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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, 2018
OR
☐ 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
Charlotte, North Carolina
28211
(Address of principal executive offices)
(Zip Code)
(704) 566-2400
(Registrant’s telephone number, including area code)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically 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 23, 2018, there were 30,721,226 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,” “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, 2017 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 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 complete additional acquisitions;
• 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 competition in the retail automotive industry, which not only creates 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; and
• the rate and timing of overall economic recovery or decline.
These forward-looking statements speak only as of the date of this report or when made, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission.




SONIC AUTOMOTIVE, INC.
FORM 10-Q 
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS
Page
Item 1. 
Item 2. 
Item 3. 
Item 4. 
Item 1. 
Item 1A. 
Item 2. 
Item 6. 




PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
(Dollars and shares in thousands, except per share amounts) 
Revenues: 
New vehicles $1,235,094 $1,362,301 $3,654,510 $3,809,302 
Used vehicles 745,998 659,724 2,217,616 1,936,088 
Wholesale vehicles 48,578 43,098 167,726 130,174 
Total vehicles 2,029,670 2,065,123 6,039,852 5,875,564 
Parts, service and collision repair 343,118 347,717 1,041,630 1,060,873 
Finance, insurance and other, net 98,061 92,861 295,890 262,832 
Total revenues 2,470,849 2,505,701 7,377,372 7,199,269 
Cost of Sales: 
New vehicles (1,173,453)(1,296,063)(3,478,802)(3,622,264)
Used vehicles (710,681)(620,579)(2,108,219)(1,816,076)
Wholesale vehicles (49,877)(46,390)(176,806)(136,555)
Total vehicles (1,934,011)(1,963,032)(5,763,827)(5,574,895)
Parts, service and collision repair (176,302)(180,047)(538,135)(550,788)
Total cost of sales (2,110,313)(2,143,079)(6,301,962)(6,125,683)
Gross profit 360,536 362,622 1,075,410 1,073,586 
Selling, general and administrative expenses (289,022)(283,974)(871,410)(870,139)
Impairment charges  (200)(13,961)(3,315)
Depreciation and amortization (23,377)(22,686)(71,067)(65,751)
Operating income (loss) 48,137 55,762 118,972 134,381 
Other income (expense): 
Interest expense, floor plan (12,192)(8,882)(34,815)(26,413)
Interest expense, other, net (13,313)(13,028)(40,144)(39,200)
Other income (expense), net  4 107 (14,490)
Total other income (expense) (25,505)(21,906)(74,852)(80,103)
Income (loss) from continuing operations before taxes 22,632 33,856 44,120 54,278 
Provision for income taxes for continuing operations - benefit (expense) (7,331)(14,126)(13,711)(22,254)
Income (loss) from continuing operations 15,301 19,730 30,409 32,024 
Discontinued operations: 
Income (loss) from discontinued operations before taxes (252)(481)(797)(1,650)
Provision for income taxes for discontinued operations - benefit (expense) 69 191 218 657 
Income (loss) from discontinued operations (183)(290)(579)(993)
Net income (loss) $15,118 $19,440 $29,830 $31,031 
Basic earnings (loss) per common share: 
Earnings (loss) per share from continuing operations $0.36 $0.45 $0.71 $0.72 
Earnings (loss) per share from discontinued operations (0.01) (0.01)(0.02)
Earnings (loss) per common share $0.35 $0.45 $0.70 $0.70 
Weighted average common shares outstanding 42,673 43,496 42,708 44,281 
Diluted earnings (loss) per common share: 
Earnings (loss) per share from continuing operations $0.36 $0.45 $0.71 $0.72 
Earnings (loss) per share from discontinued operations (0.01)(0.01)(0.02)(0.02)
Earnings (loss) per common share $0.35 $0.44 $0.69 $0.70 
Weighted average common shares outstanding 42,994 43,811 42,964 44,585 
Dividends declared per common share $0.06 $0.05 $0.18 $0.15 

 See notes to condensed consolidated financial statements.


1


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
(Dollars in thousands) 
Net income (loss) $15,118 $19,440 $29,830 $31,031 
Other comprehensive income (loss) before taxes: 
Change in fair value of interest rate swap and interest rate cap agreements 533 747 5,736 2,891 
Provision for income tax benefit (expense) related to 
components of other comprehensive income (loss) (145)(284)(1,563)(1,099)
Other comprehensive income (loss) 388 463 4,173 1,792 
Comprehensive income (loss) $15,506 $19,903 $34,003 $32,823 

 See notes to condensed consolidated financial statements.


2


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 2018 December 31, 2017 
(Dollars in thousands) 
ASSETS 
Current Assets: 
Cash and cash equivalents $7,582 $6,352 
Receivables, net 350,912 482,126 
Inventories 1,474,832 1,512,745 
Other current assets 30,649 18,574 
Total current assets 1,863,975 2,019,797 
Property and Equipment, net 1,207,263 1,146,881 
Goodwill 510,160 525,780 
Other Intangible Assets, net 71,957 74,589 
Other Assets 50,576 51,471 
Total Assets $3,703,931 $3,818,518 
LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current Liabilities: 
Notes payable - floor plan - trade $750,512 $804,238 
Notes payable - floor plan - non-trade 656,535 709,098 
Trade accounts payable 119,082 129,903 
Accrued interest 12,258 12,316 
Other accrued liabilities 241,443 237,963 
Current maturities of long-term debt 33,110 61,314 
Total current liabilities 1,812,940 1,954,832 
Long-Term Debt 957,519 963,389 
Other Long-Term Liabilities 79,179 61,918 
Deferred Income Taxes 50,449 51,619 
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; 64,197,385 shares issued and 30,721,226 shares outstanding at September 30, 2018; 63,456,698 shares issued and 31,166,205 shares outstanding at December 31, 2017 642 635 
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at September 30, 2018 and December 31, 2017 121 121 
Paid-in capital 743,788 732,854 
Retained earnings 651,436 625,356 
Accumulated other comprehensive income (loss) 5,480 1,307 
Treasury stock, at cost; 33,476,159 Class A Common Stock shares held at September 30, 2018 and 32,290,493 Class A Common Stock shares held at December 31, 2017 (597,623)(573,513)
Total Stockholders’ Equity 803,844 786,760 
Total Liabilities and Stockholders’ Equity $3,703,931 $3,818,518 

 See notes to condensed consolidated financial statements.


3


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENT 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 in thousands) 
Balance at December 31, 2017 63,457 $635 (32,290)$(573,513)12,029 $121 $732,854 $625,356 $1,307 $786,760 
Shares awarded under stock compensation plans 740 7 — — — — 345 — — 352 
Purchases of treasury stock — — (1,186)(24,110)— — — — — (24,110)
Change in fair value of interest rate swap and interest rate cap agreements, net of tax expense of $1,563 — — — — — — — — 4,173 4,173 
Restricted stock amortization — — — — — — 10,589 — — 10,589 
Net income (loss) — — — — — — — 29,830 — 29,830 
Cumulative effect of change in accounting principle (1) — — — — — — — 3,918 — 3,918 
Dividends declared — — — — — — — (7,668)— (7,668)
Balance at September 30, 2018 64,197 $642 (33,476)$(597,623)12,029 $121 $743,788 $651,436 $5,480 $803,844 
(1)  See Note 1, “Summary of Significant Accounting Policies,” of the notes to the condensed consolidated financial statements for further discussion.
 See notes to condensed consolidated financial statements.


4


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, 
20182017
(Dollars in thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES: 
Net income (loss) $29,830 $31,031 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 
Depreciation and amortization of property and equipment 71,063 65,747 
Provision for bad debt expense 370 657 
Other amortization 463 487 
Debt issuance cost amortization 1,828 1,784 
Debt discount amortization, net of premium amortization  157 
Stock-based compensation expense 10,589 8,902 
Deferred income taxes (5,708)2,745 
Net distributions from equity investee (21)17 
Asset impairment charges 13,961 3,315 
Loss (gain) on disposal of dealerships and property and equipment (41,116)(8,594)
Loss (gain) on exit of leased dealerships 2,697 2,016 
Loss (gain) on retirement of debt  14,607 
Changes in assets and liabilities that relate to operations: 
Receivables 150,013 24,330 
Inventories (20,270)191,077 
Other assets 2,017 (4,286)
Notes payable - floor plan - trade (53,726)(131,578)
Trade accounts payable and other liabilities (6,517)(14,282)
Total adjustments 125,643 157,101 
Net cash provided by (used in) operating activities 155,473 188,132 
CASH FLOWS FROM INVESTING ACTIVITIES: 
Purchase of businesses, net of cash acquired  (76,610)
Purchases of land, property and equipment (133,918)(181,893)
Proceeds from sales of property and equipment 13,290 392 
Proceeds from sales of dealerships 121,859 22,578 
Net cash provided by (used in) investing activities 1,231 (235,533)
CASH FLOWS FROM FINANCING ACTIVITIES: 
Net (repayments) borrowings on notes payable - floor plan - non-trade (52,563)(74,974)
Borrowings on revolving credit facilities 738,262 253,668 
Repayments on revolving credit facilities (799,736)(118,668)
Proceeds from issuance of long-term debt 21,072 288,419 
Debt issuance costs (149)(4,673)
Principal payments and repurchase of long-term debt (31,337)(31,194)
Repurchase of debt securities  (210,914)
Purchases of treasury stock (24,110)(37,347)
Issuance of shares under stock compensation plans 352 46 
Dividends paid (7,265)(6,691)
Net cash provided by (used in) financing activities (155,474)57,672 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,230 10,271 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 6,352 3,108 
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,582 $13,379 
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: 
Change in fair value of interest rate swap and interest rate cap agreements (net of tax expense of $1,563 and $1,099 in the nine months ended September 30, 2018 and 2017, respectively) $4,173 $1,792 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 
Cash paid (received) during the period for: 
Interest, including amount capitalized $73,372 $67,523 
Income taxes $32,956 $30,752 


 See notes to condensed consolidated financial statements.


5

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation  The accompanying condensed consolidated financial statements of Sonic Automotive, Inc. and its wholly owned subsidiaries (“Sonic,” the “Company,” “we,” “us” and “our”) for the three and nine months ended September 30, 2018 and 2017 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 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, third and fourth quarters. The accompanying 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, 2017.
Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 as well as several subsequent amendments to amend the accounting guidance on revenue recognition. The amendments to the revenue recognition accounting guidance are included in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” and are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments to this guidance must be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the amendments in each prior reporting period with the option to elect certain practical expedients; or (2) a modified retrospective approach with the cumulative effect of initially applying the amendments recognized at the date of adoption (which requires additional footnote disclosures). These amendments were effective for reporting periods beginning after December 15, 2017. On January 1, 2018, Sonic adopted ASC 606 (the “new revenue standard”) using the modified retrospective transition approach applied to contracts not completed as of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for that period. We do not expect the adoption of the new revenue standard to have a material impact on our net income on an ongoing basis.
Under the new revenue standard, 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. The principles apply 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 new revenue standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Sonic does not include the cost of obtaining contracts within the related revenue streams. Sonic has elected the practical expedient to expense the costs to obtain a contract when incurred.

During the implementation process, management evaluated its established business processes, revenue transaction streams and accounting policies, and generally expects similar performance obligations to result under the new revenue standard as compared with prior U.S. GAAP. Management identified its 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 and other insurance contracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. As a result of this evaluation during the implementation process, management expects the amounts and timing of revenue recognition to generally remain the same, with the exception of the timing of revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certain retrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenues”), both of which are subject to accelerated recognition under the new revenue standard. Work in process revenues are recognized over time based on the completed work to date and 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. F&I retro revenues, which represent variable consideration, subject to a 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, Sonic utilizes 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.
6

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. Sonic does 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).
The cumulative effect of the adjustments to our September 30, 2018 condensed consolidated statements of income and January 1, 2018 condensed consolidated balance sheet for the adoption of ASC 606 were as follows:
Pre-ASC 606 Results Effects of Adoption of ASC 606 As Reported 
Three Months Ended Three Months Ended
Income Statement September 30, 2018September 30, 2018
(In thousands) 
Revenues: 
Parts, service and collision repair $340,600 $2,518 $343,118 
Finance, insurance and other, net 96,031 2,030 98,061 
Total revenues $436,631 $4,548 $441,179 
Cost of Sales: 
Parts, service and collision repair $(175,153)$(1,149)$(176,302)
Selling, general and administrative expenses $(288,639)$(383)$(289,022)
Operating income (loss): $45,121 $3,016 $48,137 

Pre-ASC 606 Results Effects of Adoption of ASC 606 As Reported 
Nine Months Ended Nine Months Ended 
Income Statement September 30, 2018September 30, 2018
(In thousands) 
Revenues: 
Parts, service and collision repair $1,041,424 $206 $1,041,630 
Finance, insurance and other, net 289,937 5,953 295,890 
Total revenues $1,331,361 $6,159 $1,337,520 
Cost of Sales: 
Parts, service and collision repair $(537,990)$(145)$(538,135)
Selling, general and administrative expenses $(871,394)$(16)$(871,410)
Operating income (loss): $112,974 $5,998 $118,972 

Balance Sheet December 31, 2017Effects of Adoption of ASC 606 January 1, 2018
(In thousands) 
Assets: 
Receivables, net $482,126 $4,590 $486,716 
Contract assets (1)  2,082 2,082 
Liabilities: 
Other accrued liabilities $237,963 $1,286 $239,249 
Deferred income taxes 51,619 1,468 53,087 
Stockholders’ Equity: 
Retained earnings $625,356 $3,918 $629,274 
(1)  Contract assets are included in receivables, net in the accompanying condensed consolidated balance sheets.
Receivables, net at September 30, 2018 includes approximately $4.7 million related to work in process and a contract asset of approximately $8.0 million related to F&I retro revenues. Changes in contract assets from January 1, 2018 to September 30, 2018 were primarily due to ordinary business activity.
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that leases are classified as either finance or operating leases, a right-of-use asset and lease liability is recognized in the statement of financial position and repayments are classified within operating activities in the
7

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
statement of cash flows. The amendments in this ASU are to be applied using a modified retrospective approach and are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We plan to adopt this ASU effective January 1, 2019. While management is still in the process of quantifying the impact of adopting the provisions of this ASU, management expects that upon adoption of this ASU, the presentation of certain items in our consolidated financial position, cash flows and other disclosures will be materially impacted, primarily due to the recognition of a right-of-use asset and an associated liability in our consolidated balance sheets and a change in the timing and classification of certain items in our consolidated statements of income and consolidated statements of cash flows as a result of the derecognition of the lease liability. We are currently implementing the changes required under this ASU by identifying and assessing our existing lease contracts and importing lease data into specialized lease accounting software to meet the future reporting requirements of this ASU. As part of our implementation plan, we are also evaluating the changes in internal controls and processes that are necessary to implement this ASU, but do not expect material changes. We expect to provide a quantitative disclosure of the impact of the adoption of this ASU in our Form 10-K for the year ending December 31, 2018.
In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC Topic 815, Derivatives and Hedging. This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We do not believe the effects of this ASU will materially impact our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of 2017, from accumulated other comprehensive income to retained earnings. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We are currently in the process of evaluating the effects of this ASU on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We are currently in the process of evaluating the effects of this ASU on our consolidated financial statements.
Principles of Consolidation  All of our subsidiaries are wholly owned and consolidated in the accompanying condensed consolidated financial statements, except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Income Tax Expense – Beginning January 1, 2018, the federal corporate income tax rate changed from 35.0% to 21.0% along with other tax provision changes that affect the deductibility of certain expenses. Sonic considered these items in its calculation of income tax amounts as of September 30, 2018 and for the three and nine months ended September 30, 2018. The overall effective tax rate from continuing operations was 32.4% and 31.1% for the three and nine months ended September 30, 2018, respectively, and 41.7% and 41.0% for the three and nine months ended September 30, 2017, respectively. Income tax expense for the three months ended September 30, 2018 includes a $0.8 million discrete charge for non-deductible executive officer compensation related to executive transition costs. Income tax expense for the nine months ended September 30, 2018 includes a $0.8 million discrete charge for non-deductible executive officer compensation related to executive transition costs, a $0.2 million discrete charge related to changes in uncertain tax positions and a $0.6 million discrete charge for non-deductible book goodwill related to dealership dispositions, offset partially by a $0.9 million discrete benefit related to vested or exercised stock compensation. Income tax expense for the three months ended September 30, 2017 includes a $0.4 million discrete charge related to a non-deductible asset impairment charge. Income tax expense for the nine months ended September 30, 2017 includes a $0.4 million discrete charge related to a non-deductible asset impairment charge and  a benefit of approximately $0.5 million as a result of the adoption of ASU 2016-09 which requires all book-tax differences related to the exercise of stock options or vesting of restricted stock or restricted stock units to flow through the provision for income taxes. Sonic’s effective tax rate varies from year to year based on the distribution of taxable income between states in which the Company operates and other tax adjustments. Sonic expects the annual effective tax rate in future periods to fall within a range of 26.0% to 28.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets or discrete tax adjustments.
2. Business Acquisitions and Dispositions
Acquisitions  Sonic did not acquire any businesses during the three and nine months ended September 30, 2018. During the three months ended September 30, 2017, Sonic acquired a pre-owned vehicle business for approximately $76.6 million.
8

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dispositions  Sonic disposed of six franchised dealerships during the nine months ended September 30, 2018 that generated net cash of approximately $121.9 million. In addition to these dispositions, Sonic terminated one luxury franchised dealership and ceased operations at three stores in our EchoPark Segment. Sonic disposed of one mid-line import franchised dealership during the three months ended September 30, 2017 that generated net cash of approximately $22.6 million.
Revenues and other activities associated with disposed franchised dealerships classified as discontinued operations were as follows:
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
(In thousands) 
Income (loss) from operations $(148)$(119)$(478)$(561)
Lease exit accrual adjustments and charges (104)(362)(319)(1,089)
Pre-tax income (loss) $(252)$(481)$(797)$(1,650)
Total revenues $ $ $ $ 
Revenues and other activities associated with disposed franchised dealerships that remain in continuing operations were as follows:
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
(In thousands) 
Income (loss) from operations $(910)$(1,779)$(6,039)$(4,067)
Gain (loss) on disposal (88)8,490 39,149 8,466 
Lease exit accrual adjustments and charges (15) (33) 
Pre-tax income (loss) $(1,013)$6,711 $33,077 $4,399 
Total revenues $ $127,313 $108,754 $393,662 

3. Inventories
Inventories consist of the following:
September 30, 2018 December 31, 2017 
(In thousands) 
New vehicles $992,935 $1,017,523 
Used vehicles 280,143 294,496 
Service loaners 137,337 130,406 
Parts, accessories and other 64,417 70,320 
Net inventories $1,474,832 $1,512,745 


9

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment, net consists of the following:
September 30, 2018 December 31, 2017 
(In thousands) 
Land $385,814 $370,828 
Building and improvements 984,214 893,768 
Software and computer equipment 127,515 147,812 
Parts and service equipment 108,281 105,123 
Office equipment and fixtures 94,942 96,066 
Company vehicles 9,144 9,723 
Construction in progress 74,576 54,429 
Total, at cost 1,784,486 1,677,749 
Less accumulated depreciation (567,559)(527,379)
Subtotal 1,216,927 1,150,370 
Less assets held for sale (1) (9,664)(3,489)
Property and equipment, net $1,207,263 $1,146,881 
(1)  Classified in other current assets in the accompanying condensed consolidated balance sheets.
In the three and nine months ended September 30, 2018, capital expenditures were approximately $34.3 million and $133.9 million, respectively, and in the three and nine months ended September 30, 2017, capital expenditures were approximately $60.7 million and $181.9 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, 2018 consists of real property not being used in operations that we expect to dispose of in the next 12 months.
There were no impairment charges for the three months ended September 30, 2018. Impairment charges for the nine months ended September 30, 2018 were approximately $14.0 million, which include the write-off of certain costs associated with internally developed software as well as the write-off of capitalized costs associated with the abandonment of certain construction projects. Impairment charges for the three and nine months ended September 30, 2017 were approximately $0.2 million and $3.3 million, respectively, which include the write-off of goodwill and property and equipment related to the closure of two pre-owned stores that were purchased in 2016 as well as the write-off of capitalized costs associated with the abandonment of certain construction projects.
5. Goodwill and Intangible Assets
The carrying amount of goodwill was approximately $510.2 million and $525.8 million as of September 30, 2018 and December 31, 2017, respectively. The carrying amount of goodwill is net of accumulated impairment losses of approximately $797.6 million as of both September 30, 2018 and December 31, 2017. The carrying amount of franchise assets was approximately $67.8 million and $69.9 million as of September 30, 2018 and December 31, 2017, respectively. The changes in the carrying amount of both goodwill and franchise assets are related to the disposition of several franchised dealerships during the nine months ended September 30, 2018. At December 31, 2017, Sonic had approximately $4.7 million of definite life intangibles related to favorable lease agreements. After the effect of amortization of the definite life intangibles, the balance recorded at September 30, 2018 was approximately $4.2 million. Both franchise assets and favorable lease agreement assets are included in other intangible assets, net in the accompanying condensed consolidated balance sheets.
10

SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. Long-Term Debt
Long-term debt consists of the following:
September 30, 2018 December 31, 2017 
(In thousands) 
2016 Revolving Credit Facility (1)$13,526 $75,000 
5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”) 289,273 289,273 
6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”) 250,000 250,000 
Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03% 226,548 199,972 
Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR 183,499 219,719 
Debt issuance costs (11,528)(13,208)
Other 39,311 3,947 
Total debt $990,629 $1,024,703 
Less current maturities (33,110)(61,314)
Long-term debt $957,519 $963,389 
(1)  The interest rate on the 2016 Revolving Credit Facility (as defined below) was 250 and 225 basis points above the London Interbank Offer Rate (“LIBOR”) at September 30, 2018 and December 31, 2017, respectively.
2016 Credit Facilities
On November 30, 2016, Sonic entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) and amended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 Revolving Credit Facility, the “2016 Credit Facilities”), which are scheduled to mature on November 30, 2021.
Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving Borrowing Base”). The 2016 Revolving Credit Facility may be increased at Sonic’s option up to $300.0 million upon satisfaction of certain conditions. As of September 30, 2018, the 2016 Revolving Borrowing Base was approximately $222.5 million based on balances as of such date. As of September 30, 2018, Sonic had approximately $13.5 million of outstanding borrowings and approximately $16.2 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in total borrowing availability of approximately $192.8 million under the 2016 Revolving Credit Facility.
The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2016 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2016 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount of up to $1.015 billion. We may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.265 billion, which shall be allocated between the 2016 New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as we request, with no more than 30% of the aggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2016 Floor Plan 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. The amounts outstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.
We agreed under the 2016 Credit Facilities not to pledge any assets to any third parties (other than those explicitly allowed under the amended terms of the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 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 2016 Credit Facilities permit cash dividends on our Class A and Class B Common Stock so long as no event of default (as defined in the 2016 Credit Facilities) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2016 Credit Facilities.
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SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5.0% Notes
On May 9, 2013, Sonic issued $300.0 million in aggregate principal amount of unsecured senior subordinated 5.0% Notes, which are scheduled to mature on May 15, 2023. The 5.0% Notes were issued at a price of 100.0% of the principal amount thereof. The 5.0% Notes are guaranteed by Sonic’s domestic operating subsidiaries. Interest on the 5.0% Notes is payable semi-annually in arrears on May 15 and November 15 of each year. On September 30, 2016, Sonic repurchased approximately $10.7 million of the outstanding 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto. Sonic may redeem the remaining outstanding 5.0% Notes, in whole or in part, at any time.
The indenture governing the 5.0% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 5.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and Class B Common Stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and Class B Common Stock if Sonic complies with the terms of the indenture governing the 5.0% Notes. Sonic was in compliance with all restrictive covenants in the indenture governing the 5.0% Notes as of September 30, 2018.
6.125% Notes
On March 10, 2017, Sonic issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes, which are scheduled to mature on March 15, 2027. The 6.125% Notes were issued at a price of 100.0% of the principal amount thereof. Sonic used the net proceeds from the issuance of the 6.125% Notes (i) to repurchase all of its then outstanding 7.0% Senior Subordinated Notes due 2022 on March 27, 2017 (the “7.0% Notes”) and (ii) for other general corporate purposes. The 6.125% Notes are guaranteed by Sonic’s domestic operating subsidiaries. Interest on the 6.125% Notes is payable semi-annually in arrears on March 15 and September 15 of each year. Sonic may redeem the 6.125% Notes, in whole or in part, at any time on or after March 15, 2022.
The indenture governing the 6.125% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing the 6.125% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and Class B Common Stock in excess of $0.12 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and Class B Common Stock if Sonic complies with the terms of the indenture governing the 6.125% Notes. Sonic was in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as of September 30, 2018.
Mortgage Notes
During the nine months ended September 30, 2018, Sonic obtained approximately $21.1 million in mortgage financing related to three of its operating locations. As of September 30, 2018, the weighted average interest rate was 4.61% and the total outstanding mortgage principal balance was approximately $410.0 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 2018 and 2033.
Other
Other debt consists of capital lease obligations, which increased approximately $35.4 million during the nine months ended September 30, 2018 due to several new lease contracts executed in the three months ended September 30, 2018 meeting the criteria to be treated as a capital lease obligation. The recorded capital lease obligation and corresponding lease asset will be amortized into earnings over the term of the agreements.
Covenants
Under the 2016 Credit Facilities, Sonic agreed not to pledge any assets to any third parties (other than those explicitly allowed under the amended terms of the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016 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.
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SONIC AUTOMOTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sonic was in compliance with the covenants under the 2016 Credit Facilities as of September 30, 2018. Financial covenants include required specified ratios (as each is defined in the 2016 Credit Facilities) of:
Covenant 
Minimum Consolidated Liquidity Ratio Minimum Consolidated Fixed Charge Coverage Ratio Maximum Consolidated Total Lease Adjusted Leverage Ratio 
Required ratio 1.05 1.20 5.75 
September 30, 2018 actual 1.13 1.45 5.11 
The 2016 Credit Facilities contain events of default, including cross defaults to other material indebtedness, change of control events and other events of default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, Sonic could be required to immediately repay all outstanding amounts under the 2016 Credit Facilities.
After giving effect to the applicable restrictions on the payment of dividends under its debt agreements, as of September 30, 2018, Sonic had approximately $151.8 million of net income and retained earnings free of such restrictions. Sonic was in compliance with all restrictive covenants under its debt agreements as of September 30, 2018.
In addition, many of Sonic’s facility leases are governed by a guarantee agreement between the landlord and Sonic that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2016 Credit Facilities with the exception of one financial covenant related to the ratio of EBTDAR to Rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of September 30, 2018, the ratio was 3.55 to 1.00.
Derivative Instruments and Hedging Activities
Sonic has interest rate cap agreements designated as hedging instruments to limit its exposure to increases in LIBOR rates above certain levels. Under the terms of these interest rate caps, interest rates reset monthly. The fair value of these interest rate cap positions at September 30, 2018 was an asset of approximately $8.6 million, with approximately $6.6 million included in other assets and approximately $2.0 million included in other current assets in the accompanying condensed consolidated balance sheets. During the nine months ended September 30, 2018, Sonic terminated all of its previously outstanding interest rate cash flow swap agreements for net cash proceeds of approximately $4.8 million, which will be amortized into income as a reduction of interest expense, other, net on a ratable basis over the original term of these agreements (through July 1, 2020). The fair value of the outstanding interest rate swap and interest rate cap positions at December 31, 2017 was a net asset of approximately $4.7 million, with approximately $5.1 million included in other assets and approximately $0.9 million included in other current assets in the accompanying condensed consolidated balance sheets, offset partially by approximately $1.0 million included in other accrued liabilities and approximately $0.3 million included in other long-term liabilities in the accompanying condensed consolidated balance sheets.
Under the terms of the interest rate cap agreements, Sonic will receive and pay interest based on the following:
Notional
Amount 
Pay Rate (1) Receive Rate (2) Start Date  End Date 
(In millions) 
$250.0 2.000 one-month LIBOR September 1, 2017June 30, 2018
$375.0 2.000 one-month LIBOR July 1, 2018June 30, 2019
$375.0 3.000 one-month LIBOR July 1, 2018June 30, 2019
$312.5 2.000 one-month LIBOR July 1, 2019June 30, 2020
$250.0 3.000 one-month LIBOR July 1, 2019June 30, 2020
$225.0 3.000 one-month LIBOR July 1, 2020June 30, 2021
$150.0 2.000 one-month LIBOR July 1, 2020July 1, 2021
$