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EX-31.2 - EX-31.2 - SONIC AUTOMOTIVE INCsah-ex312_9.htm
EX-32.1 - EX-32.1 - SONIC AUTOMOTIVE INCsah-ex321_6.htm
EX-32.2 - EX-32.2 - SONIC AUTOMOTIVE INCsah-ex322_8.htm
EX-31.1 - EX-31.1 - SONIC AUTOMOTIVE INCsah-ex311_7.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 March 31, 2016

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 April 19, 2016, there were 33,789,022 shares of Class A common stock and 12,029,375 shares of Class B common stock outstanding.

 

 

 

 

 

 


 

Uncertainty of Forward-Looking Statements and Information

This Quarterly Report on Form 10-Q 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,” “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 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2015 and elsewhere in this report, as well as:

 

·

the number of new and used cars 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 business and growth strategies, including, but not limited to, our EchoPark® initiative and our One Sonic-One Experience initiative;

 

·

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 complete additional acquisitions;

 

·

adverse resolutions of one or more significant legal proceedings against us or our dealerships;

 

·

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

 

·

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 competition in the automotive retailing industry, which not only creates 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 recovery or decline.

These forward-looking statements speak only as of the date of this report 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.

FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2016

INDEX

 

 

  

Page

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

  

 

1

  

 

 

 

Item 1.

  

Financial Statements (unaudited)

  

 

1

  

 

 

 

 

  

Condensed Consolidated Statements of Income

  

 

1

  

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income

  

 

2

  

 

 

 

 

  

Condensed Consolidated Balance Sheets

  

 

3

  

 

 

 

 

  

Condensed Consolidated Statement of Stockholders’ Equity

  

 

4

  

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows

  

 

5

  

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

  

 

6

 

 

 

 

Item 2.

  

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

  

 

17

  

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

34

  

 

 

 

Item 4.

  

Controls and Procedures

  

 

35

  

 

 

PART II – OTHER INFORMATION

  

 

36

  

 

 

 

Item 1.

  

Legal Proceedings

  

 

36

  

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

37

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

38

  

 

 

 

Item 6.

  

Exhibits

  

 

39

  

 

 

Signatures

  

 

40

  

 

 

Exhibit Index

  

 

41

  

 

 

 

 

 


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicles

 

$

1,164,570

 

 

$

1,202,323

 

 

Used vehicles

 

 

598,355

 

 

 

593,742

 

 

Wholesale vehicles

 

 

44,374

 

 

 

41,656

 

 

Total vehicles

 

 

1,807,299

 

 

 

1,837,721

 

 

Parts, service and collision repair

 

 

346,054

 

 

 

323,194

 

 

Finance, insurance and other, net

 

 

81,273

 

 

 

74,600

 

 

Total revenues

 

 

2,234,626

 

 

 

2,235,515

 

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

New vehicles

 

 

(1,106,146

)

 

 

(1,138,973

)

 

Used vehicles

 

 

(557,824

)

 

 

(552,898

)

 

Wholesale vehicles

 

 

(45,452

)

 

 

(41,866

)

 

Total vehicles

 

 

(1,709,422

)

 

 

(1,733,737

)

 

Parts, service and collision repair

 

 

(180,054

)

 

 

(166,819

)

 

Total cost of sales

 

 

(1,889,476

)

 

 

(1,900,556

)

 

Gross profit

 

 

345,150

 

 

 

334,959

 

 

Selling, general and administrative expenses

 

 

(284,375

)

 

 

(270,862

)

 

Impairment charges

 

 

-

 

 

 

(6,192

)

 

Depreciation and amortization

 

 

(18,470

)

 

 

(16,409

)

 

Operating income (loss)

 

 

42,305

 

 

 

41,496

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, floor plan

 

 

(6,436

)

 

 

(4,778

)

 

Interest expense, other, net

 

 

(12,339

)

 

 

(13,219

)

 

Other income (expense), net

 

 

104

 

 

 

90

 

 

Total other income (expense)

 

 

(18,671

)

 

 

(17,907

)

 

Income (loss) from continuing operations before taxes

 

 

23,634

 

 

 

23,589

 

 

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

 

 

(9,170

)

 

 

(9,200

)

 

Income (loss) from continuing operations

 

 

14,464

 

 

 

14,389

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before taxes

 

 

261

 

 

 

(691

)

 

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

 

 

(101

)

 

 

269

 

 

Income (loss) from discontinued operations

 

 

160

 

 

 

(422

)

 

Net income (loss)

 

$

14,624

 

 

$

13,967

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.31

 

 

$

0.28

 

 

Earnings (loss) per share from discontinued operations

 

 

-

 

 

 

(0.01

)

 

Earnings (loss) per common share

 

$

0.31

 

 

$

0.27

 

 

Weighted average common shares outstanding

 

 

46,950

 

 

 

50,854

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.31

 

 

$

0.28

 

 

Earnings (loss) per share from discontinued operations

 

 

-

 

 

 

(0.01

)

 

Earnings (loss) per common share

 

$

0.31

 

 

$

0.27

 

 

Weighted average common shares outstanding

 

 

47,122

 

 

 

51,403

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05

 

 

$

0.025

 

 

 

 

 

 

1

 


 

See notes to condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Net income (loss)

 

$

14,624

 

 

$

13,967

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap agreements

 

 

(4,878

)

 

 

(1,489

)

Provision for income tax benefit (expense) related to

   components of other comprehensive income (loss)

 

 

1,853

 

 

 

566

 

Other comprehensive income (loss)

 

 

(3,025

)

 

 

(923

)

Comprehensive income (loss)

 

$

11,599

 

 

$

13,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

2

 


 

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,390

 

 

$

3,625

 

Receivables, net

 

 

278,099

 

 

 

378,520

 

Inventories

 

 

1,593,732

 

 

 

1,599,581

 

Other current assets

 

 

57,237

 

 

 

101,386

 

Total current assets

 

 

1,931,458

 

 

 

2,083,112

 

Property and Equipment, net

 

 

908,176

 

 

 

886,902

 

Goodwill

 

 

471,493

 

 

 

471,493

 

Other Intangible Assets, net

 

 

80,715

 

 

 

80,876

 

Other Assets

 

 

39,529

 

 

 

39,998

 

Total Assets

 

$

3,431,371

 

 

$

3,562,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current Liabilities:

 

 

 

 

 

 

 

 

Notes payable - floor plan - trade

 

$

811,411

 

 

$

893,466

 

Notes payable - floor plan - non-trade

 

 

608,927

 

 

 

625,367

 

Trade accounts payable

 

 

138,511

 

 

 

131,204

 

Accrued interest

 

 

13,154

 

 

 

12,640

 

Other accrued liabilities

 

 

205,471

 

 

 

218,507

 

Current maturities of long-term debt

 

 

26,679

 

 

 

33,437

 

Total current liabilities

 

 

1,804,153

 

 

 

1,914,621

 

Long-Term Debt

 

 

817,065

 

 

 

781,145

 

Other Long-Term Liabilities

 

 

66,941

 

 

 

64,245

 

Deferred Income Taxes

 

 

76,755

 

 

 

73,322

 

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;

   62,925,921 shares issued and 34,148,040 shares outstanding at

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

   outstanding at December 31, 2015

 

 

629

 

 

 

626

 

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

   12,029,375 shares issued and outstanding at March 31, 2016

   and December 31, 2015

 

 

121

 

 

 

121

 

Paid-in capital

 

 

715,634

 

 

 

713,118

 

Retained earnings

 

 

469,340

 

 

 

457,010

 

Accumulated other comprehensive income (loss)

 

 

(8,657

)

 

 

(5,632

)

Treasury stock, at cost; 28,777,881 Class A common stock shares held

   at March 31, 2016 and 24,675,443 Class A common stock shares

   held at December 31, 2015

 

 

(510,610

)

 

 

(436,195

)

Total Stockholders’ Equity

 

 

666,457

 

 

 

729,048

 

Total Liabilities and Stockholders’ Equity

 

$

3,431,371

 

 

$

3,562,381

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

3

 


 

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, 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

 

 

340

 

 

 

3

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

1

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(4,103

)

 

 

(74,415

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(74,415

)

Income tax expense associated with stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(377

)

 

 

-

 

 

 

-

 

 

 

(377

)

Change in fair value of interest rate swap agreements, net of tax benefit of $1,853

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,025

)

 

 

(3,025

)

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,895

 

 

 

-

 

 

 

-

 

 

 

2,895

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

14,624

 

 

 

-

 

 

 

14,624

 

Dividends declared ($0.05 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,294

)

 

 

-

 

 

 

(2,294

)

Balance at March 31, 2016

 

 

62,926

 

 

$

629

 

 

 

(28,778

)

 

$

(510,610

)

 

 

12,029

 

 

$

121

 

 

$

715,634

 

 

$

469,340

 

 

$

(8,657

)

 

$

666,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

4

 


 

 

 

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,624

 

 

$

13,967

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

18,468

 

 

 

16,408

 

Provision for bad debt expense

 

 

141

 

 

 

(2

)

Other amortization

 

 

162

 

 

 

162

 

Debt issuance cost amortization

 

 

622

 

 

 

483

 

Debt discount amortization, net of premium amortization

 

 

73

 

 

 

36

 

Stock-based compensation expense

 

 

2,895

 

 

 

2,392

 

Deferred income taxes

 

 

4,141

 

 

 

4,063

 

Equity interest in earnings of investee

 

 

(189

)

 

 

(32

)

Asset impairment charges

 

 

-

 

 

 

6,192

 

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

 

 

(148

)

 

 

(95

)

Loss (gain) on exit of leased dealerships

 

 

(409

)

 

 

503

 

Changes in assets and liabilities that relate to operations:

 

 

 

 

 

 

 

 

Receivables

 

 

101,436

 

 

 

56,920

 

Inventories

 

 

5,849

 

 

 

31,675

 

Other assets

 

 

44,433

 

 

 

(5,089

)

Notes payable - floor plan - trade

 

 

(82,055

)

 

 

(62,041

)

Trade accounts payable and other liabilities

 

 

(6,403

)

 

 

(21,486

)

Total adjustments

 

 

89,016

 

 

 

30,089

 

Net cash provided by (used in) operating activities

 

 

103,640

 

 

 

44,056

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of land, property and equipment

 

 

(41,382

)

 

 

(46,767

)

Proceeds from sales of property and equipment

 

 

769

 

 

 

635

 

Distributions from equity investee

 

 

375

 

 

 

-

 

Net cash provided by (used in) investing activities

 

 

(40,238

)

 

 

(46,132

)

CASH  FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

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

 

 

(16,440

)

 

 

(9,199

)

Borrowings on revolving credit facilities

 

 

76,777

 

 

 

120,534

 

Repayments on revolving credit facilities

 

 

(77,290

)

 

 

(120,534

)

Proceeds from issuance of long-term debt

 

 

33,755

 

 

 

25,618

 

Debt issuance costs

 

 

(152

)

 

 

-

 

Principal payments on long-term debt

 

 

(4,623

)

 

 

(4,446

)

Purchases of treasury stock

 

 

(74,415

)

 

 

(11,123

)

Income tax benefit (expense) associated with stock compensation plans

 

 

(377

)

 

 

394

 

Issuance of shares under stock compensation plans

 

 

1

 

 

 

1,881

 

Dividends paid

 

 

(1,873

)

 

 

(1,273

)

Net cash provided by (used in) financing activities

 

 

(64,637

)

 

 

1,852

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,235

)

 

 

(224

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

3,625

 

 

 

4,182

 

CASH AND CASH EQUIVALENTS, END OF YEAR

 

$

2,390

 

 

$

3,958

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Change in fair value of cash flow interest rate swap agreements (net of tax benefit of $1,853 and

 

 

 

 

 

 

 

 

$566 in the months ended March 31, 2016 and 2015, respectively)

 

$

(3,025

)

 

$

(923

)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, including amount capitalized

 

$

18,219

 

 

$

17,482

 

Income taxes

 

$

375

 

 

$

(667

)

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

5

 


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 months ended March 31, 2016 and 2015, are unaudited and have been prepared in accordance with U.S. 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, 2015.

 

Recent Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that leases are classified as either finance or operating leases, a right-of-use asset and lease liability is recognized in the statement of financial position, and repayments are classified within operating activities in the statement of cash flows. For public companies, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 (early adoption is permitted). Upon adoption of this ASU, the presentation of certain items in Sonic’s consolidated financial position, cash flows and other disclosures will be impacted.

 

In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based payment transactions. For public companies, this ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (early adoption is permitted). Upon adoption of this ASU, the presentation of certain items in Sonic’s consolidated financial position, results of operations, cash flows and other disclosures will be impacted.

Principles of Consolidation All of Sonic’s 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 that remain subject to a current lease agreement. 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 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 in situations where a store is closed as a result of the associated franchise being terminated by Sonic or the manufacturer and no other operations continue on the leased property. See Note 12, “Commitments and Contingencies,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion.

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)

 

 

(409

)

Payments (2)

 

 

(1,581

)

Balance at March 31, 2016

 

$

12,537

 

 

(1)

Income of approximately $0.5 million is recorded in income (loss) from discontinued operations before taxes, offset partially by expense of approximately $0.1 million recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of income.

(2)

Amount is recorded as an offset to rent expense, with approximately $0.2 million recorded in selling, general and administrative expenses and approximately $1.4 million recorded in income (loss) from discontinued operations before taxes, in the accompanying condensed consolidated statements of income.

 

6

 


SONIC AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Income Tax Expense – The overall effective tax rate from continuing operations was 38.8% and 39.0% for the three months ended March 31, 2016 and 2015, respectively. Sonic’s effective tax rate varies from year to year based on the distribution of taxable income between states in which Sonic operates and other tax adjustments. Sonic expects the effective tax rate in future periods to fall within a range of 38.0% to 40.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets or unusual discrete tax adjustments.

2. Business Acquisitions and Dispositions

Acquisitions Sonic did not acquire any franchises during the three months ended March 31, 2016 and 2015.

Dispositions Revenues and other activities associated with dealerships classified as discontinued operations were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

(In thousands)

Income (loss) from operations

 

$

(194

)

 

$

(335

)

 

Lease exit accrual adjustments and charges

 

 

455

 

 

 

(356

)

 

Pre-tax income (loss)

 

$

261

 

 

$

(691

)

 

Total revenues

 

$

-

 

 

$

-

 

 

 

Sonic did not dispose of any franchises during the three months ended March 31, 2016 and 2015. Revenues and other activities associated with disposed dealerships that remain in continuing operations were as follows:

 

 

Three Months Ended March 31,

 

 

 

 

2016

 

 

2015

 

 

 

 

(In thousands)

Income (loss) from operations

 

$

(31

)

 

$

(945

)

 

Gain (loss) on disposal

 

 

(48

)

 

 

(102

)

 

Pre-tax income (loss)

 

$

(79

)

 

$

(1,047

)

 

Total revenues

 

$

14

 

 

$

28,619

 

 

 

 

3. Inventories

Inventories consist of the following: 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

New vehicles

 

$

1,133,845

 

 

$

1,161,490

 

Used vehicles

 

 

270,336

 

 

 

251,103

 

Service loaners

 

 

126,503

 

 

 

121,946

 

Parts, accessories and other

 

 

63,048

 

 

 

65,042

 

     Net inventories

 

$

1,593,732

 

 

$

1,599,581

 

 

7

 


SONIC AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4. Property and Equipment

 

Property and equipment, net consists of the following:

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

Land

 

$

264,904

 

 

$

260,275

 

Building and improvements

 

 

692,545

 

 

 

679,712

 

Software and computer equipment

 

 

111,763

 

 

 

107,086

 

Parts and service equipment

 

 

81,108

 

 

 

79,219

 

Office equipment and fixtures

 

 

80,020

 

 

 

76,810

 

Company vehicles

 

 

8,916

 

 

 

8,478

 

Construction in progress

 

 

66,601

 

 

 

55,010

 

       Total, at cost

 

 

1,305,857

 

 

 

1,266,590

 

Less accumulated depreciation

 

 

(397,681

)

 

 

(379,688

)

       Property and equipment, net

 

$

908,176

 

 

$

886,902

 

In the three months ended March 31, 2016 and 2015, capital expenditures were approximately $41.4 million and $46.8 million, respectively. Capital expenditures for the three months ended March 31, 2016 and 2015 were primarily related to real estate acquisitions, construction of new dealerships and EchoPark® stores, building improvements and equipment purchased for use in Sonic’s dealerships and EchoPark® stores.

 

5. Goodwill and Intangible Assets

 

The carrying amount of franchise assets and goodwill was approximately $74.9 million and $471.5 million, respectively, as of March 31, 2016 and December 31, 2015. The carrying amount of goodwill is net of accumulated impairment losses of approximately $796.7 million as of March 31, 2016 and December 31, 2015.

 

At December 31, 2015, Sonic had approximately $6.0 million of definite life intangibles related to favorable lease agreements. After the effect of amortization of the definite life intangibles, the balance recorded at March 31, 2016 was approximately $5.8 million and is included in other intangible assets, net in the accompanying condensed consolidated balance sheets.

 

6. Long-Term Debt

Long-term debt consists of the following:

 

 

 

March 31, 2016

 

 

December 31, 2015

 

 

 

(In thousands)

 

2014 Revolving Credit Facility (1)

 

$

3,690

 

 

$

4,203

 

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”)

 

 

300,000

 

 

 

300,000

 

Mortgage notes to finance companies-fixed rate, bearing interest from 3.51% to 7.03%

 

 

183,885

 

 

 

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

 

 

165,014

 

 

 

150,961

 

Net debt discount and premium (2)

 

 

(1,489

)

 

 

(1,562

)

Debt issuance costs

 

 

(12,414

)

 

 

(12,884

)

Other

 

 

5,058

 

 

 

5,454

 

Total debt

 

$

843,744

 

 

$

814,582

 

Less current maturities