Attached files

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EX-32.2 - EX-32.2 - SONIC AUTOMOTIVE INCsah-ex322_6.htm
EX-31.2 - EX-31.2 - SONIC AUTOMOTIVE INCsah-ex312_9.htm
EX-31.1 - EX-31.1 - SONIC AUTOMOTIVE INCsah-ex311_7.htm
EX-32.1 - EX-32.1 - SONIC AUTOMOTIVE INCsah-ex321_8.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2015

OR

¨

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: 1-13395

 

SONIC AUTOMOTIVE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

56-2010790

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

4401 Colwick Road

Charlotte, North Carolina

 

28211

(Address of principal executive offices)

 

(Zip Code)

(704) 566-2400

(Registrant’s telephone number, including area code)

 

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  x    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  x    No  ¨

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

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 26, 2015, there were 37,781,160 shares of Class A common stock and 12,029,375 shares of Class B common stock outstanding.

 

 

 

 

 


SONIC AUTOMOTIVE, INC.

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015

INDEX

 

 

  

Page

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

  

 

3

  

 

 

 

Item 1.

  

Financial Statements (unaudited)

  

 

3

  

 

 

 

 

  

Condensed Consolidated Statements of Income

  

 

3

  

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income

  

 

4

  

 

 

 

 

  

Condensed Consolidated Balance Sheets

  

 

5

  

 

 

 

 

  

Condensed Consolidated Statement of Stockholders’ Equity

  

 

6

  

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows

  

 

7

  

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

 

8

 

 

 

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

21

  

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

40

  

 

 

 

Item 4.

  

Controls and Procedures

  

 

41

  

 

 

PART II – OTHER INFORMATION

  

 

42

  

 

 

 

Item 1.

  

Legal Proceedings

  

 

42

  

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

43

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

44

  

 

 

 

Item 6.

  

Exhibits

  

 

45

  

 

 

Signatures

  

 

47

  

 

 

Exhibit Index

  

 

48

  

 

 

 

2


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Dollars and shares in thousands, except per share amounts)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

$

1,368,029

 

 

$

1,327,837

 

 

$

3,865,639

 

 

$

3,773,234

 

Used vehicles

 

 

652,058

 

 

 

583,570

 

 

 

1,904,594

 

 

 

1,747,254

 

Wholesale vehicles

 

 

37,971

 

 

 

41,433

 

 

 

120,760

 

 

 

127,797

 

Total vehicles

 

 

2,058,058

 

 

 

1,952,840

 

 

 

5,890,993

 

 

 

5,648,285

 

Parts, service and collision repair

 

 

350,520

 

 

 

325,740

 

 

 

1,019,878

 

 

 

973,646

 

Finance, insurance and other, net

 

 

85,830

 

 

 

77,024

 

 

 

242,792

 

 

 

223,340

 

Total revenues

 

 

2,494,408

 

 

 

2,355,604

 

 

 

7,153,663

 

 

 

6,845,271

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

 

(1,302,594

)

 

 

(1,258,811

)

 

 

(3,671,919

)

 

 

(3,563,342

)

Used vehicles

 

 

(610,328

)

 

 

(542,325

)

 

 

(1,781,323

)

 

 

(1,627,842

)

Wholesale vehicles

 

 

(40,452

)

 

 

(42,519

)

 

 

(126,126

)

 

 

(130,290

)

Total vehicles

 

 

(1,953,374

)

 

 

(1,843,655

)

 

 

(5,579,368

)

 

 

(5,321,474

)

Parts, service and collision repair

 

 

(180,783

)

 

 

(170,460

)

 

 

(523,531

)

 

 

(506,361

)

Total cost of sales

 

 

(2,134,157

)

 

 

(2,014,115

)

 

 

(6,102,899

)

 

 

(5,827,835

)

Gross profit

 

 

360,251

 

 

 

341,489

 

 

 

1,050,764

 

 

 

1,017,436

 

Selling, general and administrative expenses

 

 

(280,041

)

 

 

(270,144

)

 

 

(835,564

)

 

 

(803,031

)

Impairment charges

 

 

(37

)

 

 

(208

)

 

 

(16,698

)

 

 

(215

)

Depreciation and amortization

 

 

(17,250

)

 

 

(14,235

)

 

 

(50,953

)

 

 

(43,047

)

Operating income (loss)

 

 

62,923

 

 

 

56,902

 

 

 

147,549

 

 

 

171,143

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, floor plan

 

 

(5,364

)

 

 

(4,406

)

 

 

(15,488

)

 

 

(13,941

)

Interest expense, other, net

 

 

(12,361

)

 

 

(12,893

)

 

 

(38,635

)

 

 

(40,576

)

Other income (expense), net

 

 

-

 

 

 

(1

)

 

 

102

 

 

 

98

 

Total other income (expense)

 

 

(17,725

)

 

 

(17,300

)

 

 

(54,021

)

 

 

(54,419

)

Income (loss) from continuing operations before taxes

 

 

45,198

 

 

 

39,602

 

 

 

93,528

 

 

 

116,724

 

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

 

 

(18,095

)

 

 

(15,045

)

 

 

(36,944

)

 

 

(45,122

)

Income (loss) from continuing operations

 

 

27,103

 

 

 

24,557

 

 

 

56,584

 

 

 

71,602

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before taxes

 

 

(999

)

 

 

254

 

 

 

(2,200

)

 

 

(838

)

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

 

 

401

 

 

 

(99

)

 

 

869

 

 

 

327

 

Income (loss) from discontinued operations

 

 

(598

)

 

 

155

 

 

 

(1,331

)

 

 

(511

)

Net income (loss)

 

$

26,505

 

 

$

24,712

 

 

$

55,253

 

 

$

71,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.54

 

 

$

0.47

 

 

$

1.12

 

 

$

1.36

 

Earnings (loss) per share from discontinued operations

 

 

(0.01

)

 

 

-

 

 

 

(0.03

)

 

 

(0.01

)

Earnings (loss) per common share

 

$

0.53

 

 

$

0.47

 

 

$

1.09

 

 

$

1.35

 

Weighted average common shares outstanding

 

 

50,456

 

 

 

52,070

 

 

 

50,697

 

 

 

52,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.53

 

 

$

0.47

 

 

$

1.11

 

 

$

1.35

 

Earnings (loss) per share from discontinued operations

 

 

(0.01

)

 

 

-

 

 

 

(0.03

)

 

 

(0.01

)

Earnings (loss) per common share

 

$

0.52

 

 

$

0.47

 

 

$

1.08

 

 

$

1.34

 

Weighted average common shares outstanding

 

 

50,769

 

 

 

52,553

 

 

 

51,086

 

 

 

52,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.025

 

 

$

0.025

 

 

$

0.075

 

 

$

0.075

 

 

 

 

 

See notes to condensed consolidated financial statements.

3


SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

Net income (loss)

 

$

26,505

 

 

$

24,712

 

 

$

55,253

 

 

$

71,091

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap agreements

 

 

(4,221

)

 

 

4,037

 

 

 

(4,271

)

 

 

5,223

 

Provision for income tax benefit (expense) related to

   components of other comprehensive income (loss)

 

 

1,604

 

 

 

(1,534

)

 

 

1,623

 

 

 

(1,985

)

Other comprehensive income (loss)

 

 

(2,617

)

 

 

2,503

 

 

 

(2,648

)

 

 

3,238

 

Comprehensive income (loss)

 

$

23,888

 

 

$

27,215

 

 

$

52,605

 

 

$

74,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

4


SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,493

 

 

$

4,182

 

Receivables, net

 

 

299,530

 

 

 

371,994

 

Inventories

 

 

1,422,433

 

 

 

1,311,702

 

Other current assets

 

 

99,459

 

 

 

81,081

 

Total current assets

 

 

1,823,915

 

 

 

1,768,959

 

Property and Equipment, net

 

 

859,855

 

 

 

799,319

 

Goodwill

 

 

472,613

 

 

 

475,929

 

Other Intangible Assets, net

 

 

81,937

 

 

 

83,720

 

Other Assets

 

 

54,088

 

 

 

55,208

 

Total Assets

 

$

3,292,408

 

 

$

3,183,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

Current Liabilities:

 

 

 

 

 

 

 

 

Notes payable - floor plan - trade

 

$

762,031

 

 

$

711,618

 

Notes payable - floor plan - non-trade

 

 

521,924

 

 

 

551,118

 

Trade accounts payable

 

 

113,527

 

 

 

132,405

 

Accrued interest

 

 

12,485

 

 

 

12,409

 

Other accrued liabilities

 

 

214,900

 

 

 

208,654

 

Current maturities of long-term debt

 

 

31,711

 

 

 

30,802

 

Total current liabilities

 

 

1,656,578

 

 

 

1,647,006

 

Long-Term Debt

 

 

795,871

 

 

 

742,610

 

Other Long-Term Liabilities

 

 

73,984

 

 

 

69,200

 

Deferred Income Taxes

 

 

72,815

 

 

 

57,601

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity:

 

 

 

 

 

 

 

 

Class A convertible preferred stock, none issued

 

 

-

 

 

 

-

 

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

   62,456,603 shares issued and 37,899,038 shares outstanding at

   September 30, 2015; 62,046,966 shares issued and 38,890,533 shares

   outstanding at December 31, 2014

 

 

625

 

 

 

620

 

Class B common stock; $0.01 par value; 30,000,000 shares authorized;

   12,029,375 shares issued and outstanding at September 30, 2015

   and December 31, 2014

 

 

121

 

 

 

121

 

Paid-in capital

 

 

707,419

 

 

 

697,760

 

Retained earnings

 

 

427,819

 

 

 

376,353

 

Accumulated other comprehensive income (loss)

 

 

(9,072

)

 

 

(6,424

)

Treasury stock, at cost; 24,557,565 Class A shares held

   at September 30, 2015 and 23,156,433 Class A shares

   held at December 31, 2014

 

 

(433,752

)

 

 

(401,712

)

Total Stockholders' Equity

 

 

693,160

 

 

 

666,718

 

Total Liabilities and Stockholders' Equity

 

$

3,292,408

 

 

$

3,183,135

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

5


SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

(Dollars and shares in thousands)

 

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

 

 

389

 

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,834

 

 

 

-

 

 

 

-

 

 

 

1,839

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(1,402

)

 

 

(32,040

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(32,040

)

Income tax benefit associated

   with stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

416

 

 

 

-

 

 

 

-

 

 

 

416

 

Fair value of interest rate swap

   agreements, net of tax

   benefit of $1,623

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,648

)

 

 

(2,648

)

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,409

 

 

 

-

 

 

 

-

 

 

 

7,409

 

Other

 

 

21

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

55,253

 

 

 

-

 

 

 

55,253

 

Dividends ($0.075 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,787

)

 

 

-

 

 

 

(3,787

)

Balance at September 30, 2015

 

 

62,457

 

 

$

625

 

 

 

(24,558

)

 

$

(433,752

)

 

 

12,029

 

 

$

121

 

 

$

707,419

 

 

$

427,819

 

 

$

(9,072

)

 

$

693,160

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

6


 

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

55,253

 

 

$

71,091

 

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

50,948

 

 

 

43,042

 

Provision for bad debt expense

 

 

1,633

 

 

 

331

 

Other amortization

 

 

487

 

 

 

987

 

Debt issuance cost amortization

 

 

1,456

 

 

 

1,654

 

Debt discount amortization, net of premium amortization

 

 

127

 

 

 

43

 

Stock - based compensation expense

 

 

7,409

 

 

 

6,203

 

Deferred income taxes

 

 

16,837

 

 

 

21,273

 

Equity interest in earnings of investee

 

 

(278

)

 

 

(221

)

Asset impairment charges

 

 

16,698

 

 

 

215

 

Loss (gain) on disposal of dealerships and property and equipment

 

 

(699

)

 

 

(11,646

)

Loss (gain) on exit of leased dealerships

 

 

1,485

 

 

 

(272

)

Changes in assets and liabilities that relate to operations:

 

 

 

 

 

 

 

 

Receivables

 

 

76,888

 

 

 

96,778

 

Inventories

 

 

(110,732

)

 

 

52,070

 

Other assets

 

 

(20,532

)

 

 

(53,589

)

Notes payable - floor plan - trade

 

 

50,413

 

 

 

(50,363

)

Trade accounts payable and other liabilities

 

 

(15,953

)

 

 

(22,054

)

Total adjustments

 

 

76,187

 

 

 

84,451

 

Net cash provided by (used in) operating activities

 

 

131,440

 

 

 

155,542

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of businesses, net of cash acquired

 

 

-

 

 

 

(15,288

)

Purchases of land, property and equipment

 

 

(127,098

)

 

 

(89,930

)

Proceeds from sales of property and equipment

 

 

1,256

 

 

 

6,406

 

Proceeds from sales of dealerships

 

 

1,250

 

 

 

51,391

 

Distributions from equity investee

 

 

225

 

 

 

400

 

Net cash provided by (used in) investing activities

 

 

(124,367

)

 

 

(47,021

)

CASH  FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (repayments) borrowings on notes payable - floor plan - non-trade

 

 

(29,194

)

 

 

(101,371

)

Borrowings on revolving credit facilities

 

 

309,409

 

 

 

97,847

 

Repayments on revolving credit facilities

 

 

(306,163

)

 

 

(88,068

)

Proceeds from issuance of long-term debt

 

 

65,075

 

 

 

40,420

 

Debt issuance costs

 

 

-

 

 

 

(2,956

)

Principal payments on long-term debt

 

 

(14,280

)

 

 

(15,134

)

Purchases of treasury stock

 

 

(32,040

)

 

 

(39,536

)

Income tax benefit (expense) associated with stock compensation plans

 

 

416

 

 

 

336

 

Issuance of shares under stock compensation plans

 

 

1,839

 

 

 

2,552

 

Dividends paid

 

 

(3,824

)

 

 

(3,963

)

Net cash provided by (used in) financing activities

 

 

(8,762

)

 

 

(109,873

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,689

)

 

 

(1,352

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

4,182

 

 

 

3,016

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

2,493

 

 

$

1,664

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedging instruments (net of tax benefit of $1,623 and

 

 

 

 

 

 

 

 

expense of $1,985 in the nine months ended September 30, 2015 and 2014, respectively)

 

$

(2,648

)

 

$

3,238

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, including amount capitalized

 

$

53,694

 

 

$

54,267

 

Income taxes

 

$

21,718

 

 

$

34,278

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

7


SONIC AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

Basis of Presentation The accompanying condensed consolidated financial statements of Sonic Automotive, Inc. and its wholly-owned subsidiaries (“Sonic,” the “Company,” “we,” “us” and “our”) for the three and nine months ended September 30, 2015 and 2014, are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The operating results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year or future interim periods, because the first quarter normally contributes less operating profit than the second, third and fourth quarters. These interim financial statements should be read in conjunction with the audited consolidated financial statements included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Recent Accounting Pronouncements – In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03 to simplify the presentation of debt issuance costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and premiums. The ASU also requires that the amortization of debt issuance costs be reported as interest expense. For public companies, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 (early adoption is permitted). The adoption of this ASU will impact the presentation of certain items in Sonic’s consolidated financial position and other disclosures.

 

Also in April 2015, the FASB issued ASU 2015-05 related to customer’s accounting for fees paid in a cloud computing arrangement. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after

December 15, 2015 (early adoption is permitted). Sonic does not expect this ASU to have a significant impact on its consolidated financial position, results of operations or cash flows.

 

In July 2015, the FASB issued ASU 2015-11 to clarify the subsequent measurement of inventory. This ASU requires an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU excludes inventory measured using last-in, first-out and the retail inventory method. For public companies, this ASU is effective for fiscal years beginning after December 15, 2016 (early adoption is permitted). Sonic does not expect this ASU to have a significant impact on its consolidated financial position, results of operations or cash flows.

Principles of Consolidation All of Sonic’s dealership and non-dealership subsidiaries are wholly-owned and consolidated in the accompanying condensed 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 condensed consolidated financial statements.

Lease Exit Accruals – Lease exit accruals relate to facilities Sonic has ceased using in its operations. The accruals represent the present value of the lease payments, net of estimated or actual sublease proceeds, 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 whereby 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. See Note 12, “Commitments and Contingencies,” of the notes to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2014 for further discussion.

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

 

 

 

(In thousands)

 

Balance at December 31, 2014

 

$

18,962

 

Lease exit expense (1)

 

 

1,485