Annual report pursuant to Section 13 and 15(d)

Intangible Assets and Goodwill

v3.22.4
Intangible Assets and Goodwill - USD ($)
$ in Thousands
 12 Months Ended
Dec. 31, 2022
Dec. 31, 2021
Goodwill and Intangible Assets Disclosure [Abstract]    
Intangible Assets and Goodwill Goodwill and Intangible Assets
Pursuant to the applicable accounting pronouncements, we are required to evaluate the recoverability of our goodwill and indefinite lived intangible assets at least annually (as of October 1 of each year) or more frequently if indications of impairment exist. We utilized the DCF method, using unobservable inputs (Level 3) to estimate Sonic’s enterprise value as of October 1, 2022 and reconciled the discounted cash flows to Sonic’s market capitalization, using quoted market price inputs (Level 1). The significant assumptions in our DCF model include projected revenues and projected operating margins, a discount rate (and estimates in the discount rate inputs), control premium factors and residual growth rates. Based on our evaluation as of October 1, 2022, we determined the carrying value of the goodwill related to our EchoPark reporting unit was greater than the fair value of the reporting unit. As a result, we recorded a non-cash pre-tax goodwill impairment charge of $202.9 million to reduce the carrying value to fair value as of December 31, 2022. After the effect of impairment charges, the carrying value of our goodwill at our franchised dealerships reporting unit and powersports reporting unit totaled approximately $231.0 million at December 31, 2022, and is included in goodwill in the accompanying consolidated balance sheet as of such date.
In evaluating the recoverability of our indefinite lived franchise assets, we utilized a multi-period excess earnings method (“MPEEM”) model using unobservable inputs (Level 3) to estimate the fair value of the franchise assets for each of our franchises with recorded franchise assets. The significant assumptions in our MPEEM model include projected revenue, projected operating margins, a discount rate (and estimates in the discount rate inputs) and residual growth rates. As a result of our impairment testing as of October 1, 2022, we determined that several of our franchise assets’ fair values did not exceed the carrying values, resulting in a non-cash pre-tax franchise asset impairment charge of $116.4 million to reduce the carrying value to fair value as of December 31, 2022. After the effect of impairment charges, the carrying value of our franchise assets totaled approximately $396.7 million at December 31, 2022, and is included in other intangible assets, net in the accompanying consolidated balance sheet as of such date.
The changes in the carrying amount of franchise assets and goodwill for 2022 and 2021 were as follows:
 
Franchise
Assets
Net
Goodwill
  
(In millions)
Balance at December 31, 2020 $ 64.3  $ 214.0  (1)
Additions through current year acquisitions 415.9  204.0  (2)
Reductions from dispositions —  (0.2)
Prior year acquisition allocations —  (1.4)
Balance at December 31, 2021 $ 480.2  $ 416.4  (1)
Additions through current year acquisitions 33.1  14.3 
Reductions from dispositions (0.2) — 
Reductions from impairment (116.4) (202.9)
Prior year acquisition allocations —  3.2 
Balance at December 31, 2022 $ 396.7  $ 231.0  (3)
(1)Net of accumulated impairment losses of $1.1 billion.
(2)Goodwill includes goodwill in connection with the RFJ Acquisition of approximately $123.4 million and $52.7 million allocated to the EchoPark Segment and the Franchised Dealership Segment, respectively.
(3)Net of accumulated impairment losses of $1.3 billion.
 
Acquired RFJ Goodwill Allocated to EchoPark $ 177,100 $ 123,400
Acquired RFJ Goodwill Allocated to Franchise   $ 52,700