UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
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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)
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Delaware |
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56-2010790 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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4401 Colwick Road Charlotte, North Carolina |
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28211 |
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(Address of principal executive offices) |
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(Zip Code) |
(704) 566-2400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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☐ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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Emerging growth company |
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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 July 25, 2017, there were 31,832,131 shares of Class A common stock and 12,029,375 shares of Class B common stock outstanding.
Uncertainty of Forward-Looking Statements and Information
This Quarterly Report on Form 10-Q contains, and written or oral statements made from time to time by us or by our authorized officers may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our future objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, results and events, and can generally be identified by words such as “may,” “will,” “should,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee” and other similar words or phrases.
These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and elsewhere in this report, as well as:
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the number of new and used vehicles sold in the United States as compared to our expectations and the expectations of the market; |
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our ability to generate sufficient cash flows or obtain additional financing to fund our EchoPark expansion, our One Sonic-One Experience initiative, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities; |
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our business and growth strategies, including, but not limited to, our EchoPark initiative and our One Sonic-One Experience initiative; |
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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; |
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our relationships with manufacturers, which may affect our ability to obtain desirable new vehicle models in inventory or complete additional acquisitions; |
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adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or EchoPark stores; |
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changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements and environmental laws; |
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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; |
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high competition in the automotive retailing industry, which not only creates pricing pressures on the products and services we offer, but also on businesses we may seek to acquire; |
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our ability to successfully integrate potential future acquisitions; and |
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the rate and timing of overall economic recovery or decline. |
These forward-looking statements speak only as of the date of this report or when made, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission.
SONIC AUTOMOTIVE, INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017
TABLE OF CONTENTS
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Item 1. |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
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PART I – FINANCIAL INFORMATION
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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(Dollars and shares in thousands, except per share amounts) |
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Revenues: |
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New vehicles |
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$ |
1,275,069 |
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$ |
1,286,464 |
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$ |
2,447,001 |
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$ |
2,451,034 |
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Used vehicles |
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641,891 |
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622,186 |
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1,276,364 |
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1,220,540 |
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Wholesale vehicles |
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40,765 |
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38,245 |
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87,076 |
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82,620 |
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Total vehicles |
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1,957,725 |
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1,946,895 |
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3,810,441 |
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3,754,194 |
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Parts, service and collision repair |
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361,113 |
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351,329 |
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713,156 |
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697,384 |
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Finance, insurance and other, net |
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86,908 |
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84,088 |
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169,971 |
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165,361 |
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Total revenues |
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2,405,746 |
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2,382,312 |
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4,693,568 |
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4,616,939 |
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Cost of Sales: |
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New vehicles |
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(1,212,547 |
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(1,220,598 |
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(2,326,201 |
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(2,326,744 |
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Used vehicles |
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(601,856 |
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(585,217 |
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(1,195,497 |
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(1,143,041 |
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Wholesale vehicles |
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(42,682 |
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(40,084 |
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(90,163 |
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(85,537 |
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Total vehicles |
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(1,857,085 |
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(1,845,899 |
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(3,611,861 |
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(3,555,322 |
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Parts, service and collision repair |
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(188,043 |
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(183,108 |
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(370,742 |
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(363,162 |
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Total cost of sales |
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(2,045,128 |
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(2,029,007 |
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(3,982,603 |
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(3,918,484 |
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Gross profit |
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360,618 |
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353,305 |
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710,965 |
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698,455 |
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Selling, general and administrative expenses |
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(293,931 |
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(277,204 |
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(586,165 |
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(561,580 |
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Impairment charges |
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(2,605 |
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(151 |
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(3,115 |
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(151 |
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Depreciation and amortization |
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(21,911 |
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(18,905 |
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(43,065 |
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(37,374 |
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Operating income (loss) |
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42,171 |
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57,045 |
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78,620 |
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99,350 |
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Other income (expense): |
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Interest expense, floor plan |
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(9,144 |
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(6,690 |
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(17,531 |
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(13,126 |
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Interest expense, other, net |
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(12,764 |
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(12,205 |
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(26,172 |
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(24,544 |
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Other income (expense), net |
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7 |
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6 |
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(14,495 |
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110 |
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Total other income (expense) |
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(21,901 |
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(18,889 |
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(58,198 |
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(37,560 |
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Income (loss) from continuing operations before taxes |
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20,270 |
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38,156 |
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20,422 |
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61,790 |
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Provision for income taxes for continuing operations - benefit (expense) |
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(7,956 |
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(15,113 |
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(8,128 |
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(24,283 |
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Income (loss) from continuing operations |
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12,314 |
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23,043 |
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12,294 |
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37,507 |
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Discontinued operations: |
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Income (loss) from discontinued operations before taxes |
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(301 |
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(362 |
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(1,168 |
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(100 |
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Provision for income taxes for discontinued operations - benefit (expense) |
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119 |
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141 |
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465 |
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39 |
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Income (loss) from discontinued operations |
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(182 |
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(221 |
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(703 |
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(61 |
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Net income (loss) |
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$ |
12,132 |
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$ |
22,822 |
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$ |
11,591 |
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$ |
37,446 |
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Basic earnings (loss) per common share: |
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Earnings (loss) per share from continuing operations |
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$ |
0.28 |
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$ |
0.50 |
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$ |
0.27 |
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$ |
0.81 |
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Earnings (loss) per share from discontinued operations |
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(0.01 |
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- |
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(0.01 |
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- |
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Earnings (loss) per common share |
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$ |
0.27 |
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$ |
0.50 |
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$ |
0.26 |
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$ |
0.81 |
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Weighted average common shares outstanding |
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44,570 |
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45,731 |
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44,680 |
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46,340 |
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Diluted earnings (loss) per common share: |
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Earnings (loss) per share from continuing operations |
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$ |
0.27 |
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$ |
0.50 |
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$ |
0.27 |
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$ |
0.81 |
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Earnings (loss) per share from discontinued operations |
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- |
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- |
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(0.01 |
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(0.01 |
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Earnings (loss) per common share |
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$ |
0.27 |
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$ |
0.50 |
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$ |
0.26 |
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$ |
0.80 |
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Weighted average common shares outstanding |
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44,810 |
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45,924 |
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44,976 |
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46,523 |
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Dividends declared per common share |
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$ |
0.05 |
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$ |
0.05 |
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$ |
0.10 |
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$ |
0.10 |
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See notes to condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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(In thousands) |
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Net income (loss) |
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$ |
12,132 |
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$ |
22,822 |
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$ |
11,591 |
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$ |
37,446 |
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Other comprehensive income (loss) before taxes: |
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Change in fair value of interest rate swap agreements |
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42 |
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(2,798 |
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2,144 |
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(7,676 |
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Provision for income tax benefit (expense) related to components of other comprehensive income (loss) |
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(16 |
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1,063 |
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(815 |
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2,916 |
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Other comprehensive income (loss) |
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26 |
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(1,735 |
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1,329 |
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(4,760 |
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Comprehensive income (loss) |
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$ |
12,158 |
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$ |
21,087 |
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$ |
12,920 |
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$ |
32,686 |
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See notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, |
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December 31, |
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2017 |
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2016 |
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(Dollars in thousands) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
4,380 |
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$ |
3,108 |
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Receivables, net |
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289,820 |
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430,242 |
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Inventories |
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1,622,338 |
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1,570,701 |
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Other current assets |
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43,622 |
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26,993 |
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Total current assets |
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1,960,160 |
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2,031,044 |
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Property and Equipment, net |
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1,087,369 |
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1,010,380 |
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Goodwill |
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471,493 |
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472,437 |
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Other Intangible Assets, net |
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79,911 |
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80,233 |
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Other Assets |
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46,223 |
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45,242 |
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Total Assets |
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$ |
3,645,156 |
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$ |
3,639,336 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Notes payable - floor plan - trade |
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$ |
802,255 |
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$ |
850,537 |
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Notes payable - floor plan - non-trade |
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679,075 |
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675,353 |
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Trade accounts payable |
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123,010 |
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117,740 |
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Accrued interest |
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11,924 |
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13,265 |
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Other accrued liabilities |
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221,389 |
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236,982 |
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Current maturities of long-term debt |
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67,231 |
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43,003 |
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Total current liabilities |
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1,904,884 |
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1,936,880 |
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Long-Term Debt |
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887,327 |
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839,675 |
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Other Long-Term Liabilities |
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63,037 |
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61,170 |
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Deferred Income Taxes |
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76,498 |
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76,447 |
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Commitments and Contingencies |
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Stockholders’ Equity: |
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Class A convertible preferred stock, none issued |
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- |
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- |
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Class A common stock, $0.01 par value; 100,000,000 shares authorized; 63,455,509 shares issued and 31,832,131 shares outstanding at June 30, 2017; 62,967,061 shares issued and 32,703,865 shares outstanding at December 31, 2016 |
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635 |
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630 |
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Class B common stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at June 30, 2017 and December 31, 2016 |
|
|
121 |
|
|
|
121 |
|
|
Paid-in capital |
|
|
727,459 |
|
|
|
721,695 |
|
|
Retained earnings |
|
|
548,242 |
|
|
|
541,146 |
|
|
Accumulated other comprehensive income (loss) |
|
|
(933 |
) |
|
|
(2,262 |
) |
|
Treasury stock, at cost; 31,623,378 Class A common stock shares held at June 30, 2017 and 30,263,196 Class A common stock shares held at December 31, 2016 |
|
|
(562,114 |
) |
|
|
(536,166 |
) |
|
Total Stockholders’ Equity |
|
|
713,410 |
|
|
|
725,164 |
|
|
Total Liabilities and Stockholders’ Equity |
|
$ |
3,645,156 |
|
|
$ |
3,639,336 |
|
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class A |
|
|
Class B |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|||||||||||||||||
|
|
|
Common Stock |
|
|
Treasury Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders’ |
|
|||||||||||||||||||
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Equity |
|
||||||||||
|
|
|
(In thousands) |
|
|||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2016 |
|
|
62,967 |
|
|
$ |
630 |
|
|
|
(30,263 |
) |
|
$ |
(536,166 |
) |
|
|
12,029 |
|
|
$ |
121 |
|
|
$ |
721,695 |
|
|
$ |
541,146 |
|
|
$ |
(2,262 |
) |
|
$ |
725,164 |
|
|
Shares awarded under stock compensation plans |
|
|
489 |
|
|
|
5 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
- |
|
|
|
46 |
|
|
Purchases of treasury stock |
|
|
- |
|
|
|
- |
|
|
|
(1,360 |
) |
|
|
(25,948 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(25,948 |
) |
|
Change in fair value of interest rate swap agreements, net of tax expense of $815 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,329 |
|
|
|
1,329 |
|
|
Restricted stock amortization |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,723 |
|
|
|
- |
|
|
|
- |
|
|
|
5,723 |
|
|
Net income (loss) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
11,591 |
|
|
|
- |
|
|
|
11,591 |
|
|
Dividends declared |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,495 |
) |
|
|
- |
|
|
|
(4,495 |
) |
|
Balance at June 30, 2017 |
|
|
63,456 |
|
|
$ |
635 |
|
|
|
(31,623 |
) |
|
$ |
(562,114 |
) |
|
|
12,029 |
|
|
$ |
121 |
|
|
$ |
727,459 |
|
|
$ |
548,242 |
|
|
$ |
(933 |
) |
|
$ |
713,410 |
|
See notes to condensed consolidated financial statements.
4
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Six Months Ended June 30, |
|
|||||
|
|
|
2017 |
|
|
2016 |
|
||
|
|
|
(In thousands) |
|
|||||
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,591 |
|
|
$ |
37,446 |
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment |
|
|
43,062 |
|
|
|
37,371 |
|
|
Provision for bad debt expense |
|
|
495 |
|
|
|
248 |
|
|
Other amortization |
|
|
325 |
|
|
|
325 |
|
|
Debt issuance cost amortization |
|
|
1,193 |
|
|
|
1,250 |
|
|
Debt discount amortization, net of premium amortization |
|
|
99 |
|
|
|
150 |
|
|
Stock-based compensation expense |
|
|
5,723 |
|
|
|
5,634 |
|
|
Deferred income taxes |
|
|
182 |
|
|
|
11,192 |
|
|
Net distributions from equity investee |
|
|
190 |
|
|
|
35 |
|
|
Asset impairment charges |
|
|
3,115 |
|
|
|
151 |
|
|
Loss (gain) on disposal of dealerships and property and equipment |
|
|
(67 |
) |
|
|
(149 |
) |
|
Loss (gain) on exit of leased dealerships |
|
|
1,827 |
|
|
|
(139 |
) |
|
(Gain) loss on retirement of debt |
|
|
14,607 |
|
|
|
- |
|
|
Changes in assets and liabilities that relate to operations: |
|
|
|
|
|
|
|
|
|
Receivables |
|
|
144,029 |
|
|
|
70,389 |
|
|
Inventories |
|
|
(51,637 |
) |
|
|
9,365 |
|
|
Other assets |
|
|
(19,837 |
) |
|
|
46,560 |
|
|
Notes payable - floor plan - trade |
|
|
(48,282 |
) |
|
|
(106,336 |
) |
|
Trade accounts payable and other liabilities |
|
|
(13,732 |
) |
|
|
(6,773 |
) |
|
Total adjustments |
|
|
81,292 |
|
|
|
69,273 |
|
|
Net cash provided by (used in) operating activities |
|
|
92,883 |
|
|
|
106,719 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Purchases of land, property and equipment |
|
|
(121,222 |
) |
|
|
(108,970 |
) |
|
Proceeds from sales of property and equipment |
|
|
291 |
|
|
|
887 |
|
|
Net cash provided by (used in) investing activities |
|
|
(120,931 |
) |
|
|
(108,083 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings on notes payable - floor plan - non-trade |
|
|
3,722 |
|
|
|
29,915 |
|
|
Borrowings on revolving credit facilities |
|
|
44,017 |
|
|
|
155,208 |
|
|
Repayments on revolving credit facilities |
|
|
(44,017 |
) |
|
|
(159,411 |
) |
|
Proceeds from issuance of long-term debt |
|
|
282,458 |
|
|
|
76,409 |
|
|
Debt issuance costs |
|
|
(4,512 |
) |
|
|
(293 |
) |
|
Principal payments and repurchase of long-term debt |
|
|
(11,051 |
) |
|
|
(9,633 |
) |
|
Repurchase of debt securities |
|
|
(210,914 |
) |
|
|
- |
|
|
Purchases of treasury stock |
|
|
(25,948 |
) |
|
|
(87,504 |
) |
|
Income tax benefit (expense) associated with stock compensation plans |
|
|
- |
|
|
|
(364 |
) |
|
Issuance of shares under stock compensation plans |
|
|
46 |
|
|
|
6 |
|
|
Dividends paid |
|
|
(4,481 |
) |
|
|
(4,175 |
) |
|
Net cash provided by (used in) financing activities |
|
|
29,320 |
|
|
|
158 |
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
1,272 |
|
|
|
(1,206 |
) |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
3,108 |
|
|
|
3,625 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
4,380 |
|
|
$ |
2,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Change in fair value of cash flow interest rate swap agreements (net of tax expense of $815 |
|
|
|
|
|
|
|
|
|
and benefit of $2,916 in the six months ended June 30, 2017 and 2016, respectively) |
|
$ |
1,329 |
|
|
$ |
(4,760 |
) |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
Cash paid (received) during the period for: |
|
|
|
|
|
|
|
|
|
Interest, including amount capitalized |
|
$ |
44,897 |
|
|
$ |
37,576 |
|
|
Income taxes |
|
$ |
12,664 |
|
|
$ |
10,875 |
|
See notes to condensed consolidated financial statements.
5
SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation – The accompanying condensed consolidated financial statements of Sonic Automotive, Inc. and its wholly owned subsidiaries (“Sonic,” the “Company,” “we,” “us” and “our”) for the three and six months ended June 30, 2017 and 2016 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements reflect, in the opinion of management, all material normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The operating results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year or future interim periods, because the first quarter normally contributes less operating profit than the second, third and fourth quarters. These interim financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2016.
Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 to amend the accounting guidance on revenue recognition. The amendments in this ASU are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments in this ASU must be applied using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). This ASU is effective for reporting periods beginning after December 15, 2017. Earlier application is permitted only as of reporting periods beginning after December 15, 2016. Sonic plans to adopt this ASU effective January 1, 2018 and anticipates adopting a full retrospective transition approach. While management is still evaluating the specific financial statement impact and quantitative and qualitative disclosure impact of the provisions of this ASU, based on preliminary analysis, management expects similar performance obligations to result under this ASU as compared with deliverables and separate units of accounting currently identified. As a result, management expects the amounts and timing of revenue recognition to generally remain the same.
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that leases are classified as either finance or operating leases, a right-of-use asset and lease liability is recognized in the statement of financial position, and repayments are classified within operating activities in the statement of cash flows. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). Sonic plans to adopt this ASU effective January 1, 2019. While management is still evaluating the impact of adopting the provisions of this ASU, management expects that upon adoption of this ASU, the presentation of certain items in Sonic’s consolidated financial position, cash flows and other disclosures will be materially impacted, primarily due to the recognition of a right-of-use asset and an associated liability and a change in the timing and classification of certain items in Sonic’s results of operations as a result of the derecognition of the lease liability.
In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based payment transactions. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 (early adoption is permitted). Sonic adopted this ASU effective January 1, 2017. Upon adoption of this ASU, interim period and annual income tax expense is affected by stock option exercises and restricted stock and restricted stock unit vesting activity, potentially creating volatility in Sonic’s effective income tax rate from period to period. See the heading “Income Tax Expense” below for further discussion of the impact of the adoption of this ASU on Sonic’s effective income tax rate for the three and six months ended June 30, 2017.
In August 2016, the FASB issued ASU 2016-15 related to the classification of certain cash receipts and cash payments on the statement of cash flows. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 (early adoption is permitted). Sonic plans to adopt this ASU effective January 1, 2018. Upon adoption of this ASU, the presentation of certain items in Sonic’s cash flows and other disclosures may be impacted.
Principles of Consolidation – All of Sonic’s subsidiaries are wholly owned and consolidated in the accompanying condensed consolidated financial statements, except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
6
SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lease Exit Accruals – Lease exit accruals relate to facilities Sonic has ceased using in its operations that remain subject to a current lease agreement. The accruals represent the present value of the lease payments, net of estimated or actual sublease proceeds, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. These situations could include the relocation of an existing facility or the sale of a dealership when the buyer will not be subleasing the property for either the remaining term of the lease or for an amount of rent equal to Sonic’s obligation under the lease, or situations in which a store is closed as a result of the associated franchise being terminated by Sonic or the manufacturer and no other operations continue on the leased property. See Note 12, “Commitments and Contingencies,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2016 for further discussion.
A summary of the activity of these operating lease exit accruals consists of the following:
|
|
|
(In thousands) |
|
|
|
Balance at December 31, 2016 |
|
$ |
9,790 |
|
|
Lease exit expense (1) |
|
|
1,827 |
|
|
Payments (2) |
|
|
(1,877 |
) |
|
Other (3) |
|
|
(1,377 |
) |
|
Balance at June 30, 2017 |
|
$ |
8,363 |
|
|
(1) |
Expense of approximately $1.1 million is recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of income and expense of approximately $0.7 million is recorded in income (loss) from discontinued operations before taxes in the accompanying condensed consolidated statements of income. |
|
(2) |
Amount is recorded as an offset to rent expense, with approximately $0.4 million recorded in selling, general and administrative expenses in the accompanying condensed consolidated statements of income and approximately $1.5 million recorded in income (loss) from discontinued operations before taxes in the accompanying condensed consolidated statements of income. |
|
(3) |
Amount represents the cash settlement of accruals related to certain deferred maintenance costs and other liabilities related to lease termination. |
Income Tax Expense – The overall effective tax rate from continuing operations was 39.3% and 39.8% for the three and six months ended June 30, 2017, respectively, and was 39.6% and 39.3% for the three and six months ended June 30, 2016, respectively. Income tax expense for the three and six months ended June 30, 2017 includes a benefit of approximately $0.2 million and $0.5 million, respectively, as a result of the adoption of ASU 2016-09 discussed above. Sonic’s effective tax rate varies from year to year based on the distribution of taxable income between states in which Sonic operates and other tax adjustments. Sonic expects the effective tax rate in future periods to fall within a range of 38.0% to 40.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets or discrete tax adjustments.
2. Business Acquisitions and Dispositions
Sonic did not acquire or dispose of any franchises during the three and six months ended June 30, 2017 and 2016.
Revenues and other activities associated with dealerships classified as discontinued operations were as follows:
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
||||||||||
|
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
|
||||
|
|
|
(In thousands) |
|
|
|||||||||||||
|
Income (loss) from operations |
|
$ |
(162 |
) |
|
$ |
(135 |
) |
|
$ |
(441 |
) |
|
$ |
(327 |
) |
|