sah-20200930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________

FORM 10-Q

______________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ 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 October 28, 2020, there were 30,020,591 shares of the registrant’s Class A Common Stock and 12,029,375 shares of the registrant’s Class B Common Stock outstanding.

UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

This Quarterly Report on Form 10-Q contains, and written or oral statements made from time to time by us or by our authorized officers may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address our future objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, results and events, and can generally be identified by words such as “may,” “will,” “should,” “could,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee” and other similar words or phrases.

These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and in “Item 1A. Risk Factors” of this report and elsewhere herein, as well as:

•the number of new and used vehicles sold in the United States as compared to our expectations and the expectations of the market;

•our ability to generate sufficient cash flows or to obtain additional financing to fund our EchoPark expansion, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities;

•our business and growth strategies, including, but not limited to, our EchoPark store operations;

•the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives vehicle manufacturers offer and their ability to design, manufacture, deliver and market their vehicles successfully;

•our relationships with manufacturers, which may affect our ability to obtain desirable new vehicle models in inventory or to complete additional acquisitions or dispositions;

•the adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or EchoPark stores;

•changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements and environmental laws;

•changes in vehicle and parts import quotas, duties, tariffs or other restrictions;

•general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level of consumer spending and consumer credit availability;

•high levels of competition in the retail automotive industry, which not only create pricing pressures on the products and services we offer, but also on businesses we may seek to acquire;

•our ability to successfully integrate potential future acquisitions;

•the rate and timing of overall economic expansion or contraction; and

•the severity and duration of the COVID-19 pandemic and the actions taken by vehicle manufacturers, governmental authorities, businesses or consumers in response to the pandemic, including in response to a worsening or “second wave” of the pandemic.

These forward-looking statements speak only as of the date of this report or when made, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission.

SONIC AUTOMOTIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Statements of Operations	1
	Condensed Consolidated Statements of Comprehensive Operations	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	73
PART II – OTHER INFORMATION		74
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 6.	Exhibits	77
SIGNATURES		79

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars and shares in thousands, except per share amounts)
Revenues:
New vehicles	$	1,098,302	$	1,258,018	$	2,957,794	$	3,529,106
Used vehicles	946,028		914,272		2,604,957		2,620,264
Wholesale vehicles	56,502		51,542		138,221		156,351
Total vehicles	2,100,832		2,223,832		5,700,972		6,305,721
Parts, service and collision repair	320,929		352,047		914,667		1,048,789
Finance, insurance and other, net	126,784		126,841		352,848		351,429
Total revenues	2,548,545		2,702,720		6,968,487		7,705,939
Cost of Sales:
New vehicles	(1,035,624)		(1,202,710)		(2,804,314)		(3,363,603)
Used vehicles	(917,993)		(877,444)		(2,517,421)		(2,509,699)
Wholesale vehicles	(53,958)		(52,648)		(136,260)		(159,437)
Total vehicles	(2,007,575)		(2,132,802)		(5,457,995)		(6,032,739)
Parts, service and collision repair	(164,403)		(183,107)		(475,964)		(546,067)
Total cost of sales	(2,171,978)		(2,315,909)		(5,933,959)		(6,578,806)
Gross profit	376,567		386,811		1,034,528		1,127,133
Selling, general and administrative expenses	(257,174)		(296,826)		(769,688)		(838,453)
Impairment charges	(26)		(1,124)		(268,859)		(3,076)
Depreciation and amortization	(22,934)		(23,665)		(67,879)		(70,120)
Operating income (loss)	96,433		65,196		(71,898)		215,484
Other income (expense):
Interest expense, floor plan	(4,999)		(11,638)		(21,821)		(37,382)
Interest expense, other, net	(10,762)		(13,013)		(31,523)		(39,494)
Other income (expense), net	1		(5)		100		90
Total other income (expense)	(15,760)		(24,656)		(53,244)		(76,786)
Income (loss) from continuing operations before taxes	80,673		40,540		(125,142)		138,698
Provision for income taxes for continuing operations - benefit (expense)	(20,685)		(11,372)		16,995		(40,430)
Income (loss) from continuing operations	59,988		29,168		(108,147)		98,268
Discontinued operations:
Income (loss) from discontinued operations before taxes	(234)		(223)		(808)		(616)
Provision for income taxes for discontinued operations - benefit (expense)	64		65		231		179
Income (loss) from discontinued operations	(170)		(158)		(577)		(437)
Net income (loss)	$	59,818	$	29,010	$	(108,724)	$	97,831
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	1.41	$	0.68	$	(2.53)	$	2.28
Earnings (loss) per share from discontinued operations	—		(0.01)		(0.02)		(0.01)
Earnings (loss) per common share	$	1.41	$	0.67	$	(2.55)	$	2.27
Weighted-average common shares outstanding	42,510		43,078		42,687		42,995
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	1.35	$	0.66	$	(2.53)	$	2.26
Earnings (loss) per share from discontinued operations	(0.01)		—		(0.02)		(0.01)
Earnings (loss) per common share	$	1.34	$	0.66	$	(2.55)	$	2.25
Weighted-average common shares outstanding	44,577		44,203		42,687		43,456

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Net income (loss)	$	59,818	$	29,010	$	(108,724)	$	97,831
Other comprehensive income (loss) before taxes:
Change in fair value of interest rate swap and interest rate cap agreements	296		(223)		1,076		(3,971)
Amortization of terminated interest rate swap agreements	(280)		(786)		(1,912)		(1,707)
Total other comprehensive income (loss) before taxes	16		(1,009)		(836)		(5,678)
Provision for income tax benefit (expense) related to components of other comprehensive income (loss)	9		330		334		1,726
Other comprehensive income (loss)	25		(679)		(502)		(3,952)
Comprehensive income (loss)	$	59,843	$	28,331	$	(109,226)	$	93,879

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2020		December 31, 2019
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	125,739	$	29,103
Receivables, net	286,938		432,742
Inventories	1,137,852		1,517,875
Other current assets	101,601		37,890
Total current assets	1,652,130		2,017,610
Property and Equipment, net	1,110,609		1,097,247
Goodwill	207,297		475,791
Other Intangible Assets, net	64,300		64,300
Operating Right-of-Use Lease Assets	337,774		337,842
Finance Right-of-Use Lease Assets	39,463		34,691
Other Assets	92,344		43,554
Total Assets	$	3,503,917	$	4,071,035

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable - floor plan - trade	$	543,126	$	860,871
Notes payable - floor plan - non-trade	628,978		678,223
Trade accounts payable	92,624		135,217
Operating short-term lease liabilities	43,900		43,332
Finance short-term lease liabilities	3,167		1,564
Accrued interest	6,352		10,830
Other accrued liabilities	246,958		266,211
Current maturities of long-term debt	63,913		69,908
Total current liabilities	1,629,018		2,066,156
Long-Term Debt	669,684		636,978
Other Long-Term Liabilities	86,728		73,746
Operating Long-Term Lease Liabilities	304,596		304,151
Finance Long-Term Lease Liabilities	39,789		36,313
Deferred Income Taxes	—		8,927
Commitments and Contingencies
Stockholders’ Equity:
Class A Convertible Preferred Stock, none issued	—		—
Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 65,607,628 shares issued and 30,185,830 shares outstanding at September 30, 2020; 64,733,667 shares issued and 31,105,000 shares outstanding at December 31, 2019	656		647
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at September 30, 2020 and December 31, 2019	121		121
Paid-in capital	764,446		755,904
Retained earnings	668,540		790,158
Accumulated other comprehensive income (loss)	(2,564)		(2,062)
Treasury stock, at cost; 35,421,798 Class A Common Stock shares held at September 30, 2020 and 33,628,667 Class A Common Stock shares held at December 31, 2019	(657,097)		(600,004)
Total Stockholders’ Equity	774,102		944,764
Total Liabilities and Stockholders’ Equity	$	3,503,917	$	4,071,035

See notes to unaudited condensed consolidated financial statements.

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 thousands, except per share amounts)
Balance at June 30, 2019	64,728	$	647	(33,629)	$	(600,004)	12,029	$	121	$	750,532	$	723,469	$	960	$	875,725
Shares awarded under stock compensation plans	6	—		—	—		—	—		—		—		—		—
Purchases of treasury stock	—	—		—	—		—	—		—		—		—		—
Effect of cash flow hedge instruments, net of tax benefit of $330	—	—		—	—		—	—		—		—		(679)		(679)
Restricted stock amortization	—	—		—	—		—	—		2,682		—		—		2,682
Net income (loss)	—	—		—	—		—	—		—		29,010		—		29,010

Class A dividends declared ($0.10)	—	—		—	—		—	—		—		(3,110)		—		(3,110)
Class B dividends declared ($0.10)	—	—		—	—		—	—		—		(1,203)		—		(1,203)
Balance at September 30, 2019	64,734	$	647	(33,629)	$	(600,004)	12,029	$	121	$	753,214	$	748,166	$	281	$	902,425


	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 thousands, except per share amounts)
Balance at June 30, 2020	65,604	$	656	(34,638)	$	(627,812)	12,029	$	121	$	761,293	$	613,033	$	(2,589)	$	744,702
Shares awarded under stock compensation plans	4	—		—	—		—	—		(1)		—		—		(1)
Purchases of treasury stock	—	—		(784)	(29,285)		—	—		—		—		—		(29,285)
Effect of cash flow hedge instruments, net of tax benefit of $9	—	—		—	—		—	—		—		—		25		25
Restricted stock and option amortization	—	—		—	—		—	—		3,154		—		—		3,154
Net income (loss)	—	—		—	—		—	—		—		59,818		—		59,818

Class A dividends declared ($0.10)	—	—		—	—		—	—		—		(3,108)		—		(3,108)
Class B dividends declared ($0.10)	—	—		—	—		—	—		—		(1,203)		—		(1,203)
Balance at September 30, 2020	65,608	$	656	(35,422)	$	(657,097)	12,029	$	121	$	764,446	$	668,540	$	(2,564)	$	774,102

See notes to unaudited condensed consolidated financial statements.

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 thousands, except per share amounts)
Balance at December 31, 2018	64,197	$	642	(33,476)	$	(597,623)	12,029	$	121	$	745,052	$	670,691	$	4,233	$	823,116
Shares awarded under stock compensation plans	537	5		—	—		—	—		55		—		—		60
Purchases of treasury stock	—	—		(153)	(2,381)		—	—		—		—		—		(2,381)
Effect of cash flow hedge instruments, net of tax benefit of $1,726	—	—		—	—		—	—		—		—		(3,952)		(3,952)
Restricted stock amortization	—	—		—	—		—	—		8,107		—		—		8,107
Net income (loss)	—	—		—	—		—	—		—		97,831		—		97,831
Cumulative effect of change in accounting principle (1)	—	—		—	—		—	—		—		(7,428)		—		(7,428)
Class A dividends declared ($0.30)	—	—		—	—		—	—		—		(9,319)		—		(9,319)
Class B dividends declared ($0.30)	—	—		—	—		—	—		—		(3,609)		—		(3,609)
Balance at September 30, 2019	64,734	$	647	(33,629)	$	(600,004)	12,029	$	121	$	753,214	$	748,166	$	281	$	902,425



	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 thousands, except per share amounts)
Balance at December 31, 2019	64,734	$	647	(33,629)	$	(600,004)	12,029	$	121	$	755,904	$	790,158	$	(2,062)	$	944,764
Shares awarded under stock compensation plans	874	9		—	—		—	—		(9)		—		—		—
Purchases of treasury stock	—	—		(1,793)	(57,093)		—	—		—		—		—		(57,093)
Effect of cash flow hedge instruments, net of tax benefit of $334	—	—		—	—		—	—		—		—		(502)		(502)
Restricted stock and option amortization	—	—		—	—		—	—		8,551		—		—		8,551
Net income (loss)	—	—		—	—		—	—		—		(108,724)		—		(108,724)

Class A dividends declared ($0.30)	—	—		—	—		—	—		—		(9,285)		—		(9,285)
Class B dividends declared ($0.30)	—	—		—	—		—	—		—		(3,609)		—		(3,609)
Balance at September 30, 2020	65,608	$	656	(35,422)	$	(657,097)	12,029	$	121	$	764,446	$	668,540	$	(2,564)	$	774,102

(1)See Note 1, “Summary of Significant Accounting Policies,” for further discussion.

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2020		2019
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(108,724)	$	97,831
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	65,474		67,674
Provision for bad debt expense	525		277

Debt issuance cost amortization	2,016		1,789

Stock-based compensation expense	8,551		8,107
Deferred income taxes	(62,950)		(8,337)
Net distributions from equity investee	314		50
Asset impairment charges	268,859		3,076
Loss (gain) on disposal of dealerships and property and equipment	(1,354)		(46,024)
Loss (gain) on exit of leased dealerships	—		(170)

Changes in assets and liabilities that relate to operations:
Receivables	145,280		83,609
Inventories	374,651		(47,692)
Other assets	(21,485)		(65,078)
Notes payable - floor plan - trade	(317,745)		(78,554)
Trade accounts payable and other liabilities	(80,416)		(42,204)
Total adjustments	381,720		(123,477)
Net cash provided by (used in) operating activities	272,996		(25,646)
CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of land, property and equipment	(92,056)		(74,549)
Proceeds from sales of property and equipment	21,488		10,796
Proceeds from sales of dealerships	8,806		130,086
Net cash provided by (used in) investing activities	(61,762)		66,333
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable - floor plan - non-trade	(49,245)		(8,728)
Borrowings on revolving credit facilities	460,916		359,362
Repayments on revolving credit facilities	(460,916)		(359,362)
Proceeds from issuance of long-term debt	53,135		—
Debt issuance costs	(2,115)		23
Principal payments and repurchase of long-term debt	(26,328)		(17,229)
Principal payments of long-term lease liabilities	(20,058)		(4,706)
Purchases of treasury stock	(57,093)		(2,381)

Issuance of shares under stock compensation plans	—		60
Dividends paid	(12,894)		(11,179)
Net cash provided by (used in) financing activities	(114,598)		(44,140)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	96,636		(3,453)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	29,103		5,854
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	125,739	$	2,401

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Effect of cash flow hedge instruments (net of tax benefit of $334 and $1,726 in the nine months ended September 30, 2020 and 2019, respectively)	$	(502)	$	(3,952)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, including amount capitalized	$	56,912	$	78,518
Income taxes	$	51,455	$	56,629

See notes to unaudited condensed consolidated financial statements.

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 and nine months ended September 30, 2020 and 2019 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all material normal, recurring adjustments necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The operating results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year or future interim periods, because the first quarter historically has contributed less operating profit than the second and third quarters, while the fourth quarter historically has contributed the highest operating profit of any quarter. Additionally, the ongoing COVID-19 pandemic could impact earnings for the remainder of 2020 and beyond. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019.

COVID 19 – The COVID-19 pandemic negatively impacted the global economy beginning in the first quarter of 2020. During the first three quarters of 2020, the impact on the economy affected both consumer demand and supply of manufactured goods as many countries around the world and states and municipalities in the United States (the “U.S.”) mandated restrictions on citizen movements (i.e., shelter-in-place or stay-at-home orders) or on retail trade or manufacturing activities at physical locations. As a result, many businesses curtailed operations and furloughed or terminated many positions. In the U.S., the government passed several measures through the legislature that were signed by the President and enacted into law. Those measures include the Coronavirus Aid, Relief, and Economic Security Act and the Families First Coronavirus Response Act. Both such acts attempt to provide short-term relief to families and businesses as a result of the economic impacts of the COVID-19 pandemic.

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 does not permit remote work (i.e., service repair technicians), we have implemented staggered work hours and other social distancing measures to promote the health and safety of our teammates and guests. As a result of the systems and infrastructure we had in place prior to the pandemic, we have been able to effectively maintain our back-office operations, financial reporting and internal control processes with minimal disruption.

All of our store operations have been impacted by the crisis to varying degrees. During the end of the first quarter of 2020 and the first two months of the second quarter of 2020, the majority of our stores were not permitted to conduct retail sales of new and used vehicles at our physical locations. Those locations could offer virtual sales transactions with “contactless” delivery to customers. As of September 30, 2020, most of such restrictions have been relaxed; however, our stores remain subject to certain health and safety policies and practices that may affect the way we sell vehicles and interact with our guests. Due to the critical nature of automotive repair, our fixed operations were deemed “essential” by governmental agencies and have been able to continue to conduct business throughout the pandemic to date, but must maintain certain local standards for social distancing to promote the health and safety of our teammates and guests.

The effects of the COVID-19 pandemic continue to evolve. While we currently expect to see continued economic recovery in the remainder of 2020 and into 2021, the ongoing pandemic may cause changes in customer behaviors, including a potential reduction in consumer spending for vehicles and automotive repairs, especially if the pandemic worsens or the regulatory environment changes in response to the pandemic. This may lead to increased asset recovery and valuation risks, such as impairment of additional long-lived assets. In addition, uncertainties in the global economy may negatively impact our suppliers and other business partners, which may interrupt our supply chain and require other changes to our operations. These and other factors may adversely impact our revenues, operating income and earnings per share financial measures.

Based on the events and circumstances around the COVID-19 pandemic, during the first quarter of 2020, we evaluated our long-lived assets for impairment. This evaluation included reviews of fixed assets and related right-of-use assets, franchise assets and goodwill. As a result of this evaluation, we determined the carrying values of all long-lived assets to be recoverable at March 31, 2020 with the exception of goodwill related to our franchised dealership reporting unit, resulting in a non-cash goodwill impairment charge of $268.0 million. One of the primary factors which contributed to the conclusion that goodwill was impaired was the decline in the market value of Sonic’s stock between the announcement date of the pandemic on March 11, 2020 and March 31, 2020. Based on the improvement in our business operations and market value during the second and

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

third quarters of 2020, as well as our future forecast expectations, no further impairment assessment was required. See Note 5 for further discussion.

Recent Accounting Pronouncements – In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Accounting Standards Codification (“ASC”) Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendment in this update replaced the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This ASU was effective for fiscal years beginning after December 15, 2019. We adopted this ASU as of January 1, 2020 and the effects of this ASU did not materially impact our unaudited condensed consolidated financial statements.

Principles of Consolidation – All of our dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanying unaudited condensed consolidated financial statements, except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements.

Revenue Recognition – Revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. ASC Topic 606, “Revenue from Contracts with Customers,” applies a five-step model that includes: (1) identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4) allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied. The standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We do not include the cost of obtaining contracts within the related revenue streams since we elected the practical expedient to expense the costs to obtain a contract when incurred.

Management has evaluated our established business processes, revenue transaction streams and accounting policies, and identified our material revenue streams to be: (1) the sale of new vehicles; (2) the sale of used vehicles to retail customers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service, warranty and other insurance contracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance has occurred, or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components as payments are typically received within a short period of time following completion of the performance obligation(s). Certain retrospective finance and insurance revenue is earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”).

F&I retro revenues are recognized when the product contract has been executed with the end customer and are estimated each reporting period based on the expected value method using historical and projected data, which results in the acceleration of revenue recognition. F&I retro revenues, which represent variable consideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We record revenue when vehicles are delivered to customers, when vehicle service work is performed and when parts are delivered. Conditions for completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonably expected to be collected.

Receivables, net in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 include approximately $4.3 million and $5.1 million, respectively, related to work in process and contract assets related to F&I retro revenues of approximately $11.1 million and $12.9 million, respectively. Changes in contract assets from December 31, 2019 to September 30, 2020 were primarily due to ordinary business activity, including the receipt of cash for amounts earned and recognized in prior periods. Please refer to Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2019 for further discussion of our revenue recognition policies and processes.

Income Taxes – The overall effective tax rate from continuing operations was 25.6% and 13.6% for the three and nine months ended September 30, 2020, respectively, and 28.0% and 29.2% for the three and nine months ended September 30, 2019, respectively. Income tax expense for the three months ended September 30, 2020 includes a $0.1 million discrete charge for non-deductible book goodwill related to dealership dispositions. Income tax benefit for the nine months ended September 30, 2020 includes a $55.8 million benefit, including the effect of non-deductible amounts, related to the $268.0 million

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

goodwill impairment charge, a $0.2 million discrete benefit related to vested or exercised stock compensation awards, and a $0.2 million discrete benefit related to the favorable resolution of certain tax matters, offset partially by a $1.4 million discrete charge related to changes in uncertain tax positions and other adjustments and a $0.1 million discrete charge for non-deductible book goodwill related to dealership dispositions. Income tax expense for the three months ended September 30, 2019 includes a $0.4 million discrete charge related to tax return to provision adjustments and a state income tax rate reduction. Income tax expense for the nine months ended September 30, 2019 includes a $1.5 million discrete charge for non-deductible executive officer compensation related to executive transition costs, a $0.4 million discrete charge related to tax return to provision adjustments and a state income tax rate reduction, a $0.2 million discrete charge related to changes in uncertain tax positions and a $0.2 million discrete charge related to vested or exercised stock compensation awards, offset partially by a $0.4 million discrete benefit related to the favorable resolution of certain tax matters. Sonic’s effective tax rate varies from year to year based on the level of taxable income, the distribution of taxable income between states in which the Company operates and other tax adjustments.

Earnings Per Share – The calculation of diluted earnings per share considers the potential dilutive effect of restricted stock units, restricted stock awards and stock options granted under Sonic’s stock compensation plans (and any non-forfeitable dividends paid on such awards).

2. Business Dispositions

We disposed of one mid-line import franchised dealership and terminated one luxury franchised dealership during the nine months ended September 30, 2020 that generated net cash of approximately $8.8 million. We disposed of one luxury franchised dealership and four mid-line import franchised dealerships during the nine months ended September 30, 2019 that generated net cash of approximately $130.1 million. The results of operations of each of these disposed or terminated franchised dealerships remain in continuing operations in the accompanying unaudited condensed consolidated statements of operations.

Revenues and other activities associated with disposed or terminated franchised dealerships that remain in continuing operations were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Income (loss) from operations	$	(1,119)	$	337	$	(1,964)	$	(2,499)
Gain (loss) on disposal	3,388		(823)		2,273		45,570
Lease exit accrual adjustments and charges	—		—		—		169
Pre-tax income (loss)	$	2,269	$	(486)	$	309	$	43,240
Total revenues	$	11,050	$	110,274	$	44,817	$	358,788

Revenues and other activities associated with disposed or terminated franchised dealerships classified as discontinued operations were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(In thousands)
Income (loss) from operations	$	(234)	$	(223)	$	(808)	$	(616)
Pre-tax income (loss)	$	(234)	$	(223)	$	(808)	$	(616)
Total revenues	$	—	$	—	$	—	$	—

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. Inventories

Inventories consist of the following:


	September 30, 2020		December 31, 2019
	(In thousands)
New vehicles	$	596,785	$	983,123
Used vehicles	362,434		319,791
Service loaners	127,526		152,278
Parts, accessories and other	51,107		62,683
Net inventories	$	1,137,852	$	1,517,875

4. Property and Equipment

Property and equipment, net consists of the following:


	September 30, 2020		December 31, 2019
	(In thousands)
Land	$	384,046	$	373,301
Building and improvements	1,013,612		969,609
Furniture, fixtures and equipment	359,663		346,260
Construction in progress	28,782		50,928
Total, at cost	1,786,103		1,740,098
Less accumulated depreciation	(659,044)		(616,611)
Subtotal	1,127,059		1,123,487
Less assets held for sale (1)	(16,450)		(26,240)
Property and equipment, net	$	1,110,609	$	1,097,247

(1)Classified in other current assets in the accompanying unaudited condensed consolidated balance sheets.

In the three and nine months ended September 30, 2020, capital expenditures were approximately $30.3 million and $92.0 million, respectively, and in the three and nine months ended September 30, 2019, capital expenditures were approximately $23.3 million and $74.5 million, respectively. Capital expenditures in all periods were primarily related to real estate acquisitions, construction of new franchised dealerships and EchoPark stores, building improvements and equipment purchased for use in our franchised dealerships and EchoPark stores. Assets held for sale as of September 30, 2020 and December 31, 2019 consists of real property not currently used in operations that we expect to dispose of in the next 12 months.

Property and equipment impairment charges for the nine months ended September 30, 2020, were approximately $0.9 million, related to the abandonment of certain construction projects. Impairment charges for the nine months ended September 30, 2019 were approximately $3.1 million, related to fair value adjustments of real estate at former EchoPark locations classified as held for sale.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Goodwill and Intangible Assets

Pursuant to the applicable accounting pronouncements, we were required to evaluate the recoverability of our long-lived assets during the first quarter of 2020 as a result of the effects of the COVID-19 pandemic on our operations and market value. Based on this evaluation, we determined the carrying value of the goodwill related to our franchised dealership reporting unit was greater than the fair value of the reporting unit. Accordingly, we recorded a non-cash goodwill impairment charge of $268.0 million and a corresponding income tax benefit of $55.8 million to reduce the carrying value to fair value as of March 31, 2020. We utilized the Discounted Cash Flows (“DCF”) method, using unobservable inputs (Level 3) to estimate Sonic’s enterprise value as of March 31, 2020 and reconciled the discounted cash flows to Sonic’s market capitalization, using quoted market price inputs (Level 1). The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs), control premium factors and residual growth rates. Based on the improvement in our business operations and market value during the second and third quarters of 2020, as well as our future forecast expectations, no further impairment assessment was required.

The carrying amount of goodwill was approximately $207.3 million and $475.8 million as of September 30, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our franchised dealership reporting unit was $147.3 million and $415.8 million as of September 30, 2020 and December 31, 2019, respectively. The carrying amount of goodwill for our EchoPark reporting unit was $60.0 million as of both September 30, 2020 and December 31, 2019. The total carrying amount of goodwill is net of accumulated impairment losses of approximately $1.1 billion and $797.6 million as of September 30, 2020 and December 31, 2019, respectively. The carrying amount of franchise assets was approximately $64.3 million as of both September 30, 2020 and December 31, 2019.

6. Long-Term Debt

Long-term debt consists of the following:


	September 30, 2020		December 31, 2019
	(In thousands)
2016 Revolving Credit Facility (1)	$	—	$	—

6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”)	250,000		250,000
2019 Mortgage Facility (2)	103,633		109,088
Mortgage notes to finance companies - fixed rate, bearing interest from 2.41% to 7.03%	217,090		194,535
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR	171,055		161,345


Subtotal	$	741,778	$	714,968
Debt issuance costs	(8,181)		(8,082)
Total debt	733,597