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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 March 31, 2019
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 filerAccelerated 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 April 23, 2019, there were 31,051,431 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, 2018 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;
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.
QUARTERLY REPORT ON FORM 10-Q 
FOR THE THREE MONTHS ENDED MARCH 31, 2019

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 March 31,
20192018
(Dollars and shares in thousands, except per share amounts)
Revenues:
New vehicles$1,066,334 $1,180,846 
Used vehicles820,366 709,046 
Wholesale vehicles54,770 65,398 
Total vehicles1,941,470 1,955,290 
Parts, service and collision repair341,430 351,758 
Finance, insurance and other, net106,238 93,725 
Total revenues2,389,138 2,400,773 
Cost of Sales:
New vehicles(1,012,538)(1,124,046)
Used vehicles(783,358)(672,275)
Wholesale vehicles(56,037)(69,823)
Total vehicles(1,851,933)(1,866,144)
Parts, service and collision repair(178,194)(182,130)
Total cost of sales(2,030,127)(2,048,274)
Gross profit359,011 352,499 
Selling, general and administrative expenses(247,095)(304,925)
Impairment charges(1,952)(3,643)
Depreciation and amortization(22,649)(23,743)
Operating income (loss)87,315 20,188 
Other income (expense):
Interest expense, floor plan(13,226)(10,677)
Interest expense, other, net(12,853)(13,456)
Other income (expense), net100 89 
Total other income (expense)(25,979)(24,044)
Income (loss) from continuing operations before taxes61,336 (3,856)
Provision for income taxes for continuing operations - benefit (expense)(18,987)1,842 
Income (loss) from continuing operations42,349 (2,014)
Discontinued operations:
Income (loss) from discontinued operations before taxes(180)(248)
Provision for income taxes for discontinued operations - benefit (expense)52 68 
Income (loss) from discontinued operations(128)(180)
Net income (loss)$42,221 $(2,194)
Basic earnings (loss) per common share:
Earnings (loss) per share from continuing operations$0.99 $(0.05)
Earnings (loss) per share from discontinued operations(0.01) 
Earnings (loss) per common share$0.98 $(0.05)
Weighted average common shares outstanding42,838 42,789 
Diluted earnings (loss) per common share:
Earnings (loss) per share from continuing operations$0.99 $(0.05)
Earnings (loss) per share from discontinued operations(0.01) 
Earnings (loss) per common share$0.98 $(0.05)
Weighted average common shares outstanding42,888 42,789 

 See notes to unaudited condensed consolidated financial statements.


1


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

Three Months Ended March 31,
20192018
(Dollars in thousands)
Net income (loss)$42,221 $(2,194)
Other comprehensive income (loss) before taxes:
Change in fair value of interest rate swap and interest rate cap agreements(2,349)4,044 
Amortization of terminated interest rate swap agreements(288) 
Total other comprehensive income (loss) before taxes(2,637)4,044 
Provision for income tax benefit (expense) related to components of other
comprehensive income (loss)
776 (1,130)
Other comprehensive income (loss)(1,861)2,914 
Comprehensive income (loss)$40,360 $720 



 See notes to unaudited condensed consolidated financial statements.


2


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 2019December 31, 2018
(Dollars in thousands)
ASSETS
Current Assets:
Cash and cash equivalents$2,722 $5,854 
Receivables, net371,768 438,186 
Inventories1,530,201 1,528,461 
Other current assets118,578 20,886 
Total current assets2,023,269 1,993,387 
Property and Equipment, net1,137,573 1,178,489 
Goodwill487,306 509,592 
Other Intangible Assets, net64,300 69,705 
Other Assets43,663 45,634 
Right-of-Use Assets382,979  
Total Assets$4,139,090 $3,796,807 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Notes payable - floor plan - trade$763,090 $821,074 
Notes payable - floor plan - non-trade722,807 712,966 
Trade accounts payable127,443 114,263 
Current lease liabilities50,594  
Accrued interest12,892 13,417 
Other accrued liabilities251,038 257,823 
Current maturities of long-term debt38,416 26,304 
Total current liabilities1,966,280 1,945,847 
Long-Term Debt880,939 918,779 
Other Long-Term Liabilities67,819 75,887 
Long-Term Lease Liabilities 344,922  
Deferred Income Taxes26,844 33,178 
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; 64,676,858 shares issued and 31,051,431 shares outstanding at March 31, 2019; 64,197,385 shares issued and 30,721,226 shares outstanding at December 31, 2018647 642 
Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at March 31, 2019 and December 31, 2018121 121 
Paid-in capital747,920 745,052 
Retained earnings701,182 670,691 
Accumulated other comprehensive income (loss)2,372 4,233 
Treasury stock, at cost; 33,625,427 Class A Common Stock shares held at March 31, 2019 and 33,476,159 Class A Common Stock shares held at December 31, 2018(599,956)(597,623)
Total Stockholders’ Equity852,286 823,116 
Total Liabilities and Stockholders’ Equity$4,139,090 $3,796,807 

 See notes to unaudited condensed consolidated financial statements.


3


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)


Class A
Common Stock
Class A
Treasury Stock
Class B
Common Stock
Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmountSharesAmountSharesAmount
(Dollars and shares in thousands, except per share amounts)
Balance at December 31, 201763,457 $635 (32,290)$(573,513)12,029 $121 $732,854 $625,356 $1,307 $786,760 
Shares awarded under stock compensation plans628 6 — — — — 345 — — 351 
Purchases of treasury stock— — (1,153)(23,449)— — — — — (23,449)
Change in fair value of interest rate swap and interest rate cap agreements, net of tax expense of $1,130— — — — — — — — 2,914 2,914 
Restricted stock amortization— — — — — — 2,962 — — 2,962 
Net income (loss)— — — — — — — (2,194)— (2,194)
Cumulative effect of change in accounting principle— — — — — — — 3,918 — 3,918 
Class A dividends declared ($0.06)— — — — — — — (1,823)— (1,823)
Class B dividends declared ($0.06)— — — — — — — (722)— (722)
Balance at March 31, 201864,085 $641 (33,443)$(596,962)12,029 $121 $736,161 $624,535 $4,221 $768,717 

Class A
Common Stock
Class A
Treasury Stock
Class B
Common Stock
Paid-In CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Stockholders’ Equity
SharesAmountSharesAmountSharesAmount
(Dollars and shares in thousands, except per share amounts)
Balance at December 31, 201864,197 $642 (33,476)$(597,623)12,029 $121 $745,052 $670,691 $4,233 $823,116 
Shares awarded under stock compensation plans480 5 — — — — 54 — — 59 
Purchases of treasury stock— — (149)(2,333)— — — — — (2,333)
Change in fair value of interest rate swap and interest rate cap agreements, net of tax benefit of $776— — — — — — — — (1,861)(1,861)
Restricted stock amortization— — — — — — 2,814 — — 2,814 
Net income (loss)— — — — — — — 42,221 — 42,221 
Cumulative effect of change in accounting principle— — — — — — — (7,428)— (7,428)
Class A dividends declared ($0.10)— — — — — — — (3,099)— (3,099)
Class B dividends declared ($0.10)— — — — — — — (1,203)— (1,203)
Balance at March 31, 201964,677 $647 (33,625)$(599,956)12,029 $121 $747,920 $701,182 $2,372 $852,286 
(1) See Note 1, “Summary of Significant Accounting Policies,” for further discussion.
 See notes to unaudited condensed consolidated financial statements.


4


SONIC AUTOMOTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
20192018
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$42,221 $(2,194)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization of property and equipment22,197 23,741 
Provision for bad debt expense159 111 
Other amortization1 156 
Debt issuance cost amortization591 598 
Stock-based compensation expense2,814 2,962 
Deferred income taxes(2,816)(1,069)
Net distributions from equity investee379 (168)
Asset impairment charges1,952 3,643 
Loss (gain) on disposal of dealerships and property and equipment(46,785)(1,216)
Loss (gain) on exit of leased dealerships(170)5,070 
Changes in assets and liabilities that relate to operations:
Receivables66,814 120,792 
Inventories(40,210)(42,836)
Other assets(66,967)(3,774)
Notes payable - floor plan - trade(57,984)(28,951)
Trade accounts payable and other liabilities(16,525)(22,043)
Total adjustments(136,550)57,016 
Net cash provided by (used in) operating activities(94,329)54,822 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of land, property and equipment(30,619)(65,713)
Proceeds from sales of property and equipment1,125 2,178 
Proceeds from sales of dealerships121,700 7,461 
Net cash provided by (used in) investing activities92,206 (56,074)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on notes payable - floor plan - non-trade9,841 (3,991)
Borrowings on revolving credit facilities126,185 301,803 
Repayments on revolving credit facilities(126,185)(276,803)
Proceeds from issuance of long-term debt 20,960 
Debt issuance costs (159)
Principal payments and repurchase of long-term debt(6,011)(12,489)
Purchases of treasury stock(2,333)(23,449)
Issuance of shares under stock compensation plans59 351 
Dividends paid(2,565)(2,160)
Net cash provided by (used in) financing activities(1,009)4,063 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(3,132)2,811 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR5,854 6,352 
CASH AND CASH EQUIVALENTS, END OF PERIOD$2,722 $9,163 
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Change in fair value of interest rate swap and interest rate cap agreements (net of tax benefit of $776 in the three months ended March 31, 2019 and net of tax expense of $1,130 in the three months ended March 31, 2018)$(1,861)$2,914 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, including amount capitalized$26,945 $23,360 
Income taxes$10,277 $ 


 See notes to unaudited condensed consolidated financial statements.


5

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED 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 months ended March 31, 2019 and 2018 are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect, in the opinion of management, all material normal recurring adjustments necessary to fairly state the financial position, results of operations and cash flows for the periods presented. The operating results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year or future interim periods, because the first quarter historically has contributed less operating profit than the second, third and fourth quarters. 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, 2018.
Recent Accounting Pronouncements – In February 2016, the Financial Accounting Standards Board (the “FASB”) established Accounting Standards Codification (“ASC”) 842, “Leases,” by issuing Accounting Standards Update (“ASU”) 2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10 and ASU 2018-11) in order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Prior to adoption of the new lease standard, only leases classified as capital leases under ASC 840 were recorded in the consolidated balance sheets. Under ASC 842, “Leases,” an entity must classify leases as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset (“ROU asset”) and lease liability are required to be recognized in the consolidated balance sheets for both finance and operating leases with a term longer than 12 months. The new lease standard requires a modified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or (2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. We adopted the new lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosures required under the new lease standard have not been provided for dates and periods prior to January 1, 2019. The new lease standard provides for a number of optional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, lease classification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accounting policy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the use of hindsight in estimating lease term or assessing impairment of ROU assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We have elected all of the practical expedients permitted under the transition guidance within the new lease standard. The new lease standard also provides practical expedients for ongoing accounting. We have elected the short-term lease recognition exemption for our real estate and equipment leases, which means that for those leases that qualify (less than 1-year term), we will not recognize ROU assets or lease liabilities. We have also elected not to separate non-lease components of an agreement from lease components (by asset class).
The cumulative effect of the adoption of ASC 842, “Leases,” on our unaudited condensed consolidated balance sheet as of January 1, 2019 was the recognition of ROU assets of approximately $406.9 million (including approximately $18.9 million related to capital leases that was reclassified from property and equipment, net in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2018) and lease liabilities of approximately $419.5 million (including approximately $20.6 million related to capital leases that was reclassified from current maturities of long-term debt and long-term debt in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2018). Upon adoption of ASC 842, “Leases,” we evaluated ROU assets for impairment and determined that approximately $10.5 million of impairment was required related to newly recognized ROU assets that would have been impaired in previous periods. This impairment of the ROU asset as of January 1, 2019 was recorded, net of related income tax effects, as a $7.4 million reduction of beginning retained earnings. The adoption of ASC 842 did not have a material affect on our unaudited condensed consolidated statements of income or unaudited condensed consolidated statements of cash flows. The effect of the adoption of ASC 842, “Leases,” on our unaudited condensed consolidated balance sheet as of January 1, 2019 and March 31, 2019 was as follows:

6

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Before Impact of ASC 842Effects of Adoption of ASC 842After Impact of ASC 842
December 31, 2018January 1, 2019
Balance Sheet(In thousands)
Assets:
Property and Equipment, net$1,178,489 $(18,948)$1,159,541 
Other Intangible Assets, net69,705(4,005)65,700 
Right-of-Use Assets 406,918 406,918 
Liabilities:
Current lease liabilities$ $48,832 $48,832 
Other accrued liabilities257,823 (1,987)255,836 
Long-Term Debt918,779 (20,557)898,222 
Long-Term Lease Liabilities 370,647 370,647 
Other Long-Term Liabilities75,887 (2,508)73,379 
Deferred Income Taxes33,178 (3,034)30,144 
Stockholders' Equity:
Retained earnings$670,691 $(7,428)$663,263 

Adoption
of ASC 842 as of
January 1, 2019
New
Leases
Modifications (1)AmortizationAs Reported
March 31, 2019
(In thousands)
Right-of-Use Assets:
Finance Leases$18,948 $ $21,520 $(709)$39,759 
Operating Leases387,970  (33,697)(11,052)343,221 
Total Right-of-Use Assets$406,918 $— $(12,177)$(11,761)$382,980 
Current Lease Liabilities:
Finance Leases$728 $ $4,510 $ $5,238 
Operating Leases48,104 21 (1,473)(1,295)45,357 
Total Current Lease Liabilities$48,832 $21 $3,037 $(1,295)$50,595 
Long-Term Lease Liabilities:
Finance Leases$19,829 $ $16,935 $ $36,764 
Operating Leases350,818  (32,262)(10,397)308,159 
Total Long-Term Lease Liabilities$370,647 $— $(15,327)$(10,397)$344,923 
(1) Includes the impact of remeasurements related to lease terminations and changes in assumptions around the probability of exercise of extension options.
Three Months Ended March 31, 2019
Lease Expense(In thousands)
Finance lease expense:
Amortization of right-of use assets$709 
Interest on lease liabilities1,176 
Operating lease expense (1)17,997 
Short-term lease expense (1)427 
Variable lease expense114 
Sublease income(3,578)
Total$16,845 
(1) Included in operating cash flows in the accompanying condensed consolidated statements of cash flows.
7

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2019
(In thousands, except lease term)
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Financing cash flows for finance leases$281 
Operating cash flows for finance leases$1,176 
Operating cash flows for operating leases$18,469 
Right-of-use assets obtained in exchange for lease liabilities:
Finance leases$9,983 
Operating leases (1)$(10,711)
Weighted-average remaining lease term (in years):
Finance leases11.42
Operating leases9.76
Weighted-average discount rate:
Finance leases18.31 %
Operating leases6.86 %

(1) Includes the impact of reclassification of right-of-use assets from operating to finance due to remeasurement.
Undiscounted Lease Cash Flows Under ASC 842 as of March 31, 2019
FinanceOperatingReceipts from Subleases
Year Ending December 31,(In thousands)
2019$8,786 $51,413 $(11,855)
20206,530 62,828 (12,274)
20216,662 55,693 (9,234)
20226,662 47,966 (6,547)
20236,714 46,198 (6,547)
Thereafter49,893 234,758 (9,592)
Total$85,247 $498,856 $(56,049)
Less: Present value discount(43,414)(145,173)
Lease liabilities$41,833 $353,683 
For comparison purposes the following table provides the future minimum lease payments as presented in our Annual Report on Form 10-K for the year ended December 31, 2018 in accordance with ASC 840.
Undiscounted Lease Cash Flows Under ASC 840 as of December 31, 2018
FinanceOperatingReceipts from Subleases
Year Ending December 31,(In thousands)
2019$6,985 $82,177 $(13,430)
20207,165 66,023 (10,508)
20217,357 51,501 (8,534)
20227,374 37,152 (7,232)
20237,609 33,486 (7,013)
Thereafter482,390 127,026 (13,116)
Total minimum lease payments (receipts)$518,880 $397,365 $(59,833)
Less: Present value discount(498,291)
Lease liabilities$20,589 
Current portion of lease liabilities$643 
Long-term portion of lease liabilities$19,946 

The majority of our leases are related to dealership properties that are subject to long-term lease arrangements. In addition, we have certain equipment leases and contracts containing embedded leased assets that have been evaluated and included in the ROU assets and lease liabilities above as appropriate.
8

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We recognize a ROU asset and a lease liability at the lease commencement date. For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently measured at amortized cost using the effective interest method.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred or previously recognized favorable lease assets, less any lease incentives received or previously recognized lease exit accruals. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For finance leases, the ROU asset is subsequently amortized using the straight-line method from the lease commencement date to the earlier of the end of its useful life or the end of the lease term unless the lease transfers ownership of the underlying asset to us or we are reasonably certain to exercise an option to purchase the underlying asset. In those cases, the ROU asset is amortized over the useful life of the underlying asset. Amortization of the ROU asset is recognized and presented separately from interest expense on the lease liability.
Variable lease payments associated with our leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expense in our consolidated financial statements of income in the same line item as expense arising from fixed lease payments (operating leases) or amortization of the ROU asset (finance leases).
ROU assets for operating and finance leases are periodically reduced by impairment losses. We use the long-lived assets impairment guidance in ASC 360, “Property, Plant, and Equipment,” to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in profit or loss.
Key estimates and judgments include how we determine: (1) the discount rate used to discount the unpaid lease payments to present value; (2) the expected lease term, including any extension options; and (3) future lease payments.
ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. Generally, we cannot determine the interest rate implicit in the lease because we not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we generally use our incremental borrowing rate as the discount rate for the lease. We determined the discount rate for our leases based on the risk-free rate as of the measurement date for varying maturities corresponding to the remaining lease term, adjusted for the risk-premium attributed to Sonic’s corporate credit rating for a secured or collateralized instrument.
Many of our lease arrangements have one or multiple options to extend the lease term (typically five- to ten-year options), which were considered in the calculation of the ROU assets and lease liabilities if it was reasonably probable that an extension option would be exercised. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by our option to extend the lease that we are reasonably certain to exercise. We determined the probability of the exercise of a lease extension option based on our long-term strategic business outlook and the condition and remaining useful life of the fixed assets at the location subject to the lease agreement, among other factors. 
The majority of our lease agreements require fixed monthly payments (subject to either specific or index-based escalations in future periods) while other agreements require variable lease payments based on changes in London Interbank Offer Rate (“LIBOR”). Lease payments included in the measurement of the lease liability comprise the: (1) fixed payments, including in-substance fixed payments, owed over the lease term, which includes termination penalties we would owe if the lease term assumes Company exercise of a termination option; (2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and (3) the exercise price of our option to purchase the underlying asset if we are reasonably certain to exercise the option. Our leases do not typically contain residual value guarantees.
In certain situations, we have entered into sublease agreements whereby we sublease all or a portion of a leased real estate asset to a third party. To the extent that we have a sublease related to a lease agreement for an asset that we are no longer using in operations, we have reduced the ROU asset by the net deficiency in expected cash flows from that sublease (either due to partial monthly sublease proceeds or a sublease term less than the remaining master lease term). As of December 31, 2018, the net liability related to these lease exit accruals was approximately $4.6 million as discussed in Note 7, “Commitments and
9

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contingencies.” Upon the adoption of ASC 842, “Leases,” this balance was reclassified from other accrued liabilities and other long-term liabilities to a reduction in right-of-use assets in the accompanying unaudited condensed consolidated balance sheets. 
Prior to the adoption of ASC 842, “Leases,” we had recorded definite life intangible assets related to favorable lease assets acquired in business combinations. As of December 31, 2018, the net unamortized balance related to these definite life intangible assets was approximately $4.0 million. Upon adoption of ASC 842, “Leases,” this balance was reclassified from other intangible assets, net to right-of-use assets in the accompanying unaudited condensed consolidated balance sheets and continues to be amortized over the remaining lease term.
As part of the lease standard implementation process, we assessed our existing real estate and equipment lease agreements, identified certain lease components embedded within existing service contracts, evaluated transition guidance and practical expedient elections, implemented lease accounting software and designed internal controls over lease accounting under the new standard.
In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC 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. The effects of this ASU did not 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. The effects of this ASU did not materially impact our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC 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. The effects of this ASU did not materially impact our consolidated financial statements.
Principles of Consolidation  All of our 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 from Contracts with Customers – As of January 1, 2018, we adopted ASC 606, “Revenue from Contracts with Customers.” Under this 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 standard 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 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). Upon adoption, we accelerated 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”). 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 constraint, are to be included in the transaction price and recognized when or as the
10

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Receivables, net in the accompanying condensed consolidated balance sheets at March 31, 2019 and December 31, 2018 include approximately $4.6 million and $4.7 million, respectively, related to work in process and contract assets of approximately $4.8 million and $5.4 million, respectively, related to F&I retro revenues. Changes in contract assets from December 31, 2018 to March 31, 2019 were primarily due to ordinary business activity. 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, 2018 for further discussion of our revenue recognition policies and processes.
Income Tax Expense – The overall effective tax rate from continuing operations was 31.0% for the three months ended March 31, 2019, and 47.8% for the three months ended March 31, 2018. Income tax expense for the three months ended March 31, 2019 includes a $1.5 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 $0.2 million discrete charge related to vested or exercised stock compensation awards. Income tax expense for the three months ended March 31, 2018 includes a $0.9 million discrete benefit related to vested or exercised stock compensation awards, offset partially by a $0.2 million discrete charge related to changes in uncertain tax positions. 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. Sonic expects the annual effective tax rate in future periods to fall within a range of 26.0% to 29.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets or discrete tax adjustments.

Earnings Per Share  The calculation of diluted earnings per share considers the potential dilutive effect of stock options and shares under Sonic’s stock compensation plans and Class A Common Stock purchase warrants.
2. Business Dispositions
We disposed of one luxury franchised dealership and three mid-line import franchised dealerships during the three months ended March 31, 2019 that generated net cash of approximately $121.7 million. We disposed of one luxury franchised dealership during the three months ended March 31, 2018 that generated net cash of approximately $7.5 million. Additionally, we terminated one luxury franchised dealership and ceased operations at a previously acquired pre-owned store in Florida during the three months ended March 31, 2018.
Revenues and other activities associated with disposed franchised dealerships that remain in continuing operations were as follows:
Three Months Ended March 31,
20192018
(In thousands)
Income (loss) from operations$(1,504)$(6,335)
Gain (loss) on disposal46,750 1,190 
Lease exit accrual adjustments and charges170 (520)
Pre-tax income (loss)$45,416 $(5,665)
Total revenues$26,276 $147,880 

Revenues and other activities associated with disposed franchised dealerships classified as discontinued operations were as follows:
Three Months Ended March 31,
20192018
(In thousands)
Income (loss) from operations$(180)$(139)
Lease exit accrual adjustments and charges (109)
Pre-tax income (loss)$(180)$(248)
Total revenues$ $ 
 
11

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Inventories 
Inventories consist of the following:
March 31, 2019December 31, 2018
(In thousands)
New vehicles$1,045,392 $1,027,727 
Used vehicles281,706 293,179 
Service loaners141,493 141,542 
Parts, accessories and other61,610 66,013 
Net inventories$1,530,201 $1,528,461 

4. Property and Equipment
Property and equipment, net consists of the following:
March 31, 2019December 31, 2018
(In thousands)
Land$386,518 $381,527 
Building and improvements (1)952,333 989,872 
Software and computer equipment119,138 116,348 
Parts and service equipment107,320 108,040 
Office equipment and fixtures97,355 96,622 
Company vehicles9,153 9,139 
Construction in progress58,711 59,523 
Total, at cost1,730,528 1,761,071 
Less accumulated depreciation(570,412)(575,720)
Subtotal1,160,116 1,185,351 
Less assets held for sale (2)(22,543)(6,862)
Property and equipment, net$1,137,573 $1,178,489 
(1) As discussed in Note 1, “Summary of Significant Accounting Policies,” due to the adoption of ASC 842, “Leases,” effective January 1, 2019, previously existing capital lease assets have been reclassified from property and equipment, net to right-of-use assets in the accompanying unaudited condensed consolidated balance sheets.
(2) Classified in other current assets in the accompanying unaudited condensed consolidated balance sheets.
In the three months ended March 31, 2019 and 2018, capital expenditures were approximately $30.6 million and $65.7 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 March 31, 2019 and December 31, 2018 consists of real property not currently used in operations that we expect to dispose of in the next 12 months.
Impairment charges were approximately $2.0 million in the three months ended March 31, 2019, related to the fair value adjustment of long-lived assets held for sale related to real estate at former EchoPark locations. Impairment charges for the three months ended March 31, 2018 were approximately $3.6 million, which include the write-off of capitalized costs associated with the abandonment of certain construction projects. 
12

SONIC AUTOMOTIVE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Goodwill and Intangible Assets
The carrying amount of goodwill was approximately $487.3 million and $509.6 million as of March 31, 2019 and December 31, 2018, respectively. The carrying amount of goodwill is net of accumulated impairment losses of approximately $797.6 million as of both March 31, 2019 and December 31, 2018. The carrying amount of franchise assets was approximately $64.3 million and $65.7 million as of March 31, 2019 and December 31, 2018, respectively. The changes in the carrying amount of both goodwill and franchise assets are related to the disposition of several franchised dealerships during the three months ended March 31, 2019. At December 31, 2018, we had approximately $4.0 million of definite life intangible assets related to favorable lease agreements. As discussed in Note 1, “Summary of Significant Accounting Policies,” due to the adoption of ASC 842, “Leases,” effective January 1, 2019, previously existing definite life intangible assets have been reclassified from other intangible assets, net to right-of-use assets in the accompanying unaudited condensed consolidated balance sheets.

6. Long-Term Debt