Sonic Automotive, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Business Acquisitions and Dispositions (Tables)

Business Acquisitions and Dispositions (Tables)

12 Months Ended

Dec. 31, 2022

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Revenues and Other Activities Associated with Disposed Dealerships That Remain in Continuing Operations

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


	Year Ended December 31,
	2022		2021		2020
	(In millions)
Income (loss) from operations before taxes and items below	$	0.2	$	(2.2)	$	(2.6)
Gain (loss) on disposal of dealerships (1)	—		2.3		3.1
Lease exit accrual adjustments and charges	—		0.4		—

Income (loss) before taxes	0.2		0.5		0.5
Total revenues	$	—	$	25.5	$	52.1

Number of Powersports Stores Acquired

Business Acquisitions and Dispositions

2. Business Acquisitions and Dispositions

Acquisitions

During 2022, we acquired two businesses in our Franchised Dealerships Segment and two businesses (consisting of eight locations) in our Powersports Segment for an aggregate gross purchase price (including inventory acquired and subsequently funded by floor plan notes payable) of approximately $102.3 million, including a $14.7 million impact of a post-close adjustment related to the RFJ Acquisition completed in December 2021. The allocation of the approximately $87.6 million aggregate gross purchase price for the acquisitions completed during 2022 included inventory of approximately $31.0 million, property and equipment of approximately $0.5 million, franchise assets of approximately $33.2 million, goodwill of approximately $14.1 million, real estate of approximately $8.1 million, other assets of approximately $1.1 million, and liabilities of approximately $0.4 million. During 2021, we acquired 27 franchised dealership businesses and 14 pre-owned businesses for approximately $1,018.9 million. During 2020, we acquired two pre-owned businesses for approximately $19.7 million.

Results of acquired dealerships are included in our accompanying Consolidated Statements of Income commencing on the date of acquisition. Our acquisitions are accounted for such that the assets acquired and liabilities assumed are recognized at their acquisition date fair values, with any excess of the consideration transferred over the estimated fair values of the identifiable net assets acquired recorded as goodwill. Goodwill is an asset representing operational synergies and future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. The fair value of our manufacturer franchise rights are determined as of the acquisition date, by discounting the projected cash flows specific to each franchise. This analysis includes projected revenue, projected operating margin, a discount rates (and estimates in the discount rate inputs) and residual growth rates.

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 merged with and into a wholly owned subsidiary of Sonic, with RFJ Auto surviving the merger and becoming a direct, wholly owned subsidiary of Sonic (the “RFJ Acquisition”). In connection with the RFJ Acquisition, Sonic acquired RFJ Auto, which collectively have 33 automotive retail locations in seven states and a portfolio of 16 automotive brands. Beginning on the Closing Date, the results of 22 stores acquired in the RFJ Acquisition were included in our Franchised Dealerships Segment and 11 Northwest Motorsport pre-owned vehicle stores acquired in the RFJ Acquisition were included in our EchoPark Segment. The aggregate consideration for the RFJ Acquisition was approximately $964.9 million, including a $14.7 million impact of a post-close adjustment, of which approximately $222.4 million was funded from borrowings under Sonic’s syndicated new and used vehicle floor plan credit facilities.

Under the acquisition method of accounting, the purchase price is allocated to the tangible and intangible assets acquired and liabilities assumed based on information currently available. The following table summarizes the allocation of the purchase price based on final assessment of fair value:


Summary of Assets Acquired and Liabilities Assumed	(In millions)
Cash	$	9.4
Receivables	31.4
Inventories	253.5
Other current assets	7.8
Property and equipment	129.7
Goodwill	177.1
Franchise assets	398.2
Total assets acquired	$	1,007.1
Trade accounts payable	(5.3)
Other accrued liabilities	(36.9)
Total liabilities assumed	$	(42.2)
Net assets acquired	$	964.9

We recorded approximately $0.6 million and $3.0 million of acquisition related costs during the year ended December 31, 2022 and December 31, 2021, respectively, which are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

The accompanying consolidated statements of operations include revenue and net income attributable to RFJ Auto from December 6, 2021 through December 31, 2021 of approximately $215.7 million and $7.5 million, respectively.

The following unaudited pro forma summary presents consolidated information as if the acquisition of RFJ Auto had occurred on January 1, 2020:


	Year Ended December 31,
	2021		2020
	(In millions)
Revenue	$	15,408.7	$	12,526.0
Net income	$	393.4	$	(42.9)

Dispositions

We did not dispose of any businesses in 2022. We disposed of one luxury franchised dealership and terminated two mid-line import franchises in 2021, which generated net cash from dispositions of approximately $6.6 million. We disposed of one mid-line import franchised dealership and terminated two luxury franchises in 2020, which generated net cash from dispositions of approximately $9.6 million. In conjunction with dealership dispositions, we have agreed to indemnify the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but which may or may not have been known at the time of sale, including environmental liabilities and liabilities resulting from the breach of representations or warranties made under the agreements. See Note 12, “Commitments and Contingencies,” for further discussion.

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


	Year Ended December 31,
	2022		2021		2020
	(In millions)
Income (loss) from operations before taxes and items below	$	0.2	$	(2.2)	$	(2.6)
Gain (loss) on disposal of dealerships (1)	—		2.3		3.1
Lease exit accrual adjustments and charges	—		0.4		—

Income (loss) before taxes	0.2		0.5		0.5
Total revenues	$	—	$	25.5	$	52.1

(1)Included in selling, general and administrative expenses in the accompanying consolidated statements of operations.

In the ordinary course of business, we evaluate our dealership franchises for possible disposition based on various strategic and performance criteria. As of December 31, 2022, we did not have any dealerships classified as held for sale.