Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc.; each

lender a party thereto; Bank of America, N.A., as administrative agent, swing line lender and an l/c issuer; and Wells

Fargo Bank, National Association, as an l/c issuer.

Form of Promissory Note, dated November 30, 2016, executed by Sonic Automotive, Inc., as borrower, in favor of

each of the lenders to the Fourth Amended and Restated Credit Agreement.

Fourth Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of

Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the

lenders.

Fourth Amended and Restated Securities Pledge Agreement, dated as of November 30, 2016, among Sonic

Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as

administrative agent for the lenders.

Fourth Amended and Restated Escrow and Security Agreement, dated as of November 30, 2016, among Sonic

Automotive, Inc., the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as

administrative agent for the lenders.

Fourth Amended and Restated Security Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc.,

the subsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the

lenders.

Third Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated as of November

30, 2016, among Sonic Automotive, Inc.; the subsidiaries of Sonic Automotive, Inc. named therein; each lender a party

thereto; Bank of America, N.A., as administrative agent, new vehicle swing line lender and used vehicle swing line

lender; and Bank of America, N.A., as revolving administrative agent.

Form of Promissory Note, dated November 30, 2016, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic

Automotive, Inc. named therein, as borrowers, in favor of each of the lenders to the Third Amended and Restated

Syndicated New and Used Vehicle Floorplan Credit Agreement.

Third Amended and Restated Company Guaranty Agreement, dated as of November 30, 2016, by Sonic Automotive,

Inc. to Bank of America, N.A., as administrative agent for the lenders.

Third Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of

Sonic Automotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the

lenders.

10.21

Standard Form of Lease executed with Capital Automotive L.P. or its affiliates (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).

10.22

Standard Form of Lease Guaranty executed with Capital Automotive L.P. or its affiliates (incorporated by reference to Exhibit 10.39 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).

10.23

Amendment to Guaranty and Subordination Agreements, dated as of January 1, 2005, by and between Sonic Automotive, Inc., as guarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).

10.24

Second Amendment to Guaranty and Subordination Agreements, dated as of March 12, 2009, by and between Sonic Automotive, Inc., as guarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference to Exhibit 10.41 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).

75

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.25

Side Letter to Second Amendment to Guaranty and Subordination Agreements, dated as of March 12, 2009, by and between Sonic Automotive, Inc., as guarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference to Exhibit 10.42 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).

10.26

Sonic Automotive, Inc. Employee Stock Purchase Plan, amended and restated as of May 8, 2002 (incorporated by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-13395)). (1)

10.27

Sonic Automotive, Inc. Nonqualified Employee Stock Purchase Plan, amended and restated as of October 23, 2002 (incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-13395)). (1)

10.28

Sonic Automotive, Inc. 1997 Stock Option Plan, amended and restated as of April 22, 2003 (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-13395)). (1)

10.29

Sonic Automotive, Inc. 2004 Stock Incentive Plan, amended and restated as of February 11, 2009 (incorporated by reference to Exhibit 4 to the Registration Statement on Form S-8 filed June 2, 2009 (File No. 333-159674)). (1)

10.30

Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1)

10.31

Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.34 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1)

10.32

Sonic Automotive, Inc. Incentive Compensation Plan, amended and restated as of October 16, 2013 (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed March 4, 2014 (File No. 001-13395)). (1)

10.33

Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated by reference to Exhibit 10.46 to the Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-13395)). (1)

10.34

First Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated by reference to Exhibit 10.47 to the Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-13395)). (1)

10.35

Second Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated by reference to Exhibit 10.59 to the Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 001-13395)). (1)

10.36

Third Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective February 12, 2015 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 13, 2015 (File No. 001-13395)). (1)

10.37

Sonic Automotive, Inc. 2012 Stock Incentive Plan, amended and restated as of February 11, 2015 (incorporated by reference to Appendix A to the Definitive Proxy Statement on Schedule 14A filed March 3, 2015 (File No. 001-13395)). (1)

10.38

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Incentive Stock Option Award Agreement (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.39

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Nonstatutory Stock Option Award Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.40

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Performance-Based Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

76

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

10.41

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Performance-Based Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.42

Sonic Automotive, Inc. 2012 Stock Incentive Plan Performance-Based Restricted Stock Unit Award Agreement for Retention Grant, dated May 6, 2015, between Sonic Automotive, Inc. and Jeff Dyke (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed May 8, 2015 (File No. 001-13395)). (1)

10.43

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.44

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.45

Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Stock Appreciation Rights Award Agreement (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1)

10.46

Sonic Automotive, Inc. 2012 Formula Restricted Stock Plan for Non-Employee Directors (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-8 filed April 19, 2012 (File No. 333-180815)). (1)

10.47

Director Compensation Policy (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed October 15, 2014 (File No. 001-13395)). (1)

10.48

Employment Agreement of Heath R. Byrd, dated October 18, 2007, as amended December 19, 2008 (incorporated by reference to Exhibit 10.54 to the Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-13395)). (1)

10.49

Form of Change in Control Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed May 8, 2015 (File No. 001-13395)). (1)

12.1*

Computation of Ratio of Earnings to Fixed Charges.

21.1*

Subsidiaries of Sonic Automotive, Inc.

23.1*

Consent of KPMG LLP.

31.1*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of

the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302

of the Sarbanes-Oxley Act of 2002.

32.1**

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*

XBRL Instance Document.

101.SCH*

XBRL Taxonomy Extension Schema Document.

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document.

77

SONIC AUTOMOTIVE, INC.

EXHIBIT NO.

DESCRIPTION

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document.

*

Filed herewith.

**

Furnished herewith.


(1)

Indicates a management contract or compensatory plan or arrangement.

78

75


Report of Independent RegisteredRegistered Public Accounting Firm

The

To the Stockholders and Board of Directors and Stockholders

Sonic Automotive, Inc.:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Sonic Automotive, Inc. and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2016. 2019 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 21, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases and revenue as of January 1, 2018, due to the adoption of ASC Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the carrying value of goodwill for the EchoPark stores reporting unit
As discussed in Notes 1 and 5 to the consolidated financial statements, the Company tests goodwill for impairment at least annually, or more frequently when events or circumstances indicate an impairment might have occurred. The goodwill balance as of December 31, 2019 was $476 million, of this amount, the goodwill balance for the EchoPark stores reporting unit was $60 million.
We identified the assessment of the carrying value of goodwill for the EchoPark stores reporting unit as a critical audit matter. Specifically, certain assumptions used to estimate the fair value of the EchoPark stores reporting unit required subjective and
F-1

challenging auditor judgment as changes to the projected earnings, residual growth rate and the discount rate assumptions could have an effect on the assessment of the recoverability of the carrying value of goodwill.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including controls related to the determination of the fair value of the EchoPark stores reporting unit, the related projected earnings, residual growth rate, and the discount rate. We performed sensitivity analyses over the projected earnings, residual growth rate and discount rate assumptions to assess their impact on the Company’s determination that the fair value of the EchoPark stores reporting unit exceeded its carrying value. We compared the Company’s projected earnings to actual results to assess the Company’s ability to accurately estimate projected earnings. We also involved a valuation professional with specialized skill and knowledge who assisted in:
•evaluating the Company’s discount rate, by comparing it against a discount rate range that was independently developed using publicly available market data;
•evaluating the Company’s residual growth rate for EchoPark stores, including an evaluation of relevant industry data; and
•developing an independent estimate of the EchoPark stores reporting unit’s fair value using the reporting unit’s cash flow projections and an independently developed discount rate; and comparing the results of our estimate of the fair value to the Company’s fair value estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Charlotte, North Carolina
February 21, 2020


F-2

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Sonic Automotive, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Sonic Automotive, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly,Company maintained, in all material respects, theeffective internal control over financial position of Sonic Automotive, Inc. and subsidiariesreporting as of December 31, 2016 and 2015, and2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the resultsCommittee of their operations and their cash flows for eachSponsoring Organizations of the years in the three‑year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.

Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Sonic Automotive, Inc.’s internal control over financial reportingthe consolidated balance sheets of the Company as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by2019 and 2018, the Committeerelated consolidated statements of Sponsoring Organizationsincome, comprehensive income, stockholders’ equity, and cash flows for each of the Treadway Commission (COSO)years in the three-year period ended December 31, 2019 and the related notes (collectively, the consolidated financial statements), and our report dated February 24, 201721, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control overthose consolidated financial reporting.

/s/ KPMG LLP  

Charlotte, North Carolina

February 24, 2017

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Sonic Automotive, Inc.:

We have audited Sonic Automotive, Inc.’s (the Company) internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). statements.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated February 24, 2017 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Charlotte, North Carolina

February 24, 2017

F-2

21, 2020

F-3


SONIC AUTOMOTIVE, INC.

CONSOLIDATED BALANCE SHEETS

 

December 31,

 

 

December 31,

 

 

2016

 

 

2015

 

December 31, 2019December 31, 2018

 

(Dollars in thousands)

 

 (Dollars in thousands)

ASSETS

ASSETS

 

ASSETS

Current Assets:

 

 

 

 

 

 

 

 

Current Assets:  

Cash and cash equivalents

 

$

3,108

 

 

$

3,625

 

Cash and cash equivalents$29,103  $5,854  

Receivables, net

 

 

430,242

 

 

 

378,520

 

Receivables, net432,742  438,186  

Inventories

 

 

1,570,701

 

 

 

1,599,581

 

Inventories1,517,875  1,528,461  

Other current assets

 

 

26,993

 

 

 

101,386

 

Other current assets37,890  20,886  

Total current assets

 

 

2,031,044

 

 

 

2,083,112

 

Total current assets2,017,610  1,993,387  

Property and Equipment, net

 

 

1,010,380

 

 

 

886,902

 

Property and Equipment, net1,097,247  1,178,489  

Goodwill

 

 

472,437

 

 

 

471,493

 

Goodwill475,791  509,592  

Other Intangible Assets, net

 

 

80,233

 

 

 

80,876

 

Other Intangible Assets, net64,300  69,705  
Operating Right-of-Use Lease AssetsOperating Right-of-Use Lease Assets337,842  —  
Finance Right-of-Use Lease AssetsFinance Right-of-Use Lease Assets34,691  —  

Other Assets

 

 

45,242

 

 

 

39,998

 

Other Assets43,554  45,634  

Total Assets

 

$

3,639,336

 

 

$

3,562,381

 

Total Assets$4,071,035  $3,796,807  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:

 

 

 

 

 

 

 

 

Current Liabilities:  

Notes payable - floor plan - trade

 

$

850,537

 

 

$

893,466

 

Notes payable - floor plan - trade$860,871  $821,074  

Notes payable - floor plan - non-trade

 

 

675,353

 

 

 

625,367

 

Notes payable - floor plan - non-trade678,223  712,966  

Trade accounts payable

 

 

117,740

 

 

 

131,204

 

Trade accounts payable135,217  114,263  
Operating short-term lease liabilitiesOperating short-term lease liabilities43,332  —  
Finance short-term lease liabilitiesFinance short-term lease liabilities1,564  —  

Accrued interest

 

 

13,265

 

 

 

12,640

 

Accrued interest10,830  13,417  

Other accrued liabilities

 

 

236,982

 

 

 

218,507

 

Other accrued liabilities266,211  257,823  

Current maturities of long-term debt

 

 

43,003

 

 

 

33,437

 

Current maturities of long-term debt69,908  26,304  

Total current liabilities

 

 

1,936,880

 

 

 

1,914,621

 

Total current liabilities2,066,156  1,945,847  

Long-Term Debt

 

 

839,675

 

 

 

781,145

 

Long-Term Debt636,978  918,779  

Other Long-Term Liabilities

 

 

61,170

 

 

 

64,245

 

Other Long-Term Liabilities73,746  75,887  
Operating Long-Term Lease LiabilitiesOperating Long-Term Lease Liabilities304,151  —  
Finance Long-Term Lease LiabilitiesFinance Long-Term Lease Liabilities36,313  —  

Deferred Income Taxes

 

 

76,447

 

 

 

73,322

 

Deferred Income Taxes8,927  33,178  

Commitments and Contingencies

 

 

 

 

 

 

 

 

Commitments and Contingencies

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Stockholders’ Equity:

Class A convertible preferred stock, none issued

 

 

-

 

 

 

-

 

Class A common stock, $0.01 par value; 100,000,000 shares authorized;

62,967,061 shares issued and 32,703,865 shares outstanding at

December 31, 2016; 62,586,381 shares issued and 37,910,938 shares

outstanding at December 31, 2015

 

 

630

 

 

 

626

 

Class B common stock, $0.01 par value; 30,000,000 shares authorized;

12,029,375 shares issued and outstanding at December 31, 2016

and December 31, 2015

 

 

121

 

 

 

121

 

Class A Convertible Preferred Stock, none issuedClass A Convertible Preferred Stock, none issued—  —  
Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 64,733,667 shares issued and 31,105,000 shares outstanding at December 31, 2019; 64,197,385 shares issued and 30,721,226 shares outstanding at December 31, 2018Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 64,733,667 shares issued and 31,105,000 shares outstanding at December 31, 2019; 64,197,385 shares issued and 30,721,226 shares outstanding at December 31, 2018647  642  
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at December 31, 2019 and 2018Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at December 31, 2019 and 2018121  121  

Paid-in capital

 

 

721,695

 

 

 

713,118

 

Paid-in capital755,904  745,052  

Retained earnings

 

 

541,146

 

 

 

457,010

 

Retained earnings790,158  670,691  

Accumulated other comprehensive income (loss)

 

 

(2,262

)

 

 

(5,632

)

Accumulated other comprehensive income (loss)(2,062) 4,233  

Treasury stock, at cost; 30,263,196 Class A common stock shares held

at December 31, 2016 and 24,675,443 Class A common stock shares

held at December 31, 2015

 

 

(536,166

)

 

 

(436,195

)

Treasury stock, at cost; 33,628,667 Class A Common Stock shares held at December 31, 2019 and 33,476,159 Class A Common Stock shares held at December 31, 2018Treasury stock, at cost; 33,628,667 Class A Common Stock shares held at December 31, 2019 and 33,476,159 Class A Common Stock shares held at December 31, 2018(600,004) (597,623) 

Total Stockholders’ Equity

 

 

725,164

 

 

 

729,048

 

Total Stockholders’ Equity944,764  823,116  

Total Liabilities and Stockholders’ Equity

 

$

3,639,336

 

 

$

3,562,381

 

Total Liabilities and Stockholders’ Equity$4,071,035  $3,796,807  

See notes to consolidated financial statements

F-3

statements.
F-4


SONIC AUTOMOTIVE, INC.

CONSOLIDATED STATEMENTS OF INCOME

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(Dollars and shares in thousands,

 

 

 

except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

$

5,234,505

 

 

$

5,265,401

 

 

$

5,124,029

 

Used vehicles

 

 

2,533,122

 

 

 

2,512,024

 

 

 

2,310,247

 

Wholesale vehicles

 

 

211,048

 

 

 

155,339

 

 

 

166,158

 

Total vehicles

 

 

7,978,675

 

 

 

7,932,764

 

 

 

7,600,434

 

Parts, service and collision repair

 

 

1,409,819

 

 

 

1,364,947

 

 

 

1,296,570

 

Finance, insurance and other, net

 

 

343,285

 

 

 

326,588

 

 

 

300,095

 

Total revenues

 

 

9,731,779

 

 

 

9,624,299

 

 

 

9,197,099

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

 

(4,973,911

)

 

 

(4,997,472

)

 

 

(4,835,403

)

Used vehicles

 

 

(2,374,537

)

 

 

(2,349,982

)

 

 

(2,153,001

)

Wholesale vehicles

 

 

(218,364

)

 

 

(162,707

)

 

 

(169,774

)

Total vehicles

 

 

(7,566,812

)

 

 

(7,510,161

)

 

 

(7,158,178

)

Parts, service and collision repair

 

 

(735,693

)

 

 

(699,526

)

 

 

(673,021

)

Total cost of sales

 

 

(8,302,505

)

 

 

(8,209,687

)

 

 

(7,831,199

)

Gross profit

 

 

1,429,274

 

 

 

1,414,612

 

 

 

1,365,900

 

Selling, general and administrative expenses

 

 

(1,110,856

)

 

 

(1,110,565

)

 

 

(1,067,433

)

Impairment charges

 

 

(8,063

)

 

 

(17,955

)

 

 

(6,594

)

Depreciation and amortization

 

 

(77,446

)

 

 

(68,799

)

 

 

(58,260

)

Operating income (loss)

 

 

232,909

 

 

 

217,293

 

 

 

233,613

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, floor plan

 

 

(27,716

)

 

 

(21,326

)

 

 

(18,793

)

Interest expense, other, net

 

 

(50,106

)

 

 

(50,910

)

 

 

(53,190

)

Other income (expense), net

 

 

125

 

 

 

99

 

 

 

97

 

Total other income (expense)

 

 

(77,697

)

 

 

(72,137

)

 

 

(71,886

)

Income (loss) from continuing operations before taxes

 

 

155,212

 

 

 

145,156

 

 

 

161,727

 

Provision for income taxes for continuing operations - benefit (expense)

 

 

(60,696

)

 

 

(57,065

)

 

 

(63,168

)

Income (loss) from continuing operations

 

 

94,516

 

 

 

88,091

 

 

 

98,559

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before taxes

 

 

(2,121

)

 

 

(2,883

)

 

 

(2,164

)

Provision for income taxes for discontinued operations - benefit (expense)

 

 

798

 

 

 

1,103

 

 

 

822

 

Income (loss) from discontinued operations

 

 

(1,323

)

 

 

(1,780

)

 

 

(1,342

)

Net income (loss)

 

$

93,193

 

 

$

86,311

 

 

$

97,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

2.07

 

 

$

1.74

 

 

$

1.89

 

Earnings (loss) per share from discontinued operations

 

 

(0.03

)

 

 

(0.03

)

 

 

(0.03

)

Earnings (loss) per common share

 

$

2.04

 

 

$

1.71

 

 

$

1.86

 

Weighted average common shares outstanding

 

 

45,637

 

 

 

50,489

 

 

 

52,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

2.06

 

 

$

1.73

 

 

$

1.87

 

Earnings (loss) per share from discontinued operations

 

 

(0.03

)

 

 

(0.03

)

 

 

(0.03

)

Earnings (loss) per common share

 

$

2.03

 

 

$

1.70

 

 

$

1.84

 

Weighted average common shares outstanding

 

 

45,948

 

 

 

50,883

 

 

 

52,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.20

 

 

$

0.11

 

 

$

0.10

 

 Year Ended December 31,
 201920182017
(Dollars and shares in thousands,
except per share amounts)
Revenues:
New vehicles$4,889,171  $4,974,097  $5,295,051  
Used vehicles3,489,972  2,973,498  2,622,053  
Wholesale vehicles202,946  217,625  171,064  
Total vehicles8,582,089  8,165,220  8,088,168  
Parts, service and collision repair1,395,303  1,380,887  1,416,010  
Finance, insurance and other, net476,951  405,523  363,030  
Total revenues10,454,343  9,951,630  9,867,208  
Cost of Sales:
New vehicles(4,656,084) (4,732,595) (5,030,125) 
Used vehicles(3,342,576) (2,830,510) (2,467,150) 
Wholesale vehicles(207,378) (228,874) (179,778) 
Total vehicles(8,206,038) (7,791,979) (7,677,053) 
Parts, service and collision repair(727,288) (713,526) (732,479) 
Total cost of sales(8,933,326) (8,505,505) (8,409,532) 
Gross profit1,521,017  1,446,125  1,457,676  
Selling, general and administrative expenses(1,099,374) (1,145,325) (1,147,773) 
Impairment charges(20,768) (29,514) (9,394) 
Depreciation and amortization(93,169) (93,623) (88,944) 
Operating income (loss)307,706  177,663  211,565  
Other income (expense):
Interest expense, floor plan(48,519) (48,398) (36,395) 
Interest expense, other, net(52,953) (54,059) (52,524) 
Other income (expense), net(6,589) 106  (14,522) 
Total other income (expense)(108,061) (102,351) (103,441) 
Income (loss) from continuing operations before taxes199,645  75,312  108,124  
Provision for income taxes for continuing operations - benefit (expense)(55,108) (22,922) (13,971) 
Income (loss) from continuing operations144,537  52,390  94,153  
Discontinued operations:
Income (loss) from discontinued operations before taxes(554) (1,017) (1,942) 
Provision for income taxes for discontinued operations - benefit (expense)154  277  772  
Income (loss) from discontinued operations(400) (740) (1,170) 
Net income (loss)$144,137  $51,650  $92,983  
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations$3.36  $1.23  $2.14  
Earnings (loss) per share from discontinued operations(0.01) (0.02) (0.03) 
Earnings (loss) per common share$3.35  $1.21  $2.11  
Weighted average common shares outstanding43,016  42,708  43,997  
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations$3.31  $1.22  $2.12  
Earnings (loss) per share from discontinued operations(0.01) (0.02) (0.03) 
Earnings (loss) per common share$3.30  $1.20  $2.09  
Weighted average common shares outstanding43,710  42,950  44,358  
See notes to consolidated financial statements

F-4

statements.
F-5


SONIC AUTOMOTIVE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

 

Year Ended December 31,

2016

 

 

2015

 

 

2014

 

201920182017

(Dollars in thousands)

 

(Dollars in thousands)

Net income (loss)

$

93,193

 

 

$

86,311

 

 

$

97,217

 

Net income (loss)$144,137  $51,650  $92,983  

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before taxes:

Change in fair value of interest rate swap agreements

 

5,731

 

 

 

540

 

 

 

4,655

 

Change in fair value of interest rate swap and rate cap agreementsChange in fair value of interest rate swap and rate cap agreements(3,819) 2,173  6,186  
Amortization of terminated interest rate swap agreements
Amortization of terminated interest rate swap agreements
(2,484) (429) —  

Pension actuarial income (loss)

 

(295

)

 

 

737

 

 

 

(1,174

)

Pension actuarial income (loss)(2,670) 2,368  (429) 

Total other comprehensive income (loss) before taxes

 

5,436

 

 

 

1,277

 

 

 

3,481

 

Total other comprehensive income (loss) before taxes(8,973) 4,112  5,757  

Provision for income tax benefit (expense) related to

components of other comprehensive income (loss)

 

(2,066

)

 

 

(485

)

 

 

(1,323

)

Provision for income tax benefit (expense) related to
components of other comprehensive income (loss)
2,678  (1,186) (2,188) 

Other comprehensive income (loss)

 

3,370

 

 

 

792

 

 

 

2,158

 

Other comprehensive income (loss)(6,295) 2,926  3,569  

Comprehensive income (loss)

$

96,563

 

 

$

87,103

 

 

$

99,375

 

Comprehensive income (loss)$137,842  $54,576  $96,552  


See notes to consolidated financial statements

F-5

statements.

F-6


SONIC AUTOMOTIVE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Class A

 

 

Class A

 

 

Class B

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

 

(In thousands)

 

Balance at December 31, 2013

 

 

61,584

 

 

$

616

 

 

 

(20,900

)

 

$

(348,666

)

 

 

12,029

 

 

$

121

 

 

$

685,782

 

 

$

284,368

 

 

$

(8,582

)

 

$

613,639

 

Shares awarded under stock compensation plans

 

 

440

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,270

 

 

 

-

 

 

 

-

 

 

 

3,274

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(2,256

)

 

 

(53,046

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(53,046

)

Income tax benefit associated with stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,033

 

 

 

-

 

 

 

-

 

 

 

1,033

 

Change in fair value of interest rate swap agreements, net of tax expense of $1,769

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,886

 

 

 

2,886

 

Pension actuarial loss, net of tax benefit of $446

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(728

)

 

 

(728

)

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,675

 

 

 

-

 

 

 

-

 

 

 

7,675

 

Other

 

 

23

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

97,217

 

 

 

-

 

 

 

97,217

 

Dividends declared ($0.10 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,232

)

 

 

-

 

 

 

(5,232

)

Balance at December 31, 2014

 

 

62,047

 

 

$

620

 

 

 

(23,156

)

 

$

(401,712

)

 

 

12,029

 

 

$

121

 

 

$

697,760

 

 

$

376,353

 

 

$

(6,424

)

 

$

666,718

 

Shares awarded under stock compensation plans

 

 

518

 

 

 

6

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,656

 

 

 

-

 

 

 

-

 

 

 

3,662

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(1,519

)

 

 

(34,483

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34,483

)

Income tax benefit associated with stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,888

 

 

 

-

 

 

 

-

 

 

 

1,888

 

Change in fair value of interest rate swap agreements, net of tax expense of $205

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

335

 

 

 

335

 

Pension actuarial income, net of tax expense of $280

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

457

 

 

 

457

 

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

9,814

 

 

 

-

 

 

 

-

 

 

 

9,814

 

Other

 

 

21

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

86,311

 

 

 

-

 

 

 

86,311

 

Dividends declared ($0.11 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5,654

)

 

 

-

 

 

 

(5,654

)

Balance at December 31, 2015

 

 

62,586

 

 

$

626

 

 

 

(24,675

)

 

$

(436,195

)

 

 

12,029

 

 

$

121

 

 

$

713,118

 

 

$

457,010

 

 

$

(5,632

)

 

$

729,048

 

Shares awarded under stock compensation plans

 

 

381

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

27

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(5,588

)

 

 

(99,971

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(99,971

)

Income tax expense associated with stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,611

)

 

 

-

 

 

 

-

 

 

 

(2,611

)

Change in fair value of interest rate swap agreements, net of tax expense of $2,178

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,553

 

 

 

3,553

 

Pension actuarial loss, net of tax benefit of $112

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(183

)

 

 

(183

)

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,165

 

 

 

-

 

 

 

-

 

 

 

11,165

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

93,193

 

 

 

-

 

 

 

93,193

 

Dividends declared ($0.20 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9,057

)

 

 

-

 

 

 

(9,057

)

Balance at December 31, 2016

 

 

62,967

 

 

$

630

 

 

 

(30,263

)

 

$

(536,166

)

 

 

12,029

 

 

$

121

 

 

$

721,695

 

 

$

541,146

 

 

$

(2,262

)

 

$

725,164

 


Class A
Common Stock 		 Class A
Treasury Stock 		 Class B
Common Stock 		 Paid-In
Capital 		 Retained
Earnings 		 Accumulated
Other
Comprehensive
Income (Loss)		 Total
Stockholders'
Equity 		 
SharesAmount  SharesAmount  SharesAmount  
(In thousands) 
Balance at December 31, 201662,967  $630  (30,263) $(536,166) 12,029  $121  $721,695  $541,146  $(2,262) $725,164  
Shares awarded under stock compensation plans490  5  —  —  —  —  40  —  —  45  
Purchases of treasury stock—  —  (2,027) (37,347) —  —  —  —  —  (37,347) 
Effect of cash flow hedge instruments, net of tax expense of $2,351—  —  —  —  —  —  —  —  3,835  3,835  
Pension actuarial income, net of tax benefit of $163—  —  —  —  —  —  —  —  (266) (266) 
Restricted stock amortization—  —  —  —  —  —  11,119  —  —  11,119  
Net income (loss)—  —  —  —  —  —  —  92,983  —  92,983  
Class A dividends declared ($0.20 per share)—  —  —  —  —  —  —  (6,367) —  (6,367) 
Class B dividends declared ($0.20 per share)—  —  —  —  —  —  —  (2,406) —  (2,406) 
Balance at December 31, 201763,457  $635  (32,290) $(573,513) 12,029  $121  $732,854  $625,356  $1,307  $786,760  
Shares awarded under stock compensation plans740  7  —  —  —  —  345  —  —  352  
Purchases of treasury stock—  —  (1,186) (24,110) —  —  —  —  —  (24,110) 
Effect of cash flow hedge instruments, net of tax expense of $460—  —  —  —  —  —  —  —  1,284  1,284  
Pension actuarial income, net of tax expense of $726—  —  —  —  —  —  —  —  1,642  1,642  
Restricted stock amortization—  —  —  —  —  —  11,853  —  —  11,853  
Net income (loss)—  —  —  —  —  —  —  51,650  —  51,650  
Cumulative effect of change in accounting principle (1)—  —  —  —  —  —  —  3,918  —  3,918  
Class A dividends declared ($0.24 per share)—  —  —  —  —  —  —  (7,346) —  (7,346) 
Class B dividends declared ($0.24 per share)—  —  —  —  —  —  —  (2,887) —  (2,887) 
Balance at December 31, 201864,197  $642  (33,476) $(597,623) 12,029  $121  $745,052  $670,691  $4,233  $823,116  
Shares awarded under stock compensation plans537  5  —  —  —  —  55  —  —  60  
Purchases of treasury stock—  —  (153) (2,381) —  —  —  —  —  (2,381) 
Effect of cash flow hedge instruments, net of tax benefit of $1,944—  —  —  —  —  —  —  —  (4,359) (4,359) 
Pension actuarial income, net of tax benefit of $734—  —  —  —  —  —  —  —  (1,936) (1,936) 
Restricted stock amortization—  —  —  —  —  —  10,797  —  —  10,797  
Net income (loss)—  —  —  —  —  —  —  144,137  —  144,137  
Cumulative effect of change in accounting principle (1)—  —  —  —  —  —  —  (7,428) —  (7,428) 
Class A dividends declared ($0.40 per share)—  —  —  —  —  —  —  (12,430) —  (12,430) 
Class B dividends declared ($0.40 per share)—  —  —  —  —  —  —  (4,812) —  (4,812) 
Balance at December 31, 201964,734  $647  (33,629) $(600,004) 12,029  $121  $755,904  $790,158  $(2,062) $944,764  

(1) See Note 1, “Description of Business and Summary of Significant Accounting Policies,” for further discussion of the effects of adoption of new accounting pronouncements.



See notes to consolidated financial statements

F-6

statements.
F-7


SONIC AUTOMOTIVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

 

 Year Ended December 31,

2016

 

 

2015

 

 

2014

 

 201920182017

(Dollars in thousands)

 

 (Dollars in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:   

Net income (loss)

$

93,193

 

 

$

86,311

 

 

$

97,217

 

Net income (loss)$144,137  $51,650  $92,983  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization of property, plant and equipment

 

77,532

 

 

 

68,793

 

 

 

58,254

 

Depreciation and amortization of property and equipmentDepreciation and amortization of property and equipment89,949  93,617  88,938  

Provision for bad debt expense

 

389

 

 

 

1,909

 

 

 

516

 

Provision for bad debt expense522  531  748  

Other amortization

 

649

 

 

 

649

 

 

 

1,165

 

Other amortization5  617  649  

Debt issuance cost amortization

 

2,641

 

 

 

2,489

 

 

 

2,135

 

Debt issuance cost amortization2,478  2,418  2,383  

Debt discount amortization, net of premium amortization

 

303

 

 

 

199

 

 

 

67

 

Debt discount amortization, net of premium amortization—  —  157  

Stock-based compensation expense

 

11,165

 

 

 

9,814

 

 

 

7,675

 

Stock-based compensation expense10,797  11,853  11,119  

Deferred income taxes

 

14,465

 

 

 

15,996

 

 

 

28,470

 

Deferred income taxes(20,845) (20,606) (27,760) 

Net distributions from equity investee

 

(300

)

 

 

(263

)

 

 

117

 

Net distributions from equity investee(101) (225) (138) 

Asset impairment charges

 

8,063

 

 

 

17,955

 

 

 

6,594

 

Asset impairment charges20,768  29,514  9,394  

Loss (gain) on disposal of dealerships and property and equipment

 

(331

)

 

 

(3,089

)

 

 

(13,323

)

Loss (gain) on disposal of dealerships and property and equipment(75,318) (43,164) (10,194) 

Loss (gain) on exit of leased dealerships

 

1,386

 

 

 

1,848

 

 

 

302

 

Loss (gain) on exit of leased dealerships(170) 1,709  2,157  
Loss (gain) on retirement of debtLoss (gain) on retirement of debt6,690  —  14,607  

Changes in assets and liabilities that relate to operations:

 

 

 

 

 

 

 

 

 

 

 

Changes in assets and liabilities that relate to operations:

Receivables

 

(62,894

)

 

 

(9,048

)

 

 

(2,436

)

Receivables4,652  50,351  (52,989) 

Inventories

 

35,545

 

 

 

(291,100

)

 

 

(56,203

)

Inventories(78,523) (78,701) 57,250  

Other assets

 

62,538

 

 

 

(19,785

)

 

 

(278

)

Other assets47,472  11,288  3,266  

Notes payable - floor plan - trade

 

(42,929

)

 

 

181,848

 

 

 

30,588

 

Notes payable - floor plan - trade39,797  16,836  (46,299) 

Trade accounts payable and other liabilities

 

14,953

 

 

 

5,190

 

 

 

190

 

Trade accounts payable and other liabilities(21,396) 15,987  16,612  

Total adjustments

 

123,175

 

 

 

(16,595

)

 

 

63,833

 

Total adjustments26,777  92,025  69,900  

Net cash provided by (used in) operating activities

 

216,368

 

 

 

69,716

 

 

 

161,050

 

Net cash provided by (used in) operating activities170,914  143,675  162,883  

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of businesses, net of cash acquired

 

(15,861

)

 

 

-

 

 

 

(50,867

)

Purchase of businesses, net of cash acquired—  —  (76,610) 

Purchases of land, property and equipment

 

(206,232

)

 

 

(173,249

)

 

 

(146,432

)

Purchases of land, property and equipment(125,576) (163,619) (234,245) 

Proceeds from sales of property and equipment

 

1,319

 

 

 

1,397

 

 

 

14,122

 

Proceeds from sales of property and equipment10,841  19,554  596  

Proceeds from sales of dealerships

 

-

 

 

 

7,978

 

 

 

74,823

 

Proceeds from sales of dealerships250,711  128,734  38,150  
Proceeds from company-owned life insuranceProceeds from company-owned life insurance805  —  —  

Net cash provided by (used in) investing activities

 

(220,774

)

 

 

(163,874

)

 

 

(108,354

)

Net cash provided by (used in) investing activities136,781  (15,331) (272,109) 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

Net (repayments) borrowings on notes payable - floor plan - non-trade

 

49,986

 

 

 

74,249

 

 

 

(19,543

)

Net (repayments) borrowings on notes payable - floor plan - non-trade(34,743) 3,868  33,745  

Borrowings on revolving credit facilities

 

209,287

 

 

 

402,093

 

 

 

179,791

 

Borrowings on revolving credit facilities482,488  918,967  327,070  

Repayments on revolving credit facilities

 

(213,490

)

 

 

(397,890

)

 

 

(179,791

)

Repayments on revolving credit facilities(482,488) (993,967) (252,070) 

Proceeds from issuance of long-term debt

 

103,395

 

 

 

69,075

 

 

 

44,454

 

Proceeds from issuance of long-term debt109,088  21,072  302,483  

Debt issuance costs

 

(3,084

)

 

 

(491

)

 

 

(2,959

)

Debt issuance costs(1,427) (144) (4,855) 

Principal payments and repurchase of long-term debt

 

(30,949

)

 

 

(19,424

)

 

 

(19,482

)

Principal payments and repurchase of long-term debt(40,274) (45,053) (36,836) 
Repurchase of debt securitiesRepurchase of debt securities(294,095) —  (210,914) 
Reduction of finance lease liabilitiesReduction of finance lease liabilities(5,181) —  —  

Purchases of treasury stock

 

(99,971

)

 

 

(34,483

)

 

 

(53,046

)

Purchases of treasury stock(2,381) (24,110) (37,347) 

Income tax benefit (expense) associated with stock compensation plans

 

(2,611

)

 

 

1,888

 

 

 

1,033

 

Issuance of shares under stock compensation plans

 

27

 

 

 

3,662

 

 

 

3,274

 

Issuance of shares under stock compensation plans60  352  45  

Dividends paid

 

(8,701

)

 

 

(5,078

)

 

 

(5,261

)

Dividends paid(15,493) (9,827) (8,851) 

Net cash provided by (used in) financing activities

 

3,889

 

 

 

93,601

 

 

 

(51,530

)

Net cash provided by (used in) financing activities(284,446) (128,842) 112,470  

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

(517

)

 

 

(557

)

 

 

1,166

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS23,249  (498) 3,244  

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

3,625

 

 

 

4,182

 

 

 

3,016

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR5,854  6,352  3,108  

CASH AND CASH EQUIVALENTS, END OF YEAR

$

3,108

 

 

$

3,625

 

 

$

4,182

 

CASH AND CASH EQUIVALENTS, END OF YEAR$29,103  $5,854  $6,352  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:   

Change in fair value of cash flow interest rate swap agreements (net of tax expense of $2,178,

 

 

 

 

 

 

 

 

 

 

 

$205 and $1,769 in the years ended December 31, 2016, 2015 and 2014, respectively)

$

3,553

 

 

$

335

 

 

$

2,886

 

Effect of cash flow hedge instruments (net of tax benefit of $1,944 in the year ended December 31, 2019 and net of tax expense of $460 and $2,351 in the years ended December 31, 2018 and 2017, respectively)Effect of cash flow hedge instruments (net of tax benefit of $1,944 in the year ended December 31, 2019 and net of tax expense of $460 and $2,351 in the years ended December 31, 2018 and 2017, respectively)$(4,359) $1,284  $3,835  

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

Interest, including amount capitalized

$

77,289

 

 

$

71,328

 

 

$

71,776

 

Interest, including amount capitalized$104,204  $98,126  $89,525  

Income taxes

$

28,459

 

 

$

38,474

 

 

$

50,525

 

Income taxes$72,752  $35,217  $42,907  

See notes to consolidated financial statements

statements.


F-7

F-8

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All tables in thousands except per share amounts)

1. Description of Business and Summary of Significant Accounting Policies

Organization and Business -Sonic Automotive, Inc. (“Sonic”Sonic,” the “Company,” “we,” “us” or the “Company”“our”) is one of the largest automotive retailers in the United States (as measured by total revenue). As a result of the way we manage our business, we had 2 reportable segments as of December 31, 2016, Sonic operated 116 franchises in 13 states (representing 25 different brands of cars2019: (1) the Franchised Dealerships Segment and light trucks) and 18 collision repair centers.(2) the EchoPark Segment. For management and operational reporting purposes, Sonic groupswe group certain franchisesbusinesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2016, Sonic2019, we operated 107 franchised dealership86 stores in the Franchised Dealerships Segment and five9 stores in the EchoPark® stores. Sonic’s franchised dealerships provide Segment. The Franchised Dealerships Segment consists of 99 new vehicle franchises (representing 21 different brands of cars and light trucks) and 15 collision repair centers in 12 states.
The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for itsour customers. The EchoPark® provides the same services (excluding new vehicle Segment sells used cars and light trucks and arranges F&I product sales and manufacturer warranty repairs)for our customers in unique stand-alonepre-owned vehicle specialty retail locations. Sonic’sOur EchoPark® business operates independently from itsour franchised new and used dealership sales operations. Sales operations in the first EchoPark® market in Denver, Colorado began in the fourth quarter of 2014.

dealerships business.

Principles of Consolidation -All of Sonic’sour dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanying consolidated financial statements except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.

Recent Accounting Pronouncements – - In November 2015, the FASB issued ASU 2015-17 to simplify the presentation of deferred income taxes. The amendments in this ASU require deferred tax liabilities and assets to be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity must be netted and presented as a single amount is not affected by this ASU. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15,February 2016, and interim periods within those annual periods (early adoption is permitted). Sonic adopted this ASU prospectively effective October 1, 2016, and prior periods were not retrospectively adjusted. Accordingly, as of December 31, 2016, a deferred tax asset of approximately $2.4 million and deferred tax liability of approximately $76.4 million are included in other assets and deferred income taxes, respectively, in the accompanying consolidated balance sheets. Sonic did not adjust prior periods retrospectively for the new ASU, therefore, as of December 31, 2015, a current deferred tax asset of approximately $13.6 million, a current deferred tax liability of approximately $0.1 million, a noncurrent deferred tax asset of approximately $2.8 million and a noncurrent deferred tax liability of approximately $73.3 million are included in other current assets, other accrued liabilities, other assets and deferred income taxes, respectively, in the accompanying consolidated balance sheets.

In May 2014, the Financial Accounting Standards Board (the “FASB”) issuedestablished Accounting Standards Codification (“ASC”) 842, “Leases,” by issuing Accounting Standards Update (“ASU”) 2014-09 to amend the accounting guidance on revenue recognition. The2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10 and ASU 2018-11) in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this ASU will be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). This ASU is effective for reporting periods beginning after December 15, 2017. Earlier application is permitted only as of reporting periods beginning after December 15, 2016. Sonic plans to adopt this ASU effective January 1, 2018. While management is still evaluating the method of adoption and the impact of the provisions of this ASU, management expects similar performance obligations to result under this update as compared with deliverables and separate units of accounting currently identified. As a result, management expects the timing of Sonic’s revenue recognition to generally remain the same.

In February 2016, the FASB issued ASU 2016-02order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendmentsnew lease standard was effective for us on January 1, 2019. Prior to adoption of the new lease standard, only leases classified as capital leases under ASC Topic 840, “Leases,” were recorded in this ASU require thatthe consolidated balance sheets. Under ASC 842, “Leases,” we classify leases are classified as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset and lease liability isare required to be recognized in the statement of financial position,consolidated balance sheets for both finance and repayments are classified within operating activities in the statement of cash flows.leases with a term longer than 12 months. The amendments in this ASU are to be applied usingnew lease standard required a modified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or (2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. We adopted the new lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosures required under the new lease standard are effectivenot provided for fiscal years,dates and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). Sonic plansprior to adopt this ASU effective January 1, 2019. While management is still evaluatingThe new lease standard provides for a number of optional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, lease classification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accounting policy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the impactuse of adoptinghindsight in estimating lease term or assessing impairment of right-of-use assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We elected all of the provisions of this ASU, management

F-8

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

expectspractical expedients permitted under the transition guidance within the new lease standard. The new lease standard also provides practical expedients for ongoing accounting. We elected the short-term lease recognition exemption for our real estate and equipment leases, which means that upon adoption of this ASU,for those leases that qualify, we do not recognize right-of-use assets or lease liabilities and recognize the presentation of certain items in Sonic’s consolidated financial position, cash flows and other disclosures will be materially impacted, primarily dueexpense related to the recognitionshort-term leases on a straight-line basis over the lease term and any variable lease payments in the period in which the obligation for those payments is incurred. We have also elected the practical expedient that allows us not to separate non-lease components of a right-of-use asset and an associated liability.

agreement from lease components (for certain non-real estate assets). See Note 16, “Leases,” for further discussion on leases.

In March 2016,August 2017, the FASB issued ASU 2016-092017-12, which amends the hedge accounting recognition and presentation requirements in ASC Topic 815, “Derivatives and Hedging.” This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify several aspectsthe application of the accounting for share-based payment transactions.current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 (early adoption is permitted). Sonic adopted this ASU effective January 1, 2017. Upon2018. The adoption of this ASU interim period and annual income tax expense will be affected by stock option exercises and restricted stock vesting activity, potentially creating volatility in Sonic’s effective income tax rate from period to period.

did not materially impact our consolidated financial statements.

F-9
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2016,February 2018, the FASB issued ASU 2016-15 related2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of 2017 (the “Tax Act”), from accumulated other comprehensive income to the classification of certain cash receipts and cash payments on the statement of cash flows.retained earnings. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (early adoption is permitted). Sonic plans to adopt this ASU effective January 1, 2018. UponThe adoption of this ASU did not materially impact our consolidated financial statements.
In June 2018, the presentationFASB issued ASU 2018-07 to expand the scope of certain items in Sonic’s cash flowsASC Topic 718, “Compensation - Stock Compensation,” to include share-based payment transactions for acquiring goods and other disclosures may be impacted.

Reclassifications - Prior to Sonic’sservices from non-employees. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of this ASU 2014-08 beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014, individual dealership franchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of these dealership franchises for the years ended December 31, 2016, 2015 and 2014 are reported as discontinued operations for all periods presented. Dealership franchises sold during the year ended December 31, 2014 have not been reclassified to discontinued operations since they were disposed of after March 31, 2014 and they did not meetmaterially impact our consolidated financial statements.

In June 2016, the criteriaFASB issued ASU 2016-13, “Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendment in this update replaced the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This ASU 2014-08. If, in future periods, Sonic determines that a dealership franchise should be reclassified from continuing operationsis effective for fiscal years beginning after December 15, 2019. We adopted this ASU as of January 1, 2020 and the effects of this ASU are not expected to discontinued operations, previously reportedmaterially impact our consolidated statements of income will be reclassified in order to reflect the most recent classification.

financial statements.

Use of Estimates -The preparation of financial statements in conformity with accounting principlesU.S. generally accepted in the United Statesaccounting principles requires Sonic’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the datedates of the accompanying consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.periods. Actual results could differ from those estimates, particularly related to allowance for credit loss, realization of inventory values, intangible asset and deferred tax asset values, reserves for tax contingencies and legal matters, reserves for future commission revenue to be returned to the third-party provider for early termination of customer contracts (“chargebacks”), estimates of certain retrospective finance and insurance revenue, results reported as continuing and discontinued operations, insurance reserves, lease exit accruals and certain accrued expenses.

Cash and Cash Equivalents - Sonic classifiesWe classify cash and all highly liquid investments with a maturity of three months or less at the date of purchase, including short-term time deposits and government agency and corporate obligations, as cash and cash equivalents. In the event that Sonic iswe are in a book overdraft cash position as of a reporting date, the book overdraft position is reclassified from cash and cash equivalents to trade accounts payable in the accompanying consolidated balance sheets and is reflected as activity in trade accounts payable and other liabilities in the accompanying consolidated statements of cash flows. Sonic wasWe were 0t in a book overdraft position in an amount of approximately $8.0 million and $38.5 million, as of December 31, 2016 and 2015, respectively.

2019 or 2018.

Revenue Recognition - Sonic recordsAs of January 1, 2018, we adopted ASC Topic 606 (ASC 606), “Revenue from Contracts with Customers.” Under this standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The standard applies a five-step model that includes: (1) identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4) allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We do not include the cost of obtaining contracts within the related revenue streams since we elected the practical expedient to expense the costs to obtain a contract when incurred. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for that period.
F-10
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The cumulative effect of the adjustments to our December 31, 2018 consolidated statements of income and January 1, 2018 consolidated balance sheet for the adoption of ASC Topic 606 was as follows:
Income StatementPre-ASC 606 Results
Year Ended
December 31, 2018		Effects of Adoption of ASC 606As Reported
Year Ended
December 31, 2018
(In thousands)
Revenues:
Parts, service and collision repair$1,380,506  $381  $1,380,887  
Finance, insurance and other, net$396,905  $8,618  $405,523  
Cost of Sales:
Parts, service and collision repair$(713,259) $(267) $(713,526) 
Selling, general and administrative expenses:$(1,145,294) $(31) $(1,145,325) 
Operating income (loss):$168,962  $8,701  $177,663  

Balance SheetDecember 31, 2017Effects of Adoption of ASC 606January 1, 2018
(In thousands)
Assets:
Receivables, net$482,126  $4,590  $486,716  
Contract assets (1)$—  $2,082  $2,082  
Liabilities:
Other accrued liabilities$237,963  $1,286  $239,249  
Deferred income taxes$51,619  $1,468  $53,087  
Stockholders' Equity:
Retained earnings$625,356  $3,918  $629,274  
(1)Receivables, net in the accompanying consolidated balance sheet as of December 31, 2018 includes approximately $4.7 million related to work in process and a contract asset of approximately $5.4 million related to F&I retro revenues. Changes in contract assets from January 1, 2018 to December 31, 2018 were primarily due to ordinary business activity.
Management has evaluated our established business processes, revenue transaction streams and accounting policies, and identified our material revenue streams to be: (1) the sale of new vehicles; (2) the sale of used vehicles to retail customers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service, warranty and other insurance contracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance has occurred, or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components as payments are typically received within a short period of time following completion of the performance obligation(s). Upon adoption, we changed the timing of revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certain retrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”). We previously recognized work in process when the service was completed and recognized F&I retro revenues at the amount that would be due at each reporting date based on the performance of the portfolio at such date, which results in the acceleration of revenue recognition. Under ASC 606, work in process revenues are recognized over time based on the completed work to date. Under ASC 606, F&I retro revenues are recognized when the product contract has been executed with the end customer and are estimated each reporting period based on the expected value method using historical and projected data, which results in the acceleration of revenue recognition. F&I retro revenues, which represent variable consideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

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SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We record revenue when vehicles are delivered to customers, when vehicle service work is performed and when parts are delivered. Conditions for completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonably expected to be collected.

Sonic arranges

Receivables, net in the accompanying consolidated balance sheet as of December 31, 2019 include approximately $5.1 million related to work in process and a contract asset of approximately $12.9 million related to F&I retro revenues included in receivables, net on the accompanying consolidated balance sheets.
We arrange financing for customers through various financial institutions and receivesreceive a commission from the financial institution either in a flat fee amount or in an amount equal to the difference between the interest rates charged to customers overand the predetermined interest rates set by the financial institution. SonicWe also receivesreceive commissions from the sale of various insurance contracts and non-recourse third-party extended service contracts to customers. SonicUnder these contracts, the applicable manufacturer or third-party warranty company is directly liable for all warranties provided within the contract. We may be assessed a chargeback fee in the event of early cancellation of a loan or insurance contract by the customer. Finance and insurance commission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution.

Sonic also receives commissions from the sale of non-recourse third-party extended service contracts to customers. Under these contracts, the applicable manufacturer or third-party warranty company is directly liable for all warranties provided within the contract. Commission revenue from the sale of these third-party extended service contracts is recorded net of estimated chargebacks at the time of sale.

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SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

As of December 31, 20162019 and 2015,2018, the amounts recorded as allowances for finance, insurance and service contract commission chargeback reserves were $19.2approximately $32.0 million and $17.0$25.8 million, respectively, and were classified as other accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheets.

Floor Plan Assistance - Sonic receivesWe receive floor plan assistance payments from certain manufacturers. This assistance reduces the carrying value of Sonic’sour new vehicle inventory and is recognized as a reduction of cost of sales at the time the vehicle is sold. Amounts recognized as a reduction of cost of sales for continuing operations were $45.0approximately $41.5 million, $42.1$42.2 million and $39.7$45.3 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.

Contracts in Transit -Contracts in transit represent customer finance contracts evidencing loan agreementsloans or lease agreements between Sonic,us, as creditor, and the customer, as borrower, to acquire or lease a vehicle in situations where a third-party finance source has given Sonicus initial, non-binding approval to assume Sonic’sour position as creditor. Funding and final approval from the finance source is provided upon the finance source’s review of the loan or lease agreement and related documentation executed by the customer at the dealership. These finance contracts are typically funded within ten10 days of the initial approval of the finance transaction given by the third-party finance source. The finance source is not contractually obligated to make the loan or lease to the customer until it gives its final approval and funds the transaction, and until such final approval is given, the contracts in transit represent amounts due from the customer to Sonic.us. Contracts in transit are included in receivables, net on the accompanying consolidated balance sheets and totaled $236.4approximately $230.9 million and $227.8 million at December 31, 20162019 and $196.3 million at December 31, 2015.

2018, respectively.

Accounts Receivable -In addition to contracts in transit, Sonic’sour accounts receivable primarily consistconsists of amounts due from theautomobile manufacturers for repair services performed on vehicles with a remaining factory warranty and amounts due from third parties from the sale of parts. Sonic evaluatesWe evaluate receivables for collectability based on the age of the receivable, the credit history of the customer and past collection experience. The recorded allowance for doubtful accounts receivable was not significant at December 31, 20162019 and 2015.

2018.

Inventories -Inventories of new vehicles, recorded net of manufacturer credits, and used vehicles, including demonstrators, are stated at the lower of specific cost or market.net realizable value. Inventories of parts and accessories are accounted for using the “first-in, first-out” (“FIFO”) method of inventory accounting and are stated at the lower of FIFO cost or market.net realizable value. Other inventories are primarily service loaner vehicles and, to a lesser extent, vehicle chassis, other supplies and capitalized customer work-in-progress (open customer vehicle repair orders). Other inventories are stated at the lower of specific cost (depreciated cost for service loaner vehicles) or market.

Sonic assessesnet realizable value.

We assess the valuation of all itsof our vehicle and parts inventories and maintainsmaintain a reserve where the cost basis exceeds the fair market value. In making this assessment for new vehicles, used vehicles, service loaners and parts inventory, Sonic considerswe consider recent internal and external market data and the age of the vehicles to estimate the inventory’s fair market value. The risk with vehicle inventory is minimized by the fact that vehicles can be transferred within Sonic’sour network of dealerships. The risk with parts inventories is minimized by the fact that excess or obsolete parts can also be transferred within Sonic’sour network of dealerships or can usually be returned to the manufacturer. Recorded inventory reserves were not significant at December 31, 20162019 and 2015.

2018.

Property and Equipment -Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Sonic amortizesWe amortize leasehold improvements over the shorter of
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SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the estimated useful life or the remaining available lease life. Thisterm. The available lease lifeterm includes renewal options if the exercise of a renewal option has been determined to be reasonably assured.
The range of estimated useful lives is as follows:

Leasehold, buildings and land improvements

10-30 years

Buildings

10-30 years

PartsFurniture, fixtures and service equipment

7-103-10 years

Office equipment and fixtures

3-10 years

Company vehicles

3-5 years

Sonic reviews

We review the carrying value of property and equipment and other long-term assets (other than(including related right-of-use assets for leased properties, but excluding goodwill and franchise assets) for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If such an indication is present, Sonic compareswe compare the carrying amount of the asset to the estimated undiscounted cash flows related to those assets. Sonic concludesthat asset. We conclude that an asset is impaired if the sum of such expected future cash flows is less than the carrying amount of the related asset. If Sonic determineswe determine an asset is impaired, the impairment loss would be the amount by which the carrying amount of the related asset exceeds its fair value. The fair value of the asset would be determined based on the quoted market prices, if available. If quoted market prices are not available, Sonic determineswe determine fair value by using a discounted cash flow model. See Note 4, “Property and Equipment,” for a discussion of impairment charges.

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SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Derivative Instruments and Hedging Activities - Sonic utilizesWe utilize derivative financial instruments for the purpose of hedging the risks of certain identifiable and anticipated transactions. Commonly, the types of risks being hedged are those relating to the variability of cash flows caused by fluctuations in interest rates. Sonic documents itsWe document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. As of December 31, 2016, Sonic2019, we utilized interest rate cash flow swapcap agreements to effectively convert a portion of its LIBOR-based variable rate debtlimit our exposure to a fixed rate.increases in London InterBank Offered Rate (“LIBOR”) rates above certain levels. See Note 6, “Long-Term Debt,” for further discussion of derivative instruments and hedging activities.

Goodwill -Goodwill is recognized to the extent that the purchase price of the acquisition exceeds the estimated fair value of the net assets acquired, including other identifiable intangible assets. In accordance with “Intangibles –- Goodwill and Other” in the Accounting Standards Codification (the “ASC”),ASC, we test goodwill is tested for impairment at least annually (as of October 1 of each year), or more frequently when events or circumstances indicate thatif indications of impairment might have occurred. exist.The ASC also states that if an entity determines, based on an assessment of certain qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of thea quantitative goodwill impairment test areis unnecessary. For its annual impairment assessment as of October 1, 2016, Sonic elected to perform a quantitative step-one assessment.
For purposes of goodwill impairment testing, Sonic has twowe have 2 reporting units, which consist of itsof: (1) our traditional franchised dealerships and EchoPark®.(2) our EchoPark stores. The carrying value of Sonic’sour goodwill (all of which is associated with its franchised dealerships reporting unit) totaled approximately $472.4$475.8 million at December 31, 2016.

2019, $415.8 million of which was related to our franchised dealerships reporting unit and $60.0 million of which was related to our EchoPark reporting unit. For each reporting unit, we utilized the Discounted Cash Flows (“DCF”) method to estimate its enterprise value as of October 1, 2019. The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs) and residual growth rates. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, Sonic would have been required to proceed to the second step of the impairment test. The second step involves allocating the calculated fair value to all of the assets and liabilities of the reporting unit as if the calculated fair value was the purchase price in a business combination. This allocation would include assigning value to any previously unrecognized identifiable assets (including franchise assets) which means the remaining fair value that would be allocated to goodwill would be significantly reduced. See discussion regarding franchise and dealer agreements acquired prior to July 1, 2001 under the heading “Other Intangible Assets” below. Sonic would then compare the fair value of the goodwill resulting from this allocation process to the carrying value of the goodwill with the difference representingwould represent the amount of impairment. The purpose of this second step is only to determine the amount ofrequired goodwill that should be recorded at fair value on the balance sheet. The recorded amounts of other items on the balance sheet are not adjusted. In January 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (early adoption is permitted for impairment testing dates after January 1, 2017). Sonic plans to adopt this ASU prior to its impairment test as of October 1, 2017.

Sonic utilized the Market Price (“MP”) method to estimate its enterprise value. The significant inputs in Sonic’s MP method include debt value, stock price and control premium.impairment. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputsassumptions that would result in lower valuation results, it could cause the carrying value of the reporting unit to exceed its fair value and thus require Sonicus to conduct the second step of the impairment test described above.

record goodwill impairment.

Based on the results of Sonic’s step-oneour quantitative test as of October 1, 2016, its Franchised Dealerships’2019, each reporting unit’s fair value exceedsexceeded its carrying value. As a result, Sonic waswe were not required to complete step tworecord goodwill impairment for either of the impairment evaluation according to “Intangibles – Goodwill and Other” in the ASC.our reporting units. See Note 5, “Intangible Assets and Goodwill,” for further discussion of goodwill.

Other Intangible Assets -The principal identifiable intangible assets other than goodwill acquired in an acquisition are rights under franchise or dealer agreements with manufacturers. Sonic classifiesWe classify franchise and dealer agreements as indefinite lived intangible assets as it has been Sonic’sour experience that renewals have occurred without substantial cost or material modifications to the underlying agreements. As such, Sonic believeswe believe that itsour franchise and dealer agreements will contribute to cash flows for an indefinite period, therefore the carrying amount of franchise rights is not amortized. Franchise and dealer agreements acquired on or after July 1, 2001 have been included in other intangible assets, net on the accompanying consolidated balance sheets. Prior to July 1, 2001, franchise and dealer agreements were recorded and amortized as part of goodwill and remain as part of goodwill on theaccompanying consolidated balance sheets. Other intangible assets acquired in acquisitions include favorable lease agreements with definite lives which are amortized on a straight-line basis over the remaining lease term. In accordance with “Intangibles –- Goodwill and Other” in the ASC, Sonic evaluateswe evaluate other intangible assets for impairment annually (as of October 1)1 each year) or more frequently if indicatorsindications of impairment exist.

Sonic

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SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We utilized a discounted cash flow (“DCF”)DCF model to estimate the fair value of the franchise assets for each of itsour franchises with recorded franchise assets. The significant assumptions in Sonic’sour DCF model include projected revenue, weighted average cost of capitalprojected operating margin, a discount rate (and estimates in the weighted average cost of capitaldiscount rate inputs) and residual growth rates. In projecting the franchises’ revenue and growth rates, Sonic developswe developed many assumptions which may include, but are not limited to, revenue growth, internal revenue enhancement initiatives, cost control initiatives, internal investment programs (such as training, technology and infrastructure) and

F-11

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

inventory floor plan borrowing rates. Sonic’sOur expectation of revenue growth is in part driven by itsour estimates of new vehicle industry sales volume in future periods. Sonic believesWe believe the historic and projected industry sales volume is a good general indicator of growth or contraction in the retail automotive industry.

Based on the October 1, 20162019 impairment test, Sonicwe determined that the fair value of the franchise assets exceeded the carrying value of the franchise assets for all of itsour franchises, requiring noresulting in 0 franchise asset impairment charges during the year ended December 31, 2016.2019. See Note 5, “Intangible Assets and Goodwill,” for further discussion of franchise and dealer agreements.

In evaluating its definite life favorable lease assets for impairment, Sonic considered whether the leased asset was being utilized by the dealership and if the dealership operating activities could recover the value of the recorded favorable lease asset. Sonic evaluated its favorable lease assets for impairment as of October 1, 2016 and determined that no impairment was required.

Insurance Reserves - Sonic hasWe have various self-insured and high deductible casualty and other insurance programs which require the Company to make estimates in determining the ultimate liability it may incur for claims arising under these programs. These insurance reserves are estimated by management using actuarial evaluations based on historical claims experience, claims processing procedures, medical cost trends and, in certain cases, a discount factor. As of December 31, 20162019 and 2015, Sonic2018, we had $22.7approximately $23.1 million and $24.9$22.9 million, respectively, reserved for such programs.

Lease Exit Accruals - The majority of Sonic’s dealership properties are leased under long-term operating lease arrangements. When situations arise where the leased properties are no longer utilized in operations, Sonic records accruals for the present value of the lease payments, net of estimated sublease rentals, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. These situations could include the relocation of an existing facility or the sale of a dealership where the buyer will not be subleasing the property for either the remaining term of the lease or for an amount of rent equal to Sonic’s obligation under the lease, or situations where a store is closed as a result of the associated franchise being terminated by the manufacturer or Sonic and no other operations continue on the leased property. See Note 12, “Commitments and Contingencies,” for further discussion.

Income Taxes -Income taxes are provided for the tax effects of transactions reported in the accompanying consolidated financial statements and consist of taxes currently due plus deferred taxes. Deferred taxes are provided at enacted tax rates for the tax effects of carryforward items and temporary differences between the tax basis of assets and liabilities and their reported amounts. As a matter of course, the Company is regularly audited by various taxing authorities and, from time to time, these audits result in proposed assessments where the ultimate resolution may result in the Company owing additional taxes. Sonic’s managementManagement believes that the Company’s tax positions comply, in all material respects, with applicable tax law and that the Company has adequately provided for any reasonably foreseeable outcome related to these matters.

From time to time, Sonic engageswe engage in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required in assessing and estimating the tax consequences of these transactions. Sonic determinesWe determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, Sonic presumeswe presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that does not meet the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The tax position is measured at the largest amount of benefit that is likely to be realized upon ultimate settlement. Sonic adjusts itsWe adjust our estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent. See Note 7, “Income Taxes,” for further discussion of Sonic’sour uncertain tax positions.

Concentrations of Credit and Business Risk -Financial instruments that potentially subject Sonicus to concentrations of credit risk consist principally of cash on deposit with financial institutions. At times, amounts invested with financial institutions exceed Federal Deposit Insurance Corporation insurance limits. Concentrations of credit risk with respect to receivables are limited primarily to receivables from automobile manufacturers, totaling approximately $92.8$94.8 million and $90.3$93.8 million at December 31, 20162019 and 2015,2018, respectively, and receivables from financial institutions (which includesinclude manufacturer-affiliated finance companies and contracts in transit)commercial banks), totaling approximately $265.3 million and $221.6$258.7 million at December 31, 20162019 and 2015, respectively.2018. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the trade receivables balances.

Sonic participates in a program with two of its manufacturer-affiliated finance companies wherein Sonic maintains a deposit balance with the lender that earns floor plan interest rebates based on the agreed upon rate. This deposit balance is not designated as a pre-payment of notes payable – floor plan, nor is it Sonic’s intent to use this amount to offset principal amounts owed under notes

F-12

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

payable – floor plan in the future, although Sonic has the right and ability to do so. The deposit balance of $10.0 million and $74.0 million as of December 31, 2016 and 2015, respectively, is classified in other current assets in the accompanying consolidated balance sheets, because there

We are restrictions on Sonic’s availability to withdraw these funds under certain circumstances. Changes in this deposit balance are classified as changes in other assets in the cash flows from operating activities section of the accompanying consolidated statements of cash flows. The interest rebate as a result of this deposit balance is classified as a reduction in interest expense, floor plan in the accompanying consolidated statements of income. In the years ended December 31, 2016, 2015 and 2014, the reduction in interest expense, floor plan was approximately $0.6 million, $1.5 million and $2.1 million, respectively.

Sonic is subject to a concentration of risk in the event of financial distress or other adverse events related to any of the automobile manufacturers whose franchised dealerships are included in Sonic’sour brand portfolio. Sonic purchases itsWe purchase our new vehicle inventory from various automobile manufacturers at the prevailing prices available to all franchised dealerships. In addition, Sonic financeswe finance a substantial portion of itsour new vehicle inventory with manufacturer-affiliated finance companies. Sonic’sOur results of operations could be adversely affected by the manufacturers’ inability to supply Sonic’sour dealerships with an adequate supply of new vehicle inventory and related floor plan financing. SonicWe also hashave concentrations of risk related to the geographic markets in which itsour dealerships operate. Changes in overall economic, retail automotive or regulatory environments in one or more of these markets could adversely impact Sonic’sthe results of our operations.

Financial Instruments and Market Risks -As of December 31, 20162019 and 2015,2018, the fair values of Sonic’sour financial instruments including receivables, notes receivable from finance contracts, notes payable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes approximated their carrying values due either to
F-14
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
length of maturity or existence of variable interest rates that approximate prevailing market rates. See Note 11, “Fair Value Measurements,” for further discussion of the fair value and carrying value of Sonic’sour fixed rate long-term debt.

Sonic hasdebt and other financial instruments.

We have variable rate notes payable - floor plan, revolving credit facilities, a mortgage facility and other variable rate notes that expose Sonicus to risks caused by fluctuations in the underlying interest rates. The counterparties to Sonic’s swap transactions consist ofour interest rate cap agreements are large financial institutions. Sonicinstitutions, however, we could be exposed to loss in the event of non-performance by any of these counterparties. See further discussion in Note 6, “Long-Term Debt.”

Advertising - Sonic expensesWe expense advertising costs in the period incurred, net of earned cooperative manufacturer credits that represent reimbursements for specific, identifiable and incremental advertising costs. Advertising expense for continuing operations amounted to approximately $61.7$60.8 million, $63.1 million and $61.6 million for 2019, 2018 and $57.4 million for the years ended December 31, 2016, 2015 and 2014,2017, respectively, and is classified asin selling, general and administrative expenses in the accompanying consolidated statements of income.

Sonic has

We have cooperative advertising reimbursement agreements with certain automobile manufacturers it represents.we represent. These agreements require Sonicus to provide the manufacturer with support for qualified, actual advertising expenditures in order to receive reimbursement under the agreements. It is uncertain whether or not Sonicwe would maintain the same level of advertising expenditures if these manufacturers discontinued their cooperative programs. Cooperative manufacturer credits classified as an offset to advertising expenses were approximately $26.2$25.3 million, $24.2$26.7 million and $23.4$26.0 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.

Segment Information - Sonic hasWe have determined it has two reporting segments,we have 2 reportable segments: (1) the Franchised Dealerships Segment and (2) theEchoPark®, Segment, for purposes of reporting financial condition and results of operations. The Franchised Dealerships segmentSegment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repair and maintenance services, and arrange finance and insurance products. TheEchoPark® segmentSegment is comprised of stand-alonepre-owned vehicle specialty retail locations that provide customers an opportunity to search buy, service,our nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell pre-owned vehicles.

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SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

their current vehicle to us.

Earnings Per Share -The calculation of diluted earnings per share considers the potential dilutive effect of restricted stock units, restricted stock awards and stock options granted under Sonic’s stock compensation plans (and any non-forfeitable dividends paid on such awards).
2. Business Acquisitions and Dispositions

Acquisitions

Sonic acquired three stand-alone used vehicle dealership businesses and real estate for approximately $15.9 during the year ended December 31, 2016. These cash outflows were funded by cash from operations and borrowings under Sonic’s floor plan facilities. Sonic

We did not acquire any businesses during 2019 or 2018. We opened 1 new EchoPark store in California during 2019 and opened 1 manufacturer-awarded luxury franchised dealership and 3 new EchoPark stores in 2018. We acquired 1 pre-owned business (that was subsequently converted to an EchoPark store) for approximately $76.6 million during 2017. Acquisitions are included in the year ended December 31, 2015. Sonic acquired twoconsolidated financial statements from the date of acquisition.
Dispositions
We disposed of 1 luxury franchises, onefranchised dealership and 9 mid-line import franchise and one domestic franchise during the year ended December 31, 2014, for an aggregate purchase pricefranchised dealerships in 2019, which generated net cash from dispositions of approximately $50.9 million in cash, net$250.7 million. We disposed of cash acquired, including the underlying assets and real estate.

In addition to the three stand-alone used vehicle dealership businesses discussed above, Sonic opened two new manufacturer-awarded open point2 luxury franchised dealerships and two new5 mid-line import franchised dealerships in 2018, which generated net cash from dispositions of approximately $128.7 million. Additionally, we terminated 1 luxury franchised dealership and ceased operations at a previously acquired pre-owned store in Florida and 4 stores in our EchoPark® stores during the year ended December 31, 2016.

Dispositions

Sonic did not dispose of any dealerships during the year ended December 31, 2016, and Segment in 2018. We disposed of four1 domestic franchised dealership franchises during the year ended December 31, 2015 and nine dealership franchises during the year ended December 31, 2014.  The2 mid-line import franchised dealerships in 2017, which generated net cash from dispositions during the years ended December 31, 2015 and 2014 generated cash of approximately $ 8.0 million and $74.8 million, respectively.$38.2 million. In conjunction with dealership dispositions, Sonic haswe have agreed to indemnify the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but which may or may not behave been known at the time of sale, including environmental liabilities and liabilities associatedresulting from the breach of representations or warranties made under the agreements. See Note 12, “Commitments and Contingencies,” for further discussion.

Results

Prior to our adoption of ASU 2014-08 beginning with our Quarterly Report on Form 10-Q for the period ended June 30, 2014, individual dealership franchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of these dealership franchises sold or terminated on or prior to March 31, 2014 are reported as discontinued operations for all periods presented. Dealership franchises sold after March 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-08.
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SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income (loss) from operations and lease exit accrual adjustments and charges associated with disposed dealerships classified as discontinued operations were as follows:

 

Year Ended December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

(In thousands)

 

Income (loss) from operations

$

(1,100

)

 

$

(1,421

)

 

$

(2,515

)

Gain (loss) on disposal

 

(1

)

 

 

-

 

 

 

199

 

Lease exit accrual adjustments and charges

 

(1,020

)

 

 

(1,462

)

 

 

152

 

Pre-tax income (loss)

$

(2,121

)

 

$

(2,883

)

 

$

(2,164

)

Total revenues

$

-

 

 

$

-

 

 

$

-

 

Year Ended December 31,
201920182017
(In thousands)
Income (loss) from operations before taxes$(554) $(610) $(735) 
Lease exit accrual adjustments and charges—  (407) (1,207) 
Income (loss) from discontinued operations before taxes$(554) $(1,017) $(1,942) 

Revenues and other activitiesoperating results associated with disposed dealerships that remain in continuing operations were as follows:

 

Year Ended December 31,

 

 

2016

 

 

2015

 

 

2014

 

 

(In thousands)

 

Income (loss) from operations

$

(364

)

 

$

(4,958

)

 

$

(2,475

)

Gain (loss) on disposal

 

(47

)

 

 

2,748

 

 

 

11,079

 

Property and equipment impairment charges

 

(4

)

 

 

(10,096

)

 

 

(125

)

Pre-tax income (loss)

$

(415

)

 

$

(12,306

)

 

$

8,479

 

Total revenues

$

-

 

 

$

95,168

 

 

$

311,978

 

Year Ended December 31,
201920182017
(In thousands)
Income (loss) from operations before taxes and items below$3,154  $(4,313) $(736) 
Gain (loss) on disposal of dealerships (1)76,461  39,307  9,974  
Lease exit accrual adjustments and charges170  210  (1,207) 
Impairment charges—  (4,180) (318) 
Income (loss) before taxes$79,785  $31,024  $7,713  
Total revenues$307,849  $783,275  $1,140,514  

(1) Included in selling, general and administrative expenses in the accompanying consolidated statements of income.
In the ordinary course of business, Sonic evaluates itswe evaluate our dealership franchises for possible disposition based on various strategic and performance criteria. As of December 31, 2016, Sonic2019, we did not0t have any franchises classified as held for sale; however, in the future, Sonicwe may sell other franchises that are not currently held for sale.

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SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. Inventories and Related Notes Payable - Floor Plan

Inventories consist of the following:

 

December 31, 2016

 

 

December 31, 2015

 

 December 31, 2019December 31, 2018

 

(In thousands)

 

 (In thousands)

New vehicles

 

$

1,088,814

 

 

$

1,161,490

 

New vehicles$983,123  $1,027,727  

Used vehicles

 

 

282,288

 

 

 

251,103

 

Used vehicles319,791  293,179  

Service loaners

 

 

128,821

 

 

 

121,946

 

Service loaners152,278  141,542  

Parts, accessories and other

 

 

70,778

 

 

 

65,042

 

Parts, accessories and other62,683  66,013  

Net inventories

 

$

1,570,701

 

 

$

1,599,581

 

Net inventories$1,517,875  $1,528,461  

Sonic finances

We finance all of itsour new and certain of itsour used vehicle inventory through standardized floor plan facilities with either a syndicate of financial institutions and manufacturer-affiliated finance companies.companies or directly with individual manufacturer-affiliated finance companies and other lending institutions. The new and used vehicle floor plan facilities bear interest at variable rates based on either LIBOR or prime and LIBOR.rates, depending on the lender arrangement. The weighted average interest rate for Sonic’sour new vehicle floor plan facilities was 3.03%, 3.10% and 2.37% for continuing operations2019, 2018 and discontinued operations, was 1.85%, 1.61% and 1.57% for the years ended December 31, 2016, 2015 and 2014,2017, respectively. Sonic’sOur floor plan interest expense related to the new vehicle floor plan arrangements is partially offset by amounts received from manufacturers in the form of floor plan assistance. Floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated inventory is sold. For the years ended December 31, 2016, 20152019, 2018 and 2014, for continuing operations and discontinued operations, Sonic2017, we recognized a reduction in cost of sales of approximately $45.0$41.5 million, $42.1$42.2 million and $39.7$45.3 million, respectively, related to manufacturer floor plan assistance.

The weighted average interest rate for Sonic’sour used vehicle floor plan facilities was 3.10%, 2.98% and 2.61% for continuing operations2019, 2018 and discontinued operations, was 1.78%, 1.72% and 1.80% for the years ended December 31, 2016, 2015 and 2014,2017, respectively.

The new and used vehicle floor plan facilities are collateralized by vehicle inventoriesinventory and other assets, excluding franchisegoodwill and dealer agreements,other intangible assets, of the relevant dealership subsidiary. The new and used vehicle floor plan facilities contain a number of covenants, including, among others, covenants restricting Sonicus with respect to the creation of liens and changes in ownership, officers and key management personnel. Sonic wasWe were in compliance with all of these restrictive covenants as of December 31, 2016.

2019.

F-16
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment

Property and equipment, net consists of the following:

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Land

 

$

306,457

 

 

$

260,275

 

Building and improvements

 

 

777,766

 

 

 

679,712

 

Software and computer equipment

 

 

128,366

 

 

 

107,086

 

Parts and service equipment

 

 

93,901

 

 

 

79,219

 

Office equipment and fixtures

 

 

86,216

 

 

 

76,810

 

Company vehicles

 

 

9,107

 

 

 

8,478

 

Construction in progress

 

 

62,982

 

 

 

55,010

 

       Total, at cost

 

 

1,464,795

 

 

 

1,266,590

 

Less accumulated depreciation

 

 

(450,184

)

 

 

(379,688

)

Subtotal

 

 

1,014,611

 

 

 

886,902

 

Less assets held for sale (1)

 

 

(4,231

)

 

 

-

 

       Property and equipment, net

 

$

1,010,380

 

 

$

886,902

 

(1)

Classified in other current assets

 December 31, 2019December 31, 2018
 (In thousands)
Land$373,301  $381,527  
Building and improvements (1)969,609  989,872  
Furniture, fixtures and equipment346,260  330,149  
Construction in progress50,928  59,523  
    Total, at cost1,740,098  1,761,071  
Less accumulated depreciation(616,611) (575,720) 
Subtotal1,123,487  1,185,351  
Less assets held for sale (2)(26,240) (6,862) 
Property and equipment, net$1,097,247  $1,178,489  

(1) As discussed in Note 1, “Description of Business and Summary of Significant Accounting Policies,” due to the adoption of ASC 842, “Leases,” effective January 1, 2019, previously existing capital lease assets have been reclassified from property and equipment, net to financing - right-of- use assets in the accompanying consolidated balance sheet as of December 31, 2019.
(2) Classified in other current assets in the accompanying consolidated balance sheets.
Interest capitalized in conjunction with construction projects and software development was approximately $2.8$1.6 million, $1.9$1.5 million and $1.9$2.2 million for the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. As of December 31, 2016,2019, commitments for facility construction projects totaled approximately $56.5$18.0 million.

F-15

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the years ended December 31, 2016, 20152019, 2018 and 2014,2017, property and equipment impairment charges were recorded in continuing operations as noted in the following table:

Year Ended December 31,

 

(In thousands)

 

2016

 

$

8,063

 

2015

 

$

12,210

 

2014

 

$

4,394

 

Franchised Dealerships SegmentEchoPark SegmentConsolidated
Year Ended December 31,(In thousands)
2019$1,101  $19,667  $20,768  
2018$25,832  $1,582  $27,414  
2017$3,890  $1,004  $4,894  

Impairment charges related to continuing operations were due to the fair value adjustments of long-lived assets held for sale related to real estate at former EchoPark locations, the abandonment of construction andcertain internally developed software development projects,applications, the abandonment and disposal of dealership equipment or Sonic’sour estimate that based on historical and projected operating losses for certain dealerships, these dealerships would not be able to recover recorded property and equipment asset balances.

5. Intangible Assets and Goodwill

The changes in the carrying amount of franchise assets and goodwill for the years ended December 31, 20162019 and 20152018 were as follows:

 

 

Franchise

Assets

 

 

Net

Goodwill

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

77,100

 

 

$

475,929

 

(1)

Prior year acquisition allocations

 

 

1,100

 

 

 

(870

)

 

Reductions from dispositions

 

 

-

 

 

 

(1,121

)

 

Reductions from impairment

 

 

(3,300

)

 

 

(2,445

)

 

Balance at December 31, 2015

 

$

74,900

 

 

$

471,493

 

(1)

Additions through current year acquisitions

 

 

-

 

 

 

944

 

 

Balance at December 31, 2016

 

$

74,900

 

 

$

472,437

 

(1)

(1)

 
Franchise
Assets
Net
Goodwill
 
(In thousands)
Balance at December 31, 2017$69,900  $525,780  (1) 
Reductions from dispositions(2,100) (16,188) 
Reductions from impairment(2,100) —  
Balance at December 31, 2018$65,700  $509,592  (1) 
Reductions from dispositions(1,400) (33,801) 
Balance at December 31, 2019$64,300  $475,791  (1) 

(1) Net of accumulated impairment losses of $796,725.

Goodwill

There was no impairment losses of goodwill in the year ended December 31, 2016.  Sonic impaired approximately $2.4 million of goodwill in the year ended December 31, 2015 related to the disposition of a franchise that was acquired in 2014 and disposed of in 2015.

$797.6 million.

F-17
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Intangible Assets

Other intangible assets consistsconsist of franchise assets and definite life intangible assets, and isare presented net of accumulated amortization on the accompanying consolidated balance sheets. Pursuant to applicable accounting pronouncements, Sonic evaluates itswe evaluate our franchise assets and definite life intangible assets for impairment annually (as of October 1)1 of each year) or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair valueindications of the asset below its carrying amount.impairment exist. There were no0 franchise asset impairment charges in the year ended December 31, 2016. Franchise asset impairment charges of $0.9for 2019 and $2.1 million and $2.2 million werefor 2018, which was recorded in continuing operations for the years ended December 31, 2015 and 2014, respectively, based on the impairment evaluations performed as of October 1, 2015 and 2014, respectively. In addition, Sonic impaired approximately $2.4 million of franchise assetsperformed. As discussed below in the year ended December 31, 2015 relatedNote 16, “Leases,” due to the dispositionadoption of a dealership that was acquired in 2014 and disposed of in 2015. There were no definite life intangible asset impairment charges in the years ended December 31, 2016, 2015 and 2014.

Definite life intangible assets consist of the following:

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Favorable lease agreements

 

$

17,318

 

 

$

17,318

 

Less accumulated amortization

 

 

(11,985

)

 

 

(11,342

)

Definite life intangibles, net

 

$

5,333

 

 

$

5,976

 

F-16

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Amortization expense forASC 842, “Leases,” effective January 1, 2019, previously existing definite life intangible assets was approximately $0.6 million, $0.6 million and $1.2 million forhave been reclassified from other intangible assets, net to right-of-use assets in the years endedaccompanying consolidated balance sheet as of December 31, 2016, 2015 and 2014, respectively. The initial weighted average amortization period for lease agreements and definite life intangible assets outstanding at December 31, 2016 was 17 years. Expiration dates for these lease agreements range between 2020 and 2027.

Future amortization expense is as follows:

2019.

Year Ending December 31,

 

(In thousands)

 

2017

 

$

644

 

2018

 

 

644

 

2019

 

 

644

 

2020

 

 

614

 

2021

 

 

475

 

Thereafter

 

 

2,312

 

Total

 

$

5,333

 

6. Long-Term Debt

Long-term debt consists of the following:

 

December 31, 2016

 

 

December 31, 2015

 

 

(In thousands)

 

December 31, 2019December 31, 2018

2014 Revolving Credit Facility (1)

 

$

-

 

 

$

4,203

 

(In thousands) 

2016 Revolving Credit Facility (2)(1)

 

 

-

 

 

 

-

 

$—  $—  

7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”)

 

 

200,000

 

 

 

200,000

 

5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”)

 

 

289,273

 

 

 

300,000

 

5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”)—  289,273  

Mortgage notes to finance companies-fixed rate, bearing interest from 3.51% to 7.03%

 

 

176,369

 

 

 

168,410

 

Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 2.80

percentage points above one-month or three-month LIBOR

 

 

227,342

 

 

 

150,961

 

Net debt discount and premium (3)

 

 

(1,258

)

 

 

(1,562

)

6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)250,000  250,000  
2019 Mortgage Facility (2)2019 Mortgage Facility (2)109,088  —  
Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03%Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03%194,535  215,196  
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBORMortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR161,345  180,959  
OtherOther—  20,589  
SubtotalSubtotal714,968  956,017  

Debt issuance costs

 

 

(13,328

)

 

 

(12,884

)

Debt issuance costs(8,082) (10,934) 

Other

 

 

4,280

 

 

 

5,454

 

Total debt

 

$

882,678

 

 

$

814,582

 

Total debt706,886  945,083  

Less current maturities

 

 

(43,003

)

 

 

(33,437

)

Less current maturities(69,908) (26,304) 

Long-term debt

 

$

839,675

 

 

$

781,145

 

Long-term debt$636,978  $918,779  

F-17

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(1)

The interest rate on the 2014 Revolving Credit Facility was 225

(1) The interest rate on the 2016 Revolving Credit Facility (as defined below) was 150 and 250 basis points above LIBOR at December 31, 2015.

(2)

The interest rate on the 2016 Revolving Credit Facility was 225 basis points above LIBOR at December 31, 2016.

(3)

December 31, 2016 includes a $1.1 million discount associated with the 7.0% Notes and a $0.2 million discount associated with mortgage notes payable.

December 31, 2015 includes a $1.3 million discount associated with2019 and 2018, respectively.

(2) The interest rate on the 7.0% Notes and a $0.3 million discount associated with mortgage notes payable.

2019 Mortgage Facility (as defined below) was 200 basis points above LIBOR at December 31, 2019.


Future maturities of long-term debt are as follows:

 

Principal

 

 

Net of

Discount/

Premium

 

Principal

Year Ending December 31,

 

(In thousands)

 

Year Ending December 31,(In thousands)

2017

 

$

43,127

 

 

$

43,003

 

2018

 

 

55,986

 

 

 

55,986

 

2019

 

 

19,605

 

 

 

19,605

 

2020

 

 

51,523

 

 

 

51,523

 

2020$69,908  

2021

 

 

45,434

 

 

 

45,434

 

202163,274  
2022202250,241  
2023202368,857  
20242024108,462  

Thereafter

 

 

681,589

 

 

 

680,455

 

Thereafter354,226  

Total

 

$

897,264

 

 

$

896,006

 

Total$714,968  

2014


2016 Credit Facilities

Prior to November 30, 2016, Sonic had a syndicated revolving credit facility (the “2014 Revolving Credit Facility”) and syndicated new and used vehicle floor plan credit facilities (the “2014 Floor Plan Facilities” and, together with the 2014 Revolving Credit Facility, the “2014 Credit Facilities”), which were scheduled to mature on August 15, 2019.

On November 30, 2016, Sonic amended and restated the 2014 Credit Facilities to, among other things, extend the maturity to November 30, 2021. See the heading “2016 Credit Facilities” below for additional information.

2016 Credit Facilities

On November 30, 2016, Sonicwe entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 Revolving Credit Facility, the “2016 Credit Facilities”), which are scheduled

F-18
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to mature on November 30, 2021. The amendedamendment and restatedrestatement of the 2016 Credit Facilities extended the scheduled maturity date, increased availability under the 2016 Revolving Credit Facility by $25.0 million and increased availability under the 2016 Floor Plan Facilities by $200.0$215.0 million, among other things.

Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving Borrowing Base”). The 2016 Revolving Credit Facility may be increased at Sonic’sour option up to $300.0 million upon satisfaction of certain conditions. Based on balances as of December 31, 2016,2019, the 2016 Revolving Borrowing Base was approximately $228.5$245.3 million. As of December 31, 2016, Sonic2019, we had no0 outstanding borrowings and approximately $21.4$14.6 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in total borrowing availability of $207.1approximately $230.7 million under the 2016 Revolving Credit Facility.

F-18

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2016 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2016 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount of up to $1.015 billion. SonicWe may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.265 billion, which shall be allocated between the 2016 New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as Sonic requests,we request, with no more than 30% of the aggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2016 Floor Plan Facilities are guaranteed by Sonicus and certain of itsour subsidiaries and are secured by a pledge of substantially all of theour assets of Sonic and its subsidiaries.our subsidiaries’ assets. The amounts outstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.

Sonic

We agreed under the 2016 Credit Facilities not to pledge any assets to any third party (other than those explicitly allowed underto be pledged by the amended terms of the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2016 Credit Facilities permit cash dividends on Sonic’sour Class A and Class B common stockCommon Stock so long as no event of default (as defined in the 2016 Credit Facilities) has occurred and is continuing and provided that Sonic remainswe remain in compliance with all financial covenants under the 2016 Credit Facilities.

7.0%

5.0% Notes

On July 2, 2012, SonicMay 9, 2013, we issued $200.0$300.0 million in aggregate principal amount of unsecured 5.0% Senior Subordinated Notes due May 15, 2023 ("the 5% Notes"). During the year ended December 31, 2016, we repurchased approximately $10.7 million of the 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto. On December 30, 2019, we repurchased all of the remaining 5.0% Notes outstanding, totaling approximately $289.3 million aggregate principal amount, using cash on hand, net proceeds from the disposition of several franchised dealerships and proceeds from borrowings under the 2019 Mortgage Facility. We paid approximately $295.9 million in cash, including an early redemption premium of 1.667% and accrued and unpaid interest, to extinguish the 5.0% Notes. In conjunction with the redemption of the 5.0% Notes, we recognized a loss on debt extinguishment of approximately $6.7 million, recorded in other income (expense), net in the accompanying consolidated statements of income. In addition, we recognized approximately $0.5 million of double-carry interest in interest expense, other, net in the accompanying consolidated statements of income for the period during which both the 5.0% Notes and the 2019 Mortgage Facility had outstanding balances. On December 30, 2019, after the repurchase of all of the outstanding 5.0% Notes, there were no notes outstanding under the indenture which governed the 5.0% Notes, and the indenture was discharged at that time.
6.125% Notes
On March 10, 2017, we issued $250.0 million in aggregate principal amount of unsecured senior subordinated 7.0%6.125% Notes which mature on JulyMarch 15, 2022.2027. The 7.0%6.125% Notes were issued at a price of 99.11%100.0% of the principal amount thereof, resulting in a yield to maturity of 7.125%. Sonicthereof. We used the net proceeds from the issuance of the 7.0%6.125% Notes and issued approximately 4.1 million shares of its Class A common stock to repurchase all of the outstanding 5.0% Convertible7.0% Senior Subordinated Notes due 2029.2022 (the “7.0% Notes”) on March 27, 2017. Remaining proceeds from the issuance of the 7.0%6.125% Notes were used for general corporate purposes, including repurchasespurposes. Balances outstanding under the 6.125% Notes are guaranteed by all of shares of Class A common stock.our domestic operating subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic operating subsidiary that is not a guarantor is considered to be minor. Interest on the 6.125% Notes is payable semi-annually in arrears on JanuaryMarch 15 and JulySeptember 15 of each year.

SonicWe may redeem the 7.0%6.125% Notes, in whole or in part, at any time on or after JulyMarch 15, 20172022 at the following redemption prices, which are expressed as percentages of the principal amount:

F-19
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Redemption

Price

Redemption Price
Beginning on JulyMarch 15, 2017

2022

103.063 

103.500

%

Beginning on JulyMarch 15, 2018

2023

102.042 

102.333

%

Beginning on JulyMarch 15, 2019

2024

101.021 

101.167

%

Beginning on JulyMarch 15, 20202025 and thereafter

100.000 

100.000

%

Before March 15, 2022, we may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the principal amount of the 6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and any accrued and unpaid interest, if any, to the redemption date. In addition, on or before March 15, 2020, we may redeem up to 35% of the aggregate principal amount of the 6.125% Notes at a redemption price equal to 106.125% of the par value of the 6.125% Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date with proceeds from certain equity offerings. The indenture governing the 6.125% Notes also provides that holders of the 7.0%6.125% Notes may require Sonicus to repurchase the 7.0%6.125% Notes at a purchase price equal to 101%101.0% of the par value of the 7.0%6.125% Notes, plus accrued and unpaid interest, if Sonic undergoesany, to the date of purchase if we undergo a changeChange of controlControl (as defined in the indenture)indenture governing the 6.125% Notes).

The indenture governing the 7.0%6.125% Notes contains certain specified restrictive covenants. Sonic hasWe have agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. SonicWe also hashave agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 7.0%6.125% Notes limits Sonic’sour ability to pay quarterly cash dividends on Sonic’sour Class A and Class B common stockCommon Stock in excess of $0.10$0.12 per share. SonicWe may only pay quarterly cash dividends on Sonic’sour Class A and Class B common stockCommon Stock if Sonic complieswe comply with the terms of the indenture governing the 7.0%6.125% Notes. After giving effect to the applicable restrictions on the payment of dividends under its debt agreements, as of December 31, 2016, Sonic had at least $127.4 million of its net income and retained earnings free of such restrictions. Sonic wasWe were in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as of December 31, 2016.

Balances outstanding under the 7.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The subsidiaries that are not guarantors are considered to be minor.

Sonic’s2019.

Our obligations under the 7.0%6.125% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 7.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due;

F-19

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2) defaults in the performance, or breach, of Sonic’s covenants under the 7.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $35.0 million.

5.0% Notes

On May 9, 2013, Sonic issued $300.0 million in aggregate principal amount of unsecured senior subordinated 5.0% Notes which mature on May 15, 2023. The 5.0% Notes were issued at a price of 100.0% of the principal amount thereof. Sonic used the net proceeds from the issuance of the 5.0% Notes to repurchase all of the outstanding 9.0% Senior Subordinated Notes due 2018. Remaining proceeds from the issuance of the 5.0% Notes were used for general corporate purposes. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. During the year ended December 31, 2016, Sonic repurchased approximately $10.7 million of its outstanding 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto.

Sonic may redeem the 5.0% Notes in whole or in part at any time on or after May 15, 2018 at the following redemption prices, which are expressed as percentages of the principal amount:

Redemption

Price

Beginning on May 15, 2018

102.500

%

Beginning on May 15, 2019

101.667

%

Beginning on May 15, 2020

100.833

%

Beginning on May 15, 2021 and thereafter

100.000

%

In addition, before May 15, 2018, Sonic may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of the principal amount of the 5.0% Notes redeemed plus an applicable premium (as defined in the indenture) and any accrued and unpaid interest as of the redemption date. The indenture also provides that holders of the 5.0% Notes may require Sonic to repurchase the 5.0% Notes at a purchase price equal to 101% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if Sonic undergoes a change of control (as defined in the indenture).

The indenture governing the 5.0% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 5.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and Class B common stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and Class B common stock if Sonic complies with the terms of the indenture governing the 5.0% Notes.  

Balances outstanding under the 5.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The subsidiaries that are not guarantors are considered to be minor.

Sonic’s obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0%6.125% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of Sonic’sour covenants under the 5.0%6.125% Notes; and (3) certain defaults under other agreements under which Sonicwe or itsour subsidiaries have outstanding indebtedness in excess of $50.0 million.

2019 Mortgage Notes

DuringFacility

On November 22, 2019, we entered into a delayed draw-term loan credit agreement which is scheduled to mature on November 22, 2024 (the “2019 Mortgage Facility”).
Under the year ended2019 Mortgage Facility, Sonic has a maximum borrowing limit of $112.2 million, which varies based on the value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraisal value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. Based on balances as of December 31, 2016, Sonic obtained2019, we had approximately $103.4$109.1 million of outstanding borrowings, resulting in mortgage financing relatedtotal remaining borrowing availability of approximately $3.1 million under the 2019 Mortgage Facility.
Amounts outstanding under the 2019 Mortgage Facility bear interest at (i) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to ten2.75% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of its dealership properties. the last day of the immediately preceding fiscal quarter (the “Performance Grid”); or (ii) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid. Interest on the 2019 Mortgage Facility is paid monthly in arrears calculated using the Base Rate plus the Applicable Rate (as defined in the 2019 Mortgage Facility) according to the Performance Grid. Repayment of principal is paid quarterly commencing on March 31, 2020 through September 30, 2024 at a rate of 2.50% of the aggregate initial principal amount. A balloon payment of the remaining balance will be due at the November 22, 2024 maturity date. Prior to the November 22, 2024 maturity date, the Company reserves the right to prepay the principal amount outstanding at any time without premium or penalty provided the prepayment amount exceeds $0.5 million.
The 2019 Mortgage Facility contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including covenants which could restrict or prohibit indebtedness, liens, payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as
F-20
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other usual and customary covenants and default provisions. Specifically, the 2019 Mortgage Facility permits quarterly cash dividends on our Class A and Class B Common Stock up to $0.10 per share so long as no Event of Default (as defined in the 2019 Mortgage Facility) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2019 Mortgage Facility.
Mortgage Notes to Finance Companies
As of December 31, 2016,2019, the weighted average interest rate of other mortgage notes, excluding the 2019 Mortgage Facility, was 3.74%4.36% and the total outstanding mortgage principal balance of these notes was approximately $403.7 million, related to approximately 45% of Sonic’s operating locations.$355.9 million. These mortgage notes require monthly payments of principal and interest through maturity,their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 20172020 and 2033.

Covenants

Sonic

We agreed under the 2016 Credit Facilities and the 2019 Mortgage Facility not to pledge any assets to any third party (other than those explicitly allowed under the amended terms of the 2016 Credit Facilities)Facilities and the 2019 Mortgage Facility), including other lenders, subject to certain stated exceptions, including floor

F-20

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

plan financing arrangements. In addition, the 2016 Credit Facilities and the 2019 Mortgage Facility contain certain negative covenants, including covenants which could restrict or prohibit theour indebtedness, liens, payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other usual and customary covenants and default provisions.

Sonic was

We were in compliance with the financial covenants under the 2016 Credit Facilities and the 2019 Mortgage Facility as of December 31, 2016.2019. Financial covenants include required specified ratios (as each is defined in the 2016 Credit Facilities)Facilities and the 2019 Mortgage Facility) of:

 

Covenant

 

 

Minimum

Consolidated

Liquidity

Ratio

 

 

Minimum

Consolidated

Fixed Charge

Coverage

Ratio

 

 

Maximum

Consolidated

Total Lease

Adjusted Leverage

Ratio

 

Covenant

 

 

 

 

 

 

 

 

 

 

 

 

Minimum
Consolidated
Liquidity
Ratio
Minimum
Consolidated
Fixed Charge
Coverage
Ratio
Maximum
Consolidated
Total Lease
Adjusted Leverage
Ratio

Required ratio

 

 

1.05

 

 

 

1.20

 

 

 

5.75

 

Required ratio1.05  1.20  5.75  

December 31, 2016 actual

 

 

1.17

 

 

 

1.92

 

 

 

4.08

 

December 31, 2019 actualDecember 31, 2019 actual1.11  1.60  3.21  

The 2016 Credit Facilities and the 2019 Mortgage Facility contain events of default, including cross defaults to other material indebtedness, change of control events and other events of default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, Sonicwe could be required to immediately repay all outstanding amounts under the 2016 Credit Facilities.

Facilities and the 2019 Mortgage Facility.

After giving effect to the applicable restrictions on the payment of dividends under itsour debt agreements, as of December 31, 2016, Sonic2019, we had at least $127.4$259.9 million of its net income and retained earnings free of such restrictions. Sonic wasWe were in compliance with all restrictive covenants as of December 31, 2016.

2019.

In addition, many of Sonic’sour facility leases are governed by a guarantee agreement between the landlord and Sonicus that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2016 Credit Facilities and the 2019 Mortgage Facility with the exception of one additional financial covenant related to the ratio of EBTDAR to rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of December 31, 2016,2019, the ratio was 4.015.57 to 1.00.

Derivative Instruments and Hedging Activities
As of December 31, 2019 and 2018, we had interest rate cap agreements to limit our exposure to increases in LIBOR rates above certain levels. Under the terms of these interest rate cap agreements, interest rates reset monthly. We paid cash premiums of approximately $2.5 million and $2.8 million in the years ended December 31, 2019 and 2018, respectively, upon entering into new interest rate cap agreements, and the cash premiums were reflected in operating cash flows for the periods in which the premiums were paid. The unamortized premium amounts related to the outstanding interest rate caps were approximately $3.7 million and $4.6 million as of December 31, 2019 and 2018, respectively, and will be amortized through interest expense, other, net in the accompanying consolidated statements of income over the remaining term of the interest rate cap agreements. The fair value of the interest rate cap positions at December 31, 2019 was a net asset of approximately $0.1
F-21

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Derivative Instruments and Hedging Activities

Sonic has interest rate cash flow swap agreements to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these swap positions at December 31, 2016 was a net liability of approximately $3.7

million, with $4.1approximately $0.1 million included in other accrued liabilities and $2.4 million included in other long-term liabilities, offset partially by an asset of approximately $2.8 million includedassets in the accompanying consolidated balance sheets. The fair value of these swapthe interest rate cap positions at December 31, 20152018 was a net liabilityan asset of approximately $10.0$4.8 million, with $5.1approximately $1.8 million included in other accrued liabilitiescurrent assets and $4.9approximately $3.0 million included in other long-term liabilitiesassets in the accompanying consolidated balance sheets.
Notional
Amount		Cap Rate (1)Receive Rate (1) (2)Start DateMaturing Date
(In millions)
$312.5  2.000%  one-month LIBORJuly 1, 2019June 30, 2020
$250.0  3.000%  one-month LIBORJuly 1, 2019June 30, 2020
$225.0  3.000%  one-month LIBORJuly 1, 2020June 30, 2021
$150.0  2.000%  one-month LIBORJuly 1, 2020July 1, 2021
$250.0  3.000%  one-month LIBORJuly 1, 2021July 1, 2022
(1) Under these interest rate caps, 0 payment will occur unless the terms of these cash flow swaps, Sonic willstated receive andrate exceeds the stated pay interestrate. If this occurs, a net payment to us from the counterparty based on the following:

Notional

Amount

 

 

Pay

Rate

 

 

Receive Rate (1)

 

Maturing Date

(In millions)

 

 

 

 

 

 

 

 

 

$

2.3

 

 

 

7.100%

 

 

one-month LIBOR + 1.50%

 

July 10, 2017

$

7.3

 

 

 

4.655%

 

 

one-month LIBOR

 

December 10, 2017

$

6.6

 

(2)

 

6.860%

 

 

one-month LIBOR + 1.25%

 

August 1, 2017

$

6.0

 

(2)

 

6.410%

 

 

one-month LIBOR + 1.25%

 

September 12, 2017

$

100.0

 

 

 

2.065%

 

 

one-month LIBOR

 

June 30, 2017

$

100.0

 

 

 

2.015%

 

 

one-month LIBOR

 

June 30, 2017

$

50.0

 

 

 

1.320%

 

 

one-month LIBOR

 

July 1, 2017

$

250.0

 

(3)

 

1.887%

 

 

one-month LIBOR

 

June 30, 2018

$

25.0

 

 

 

2.080%

 

 

one-month LIBOR

 

July 1, 2017

$

100.0

 

 

 

1.560%

 

 

one-month LIBOR

 

July 1, 2017

$

125.0

 

 

 

1.303%

 

 

one-month LIBOR

 

July 1, 2017

$

125.0

 

(4)

 

1.900%

 

 

one-month LIBOR

 

July 1, 2018

$

50.0

 

(5)

 

2.320%

 

 

one-month LIBOR

 

July 1, 2019

$

200.0

 

(5)

 

2.313%

 

 

one-month LIBOR

 

July 1, 2019

$

100.0

 

(6)

 

1.384%

 

 

one-month LIBOR

 

July 1, 2020

$

125.0

 

(5)

 

1.158%

 

 

one-month LIBOR

 

July 1, 2019

$

150.0

 

(6)

 

1.310%

 

 

one-month LIBOR

 

July 1, 2020

$

125.0

 

(4)

 

1.020%

 

 

one-month LIBOR

 

July 1, 2018

(1)

The one-month LIBOR rate was approximately 0.772% at December 31, 2016.

(2)

Changes in fair value are recorded through earnings.

(3)

The effective date of this forward-starting swap is July 3, 2017.

(4)

The effective date of these forward-starting swaps is July 1, 2017.

(5)

The effective date of these forward-starting swaps is July 2, 2018.

(6)

The effective date of these forward-starting swaps is July 1, 2019.

Duringspread between the year ended December 31, 2016, Sonic entered into four forward-starting interestreceive rate cash flow swap agreements.  These interestand the pay rate swaps have been designated and qualify as cash flow hedges and,will be recognized as a result, changes in the fair valuereduction of these swaps are recorded in other comprehensive income (loss) before taxes in the accompanying consolidated statements of comprehensive income.  

For interest rate swaps not designated as cash flow hedges, the changes in the fair value of these swaps are recognized through earnings and are included in interest expense, other, net in the accompanying consolidated statements of income. For the years ended

(2) The one-month LIBOR rate was approximately 1.763% at December 31, 2016, 2015 and 2014, these items were a benefit of approximately $0.6 million, $0.6 million and $0.5 million, respectively.

For the2019.

The interest rate swaps that qualifycaps are designated as cash flow hedges, and the changes in the fair value of these swapsinstruments are recorded in other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying consolidated statements of cash flows. The incremental interest expense (the difference between interest paid and interest received)income related to thesethe interest rate caps was approximately $1.2 million and $0.2 million for 2019 and 2018, respectively, and is included as a reduction of interest expense, other, net in the accompanying consolidated statements of income and the interest amount is disclosed in the supplemental disclosures of cash flow information in the accompanying consolidated statements of cash flows. The incremental interest expense related to the interest rate swaps was approximately $5.5 million, $7.8 million and $10.7$3.1 million for the years ended December 31, 2016, 2015 and 2014, respectively,2017 and is included in interest expense, other, net in the accompanying consolidated statements of income and the interest paid amount is disclosed in the supplemental disclosures of cash flow information in the accompanying consolidated statements of cash flows. The estimated net

F-22

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

expense expected to be reclassified out of accumulated other comprehensive income (loss) into results of operations during the next twelve12 months is approximately $2.5 million.

$1.3 million related to the interest rate caps.

7. Income Taxes

The provision for income taxes for continuing operations - (benefit) expensebenefit (expense) consists of the following:

 

Year Ended December 31,

 

Year Ended December 31,

 

2016

 

 

2015

 

 

2014

 

201920182017

 

(In thousands)

 

(In thousands)

Current:

 

 

 

 

 

 

 

 

 

 

 

 

Current:

Federal

 

$

43,655

 

 

$

36,241

 

 

$

36,874

 

Federal$(62,016) $(37,028) $(34,877) 

State

 

 

3,766

 

 

 

6,414

 

 

 

5,771

 

State(12,563) (7,411) (7,292) 

Total current

 

 

47,421

 

 

 

42,655

 

 

 

42,645

 

Total current(74,579) (44,439) (42,169) 

Deferred

 

 

13,275

 

 

 

14,410

 

 

 

20,523

 

Deferred19,471  21,517  28,198  

Total provision for income taxes for continuing operations - (benefit) expense

 

$

60,696

 

 

$

57,065

 

 

$

63,168

 

Total provision for income taxes for continuing operations - benefit (expense)Total provision for income taxes for continuing operations - benefit (expense)$(55,108) $(22,922) $(13,971) 

The provision for income taxes for continuing operations - benefit (expense) includes a benefit of $28.4 million related to the remeasurement of the net deferred tax liability as of December 31, 2017, due to a reduction in the U.S. statutory federal income tax rate from 35.0% to 21.0% (beginning in 2018) resulting from enactment of the Tax Act which was signed into law in December 2017. The effect of this benefit is shown separately in the following rate reconciliation table. The reconciliation of the U.S. statutory federal income tax rate with Sonic’sour federal and state overall effective income tax rate from continuing operations is as follows:

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Statutory federal income tax rate

 

 

35.00

%

 

 

35.00

%

 

 

35.00

%

Effective state income tax rate

 

 

2.04

%

 

 

3.26

%

 

 

3.15

%

Valuation allowance adjustments

 

 

0.85

%

 

 

(0.45

%)

 

 

(0.14

%)

Uncertain tax positions

 

 

0.17

%

 

 

(0.14

%)

 

 

(0.08

%)

Other

 

 

1.05

%

 

 

1.64

%

 

 

1.13

%

Effective income tax rate

 

 

39.11

%

 

 

39.31

%

 

 

39.06

%

F-22

SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
201920182017
U.S. statutory federal income tax rate21.00 %21.00 %35.00 %
Effective state income tax rate4.10 %4.60 %4.58 %
Valuation allowance adjustments(0.18)%0.20 %(0.59)%
Uncertain tax positions(0.45)%0.17 %0.71 %
Effect of change in future U.S. statutory federal income tax rate0.00 %0.00 %(26.27)%
Non-deductible compensation1.48 %3.06 %0.23 %
Other1.65 %1.41 %(0.74)%
Effective income tax rate27.60 %30.44 %12.92 %
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of Sonic’sour deferred tax assets and liabilities are as follows:

 

December 31, 2016

 

 

December 31, 2015

 

December 31, 2019December 31, 2018

 

(In thousands)

 

(In thousands) 

Deferred tax assets:

 

 

 

 

 

 

 

 

Deferred tax assets:

Accruals and reserves

 

$

34,884

 

 

$

33,397

 

Accruals and reserves$27,271  $24,948  

State net operating loss carryforwards

 

 

10,777

 

 

 

10,187

 

State net operating loss carryforwards10,771  12,687  

Fair value of interest rate swaps

 

 

1,406

 

 

 

3,793

 

Basis difference in property and equipmentBasis difference in property and equipment20,923  11,515  

Interest and state taxes associated with the liability for uncertain income tax positions

 

 

1,746

 

 

 

1,725

 

Interest and state taxes associated with the liability for uncertain income tax positions938  1,175  
Fair value of interest rate swaps and interest rate capsFair value of interest rate swaps and interest rate caps1,153  —  
Basis difference in liabilities related to right-of-use assetsBasis difference in liabilities related to right-of-use assets93,808  —  

Other

 

 

774

 

 

 

864

 

Other2,146  1,778  

Total deferred tax assets

 

 

49,587

 

 

 

49,966

 

Total deferred tax assets157,010  52,103  

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Deferred tax liabilities:

Basis difference in inventory

 

 

(1,506

)

 

 

(1,530

)

Basis difference in property and equipment

 

 

(9,335

)

 

 

(9,850

)

Fair value of interest rate swaps and capsFair value of interest rate swaps and caps—  (462) 
Basis difference in inventoriesBasis difference in inventories(804) (838) 

Basis difference in goodwill

 

 

(101,999

)

 

 

(86,504

)

Basis difference in goodwill(61,397) (69,646) 
Basis difference in right-of-use assetsBasis difference in right-of-use assets(90,679) —  

Other

 

 

(3,540

)

 

 

(3,249

)

Other(2,316) (2,544) 

Total deferred tax liability

 

 

(116,380

)

 

 

(101,133

)

Total deferred tax liabilitiesTotal deferred tax liabilities(155,196) (73,490) 

Valuation allowance

 

 

(7,211

)

 

 

(5,880

)

Valuation allowance(7,775) (8,138) 

Net deferred tax asset (liability)

 

$

(74,004

)

 

$

(57,047

)

Net deferred tax asset (liability)$(5,961) $(29,525) 

Net short-term deferred tax asset balances were zero and approximately $13.6 million at December 31, 2016 and 2015, respectively, and are recorded in other current assets on the accompanying consolidated balance sheets.

Net long-term deferred tax asset balances were approximately $2.4$3.0 million and $2.8$3.7 million at December 31, 20162019 and 2015,2018, respectively, and are recorded in other assets on the accompanying consolidated balance sheets. Net short-term deferred tax liability balances were zero and

F-23

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

approximately $0.1 million at December 31, 2016 and 2015, respectively, and are recorded in other accrued liabilities on the accompanying consolidated balance sheets. Net long-term deferred tax liability balances were approximately $76.4$8.9 million and $73.3$33.2 million at December 31, 20162019 and 2015,2018, respectively, and are recorded in deferred income taxes on the accompanying consolidated balance sheets. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” for discussion of the adoption of ASU 2015-17 during the year ended December 31, 2016.

Sonic has

We have approximately $294.5$248.4 million in gross state net operating loss carryforwards that will expire between 20172020 and 2036.2039. Management reviews these carryforward positions, the time remaining until expiration and other opportunities to realize these carryforwards in making an assessment as to whether it is more likely than not that these carryforwards will be realized. The results of future operations, regulatory framework of the taxing authorities and other related matters cannot be predicted with certainty and, therefore, differences from the assumptions used in the development of management’s judgment could occur. As of December 31, 2016, Sonic2019, we had recorded a valuation allowance amount of approximately $7.2$7.8 million related to certain state net operating loss carryforward deferred tax assets as Sonicwe determined that itwe would not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.

At January 1, 2016, Sonic2019, we had liabilities of approximately $5.8$5.5 million recorded related to unrecognized tax benefits. Included in the liabilities related to unrecognized tax benefits at January 1, 2016,2019, was approximately $1.1$0.6 million related to interest and penalties which Sonic haswe have estimated may be paid as a result of itsour tax positions. It is Sonic’sour policy to classify the
F-23
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expense related to interest and penalties to be paid on underpayments of income taxes within income tax expense. A summary of the changes in the liability related to Sonic’sour unrecognized tax benefits is presented below.

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Unrecognized tax benefit liability, January 1 (1)

 

$

4,755

 

 

$

5,740

 

 

$

6,693

 

Prior period positions:

 

 

 

 

 

 

 

 

 

 

 

 

Increases

 

 

939

 

 

 

175

 

 

 

181

 

Decreases

 

 

(415

)

 

 

-

 

 

 

(66

)

Increases from current period positions

 

 

615

 

 

 

184

 

 

 

195

 

Settlements

 

 

-

 

 

 

-

 

 

 

(897

)

Lapse of statute of limitations

 

 

(1,290

)

 

 

(1,114

)

 

 

(170

)

Other

 

 

(247

)

 

 

(230

)

 

 

(196

)

Unrecognized tax benefit liability, December 31 (2)

 

$

4,357

 

 

$

4,755

 

 

$

5,740

 

(1)

Excludes accrued interest and penalties of $1.1 million, $1.2 million and $1.1 million at January 1, 2016, 2015 and 2014, respectively.

201920182017
(In thousands) 
Unrecognized tax benefit liability, January 1 (1)$4,901  $4,645  $4,357  
New positions—  —  653  
Prior period positions:
Increases1,795  7  491  
Decreases(2,697) (199) (539) 
Increases from current period positions582  714  692  
Settlements(653) —  —  
Lapse of statute of limitations(8) (69) (781) 
Other(81) (197) (228) 
Unrecognized tax benefit liability, December 31 (2)$3,839  $4,901  $4,645  

(2)

Excludes accrued interest and penalties of $0.8 million, $1.1 million and $1.2 million at December 31, 2016, 2015 and 2014, respectively. Amount presented is net of state net operating losses of $0.3(1) Excludes accrued interest and penalties of $0.6 million, $0.6 million and $0.8 million at December 31, 2016, 2015 and 2014, respectively.

Approximately $3.3 million and $2.6$0.8 million at January 1, 2019, 2018 and 2017, respectively.

(2) Excludes accrued interest and penalties of $0.5 million, $0.6 million and $0.6 million at December 31, 2019, 2018 and 2017, respectively. Amount presented is net of state net operating losses of $0.0 million, $0.0 million and $0.1 million at December 31, 2019, 2018 and 2017, respectively.
Approximately $3.8 million and $4.9 million of the unrecognized tax benefits as of December 31, 20162019 and 2015,2018, respectively, would ultimately affect the income tax rate if recognized. Included in the December 31, 20162019 recorded liability is approximately $0.9$0.5 million related to interest and penalties which Sonic haswe have estimated may be paid as a result of itsour tax positions. Sonic doesWe do not anticipate any significant changes in itsour unrecognized tax benefit liability within the next twelve12 months.

Sonic and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Sonic’s 20132016 through 20162019 U.S. federal income tax returns remain open to examination by the U.S. Internal Revenue Service. Sonic and its subsidiaries’ state income tax returns remain open to examination by state taxing authorities for years ranging from 20062015 to 2016.

2019.

The primary effect of the change in the U.S. federal income tax rate from 35.0% to 21.0%, as required by the Tax Act, related to the adjustment of deferred income tax balances. In periods prior to the year ended December 31, 2017, the income tax benefit or expense related to the reversal of deferred income tax assets and liabilities was expected to be realized at a federal income tax rate of 35.0%. Because of the Tax Act, the reversal of deferred income tax asset and liabilities in subsequent periods is recorded assuming a federal income tax rate of 21.0%. There were no significant provisional amounts considered in our recorded income tax balances at December 31, 2019. However, as the Tax Act was signed into law on December 22, 2017, clarifications of the Tax Act’s provisions may be issued at later dates that alter our understanding of the Tax Act’s provisions and thus may affect recorded income tax balances. Interpretations related to the Tax Act’s provisions concerning depreciation, interest and compensation deductibility could impact recorded income tax balances.
8. Related Parties

Certain of Sonic’sour dealerships purchase the zMAX micro-lubricant from Oil-Chem Research Corporation (“Oil-Chem”), a subsidiary of Speedway Motorsports, LLC f/k/a Speedway Motorsports Inc. (“SMI”Speedway Motorsports”), for resale to Fixed Operations customers of Sonic’sour dealerships in the ordinary course of business. Sonic’s Executive Chairman, Mr. O. Bruton Smith, is also the Executive Chairman of SMI,Speedway Motorsports, and Mr. Smith’s son, Mr. Marcus G. Smith, a director and a greater than 10% beneficial owner of Sonic, is the Chief Executive Officer and President and a director of SMI.Speedway Motorsports, and an Executive Vice President of Sonic Financial Corporation (“SFC”). Total purchases from Oil-Chem by Sonicour dealerships were approximately $2.1$1.6 million in each of the years ended December 31, 2016, 2015both 2019 and 2014. Sonic2018, and approximately $1.9 million in 2017. We also engaged in other transactions with various SMISpeedway Motorsports subsidiaries, in the year ended December 31, 2016, consisting primarily of (i)(1) merchandise and apparel purchases from SMISC Holdings, Inc.LLC. (d/b/a SMI Properties), for a net amount of

F-24

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

approximately $0.9 million in each of 2019, 2018 and (ii)2017; and (2) vehicle sales to various SMISpeedway Motorsports subsidiaries for a net amount of approximately $0.2 million. Because Messrs. O. Bruton Smith, B. Scott Smith, David Bruton Smithmillion in each of 2019, 2018 and Marcus G. Smith and Sonic Financial Corporation (“SFC”), an entity jointly controlled by Messrs. O. Bruton Smith, B. Scott Smith, David Bruton Smith and Marcus G. Smith, own collectively approximately 70% of SMI, under applicable SEC rules, the amount of Messrs. O. Bruton Smith’s, B. Scott Smith’s, David Bruton Smith’s and Marcus G. Smith’s interest in these transactions may be deemed to be approximately $1.5 million, $0.6 million and $0.1 million, respectively.

Sonic participates2017.

We participate in various aircraft-related transactions with SFC.SFC, a privately held company controlled by Mr. O. Bruton Smith and his family. Such transactions include, but are not limited to, the use of aircraft owned by SFC for business-related travel by Sonicour executives, a management agreement with SFC for storage and maintenance of aircraft leased by Sonicus from
F-24
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unrelated third parties and the use of Sonic’sour aircraft for business-related travel by certain affiliates of SFC. SonicWe incurred net expenses of approximately $0.5 million, $0.6 million and $0.5$0.3 million in the years ended December 31, 2016, 2015both 2019 and 2014, respectively,2018, and approximately $0.4 million in 2017 in aircraft-related transactions with these related parties.

Sonic incurred net expenses of approximately $0.8 million, $0.8 million and $0.6 million in the years ended December 31, 2016, 2015 and 2014, respectively, related to other transactions with various SMI subsidiaries, consisting primarily of merchandise and apparel purchases.

9. Capital Structure and Per Share Data

Preferred Stock- Sonic hasWe have 3,000,000 shares of “blank check” preferred stock authorized with such designations, rights and preferences as may be determined from time to time by theour Board of Directors. TheOur Board of Directors has designated 300,000 shares of preferred stock as Class A convertible preferred stock,Convertible Preferred Stock, par value $0.10 per share (the “Preferred Stock”), which is divided into 100,000 shares of Series I Preferred Stock, 100,000 shares of Series II Preferred Stock and 100,000 shares of Series III Preferred Stock. There were no0 shares of Preferred Stock issued or outstanding at December 31, 2016 and 2015.

2019 or 2018.

Common Stock- Sonic has twoWe have 2 classes of common stock. Sonic hasWe have authorized 100,000,000 shares of Class A common stockCommon Stock at a par value of $0.01 per share. Class A common stockCommon Stock entitles its holder to one1 vote per share. Sonic hasWe have also authorized 30,000,000 shares of Class B common stockCommon Stock at a par value of $0.01 per share. Class B common stockCommon Stock entitles its holder to ten10 votes per share, except in certain circumstances. Each share of Class B common stockCommon Stock is convertible into one1 share of Class A common stockCommon Stock either upon voluntary conversion at the option of the holder, or automatically upon the occurrence of certain events, as provided in Sonic’sour charter. The two classes of common stock share equally in dividends and in the event of liquidation.

Share Repurchases- Prior to December 31, 2016, Sonic’s2019, our Board of Directors had authorized Sonicus to expend up to $595.0$695.0 million to repurchase shares of itsour Class A common stock.Common Stock. As of December 31, 2016, Sonic2019, we had repurchased a total of approximately 30.333.6 million shares of Class A common stockCommon Stock at an average price per share of approximately $17.72$17.84 and had redeemed and retired 13,801.5 shares of Class A convertible preferred stockthe Preferred Stock at an average price of $1,000 per share. As of December 31, 2016, Sonic2019, we had approximately $45.0$81.2 million remaining under theour Board’s authorization. Please refer to Note 15, “Subsequent Events,” to the accompanying consolidated financial statements for further discussion of the Board’s authorization.

F-25

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Per Share Data-The calculation of diluted earnings per share considers the potential dilutive effect of restricted stock units, restricted stock awards and stock options and sharesgranted under Sonic’s stock compensation plans and(and any non-forfeitable dividends paid on such awards), in addition to Class A common stockCommon Stock purchase warrants. Certain of Sonic’s non-vested restricted stock and restricted stock units contain rights to receive non-forfeitable dividends and, thus, are considered participating securities and are included in the two-class method of computing earnings per share. The following table illustrates the dilutive effect of such items on earnings per share for the years ended December 31, 2016, 2015 and 2014:

 

 

For the Year Ended December 31, 2016

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

45,637

 

 

$

94,516

 

 

 

 

 

 

$

(1,323

)

 

 

 

 

 

$

93,193

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(52

)

 

 

 

 

Basic earnings (loss) and shares

 

 

45,637

 

 

$

94,464

 

 

$

2.07

 

 

$

(1,323

)

 

$

(0.03

)

 

$

93,141

 

 

$

2.04

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

311

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

45,948

 

 

$

94,464

 

 

$

2.06

 

 

$

(1,323

)

 

$

(0.03

)

 

$

93,141

 

 

$

2.03

 

 

 

For the Year Ended December 31, 2015

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

50,489

 

 

$

88,091

 

 

 

 

 

 

$

(1,780

)

 

 

 

 

 

$

86,311

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

(36

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(36

)

 

 

 

 

Basic earnings (loss) and shares

 

 

50,489

 

 

$

88,055

 

 

$

1.74

 

 

$

(1,780

)

 

$

(0.03

)

 

$

86,275

 

 

$

1.71

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

50,883

 

 

$

88,055

 

 

$

1.73

 

 

$

(1,780

)

 

$

(0.03

)

 

$

86,275

 

 

$

1.70

 

 

 

For the Year Ended December 31, 2014

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

 

  

Net

 

 

 

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

52,065

 

 

$

98,559

 

 

 

 

 

 

$

(1,342

)

 

 

 

 

 

$

97,217

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock and restricted stock units

 

 

 

 

 

 

(311

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(311

)

 

 

 

 

Basic earnings (loss) and shares

 

 

52,065

 

 

$

98,248

 

 

$

1.89

 

 

$

(1,342

)

 

$

(0.03

)

 

$

96,906

 

 

$

1.86

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

52,563

 

 

$

98,248

 

 

$

1.87

 

 

$

(1,342

)

 

$

(0.03

)

 

$

96,906

 

 

$

1.84

 

In addition to the stock options included in the tables above, options to purchase approximately 0.2 million,  0.4 million and 0.4 million shares of Class A common stock were outstanding during the years ended December 31, 2016, 2015 and 2014, respectively, but were not included in the computation of diluted net income per share because the options were not dilutive.

F-26

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

10. Employee Benefit Plans

Substantially all of theour employees of Sonic are eligible to participate in a 401(k) plan. Contributions by Sonicus to theour 401(k) planplans were approximately $8.9 million, $9.2 million and $8.0 million $7.7 millionin 2019, 2018 and $7.4 million in the years ended December 31, 2016, 2015 and 2014,2017, respectively.

Stock Compensation Plans

Sonic

We currently has threehave 2 active stock compensation plans: the Sonic Automotive, Inc. 2004 Stock Incentive Plan (the “2004 Plan”), the Sonic Automotive, Inc. 2012 Stock Incentive Plan (the “2012 Plan”), and the Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors (the “2012 Formula Plan”). Effective February 19, 2014, new grants of equity awards under the 2004 Plan were no longer permitted. Stock options outstanding, non-vested restricted stock awards and restricted stock units previously granted under the 2004 Plan were unaffected by this change in plan status. Sonic has one additional terminated plan with outstanding grants as of December 31, 2016: the Sonic Automotive, Inc. 1997 Stock Option Plan. Collectively, these plans are referred to as the “Stock Plans.” During the second quarter of 2012, Sonic’sour stockholders voted to approve the 2012 Plan and the 2012 Formula Plan, with authorization for issuance of 2,000,000 shares of Class A common stockCommon Stock and 300,000 shares of Class A common stock,Common Stock, respectively. During the second quarter of 2015, Sonic’sour stockholders voted to increase the number of shares of Class A common stockCommon Stock authorized for issuance under the 2012 Plan from 2,000,000 shares to 4,000,000 shares.

 During the second quarter of 2017, our stockholders voted to increase the number of shares of Class A Common Stock authorized for issuance under the 2012 Formula Plan from 300,000 shares to 500,000 shares. During the second quarter of 2019, our stockholders voted to increase the number of shares of Class A Common Stock authorized for issuance under the 2012 Plan from 4,000,000 shares to 6,000,000 shares.

The Stock Plans were adopted by theour Board of Directors in order to attract and retain key personnel. Under the 2012 Plan, and the 2004 Plan, options to purchase shares of Class A common stockCommon Stock may be granted to key employees of Sonic and its subsidiaries and to officers, directors, consultants and other individuals providing services to Sonic.us. The options are granted at the fair market value of Sonic’sour Class A common stockCommon Stock at the date of grant, typically vest over a period ranging from six months to three years, are exercisable upon vesting and typically expire ten10 years from the date of grant. The 2012 Plan and the 2004 Plan also authorizedauthorizes the issuance of restricted stock awards and restricted stock units. Restricted stock award and restricted stock unit grants under the 2012 Plan and the 2004 Plan typically vest over a period ranging from one to three years, but may be longer in certain cases. The 2012 Formula Plan provides for grants of restricted stock awards or deferred restricted stock units to non-employee directors and restrictions on those shares expire on the earlier of the first anniversary of the grant date or the day before the next annual meeting of Sonic’s stockholders.our stockholders, except to the extent that such grant is considered an interim grant for a newly elected non-employee director, in which case, restrictions on those shares expire on the first anniversary of the grant date. Individuals holding non-vested restricted stock awards under the 2012 Plan and the 2012 Formula Plan and the 2004 Plan have voting rights and certain grants may receive
F-25
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dividends on non-vested shares. Individuals holding restricted stock units as of December 31, 20162019 granted under the 2012 Plan and the 2004 Plan do not have voting or dividend rights. Sonic issuesWe issue new shares of Class A common stockCommon Stock to employees and directors to satisfy itsour option exercise and stock grant obligations. To offset the effects of these transactions, Sonic haswe have historically repurchased its shares of our Class A common stockCommon Stock after considering cash flow, market conditions and other factors.

factors; however, there is no guarantee that this will occur in future periods.

A summary of the status of the stock options related to the Stock Plans is presented below:

 

 

Options

Outstanding

 

 

Exercise Price

Per Share

(Low - High)

 

Weighted

Average

Exercise

Price

Per Share

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value

 

 

 

(In thousands, except per share data, term in years)

 

Balance at December 31, 2015

 

 

714

 

 

$

1.81

 

-

30.07

 

$

17.56

 

 

 

1.6

 

 

$

5,605

 

Exercised

 

 

(15

)

 

$

1.81

 

-

1.81

 

$

1.81

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(260

)

 

$

23.30

 

-

26.42

 

$

25.44

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

439

 

 

$

1.81

 

-

30.07

 

$

13.42

 

 

 

1.4

 

 

$

5,327

 

Exercisable

 

 

439

 

 

$

1.81

 

-

30.07

 

$

13.42

 

 

 

1.4

 

 

$

5,327

 

Options
Outstanding
Exercise Price
Per Share
(Low - High)
Weighted Average Exercise Price Per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(In thousands, except per share data, term in years)
Balance at December 31, 201833  $1.81 -1.81  $1.81  0.3$392  
Exercised(33) $1.81 -1.81  $1.81  

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands, except per option data)

 

Intrinsic value of stock options exercised

 

$

250

 

 

$

2,511

 

 

$

1,187

 


F-27

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Sonic recognizes

Year Ended December 31,
201920182017
(In thousands)
Intrinsic value of stock options exercised$426  $3,564  $425  
We recognize compensation expense within selling, general and administrative expenses related to the stock options ingranted under the Stock Plans. NoNaN stock option compensation expense was recognized during the years ended December 31, 2016, 20152019, 2018 or 20142017, as all previous stock option grants were completely vested prior to December 31, 2012.

A summary of the status of the non-vested restricted stock award and restricted stock unit grants related to the Stock Plans is presented below:

 

Non-vested

Restricted

Stock Awards

and Restricted

Stock Units

 

 

Weighted

Average

Grant Date

Fair Value

per Share

 

 

(Shares in thousands)

 

Non-Vested
Restricted
Stock Awards
and Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
per Share

Balance at December 31, 2015

 

 

1,831

 

 

$

23.33

 

(In thousands, except per share data)
Balance at December 31, 2018Balance at December 31, 20182,161  $21.20  

Granted

 

 

750

 

 

$

16.30

 

Granted968  $13.38  

Forfeited

 

 

(40

)

 

$

25.32

 

Forfeited(295) $19.75  

Vested

 

 

(361

)

 

$

23.40

 

Vested(487) $18.82  

Balance at December 31, 2016

 

 

2,180

 

 

$

20.86

 

Balance at December 31, 2019Balance at December 31, 20192,347  $19.34  

During the year ended December 31, 2016,2019, approximately 725,000911,000 restricted stock units were awarded to Sonic’sour executive officers and other key associates under the 2012 Plan. These awards were made in connection with establishing the objective performance criteria for the year ended December 31, 20162019 incentive compensation and vest over three years. The majority of the restricted stock units awarded to executive officers and other key associates are subject to forfeiture, in whole or in part, based upon specified measures of Sonic’s earnings per share performance for the year ended December 31, 2016,2019, continuation of employment and compliance with any restrictive covenants contained in an agreement between Sonicus and the respective executive officer or other key associate. Also in the year ended December 31, 2016,2019, approximately 25,000 non-vested57,000 restricted stock awards were granted to Sonic’sour Board of Directors pursuant to the 2012 Formula Plan and vest on the earlier of the first anniversary of the grant date or the day before the next annual meeting of Sonic’s stockholders. Sonicour stockholders, except to the extent that such grant is considered an interim grant for a newly elected non-employee director, in which case, restrictions on those shares expire on the first anniversary of the grant date. We recognized compensation expense within selling, general and administrative expenses related to restricted stock awardsunits and restricted stock unitsawards of approximately $11.2$10.8 million, $9.8$11.9 million and $7.7$11.1 million in the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively.

Tax benefits recognized related to restricted stock awardsunit and restricted stock unitsaward compensation expense were approximately $2.9 million, $3.0 million and $4.2 million $3.7 millionfor 2019, 2018 and $2.9 million for the years ended December 31, 2016, 2015 and 2014,2017, respectively. Total compensation cost related to non-vested restricted stock awardsunits and restricted stock unitsawards not yet recognized at December 31, 20162019 was approximately $34.7$29.1 million and is expected to be recognized over a weighted average period of approximately 8.56.5 years.

F-26
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Executive Retirement Plan

On December 7, 2009, the Compensation Committee of Sonic’sour Board of Directors approved and adopted the Sonic Automotive, Inc. Supplemental Executive Retirement Plan (the “SERP”) to be effective as of January 1, 2010. The SERP is a nonqualifiednon-qualified deferred compensation plan that is unfunded for federal tax purposes. The SERP included 12 active or former members of senior management at December 31, 2016.2019. The purpose of the SERP is to attract and retain key members of management by providing a retirement benefit in addition to the benefits provided by Sonic’sour tax-qualified and other nonqualifiednon-qualified deferred compensation plans.

The following table sets forth the status of the SERP:

 

Year Ended December 31,

 

 

2016

 

 

2015

 

Year Ended December 31,

 

(In thousands)

 

20192018

Change in projected benefit obligation:

 

 

 

 

 

 

 

 

Change in projected benefit obligation:(In thousands)

Obligation at January 1, 2016

 

$

9,234

 

 

$

7,976

 

Obligation at January 1Obligation at January 1$13,326  $13,556  

Service cost

 

 

1,590

 

 

 

1,950

 

Service cost1,731  1,933  

Interest cost

 

 

383

 

 

 

307

 

Interest cost575  470  

Actuarial loss (gain)

 

 

295

 

 

 

(737

)

Actuarial loss (gain)2,641  (2,368) 

Amendments/settlements/curtailments loss (gain)

 

 

-

 

 

 

-

 

Amendments/settlements/curtailments loss (gain)—  —  

Benefits paid

 

 

(269

)

 

 

(262

)

Benefits paid(265) (265) 

Obligation at December 31, 2016 (1)

 

$

11,233

 

 

$

9,234

 

Obligation at December 31 (1)Obligation at December 31 (1)$18,008  $13,326  

Accumulated benefit obligation

 

$

8,557

 

 

$

7,115

 

Accumulated benefit obligation$13,694  $10,191  

F-28

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(1)

Approximately $11.0 million is included in other long-term(1) For 2019, approximately $0.4 million is included in other accrued liabilities and approximately $17.6 million is included in other long-term liabilities in the accompanying consolidated balance sheets. For 2018, approximately $0.3 million is included in other accrued liabilities and approximately $13.0 million is included in other long-term liabilities in the accompanying consolidated balance sheets.

 

Year Ended December 31,

 

Year Ended December 31,

 

2016

 

 

2015

 

20192018

 

(In thousands)

 

(In thousands)

Change in fair value of plan assets:

 

 

 

 

 

 

 

 

Change in fair value of plan assets:

Plan assets at January 1, 2016

 

$

-

 

 

$

-

 

Plan assets at January 1Plan assets at January 1$—  $—  

Actual return on plan assets

 

 

-

 

 

 

-

 

Actual return on plan assets—  —  

Employer contributions

 

 

269

 

 

 

262

 

Employer contributions265  265  

Benefits paid

 

 

(269

)

 

 

(262

)

Benefits paid(265) (265) 

Plan assets at December 31, 2016

 

 

-

 

 

 

-

 

Plan assets at December 31Plan assets at December 31—  —  

Funded status recognized

 

$

(11,233

)

 

$

(9,234

)

Funded status recognized$(18,008) $(13,326) 

The following table provides the cost components of the SERP:

 

Year Ended December 31,

 

Year Ended December 31,

 

2016

 

 

2015

 

20192018

 

(In thousands)

 

(In thousands)

Service cost

 

$

1,590

 

 

$

1,950

 

Service cost$1,731  $1,933  

Interest cost

 

 

383

 

 

 

307

 

Interest cost575  470  

Net pension expense (benefit)

 

$

1,973

 

 

$

2,257

 

Net pension expense (benefit)$2,306  $2,403  

The weighted average assumptions used to determine the benefit obligation and net periodic benefit costs consist of:

 

As of December 31,

 

As of December 31,

 

2016

 

 

2015

 

20192018

Discount rate

 

 

4.04

%

 

 

4.21

%

Discount rate2.99 %4.36 %

Rate of compensation increase

 

 

3.00

%

 

 

3.00

%

Rate of compensation increase3.00 %3.00 %

F-27
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated future benefit payments expected to be paid for each of the next five years and the sum of the payments expected for the next five years thereafter are:

 

 

 

 

 

 

 

Estimated Future Benefit Payments

 

Year Ending December 31,

 

(In thousands)

 

2017

 

$

265

 

2018

 

$

265

 

2019

 

$

265

 

2020

 

$

364

 

2021

 

$

364

 

2022 - 2026

 

$

1,820

 

Estimated Future Benefit Payments
Year Ending December 31,(In thousands)
2020$360  
2021$360  
2022$360  
2023$360  
2024$360  
2025 - 2029$2,414  

Multiemployer Benefit Plan

Six

Five of Sonic’sour dealership subsidiaries in northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”) pursuant to collective bargaining agreements between Sonic’sour subsidiaries and the International Association of Machinists (the “IAM”) and the International Brotherhood of Teamsters (the “IBT”). The AI Pension Plan is a “multiemployer plan” as defined under the Employee Retirement Income Security Act of 1974, as amended, and Sonic’s sixour five dealership subsidiaries are among approximately 149188 employers that are obligated to make contributions to the AI Pension Plan pursuant to collective bargaining agreements with the IAM, the IBT and other unions. The risks of participating in this multiemployer pension plan are different from single-employer plans in the following aspects:

•assets contributed to the multiemployer pension plan by one employer may be used to provide benefits to employees of other participating employers;

F-29

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

•if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and

•if Sonic chooseswe choose to stop participating in the multiemployer pension plan, Sonicwe may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

Sonic’s

Our participation in the AI Pension Plan for the years ended December 31, 2016, 20152019, 2018 and 20142017 is outlined in the table below. The “EIN/Pension Plan Number” column provides the Employee Identification Number (the “EIN”). Unless otherwise noted, the most recent Pension Protection Act of 2006 (the “PPA”) zone status available in the years ended December 31, 20162019 and 20152018 is for the plan’s year-end at December 31, 20152018 and 2014,2017, respectively. The zone status is based on information that Sonicwe received from the AI Pension Plan. Among other factors, plans in the red zone are generally less than 65% funded (“Critical Status”), plans in the yellow zone are less than 80% funded and plans in the green zone are at least 80% funded. The “FIP/RP Status -Pending/Implemented” column indicates plans for which a Financial Improvement Plan (the “FIP”(“FIP”) or a Rehabilitation Plan (the “RP”(“RP”) is either pending or has been implemented. The last column lists the expiration dates of the collective bargaining agreements to which the plan is subject. The number of employees covered by Sonic’s multiemployer pension plans increased 4.8%the AI Pension Plan decreased 1.0% from December 31, 20142017 to December 31, 20152018 and increased 2.6%decreased 5.5% from December 31, 20152018 to December 31, 2016,2019, affecting the period-to-period comparability of the contributions for the years ended December 31, 2016, 20152019, 2018 and 2014.

 

 

 

 

Pension

Protection

Act Zone

Status

 

FIP/RP Status

 

Sonic Contributions

 

 

 

 

Collective

Bargaining

Pension

 

EIN/Pension

 

 

 

 

 

Pending /

 

Year Ended December 31,

 

 

Surcharge

 

Agreement

Fund

 

Plan Number

 

2016

 

2015

 

Implemented

 

2016

 

 

2015

 

 

2014

 

 

Imposed

 

Expiration Date (1)

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

AI Pension Plan

 

94-1133245

 

Red

 

Red

 

RP Implemented

 

$

150

 

 

$

140

 

 

$

148

 

 

Yes

 

Between

August 31, 2014

and November 29, 2017

2017.

(1)

Collective bargaining agreement expiration dates vary by union and dealership. Dates shown represent the range of the earliest and latest stated expirations for Sonic’s union employees, noting certain of Sonic’s collective bargaining agreements are expired as of December 31, 2016 and are currently under negotiation.

Pension
Protection
Act Zone
Status
FIP/RP StatusSonic ContributionsSurcharge ImposedCollective Bargaining Agreement Expiration Date
Pension FundEIN/Pension Plan Number20192018Pending /ImplementedYear Ended December 31,
201920182017
(In thousands)
AI Pension Plan94-1133245RedRedRP Implemented$181  $176  $171  YesBetween
October 2021
and February 2022

Sonic’s

Our participating dealership subsidiaries were not listed in the AI Pension Plan’s Form 5500 as providing more than 5% of the total contributions for the plan years ended December 31, 20152019 and December 31, 2014.2018. In June 2006, Sonicwe received information that the AI Pension Plan was substantially underfunded as of December 31, 2005. In July 2007, Sonicwe received updated information that the AI Pension Plan continued to be substantially underfunded as of December 31, 2006, with the amount of such underfunding increasing versus year end 2005. In March 2008, the Board of Trustees of the AI Pension Plan
F-28
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notified participants, participating employers and local unions that the AI Pension Plan’s actuary, in accordance with the requirements of the PPA, had issued a certification that the AI Pension Plan was in Critical Status effective with the plan year commencing January 1, 2008. In conjunction with the AI Pension Plan’s Critical Status, the Board of Trustees of the AI Pension Plan adopted a rehabilitation planRP that implementsimplemented reductions or eliminations of certain adjustable benefits that were previously available under the AI Pension Plan (including some forms of early retirement benefits, and disability and death benefits, among other items), and also implemented a requirement on all participating employers to increase employer contributions to the AI Pension Plan for a seven-year period which commenced in 2013. As of April 2015, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in Critical Status for the plan year commencing January 1, 2015. According to publicly available information, in September 2016, the AI Pension Plan made a formal application for approval of suspension of benefits with the U.S. Treasury Department, which, if approved by the U.S. Treasury Department, would implementhave implemented a benefit reduction effective July 1, 2017 for participants in the AI Pension Plan. The filing included an Actuarial Certification of Plan Status as of January 1, 2016 that the AI Pension Plan previously filed with the U.S. Internal Revenue Service on March 30, 2016, which reported that the AI Pension Plan was in critical and declining status as of January 1, 2016 and further notified that the AI Pension Plan is making the scheduled progress in meeting the requirements of the plan’s previously-adopted Rehabilitation Plan.previously adopted RP. The September 2016 filing with the U.S. Treasury Department also included an Actuarial Certification of Plan Solvency as of July 1, 2016 with the actuarial firm’s projection that the proposed suspensions of benefits are reasonably estimated to enable the AI Pension Plan to avoid insolvency assuming the proposed suspensions of benefits continue indefinitelyindefinitely. In May 2017, the U.S. Treasury Department denied the application to suspend benefits but noted that it remains willing to discuss the issues presented in the September 2016 formal application for suspension of benefits. As of April 2019, the AI Pension Plan's actuary certified that the AI Pension Plan remained in critical status for the plan year commencing January 1, 2019 and the benefit accrual reduction becomes effective upon the proposed July 1, 2017 suspension effective date.is projected to become insolvent in 2031. Under applicable federal law, any employer contributing to a multiemployer pension plan that completely ceases participating in the plan while the plan is underfunded is subject to payment of such employer’s assessed share of the aggregate unfunded vested benefits of the plan. In certain circumstances, an employer can be assessed withdrawal liability for a partial withdrawal from a multiemployer pension plan. In addition, if the financial condition of the

F-30

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

AI Pension Plan were to continue to deteriorate to the point that the AI Pension Plan is forced to terminate and be administered by the Pension Benefit Guaranty Corporation (the “PBGC”), the participating employers could be subject to assessments by the PBGC to cover the participating employers’ assessed share of the unfunded vested benefits. If any of these adverse events were to occur in the future, it could result in a substantial withdrawal liability assessment to Sonic.

us.

11. Fair Value Measurements

In determining fair value, Sonic useswe use various valuation approaches including market, income and/or cost approaches. “Fair Value Measurements and Disclosures” in the ASC establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of Sonic.us. Unobservable inputs are inputs that reflect Sonic’sour assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 –- Valuations based on quoted prices in active markets for identical assets or liabilities that Sonic haswe have the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded, including the value of Sonic’sour stock or public bonds.

Level 2 –- Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments and deferred compensation plan balances.

Level 3 –- Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, those used in assessing impairment of right-of-use assets, property, plant and equipment and other intangibles and those used in the reporting unit valuation in the annual goodwill impairment evaluation.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required by Sonicus in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is
F-29
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disclosed is determined based on the lowest level input (Level 3 being the lowest level) that is significant to the fair value measurement.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, Sonic’sour own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. Sonic usesWe use inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that may or may not be within Sonic’sour control.

F-31

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Assets orand liabilities recorded at fair value in the accompanying consolidated balance sheets as of December 31, 20162019 and 20152018 are as follows:

 

 

Fair Value Based on

Significant Other Observable

Inputs (Level 2)

 

 

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (1)

 

$

31,475

 

 

$

29,055

 

 

Cash flow swaps designated as hedges (1)

 

 

2,772

 

 

 

-

 

 

Total assets

 

$

34,247

 

 

$

29,055

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Cash flow swaps designated as hedges (2)

 

$

6,135

 

 

$

9,094

 

 

Cash flow swaps not designated as hedges (3)

 

 

346

 

 

 

913

 

 

Deferred compensation plan (4)

 

 

14,824

 

 

 

13,551

 

 

Total liabilities

 

$

21,305

 

 

$

23,558

 

 

(1)

Included in other assets in the accompanying consolidated balance sheets.

 
Fair Value Based on
Significant Other Observable
Inputs (Level 2)
 December 31, 2019December 31, 2018
 (In thousands)
Assets:  
Cash surrender value of life insurance policies (1)$32,799  $31,395  
Cash flow swaps and interest rate caps designated as hedges (2)97  4,839  
Total assets$32,896  $36,234  
Liabilities:
Deferred compensation plan (3)$17,890  $19,848  
Total liabilities$17,890  $19,848  

(1) Included in other assets in the accompanying consolidated balance sheets.
(2) As of December 31, 2016,2019, approximately $3.7$0.1 million was included in other assets in the accompanying consolidated balance sheets. As of December 31, 2018, approximately $1.8 million and $2.4$3.0 million were included in other accrued liabilitiescurrent assets and other long-term liabilities,assets, respectively, in the accompanying consolidated balance sheets.

(2)

As of December 31, 2016, approximately $0.3 million was included in other accrued liabilities in the accompanying consolidated balance sheets. As of December 31, 2015, approximately $4.6 million and $4.5 million were included in other accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheets.

(3)

As of December 31, 2015, approximately $0.5 million and $0.4 million were included(3) Included in other accrued liabilities and other long-term liabilities respectively, in the accompanying consolidated balance sheets.

(4)

Included in other long-term liabilities in the accompanying consolidated balance sheets.

The carrying value of assets orand liabilities measured at fair value on a non-recurring basis but not completely adjusted to fair value in the accompanying consolidated balance sheetssheet as of December 31, 2016,2019, are included in the table below. Certain components of long-lived assets held and used have been adjusted to fair value through impairment charges as discussed in Note 4, “Property and Equipment”Equipment,” and Note 5, “Intangible Assets and Goodwill.”

 

 

 

 

 

 

Significant

 

 

 

 

 

 

 

 

 

 

 

Unobservable

 

 

Total Gains /

 

 

 

 

 

 

 

Inputs

 

 

(Losses) for the

 

 

 

Balance as of

 

 

(Level 3) as of

 

 

Year Ended

 

 

 

December 31, 2016

 

 

December 31, 2016

 

 

December 31, 2016

 

 

 

(In thousands)

 

Long-lived assets held and used (1)

 

$

1,010,380

 

 

$

1,010,380

 

 

$

(8,063

)

Goodwill (2)

 

$

472,437

 

 

$

472,437

 

 

$

-

 

Franchise assets (2)

 

$

74,900

 

 

$

74,900

 

 

$

-

 

(1)

See Notes 1 and 4 for discussion.

(2)

See Notes 1 and 5 for discussion.

Significant
Unobservable
Inputs
(Level 3) as of
December 31, 2019		Total Gains /
(Losses) for the
Year Ended
December 31, 2019 (2)
(In thousands)
Long-lived assets held and used (1)$7,286  $(1,345) 
Assets held for sale (1)$23,030  $(17,741) 

(1) See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 4, “Property and Equipment.” The fair values less costs to sell of long-lived assets or disposal groups held for sale are assessed each reporting period they remain classified as held for sale. Subsequent changes in the held for sale long-lived asset’s or disposal group’s fair value less cost to sell (increase or decrease) are reported as an adjustment to its carrying amount, except that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset or disposal group at the time it was initially classified as held for sale.
(2) Excludes impairment loss of approximately $1.7 million related to long lived assets that were disposed during the year ended December 31, 2019.

As of December 31, 20162019 and 2015,2018, the fair values of Sonic’sour financial instruments, including receivables, notes receivable from finance contracts, notes payable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes, approximateapproximated their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.

F-32

F-30

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The fair value and carrying value of Sonic’sour fixed rate long-term debt were as follows:

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

 

(In thousands)

 

7.0% Notes (1)

 

$

211,000

 

 

$

198,871

 

 

$

211,000

 

 

$

198,708

 

5.0% Notes (1)

 

$

284,934

 

 

$

289,273

 

 

$

284,250

 

 

$

300,000

 

Mortgage Notes (2)

 

$

185,979

 

 

$

176,369

 

 

$

174,007

 

 

$

168,410

 

Other (2)

 

$

4,057

 

 

$

4,280

 

 

$

5,192

 

 

$

5,457

 

(1)

As determined by market quotations as of December 31, 2016 and 2015, respectively (Level 1).

(2)

As determined by discounted cash flows (Level 3).

 December 31, 2019December 31, 2018
 Fair ValueCarrying ValueFair ValueCarrying Value
 (In thousands)
5.0% Notes (1)$—  $—  $262,515  $289,273  
6.125% Notes (1)$261,250  $250,000  $216,250  $250,000  
Mortgage Notes (2)$195,962  $194,535  $218,402  $215,196  
Other (2)$—  $—  $20,437  $20,588  

(1) As determined by market quotations as of December 31, 2019 and 2018, respectively (Level 1).
(2) As determined by DCF (Level 3).
12. Commitments and Contingencies

Facility and Equipment Leases

For the year ended December 31, 2016, Sonic recognized approximately $1.4 million

Lease Exit Accruals
A significant number of our dealership properties are leased under long-term operating lease arrangements. Prior to January 1, 2019, if leased properties were no longer being utilized in operations, we recorded lease exit expense,accruals. These situations could include the relocation of an existing facility or the sale of a dealership when the buyer will not be subleasing the property for either the remaining term of the lease or for an amount equal to our obligation under the lease, or situations in which consistsa facility is closed as a result of $1.0 million of interest expensethe associated franchise being terminated by us or the manufacturer and $0.4 million related to adjustments tono other operations continue on the leased property. The lease exit accruals recorded in previous years forrepresented the present value of the lease payments, net of estimated sublease rentals, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitmentcommitments to the landlord.   landlords. As of December 31, 2018, the net liability related to these lease exit accruals was approximately $4.6 million. As discussed in Note 16, “Leases” due to the adoption of ASC 842, “Leases,” effective January 1, 2019, previously existing lease exit accruals have been reclassified from other accrued liabilities and other long-term liabilities to a reduction in right-of-use assets in the accompanying consolidated balance sheet as of December 31, 2019. Beginning January 1, 2019, right-of-use assets have been evaluated for impairment consistent with the impairment guidance in ASC 842, “Leases,” and ASC 360, “Property, Plant, and Equipment,” which is similar to our historical practice of recording lease exit accruals. However, beginning January 1, 2019, instead of recording new lease exit accruals, the result would be the reduction of the related right-of-use asset as an impairment charge.
A summary of the activity of these operating lease exit accruals consists of the following:

 

 

(In thousands)

 

Balance at December 31, 2015

 

$

14,527

 

Lease exit expense (1)

 

 

1,386

 

Payments (2)

 

 

(6,123

)

Balance at December 31, 2016

 

$

9,790

 

(1)

Expense

(In thousands)
Balance at December 31, 2018$4,634 
Effect of approximately $0.1 million is recorded in interest expense, other, net and expenseadoption of approximately $0.3 million is recorded in selling, general and administrative expenses in the accompanying consolidated statements of income. In addition, expense of approximately $1.0 million is recorded in income (loss) from discontinued operations in the accompanying consolidated statements of income.

ASC 842, “Leases”		(4,634)
Balance at December 31, 2019$— 

(2)

Amount is recorded as an offset to rent expense in selling, general and administrative expenses, with approximately $0.7  million in continuing operations and $5.4 million in income (loss) from discontinued operations in the accompanying consolidated statements of income.


Sonic leases facilities for the majority of its dealership operations under operating lease arrangements. These facility lease arrangements normally have fifteen- to twenty-year terms with one or two five- to ten-year renewal options and do not contain provisions for contingent rent related to the dealership’s operations.

Many of the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. Sonic was in compliance with these covenants at December 31, 2016. Approximately 10% of these facility leases have payments that may vary based on interest rates.

Minimum future lease payments for facility leases and future receipts from subleases as required under non-cancelable operating leases for both continuing and discontinued operations based on current interest rates in effect are as follows:  

 

 

Future

Minimum

Lease

Payments,

Net

 

 

Receipts

from

Future

Subleases

 

Year Ending December 31,

 

(In thousands)

 

2017

 

$

87,663

 

 

$

(10,363

)

2018

 

$

79,585

 

 

$

(8,486

)

2019

 

$

64,550

 

 

$

(7,373

)

2020

 

$

41,319

 

 

$

(6,912

)

2021

 

$

32,217

 

 

$

(5,541

)

Thereafter

 

$

96,657

 

 

$

(15,419

)

F-33

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Total lease expense for continuing operations for the years ended December 31, 2016, 2015 and 2014 was approximately $94.6 million, $98.2 million and $106.0 million, respectively. Total lease expense for discontinued operations for the years ended December 31, 2016  and 2015 was approximately $0.9 million and $1.4 million, respectively. Total lease income for discontinued operations for the year ended December 31, 2014 was approximately $0.9 million. Total lease expense or income for discontinued operations includes the effects of lease exit accrual adjustments for the years ended December 31, 2016, 2015 and 2014, including a benefit of approximately $1.4 million related to a lease exit accrual adjustment for the extension of a sublease during the year ended December 31, 2014.  The total net contingent rent benefit related to a decrease in interest rates since the underlying leases commenced was approximately $1.8 million and $0.1 million for continuing and discontinued operations, respectively, for the year ended December 31, 2016, and was approximately $2.0 million and $0.1 million for continuing and discontinued operations, respectively, for each of the years ended December 31, 2015 and 2014.

Many of Sonic’sour facility operating leases are subject to affirmative and financial covenant provisions related to a subordination and guaranty agreement executed with the landlord of many of itsour facility properties. The required financial covenants related to certain lease agreements are as follows:

 

Covenant

 

 

Minimum Consolidated Liquidity Ratio

 

 

Minimum Consolidated Fixed Charge Coverage Ratio

 

 

Maximum Consolidated Total Lease Adjusted Leverage Ratio

 

 

Minimum EBTDAR to Rent Ratio

 

 Covenant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Minimum Consolidated Liquidity RatioMinimum Consolidated Fixed Charge Coverage RatioMaximum Consolidated Total Lease Adjusted Leverage RatioMinimum EBTDAR to Rent Ratio

Required ratio

 

 

1.05

 

 

 

1.20

 

 

 

5.75

 

 

 

1.50

 

Required ratio1.05  1.20  5.75  1.50  

December 31, 2016 actual

 

 

1.17

 

 

 

1.92

 

 

 

4.08

 

 

 

4.01

 

December 31, 2019 actualDecember 31, 2019 actual1.11  1.60  3.21  5.57  

Guarantees and Indemnifications

In accordance with the terms of Sonic’sour operating lease agreements, Sonic’sour dealership subsidiaries, acting as lessees, generally agree to indemnify the lessor from certain exposure arising as a result of the use of the leased premises, including
F-31
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
environmental exposure and repairs to leased property upon termination of the lease. In addition, Sonic haswe have generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.

In connection with dealership dispositions and facility relocations, certain of Sonic’sour subsidiaries have assigned or sublet to the buyer itstheir interests in real property leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases, including rent payments and repairs to leased property upon termination of the lease, to the extent that the assignee or sublessee does not perform. These obligations are included within the future minimum lease payments, net, in the table above. In the event the sublessees doan assignee or a sublessee does not perform theirits obligations, Sonic remains liable for the lease payments. As of December 31, 2016, the total amount relating to this risk was approximately $54.1 million, which is the total of the receipts from future subleases in the table above under the heading “Facility and Equipment Leases.” However, there are situations where Sonic has assigned a lease to the buyer and Sonic was not able to obtain a release from the landlord. In these situations, although Sonic is no longer the primary obligor, Sonic is contingently liable if the buyer does not perform under the lease terms. The total estimated minimum lease payments remaining related to these leases totaled approximately $1.0 million at December 31, 2016. However, in accordance with the terms of the assignment and sublease agreements, the assignees and sublessees have generally agreed to indemnify Sonic and its subsidiaries in the event of non-performance. Additionally, in connection with certain dispositions, Sonic has obtained indemnifications from the parent company or owners of these assignees and sublessees in the event of non-performance.

F-34

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

such obligations.

In accordance with the terms of agreements entered into for the sale of Sonic’sour dealerships, Sonicwe generally agreesagree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the agreement.agreements. While Sonic’sour exposure with respect to environmental remediation and repairs is difficult to quantify, Sonic’sour maximum exposure associated with these general indemnifications was approximately $0.5$46.5 million at December 31, 2016.2019. These indemnifications typically expire within a period of one to three years following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for this contingency was not significant at December 31, 2016.

Sonic2019.

We also guaranteesguarantee the floor plan commitments of itsour 50%-owned joint venture, the amount of which was approximately $2.8$4.3 million at December 31, 2016.

2019.

Legal Matters

Sonic is involved, and expects to continue to be involved, in numerousvarious legal and administrative proceedings arising out of the conduct of its business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of Sonic’s business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects.

Included in other accrued liabilities and other long-term liabilities atin the accompanying consolidated balance sheet as of December 31, 2016 was2019 were approximately $0.3$1.2 million and $0.2$0.3 million, respectively, in reserves that Sonic was holding for pending proceedings. Included in other accrued liabilities and other long-term liabilities atin the accompanying consolidated balance sheet as of December 31, 2015 was2018 were approximately $0.3$2.4 million and $0.2 million, respectively, for such reserves. Except as reflected in such reserves, Sonic is currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings.

13. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component for the year ended December 31, 20162019 are as follows:

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plan

 

 

Total

Accumulated

Other

Comprehensive

Income (Loss)

 

 

 

 

(In thousands)

 

 

Balance at December 31, 2015

 

$

(5,638

)

 

$

6

 

 

$

(5,632

)

 

Other comprehensive income (loss) before reclassifications (1)

 

 

95

 

 

 

(183

)

 

 

(88

)

 

    Amounts reclassified out of accumulated

       other comprehensive income (loss) (2)

 

 

3,458

 

 

 

-

 

 

 

3,458

 

 

Net current-period other comprehensive income (loss)

 

 

3,553

 

 

 

(183

)

 

 

3,370

 

 

Balance at December 31, 2016

 

$

(2,085

)

 

$

(177

)

 

$

(2,262

)

 

(1)

Net of tax expense of $59 related to gains and losses on cash flow hedges, and tax benefit of $112 related to the defined benefit pension plan.

 Gains and (Losses) on Cash Flow HedgesDefined Benefit Pension PlanTotal Accumulated Other Comprehensive Income (Loss)
 (In thousands)
Balance at December 31, 2018$3,034  $1,199  $4,233  
Other comprehensive income (loss) before reclassifications (1)(1,646) (1,935) (3,581) 
   Amounts reclassified out of accumulated
       other comprehensive income (loss) (2)
(2,714) —  (2,714) 
Net current-period other comprehensive income (loss)(4,360) (1,935) (6,295) 
Balance at December 31, 2019$(1,326) $(736) $(2,062) 

(2)

Net of tax expense of $2,119.

(1) Net of tax benefit of $836 related to gains on cash flow hedges and tax benefit of $734 related to the defined benefit pension plan.

(2) Net of tax benefit of $1,108 related to gains on cash flow hedges.
See the heading “Derivative Instruments and Hedging Activities” in Note 6, “Long-Term Debt,” for further discussion of Sonic’sour cash flow hedges. For further discussion of Sonic’sour defined benefit pension plan, see Note 10, “Employee Benefit Plans.”

F-32
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Segment Information

As of December 31, 2016, Sonic2019, we had two2 operating segments: Franchised Dealerships and EchoPark®. The Franchised Dealerships segment is comprised of(1) retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repair and maintenance services, and arrange finance and insurance products. The EchoPark® segment is comprised of stand-aloneproducts (the “Franchised Dealerships Segment”); and (2) pre-owned vehicle specialty retail locations that provide customers an opportunity to search buy, service,our nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell pre-owned vehicles.

F-35

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

their current vehicle to us (the “EchoPark Segment”). Sonic has determined that its operating segments also represent its reportable segments. The operatingreportable segments identified above are the business activities of Sonic for which discrete financial information is available and for which operating results are regularly reviewed by Sonic’sour chief operating decision maker to assess operating performance and allocate resources. Sonic’s chief operating decision maker is a group of three individuals consisting ofof: (1) the Company’s Chief Executive OfficerOfficer; (2) the Company’s President; and President, Executive Vice President and(3) the Company’s Chief Financial Officer, and Executive Vice President of Operations. The Company has determined that its operating segments also represent its reportable segments.

Officer.

Reportable segment revenue,revenues, segment income (loss), impairment charges, depreciation and amortization, floor plan interest expense, depreciation and amortization,interest expense, other, net, capital expenditures and total assets are as follows:

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

9,602,562

 

 

$

9,547,236

 

 

$

9,191,661

 

EchoPark®

 

 

129,217

 

 

 

77,063

 

 

 

5,438

 

Total consolidated revenues

 

$

9,731,779

 

 

$

9,624,299

 

 

$

9,197,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Segment income (loss) (1):

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

217,306

 

 

$

213,224

 

 

$

230,733

 

EchoPark®

 

 

(12,113

)

 

 

(17,257

)

 

 

(15,913

)

Total segment income (loss)

 

 

205,193

 

 

 

195,967

 

 

 

214,820

 

Interest expense, other, net

 

 

(50,106

)

 

 

(50,910

)

 

 

(53,190

)

Other income (expense), net

 

 

125

 

 

 

99

 

 

 

97

 

Income (loss) from continuing operations before taxes

 

$

155,212

 

 

$

145,156

 

 

$

161,727

 

(1) Segment income (loss) for each segment is defined as operating income less floor plan interest expense.

 

Year Ended December 31,
201920182017
Segment revenues(In thousands)
Franchised Dealerships Segment revenues:
New vehicles$4,889,171  $4,974,097  $5,295,051  
Used vehicles2,493,467  2,370,799  2,406,407  
Wholesale vehicles180,020  197,184  161,581  
Parts, service and collision repair1,366,550  1,364,559  1,401,802  
Finance, insurance and other, net363,117  344,814  348,058  
Franchised Dealerships Segment revenues$9,292,325  $9,251,453  $9,612,899  
EchoPark Segment revenues:
Used vehicles$996,504  $602,698  $215,646  
Wholesale vehicles22,927  20,443  9,483  
Parts, service and collision repair28,753  16,327  14,208  
Finance, insurance and other, net113,834  60,709  14,972  
EchoPark Segment revenues$1,162,018  $700,177  $254,309  
Total consolidated revenues$10,454,343  $9,951,630  $9,867,208  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Floor plan interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

26,777

 

 

$

20,727

 

 

$

18,727

 

EchoPark®

 

 

939

 

 

 

599

 

 

 

66

 

Total floor plan interest expense

 

$

27,716

 

 

$

21,326

 

 

$

18,793

 


 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

73,635

 

 

$

65,766

 

 

$

58,001

 

EchoPark®

 

 

3,811

 

 

 

3,033

 

 

 

259

 

Total depreciation and amortization

 

$

77,446

 

 

$

68,799

 

 

$

58,260

 

Year Ended December 31,
201920182017
Segment income (loss) (1)(In thousands)
Franchised Dealerships Segment (2)$211,267  $157,413  $138,468  
EchoPark Segment (3)9,146  (52,587) (20,950) 
Total segment income (loss)$220,413  $104,826  $117,518  
Impairment charges (4)(20,768) (29,514) (9,394) 
Income (loss) from continuing operations before taxes$199,645  $75,312  $108,124  
Retail new and used vehicle unit sales volume:
Franchised Dealerships Segment226,760  232,885  248,534  
EchoPark Segment49,520  29,437  10,618  
Total retail new and used vehicle unit sales volume276,280  262,322  259,152  

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

 

 

(In thousands)

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

$

170,876

 

 

$

148,593

 

 

$

117,129

 

EchoPark®

 

 

35,356

 

 

 

24,656

 

 

 

29,303

 

Total capital expenditures

 

$

206,232

 

 

$

173,249

 

 

$

146,432

 


F-36

(1) Segment income (loss) for each segment is defined as income (loss) from continuing operations before taxes and impairment charges.
F-33

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

 

 

 

December 31,

 

 

 

 

 

2016

 

 

2015

 

 

 

 

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

Franchised Dealerships

 

 

 

$

2,095,777

 

 

$

2,211,232

 

EchoPark®

 

 

 

 

128,125

 

 

 

76,808

 

Corporate and other:

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

 

 

 

3,108

 

 

 

3,625

 

Goodwill, Net

 

 

 

 

472,437

 

 

 

471,493

 

Other Intangible Assets, Net

 

 

 

 

80,233

 

 

 

80,876

 

Other Corporate and other assets

 

 

 

 

859,656

 

 

 

718,347

 

Total assets

 

 

 

$

3,639,336

 

 

$

3,562,381

 

15. Subsequent Events

Subsequent to(2) For the year ended December 31, 2016, Sonic’s Board2019, the above amount includes approximately $76.0 million of Directors authorized an additional $100.0net gain on the disposal of franchised dealerships, offset partially by approximately $7.2 million to repurchase shares of Sonic’s Class A common stock, increasing Sonic’s remaining repurchase authorization toloss on the extinguishment of debt, approximately $145.0$6.3 million before includingof executive transition costs and approximately $1.1 million of impairment charges. For the effect of any share repurchases subsequent toyear ended December 31, 2016.

16.2018, the above amount includes approximately $38.9 million of net gain on the disposal of franchised dealerships, offset partially by approximately $27.9 million of impairment charges, approximately $4.0 million of storm-related physical damage costs, approximately $1.7 million of legal costs, approximately $1.6 million of executive transition costs and approximately $1.4 million of lease exit charges. For the year ended December 31, 2017, the above amount includes approximately $14.6 million of net loss on the extinguishment of debt, approximately $8.9 million of storm-related physical damage and legal costs, approximately $7.5 million of impairment charges, approximately $0.7 million of double-carry interest and approximately $0.3 million of lease exit charges, offset partially by approximately $10.0 million of net gain on the disposal of franchised dealerships.

(3) For the year ended December 31, 2019, the above amount includes approximately $19.7 million of impairment charges related to building and land held for sale at former EchoPark locations. For the year ended December 31, 2018, the above amount includes approximately $32.5 million of long-term compensation-related charges and approximately $1.6 million of impairment charges. For the year ended December 31, 2017, the above amount includes approximately $1.9 million of impairment charges, approximately $1.3 million of long-term compensation-related charges, approximately $0.6 million of lease exit charges and approximately $0.2 million of storm-related physical damage and legal costs.
(4) For the year ended December 31, 2019, the above amount includes approximately $1.1 million of impairment charges for the Franchised Dealerships Segment and approximately $19.7 million of impairment charges for the EchoPark Segment. For the year ended December 31, 2018, the above amount includes approximately $27.9 million of impairment charges for the Franchised Dealerships Segment and approximately $1.6 million of impairment charges for the EchoPark Segment. For the year ended December 31, 2017, the above amount includes approximately $7.5 million of impairment charges for the Franchised Dealerships Segment and approximately $1.9 million of impairment charges for the EchoPark Segment.
Year Ended December 31,
201920182017
(In thousands)
Impairment charges:
Franchised Dealerships Segment$1,101  $27,932  $7,491  
EchoPark Segment19,667  1,582  1,903  
Total impairment charges$20,768  $29,514  $9,394  

Year Ended December 31,
201920182017
(In thousands)
Depreciation and amortization:
Franchised Dealerships Segment$82,636  $85,849  $83,741  
EchoPark Segment10,533  7,774  5,203  
Total depreciation and amortization$93,169  $93,623  $88,944  

Year Ended December 31,
201920182017
(In thousands)
Floor plan interest expense:
Franchised Dealerships Segment$45,055  $46,126  $35,030  
EchoPark Segment3,464  2,272  1,365  
Total floor plan interest expense$48,519  $48,398  $36,395  

F-34
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31,
201920182017
(In thousands)
Interest expense, other, net:
Franchised Dealerships Segment$51,231  $52,396  $51,548  
EchoPark Segment1,722  1,663  976  
Total interest expense, other, net$52,953  $54,059  $52,524  


Year Ended December 31,
201920182017
(In thousands)
Capital expenditures:
Franchised Dealerships Segment$89,332  $116,854  $195,220  
EchoPark Segment36,244  46,765  39,025  
Total capital expenditures$125,576  $163,619  $234,245  
December 31,
20192018
(In thousands)
Assets:
Franchised Dealerships Segment$3,797,878  $3,485,280  
EchoPark Segment244,054  305,673  
Corporate and other:
Cash and cash equivalents29,103  5,854  
Total assets$4,071,035  $3,796,807  

15. Summary of Quarterly Financial Data (Unaudited)

The following table summarizes Sonic’sour results of operations as presented in the accompanying consolidated statements of income by quarter for 2019 and 2018:
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
(In thousands, except per share data)
Year Ended December 31, 2019
Total revenues (1)$2,389,138  $2,614,081  $2,702,720  $2,748,404  
Gross profit (1)$359,011  $381,311  $386,811  $393,884  
Net income (loss) (2)$42,221  $26,599  $29,010  $46,307  
Earnings (loss) per common share - Basic (2) (3)$0.98  $0.62  $0.67  $1.07  
Earnings (loss) per common share - Diluted (2) (3)$0.98  $0.61  $0.66  $1.04  
Year Ended December 31, 2018
Total revenues (1)$2,400,773  $2,505,749  $2,470,849  $2,574,259  
Gross profit (1)$352,499  $362,375  $360,536  $370,715  
Net income (loss) (2)$(2,194) $16,905  $15,118  $21,821  
Earnings (loss) per common share - Basic (2) (3)$(0.05) $0.40  $0.35  $0.51  
Earnings (loss) per common share - Diluted (2) (3)$(0.05) $0.39  $0.35  $0.51  
(1) Results are for continuing operations.
(2) Results include both continuing operations and discontinued operations.
(3) The sum of net income per common share for the years ended December 31, 2016 and 2015:  

 

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

 

(In thousands, except per share data)

 

Year Ended December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (1)

 

$

2,234,626

 

 

$

2,382,312

 

 

$

2,557,928

 

 

$

2,556,913

 

Gross profit (1)

 

$

345,150

 

 

$

353,305

 

 

$

359,085

 

 

$

371,734

 

Net income (loss) (2)

 

$

14,624

 

 

$

22,822

 

 

$

18,111

 

 

$

37,636

 

Earnings (loss) per common share - Basic (2) (3)

 

$

0.31

 

 

$

0.50

 

 

$

0.40

 

 

$

0.84

 

Earnings (loss) per common share - Diluted (2) (3)

 

$

0.31

 

 

$

0.50

 

 

$

0.40

 

 

$

0.83

 

Year Ended December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues (1)

 

$

2,235,516

 

 

$

2,423,740

 

 

$

2,494,408

 

 

$

2,470,635

 

Gross profit (1)

 

$

334,959

 

 

$

355,554

 

 

$

360,251

 

 

$

363,848

 

Net income (loss) (2)

 

$

13,967

 

 

$

14,781

 

 

$

26,505

 

 

$

31,058

 

Earnings (loss) per common share - Basic (2) (3)

 

$

0.27

 

 

$

0.29

 

 

$

0.53

 

 

$

0.62

 

Earnings (loss) per common share - Diluted (2) (3)

 

$

0.27

 

 

$

0.29

 

 

$

0.52

 

 

$

0.62

 

(1)

Results are for continuing operations.

quarters may not equal the full year amount due to weighted average common shares being calculated on a quarterly versus annual basis.

(2)

Results include both continuing

F-35
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our operations and discontinued operations.

(3)

The sum of net income per common share for the quarters may not equal the full year amount due to weighted average common shares being calculated on a quarterly versus annual basis.

Operations are subject to seasonal variations. The first quarter generallynormally contributes less operating profitsprofit than the second and third quarters, while the fourth quarter normally contributes the highest operating profit of any quarter. Weather conditions, the timing of manufacturer incentive programs and fourth quarters. Partsmodel changeovers cause seasonality and may adversely affect vehicle demand and, consequently, our profitability. Comparatively, parts and service demand remains more stable throughout the year.

Net income for the fourth quarter ended December 31, 20162019 includes approximately $29.3 million of pre-tax net gain on the disposal of franchised dealerships, offset partially by approximately $17.7 million of pre-tax impairment charges related to building and land held for sale at former EchoPark locations and certain capitalized software costs, and approximately $7.2 million of loss on the extinguishment of debt (including double-carry interest) related to the redemption of the 5.0% Notes.
Net income for the first quarter ended March 31, 2019 includes approximately $46.7 million of pre-tax net gain on the disposal of franchised dealerships, offset partially by approximately $6.3 million of pre-tax long-term compensation-related charges and approximately $1.9 million of pre-tax impairment charges related to the abandonment of certain construction projects.
Net income for the fourth quarter ended December 31, 2018 includes approximately $15.6 million of pre-tax impairment charges related to property and equipment, capitalized software projects, dealership facility construction projects and franchise asset write-offs, offset partially by a pre-tax benefit of approximately $14.8$0.8 million related to an original equipment manufacturer emissions-related settlement and a pre-tax benefit of approximately $0.4 million related to lease exit and storm damage accrual adjustments, offset partially by pre-tax impairment charges of approximately $1.8 million primarily

F-37

SONIC AUTOMOTIVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

related to the write-off of certain construction project costs and pre-tax charges of approximately $0.5 million related to lease exit accrual adjustments.

Net income for the third quarter ended September 30, 20162018 includes approximately $6.1$1.6 million of pre-tax executive transition costs, approximately $1.2 million of pre-tax charges related to storm-related physical damage and approximately $0.3 million of pre-tax costs related to the sale of franchised dealerships.
Net income for the second quarter ended June 30, 2018 includes approximately $38.0 million of pre-tax gain related to the sale of franchised dealerships and a pre-tax benefit of approximately $2.6 million related to lease exit accrual adjustments, offset partially by approximately $23.3 million of pre-tax long-term compensation-related charges, approximately $10.3 million of pre-tax impairment charges related to dealership facilitycertain construction projects and approximately $3.1 million of pre-tax charges of approximately $2.3 million related to stormstorm-related physical damage and legal accrual adjustments and pre-tax charges of $1.0 million related to lease exit accrual adjustments.

costs.

Net income for the first quarter ended March 31, 20162018 includes approximately $9.2 million of pre-tax long-term compensation-related charges, approximately $4.8 million of pre-tax lease exit charges, approximately $6.0$3.6 million of pre-tax impairment charges related to storm damage,certain construction projects and approximately $1.5 million of pre-tax legal costs, offset partially by a pre-tax benefitnet gain of approximately $0.5$1.2 million related to lease exit accrual adjustments.

Net income for the fourth quarter ended December 31, 2015 includes approximately $2.3 of pre-tax gain from the sale of dealership franchises, offset partially by approximately $1.3 millionfranchised dealerships.

16. Leases
The cumulative effect of pre-tax impairment charges.

Net income for the second quarter ended June 30, 2015 includes a pre-tax gainadoption of ASC 842, “Leases,” on our unaudited consolidated balance sheet as of January 1, 2019 was the recognition of right-of-use assets of approximately $1.1$406.9 million (including approximately $18.9 million related to capital leases that was reclassified from property and equipment, net in the saleaccompanying consolidated balance sheet as of dealership franchises, offset byDecember 31, 2018) and related lease liabilities of approximately $419.5 million (including approximately $20.6 million related to capital leases that was reclassified from current maturities of long-term debt and long-term debt in the accompanying consolidated balance sheet as of December 31, 2018). Upon adoption of ASC 842, “Leases,” we evaluated right-of-use assets for impairment and determined that approximately $10.5 million of pre-tax impairment charges and approximately $4.2 million of pre-tax chargeswas required related to storm damagenewly recognized right-of-use assets that would have been impaired in previous periods. This impairment of the right-of-use assets as of January 1, 2019 was recorded, net of related income tax effects, as a $7.4 million reduction of beginning retained earnings. The adoption of ASC 842, “Leases,” did not have a material effect on our consolidated statements of income or our consolidated statements of cash flows.

F-36
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of the adoption of ASC 842, “Leases,” on our unaudited consolidated balance sheet as of January 1, 2019 and legal settlements.

Netour consolidated balance sheet as of December 31, 2019 was as follows:

Before Impact of ASC 842Effects of Adoption of ASC 842After Impact of ASC 842
December 31, 2018January 1, 2019
Balance Sheet(In thousands)
Assets
Property and Equipment, net$1,178,489  $(18,948) $1,159,541  
Other Intangible Assets, net69,705  (4,005) 65,700  
Right-of-Use Assets—  406,918  406,918  
Liabilities
Current lease liabilities$—  $48,832  $48,832  
Other accrued liabilities257,823  (1,987) 255,836  
Long-Term Debt918,779  (20,557) 898,222  
Long-Term Lease Liabilities—  370,647  370,647  
Other Long-Term Liabilities75,887  (2,508) 73,379  
Deferred Income Taxes33,178  (3,034) 30,144  
Stockholders’ Equity
Retained earnings$670,691  $(7,428) $663,263  

Adoption
of ASC 842 as of
January 1, 2019		New
Leases		Modifications (1)AmortizationAs Reported December 31, 2019
(In thousands)
Right-of-Use Assets
Finance Leases$18,948  $121  $18,835  $(3,213) $34,691  
Operating Leases387,970  10,081  (15,205) (45,004) 337,842  
Total Right-of-Use Assets$406,918  $10,202  $3,630  $(48,217) $372,533  
Current Lease Liabilities
Finance Leases$728  $12  $4,513  $(3,689) $1,564  
Operating Leases48,104  1,560  (2,650) (3,682) 43,332  
Total Current Lease Liabilities$48,832  $1,572  $1,863  $(7,371) $44,896  
Long-Term Lease Liabilities
Finance Leases$19,829  $109  $17,867  $(1,492) $36,313  
Operating Leases350,818  8,521  (12,400) (42,788) 304,151  
Total Long-Term Lease Liabilities$370,647  $8,630  $5,467  $(44,280) $340,464  
(1) Includes the impact of remeasurements related to lease terminations and changes in assumptions around the probability of exercise of extension options.

F-37
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Twelve Months Ended December 31, 2019
Lease Expense(In thousands)
Finance lease expense
Reduction of right-of-use assets$3,213 
Interest on lease liabilities5,097 
Operating lease expense (1)68,367 
Short-term lease expense (1)1,570 
Variable lease expense2,120 
Sublease income(14,207)
Total$66,160 
(1) Included in operating cash flows in the accompanying consolidated statements of cash flows.
Twelve Months Ended December 31, 2019
Other Information(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
Financing cash flows for finance leases$5,181 
Operating cash flows for finance leases$5,097 
Operating cash flows for operating leases$69,834 
Right-of-use assets obtained in exchange for lease liabilities
Finance leases$10,926 
Operating leases (1)$22,055 
(1) Includes the impact of reclassification of right-of-use assets from operating leases to finance leases due to remeasurement.
December 31, 2019
Other Information
Weighted-average remaining lease term (in years)
Finance leases11.8
Operating leases9.5
Weighted-average discount rate
Finance leases18.74 %
Operating leases6.69 %

Undiscounted Lease Cash Flows Under ASC 842 as of December 31, 2019
FinanceOperatingReceipts from Subleases
Year Ending December 31,(In thousands)
2020$6,608  $64,577  $(10,795) 
20216,760  58,093  (8,078) 
20226,768  51,337  (6,103) 
20236,829  49,689  (6,103) 
20246,947  44,012  (5,042) 
Thereafter43,787  215,240  (4,270) 
Total$77,699  $482,948  $(40,391) 
Less: Present value discount(39,822) (135,465) 
Lease liabilities$37,877  $347,483  
F-38
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For comparison purposes, the following table provides the future minimum lease payments as presented in our Annual Report on Form 10-K for the first quarteryear ended MarchDecember 31, 20152018 in accordance with ASC 840, “Leases.”
Undiscounted Lease Cash Flows Under ASC 840 as of December 31, 2018
FinanceOperatingReceipts from Subleases
Year Ending December 31,(In thousands)
2019$6,985  $82,177  $(13,430) 
20207,165  66,023  (10,508) 
20217,357  51,501  (8,534) 
20227,374  37,152  (7,232) 
20237,609  33,486  (7,013) 
Thereafter48,239  127,026  (13,116) 
Total minimum lease payments (receipts)$84,729  $397,365  $(59,833) 
Less: Present value discount(64,140) 
Lease liabilities$20,589  
Current portion of lease liabilities$643  
Long-term portion of lease liabilities$19,946  

The majority of our leases are related to dealership properties that are subject to long-term lease arrangements. In addition, we have certain equipment leases and contracts containing embedded leased assets that have been evaluated and included in the right-of-use assets and lease liabilities above as appropriate.
We recognize a right-of-use asset and a lease liability at the lease commencement date. For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases and is subsequently measured at reduced cost using the effective interest method.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred or previously recognized favorable lease assets, less any lease incentives received or previously recognized lease exit accruals. For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance leases, the right-of-use asset is reduced using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to us or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the right-of-use asset is reduced over the expected useful life of the underlying asset. Expense related to the reduction of the right-of-use asset is recognized and presented separately from interest expense on the lease liability.
Variable lease payments associated with our leases are recognized when the event, activity or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expense in our consolidated statements of income in the same line item as expense arising from fixed lease payments (operating leases) or expense related to the reduction of the right-of-use asset (finance leases).
Right-of-use assets for operating and finance leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC 360, “Property, Plant, and Equipment,” to determine whether right-of-use assets are impaired and, if so, the amount of the impairment loss to recognize.
The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding right-of-use asset unless doing so would reduce the carrying amount of the right-of-use asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative right-of-use asset balance is recorded in profit or loss.
Key estimates and judgments related to the measurement and recording of right-of-use assets and lease liabilities include how we determine: (1) the discount rate used to discount the unpaid lease payments to present value; and (2) the expected lease term, including any extension options.
F-39
SONIC AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASC 842, “Leases,” requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we generally use our incremental borrowing rate as the discount rate for the lease. We determined the discount rate for our leases based on the risk-free rate as of the measurement date for varying maturities corresponding to the remaining lease term, adjusted for the risk-premium attributed to Sonic’s corporate credit rating for a secured or collateralized instrument.
Many of our lease arrangements have one or more existing renewal options to extend the lease term (typically in five- to 10-year increments), which were considered in the calculation of the right-of-use assets and lease liabilities if we determined that it was reasonably certain that an extension option would be exercised. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by our option to extend the lease that we are reasonably certain to exercise. We determined the probability of the exercise of a lease extension option based on our long-term strategic business outlook and the condition and remaining useful life of the fixed assets at the location subject to the lease agreement, among other factors.
The majority of our lease agreements require fixed monthly payments (subject to either specific or index-based escalations in future periods) while other agreements require variable lease payments based on changes in LIBOR or any replacement thereof. Lease payments included in the measurement of the lease liability comprise the: (1) fixed lease payments, including in-substance fixed payments, owed over the lease term, which include termination penalties we would owe if the estimated lease term assumes that we would be likely to exercise a termination option prior to the earliest expiration date; (2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and (3) the exercise price of our option to purchase the underlying asset if we are reasonably certain to exercise the option. Our leases do not typically contain residual value guarantees.
In certain situations, we have entered into sublease agreements whereby we sublease all or a portion of a leased real estate asset to a third party. To the extent that we have a sublease related to a lease agreement for an asset that we are no longer using in operations, we have reduced the right-of-use asset by any applicable net deficiency in expected cash flows from that sublease (either due to partial monthly sublease proceeds or a sublease term less than the remaining master lease term). As of December 31, 2018, the net liability related to these lease exit accruals was approximately $6.2$4.6 million as discussed in Note 12, “Commitments and Contingencies.” Upon the adoption of pre-tax impairment chargesASC 842, “Leases,” this balance was reclassified from other accrued liabilities and other long-term liabilities to a reduction in right-of-use assets in the accompanying consolidated balance sheet as of December 31, 2019.
Prior to the adoption of ASC 842, “Leases,” we had recorded definite life intangible assets related to favorable lease assets acquired in business combinations. As of December 31, 2018, the net unamortized balance related to these definite life intangible assets was approximately $0.9 million$4.0 million. Upon adoption of pre-tax severance expense.

F-38

ASC 842, “Leases,” this balance was reclassified from other intangible assets, net to right-of-use assets in the accompanying consolidated balance sheet as of December 31, 2019 and continues to be amortized over the remaining lease term.
As part of the new lease standard implementation process, we assessed our existing real estate and equipment lease agreements, identified certain lease components embedded within existing service contracts, evaluated transition guidance and practical expedient elections, implemented lease accounting software and implemented internal controls over lease accounting under the new lease standard.
F-40