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EX-32.2 - EX-32.2 - SONIC AUTOMOTIVE INCsah-ex322_10.htm
EX-32.1 - EX-32.1 - SONIC AUTOMOTIVE INCsah-ex321_11.htm
EX-31.2 - EX-31.2 - SONIC AUTOMOTIVE INCsah-ex312_12.htm
EX-31.1 - EX-31.1 - SONIC AUTOMOTIVE INCsah-ex311_13.htm
EX-10.3 - EX-10.3 - SONIC AUTOMOTIVE INCsah-ex103_313.htm
EX-10.2 - EX-10.2 - SONIC AUTOMOTIVE INCsah-ex102_314.htm
EX-3.4 - EX-3.4 - SONIC AUTOMOTIVE INCsah-ex34_316.htm
EX-3.3 - EX-3.3 - SONIC AUTOMOTIVE INCsah-ex33_315.htm
EX-3.2 - EX-3.2 - SONIC AUTOMOTIVE INCsah-ex32_317.htm
EX-3.1 - EX-3.1 - SONIC AUTOMOTIVE INCsah-ex31_318.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2017

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      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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “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 Exchange Act).    Yes      No  

As of April 24, 2017, there were 32,961,796 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. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and elsewhere in this report, 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 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 resolution of one or more significant legal proceedings against us or our dealerships or EchoPark stores;

 

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, 2017

TABLE OF CONTENTS

 

 

  

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

  

 

18

  

 

 

 

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

36

  

 

 

 

Item 4.

  

Controls and Procedures

  

 

38

  

 

 

PART II – OTHER INFORMATION

  

 

39

  

 

 

 

Item 1.

  

Legal Proceedings

  

 

39

  

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

40

 

 

 

 

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

41

  

 

 

 

Item 6.

  

Exhibits

  

 

42

  

 

 

SIGNATURES

  

 

43

  

 

 

EXHIBIT INDEX

  

 

44

  

 

 

 

 

 


PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicles

 

$

1,171,932

 

 

$

1,164,570

 

 

Used vehicles

 

 

634,474

 

 

 

598,355

 

 

Wholesale vehicles

 

 

46,310

 

 

 

44,374

 

 

Total vehicles

 

 

1,852,716

 

 

 

1,807,299

 

 

Parts, service and collision repair

 

 

352,043

 

 

 

346,054

 

 

Finance, insurance and other, net

 

 

83,063

 

 

 

81,273

 

 

Total revenues

 

 

2,287,822

 

 

 

2,234,626

 

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

New vehicles

 

 

(1,113,654

)

 

 

(1,106,146

)

 

Used vehicles

 

 

(593,641

)

 

 

(557,824

)

 

Wholesale vehicles

 

 

(47,482

)

 

 

(45,452

)

 

Total vehicles

 

 

(1,754,777

)

 

 

(1,709,422

)

 

Parts, service and collision repair

 

 

(182,699

)

 

 

(180,054

)

 

Total cost of sales

 

 

(1,937,476

)

 

 

(1,889,476

)

 

Gross profit

 

 

350,346

 

 

 

345,150

 

 

Selling, general and administrative expenses

 

 

(292,234

)

 

 

(284,375

)

 

Impairment charges

 

 

(510

)

 

 

-

 

 

Depreciation and amortization

 

 

(21,153

)

 

 

(18,470

)

 

Operating income (loss)

 

 

36,449

 

 

 

42,305

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest expense, floor plan

 

 

(8,387

)

 

 

(6,436

)

 

Interest expense, other, net

 

 

(13,409

)

 

 

(12,339

)

 

Other income (expense), net

 

 

(14,501

)

 

 

104

 

 

Total other income (expense)

 

 

(36,297

)

 

 

(18,671

)

 

Income (loss) from continuing operations before taxes

 

 

152

 

 

 

23,634

 

 

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

 

 

(172

)

 

 

(9,170

)

 

Income (loss) from continuing operations

 

 

(20

)

 

 

14,464

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) from discontinued operations before taxes

 

 

(868

)

 

 

261

 

 

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

 

 

347

 

 

 

(101

)

 

Income (loss) from discontinued operations

 

 

(521

)

 

 

160

 

 

Net income (loss)

 

$

(541

)

 

$

14,624

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

-

 

 

$

0.31

 

 

Earnings (loss) per share from discontinued operations

 

 

(0.01

)

 

 

-

 

 

Earnings (loss) per common share

 

$

(0.01

)

 

$

0.31

 

 

Weighted average common shares outstanding

 

 

44,791

 

 

 

46,950

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

-

 

 

$

0.31

 

 

Earnings (loss) per share from discontinued operations

 

 

(0.01

)

 

 

-

 

 

Earnings (loss) per common share

 

$

(0.01

)

 

$

0.31

 

 

Weighted average common shares outstanding

 

 

44,791

 

 

 

47,122

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.05

 

 

$

0.05

 

 

 

 

See notes to condensed consolidated financial statements.

1

 


SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

(In thousands)

Net income (loss)

 

$

(541

)

 

$

14,624

 

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

    Change in fair value of interest rate swap agreements

 

 

2,102

 

 

 

(4,878

)

 

Total other comprehensive income (loss) before taxes

 

 

2,102

 

 

 

(4,878

)

 

Provision for income tax benefit (expense) related to

   components of other comprehensive income (loss)

 

 

(799

)

 

 

1,853

 

 

Other comprehensive income (loss)

 

 

1,303

 

 

 

(3,025

)

 

Comprehensive income (loss)

 

$

762

 

 

$

11,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

2

 


SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands)

 

ASSETS

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,565

 

 

$

3,108

 

Receivables, net

 

 

297,266

 

 

 

430,242

 

Inventories

 

 

1,600,602

 

 

 

1,570,701

 

Other current assets

 

 

41,902

 

 

 

26,993

 

Total current assets

 

 

1,946,335

 

 

 

2,031,044

 

Property and Equipment, net

 

 

1,062,716

 

 

 

1,010,380

 

Goodwill

 

 

472,393

 

 

 

472,437

 

Other Intangible Assets, net

 

 

80,072

 

 

 

80,233

 

Other Assets

 

 

46,119

 

 

 

45,242

 

Total Assets

 

$

3,607,635

 

 

$

3,639,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current Liabilities:

 

 

 

 

 

 

 

 

Notes payable - floor plan - trade

 

$

813,903

 

 

$

850,537

 

Notes payable - floor plan - non-trade

 

 

631,654

 

 

 

675,353

 

Trade accounts payable

 

 

125,279

 

 

 

117,740

 

Accrued interest

 

 

11,633

 

 

 

13,265

 

Other accrued liabilities

 

 

215,478

 

 

 

236,982

 

Current maturities of long-term debt

 

 

50,032

 

 

 

43,003

 

Total current liabilities

 

 

1,847,979

 

 

 

1,936,880

 

Long-Term Debt

 

 

897,352

 

 

 

839,675

 

Other Long-Term Liabilities

 

 

61,005

 

 

 

61,170

 

Deferred Income Taxes

 

 

79,021

 

 

 

76,447

 

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;

63,389,463 shares issued and 32,948,735 shares outstanding at

   March 31, 2017; 62,967,061 shares issued and 32,703,865 shares

   outstanding at December 31, 2016

 

 

634

 

 

 

630

 

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

   12,029,375 shares issued and outstanding at March 31, 2017

   and December 31, 2016

 

 

121

 

 

 

121

 

Paid-in capital

 

 

724,276

 

 

 

721,695

 

Retained earnings

 

 

538,368

 

 

 

541,146

 

Accumulated other comprehensive income (loss)

 

 

(959

)

 

 

(2,262

)

Treasury stock, at cost; 30,440,728 Class A common stock shares held

   at March 31, 2017 and 30,263,196 Class A common stock shares

   held at December 31, 2016

 

 

(540,162

)

 

 

(536,166

)

Total Stockholders’ Equity

 

 

722,278

 

 

 

725,164

 

Total Liabilities and Stockholders’ Equity

 

$

3,607,635

 

 

$

3,639,336

 

 

 

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

 

 

 

(In thousands)

 

Balance at December 31, 2016

 

 

62,967

 

 

$

630

 

 

 

(30,263

)

 

$

(536,166

)

 

 

12,029

 

 

$

121

 

 

$

721,695

 

 

$

541,146

 

 

$

(2,262

)

 

$

725,164

 

Shares awarded under stock compensation plans

 

 

422

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

-

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(178

)

 

 

(3,996

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,996

)

Change in fair value of interest rate swap agreements, net of tax expense of $799

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,303

 

 

 

1,303

 

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,585

 

 

 

-

 

 

 

-

 

 

 

2,585

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(541

)

 

 

-

 

 

 

(541

)

Dividends declared ($0.05 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,237

)

 

 

-

 

 

 

(2,237

)

Balance at March 31, 2017

 

 

63,389

 

 

$

634

 

 

 

(30,441

)

 

$

(540,162

)

 

 

12,029

 

 

$

121

 

 

$

724,276

 

 

$

538,368

 

 

$

(959

)

 

$

722,278

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

4

 


 

 

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

(In thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(541

)

 

$

14,624

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

21,152

 

 

 

18,468

 

Provision for bad debt expense

 

 

399

 

 

 

141

 

Other amortization

 

 

162

 

 

 

162

 

Debt issuance cost amortization

 

 

605

 

 

 

622

 

Debt discount amortization, net of premium amortization

 

 

64

 

 

 

73

 

Stock-based compensation expense

 

 

2,585

 

 

 

2,895

 

Deferred income taxes

 

 

(789

)

 

 

4,141

 

Net distributions from equity investee

 

 

337

 

 

 

186

 

Asset impairment charges

 

 

510

 

 

 

-

 

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

 

 

(39

)

 

 

(148

)

Loss (gain) on exit of leased dealerships

 

 

614

 

 

 

(409

)

(Gain) loss on retirement of debt

 

 

14,607

 

 

 

-

 

Changes in assets and liabilities that relate to operations:

 

 

 

 

 

 

 

 

Receivables

 

 

132,679

 

 

 

101,436

 

Inventories

 

 

(29,900

)

 

 

5,849

 

Other assets

 

 

(16,708

)

 

 

44,433

 

Notes payable - floor plan - trade

 

 

(36,634

)

 

 

(82,055

)

Trade accounts payable and other liabilities

 

 

(9,628

)

 

 

(6,403

)

Total adjustments

 

 

80,016

 

 

 

89,391

 

Net cash provided by (used in) operating activities

 

 

79,475

 

 

 

104,015

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchases of land, property and equipment

 

 

(75,686

)

 

 

(41,382

)

Proceeds from sales of property and equipment

 

 

170

 

 

 

769

 

Net cash provided by (used in) investing activities

 

 

(75,516

)

 

 

(40,613

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

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

 

 

(43,699

)

 

 

(16,440

)

Borrowings on revolving credit facilities

 

 

11,513

 

 

 

76,777

 

Repayments on revolving credit facilities

 

 

(11,513

)

 

 

(77,290

)

Proceeds from issuance of long-term debt

 

 

269,855

 

 

 

33,755

 

Debt issuance costs

 

 

(4,222

)

 

 

(152

)

Principal payments and repurchase of long-term debt

 

 

(5,289

)

 

 

(4,623

)

Repurchase of debt securities

 

 

(210,914

)

 

 

-

 

Purchases of treasury stock

 

 

(3,996

)

 

 

(74,415

)

Income tax benefit (expense) associated with stock compensation plans

 

 

-

 

 

 

(377

)

Issuance of shares under stock compensation plans

 

 

-

 

 

 

1

 

Dividends paid

 

 

(2,237

)

 

 

(1,873

)

Net cash provided by (used in) financing activities

 

 

(502

)

 

 

(64,637

)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

3,457

 

 

 

(1,235

)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

3,108

 

 

 

3,625

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

6,565

 

 

$

2,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Change in fair value of cash flow interest rate swap agreements (net of tax expense of $799

 

 

 

 

 

 

 

 

and benefit of $1,853 in the three months ended March 31, 2017 and 2016, respectively)

 

$

1,303

 

 

$

(3,025

)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, including amount capitalized

 

$

23,295

 

 

$

18,219

 

Income taxes

 

$

103

 

 

$

375

 

 

 

 

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, 2017 and 2016, 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. 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 consolidated financial statements and related notes thereto included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 to amend the accounting guidance on revenue recognition. The amendments 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 must 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 and anticipates adopting a full retrospective transition approach. While management is still evaluating the specific financial statement impact and quantitative and qualitative disclosure impact of the provisions of this ASU, based on preliminary analysis, 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 amounts and timing of revenue recognition to generally remain the same.

 

In February 2016, the FASB issued 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. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). Sonic plans to adopt this ASU effective January 1, 2019. While management is still evaluating the impact of adopting the provisions of this ASU, management expects that upon adoption of this ASU, the presentation of certain items in Sonic’s 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 and a change in the timing and classification of certain items in Sonic’s results of operations as a result of the derecognition of the lease liability.

 

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 fiscal years, beginning after December 15, 2016 (early adoption is permitted). Sonic adopted this ASU effective January 1, 2017. Upon adoption of this ASU, interim period and annual period income tax expense is affected by stock option exercises and restricted stock and restricted stock unit vesting activity, potentially creating volatility in Sonic’s effective income tax rate from period to period. See the heading “Income Tax Expense” below for further discussion of the impact of the adoption of this ASU on Sonic’s effective income tax rate for the three months ended March 31, 2017.

 

In August 2016, the FASB issued ASU 2016-15 related to the classification of certain cash receipts and cash payments on the statement of cash flows. 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. Upon adoption of this ASU, the presentation of certain items in Sonic’s cash flows and other disclosures may 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.

6

 


SONIC AUTOMOTIVE, INC.

NOTES TO 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 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, 2016 for further discussion.

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

 

 

 

(In thousands)

 

Balance at December 31, 2016

 

$

9,790

 

Lease exit expense (1)

 

 

614

 

Payments (2)

 

 

(1,189

)

Other (3)

 

 

(885

)

Balance at March 31, 2017

 

$

8,330

 

 

(1)

Expense of approximately $0.6 million is recorded in income (loss) from discontinued operations before taxes, 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 $1.0 million recorded in income (loss) from discontinued operations before taxes, in the accompanying condensed consolidated statements of income.

(3)

Amount represents the cash settlement of accruals related to certain deferred maintenance costs and other liabilities related to lease termination.

 

Income Tax Expense – The overall effective tax rate from continuing operations was 113.3% and 38.8% for the three months ended March 31, 2017 and 2016, 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. The effective tax rate for the three months ended March 31, 2017 was impacted by lower levels of income from continuing operations before taxes and the effect of a discrete charge related to uncertain tax positions in the three months ended March 31, 2017, offset partially by a discrete benefit related to the adoption of ASU 2016-09. 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 discrete tax adjustments.

2. Business Acquisitions and Dispositions

Sonic did not acquire or dispose of any franchises during the three months ended March 31, 2017 and 2016.

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

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

(In thousands)

 

 

Income (loss) from operations

 

$

(1,165

)

 

$

(194

)

 

Lease exit accrual adjustments and charges

 

 

297

 

 

 

455

 

 

Pre-tax income (loss)

 

$

(868

)

 

$

261

 

 

Total revenues

 

$

-

 

 

$

-

 

 

7

 


SONIC AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Revenues and other activities associated with disposed dealerships that remain in continuing operations were as follows:

 

 

 

Three Months Ended March 31,

 

 

 

 

2017

 

 

2016

 

 

 

 

(In thousands)

Income (loss) from operations

 

$

(27

)

 

$

(31

)

 

Gain (loss) on disposal

 

 

(24

)

 

 

(48

)

 

Pre-tax income (loss)

 

$

(51

)

 

$

(79

)

 

Total revenues

 

$

-

 

 

$

14

 

 

 

3. Inventories

Inventories consist of the following: 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

New vehicles

 

$

1,122,919

 

 

$

1,088,814

 

Used vehicles

 

 

280,113

 

 

 

282,288

 

Service loaners

 

 

130,436

 

 

 

128,821

 

Parts, accessories and other

 

 

67,134

 

 

 

70,778

 

     Net inventories

 

$

1,600,602

 

 

$

1,570,701

 

 

4. Property and Equipment

 

Property and equipment, net consists of the following:

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

Land

 

$

335,407

 

 

$

306,457

 

Building and improvements

 

 

805,927

 

 

 

777,766

 

Software and computer equipment

 

 

132,874

 

 

 

128,366

 

Parts and service equipment

 

 

98,499

 

 

 

93,901

 

Office equipment and fixtures

 

 

88,894

 

 

 

86,216

 

Company vehicles

 

 

9,377

 

 

 

9,107

 

Construction in progress

 

 

66,793

 

 

 

62,982

 

       Total, at cost

 

 

1,537,771

 

 

 

1,464,795

 

Less accumulated depreciation

 

 

(470,824

)

 

 

(450,184

)

Subtotal

 

 

1,066,947

 

 

 

1,014,611

 

Less assets held for sale (1)

 

 

(4,231

)

 

 

(4,231

)

       Property and equipment, net

 

$

1,062,716

 

 

$

1,010,380

 

 

(1)Classified in other current assets in the accompanying condensed consolidated balance sheets.

In the three months ended March 31, 2017 and 2016, capital expenditures were approximately $75.7 million and $41.4 million, respectively. Capital expenditures for the three months ended March 31, 2017 and 2016 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. Assets held for sale as of March 31, 2017 consists of vacant land that Sonic expects to dispose of in the next twelve months.

Impairment charges for the three months ended March 31, 2017 were approximately $0.5 million, which include the write-off of capitalized costs associated with abandonment of certain construction projects. There were no impairment charges for the three months ended March 31, 2016.

8

 


SONIC AUTOMOTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

5. Goodwill and Intangible Assets

 

The carrying amount of goodwill was approximately $472.4 million as of March 31, 2017 and December 31, 2016. The carrying amount of goodwill is net of accumulated impairment losses of approximately $796.7 million as of March 31, 2017 and December 31, 2016. The carrying amount of franchise assets was approximately $74.9 million as of March 31, 2017 and December 31, 2016.

 

At December 31, 2016, Sonic had approximately $5.3 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, 2017 was approximately $5.2 million. Both franchise assets and favorable lease agreement assets are 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, 2017

 

 

December 31, 2016

 

 

 

(In thousands)

 

2016 Revolving Credit Facility (1)

 

$

-

 

 

$

-

 

7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”)

 

 

-

 

 

 

200,000

 

5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”)

 

 

289,273

 

 

 

289,273

 

6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)

 

 

250,000