2022Q1TRUE0001043509--12-3110033424.526.0zerozero— millionzerozero— million56.1253.517.031.52.92.502.25P1Y5.06.1250.0 million0.0 millionAccumulated Other Comprehensive Income (Loss)For further discussion of Sonic’s accumulated other comprehensive income (loss), see Note 13, “Accumulated Other Comprehensive Income (Loss),” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021. For further discussion of Sonic’s defined benefit pension plan, see Note 10, “Employee Benefit Plans,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021.For further discussion of Sonic’s accumulated other comprehensive income (loss), see Note 13, “Accumulated Other Comprehensive Income (Loss),” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021. For further discussion of Sonic’s defined benefit pension plan, see Note 10, “Employee Benefit Plans,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q/A
______________________________________
(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, 2022
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 class | | Trading Symbol(s) | | Name of each exchange on which registered |
Class A Common Stock, par value $0.01 per share | | SAH | | New 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 filer | ☒ | Accelerated 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 26, 2022, there were 27,530,283 shares of the registrant’s Class A Common Stock and 12,029,375 shares of the registrant’s Class B Common Stock outstanding.
EXPLANATORY NOTE
Unless the context requires otherwise, references to “we,” “us,” “our,” and “Sonic,” refer to Sonic Automotive, Inc. and its subsidiaries.
We have prepared this Amendment No. 1 (this “Amendment”) to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, which was originally filed with the Securities and Exchange Commission on April 28, 2022 (the “Original 10-Q”) to reflect the restatement of our previously issued Condensed Consolidated Statements of Operations for the quarter ended March 31, 2022.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new certifications by Sonic’s principal executive officer and principal financial officer are filed as exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.
Internal Control over Financial Reporting
In connection with this restatement, Sonic has re-evaluated the effectiveness of our disclosure controls and procedures for the three months ended March 31, 2022. Management has concluded that, in light of the error described below, a material weakness exists in our internal control over financial reporting related to the revenue recognition process at a single dealership acquired in December 2021. Based upon such re-evaluation, and due to such material weakness, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2022. For a discussion of management’s evaluation of the Company’s disclosures controls and procedures, internal control over financial reporting, and the material weakness identified, refer to Controls and Procedures in Part I, Item 4.
Background of the Restatement
On October 28, 2022, we filed a Current Report on Form 8-K under Item 4.02 with the Securities and Exchange Commission relating to previously issued financial statements as described below. As indicated in the Current Report on Form 8-K under Item 4.02, we determined that a restatement was necessary due to the effect of an error in our the Company's unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2022. The impact on the 2021 consolidated financial statements was immaterial.
During the quarter ended September 30, 2022, we identified an error related to the revenue recognition process at a single dealership acquired in December 2021. Specifically, we did not correctly apply the guidance in ASC 606 Revenue from Contracts with Customers related to transactions which required net reporting of certain fleet sales transactions within the Condensed Consolidated Statements of Operations. The effect of the error was an overstatement of fleet revenue and an equal overstatement of fleet cost of sales and associated subtotals. No other financial statements were affected and there was no impact on note disclosures, unless related to the items in the table below.
The tables below reflect the sections of the Sonic’s condensed consolidated statements of operations that were impacted by the error.
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
(Dollars in millions) | As Reported | | Adjustments | | As Restated |
Revenues: | | | | | |
Fleet new vehicles | $ | 148.6 | | | $ | (130.4) | | | $ | 18.2 | |
Total new vehicles | $ | 1,499.9 | | | $ | (130.4) | | | $ | 1,369.5 | |
Total vehicles | $ | 3,039.5 | | | $ | (130.4) | | | $ | 2,909.1 | |
Total revenues | $ | 3,586.6 | | | $ | (130.4) | | | $ | 3,456.2 | |
| | | | | |
Cost of sales: | | | | | |
Fleet new vehicles | $ | (147.8) | | | $ | 130.4 | | | $ | (17.4) | |
Total new vehicles | $ | (1,331.4) | | | $ | 130.4 | | | $ | (1,201.0) | |
Total vehicles | $ | (2,821.4) | | | $ | 130.4 | | | $ | (2,691.0) | |
Total cost of sales | $ | (3,015.3) | | | $ | 130.4 | | | $ | (2,884.9) | |
To assist in the review of this filing, this 10-Q/A sets forth the Original 10-Q in its entirety, as amended to reflect the changes described above. We believe that presenting all of the amended and restated information in this 10-Q/A allows readers to review all pertinent data in a single presentation. This 10-Q/A amends and restates the Financial Statements to reflect the restated numbers to correct the error in the Original 10-Q. In addition, in this 10-Q/A, corresponding changes were also made to the Part I, Item 2, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to reflect the restated numbers and Part I, Item 4, under “Controls and Procedures” to reflect an updated evaluation of our disclosure controls and procedures and internal control over financial reporting.
UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION
This report 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, 2021 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 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, including any change in laws or regulations in response to the COVID–19 pandemic;
•changes in vehicle and parts import quotas, duties, tariffs or other restrictions, including supply shortages that could be caused by the COVID-19 pandemic, global political and economic factors, or other supply chain disruptions;
•the inability of vehicle manufacturers and their suppliers to obtain, produce and deliver vehicles or parts and accessories to meet demand at our franchised dealerships for sale and use in our parts, service and collision repair operations;
•general economic conditions in the markets in which we operate, including fluctuations in interest rates, inflation, vehicle valuations, 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 RFJ Auto (as defined below) and future acquisitions;
•the significant control that our principal stockholders exercise over us and our business matters;
•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 vehicle manufacturers, governmental authorities, businesses or consumers in response to the pandemic, including in response to a worsening or “next wave” of the pandemic as a result of new variants of the virus or otherwise.
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/A
FOR THE THREE MONTHS ENDED MARCH 31, 2022
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 OPERATIONS
(Unaudited) | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (Dollars and shares in millions, except per share amounts) |
| As Restated | | | | | | |
Revenues: | | | | | | | |
Retail new vehicles | $ | 1,351.3 | | | $ | 1,134.0 | | | | | |
Fleet new vehicles | 18.2 | | | 22.3 | | | | | |
Total new vehicles | 1,369.5 | | | 1,156.3 | | | | | |
Used vehicles | 1,370.9 | | | 1,090.1 | | | | | |
Wholesale vehicles | 168.7 | | | 74.8 | | | | | |
Total vehicles | 2,909.1 | | | 2,321.2 | | | | | |
Parts, service and collision repair | 380.5 | | | 320.9 | | | | | |
Finance, insurance and other, net | 166.6 | | | 144.7 | | | | | |
Total revenues | 3,456.2 | | | 2,786.8 | | | | | |
Cost of sales: | | | | | | | |
Retail new vehicles | (1,183.6) | | | (1,064.8) | | | | | |
Fleet new vehicles | (17.4) | | | (22.1) | | | | | |
Total new vehicles | (1,201.0) | | | (1,086.9) | | | | | |
Used vehicles | (1,322.7) | | | (1,059.2) | | | | | |
Wholesale vehicles | (167.3) | | | (73.9) | | | | | |
Total vehicles | (2,691.0) | | | (2,220.0) | | | | | |
Parts, service and collision repair | (193.9) | | | (165.9) | | | | | |
Total cost of sales | (2,884.9) | | | (2,385.9) | | | | | |
Gross profit | 571.3 | | | 400.9 | | | | | |
Selling, general and administrative expenses | (387.0) | | | (289.4) | | | | | |
| | | | | | | |
Depreciation and amortization | (29.9) | | | (23.6) | | | | | |
Operating income | 154.4 | | | 87.9 | | | | | |
Other income (expense): | | | | | | | |
Interest expense, floor plan | (5.0) | | | (5.1) | | | | | |
Interest expense, other, net | (20.8) | | | (10.3) | | | | | |
Other income (expense), net | 0.3 | | | 0.1 | | | | | |
Total other income (expense) | (25.5) | | | (15.3) | | | | | |
Income from continuing operations before taxes | 128.9 | | | 72.6 | | | | | |
Provision for income taxes for continuing operations - benefit (expense) | (31.6) | | | (18.9) | | | | | |
Income from continuing operations | 97.3 | | | 53.7 | | | | | |
Discontinued operations: | | | | | | | |
Income (loss) from discontinued operations before taxes | — | | | 0.7 | | | | | |
Provision for income taxes for discontinued operations - benefit (expense) | — | | | (0.2) | | | | | |
Income (loss) from discontinued operations | — | | | 0.5 | | | | | |
Net income | $ | 97.3 | | | $ | 54.2 | | | | | |
Basic earnings per common share: | | | | | | | |
Earnings per share from continuing operations | $ | 2.41 | | | $ | 1.29 | | | | | |
Earnings per share from discontinued operations | — | | | 0.02 | | | | | |
Earnings per common share | $ | 2.41 | | | $ | 1.31 | | | | | |
Weighted-average common shares outstanding | 40.4 | | | 41.5 | | | | | |
Diluted earnings per common share: | | | | | | | |
Earnings per share from continuing operations | $ | 2.33 | | | $ | 1.23 | | | | | |
Earnings per share from discontinued operations | — | | | 0.02 | | | | | |
Earnings per common share | $ | 2.33 | | | $ | 1.25 | | | | | |
Weighted-average common shares outstanding | 41.8 | | | 43.5 | | | | | |
See notes to unaudited condensed consolidated financial statements.
1
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
| | | | | (Dollars in millions) |
Net income | | | | | $ | 97.3 | | | $ | 54.2 | |
Other comprehensive income (loss) before taxes: | | | | | | | |
Change in fair value and amortization of interest rate cap agreements | | | | | 0.3 | | | 0.4 | |
| | | | | | | |
Total other comprehensive income (loss) before taxes | | | | | 0.3 | | | 0.4 | |
Provision for income tax benefit (expense) related to components of other comprehensive income (loss) | | | | | (0.1) | | | (0.2) | |
Other comprehensive income (loss) | | | | | 0.2 | | | 0.2 | |
Comprehensive income | | | | | $ | 97.5 | | | $ | 54.4 | |
See notes to unaudited condensed consolidated financial statements.
2
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Dollars in millions) |
ASSETS |
Current Assets: | | | |
Cash and cash equivalents | $ | 360.2 | | | $ | 299.4 | |
Receivables, net | 351.5 | | | 401.1 | |
Inventories | 1,198.1 | | | 1,261.2 | |
Other current assets | 150.8 | | | 122.4 | |
Total current assets | 2,060.6 | | | 2,084.1 | |
Property and Equipment, net | 1,488.6 | | | 1,458.8 | |
Goodwill | 423.5 | | | 416.4 | |
Other Intangible Assets, net | 486.6 | | | 480.2 | |
Operating Right-of-Use Lease Assets | 293.6 | | | 293.2 | |
Finance Right-of-Use Lease Assets | 193.7 | | | 179.9 | |
Other Assets | 59.6 | | | 62.5 | |
Total Assets | $ | 5,006.2 | | | $ | 4,975.1 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
Current Liabilities: | | | |
Notes payable - floor plan - trade | $ | 73.8 | | | $ | 89.8 | |
Notes payable - floor plan - non-trade | 1,122.3 | | | 1,178.6 | |
Trade accounts payable | 124.2 | | | 133.3 | |
Operating short-term lease liabilities | 37.0 | | | 36.2 | |
Finance short-term lease liabilities | 52.5 | | | 52.7 | |
| | | |
Other accrued liabilities | 406.3 | | | 350.5 | |
Current maturities of long-term debt | 53.1 | | | 50.6 | |
Total current liabilities | 1,869.2 | | | 1,891.7 | |
Long-Term Debt | 1,493.2 | | | 1,510.7 | |
Other Long-Term Liabilities | 94.1 | | | 96.0 | |
Operating Long-Term Lease Liabilities | 263.8 | | | 264.8 | |
Finance Long-Term Lease Liabilities | 150.9 | | | 135.5 | |
| | | |
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; 67,016,735 shares issued and 28,516,272 shares outstanding at March 31, 2022; 66,501,072 shares issued and 28,692,532 shares outstanding at December 31, 2021 | 0.7 | | | 0.7 | |
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at March 31, 2022 and December 31, 2021 | 0.1 | | | 0.1 | |
Paid-in capital | 795.1 | | | 790.2 | |
Retained earnings | 1,138.9 | | | 1,051.7 | |
Accumulated other comprehensive income (loss) | (1.1) | | | (1.3) | |
Treasury stock, at cost; 38,500,463 Class A Common Stock shares held at March 31, 2022 and 37,808,540 Class A Common Stock shares held at December 31, 2021 | (798.7) | | | (765.0) | |
Total Stockholders’ Equity | 1,135.0 | | | 1,076.4 | |
Total Liabilities and Stockholders’ Equity | $ | 5,006.2 | | | $ | 4,975.1 | |
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 Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| (Dollars and shares in millions, except per share amounts) |
Balance at December 31, 2020 | 65.6 | | | $ | 0.7 | | | (35.8) | | | $ | (671.7) | | | 12.0 | | | $ | 0.1 | | | $ | 767.5 | | | $ | 721.8 | | | $ | (3.6) | | | $ | 814.8 | |
Shares awarded under stock compensation plans | 0.4 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Purchases of treasury stock | — | | | — | | | (1.0) | | | (42.2) | | | — | | | — | | | — | | | — | | | — | | | (42.2) | |
Effect of cash flow hedge instruments, net of tax expense of $0.2 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | |
Restricted stock amortization and stock option amortization | — | | | — | | | — | | | — | | | — | | | — | | | 3.5 | | | — | | | — | | | 3.5 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 54.2 | | | — | | | 54.2 | |
| | | | | | | | | | | | | | | | | | | |
Class A dividends declared ($0.10 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2.9) | | | — | | | (2.9) | |
Class B dividends declared ($0.10 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1.2) | | | — | | | (1.2) | |
Balance at March 31, 2021 | 66.0 | | | $ | 0.7 | | | (36.8) | | | $ | (713.9) | | | 12.0 | | | $ | 0.1 | | | $ | 771.0 | | | $ | 771.9 | | | $ | (3.4) | | | $ | 826.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class A Treasury Stock | | Class B Common Stock | | Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity |
| Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | |
| (Dollars and shares in millions, except per share amounts) |
Balance at December 31, 2021 | 66.5 | | | $ | 0.7 | | | (37.8) | | | $ | (765.0) | | | 12.0 | | | $ | 0.1 | | | $ | 790.2 | | | $ | 1,051.7 | | | $ | (1.3) | | | $ | 1,076.4 | |
Shares awarded under stock compensation plans | 0.5 | | | — | | | — | | | — | | | — | | | — | | | 0.4 | | | — | | | — | | | 0.4 | |
Purchases of treasury stock | — | | | — | | | (0.7) | | | (33.7) | | | — | | | — | | | — | | | — | | | — | | | (33.7) | |
Effect of cash flow hedge instruments, net of tax expense of $0.1 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | |
Restricted stock amortization | — | | | — | | | — | | | — | | | — | | | — | | | 4.5 | | | — | | | — | | | 4.5 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 97.3 | | | — | | | 97.3 | |
| | | | | | | | | | | | | | | | | | | |
Class A dividends declared ($0.25 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (7.1) | | | — | | | (7.1) | |
Class B dividends declared ($0.25 per share) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3.0) | | | — | | | (3.0) | |
Balance at March 31, 2022 | 67.0 | | | $ | 0.7 | | | (38.5) | | | $ | (798.7) | | | 12.0 | | | $ | 0.1 | | | $ | 795.1 | | | $ | 1,138.9 | | | $ | (1.1) | | | $ | 1,135.0 | |
See notes to unaudited condensed consolidated financial statements.
4
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 97.3 | | | $ | 54.2 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization of property and equipment | 27.0 | | | 22.2 | |
| | | |
| | | |
Debt issuance cost amortization | 1.1 | | | 0.8 | |
| | | |
Stock-based compensation expense | 4.5 | | | 3.5 | |
Deferred income taxes | (3.2) | | | (2.9) | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other | (0.2) | | | 0.4 | |
Changes in assets and liabilities that relate to operations: | | | |
Receivables | 53.4 | | | (1.9) | |
Inventories | 72.2 | | | 16.5 | |
Other assets | (11.8) | | | 9.6 | |
Notes payable - floor plan – trade | (16.0) | | | (46.5) | |
Trade accounts payable and other liabilities | 28.2 | | | 34.4 | |
Total adjustments | 155.2 | | | 36.1 | |
Net cash provided by operating activities | 252.5 | | | 90.3 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of businesses, net of cash acquired | (28.4) | | | (8.8) | |
Purchases of land, property and equipment | (58.8) | | | (67.7) | |
Proceeds from sales of property and equipment | 6.9 | | | 0.9 | |
| | | |
Net cash used in investing activities | (80.3) | | | (75.6) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net repayments on notes payable - floor plan - non-trade | (56.3) | | | (51.5) | |
Borrowings on revolving credit facilities | — | | | 4.9 | |
Repayments on revolving credit facilities | — | | | (4.9) | |
| | | |
Debt issuance costs | (0.2) | | | — | |
Principal payments of long-term debt | (15.8) | | | (9.0) | |
Principal payments of long-term lease liabilities | (0.9) | | | (0.9) | |
Purchases of treasury stock | (33.7) | | | (42.2) | |
| | | |
Issuance of shares under stock compensation plans | 0.4 | | | — | |
Dividends paid | (4.9) | | | (4.2) | |
Net cash used in financing activities | (111.4) | | | (107.8) | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 60.8 | | | (93.1) | |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR | 299.4 | | | 170.3 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 360.2 | | | $ | 77.2 | |
| | | |
| | | |
| | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | |
Cash paid (received) during the period for: | | | |
Interest, including amount capitalized | $ | 10.7 | | | $ | 19.1 | |
Income taxes | $ | 0.1 | | | $ | (0.4) | |
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, 2022 and 2021 are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (the “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 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, 2021.
COVID-19 – The COVID-19 pandemic negatively impacted the global economy beginning in the first quarter of 2020 and continued to affect the global economy and supply chain. The impact on the economy initially affected both consumer demand and supply of manufactured goods as many countries around the world and states and municipalities in the U.S. mandated restrictions on citizen movements (i.e., shelter-in-place or stay-at-home orders) or on in-person retail trade or manufacturing activities at physical locations.
The economic impact from the COVID-19 pandemic continues to impact our business. The global automotive supply chain has been significantly disrupted during the pandemic, primarily related to the production of semiconductors and other components that are used in many modern automobiles, in addition to workforce-related production delays and stoppages. As a result, automobile manufacturing is operating at lower than usual production levels, reducing the amount of new vehicle and certain parts inventory available to our dealerships. These inventory constraints, coupled with strong consumer demand and elevated levels of consumer savings, have led to low new and used vehicle inventory and a high new and used vehicle pricing environment, which drove lower retail new vehicle unit sales volumes across the industry.
As a result of the pandemic and related shelter-in-place or stay-at-home orders, we transitioned many of our teammates to remote work arrangements. In situations where a teammate’s role did not permit remote work (e.g., service repair technicians), we implemented staggered work hours, social distancing and other safety 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 were largely able to maintain our back-office operations, financial reporting and internal control processes with minimal disruption or changes in the effectiveness of such processes.
All of our store operations were impacted by the COVID-19 pandemic to varying degrees. As of March 31, 2022, our stores remain subject to both external and self-imposed health and safety policies and practices that may affect the way we sell vehicles and interact with our guests in the future. State and local governmental restrictions on consumer and business activity may be tightened again if conditions related to the pandemic worsen as a result of future coronavirus variants.
Recent Accounting Pronouncements – In March 2020, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Accounting Standards Codification (“ASC”) Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London InterBank Offered Rate (“LIBOR”). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 could be adopted beginning January 1, 2020 and are effective through December 31, 2022. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in ASC Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. We do not currently have any contracts that have been modified, amended or renegotiated to accommodate a transition to a new reference rate, but we will continue to evaluate any such modifications or amendments to our contracts to determine the applicability of this standard on our consolidated financial statements and related financial statement disclosures.
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.
SONIC AUTOMOTIVE, INC.
NOTES TO 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. 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 obligations are satisfied when the associated vehicle is either delivered to a customer and customer acceptance has occurred, over time as the maintenance and repair services are performed, or at the time of wholesale and retail parts sales. 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).
Retrospective finance and insurance revenues (“F&I retro revenues”) are recognized when the product contract has been executed with the end customer and the transaction price is estimated each reporting period based on the expected value method using historical and projected data. 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, as 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 it being probable that the proceeds from the sale will be collected.
The accompanying unaudited condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 include approximately $24.4 million and $34.9 million, respectively, related to contract assets from F&I retro revenues recognition, which are recorded in Receivables, net. Changes in contract assets from December 31, 2021 to March 31, 2022 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, 2021 for further discussion of our revenue recognition policies and processes.
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).
Restatement of Previously Issued Condensed Consolidated Financial Statements – Subsequent to the issuance of the condensed consolidated financial statements as of and for the three months ended March 31, 2022 in our Quarterly Report on Form 10-Q for the first quarter of 2022, we identified an error in the application of ASC Topic 606, Revenue Recognition, related to principal accounting (gross accounting) versus agent accounting (net accounting) for certain fleet transactions from a newly acquired subsidiary. It was determined that we should have applied net accounting to certain fleet transactions where our previously issued condensed consolidated financial statements accounted for the transactions on a gross accounting basis. The result of this error overstated both fleet new vehicles revenues and fleet new vehicles cost of sales, along with the associated subtotals, in our previously issued condensed consolidated statements of operations. There was no impact to other financial statement line items or disclosures, unless related to the items in the table below. The impact on the 2021 consolidated financial statements was immaterial.
We evaluated the effect of the corrections detailed in the tables below on the previously issued condensed consolidated financial statements, both individually and in the aggregate, in accordance with the guidance in ASC Topic 250, Accounting Changes and Error Corrections and concluded that the effect was material to the condensed consolidated financial statements for the three months ended March 31, 2022. The tables below reflect the line items of the Company’s condensed consolidated financial statements that were impacted by the error.
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| As Reported | | Adjustments | | As Restated |
| (In millions) |
Revenues: | | | | | |
Fleet new vehicles | $ | 148.6 | | | $ | (130.4) | | | $ | 18.2 | |
Total new vehicles | $ | 1,499.9 | | | $ | (130.4) | | | $ | 1,369.5 | |
Total vehicles | $ | 3,039.5 | | | $ | (130.4) | | | $ | 2,909.1 | |
Total revenues | $ | 3,586.6 | | | $ | (130.4) | | | $ | 3,456.2 | |
| | | | | |
Cost of sales: | | | | | |
Fleet new vehicles | $ | (147.8) | | | $ | 130.4 | | | $ | (17.4) | |
Total new vehicles | $ | (1,331.4) | | | $ | 130.4 | | | $ | (1,201.0) | |
Total vehicles | $ | (2,821.4) | | | $ | 130.4 | | | $ | (2,691.0) | |
Total cost of sales | $ | (3,015.3) | | | $ | 130.4 | | | $ | (2,884.9) | |
2. Business Acquisitions and Dispositions
We acquired two franchised dealership locations during the three months ended March 31, 2022 for an aggregate gross purchase price (including inventory acquired and subsequently funded by floor plan notes payable) of approximately $28.4 million, including the impact of the RFJ Acquisition post-close adjustment. Of this amount, $13.7 million was related to the acquisition of the two franchised dealerships. The allocation of the $13.7 million aggregate gross purchase price for the acquisitions completed during the three months ended March 31, 2022 included inventory of $4.9 million, property and equipment of $0.1 million, franchise assets of $6.4 million, goodwill of $1.3 million, other assets of $1.1 million and other liabilities of $0.1 million. We did not acquire any businesses during the three months ended March 31, 2021. We did not dispose of any businesses during the three months ended March 31, 2022 and 2021.
RFJ Acquisition
On December 6, 2021 (the “Closing Date”), Sonic completed the acquisition of RFJ Auto Partners, Inc. and its subsidiaries (collectively, “RFJ Auto”). On the Closing Date, RFJ Auto became a direct, wholly owned subsidiary of Sonic (the “RFJ Acquisition”). The RFJ Acquisition was $964.9 million, including a customary post-close adjustment of $14.7 million. The post-close adjustment consisted of additional acquired inventory of $4.3 million, other assets of $3.4 million, goodwill of $1.1 million, and a reduction in other liabilities of $5.9 million.
For further discussion of the RFJ Acquisition, see Note 2, “Business Acquisitions and Dispositions,” to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
3. Inventories
Inventories consist of the following: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In millions) |
New vehicles | $ | 278.2 | | | $ | 273.1 | |
Used vehicles | 730.8 | | | 807.2 | |
Service loaners | 112.5 | | | 106.3 | |
Parts, accessories and other | 76.6 | | | 74.6 | |
Net inventories | $ | 1,198.1 | | | $ | 1,261.2 | |
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment, net consists of the following: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In millions) |
Land | $ | 451.2 | | | $ | 447.4 | |
Buildings and improvements | 1,278.1 | | | 1,240.5 | |
Furniture, fixtures and equipment | 470.1 | | | 451.2 | |
Construction in progress | 57.9 | | | 68.1 | |
Total, at cost | 2,257.3 | | | 2,207.2 | |
Less accumulated depreciation | (768.7) | | | (746.2) | |
Subtotal | 1,488.6 | | | 1,461.0 | |
Less assets held for sale (1) | — | | | (2.2) | |
Property and equipment, net | $ | 1,488.6 | | | $ | 1,458.8 | |
(1)Classified in other current assets in the accompanying unaudited condensed consolidated balance sheets.
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 December 31, 2021 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, 2022 and March 31, 2021.
5. Goodwill and Intangible Assets
The changes in the carrying amount of goodwill for March 31, 2022 and December 31, 2021.
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In millions) |
Carrying Amount of Goodwill: | | | |
Franchised Dealerships Segment | $ | 219.8 | | | 213.5 |
EchoPark Segment | 203.7 | | 202.9 |
Total goodwill (1) | $ | 423.5 | | | $ | 416.4 | |
| | | |
| | | |
| | | |
(1)Net of accumulated impairment losses of $1.1 billion.
The carrying amount of indefinite lived franchise assets was approximately $486.6 million and $480.2 million as of March 31, 2022 and December 31, 2021, respectively. We did not record any impairment charges as of March 31, 2022 or December 31, 2021.
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
Long-term debt consists of the following: | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (In millions) |
2021 Revolving Credit Facility (1) | $ | — | | | $ | — | |
| | | |
| | | |
4.625% Senior Notes due 2029 (the “4.625% Notes”) | 650.0 | | | 650.0 | |
4.875% Senior Notes due 2031 (the “4.875% Notes”) | 500.0 | | | 500.0 | |
2019 Mortgage Facility (2) | 87.3 | | | 90.0 | |
Mortgage notes to finance companies - fixed rate, bearing interest from 2.05% to 7.03% | 202.5 | | | 213.4 | |
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR | 130.5 | | | 132.8 | |
| | | |
| | | |
Subtotal | $ | 1,570.3 | | | $ | 1,586.2 | |
Debt issuance costs | (24.0) | | | (24.9) | |
Total debt | 1,546.3 | | | 1,561.3 | |
Less current maturities | (53.1) | | | (50.6) | |
Long-term debt | $ | 1,493.2 | | | $ | 1,510.7 | |
(1)The interest rate on the 2021 Revolving Credit Facility (as defined below) was 100 basis points above LIBOR at both March 31, 2022 and December 31, 2021.
(2)The interest rate on the 2019 Mortgage Facility (as defined below) was 150 basis points above LIBOR at both March 31, 2022 and December 31, 2021.
2021 Credit Facilities
On April 14, 2021, we entered into an amended and restated syndicated revolving credit facility (the “2021 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2021 Floor Plan Facilities” and, together with the 2021 Revolving Credit Facility, the “2021 Credit Facilities”). The amendment and restatement of the 2021 Credit Facilities extended the scheduled maturity dates to April 14, 2025. On October 8, 2021, we entered into an amendment to the 2021 Credit Facilities (the “Credit Facility Amendment”) to, among other things: (1) increase the aggregate commitments under the 2021 Revolving Credit Facility to the lesser of $350.0 million (which may be increased at the Company’s option up to $400.0 million upon satisfaction of certain conditions) and the applicable revolving borrowing base, and the 2021 Floor Plan Facilities to $2.6 billion (which, under certain conditions, may be increased at the Company’s option up to $2.85 billion that may be allocated between the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility that comprise the 2021 Floor Plan Facilities Plan Facility as the Company requests, with no more than 40% of the aggregate commitments allocated to the commitments under the used vehicle floor plan facility); and (2) permit the issuance of the 4.625% Notes and the 4.875% Notes.
As amended, availability under the 2021 Revolving Credit Facility is calculated as the lesser of $350.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2021 Revolving Credit Facility (the "2021 Revolving Borrowing Base"). The 2021 Revolving Credit Facility may be increase at our option up to $400.0 million upon satisfaction of certain conditions. As of March 31, 2022, the 2021 Revolving Borrowing Base was approximately $286.5 million based on balances as of such date. As of March 31, 2022, we had no outstanding borrowings and approximately $12.5 million in outstanding letters of credit under the 2021 Revolving Credit Facility, resulting in $274.0 million remaining borrowing availability under the 2021 Revolving Credit Facility.
Our obligations under the 2021 Credit 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. As of the dates presented in the accompanying unaudited condensed consolidated financial statements, the amounts outstanding under the 2021 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR. We have agreed under the 2021 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 2021 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2021 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 2021 Credit Facilities permit quarterly cash dividends on our Class A and Class B Common Stock up to $0.25 per share so long as no Event of Default (as defined in the 2021 Credit Facilities) has
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2021 Credit Facilities.
4.625% Notes
On October 27, 2021, we issued $650.0 million in aggregate principal amount of 4.625% Notes, which will mature on November 15, 2029. Sonic used the net proceeds from the issuance of the 4.625% Notes to fund the RFJ Acquisition and to repay existing debt.
The 4.625% Notes were issued under an Indenture, dated as of October 27, 2021 (the “2029 Indenture”), by and among the Company, certain subsidiary guarantors named therein (collectively, the "Guarantors") and U.S. Bank National Association, as trustee (the “trustee”). The 4.625% Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis initially by all of the Company's operating domestic subsidiaries. The non-domestic operating subsidiary that is not a guarantor is considered minor. Under certain circumstances set forth in the 2029 Indenture, the guarantees of the certain subsidiaries of the Company comprising the EchoPark Business (as defined in the 2029 Indenture) may be released. The 2029 Indenture also provides substantial flexibility for the Company to enter into fundamental transactions involving the EchoPark Business. The 2029 Indenture provides that interest on the 4.625% Notes will be payable semi-annually in arrears on May 15 and November 15 of each year beginning May 15, 2022. The 2029 Indenture also contains other restrictive covenants and default provisions common for an issue of senior notes of this nature. The 4.625% Notes are redeemable by the Company under certain circumstances. For further discussion of the 4.625% Notes, see Note 6, “Long-Term Debt,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021.
4.875% Notes
On October 27, 2021, we issued $500.0 million in aggregate principal amount of 4.875% Notes, which will mature on November 15, 2031. Sonic used the net proceeds from the issuance of the 4.875% Notes to fund the RFJ Acquisition and to repay existing debt.
The 4.875% Notes were issued under an Indenture, dated as of October 27, 2021 (the “2031 Indenture”), by and among the Company, the Guarantors and the trustee. The 4.875% Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis initially by all of the Company's operating domestic subsidiaries. The non-domestic operating subsidiary that is not a guarantor is considered minor. Under certain circumstances set forth in the 2031 Indenture, the guarantees of the certain subsidiaries of the Company comprising the EchoPark Business (as defined in the 2031 Indenture) may be released. The 2031 Indenture also provides substantial flexibility for the Company to enter into fundamental transactions involving the Echo-Park Business. The 2031 Indenture provides that interest on the 4.875% Notes will be payable semi-annually in arrears on May 15 and November 15 of each year beginning May 15, 2022. The 2031 Indenture also contains other restrictive covenants and default provisions common for an issue of senior notes of this nature. The 4.875% Notes are redeemable by the Company under certain circumstances. For further discussion of the 4.875% Notes, see Note 6, “Long-Term Debt,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021.
2019 Mortgage Facility
On November 22, 2019, we entered into a delayed draw-term loan credit agreement, which is scheduled to mature on November 22, 2024 (the “2019 Mortgage Facility”). On October 11, 2021, we entered into an amendment to the 2019 Mortgage Facility to permit the issuance of the 4.625% Notes and the 4.875% Notes.
Under the 2019 Mortgage Facility, Sonic has a maximum borrowing limit of $112.2 million, which varies based on the appraised value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraised value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. Based on balances as of March 31, 2022, we had approximately $87.3 million of outstanding borrowings under the 2019 Mortgage Facility, resulting in total remaining borrowing availability of approximately $24.9 million under the 2019 Mortgage Facility.
Amounts outstanding under the 2019 Mortgage Facility bear interest at (1) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to 2.75% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of the last day of the immediately preceding fiscal quarter (the “Performance Grid”); or (2) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid.
For further discussion of the 2019 Mortgage Facility, see Note 6, “Long-Term Debt,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021.
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Notes to Finance Companies
As of March 31, 2022, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 3.62% and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $333.0 million. These mortgage notes require monthly payments of principal and interest through their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2022 and 2033.
Covenants
We have agreed under the 2021 Credit Facilities and the 2019 Mortgage Facility not to pledge any assets to any third parties (other than those explicitly allowed to be pledged by the amended terms of the 2021 Credit Facilities and the 2019 Mortgage Facility), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2021 Credit Facilities and the 2019 Mortgage Facility contain certain negative covenants, including certain covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions.
We were in compliance with the financial covenants under the 2021 Credit Facilities and the 2019 Mortgage Facility as of March 31, 2022. Financial covenants include required specified ratios (as each is defined in the 2021 Credit Facilities and the 2019 Mortgage Facility) of:
| | | | | | | | | | | | | | | | | |
| Covenant |
| Minimum Consolidated Liquidity Ratio | | Minimum Consolidated Fixed Charge Coverage Ratio | | Maximum Consolidated Total Lease Adjusted Leverage Ratio |
Required ratio | 1.05 | | 1.20 | | 5.75 |
March 31, 2022 actual | 1.26 | | 2.66 | | 2.11 |
The 2021 Credit Facilities and the 2019 Mortgage Facility contain events of default, including cross defaults to other material indebtedness, change of control events and other events of default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, we could be required to immediately repay all outstanding amounts under the 2021 Credit Facilities and the 2019 Mortgage Facility.
After giving effect to the applicable restrictions on the payment of dividends under our debt agreements, as of March 31, 2022, we had approximately $413.0 million of net income and retained earnings free of such restrictions. We were in compliance with all restrictive covenants under our debt agreements as of March 31, 2022.
In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2021 Credit Facilities and the 2019 Mortgage Facility with the exception of one additional financial covenant related to the ratio of EBTDAR to Rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of March 31, 2022, the ratio was 13.22 to 1.00.
7. Commitments and Contingencies
Guarantees and Indemnifications
In accordance with the terms of our operating lease agreements, our dealership subsidiaries, acting as lessees, generally agree to indemnify the lessor from certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upon termination of the lease. In addition, we have generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.
In connection with dealership dispositions and facility relocations, certain of our subsidiaries have assigned or sublet to the buyer their interests in real property leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases, including rent payments and repairs to leased property upon termination of the lease, to the extent that the assignee or the sublessee does not perform. In the event an assignee or a sublessee does not perform its obligations, Sonic remains liable for such obligations.
In accordance with the terms of agreements entered into for the sale of our dealerships, we generally agree to indemnify the buyer from certain liabilities and costs arising subsequent to the date of sale, including environmental exposure and
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
exposure resulting from the breach of representations or warranties made in accordance with the agreements. While our exposure with respect to environmental remediation and repairs is difficult to quantify, we did not have any exposure as of March 31, 2022 and had exposure of $4.0 million at December 31, 2021. These indemnifications typically expire within a period of one to three years following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for this contingency was not significant at March 31, 2022.
We also guarantee the floor plan commitments of our 50%-owned joint venture, and the amount of such guarantee was approximately $4.3 million at both March 31, 2022 and December 31, 2021.
Legal Matters
Sonic is involved, and expects to continue to be involved, in various legal and administrative proceedings arising out of the conduct of its business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of Sonic’s business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects.
Included in other accrued liabilities and other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2022 and December 31, 2021 were approximately $1.6 million and $0.3 million, respectively, in reserves that Sonic was holding for pending proceedings. Except as reflected in such reserves, Sonic is currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings.
8. Fair Value Measurements
Assets and liabilities recorded at fair value in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| Fair Value Based on Significant Other Observable Inputs (Level 2) |
| March 31, 2022 | | December 31, 2021 |
| (In millions) |
Assets: | | | |
Cash surrender value of life insurance policies (1) | $ | 38.5 | | | $ | 39.5 | |
| | | |
Total assets | $ | 38.5 | | | $ | 39.5 | |
| | | |
Liabilities: | | | |
| | | |
| | | |
Deferred compensation plan (2) | $ | 23.5 | | | $ | 24.4 | |
Total liabilities | $ | 23.5 | | | $ | 24.4 | |
(1)Included in other assets in the accompanying unaudited condensed consolidated balance sheets.
(2)Included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.
There were no instances during the three months ended March 31, 2022 which required a fair value measurement of assets ordinarily measured at fair value on a non-recurring basis. These assets will be evaluated as of the annual valuation assessment date of October 1, 2022 or as events or changes in circumstances require.
As of March 31, 2022 and December 31, 2021, the fair values of Sonic’s financial instruments, including receivables, notes receivable from finance contracts, notes payable – floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes, approximated their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2022 and December 31, 2021, the fair value and carrying value of Sonic’s significant fixed rate long-term debt were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| (In millions) |
| | | | | | | |
4.875% Notes (1) | $ | 443.8 | | | $ | 500.0 | | | $ | 504.8 | | | $ | 500.0 | |
4.625% Notes (1) | $ | 580.1 | | | $ | 650.0 | | | $ | 655.9 | | | $ | 650.0 | |
| | | | | | | |
| | | | | | | |
(1)As determined by market quotations from similar securities as of March 31, 2022 and December 31, 2021, respectively (Level 2).
For further discussion of Sonic’s fair value measurements, see Note 11, “Fair Value Measurements,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2021.
9. Segment Information
As of March 31, 2022, Sonic had two operating segments: (1) retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle maintenance, warranty and repair services, and arrange finance and insurance products (the “Franchised Dealerships Segment”); and (2) pre-owned vehicle specialty retail locations that provide guests an opportunity to search our nationwide inventory, purchase a pre-owned vehicle, select finance and insurance products and sell their current vehicle to us (the “EchoPark Segment”). Sonic has determined that its operating segments also represent its reportable segments.
The reportable segments identified above are the business activities of Sonic for which discrete financial information is available and for which operating results are regularly reviewed by Sonic’s chief operating decision maker to assess operating performance and allocate resources. Sonic’s chief operating decision maker is a group of three individuals consisting of: (1) the Company’s Chief Executive Officer; (2) the Company’s President; and (3) the Company’s Chief Financial Officer.
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reportable segment financial information for the three months ended March 31, 2022 and 2021 were as follows (as restated, see Note 1, “Summary of Significant Accounting Policies”:
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
| As Restated | | | | | | |
Segment Revenues: | | | | | | | |
Franchised Dealerships Segment revenues: | | | | | | | |
Retail new vehicles | $ | 1,345.7 | | | $ | 1,134.0 | | | | | |
Fleet new vehicles | 18.2 | | | 22.3 | | | | | |
Total new vehicles | 1,363.9 | | | 1,156.3 | | | | | |
Used vehicles | 853.7 | | | 661.5 | | | | | |
Wholesale vehicles | 106.3 | | | 56.2 | | | | | |
Parts, service and collision repair | 380.5 | | | 308.1 | | | | | |
Finance, insurance and other, net | 126.5 | | | 97.6 | | | | | |
Franchised Dealerships Segment revenues | $ | 2,830.9 | | | 2279.7 | | | | |
| | | | | | | |
EchoPark Segment revenues: | | | | | | | |
Retail new vehicles | $ | 5.6 | | | — | | | | | |
Used vehicles | 517.2 | | | 441.4 | | | | |
Wholesale vehicles | 62.4 | | | 18.6 | | | | | |
| | | | | | | |
Finance, insurance and other, net | 40.1 | | | 47.1 | | | | | |
EchoPark Segment revenues | $ | 625.3 | | | $ | 507.1 | | | | | |
| | | | | | | |
Total consolidated revenues | $ | 3,456.2 | | | $ | 2,786.8 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
Segment Income (Loss) (1): | | | | | | | |
Franchised Dealerships Segment | $ | 163.8 | | | $ | 70.6 | | | | | |
EchoPark Segment | (34.9) | | | 2.0 | | | | | |
| | | | | | | |
| | | | | | | |
Income from continuing operations before taxes | $ | 128.9 | | | $ | 72.6 | | | | | |
(1)Segment income (loss) for each segment is defined as income (loss) from continuing operations before taxes and impairment charges.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
Depreciation and Amortization: | | | | | | | |
Franchised Dealerships Segment | $ | 24.9 | | | $ | 20.4 | | | | | |
EchoPark Segment | 5.0 | | | 3.2 | | | | | |
Total depreciation and amortization | $ | 29.9 | | | $ | 23.6 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
Floor Plan Interest Expense: | | | | | | | |
Franchised Dealerships Segment | $ | 3.3 | | | $ | 4.1 | | | | | |
EchoPark Segment | 1.7 | | | 1.0 | | | | | |
Total floor plan interest expense | $ | 5.0 | | | $ | 5.1 | | | | | |
SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
Interest Expense, Other, Net: | | | | | | | |
Franchised Dealerships Segment | $ | 20.0 | | | $ | 10.0 | | | | | |
EchoPark Segment | 0.8 | | | 0.3 | | | | | |
Total interest expense, other, net | $ | 20.8 | | | $ | 10.3 | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
| (In millions) |
Capital Expenditures: | | | | | | | |
Franchised Dealerships Segment | $ | 30.2 | | | $ | 46.2 | | | | | |
EchoPark Segment | 28.6 | | | 21.5 | | | | | |
Total capital expenditures | $ | 58.8 | | | $ | 67.7 | | | | | |
| | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | | | |
| (In millions) | | | | |
Assets: | | | | | | | |
Franchised Dealerships Segment | $ | 3,986.9 | | | $ | 3,934.9 | | | | | |
EchoPark Segment | 659.1 | | | 740.6 | | | | | |
Corporate and other: | | | | | | | |
Cash and cash equivalents | 360.2 | | | 299.4 | | | | | |
| | | | | | | |
| | | | | | | |
Other corporate assets | — | | | 0.2 | | | | | |
Total assets | $ | 5,006.2 | | | $ | 4,975.1 | | | | | |
10. Subsequent Events
Subsequent to March 31, 2021, we repurchased an additional 1.0 million shares of Class A Common Stock at an average price of $42.40, resulting in current remaining availability of approximately $150.0 million.
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes thereto, as well as the consolidated financial statements and related notes thereto, “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Unless otherwise noted, we present the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis. To the extent that we believe a discussion of the differences among reportable segments will enhance a reader’s understanding of our financial condition, cash flows and other changes in financial condition and results of operations, the differences are discussed separately.
Unless otherwise noted, all discussion of increases or decreases are for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The three months ended March 31, 2022 were the first full quarterly period to include the results of the locations acquired in the RFJ Auto Acquisition. The following discussion of Franchised Dealerships Segment new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net, is on a same store basis, except where otherwise noted. All currently operating franchised dealership stores are included within the same store group as of the first full month following the first anniversary of the store’s opening or acquisition. All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market’s opening.
Restatement of Previously Issued Financial Statements
As discussed in Note 1, “Summary of Significant Accounting Policies,” we have restated our previously issued condensed consolidated financial statements for the three months ended March 31, 2022. Accordingly, Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised for the effects of the restatement.
Overview
We are one of the largest automotive retailers in the U.S. (as measured by reported total revenue). As a result of the way we manage our business, we had two reportable segments as of March 31, 2022: (1) the Franchised Dealerships Segment and (2) the EchoPark Segment. For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of March 31, 2022, we operated 111 stores in the Franchised Dealerships Segment and 47 stores in the EchoPark Segment. The Franchised Dealerships Segment consists of 142 new vehicle franchises (representing 29 different brands of cars and light trucks) and 17 collision repair centers in 18 states. As of March 31, 2022, we operated 47 EchoPark stores in 19 states, including 11 Northwest Motorsport pre-owned vehicle stores acquired in the RFJ Acquisition in December 2021. Under our current EchoPark growth plan, we plan to open 25 additional EchoPark stores annually through 2025 as we build out a nationwide EchoPark distribution network expected to reach 90% of the U.S. population by 2025.
The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our guests. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our guests in pre-owned vehicle specialty retail locations. Our EchoPark business generally operates independently from our franchised dealerships business (except for certain shared back-office functions and corporate overhead costs).
Executive Summary
Retail Automotive Industry Performance
The U.S. retail automotive industry’s total new vehicle (retail and fleet combined) seasonally adjusted annual rate of sales (“SAAR”) was approximately 14.2 million for the three months ended March 31, 2022, a decrease 16.0%, compared to 16.9 million vehicles for the three months ended March 31, 2021, according to data from Bloomberg Finance L.P., provided by Stephens Inc. For 2022, analysts’ industry expectation for the new vehicle SAAR ranges from 14.5 million vehicles (a 3.3% decrease compared to 2021) to 16.0 million vehicles (an increase of 6.7% compared to 2021). We estimate the 2022 new vehicle SAAR will be between 15.0 million vehicles (flat compared to 2021) and 15.5 million vehicles (an increase of 3.3% compared to 2021). The ongoing effects of the COVID-19 pandemic, availability of new and used vehicle inventory, interest
SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
rates, changes in consumer confidence, availability of consumer financing, manufacturer inventory production levels, incentive levels from automotive manufacturers or shifts in such levels, or timing of consumer demand as a result of natural disasters or other unforeseen circumstances could cause the actual 2022 total new vehicle SAAR to vary from our expectations. Many factors, including brand and geographic concentrations as well as the industry sales mix between retail and fleet new vehicle unit sales volume, have caused our past results to differ from the industry’s overall trend. Our new vehicle sales strategy focuses on our retail new vehicle sales (as opposed to fleet new vehicle sales) and, as a result, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle SAAR (which excludes fleet new vehicle sales). According to the Power Information Network (“PIN”) from J.D. Power, industry retail new vehicle SAAR was 12.7 million vehicles for the three months ended March 31, 2022, a decrease of 11.2% from 14.3 million vehicles in the prior year period.
Impact of COVID-19 and Supply Chain Disruptions