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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, 2020
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
28211
Charlotte,North Carolina
(Address of principal executive offices)(Zip Code)
(704) 566-2400
(Registrant’s telephone number, including area code)
______________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.01 per shareSAHNew York Stock Exchange
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 every Interactive Data File required to be submitted 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 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 filerAccelerated filer
Non-accelerated filer☐  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 29, 2020, there were 30,890,395 shares of the registrant’s Class A Common Stock and 12,029,375 shares of the registrant’s 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,” “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 our Annual Report on Form 10-K for the year ended December 31, 2019 and in “Item 1A. Risk Factors” of this report and elsewhere 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 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 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 or dispositions;
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 industry, which not only create 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;
the rate and timing of overall economic expansion or contraction; and
the severity and duration of the COVID-19 pandemic and the actions taken by governmental authorities, businesses or consumers in response to the pandemic.
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.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2020

TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 6.




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
20202019
(Dollars and shares in thousands, except per share amounts)
Revenues:
New vehicles$959,489  $1,066,334  
Used vehicles850,052  820,366  
Wholesale vehicles48,543  54,770  
Total vehicles1,858,084  1,941,470  
Parts, service and collision repair334,680  341,430  
Finance, insurance and other, net115,292  106,238  
Total revenues2,308,056  2,389,138  
Cost of Sales:
New vehicles(914,074) (1,012,538) 
Used vehicles(817,922) (783,358) 
Wholesale vehicles(48,700) (56,037) 
Total vehicles(1,780,696) (1,851,933) 
Parts, service and collision repair(176,782) (178,194) 
Total cost of sales(1,957,478) (2,030,127) 
Gross profit350,578  359,011  
Selling, general and administrative expenses(282,156) (247,095) 
Impairment charges(268,000) (1,952) 
Depreciation and amortization(22,297) (22,649) 
Operating income (loss)(221,875) 87,315  
Other income (expense):
Interest expense, floor plan(10,508) (13,226) 
Interest expense, other, net(10,965) (12,853) 
Other income (expense), net100  100  
Total other income (expense)(21,373) (25,979) 
Income (loss) from continuing operations before taxes(243,248) 61,336  
Provision for income taxes for continuing operations - benefit (expense)44,117  (18,987) 
Income (loss) from continuing operations(199,131) 42,349  
Discontinued operations:
Income (loss) from discontinued operations before taxes(285) (180) 
Provision for income taxes for discontinued operations - benefit (expense)83  52  
Income (loss) from discontinued operations(202) (128) 
Net income (loss)$(199,333) $42,221  
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations$(4.67) $0.99  
Earnings (loss) per share from discontinued operations(0.01) (0.01) 
Earnings (loss) per common share$(4.68) $0.98  
Weighted-average common shares outstanding42,615  42,838  
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations$(4.67) $0.99  
Earnings (loss) per share from discontinued operations(0.01) (0.01) 
Earnings (loss) per common share$(4.68) $0.98  
Weighted-average common shares outstanding42,615  42,888  




See notes to unaudited condensed consolidated financial statements.


1


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Three Months Ended March 31,
20202019
(Dollars in thousands)
Net income (loss)$(199,333) $42,221  
Other comprehensive income (loss) before taxes:
Change in fair value of interest rate swap and interest rate cap agreements361  (2,349) 
Amortization of terminated interest rate swap agreements(797) (288) 
Total other comprehensive income (loss) before taxes(436) (2,637) 
Provision for income tax benefit (expense) related to components of other comprehensive income (loss)164  776  
Other comprehensive income (loss)(272) (1,861) 
Comprehensive income (loss)$(199,605) $40,360  






See notes to unaudited condensed consolidated financial statements.


2


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

March 31, 2020December 31, 2019
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents$181,780  $29,103  
Receivables, net200,876  432,742  
Inventories1,608,218  1,517,875  
Other current assets138,912  37,890  
Total current assets2,129,786  2,017,610  
Property and Equipment, net1,092,385  1,097,247  
Goodwill207,791  475,791  
Other Intangible Assets, net64,300  64,300  
Operating Right-of-Use Lease Assets344,148  337,842  
Finance Right-of-Use Lease Assets50,698  34,691  
Other Assets87,636  43,554  
Total Assets$3,976,744  $4,071,035  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable - floor plan - trade$827,292  $860,871  
Notes payable - floor plan - non-trade719,446  678,223  
Trade accounts payable78,394  135,217  
Operating short-term lease liabilities43,139  43,332  
Finance short-term lease liabilities20,225  1,564  
Accrued interest6,534  10,830  
Other accrued liabilities237,211  266,211  
Current maturities of long-term debt80,803  69,908  
Total current liabilities2,013,044  2,066,156  
Long-Term Debt830,839  636,978  
Other Long-Term Liabilities66,287  73,746  
Operating Long-Term Lease Liabilities311,371  304,151  
Finance Long-Term Lease Liabilities33,216  36,313  
Deferred Income Taxes  8,927  
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; 65,199,247 shares issued and 30,834,793 shares outstanding at March 31, 2020; 64,733,667 shares issued and 31,105,000 shares outstanding at December 31, 2019652  647  
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at March 31, 2020 and December 31, 2019121  121  
Paid-in capital758,327  755,904  
Retained earnings586,511  790,158  
Accumulated other comprehensive income (loss)(2,334) (2,062) 
Treasury stock, at cost; 34,364,454 Class A Common Stock shares held at March 31, 2020 and 33,628,667 Class A Common Stock shares held at December 31, 2019(621,290) (600,004) 
Total Stockholders’ Equity721,987  944,764  
Total Liabilities and Stockholders’ Equity$3,976,744  $4,071,035  




See notes to unaudited condensed consolidated financial statements.


3


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)


Class A
Common Stock
Class A
Treasury Stock
Class B
Common Stock
Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmountSharesAmountSharesAmount
(Dollars and shares in thousands, except per share amounts)
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 plans480  5  —  —  —  —  54  —  —  59  
Purchases of treasury stock—  —  (149) (2,333) —  —  —  —  —  (2,333) 
Effect of cash flow hedge instruments, net of tax benefit of $776—  —  —  —  —  —  —  —  (1,861) (1,861) 
Restricted stock amortization—  —  —  —  —  —  2,814  —  —  2,814  
Net income (loss)—  —  —  —  —  —  —  42,221  —  42,221  
Cumulative effect of change in accounting principle (1)—  —  —  —  —  —  —  (7,428) —  (7,428) 
Class A dividends declared ($0.10)—  —  —  —  —  —  —  (3,099) —  (3,099) 
Class B dividends declared ($0.10)—  —  —  —  —  —  —  (1,203) —  (1,203) 
Balance at March 31, 201964,677  $647  (33,625) $(599,956) 12,029  $121  $747,920  $701,182  $2,372  $852,286  



Class A
Common Stock
Class A
Treasury Stock
Class B
Common Stock
Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmountSharesAmountSharesAmount
(Dollars and shares in thousands, except per share amounts)
Balance at December 31, 201964,734  $647  (33,629) $(600,004) 12,029  $121  $755,904  $790,158  $(2,062) $944,764  
Shares awarded under stock compensation plans465  5  —  —  —  —  (4) —  —  1  
Purchases of treasury stock—  —  (735) (21,286) —  —  —  —  —  (21,286) 
Effect of cash flow hedge instruments, net of tax benefit of $164—  —  —  —  —  —  —  —  (272) (272) 
Restricted stock amortization—  —  —  —  —  —  2,427  —  —  2,427  
Net income (loss)—  —  —  —  —  —  —  (199,333) —  (199,333) 
Class A dividends declared ($0.10)—  —  —  —  —  —  —  (3,111) —  (3,111) 
Class B dividends declared ($0.10)—  —  —  —  —  —  —  (1,203) —  (1,203) 
Balance at March 31, 202065,199  $652  (34,364) $(621,290) 12,029  $121  $758,327  $586,511  $(2,334) $721,987  
(1)See Note 1, “Summary of Significant Accounting Policies,” for further discussion.











See notes to unaudited condensed consolidated financial statements.


4


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
20202019
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(199,333) $42,221  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment21,540  22,198  
Provision for bad debt expense134  159  
Debt issuance cost amortization557  591  
Stock-based compensation expense2,427  2,814  
Deferred income taxes(53,999) (2,816) 
Net distributions from equity investee448  379  
Asset impairment charges268,000  1,952  
Loss (gain) on disposal of dealerships and property and equipment(39) (46,785) 
Loss (gain) on exit of leased dealerships  (170) 
Changes in assets and liabilities that relate to operations:
Receivables231,732  66,814  
Inventories(90,342) (40,210) 
Other assets(89,114) (66,967) 
Notes payable - floor plan - trade(33,579) (57,984) 
Trade accounts payable and other liabilities(105,630) (16,525) 
Total adjustments152,135  (136,550) 
Net cash provided by (used in) operating activities(47,198) (94,329) 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of land, property and equipment(19,805) (30,619) 
Proceeds from sales of property and equipment194  1,125  
Proceeds from sales of dealerships  121,700  
Net cash provided by (used in) investing activities(19,611) 92,206  
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable - floor plan - non-trade41,223  9,841  
Borrowings on revolving credit facilities460,916  126,185  
Repayments on revolving credit facilities(250,916) (126,185) 
Debt issuance costs(24)   
Principal payments and repurchase of long-term debt(5,777) (6,011) 
Principal payments of long-term lease liabilities(337)   
Purchases of treasury stock(21,286) (2,333) 
Issuance of shares under stock compensation plans1  59  
Dividends paid(4,314) (2,565) 
Net cash provided by (used in) financing activities219,486  (1,009) 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS152,677  (3,132) 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR29,103  5,854  
CASH AND CASH EQUIVALENTS, END OF PERIOD$181,780  $2,722  
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Effect of cash flow hedge instruments (net of tax benefit of $164 and $776 in the three months ended March 31, 2020 and 2019, respectively)$(272) $(1,861) 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, including amount capitalized$25,359  $26,945  
Income taxes$3  $10,277  




See notes to unaudited condensed consolidated financial statements.


5

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies
Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Sonic Automotive, Inc. and its wholly owned subsidiaries (“Sonic,” the “Company,” “we,” “us” or “our”) for the three months ended March 31, 2020 and 2019 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. The accompanying 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 historically has contributed less operating profit than the second, third and fourth quarters. Additionally, the continued magnitude and impact of COVID-19 pandemic could impact earnings in the second, third and fourth quarters of 2020. The accompanying unaudited condensed consolidated 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, 2019.
COVID 19 – The COVID-19 pandemic negatively impacted the global economy. As of March 31, 2020, the impact on the economy is primarily affecting demand as many countries around the world and states in the United States ("U.S.") have mandated restrictions on citizen movements (stay-at-home orders) or on retail trade at physical locations. As a result, many businesses have curtailed operations and furloughed or terminated many positions. In the U.S., the government passed several measures through the legislature that were signed by the President and enacted into law. Those measures include the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Families First Coronavirus Response Act. Both Acts attempt to provide short-term relief to families and businesses as a result of the economic impacts of the COVID-19 pandemic.
Specifically related to Sonic, all our stores have been impacted by the crisis. As of March 31, 2020, the majority of our stores are not permitted to conduct retail sales of new and used vehicles at our physical locations. Those locations can offer virtual sales transactions with “contactless” delivery to customers. Due to the critical nature of automotive repair, our fixed operations have been deemed “essential” by governmental agencies and were able to continue to conduct business, but must maintain certain local standards for “social distancing”. As a result, in the last several weeks of March of 2020, we experienced 30%-50% declines in unit sales of new and used vehicles (as compared to the prior year period) and 15%-30% reductions in repair order activity in fixed operations. These trends have continued into April of 2020 and are expected to continue until at least through mid-May of 2020.
Based on these events, we evaluated our long-lived assets for impairment. This evaluation included reviews of fixed assets and related right-of-use assets, franchise assets and goodwill. As a result of this evaluation, we determined the carrying values of all long-lived assets to be recoverable at March 31, 2020 with the exception of goodwill related to our franchised dealership reporting unit. One of the primary factors which contributed to the conclusion that goodwill was impaired was the market value of Sonic's stock between the announcement date of the pandemic on March 11, 2020 to March 31, 2020. See Note 5 for further discussion.
The effects of the COVID-19 pandemic continue to evolve. While we currently expect to begin to see recovery in the last half of 2020, the outbreak may cause changes in customer behaviors, including a potential reduction in consumer spending for vehicles and automotive repairs. This may lead to increased asset recovery and valuation risks, such as impairment of additional long-lived assets. The uncertainties in the global economy may negatively impact our suppliers and other business partners, which may interrupt our supply chain and require other changes to our operations. These and other factors may adversely impact our revenues, operating income and earnings per share financial measures.
As a result of the pandemic and related stay-at-home orders, we have transitioned many of our teammates to remote work arrangements. In situations where the role does not permit remote work (ie. technicians), we have implemented staggered work hours and other social distancing measures to promote the health and safety of our teammates and guests. As a result of the systems and infrastructure we had in place prior to the pandemic, we have been able to effectively maintain our back-office operations, financial reporting and internal control processes with minimal disruption.
Recent Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Accounting Standards Codification (“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
6

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 this ASU did not materially impact our unaudited condensed consolidated financial statements.
Principles of Consolidation All of our dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanying unaudited 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 unaudited condensed consolidated financial statements.
Revenue Recognition – 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. ASC Topic 606, “Revenue from Contracts with Customers,” 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.
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). Certain retrospective finance and insurance revenue is earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”).
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.
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.
Receivables, net in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 include approximately $3.6 million and $5.1 million, respectively, related to work in process and contract assets related to F&I retro revenues of approximately $5.2 million and $12.9 million, respectively. Changes in contract assets from December 31, 2019 to March 31, 2020 were primarily due to ordinary business activity, including the receipt of cash for amounts earned and recognized in prior periods. Please refer to Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of our revenue recognition policies and processes.
Income Tax Expense – The overall effective tax rate from continuing operations was 18.2% for the three months ended March 31, 2020, and 31.0% for the three months ended March 31, 2019. Income tax expense for the three months ended March 31, 2020 includes a $51.3 million benefit, including the effect of non-deductible amounts, related to the $268.0 million goodwill impairment charge, a $0.5 million discrete benefit related to vested or exercised stock compensation awards, offset partially by a $0.1 million discrete charge related to changes in uncertain tax positions. Income tax expense for the three months ended March 31, 2019 includes a $1.5 million discrete charge for non-deductible executive officer compensation related to executive transition costs, 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. Sonic’s effective tax rate varies from year to year based on the level of taxable income, the distribution of taxable income between states in which the Company operates and other tax adjustments.

7

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 Dispositions
We did not dispose of any dealerships during the three months ended March 31, 2020. We disposed of one luxury franchised dealership and three mid-line import franchised dealerships during the three months ended March 31, 2019 that generated net cash of approximately $121.7 million. The results of operations of each of these disposed dealerships remain in continuing operations in the accompanying unaudited condensed consolidated statements of income.
Revenues and other activities associated with disposed franchised dealerships that remain in continuing operations were as follows:
Three Months Ended March 31,
20202019
(In thousands)
Income (loss) from operations$(160) $(2,553) 
Gain (loss) on disposal2  46,750  
Lease exit accrual adjustments and charges  170  
Pre-tax income (loss)$(158) $44,367  
Total revenues$  $106,774  

Revenues and other activities associated with disposed franchised dealerships classified as discontinued operations were as follows:
Three Months Ended March 31,
20202019
(In thousands)
Income (loss) from operations$(285) $(180) 
Lease exit accrual adjustments and charges    
Pre-tax income (loss)$(285) $(180) 
Total revenues$  $  
3. Inventories
Inventories consist of the following:
March 31, 2020December 31, 2019
(In thousands)
New vehicles$1,072,318  $983,123  
Used vehicles324,526  319,791  
Service loaners152,254  152,278  
Parts, accessories and other59,120  62,683  
Net inventories$1,608,218  $1,517,875  

8

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment, net consists of the following:
March 31, 2020December 31, 2019
(In thousands)
Land$373,963  $373,301  
Building and improvements976,904  969,609  
Furniture, fixtures and equipment 352,574  346,260  
Construction in progress53,214  50,928  
Total, at cost1,756,655  1,740,098  
Less accumulated depreciation(638,030) (616,611) 
Subtotal 1,118,625  1,123,487  
Less assets held for sale (1)(26,240) (26,240) 
Property and equipment, net$1,092,385  $1,097,247  
(1)Classified in other current assets in the accompanying unaudited condensed consolidated balance sheets.
In the three months ended March 31, 2020 and 2019, capital expenditures were approximately $19.8 million and $30.6 million, respectively. Capital expenditures in all periods were primarily related to real estate acquisitions, construction of new franchised dealerships and EchoPark stores, building improvements and equipment purchased for use in our franchised dealerships and EchoPark stores. Assets held for sale as of March 31, 2020 and December 31, 2019 consists of real property not currently used in operations that we expect to dispose of in the next 12 months.
There were no fixed asset impairment charges for the three months ended March 31, 2020. Impairment charges for the three months ended March 31, 2019, were approximately $2.0 million, related to fair value adjustments of real estate at former EchoPark locations classified as held for sale.
5. Goodwill and Intangible Assets
Pursuant to the applicable accounting pronouncements, we were required to evaluate the recoverability of our long-lived assets at the end of the first quarter of 2020 as a result of the effects of the COVID-19 pandemic on our operations and market value. Based on this evaluation, we determined the carrying value of our franchised dealership reporting unit goodwill was greater than the fair value of the reporting unit. Accordingly, we recorded a non-cash goodwill impairment charge of $268.0 million and a corresponding income tax benefit of $51.3 million to reduce the carrying value to fair value as of March 31, 2020. We utilized the Discounted Cash Flows ("DCF") method, using unobservable inputs (Level 3) to estimate Sonic's enterprise value as of March 31, 2020 and reconciled the discounted cash flows to Sonic's market capitalization, using quoted market price inputs (Level 1). The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs), control premium factors and residual growth rates.
The carrying amount of goodwill was approximately $207.8 million and $475.8 million as of March 31, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our franchised dealership reporting unit was $147.8 million and $415.8 million as of March 31, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our EchoPark reporting unit was $60.0 million as of March 31, 2020 and December 31, 2019. The total carrying amount of goodwill is net of accumulated impairment losses of approximately $1.1 billion and $797.6 million as of March 31, 2020 and December 31, 2019, respectively. The carrying amount of franchise assets was approximately $64.3 million as of both March 31, 2020 and December 31, 2019, respectively.
9

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
Long-term debt consists of the following:
March 31, 2020December 31, 2019
(In thousands)
2016 Revolving Credit Facility (1)$210,000  $  
6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)250,000  250,000  
2019 Mortgage Facility (2)109,088  109,088  
Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03%191,248  194,535  
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR158,855  161,345  
Subtotal$919,191  $714,968  
Debt issuance costs(7,549) (8,082) 
Total debt911,642  706,886  
Less current maturities(80,803) (69,908) 
Long-term debt$830,839  $636,978  
(1)The interest rate on the 2016 Revolving Credit Facility (as defined below) was 175 and 150 basis points above LIBOR at March 31, 2020 and December 31, 2019, respectively.
(2)The interest rate on the 2019 Mortgage Facility (as defined below) was 175 and 200 basis points above the London Interbank Offer Rate ("LIBOR") at March 31, 2020 and December 31, 2019, respectively.
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. As of March 31, 2020, the 2016 Revolving Borrowing Base was approximately $196.5 million based on balances as of such date which will go into effect upon filing of this Form 10-Q for the period ended March 31, 2020. As of March 31, 2020, we had $210.0 million in outstanding borrowings and approximately $13.0 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in no remaining borrowing availability under the 2016 Revolving Credit Facility.

The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility ( as amended, the “2016 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (as amended, 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 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 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 parties (other than those explicitly allowed to 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 Stock so long as no event of
10

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
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 March 15, 2027. The 6.125% Notes were issued at a price of 100.0% of the principal amount thereof. 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 guarantor is considered to be minor. Interest on the 6.125% Notes is payable semi-annually in arrears on March 15 and September 15 of each year.
We may redeem the 6.125% Notes, in whole or in part, at any time on or after March 15, 2022 at the following redemption prices, which are expressed as percentages of the principal amount:
Redemption Price
Beginning on March 15, 2022103.063 %
Beginning on March 15, 2023102.042 %
Beginning on March 15, 2024101.021 %
Beginning on March 15, 2025 and thereafter100.000 %
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 aggregate principal amount of the 6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and accrued and unpaid interest, if any, to the redemption date. 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