sah-20210930

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, 2021

☐ 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 25, 2021, there were 29,225,197 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, 2020 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, including any change in laws or regulations in response to the COVID–19 pandemic;

•changes in vehicle and parts import quotas, duties, tariffs or other restrictions, including supply shortages that could be caused by the COVID-19 pandemic or other supply chain disruptions;

•the inability of vehicle manufacturers and their suppliers to obtain, produce and deliver vehicles or parts and accessories to meet demand at our franchised dealerships for sale and use in our parts, service and collision repair operations;

•general economic conditions in the markets in which we operate, including fluctuations in interest rates, 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;

•our principal stockholders exercise significant control over us and our business matters;

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

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

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

SONIC AUTOMOTIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	60
PART II – OTHER INFORMATION		61
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 6.	Exhibits	65
SIGNATURES		67

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,
	2021		2020		2021		2020
	(Dollars and shares in thousands, except per share amounts)
Revenues:
New vehicles	$	1,146,922	$	1,098,302	$	3,766,133	$	2,957,794
Used vehicles	1,309,492		946,028		3,666,286		2,604,957
Wholesale vehicles	97,087		56,502		256,701		138,221
Total vehicles	2,553,501		2,100,832		7,689,120		5,700,972
Parts, service and collision repair	355,227		320,929		1,036,736		914,667
Finance, insurance and other, net	164,084		126,784		486,000		352,848
Total revenues	3,072,812		2,548,545		9,211,856		6,968,487
Cost of sales:
New vehicles	(1,031,476)		(1,035,624)		(3,462,795)		(2,804,314)
Used vehicles	(1,289,772)		(917,993)		(3,580,944)		(2,517,421)
Wholesale vehicles	(95,832)		(53,958)		(250,072)		(136,260)
Total vehicles	(2,417,080)		(2,007,575)		(7,293,811)		(5,457,995)
Parts, service and collision repair	(183,713)		(164,403)		(534,325)		(475,964)
Total cost of sales	(2,600,793)		(2,171,978)		(7,828,136)		(5,933,959)
Gross profit	472,019		376,567		1,383,720		1,034,528
Selling, general and administrative expenses	(321,373)		(257,174)		(931,349)		(769,688)
Impairment charges	—		(26)		—		(268,859)
Depreciation and amortization	(25,239)		(22,934)		(73,687)		(67,879)
Operating income (loss)	125,407		96,433		378,684		(71,898)
Other income (expense):
Interest expense, floor plan	(3,340)		(4,999)		(12,781)		(21,821)
Interest expense, other, net	(9,817)		(10,762)		(30,180)		(31,523)
Other income (expense), net	—		1		100		100
Total other income (expense)	(13,157)		(15,760)		(42,861)		(53,244)
Income (loss) from continuing operations before taxes	112,250		80,673		335,823		(125,142)
Provision for income taxes for continuing operations - benefit (expense)	(27,559)		(20,685)		(83,452)		16,995
Income (loss) from continuing operations	84,691		59,988		252,371		(108,147)
Discontinued operations:
Income (loss) from discontinued operations before taxes	(275)		(234)		241		(808)
Provision for income taxes for discontinued operations - benefit (expense)	69		64		(60)		231
Income (loss) from discontinued operations	(206)		(170)		181		(577)
Net income (loss)	$	84,485	$	59,818	$	252,552	$	(108,724)
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	2.04	$	1.41	$	6.07	$	(2.53)
Earnings (loss) per share from discontinued operations	(0.01)		—		0.01		(0.02)
Earnings (loss) per common share	$	2.03	$	1.41	$	6.08	$	(2.55)
Weighted-average common shares outstanding	41,561		42,510		41,561		42,687
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations	$	1.96	$	1.35	$	5.81	$	(2.53)
Earnings (loss) per share from discontinued operations	(0.01)		(0.01)		0.01		(0.02)
Earnings (loss) per common share	$	1.95	$	1.34	$	5.82	$	(2.55)
Weighted-average common shares outstanding	43,285		44,577		43,416		42,687

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,
	2021		2020		2021		2020
	(Dollars in thousands)
Net income (loss)	$	84,485	$	59,818	$	252,552	$	(108,724)
Other comprehensive income (loss) before taxes:
Change in fair value and amortization of interest rate cap agreements	297		296		1,178		1,076
Amortization of terminated interest rate swap agreements	—		(280)		—		(1,912)
Total other comprehensive income (loss) before taxes	297		16		1,178		(836)
Provision for income tax benefit (expense) related to components of other comprehensive income (loss)	(78)		9		(369)		334
Other comprehensive income (loss)	219		25		809		(502)
Comprehensive income (loss)	$	84,704	$	59,843	$	253,361	$	(109,226)

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30, 2021		December 31, 2020
	(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	220,082	$	170,313
Receivables, net	278,008		371,666
Inventories	850,469		1,247,254
Other current assets	123,404		93,334
Total current assets	1,471,963		1,882,567
Property and Equipment, net	1,232,236		1,120,526
Goodwill	237,575		213,977
Other Intangible Assets, net	77,500		64,300
Operating Right-of-Use Lease Assets	313,425		330,322
Finance Right-of-Use Lease Assets	84,267		60,121
Other Assets	88,997		74,180
Total Assets	$	3,505,963	$	3,745,993

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable - floor plan - trade	$	28,605	$	585,225
Notes payable - floor plan - non-trade	867,152		739,019
Trade accounts payable	105,181		105,098
Operating short-term lease liabilities	39,684		42,339
Finance short-term lease liabilities	35,684		3,515
Accrued interest	3,431		8,496
Other accrued liabilities	295,282		279,477
Current maturities of long-term debt	53,383		68,244
Total current liabilities	1,428,402		1,831,413
Long-Term Debt	637,774		651,823
Other Long-Term Liabilities	96,420		88,753
Operating Long-Term Lease Liabilities	278,315		296,564
Finance Long-Term Lease Liabilities	59,303		62,290
Deferred Income Taxes	—		345
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; 66,493,317 shares issued and 29,225,197 shares outstanding at September 30, 2021; 65,607,628 shares issued and 29,797,727 shares outstanding at December 31, 2020	665		656
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at September 30, 2021 and December 31, 2020	121		121
Paid-in capital	786,258		767,599
Retained earnings	960,238		721,770
Accumulated other comprehensive income (loss)	(2,807)		(3,616)
Treasury stock, at cost; 37,268,120 Class A Common Stock shares held at September 30, 2021 and 35,809,901 Class A Common Stock shares held at December 31, 2020	(738,726)		(671,725)
Total Stockholders’ Equity	1,005,749		814,805
Total Liabilities and Stockholders’ Equity	$	3,505,963	$	3,745,993

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, 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, including tax benefit of $9	—	—		—	—		—	—		—		—		25		25
Restricted stock 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


	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, 2021	66,449	$	664	(36,768)	$	(713,938)	12,029	$	121	$	781,829	$	880,704	$	(3,026)	$	946,354
Shares awarded under stock compensation plans	44	1		—	—		—	—		749		—		—		750
Purchases of treasury stock	—	—		(500)	(24,788)		—	—		—		—		—		(24,788)
Effect of cash flow hedge instruments, net of tax expense of $78	—	—		—	—		—	—		—		—		219		219
Restricted stock and stock option amortization	—	—		—	—		—	—		3,680		—		—		3,680
Net income (loss)	—	—		—	—		—	—		—		84,485		—		84,485

Class A dividends declared ($0.12)	—	—		—	—		—	—		—		(3,507)		—		(3,507)
Class B dividends declared ($0.12)	—	—		—	—		—	—		—		(1,444)		—		(1,444)
Balance at September 30, 2021	66,493	$	665	(37,268)	$	(738,726)	12,029	$	121	$	786,258	$	960,238	$	(2,807)	$	1,005,749

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, 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 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



	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, 2020	65,608	$	656	(35,810)	$	(671,725)	12,029	$	121	$	767,599	$	721,770	$	(3,616)	$	814,805
Shares awarded under stock compensation plans	885	9		—	—		—	—		7,505		—		—		7,514
Purchases of treasury stock	—	—		(1,458)	(67,001)		—	—		—		—		—		(67,001)
Effect of cash flow hedge instruments, net of tax expense of $369	—	—		—	—		—	—		—		—		809		809
Restricted stock and stock option amortization	—	—		—	—		—	—		11,154		—		—		11,154
Net income (loss)	—	—		—	—		—	—		—		252,552		—		252,552

Class A dividends declared ($0.34)	—	—		—	—		—	—		—		(9,977)		—		(9,977)
Class B dividends declared ($0.34)	—	—		—	—		—	—		—		(4,107)		—		(4,107)
Balance at September 30, 2021	66,493	$	665	(37,268)	$	(738,726)	12,029	$	121	$	786,258	$	960,238	$	(2,807)	$	1,005,749

See notes to unaudited condensed consolidated financial statements.

SONIC AUTOMOTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2021		2020
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	252,552	$	(108,724)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment	69,069		65,474


Debt issuance cost amortization	2,343		2,016

Stock-based compensation expense	11,154		8,551
Deferred income taxes	(8,928)		(62,950)

Asset impairment charges	—		268,859



Other	(1,246)		(515)
Changes in assets and liabilities that relate to operations:
Receivables	93,255		145,280
Inventories	419,842		374,651
Other assets	(2,683)		(21,485)
Notes payable - floor plan – trade	(556,620)		(317,745)
Trade accounts payable and other liabilities	(12,354)		(80,416)
Total adjustments	13,832		381,720
Net cash provided by operating activities	266,384		272,996
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired	(66,138)		—
Purchases of land, property and equipment	(181,516)		(92,056)
Proceeds from sales of property and equipment	6,195		21,488
Proceeds from sales of dealerships	3,872		8,806
Net cash used in investing activities	(237,587)		(61,762)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable - floor plan - non-trade	128,133		(49,245)
Borrowings on revolving credit facilities	4,906		460,916
Repayments on revolving credit facilities	(4,906)		(460,916)
Proceeds from issuance of long-term debt	16,500		53,135
Debt issuance costs	(4,775)		(2,115)
Principal payments of long-term debt	(42,975)		(26,328)
Principal payments of long-term lease liabilities	(3,109)		(20,058)
Purchases of treasury stock	(67,001)		(57,093)

Issuance of shares under stock compensation plans	7,514		—
Dividends paid	(13,315)		(12,894)
Net cash provided by (used in) financing activities	20,972		(114,598)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	49,769		96,636
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	170,313		29,103
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	220,082	$	125,739



SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, including amount capitalized	$	46,025	$	56,912
Income taxes	$	85,773	$	51,455

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, 2021 and 2020 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 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, 2020.

Pending Acquisition – On September 17, 2021, Sonic entered into an Agreement and Plan of Merger (the “Merger Agreement”) with RFJMS, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Sonic (“Merger Sub”), RFJ Auto Partners, Inc., a Delaware corporation (“RFJ Auto”), and The Resolute Fund III, L.P., a Delaware limited partnership, solely in its capacity as the representative of RFJ Auto’s equityholders, pursuant to which Merger Sub will merge with and into RFJ Auto (the “Acquisition”), with RFJ Auto surviving the merger and becoming a direct, wholly owned subsidiary of Sonic. RFJ Auto is an automotive dealership platform based in Dallas, Texas. The Acquisition is expected to close in the fourth quarter of 2021.

Subject to the terms and conditions of the Merger Agreement and other customary adjustments set forth in the Merger Agreement, the purchase price payable by Sonic pursuant to the Merger Agreement is expected to be approximately $964.9 million comprising (1) approximately $576.1 million for the goodwill and other intangible assets and real estate assets of RFJ Auto and each of its subsidiaries, plus (2) approximately $136.5 million for property and equipment including real estate assets, plus (3) approximately $271.5 million for new and used vehicle inventories, plus (4) approximately $67.0 million for accounts receivable, minus (5) approximately $86.2 million related to liabilities assumed net of other miscellaneous assets. The value, and therefore the resulting purchase price, of RFJ Auto’s parts and accessories inventory, supplies, repair work-in-process and new and used vehicle inventories and other assets acquired or liabilities assumed by Sonic are all subject to change based on natural fluctuations in the business of RFJ Auto prior to the closing of the Acquisition and the foregoing amounts are management’s estimate based on currently available information. The Acquisition will be funded with the proceeds of the Company’s offering of the 2021 Notes (as defined below) (See Note 10, “Subsequent Events”) and borrowings on our floor plan credit facilities.

COVID-19 – The COVID-19 pandemic began negatively impacting the global economy in the first quarter 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 in-person retail trade or manufacturing activities at physical locations. As a result, many businesses curtailed operations and furloughed or terminated employees. In the U.S., the federal government passed several relief measures, including the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Families First Coronavirus Response Act, in an attempt to provide short-term relief to families and businesses as a result of the economic impacts of the COVID-19 pandemic.

This broader economic backdrop resulting from the COVID-19 pandemic had a direct impact on our business and operations beginning in March 2020 and continuing through the date of this report. As a result of the pandemic and related shelter-in-place or stay-at-home orders, we transitioned many of our teammates to remote work arrangements. In situations where a teammate’s role did not permit remote work (e.g., service repair technicians), we implemented staggered work hours, social distancing and other safety measures to promote the health and safety of our teammates and guests. As a result of the systems and infrastructure we had in place prior to the pandemic, we were largely able to maintain our back-office operations and financial reporting and internal control processes with minimal disruption or changes in the effectiveness of such operations and processes.

All of our store operations were impacted by the COVID-19 pandemic to varying degrees. During parts of the first half 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 but experienced lower consumer demand as a result of the initial onset of the pandemic and state and local governmental restrictions on business and consumer activities. Due to the critical nature of automotive repair, our fixed operations were deemed “essential” by governmental agencies and have largely been able to continue to conduct business so far, while adjusting operations to comply with state and

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

local standards for safety and social distancing to promote the health and safety of our teammates and guests. As of September 30, 2021, most of such restrictions had been relaxed; however, our stores remain subject to both external and self-imposed health and safety policies and practices that may affect the way we sell vehicles and interact with our guests in the future. These restrictions may be tightened again if conditions relating to the pandemic worsen as a result of variants.

The automotive supply chain has been disrupted during the pandemic, primarily related to the production of semiconductors that are used in many components of modern automobiles. As a result, automobile manufacturing is operating at lower than expected production levels, reducing the amount of new vehicle and certain parts inventory available to our dealerships. These inventory constraints, coupled with strong consumer demand, have led to a low new vehicle inventory and a high vehicle pricing environment. While we believe that inventory levels should improve in the first half of 2022, there is a risk that new vehicle and certain parts inventory levels remain at a low level or worsen, which could adversely impact our revenues and other financial results.

Recent Accounting Pronouncements – In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2020-04, “Reference Rate Reform (Accounting Standards Codification (“ASC”) Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as the London InterBank Offered Rate (“LIBOR”). The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 could be adopted beginning January 1, 2020 and are effective through December 31, 2022. We do not currently have any contracts that have been modified, amended or renegotiated to accommodate a transition to a new reference rate, but we will continue to evaluate any such modifications or amendments to our contracts to determine the applicability of this standard on our unaudited condensed consolidated financial statements and related financial statement disclosures.

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

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).

Retrospective finance and insurance revenues (“F&I retro revenues”) are recognized when the product contract has been executed with the end customer and the transaction price is estimated each reporting period based on the expected value method using historical and projected data. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

We record revenue when vehicles are delivered to customers, 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 it being probable that the proceeds from the sale will be collected.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 include approximately $27.5 million and $21.7 million, respectively, related to contract assets from F&I retro revenues recognition. Changes in contract assets from December 31, 2020 to September 30, 2021 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, 2020 for further discussion of our revenue recognition policies and processes.

Income Taxes – The overall effective tax rate from continuing operations was 24.6% and 24.9% for the three and nine months ended September 30, 2021, respectively, and 25.6% and 13.6% for the three and nine months ended September 30, 2020, respectively. 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 goodwill impairment charge related to adjustments in fair value of goodwill for the Franchised Dealerships Segment (as defined below). 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) To the extent that we report a net loss in any period presented, basic and diluted loss per share are the same as there is no dilutive effect of outstanding stock awards in a net loss position.

2. Business Acquisitions and Dispositions

We acquired three businesses to be included in our EchoPark segment and two franchised dealership locations during the nine months ended September 30, 2021 for an aggregate gross purchase price (including inventory acquired and subsequently funded by floor plan notes payable) of approximately $66.1 million. The acquisitions purchase price for the nine months ended September 30, 2021 acquired inventory of $26.4 million, property and equipment of $1.7 million, franchise assets of $13.2 million and goodwill of $24.8 million. We did not acquire any businesses during the nine months ended September 30, 2020.

We disposed of one luxury franchised dealership during the nine months ended September 30, 2021 that generated net cash of approximately $3.9 million. 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.

3. Inventories

Inventories consist of the following:


	September 30, 2021		December 31, 2020
	(In thousands)
New vehicles	$	135,659	$	648,448
Used vehicles	547,145		413,209
Service loaners	105,404		128,531
Parts, accessories and other	62,261		57,066
Net inventories	$	850,469	$	1,247,254

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Property and Equipment

Property and equipment, net consists of the following:


	September 30, 2021		December 31, 2020
	(In thousands)
Land	$	393,920	$	375,297
Building and improvements	1,109,311		1,028,016
Furniture, fixtures and equipment	415,999		365,222
Construction in progress	56,548		34,767
Total, at cost	1,975,778		1,803,302
Less accumulated depreciation	(737,250)		(673,082)
Subtotal	1,238,528		1,130,220
Less assets held for sale (1)	(6,292)		(9,694)
Property and equipment, net	$	1,232,236	$	1,120,526

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

Capital expenditures were approximately $60.0 million and $165.1 million in the three and nine months ended September 30, 2021, respectively, and approximately $30.3 million and $92.0 million in the three and nine months ended September 30, 2020, 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, 2021 and December 31, 2020 consists of real property not currently used in operations that we expect to dispose of in the next 12 months.

5. Goodwill and Intangible Assets

The carrying amount of goodwill was approximately $237.6 million and $214.0 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of goodwill for our franchised dealership reporting unit was approximately $158.1 million and $147.3 million as of September 30, 2021 and December 31, 2020, respectively. The carrying amount of goodwill for our EchoPark reporting unit was approximately $79.5 million and $66.7 million as of September 30, 2021 and December 31, 2020, respectively. The total carrying amount of goodwill is net of accumulated impairment losses of approximately $1.1 billion as of both September 30, 2021 and December 31, 2020. The carrying amount of indefinite lived franchise assets was approximately $77.5 million and $64.3 million as of September 30, 2021 and December 31, 2020, respectively.

Pursuant to the applicable accounting pronouncements, we were required to evaluate the recoverability of our long-lived assets at the end of 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 our franchised dealership reporting unit goodwill 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 did not record any impairment charges for the three and nine months ended September 30, 2021.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Long-Term Debt

Long-term debt consists of the following:


	September 30, 2021		December 31, 2020
	(In thousands)
2021 Revolving Credit Facility (1)	$	—	$	—

6.125% Senior Subordinated Notes due 2027	250,000		250,000
2019 Mortgage Facility (2)	92,724		100,906
Mortgage notes to finance companies - fixed rate, bearing interest from 2.05% to 7.03%	217,504		212,135
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR	141,225		164,889


Subtotal	$	701,453	$	727,930
Debt issuance costs	(10,296)		(7,863)
Total debt	691,157		720,067
Less current maturities	(53,383)		(68,244)
Long-term debt	$	637,774	$	651,823

(1)The interest rate on the 2021 Revolving Credit Facility (as defined below) was 100 and 150 basis points above LIBOR at September 30, 2021 and December 31, 2020.

(2)The interest rate on the 2019 Mortgage Facility (as defined below) was 150 basis points above LIBOR at both September 30, 2021 and December 31, 2020.

2021 Credit Facilities

On April 14, 2021, we entered into an amended and restated syndicated revolving credit facility (the “2021 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2021 Floor Plan Facilities” and, together with the 2021 Revolving Credit Facility, the “2021 Credit Facilities”). The amendment and restatement of the 2021 Credit Facilities extended the scheduled maturity dates to April 14, 2025. On October 8, 2021, we entered into an amendment to the 2021 Credit Facilities (the “Credit Facility Amendment”) to, among other things: (1) increase the aggregate commitments under the 2021 Revolving Credit Facility to the lesser of $350.0 million (which may be increased at the Company’s option up to $400.0 million upon satisfaction of certain conditions) and the applicable revolving borrowing base, and the 2021 Floor Plan Facilities to $2.6 billion (which, under certain conditions, may be increased at the Company’s option up to $2.85 billion that may be allocated between the 2021 New Vehicle Floor Plan Facility and the 2021 Used Vehicle Floor Plan Facility as the Company requests); and (2) permit the issuance of the 2021 Notes.

As amended, availability under the 2021 Revolving Credit Facility is calculated as the lesser of $350.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2021 Revolving Credit Facility (the “2021 Revolving Borrowing Base”). The 2021 Revolving Credit Facility may be increased at our option up to $400.0 million upon satisfaction of certain conditions. As of September 30, 2021, the 2021 Revolving Borrowing Base was approximately $236.3 million based on balances as of such date. As of September 30, 2021, we had no outstanding borrowings and approximately $12.3 million in outstanding letters of credit under the 2021 Revolving Credit Facility, resulting in $224.0 million remaining borrowing availability under the 2021 Revolving Credit Facility.

The 2021 Floor Plan Facilities are composed of a new vehicle revolving floor plan facility (as amended, the “2021 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (as amended, the “2021 Used Vehicle Floor Plan Facility”), in a combined amount of up to $2.6 billion. We may, under certain conditions, request an increase in the 2021 Floor Plan Facilities to a maximum borrowing limit of up to $2.85 billion, which shall be allocated between the 2021 New Vehicle Floor Plan Facility and the 2021 Used Vehicle Floor Plan Facility as we request, with no more than 40% of the aggregate commitments allocated to the commitments under the 2021 Used Vehicle Floor Plan Facility.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our obligations under the 2021 Credit Facilities are guaranteed by us and certain of our subsidiaries and are secured by a pledge of substantially all of our and our subsidiaries’ assets. As of the dates presented in the accompanying unaudited condensed consolidated financial statements, the amounts outstanding under the 2021 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR. We have agreed under the 2021 Credit Facilities not to pledge any assets to any third parties (other than those explicitly allowed to be pledged by the amended terms of the 2021 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2021 Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2021 Credit Facilities permit quarterly cash dividends on our Class A and Class B Common Stock up to $0.12 per share so long as no Event of Default (as defined in the 2021 Credit Facilities) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2021 Credit Facilities.

6.125% Notes

On March 10, 2017, we issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes due 2027 (the “6.125% Notes”). The 6.125% Notes were guaranteed by all of our domestic operating subsidiaries. On October 28, 2021, we redeemed the 6.125% Notes. The redemption price of the 6.125% Notes was $263.2 million plus accrued interest. Accordingly, we expect the pre-tax loss on the redemption of the 6.125% Notes to be approximately $13.2 million in the fourth quarter of 2021.

For further discussion of the 6.125% Notes, see Note 6, “Long-Term Debt,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2020.

2019 Mortgage Facility

On November 22, 2019, we entered into a delayed draw-term loan credit agreement which is scheduled to mature on November 22, 2024 (the “2019 Mortgage Facility”). On October 11, 2021, we entered into an amendment to the 2019 Mortgage Facility to permit the issuance of the 2021 Notes.

Under the 2019 Mortgage Facility, Sonic has a maximum borrowing limit of $112.2 million, which varies based on the appraised value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraised value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. Based on balances as of September 30, 2021, we had approximately $92.7 million of outstanding borrowings under the 2019 Mortgage Facility, resulting in total remaining borrowing availability of approximately $19.5 million under the 2019 Mortgage Facility.

Amounts outstanding under the 2019 Mortgage Facility bear interest at (1) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to 2.75% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of the last day of the immediately preceding fiscal quarter (the “Performance Grid”); or (2) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid.

For further discussion of the 2019 Mortgage Facility, see Note 6, “Long-Term Debt,” to the consolidated financial statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2020.

Mortgage Notes to Finance Companies

As of September 30, 2021, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 3.47% and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $358.7 million. These mortgage notes require monthly payments of principal and interest through their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2021 and 2033.

2020 Line of Credit Facility

On June 23, 2020, we entered into a line of credit agreement with Ally Bank (the “2020 Line of Credit Facility”) which was scheduled to mature on June 22, 2021. On June 21, 2021, we extended the maturity date of the 2020 Line of Credit Facility to June 19, 2022. On October 1, 2021, Sonic terminated the 2020 Line of Credit Facility.

SONIC AUTOMOTIVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Covenants

We have agreed under the 2021 Credit Facilities and the 2019 Mortgage Facility not to pledge any assets to any third parties (other than those explicitly allowed to be pledged by the amended terms of the 2021 Credit Facilities and the 2019 Mortgage Facility), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2021 Credit Facilities and the 2019 Mortgage Facility contain certain negative covenants, including certain covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions.

We were in compliance with the financial covenants under the 2021 Credit Facilities, the 2019 Mortgage Facility and the 2020 Line of Credit Facility as of September 30, 2021. Financial covenants include required specified ratios (as each is defined in the 2021 Credit Facilities and the 2019 Mortgage Facility) of: