UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

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

For the quarterly period ended September 30, 2014

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 17, 2014, there were 39,145,916 shares of Class A Common Stock and 12,029,375 shares of Class B Common Stock outstanding.

 

 

 

 

 


INDEX TO FORM 10-Q

 

 

  

Page

 

PART I – FINANCIAL INFORMATION

  

 

3

  

 

 

 

ITEM 1.

  

Financial Statements

  

 

3

  

 

 

 

 

  

Unaudited Condensed Consolidated Statements of Income – Third Quarter and Nine Months Ended September 30, 2014 and September 30, 2013

  

 

3

  

 

 

 

 

  

Unaudited Condensed Consolidated Statements of Comprehensive Income – Third Quarter and Nine Months Ended September 30, 2014 and September 30, 2013

  

 

4

  

 

 

 

 

  

Unaudited Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013

  

 

5

  

 

 

 

 

  

Unaudited Condensed Consolidated Statement of Stockholders’ Equity – Nine Months Ended
September 30, 2014

  

 

6

  

 

 

 

 

  

Unaudited Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and September 30, 2013

  

 

7

  

 

 

 

 

  

Notes to Unaudited Condensed Consolidated Financial Statements

  

 

8

 

 

 

 

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

 

22

  

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  

 

42

  

 

 

 

ITEM 4.

  

Controls and Procedures

  

 

43

  

 

 

PART II – OTHER INFORMATION

  

 

44

  

 

 

 

ITEM 1A.

  

Risk Factors

  

 

44

  

 

 

 

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  

 

45

  

 

 

 

ITEM 6.

  

Exhibits

  

 

46

  

 

 

SIGNATURES

  

 

48

  

 

 

EXHIBIT INDEX

  

 

49

  

 

 

 

2


PART I—FINANCIAL INFORMATION

 

Item 1: Financial Statements.

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(Dollars and shares in thousands, except per share amounts)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

$

1,327,837

 

 

$

1,261,270

 

 

$

3,773,234

 

 

$

3,651,486

 

 

 

Used vehicles

 

 

583,570

 

 

 

559,848

 

 

 

1,747,254

 

 

 

1,625,006

 

 

 

Wholesale vehicles

 

 

41,433

 

 

 

42,731

 

 

 

127,797

 

 

 

134,556

 

 

 

Total vehicles

 

 

1,952,840

 

 

 

1,863,849

 

 

 

5,648,285

 

 

 

5,411,048

 

 

 

Parts, service and collision repair

 

 

325,740

 

 

 

309,600

 

 

 

973,646

 

 

 

913,290

 

 

 

Finance, insurance and other, net

 

 

77,024

 

 

 

68,747

 

 

 

223,340

 

 

 

203,461

 

 

 

Total revenues

 

 

2,355,604

 

 

 

2,242,196

 

 

 

6,845,271

 

 

 

6,527,799

 

 

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicles

 

 

(1,258,811

)

 

 

(1,188,862

)

 

 

(3,563,342

)

 

 

(3,444,818

)

 

 

Used vehicles

 

 

(542,325

)

 

 

(520,872

)

 

 

(1,627,842

)

 

 

(1,510,391

)

 

 

Wholesale vehicles

 

 

(42,519

)

 

 

(45,928

)

 

 

(130,290

)

 

 

(140,899

)

 

 

Total vehicles

 

 

(1,843,655

)

 

 

(1,755,662

)

 

 

(5,321,474

)

 

 

(5,096,108

)

 

 

Parts, service and collision repair

 

 

(170,460

)

 

 

(160,453

)

 

 

(506,361

)

 

 

(468,784

)

 

 

Total cost of sales

 

 

(2,014,115

)

 

 

(1,916,115

)

 

 

(5,827,835

)

 

 

(5,564,892

)

 

 

Gross profit

 

 

341,489

 

 

 

326,081

 

 

 

1,017,436

 

 

 

962,907

 

 

 

Selling, general and administrative expenses

 

 

(270,144

)

 

 

(254,564

)

 

 

(803,031

)

 

 

(748,479

)

 

 

Impairment charges

 

 

(208

)

 

 

(18

)

 

 

(215

)

 

 

(69

)

 

 

Depreciation and amortization

 

 

(14,235

)

 

 

(13,744

)

 

 

(43,047

)

 

 

(39,020

)

 

 

Operating income (loss)

 

 

56,902

 

 

 

57,755

 

 

 

171,143

 

 

 

175,339

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, floor plan

 

 

(4,406

)

 

 

(5,463

)

 

 

(13,941

)

 

 

(16,267

)

 

 

Interest expense, other, net

 

 

(12,893

)

 

 

(13,553

)

 

 

(40,576

)

 

 

(42,302

)

 

 

Other income (expense), net

 

 

(1

)

 

 

29

 

 

 

98

 

 

 

(28,143

)

 

 

Total other income (expense)

 

 

(17,300

)

 

 

(18,987

)

 

 

(54,419

)

 

 

(86,712

)

 

 

Income (loss) from continuing operations before taxes

 

 

39,602

 

 

 

38,768

 

 

 

116,724

 

 

 

88,627

 

 

 

Provision for income taxes - benefit (expense)

 

 

(15,045

)

 

 

(14,066

)

 

 

(45,122

)

 

 

(33,510

)

 

 

Income (loss) from continuing operations

 

 

24,557

 

 

 

24,702

 

 

 

71,602

 

 

 

55,117

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations and the sale of dealerships

 

 

254

 

 

 

(2,057

)

 

 

(838

)

 

 

(2,434

)

 

 

Income tax benefit (expense)

 

 

(99

)

 

 

682

 

 

 

327

 

 

 

852

 

 

 

Income (loss) from discontinued operations

 

 

155

 

 

 

(1,375

)

 

 

(511

)

 

 

(1,582

)

 

 

Net income (loss)

 

$

24,712

 

 

$

23,327

 

 

$

71,091

 

 

$

53,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.47

 

 

$

0.47

 

 

$

1.36

 

 

$

1.04

 

 

 

Earnings (loss) per share from discontinued operations

 

 

-

 

 

 

(0.03

)

 

 

(0.01

)

 

 

(0.03

)

 

 

Earnings (loss) per common share

 

$

0.47

 

 

$

0.44

 

 

$

1.35

 

 

$

1.01

 

 

 

Weighted average common shares outstanding

 

 

52,070

 

 

 

52,553

 

 

 

52,333

 

 

 

52,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share from continuing operations

 

$

0.47

 

 

$

0.46

 

 

$

1.35

 

 

$

1.03

 

 

 

Earnings (loss) per share from discontinued operations

 

 

-

 

 

 

(0.02

)

 

 

(0.01

)

 

 

(0.03

)

 

 

Earnings (loss) per common share

 

$

0.47

 

 

$

0.44

 

 

$

1.34

 

 

$

1.00

 

 

 

Weighted average common shares outstanding

 

 

52,553

 

 

 

52,918

 

 

 

52,808

 

 

 

52,930

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.025

 

 

$

0.025

 

 

$

0.075

 

 

$

0.075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

 

 

3


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

24,712

 

 

$

23,327

 

 

$

71,091

 

 

$

53,535

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap agreements

 

 

4,037

 

 

 

350

 

 

 

5,223

 

 

 

13,377

 

 

 

Provision for income tax benefit (expense) related to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

components of other comprehensive income (loss)

 

 

(1,534

)

 

 

(133

)

 

 

(1,985

)

 

 

(5,083

)

 

 

Other comprehensive income (loss)

 

 

2,503

 

 

 

217

 

 

 

3,238

 

 

 

8,294

 

 

 

Comprehensive income (loss)

 

$

27,215

 

 

$

23,544

 

 

$

74,329

 

 

$

61,829

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

4


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 

2014

 

 

2013

 

 

 

 

 

(Dollars in thousands)

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,664

 

 

$

3,016

 

 

 

Receivables, net

 

 

270,386

 

 

 

354,138

 

 

 

Inventories

 

 

1,203,394

 

 

 

1,282,138

 

 

 

Assets held for sale

 

 

14,811

 

 

 

4,101

 

 

 

Other current assets

 

 

137,271

 

 

 

88,792

 

 

 

Total current assets

 

 

1,627,526

 

 

 

1,732,185

 

 

 

Property and Equipment, net

 

 

742,081

 

 

 

702,011

 

 

 

Goodwill

 

 

474,088

 

 

 

476,315

 

 

 

Other Intangible Assets, net

 

 

82,449

 

 

 

87,866

 

 

 

Other Assets

 

 

57,769

 

 

 

52,793

 

 

 

Total Assets

 

$

2,983,913

 

 

$

3,051,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Notes payable - floor plan - trade

 

$

630,667

 

 

$

681,030

 

 

 

Notes payable - floor plan - non-trade

 

 

462,703

 

 

 

570,661

 

 

 

Trade accounts payable

 

 

102,806

 

 

 

126,025

 

 

 

Accrued interest

 

 

12,163

 

 

 

12,653

 

 

 

Other accrued liabilities

 

 

200,839

 

 

 

185,951

 

 

 

Liabilities associated with assets held for sale - non-trade

 

 

6,587

 

 

 

-

 

 

 

Current maturities of long-term debt

 

 

24,018

 

 

 

18,216

 

 

 

Total current liabilities

 

 

1,439,783

 

 

 

1,594,536

 

 

 

Long-Term Debt

 

 

759,463

 

 

 

730,157

 

 

 

Other Long-Term Liabilities

 

 

71,476

 

 

 

81,286

 

 

 

Deferred Income Taxes

 

 

59,620

 

 

 

31,552

 

 

 

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;

 

 

 

 

 

 

 

 

 

 

62,006,636 shares issued and 39,438,090 shares outstanding at

 

 

 

 

 

 

 

 

 

 

September 30, 2014; 61,584,248 shares issued and 40,683,984 shares

 

 

 

 

 

 

 

 

 

 

outstanding at December 31, 2013

 

 

620

 

 

 

616

 

 

 

Class B common stock; $0.01 par value; 30,000,000 shares authorized;

 

 

 

 

 

 

 

 

 

 

12,029,375 shares issued and outstanding at September 30, 2014

 

 

 

 

 

 

 

 

 

 

and December 31, 2013

 

 

121

 

 

 

121

 

 

 

Paid-in capital

 

 

694,869

 

 

 

685,782

 

 

 

Retained earnings

 

 

351,507

 

 

 

284,368

 

 

 

Accumulated other comprehensive income (loss)

 

 

(5,344

)

 

 

(8,582

)

 

 

Treasury stock, at cost; 22,568,546 Class A shares held

 

 

 

 

 

 

 

 

 

 

at September 30, 2014 and 20,900,264 Class A shares

 

 

 

 

 

 

 

 

 

 

held at December 31, 2013

 

 

(388,202

)

 

 

(348,666

)

 

 

Total Stockholders' Equity

 

 

653,571

 

 

 

613,639

 

 

 

Total Liabilities and Stockholders' Equity

 

$

2,983,913

 

 

$

3,051,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

 

5


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Class A

 

 

Class A

 

 

Class B

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Treasury Stock

 

 

Common Stock

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

 

(Dollars and shares in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

 

61,584

 

 

$

616

 

 

 

(20,900

)

 

$

(348,666

)

 

 

12,029

 

 

$

121

 

 

$

685,782

 

 

$

284,368

 

 

$

(8,582

)

 

$

613,639

 

Shares awarded under stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plans

 

 

403

 

 

 

4

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,548

 

 

 

-

 

 

 

-

 

 

 

2,552

 

Purchases of treasury stock

 

 

-

 

 

 

-

 

 

 

(1,669

)

 

 

(39,536

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(39,536

)

Income tax benefit associated with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock compensation plans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

336

 

 

 

-

 

 

 

-

 

 

 

336

 

Fair value of interest rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

agreements, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expense of $1,985

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,238

 

 

 

3,238

 

Restricted stock amortization

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,203

 

 

 

-

 

 

 

-

 

 

 

6,203

 

Other

 

 

20

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net income (loss)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

71,091

 

 

 

-

 

 

 

71,091

 

Dividends ($0.075 per share)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,952

)

 

 

-

 

 

 

(3,952

)

Balance at September 30, 2014

 

 

62,007

 

 

$

620

 

 

 

(22,569

)

 

$

(388,202

)

 

 

12,029

 

 

$

121

 

 

$

694,869

 

 

$

351,507

 

 

$

(5,344

)

 

$

653,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

 

6


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

 

(Dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

71,091

 

 

$

53,535

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization of property, plant and equipment

 

 

43,042

 

 

 

39,048

 

Provision for bad debt expense

 

 

331

 

 

 

125

 

Other amortization

 

 

987

 

 

 

1,170

 

Debt issuance cost amortization

 

 

1,654

 

 

 

2,189

 

Debt discount amortization, net of premium amortization

 

 

43

 

 

 

(110

)

Stock - based compensation expense

 

 

6,203

 

 

 

5,559

 

Deferred income taxes

 

 

21,273

 

 

 

16,256

 

Equity interest in earnings of investee

 

 

(221

)

 

 

(311

)

Asset impairment charges

 

 

215

 

 

 

69

 

Loss (gain) on disposal of dealerships and property and equipment

 

 

(11,646

)

 

 

291

 

Loss (gain) on exit of leased dealerships

 

 

(272

)

 

 

2,331

 

(Gain) loss on retirement of debt

 

 

-

 

 

 

28,238

 

Changes in assets and liabilities that relate to operations:

 

 

 

 

 

 

 

 

Receivables

 

 

96,778

 

 

 

82,708

 

Inventories

 

 

52,070

 

 

 

(25,002

)

Other assets

 

 

(53,589

)

 

 

15,485

 

Notes payable - floor plan - trade

 

 

(50,363

)

 

 

(2,839

)

Trade accounts payable and other liabilities

 

 

(22,054

)

 

 

(38,099

)

Total adjustments

 

 

84,451

 

 

 

127,108

 

Net cash provided by (used in) operating activities

 

 

155,542

 

 

 

180,643

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of businesses, net of cash acquired

 

 

(15,288

)

 

 

(88,184

)

Purchases of land, property and equipment

 

 

(89,930

)

 

 

(127,538

)

Proceeds from sales of property and equipment

 

 

6,406

 

 

 

673

 

Proceeds from sales of dealerships

 

 

51,391

 

 

 

-

 

Distributions from equity investee

 

 

400

 

 

 

500

 

Net cash provided by (used in) investing activities

 

 

(47,021

)

 

 

(214,549

)

CASH  FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Net (repayments) borrowings on notes payable - floor plan - non-trade

 

 

(101,371

)

 

 

(37,821

)

Borrowings on revolving credit facilities

 

 

97,847

 

 

 

156,079

 

Repayments on revolving credit facilities

 

 

(88,068

)

 

 

(162,255

)

Proceeds from issuance of long-term debt

 

 

40,420

 

 

 

353,693

 

Debt issuance costs

 

 

(2,956

)

 

 

(5,394

)

Principal payments on long-term debt

 

 

(15,134

)

 

 

(15,725

)

Repurchase of debt securities

 

 

-

 

 

 

(233,574

)

Purchases of treasury stock

 

 

(39,536

)

 

 

(14,480

)

Income tax benefit (expense) associated with stock compensation plans

 

 

336

 

 

 

612

 

Issuance of shares under stock compensation plans

 

 

2,552

 

 

 

1,066

 

Dividends paid

 

 

(3,963

)

 

 

(2,673

)

Net cash provided by (used in) financing activities

 

 

(109,873

)

 

 

39,528

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

 

(1,352

)

 

 

5,622

 

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

 

 

3,016

 

 

 

3,371

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

1,664

 

 

$

8,993

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Change in fair value of cash flow hedging instruments (net of tax expense of

 

 

 

 

 

 

 

 

$1,985 and $5,083 in the nine-month periods ended September 30, 2014 and 2013, respectively)

 

$

3,238

 

 

$

8,294

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid (received) during the period for:

 

 

 

 

 

 

 

 

Interest, including amount capitalized

 

$

54,267

 

 

$

62,190

 

Income taxes

 

$

34,278

 

 

$

29,758

 

 

 

See notes to Unaudited Condensed Consolidated Financial Statements.

 

 

7


1. Summary of Significant Accounting Policies

Basis of Presentation The accompanying Unaudited Condensed Consolidated Financial Statements of Sonic Automotive, Inc. and its wholly-owned subsidiaries (“Sonic,” the “Company,” “we,” “us” and “our”) for the third quarter and nine-month periods ended September 30, 2014 and 2013, have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (“SEC”). These 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 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 normally contributes less operating profit than the second, third and fourth quarters. These interim financial statements should be read in conjunction with the audited Consolidated Financial Statements included in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements – In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-08, which amended the definition of and the reporting requirements for discontinued operations. The amendments in this ASU require that a disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial position in order to qualify as a discontinued operation. The ASU also requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This ASU is effective for interim and annual filings beginning with the quarter ending March 31, 2015. Early adoption is permitted, and Sonic elected to adopt and apply the guidance beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014. The adoption of this ASU impacts the presentation of certain items in Sonic’s consolidated financial position, results of operations and other disclosures.

In May 2014, the FASB issued ASU 2014-09 related to revenue recognition. This ASU provides a five-step analysis to use in determining the timing and method of revenue recognition. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 (early adoption is not permitted). Sonic does not expect this ASU to have a significant impact on its consolidated financial position, results of operations or cash flows.

Principles of Consolidation All of Sonic’s dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanying Unaudited Condensed Consolidated Financial Statements, except for one fifty-percent 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.

Lease Exit Accruals – Lease exit accruals relate to facilities Sonic has ceased using in its operations. The accruals represent the present value of the lease payments, net of estimated or actual sublease proceeds, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. These situations could include the relocation of an existing facility or the sale of a dealership whereby the buyer will not be subleasing the property for either the remaining term of the lease or for an amount of rent equal to Sonic’s obligation under the lease. Please see Note 12, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion.

A summary of the activity of these operating lease exit accruals consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

Balance, December 31, 2013

 

$

27,234

 

 

 

 

 

Lease exit expense (1)

 

 

(272

)

 

 

 

 

Payments (2)

 

 

(5,445

)

 

 

 

 

Lease buyout (3)

 

 

(1,556

)

 

 

 

 

Balance, September 30, 2014

 

$

19,961

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Expense of approximately $0.2 million is recorded in interest expense, other, net, expense of approximately $0.1 million

 

 

is recorded in selling, general and administrative expenses, and income of approximately $0.6 million is recorded

 

 

in income (loss) from discontinued operations in the accompanying Unaudited Condensed Consolidated

 

 

Statements of Income.

 

 

8


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(2)   Amount is recorded as an offset to rent expense in selling, general and administrative expenses, with approximately

 

 

$0.6 million in continuing operations and $4.8 million in income (loss) from discontinued operations in the

 

 

accompanying Unaudited Condensed Consolidated Statements of Income.

 

 

(3)   Amount represents write-off of accrual related to an early lease buyout agreement which was completed and paid,

 

 

relieving Sonic of any future lease obligation.

 

 

 

 

 

 

 

 

 

 

Income Tax Expense – The overall effective tax rate from continuing operations was 38.0% and 38.7% for the third quarter and nine-month periods ended September 30, 2014, respectively, and was 36.3% and 37.8% for the third quarter and nine-month periods ended September 30, 2013, respectively. The effective rate for the third quarter and nine-month periods ended September 30, 2014 was higher than the prior year periods as a result of the favorable resolution of previously outstanding tax matters in the prior year periods.

2. Business Acquisitions and Dispositions

Acquisitions Sonic acquired one mid-line import franchise during the third quarter ended September 30, 2014 and one luxury franchise during the nine-month period ended September 30, 2014 for a combined aggregate purchase price of approximately $15.3 million. The balance sheet as of September 30, 2014 includes preliminary allocations of the purchase price of the acquired assets and liabilities based on their estimated fair market values at the date of acquisition and are subject to final adjustment. On a pro forma basis as if the results of these acquisitions had been included in Sonic’s consolidated results for the entire third quarter and nine-month periods ended September 30, 2014 and 2013, revenue and net income would not have been materially different from Sonic’s reported revenue and net income for these periods.

Dispositions As discussed in Note 1, “Summary of Significant Accounting Policies,” the FASB issued ASU 2014-08 which amended the definition of and reporting requirements for discontinued operations. Sonic elected to adopt and apply this guidance beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014. The results of operations for those dealerships that were classified as discontinued operations as of March 31, 2014 are included in income (loss) from discontinued operations in the accompanying Unaudited Condensed Consolidated Statements of Income and will continue to be reported within discontinued operations in the future. There were no unsold dealerships classified in discontinued operations at March 31, 2014. Revenues and other activities associated with dealerships classified as discontinued operations were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

(900

)

 

$

(1,389

)

 

$

(1,670

)

 

$

(22

)

 

 

Gain (loss) on disposal

 

 

148

 

 

 

(57

)

 

 

201

 

 

 

(435

)

 

 

Lease exit accrual adjustments and charges

 

 

1,006

 

 

 

(611

)

 

 

631

 

 

 

(1,977

)

 

 

Pre-tax income (loss)

 

$

254

 

 

$

(2,057

)

 

$

(838

)

 

$

(2,434

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning with disposals occurring during the second quarter ended June 30, 2014, only the operating results of disposals that represent a strategic shift that has (or will have) a major impact on Sonic’s results of operations and financial position will be included in the income (loss) from discontinued operations in the accompanying Unaudited Condensed Consolidated Statements of Income. Sonic disposed of two franchises during the quarter ended September 30, 2014 and disposed of five franchises during the nine-month period ended September 30, 2014. These disposals generated net cash from disposition of approximately $14.9 million and $30.1 million, respectively.


9


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

(99

)

 

$

(132

)

 

$

268

 

 

$

(936

)

 

 

Gain (loss) on disposal

 

 

3,111

 

 

 

-

 

 

 

10,734

 

 

 

-

 

 

 

Pre-tax income (loss)

 

$

3,012

 

 

$

(132

)

 

$

11,002

 

 

$

(936

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

4,117

 

 

$

43,181

 

 

$

86,467

 

 

$

125,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the ordinary course of business, Sonic evaluates its dealership franchises for possible disposition based on various performance criteria, and the disposals during the nine-month period ended September 30, 2014 represent dealerships identified based on their unprofitable operations and other operational considerations. As of September 30, 2014, Sonic had one franchise classified as held for sale, the disposition of which was completed subsequent to September 30, 2014. In the future, Sonic may also sell other franchises that are not currently held for sale.

The major classes of assets and liabilities classified as held for sale for all periods presented in the statement of financial position are as follows:

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventories

 

$

7,630

 

 

$

-

 

 

 

Property and equipment, net (1)

 

 

6,170

 

 

 

4,101

 

 

 

Goodwill

 

 

1,011

 

 

 

-

 

 

 

Assets held for sale

 

$

14,811

 

 

$

4,101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities associated with assets held for sale - non-trade

 

$

6,587

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   September 30, 2014 includes approximately $0.2 million related to franchises classified as held for sale, and

 

 

 

approximately $6.0 million related to real estate not being used in operations. December 31, 2013 includes

 

 

 

approximately $4.1 million related to real estate not being used in operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3. Inventories

Inventories consist of the following: 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

New vehicles

 

$

856,393

 

 

$

938,263

 

Used vehicles

 

 

187,071

 

 

 

171,909

 

Service loaners

 

 

106,915

 

 

 

108,136

 

Parts, accessories and other

 

 

60,645

 

 

 

63,830

 

Subtotal

 

$

1,211,024

 

 

$

1,282,138

 

Less inventories classified as assets held for sale

 

 

(7,630

)

 

 

-

 

     Net inventories

 

$

1,203,394

 

 

$

1,282,138

 

 

10


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

4. Property and Equipment

Property and equipment, net consists of the following:

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Land

 

$

212,945

 

 

$

194,639

 

 

 

Building and improvements

 

 

573,329

 

 

 

569,619

 

 

 

Office equipment and fixtures

 

 

138,887

 

 

 

135,221

 

 

 

Parts and service equipment

 

 

72,614

 

 

 

70,950

 

 

 

Company vehicles

 

 

7,986

 

 

 

8,002

 

 

 

Construction in progress

 

 

71,125

 

 

 

27,716

 

 

 

       Total, at cost

 

 

1,076,886

 

 

 

1,006,147

 

 

 

Less accumulated depreciation

 

 

(328,635

)

 

 

(300,035

)

 

 

Subtotal

 

 

748,251

 

 

 

706,112

 

 

 

Less assets held for sale

 

 

(6,170

)

 

 

(4,101

)

 

 

       Property and equipment, net

 

$

742,081

 

 

$

702,011

 

 

 

 

 

 

 

 

 

 

 

 

 

In the third quarter and nine-month periods ended September 30, 2014, capital expenditures were approximately $41.3 million and $89.9 million, respectively, and in the third quarter and nine-month periods ended September 30, 2013, capital expenditures were approximately $38.4 million and $127.5 million, respectively. Capital expenditures in both periods were primarily related to real estate acquisitions, construction of new dealerships and EchoPark® stores (stand-alone pre-owned stores), building improvements and equipment purchased for use in Sonic’s dealerships and EchoPark® stores.

 

5. Goodwill and Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Franchise

Assets

 

 

Net

Goodwill

 

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

$

79,535

 

 

$

476,315

 

(1)

 

 

Additions through current year acquisitions

 

 

1,000

 

 

 

7,034

 

 

 

 

Prior year acquisition allocations

 

 

-

 

 

 

(3

)

 

 

 

Reclassifications to assets held for sale

 

 

-

 

 

 

(1,011

)

 

 

 

Reductions from dispositions

 

 

(5,435

)

 

 

(8,247

)

 

 

 

Balance, September 30, 2014

 

$

75,100

 

 

$

474,088

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net of accumulated impairment losses of $796,725.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2013, Sonic had approximately $8.3 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, 2014 was approximately $7.3 million and is included in other intangible assets, net, in the accompanying Unaudited Condensed Consolidated Balance Sheets. Additions through current year acquisition are preliminary allocations subject to change upon the finalization of purchase accounting.

 


11


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

6. Long-Term Debt

Long-term debt consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

(In thousands)

 

 

 

2011 Revolving Credit Facility (1)

 

$

-

 

 

$

-

 

 

 

2014 Revolving Credit Facility (2)

 

 

9,779

 

 

 

-

 

 

 

7.0% Senior Subordinated Notes due 2022 (the "7.0% Notes")

 

 

200,000

 

 

 

200,000

 

 

 

5.0% Senior Subordinated Notes due 2023 (the "5.0% Notes")

 

 

300,000

 

 

 

300,000

 

 

 

Notes payable to a finance company bearing interest from 9.52% to 10.52% (with

 

 

 

 

 

 

 

 

 

 

a weighted average of 10.19%)

 

 

5,214

 

 

 

7,629

 

 

 

Mortgage notes to finance companies-fixed rate, bearing interest from 3.51% to 7.03%

 

 

149,364

 

 

 

157,571

 

 

 

Mortgage notes to finance companies-variable rate, bearing interest

 

 

 

 

 

 

 

 

 

 

at 1.25 to 3.50 percentage points above one-month LIBOR

 

 

115,990

 

 

 

79,893

 

 

 

Net debt discount and premium (3)

 

 

(1,785

)

 

 

(1,800

)

 

 

Other

 

 

4,919

 

 

 

5,080

 

 

 

Total debt

 

$

783,481

 

 

$

748,373

 

 

 

Less current maturities

 

 

(24,018

)

 

 

(18,216

)

 

 

Long-term debt

 

$

759,463

 

 

$

730,157

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)    The interest rate on the 2011 Revolving Credit Facility was 2.00% above LIBOR at December 31, 2013.

 

 

 

(2)    The interest rate on the 2014 Revolving Credit Facility was 2.25% above LIBOR at September 30, 2014.

 

 

 

(3)    September 30, 2014 includes $1.5 million discount associated with the 7.0% Notes, $0.2 million premium associated with

 

 

 

notes payable to a finance company and $0.5 million discount associated with mortgage notes payable.

 

 

 

December 31, 2013 includes $1.6 million discount associated with the 7.0% Notes, $0.4 million premium associated with

 

 

 

the notes payable to a finance company and $0.6 million discount associated with mortgage notes payable.

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 Credit Facilities

Prior to July 23, 2014, Sonic had a syndicated revolving credit agreement (the “2011 Revolving Credit Facility”) and syndicated new and used vehicle floor plan credit facilities (the “2011 Floor Plan Facilities” and, together with the 2011 Revolving Credit Facility, the “2011 Credit Facilities”), which were scheduled to mature on August 15, 2016. On July 23, 2014, Sonic entered into an amendment to the 2011 Credit Facilities, which among other things, extended the maturity to August 15, 2019. See the heading “2014 Credit Facilities” below for additional information.

Availability under the 2011 Revolving Credit Facility was calculated as the lesser of $175.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2011 Revolving Credit Facility (the “2011 Revolving Borrowing Base”). The 2011 Floor Plan Facilities were comprised of a new vehicle revolving floor plan facility (the “2011 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2011 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount up to $605.0 million. Outstanding obligations under the 2011 Floor Plan Facilities were guaranteed by Sonic and certain of its subsidiaries and were secured by a pledge of substantially all of the assets of Sonic and its subsidiaries.

2014 Credit Facilities

On July 23, 2014, Sonic entered into an amendment to the 2011 Credit Facilities, which among other things, extended the maturity to August 15, 2019. The amended and extended syndicated revolving credit agreement (the “2014 Revolving Credit Facility”) and syndicated new and used vehicle floor plan credit facilities (the “2014 Floor Plan Facilities” and, together with the 2014 Revolving Credit Facility, the “2014 Credit Facilities”), are scheduled to mature on August 15, 2019.

Availability under the 2014 Revolving Credit Facility is calculated as the lesser of $225.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2014 Revolving Credit Facility (the “2014 Revolving Borrowing Base”). The 2014 Revolving Credit Facility may be increased at Sonic’s option up to $275.0 million upon satisfaction of certain conditions. Based on balances as of September 30, 2014, the 2014 Revolving Borrowing Base was approximately $144.2 million. Sonic had approximately $9.8 million of outstanding borrowings as of September 30, 2014 and $29.2 million in outstanding letters of credit under the 2014 Revolving Credit Facility, resulting in total borrowing availability of $105.2 million under the 2014 Revolving Credit Facility.

12


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The 2014 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2014 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2014 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount up to $800.0 million. Sonic may, under certain conditions, request an increase in the 2014 Floor Plan Facilities of up to $1.0 billion, which shall be allocated between the 2014 New Vehicle Floor Plan Facility and the 2014 Used Vehicle Floor Plan Facility as Sonic requests, with no more than 20% of the aggregate commitments allocated to the commitments under the 2014 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2014 Floor Plan Facilities are guaranteed by Sonic and certain of its subsidiaries and are secured by a pledge of substantially all of the assets of Sonic and its subsidiaries. The amounts outstanding under the 2014 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.

7.0% Senior Subordinated Notes

On July 2, 2012, Sonic issued $200.0 million in aggregate principal amount of unsecured senior subordinated 7.0% Notes which mature on July 15, 2022. The 7.0% Notes were issued at a price of 99.11% of the principal amount thereof, resulting in a yield to maturity of 7.125%. Interest is payable semi-annually in arrears on January 15 and July 15 of each year. Sonic may redeem the 7.0% Notes in whole or in part at any time after July 15, 2017 at the following redemption prices, which are expressed as percentages of the principal amount:

 

 

 

 

 

 

 

 

 

 

 

Redemption

Price

 

 

 

Beginning on July 15, 2017

 

 

103.500

%

 

 

Beginning on July 15, 2018

 

 

102.333

%

 

 

Beginning on July 15, 2019

 

 

101.167

%

 

 

Beginning on July 15, 2020 and thereafter

 

 

100.000

%

 

 

 

 

 

 

 

 

In addition, on or before July 15, 2015, Sonic may redeem up to 35% of the aggregate principal amount of the 7.0% Notes at 107% of the par value of the 7.0% Notes plus accrued and unpaid interest with proceeds from certain equity offerings. The indenture also provides that holders of the 7.0% Notes may require Sonic to repurchase the 7.0% Notes at 101% of the par value of the 7.0% Notes, plus accrued and unpaid interest, if Sonic undergoes a Change of Control (as defined in the indenture).

The indenture governing the 7.0% 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 Sonic’s 7.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and B Common Stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and B Common Stock if Sonic complies with the terms of the indenture governing the 7.0% Notes. Sonic was in compliance with all restrictive covenants as of September 30, 2014.

Balances outstanding under Sonic’s 7.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic and non-operating subsidiaries that are not guarantors are considered to be minor.

Sonic’s obligations under the 7.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 7.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of Sonic’s covenants under the 7.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $35.0 million.


13


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

5.0% Senior Subordinated Notes

On May 9, 2013, Sonic issued $300.0 million in aggregate principal amount of unsecured senior subordinated 5.0% Notes which mature on May 15, 2023. The 5.0% Notes were issued at 100.0% of the principal amount thereof. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. Sonic may redeem the 5.0% Notes in whole or in part at any time after May 15, 2018 at the following redemption prices, which are expressed as percentages of the principal amount:

 

 

 

 

 

 

 

 

 

 

 

Redemption

Price

 

 

 

Beginning on May 15, 2018

 

 

102.500

%

 

 

Beginning on May 15, 2019

 

 

101.667

%

 

 

Beginning on May 15, 2020

 

 

100.833

%

 

 

Beginning on May 15, 2021 and thereafter

 

 

100.000

%

 

 

 

 

 

 

 

 

In addition, on or before May 15, 2016, Sonic may redeem up to 35% of the aggregate principal amount of the 5.0% Notes at 105% of the par value of the 5.0% Notes plus accrued and unpaid interest with proceeds from certain equity offerings. On or before May 15, 2018, Sonic may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of the principal amount of the 5.0% Notes redeemed plus an applicable premium (as defined in the Indenture) and any accrued and unpaid interest as of the redemption date. The indenture also provides that holders of the 5.0% Notes may require Sonic to repurchase the 5.0% Notes at 101% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if Sonic undergoes a Change of Control, as defined in the indenture.

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 Sonic’s 5.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and B Common Stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and 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 as of September 30, 2014.

Balances outstanding under Sonic’s 5.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic and non-operating subsidiaries that are not guarantors are considered to be minor.

Sonic’s obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of Sonic’s covenants under the 5.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $50.0 million.

Notes Payable to a Finance Company

Three notes payable (due October 2015 and August 2016) were assumed in connection with an acquisition in 2004 (the “Assumed Notes”). Sonic recorded the Assumed Notes at fair value using an interest rate of 5.35%. The interest rate used to calculate the fair value was based on a quoted market price for notes with similar terms as of the date of assumption. As a result of calculating the fair value, a premium of $7.3 million was recorded that is being amortized over the lives of the Assumed Notes. At September 30, 2014, the outstanding principal balance on the Assumed Notes was approximately $5.2 million with a remaining unamortized premium balance of approximately $0.2 million.

Mortgage Notes

At September 30, 2014, Sonic had mortgage financing totaling approximately $265.4 million related to approximately 30% of its dealership properties. These mortgage notes require monthly payments of principal and interest through their respective maturities and are secured by the underlying properties. Maturity dates range between 2015 and 2033. The weighted average interest rate was 3.76% at September 30, 2014.

14


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Covenants

Sonic was in compliance with the covenants under the 2014 Credit Facilities as of September 30, 2014. Financial covenants include required specified ratios (as each is defined in the 2014 Credit Facilities) of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Covenant

 

 

 

 

 

 

 

 

 

Minimum

 

 

Maximum

 

 

 

 

 

Minimum

 

 

Consolidated

 

 

Consolidated

 

 

 

 

 

Consolidated

 

 

Fixed Charge

 

 

Total Lease

 

 

 

 

 

Liquidity

 

 

Coverage

 

 

Adjusted Leverage

 

 

 

 

 

Ratio

 

 

Ratio

 

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Required ratio

 

 

1.05

 

 

 

1.20

 

 

 

5.50

 

 

 

September 30, 2014 actual

 

 

1.22

 

 

 

1.74

 

 

 

4.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The 2014 Credit Facilities contain events of default, including cross-defaults to other material indebtedness, change of control events and 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 2014 Credit Facilities.

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 are identical to those under the 2014 Credit Facilities with the exception of one financial covenant related to the ratio of EBTDAR to Rent (as defined in the lease agreements) with a required ratio of no less than 1.50 to 1.00. As of September 30, 2014, the ratio was 3.56 to 1.00.

Derivative Instruments and Hedging Activities

Sonic has interest rate cash flow swap agreements to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these swap positions at September 30, 2014 was a net liability of approximately $10.6 million, with $9.3 million included in other accrued liabilities and $3.3 million included in other long-term liabilities, offset partially by an asset of approximately $2.0 million included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The fair value of these swap positions at December 31, 2013 was a net liability of approximately $16.3 million, with $11.6 million included in other accrued liabilities and $8.4 million included in other long-term liabilities, offset partially by an asset of approximately $3.7 million included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 


15


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Under the terms of these cash flow swaps, Sonic will receive and pay interest based on the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

Amount

 

 

Pay

Rate

 

 

Receive Rate (1)

 

Maturing Date

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

$

2.8

 

 

 

7.100%

 

 

one-month LIBOR + 1.50%

 

July 10, 2017

 

 

$

8.8

 

 

 

4.655%

 

 

one-month LIBOR

 

December 10, 2017

 

 

$

7.5

 

(2)

 

6.860%

 

 

one-month LIBOR + 1.25%

 

August 1, 2017

 

 

$

100.0

 

 

 

3.280%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

100.0

 

 

 

3.300%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

6.4

 

(2)

 

6.410%

 

 

one-month LIBOR + 1.25%

 

September 12, 2017

 

 

$

50.0

 

 

 

3.240%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

50.0

 

 

 

3.070%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

100.0

 

(3)

 

2.065%

 

 

one-month LIBOR

 

June 30, 2017

 

 

$

100.0

 

(3)

 

2.015%

 

 

one-month LIBOR

 

June 30, 2017

 

 

$

200.0

 

(3)

 

0.788%

 

 

one-month LIBOR

 

July 1, 2016

 

 

$

50.0

 

(4)

 

1.320%

 

 

one-month LIBOR

 

July 1, 2017

 

 

$

250.0

 

(5)

 

1.887%

 

 

one-month LIBOR

 

June 30, 2018

 

 

$

25.0

 

(4)

 

2.080%

 

 

one-month LIBOR

 

July 1, 2017

 

 

$

100.0

 

(3)

 

1.560%

 

 

one-month LIBOR

 

July 1, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The one-month LIBOR rate was 0.153% at September 30, 2014.

 

 

(2) Changes in fair value are recorded through earnings.

 

 

(3) The effective date of these forward-starting swaps is July 1, 2015.

 

 

(4) The effective date of these forward-starting swaps is July 1, 2016.

 

 

(5) The effective date of this forward-starting swap is July 3, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the second quarter ended June 30, 2014, Sonic entered into two forward-starting interest rate cash flow swap agreements with notional amounts of $25.0 million and $100.0 million. These swap agreements become effective in July 2016 and July 2015, respectively, and terminate in July 2017. These interest rate swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these swaps are recorded in other comprehensive income (loss) before taxes in the accompanying Unaudited Condensed Consolidated Statements of Comprehensive Income.

For the interest rate swaps not designated as cash flow hedges (changes in the fair value of these swaps are recognized through earnings) and amortization of amounts in accumulated other comprehensive income (loss) related to terminated cash flow swaps, certain benefits and charges were included in interest expense, other, net, in the accompanying Unaudited Condensed Consolidated Statements of Income. For the third quarter and nine-month periods ended September 30, 2014, these items were a benefit of approximately $0.2 million and $0.4 million, respectively, and for the third quarter and nine-month periods ended September 30, 2013, these items were a benefit of approximately $0.1 million and $0.7 million, respectively.

For the cash flow swaps that qualify as cash flow hedges, the changes in the fair value of these swaps have been recorded in other comprehensive income (loss), net of related income taxes, in the accompanying Unaudited Condensed Consolidated Statements of Comprehensive Income and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows. The incremental interest expense (the difference between interest paid and interest received) related to these cash flow swaps was approximately $2.4 million and $8.3 million in the third quarter and nine-month periods ended September 30, 2014, respectively, and $3.0 million and $8.8 million in the third quarter and nine-month periods ended September 30, 2013, respectively, and is included in interest expense, other, net, in the accompanying Unaudited Condensed Consolidated Statements of Income and the interest paid amount disclosed in the supplemental disclosures of cash flow information in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows. The estimated net expense expected to be reclassified out of accumulated other comprehensive income (loss) into results of operations during the next twelve months is approximately $5.8 million.

 

16


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7. Per Share Data and Stockholders’ Equity

The calculation of diluted earnings per share considers the potential dilutive effect of options and shares under Sonic’s stock compensation plans. Certain of Sonic’s non-vested restricted stock and restricted stock units contain rights to receive non-forfeitable dividends and, as a result, are considered participating securities and are included in the two-class method of computing earnings per share. The following table illustrates the dilutive effect of such items on earnings per share for the third quarter and nine-month periods ended September 30, 2014 and 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30, 2014

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

52,070

 

 

$

24,557

 

 

 

 

 

 

$

155

 

 

 

 

 

 

$

24,712

 

 

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and restricted stock units

 

 

 

 

 

 

(79

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(79

)

 

 

 

 

 

 

Basic earnings (loss) and shares

 

 

52,070

 

 

$

24,478

 

 

$

0.47

 

 

$

155

 

 

$

-

 

 

$

24,633

 

 

$

0.47

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

483

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

52,553

 

 

$

24,478

 

 

$

0.47

 

 

$

155

 

 

$

-

 

 

$

24,633

 

 

$

0.47

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30, 2013

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

52,553

 

 

$

24,702

 

 

 

 

 

 

$

(1,375

)

 

 

 

 

 

$

23,327

 

 

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and restricted stock units

 

 

 

 

 

 

(172

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(172

)

 

 

 

 

 

 

Basic earnings (loss) and shares

 

 

52,553

 

 

$

24,530

 

 

$

0.47

 

 

$

(1,375

)

 

$

(0.03

)

 

$

23,155

 

 

$

0.44

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

365

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

52,918

 

 

$

24,530

 

 

$

0.46

 

 

$

(1,375

)

 

$

(0.02

)

 

$

23,155

 

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2014

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

52,333

 

 

$

71,602

 

 

 

 

 

 

$

(511

)

 

 

 

 

 

$

71,091

 

 

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and restricted stock units

 

 

 

 

 

 

(229

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(229

)

 

 

 

 

 

 

Basic earnings (loss) and shares

 

 

52,333

 

 

$

71,373

 

 

$

1.36

 

 

$

(511

)

 

$

(0.01

)

 

$

70,862

 

 

$

1.35

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

475

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

52,808

 

 

$

71,373

 

 

$

1.35

 

 

$

(511

)

 

$

(0.01

)

 

$

70,862

 

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2013

 

 

 

 

 

 

 

 

 

Income (Loss)

 

 

Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Continuing

 

 

From Discontinued

 

 

Net

 

 

 

 

 

 

 

 

 

Operations

 

 

Operations

 

 

Income (Loss)

 

 

 

 

 

Weighted

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

 

Per

 

 

 

 

 

Average

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

 

Share

 

 

 

 

 

Shares

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

Amount

 

 

 

 

 

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) and shares

 

 

52,578

 

 

$

55,117

 

 

 

 

 

 

$

(1,582

)

 

 

 

 

 

$

53,535

 

 

 

 

 

 

 

Effect of participating securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-vested restricted stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and restricted stock units

 

 

 

 

 

 

(393

)

 

 

 

 

 

 

-

 

 

 

 

 

 

 

(393

)

 

 

 

 

 

 

Basic earnings (loss) and shares

 

 

52,578

 

 

$

54,724

 

 

$

1.04

 

 

$

(1,582

)

 

$

(0.03

)

 

$

53,142

 

 

$

1.01

 

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock compensation plans

 

 

352

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) and shares

 

 

52,930

 

 

$

54,724

 

 

$

1.03

 

 

$

(1,582

)

 

$

(0.03

)

 

$

53,142

 

 

$

1.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition to the stock options included in the table above, options to purchase approximately 0.4 million shares and 0.9 million shares of Class A Common Stock were outstanding at September 30, 2014 and 2013, respectively, but were not included in the computation of diluted earnings per share because the options were not dilutive.

 

8. Contingencies

Legal and Other Proceedings

Sonic is involved, and expects to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of its business, including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has been certified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out of the conduct of Sonic’s business, including litigation with customers, employment related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have a material adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects.

18


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Included in other accrued liabilities and other long-term liabilities was approximately $2.1 million and $0.2 million, respectively, at September 30, 2014, and approximately $0.3 million and $0.9 million, respectively, at December 31, 2013, in reserves that Sonic was holding for pending proceedings. Except as reflected in such reserves, Sonic is currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings.

Guarantees and Indemnification Obligations

In accordance with the terms of Sonic’s operating lease agreements, Sonic’s dealership subsidiaries, acting as lessees, generally agree to indemnify the lessor from certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upon termination of the lease. In addition, Sonic has generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.

In connection with dealership dispositions, certain of Sonic’s dealership subsidiaries have assigned or sublet to the buyer their interests in real property leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases, including rent payments, and repairs to leased property upon termination of the lease, to the extent that the assignee or sub-lessee does not perform. In the event the sub-lessees do not perform under their obligations Sonic remains liable for the lease payments. Please see Note 12, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion.

In accordance with the terms of agreements entered into for the sale of Sonic’s franchises, Sonic generally agrees to indemnify the buyer from certain exposure and costs arising subsequent to, but that existed prior to, the date of sale, including environmental exposure and exposure resulting from the breach of representations or warranties made in accordance with the agreement. While Sonic’s exposure with respect to environmental remediation and repairs is difficult to quantify, Sonic’s maximum exposure associated with these general indemnifications was approximately $16.8 million and $14.0 million at September 30, 2014 and December 31, 2013, respectively. These indemnifications expire within a period of one to two years following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for this contingency was not significant at September 30, 2014. Sonic also guarantees the floor plan commitments of its 50% owned joint venture, the amount of which was approximately $2.8 million at both September 30, 2014 and December 31, 2013, respectively.

9. Fair Value Measurements

In determining fair value, Sonic uses various valuation approaches including market, income and/or cost approaches. “Fair Value Measurements and Disclosures” in the Accounting Standards Codification (“ASC”) establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of Sonic. Unobservable inputs are inputs that reflect Sonic’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that Sonic has the ability to access. Assets utilizing Level 1 inputs include marketable securities that are actively traded.

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments and deferred compensation plan balances.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, those used in assessing impairment of property, plant and equipment and other intangibles and those used in the reporting unit valuation in the annual goodwill impairment evaluation.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required by Sonic in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input (Level 3 being the lowest level) that is significant to the fair value measurement.

19


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, Sonic’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. Sonic uses inputs that are current as of the measurement date, including during periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that may or may not be within Sonic’s control.

Assets and liabilities recorded at fair value in the accompanying Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Based on

Significant Other Observable

Inputs (Level 2)

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Cash surrender value of life insurance policies (1)

 

$

27,412

 

 

$

25,301

 

 

 

Cash flow swaps designated as hedges (1)

 

 

2,022

 

 

 

3,707

 

 

 

Total assets

 

$

29,434

 

 

$

29,008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

Cash flow swaps designated as hedges (2)

 

$

11,088

 

 

$

17,995

 

 

 

Cash flow swaps not designated as hedges (3)

 

 

1,578

 

 

 

2,046

 

 

 

Deferred compensation plan (4)

 

 

15,917

 

 

 

14,842

 

 

 

Total liabilities

 

$

28,583

 

 

$

34,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

(2)   As of September 30, 2014, approximately $8.6 million and $2.5 million were included in other accrued liabilities

 

 

 

and other long-term liabilities, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

As of December 31, 2013, approximately $10.6 million and $7.4 million were included in other accrued liabilities

 

 

 

and other long-term liabilities, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

(3)   As of September 30, 2014, approximately $0.7 million and $0.9 million were included in other accrued liabilities

 

 

 

and other long-term liabilities, respectively, in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

As of December 31, 2013, approximately $1.0 million was included in both other accrued liabilities

 

 

 

and other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

(4)   Included in other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets.

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no instances in the third quarter and nine-month periods ended September 30, 2014 which required a fair value measurement of assets ordinarily measured at fair value on a non-recurring basis. Therefore, the carrying value of assets measured at fair value on a non-recurring basis in the accompanying Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 have not changed since December 31, 2013.

As of September 30, 2014 and December 31, 2013, the fair values of Sonic’s financial instruments including receivables, notes receivable from finance contracts, notes payable – floor plan, trade accounts payable, borrowings under the 2014 Credit Facilities and certain mortgage notes approximate their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.


20


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At September 30, 2014 and December 31, 2013, the fair value and carrying value of Sonic’s fixed rate long-term debt were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7.0% Notes (1)

 

$

215,500

 

 

$

198,519

 

 

$

218,000

 

 

$

198,414

 

 

 

5.0% Notes (1)

 

$

290,250

 

 

$

300,000

 

 

$

285,000

 

 

$

300,000

 

 

 

Mortgage Notes (2)

 

$

154,668

 

 

$

149,364

 

 

$

165,381

 

 

$

157,571

 

 

 

Assumed Notes (2)

 

$

5,214

 

 

$

5,372

 

 

$

7,636

 

 

$

7,993

 

 

 

Other (2)

 

$

4,613

 

 

$

4,919

 

 

$

4,774

 

 

$

5,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   As determined by market quotations as of September 30, 2014 and December 31, 2013, respectively (Level 1).

 

 

 

(2)   As determined by discounted cash flows (Level 3).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) for the nine-month period ended September 30, 2014 are as follows:

 

 

 

Changes in Accumulated Other Comprehensive

Income (Loss) by Component

for the Nine Months Ended September 30, 2014

 

 

 

Gains and

Losses on

Cash Flow

Hedges

 

 

Defined

Benefit

Pension

Plan

 

 

Total

Accumulated

Other

Comprehensive

Income (Loss)

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2013

 

$

(8,859

)

 

$

277

 

 

$

(8,582

)

Other comprehensive income (loss) before reclassifications (1)

 

 

(2,052

)

 

 

-

 

 

 

(2,052

)

Amounts reclassified out of accumulated

 

 

 

 

 

 

 

 

 

 

 

 

other comprehensive income (loss) (2)

 

 

5,290

 

 

 

-

 

 

 

5,290

 

Net current-period other comprehensive income (loss)

 

 

3,238

 

 

 

-

 

 

 

3,238

 

Balance at September 30, 2014

 

$

(5,621

)

 

$

277

 

 

$

(5,344

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Net of tax benefit of $1,257.

 

 

 

 

 

 

 

 

 

 

 

 

(2) Net of tax expense of $3,242.

 

 

 

 

 

 

 

 

 

 

 

 

See the heading “Derivative Instruments and Hedging Activities” in Note 6, “Long-Term Debt,” for further discussion of Sonic’s cash flow hedges. For further discussion of Sonic’s defined benefit pension plan, see Note 10, “Employee Benefit Plans,” of the Notes to Consolidated Financial Statements in Sonic’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

 

 

 

 

 

21


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with the Sonic Automotive, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements and related notes thereto appearing elsewhere in this report, as well as the audited financial statements and related notes, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

We are one of the largest automotive retailers in the United States. As of September 30, 2014, we operated 120 franchises in 13 states (representing 25 different brands of cars and light trucks) and 18 collision repair centers. For management and operational reporting purposes, we group certain franchises together that share management and inventory (principally used vehicles) into “stores.” As of September 30, 2014, we operated 101 stores. As a result of the way we manage our business, we have a single operating segment for purposes of reporting financial condition and results of operations. Our dealerships provide comprehensive services including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts, performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair services (collectively, “Fixed Operations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “F&I”) for our customers.

As we announced during the fourth quarter of 2013, we plan to augment our manufacturer-franchised dealership operations with stand-alone pre-owned specialty retail sales locations branded as EchoPark®. Our EchoPark® business will operate independently from the existing new and used dealership sales operations and introduce customers to an exciting shopping and buying experience. The first target market is planned for Denver, Colorado, and we expect sales operations to begin in the fourth quarter of 2014.

In the fourth quarter of 2013, we also announced our customer experience initiative known as “One Sonic-One Experience.” This initiative includes several new processes and proprietary technologies from inventory management and pricing tools to a fully developed “customer-centric” Customer Relationship Management (“CRM”) tool. The development of these processes and tools will allow us to better serve our customers across our entire platform of stores. Our goal is to allow our guests to control the buying process and move at their pace so that once the vehicle has been selected our team can use these processes and technologies to get our guests on the road in their new vehicle in less than an hour. During the third quarter of 2014, we began rolling out the One Sonic-One Experience initiative at one of our Toyota dealerships in Charlotte, North Carolina.

 

 

 

22


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is a detail of our new vehicle revenues by brand for the third quarter and nine-month periods ended September 30, 2014 and 2013:

 

 

 

Percentage of New Vehicle Revenue

 

 

Percentage of New Vehicle Revenue

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

Brand

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Luxury:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BMW

 

 

20.8

%

 

 

18.0

%

 

 

20.8

%

 

 

19.1

%

Mercedes

 

 

8.7

%

 

 

8.3

%

 

 

9.0

%

 

 

8.2

%

Lexus

 

 

5.6

%

 

 

5.3

%

 

 

5.1

%

 

 

4.8

%

Audi

 

 

5.0

%

 

 

4.3

%

 

 

4.9

%

 

 

4.2

%

Cadillac

 

 

4.1

%

 

 

5.2

%

 

 

4.4

%

 

 

4.7

%

Land Rover

 

 

2.5

%

 

 

2.7

%

 

 

2.7

%

 

 

2.5

%

Porsche

 

 

2.5

%

 

 

2.1

%

 

 

2.4

%

 

 

2.1

%

Mini

 

 

2.1

%

 

 

2.5

%

 

 

2.2

%

 

 

2.6

%

Acura

 

 

0.8

%

 

 

0.9

%

 

 

0.9

%

 

 

0.8

%

Volvo

 

 

0.8

%

 

 

0.8

%

 

 

0.8

%

 

 

0.9

%

Infiniti

 

 

0.7

%

 

 

0.9

%

 

 

0.7

%

 

 

0.9

%

Jaguar

 

 

0.7

%

 

 

0.8

%

 

 

0.7

%

 

 

0.7

%

Total Luxury

 

 

54.3

%

 

 

51.8

%

 

 

54.6

%

 

 

51.5

%

Mid-line Import:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Honda

 

 

16.0

%

 

 

15.8

%

 

 

15.4

%

 

 

15.7

%

Toyota

 

 

11.3

%

 

 

10.6

%

 

 

10.6

%

 

 

10.4

%

Volkswagen

 

 

2.3

%

 

 

2.3

%

 

 

2.0

%

 

 

2.6

%

Hyundai

 

 

1.6

%

 

 

1.9

%

 

 

1.7

%

 

 

1.9

%

Other (1)

 

 

1.2

%

 

 

1.7

%

 

 

1.6

%

 

 

1.2

%

Nissan

 

 

0.8

%

 

 

1.1

%

 

 

1.0

%

 

 

1.1

%

Total Mid-line Import

 

 

33.2

%

 

 

33.4

%

 

 

32.3

%

 

 

32.9

%

Domestic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ford

 

 

7.1

%

 

 

8.9

%

 

 

7.6

%

 

 

8.9

%

General Motors (2)

 

 

5.4

%

 

 

5.9

%

 

 

5.5

%

 

 

6.7

%

Total Domestic

 

 

12.5

%

 

 

14.8

%

 

 

13.1

%

 

 

15.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Includes Kia, Scion and Subaru.

 

(2)   Includes Buick, Chevrolet and GMC.

 

Results of Operations

Unless otherwise noted, all discussion of increases or decreases for the third quarter or nine-month periods ended September 30, 2014 are compared to the third quarter or nine-month periods ended September 30, 2013, as applicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, Fixed Operations and F&I are on a same store basis, except where otherwise noted. All currently operating continuing operations stores are included within the same store group in the first full month following the first anniversary of the store’s opening or acquisition. During the second quarter of 2014, we adopted the provisions of ASU 2014-08. See Note 1, “Summary of Significant Accounting Policies,” to the accompanying Unaudited Condensed Consolidated Financial Statements for a discussion of the effects of our adoption of this ASU.

23


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

New Vehicles

The automobile retail industry uses the Seasonally Adjusted Annual Rate (“SAAR”) to measure the annual amount of expected new vehicle unit sales activity within the United States market. The SAAR averages below reflect a blended average of all brands marketed or sold in the United States market. The SAAR includes brands we do not sell and markets in which we do not operate, therefore, our new vehicle sales may not trend directly with the SAAR.

 

 

 

Third Quarter Ended September 30,

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

(in millions of vehicles)

 

2014

 

 

2013

 

 

% Change

 

 

2014

 

 

2013

 

 

% Change

 

SAAR

 

 

16.7

 

 

 

15.6

 

 

 

7.1

%

 

 

16.3

 

 

 

15.4

 

 

 

5.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bloomberg Financial Markets, via Stephens Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          New vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues can be influenced by manufacturer incentives for consumers, which vary from cash-back incentives to low interest rate financing. New vehicle revenues are also dependent on manufacturers providing adequate vehicle allocations to our dealerships to meet customer demands and the availability of consumer credit.

Our reported new vehicle results (including fleet) are as follows:  

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,327,837

 

 

$

1,261,270

 

 

$

66,567

 

 

 

5.3

%

Gross profit

 

$

69,026

 

 

$

72,408

 

 

$

(3,382

)

 

 

(4.7

%)

Unit sales

 

 

36,774

 

 

 

35,538

 

 

 

1,236

 

 

 

3.5

%

Revenue per unit

 

$

36,108

 

 

$

35,491

 

 

$

617

 

 

 

1.7

%

Gross profit per unit

 

$

1,877

 

 

$

2,037

 

 

$

(160

)

 

 

(7.9

%)

Gross profit as a % of revenue

 

 

5.2

%

 

 

5.7

%

 

 

(50

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,773,234

 

 

$

3,651,486

 

 

$

121,748

 

 

 

3.3

%

Gross profit

 

$

209,892

 

 

$

206,668

 

 

$

3,224

 

 

 

1.6

%

Unit sales

 

 

103,310

 

 

 

103,023

 

 

 

287

 

 

 

0.3

%

Revenue per unit

 

$

36,523

 

 

$

35,443

 

 

$

1,080

 

 

 

3.0

%

Gross profit per unit

 

$

2,032

 

 

$

2,006

 

 

$

26

 

 

 

1.3

%

Gross profit as a % of revenue

 

 

5.6

%

 

 

5.7

%

 

 

(10

)

 

bps

 

 


24


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

          Our same store new vehicle results (including fleet) are as follows:  

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,310,138

 

 

$

1,235,089

 

 

$

75,049

 

 

 

6.1

%

Gross profit

 

$

67,766

 

 

$

70,602

 

 

$

(2,836

)

 

 

(4.0

%)

Unit sales

 

 

36,443

 

 

 

34,992

 

 

 

1,451

 

 

 

4.1

%

Revenue per unit

 

$

35,950

 

 

$

35,296

 

 

$

654

 

 

 

1.9

%

Gross profit per unit

 

$

1,860

 

 

$

2,018

 

 

$

(158

)

 

 

(7.8

%)

Gross profit as a % of revenue

 

 

5.2

%

 

 

5.7

%

 

 

(50

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except units and per unit data)

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

3,673,608

 

 

$

3,586,365

 

 

$

87,243

 

 

 

2.4

%

Gross profit

 

$

203,132

 

 

$

202,181

 

 

$

951

 

 

 

0.5

%

Unit sales

 

 

101,392

 

 

 

101,663

 

 

 

(271

)

 

 

(0.3

%)

Revenue per unit

 

$

36,232

 

 

$

35,277

 

 

$

955

 

 

 

2.7

%

Gross profit per unit

 

$

2,003

 

 

$

1,989

 

 

$

14

 

 

 

0.7

%

Gross profit as a % of revenue

 

 

5.5

%

 

 

5.6

%

 

 

(10

)

 

bps

 

During the third quarter and nine-month periods ended September 30, 2014, we continued to test our new car pricing model with True Price®. As we move toward our national One Sonic-One Experience launch (our new customer experience initiative), we believe we will become more aggressive in pricing as well as gain market share as customers benefit from the entire complement of our new shopping experience.

The increases in new vehicle revenue during the third quarter and nine-month periods ended September 30, 2014, were primarily driven by new vehicle price per unit increases of 1.9% and 2.7%, respectively. Also contributing to the increase in new vehicle revenue during the third quarter ended September 30, 2014 was a new unit sales volume increase of 4.1%. New unit sales volume was flat in the nine-month period ended September 30, 2014. Excluding fleet sales (which we began to scale back in 2014), our retail new revenue increased 8.5% and 4.4% for the third quarter and nine-month periods ended September 30, 2014, respectively, and retail new unit sales volume increased 7.2% and 2.3% during the third quarter and nine-month periods ended September 30, 2014, respectively. Our Audi, BMW, Toyota and Honda dealerships led our new retail unit sales volume growth with increases of 27.4%, 19.2%, 11.0% and 10.6%, respectively, in the third quarter ended September 30, 2014, and our Audi, Lexus and BMW dealerships led our new retail unit sales volume growth with increases of 22.7% 12.6% and 10.0%, respectively, in the nine-month period ended September 30, 2014.

Total new vehicle gross profit dollars decreased $2.8 million, or 4.0%, during the third quarter ended September 30, 2014 and remained flat in the nine-month period ended September 30, 2014. Our gross profit per new unit decrease of $158 per unit in the third quarter ended September 30, 2014 was driven primarily by our Honda, Ford and Volkswagen dealerships. During the nine-month period ended September 30, 2014, increases in gross profit per new unit at our Audi, Land Rover and Cadillac dealerships were offset partially by decreases at our Ford and Toyota dealerships.

Our luxury dealerships (which include Cadillac) experienced new vehicle revenue increases of 11.7% and 8.7% in the third quarter and nine-month periods ended September 30, 2014, respectively, primarily due to new unit sales volume increases of 8.9% and 6.5% in the third quarter and nine-month periods ended September 30, 2014, respectively. Luxury dealership new vehicle gross profit increased 1.6% and 5.7% during the third quarter and nine-month periods ended September 30, 2014, respectively, primarily due to new unit sales volume increases at our Audi, BMW and Mercedes dealerships. Luxury dealership new vehicle gross profit per unit decreased 6.7% during the third quarter ended September 30, 2014, driven primarily by our MINI, Lexus and Jaguar dealerships, and remained flat during the nine-month period ended September 30, 2014.

25


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our mid-line import dealerships experienced a new vehicle revenue increase of 5.4% in the third quarter ended September 30, 2014, primarily due to a 7.4% increase in new unit volume during the same period, driven primarily by higher unit sales at our Toyota and Honda dealerships, which experienced a 11.4% and a 10.7% increase in new vehicle unit sales, respectively, in the third quarter ended September 30, 2014. New vehicle revenue from our mid-line import dealerships remained flat in the nine-month period ended September 30, 2014. Mid-line import gross profit decreased 16.2% and 6.7% in the third quarter and nine-month periods ended September 30, 2014, respectively, driven primarily by gross profit per new unit decreases at our Honda and Toyota dealerships.

Excluding fleet sales, our domestic dealerships experienced a new retail vehicle revenue increase of 6.0% in the third quarter ended September 30, 2014, driven by an increase unit sales volume of 4.1% during the same period. New retail vehicle revenue remained flat in the nine-month period ended September 30, 2014, driven by a new retail unit sales volume decrease of 3.1%, offset by an increase in price per unit of 3.5% during the same period. Our domestic dealerships experienced a new retail vehicle gross profit increase of 0.9% and a decrease of 4.5% for the third quarter and nine-month periods ended September 30, 2014, respectively. New retail vehicle gross profit per unit at our Ford dealerships decreased 13.2% and 10.1% during the third quarter and nine-month periods ended September 30, 21014, driving new vehicle gross profit decreases of 12.6% and 12.8% during the same period. Our General Motors dealerships (excluding Cadillac) experienced increases of 6.8% and 8.8% in new retail vehicle price per unit as well as increases in gross profit per unit of 9.6% and 9.7% during the third quarter and nine-month periods ended September 30, 2014, respectively, driving new vehicle gross profit increases of 19.1% and 6.1%, respectively, during the same period.  

Including fleet sales, our domestic dealerships experienced new vehicle revenue decreases of 11.4% and 12.7% in the third quarter and nine-month periods ended September 30, 2014, respectively, driven by new unit sales volume decreases of 16.5% and 18.4% in the third quarter and nine-month periods ended September 30, 2014, respectively. These unit sales volume decreases were partially offset by price per unit increases of 6.1% and 7.0% in the third quarter and nine-month periods ended September 30, 2014, respectively. Domestic fleet unit sales volume decreased 67.4% and 54.2% in the third quarter and nine-month periods ended September 30, 2014, respectively, driving a fleet revenue decrease of 63.5% and 50.3% in the third quarter and nine-month periods ended September 30, 2014, respectively. The decreases in fleet revenue and unit sales are due to a reduced focus on fleet sales as a result of our operational decision to move away from the low margin fleet business.


26


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Used Vehicles

Used vehicle revenues are directly affected by a number of factors including the level of manufacturer incentives on new vehicles, the number and quality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and the availability of consumer credit.

Our reported used vehicle results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

583,570

 

 

$

559,848

 

 

$

23,722

 

 

 

4.2

%

 

 

Gross profit

 

$

41,245

 

 

$

38,976

 

 

$

2,269

 

 

 

5.8

%

 

 

Unit sales

 

 

27,536

 

 

 

27,632

 

 

 

(96

)

 

 

(0.3

%)

 

 

Revenue per unit

 

$

21,193

 

 

$

20,261

 

 

$

932

 

 

 

4.6

%

 

 

Gross profit per unit

 

$

1,498

 

 

$

1,411

 

 

$

87

 

 

 

6.2

%

 

 

Gross profit as a % of revenue

 

 

7.1

%

 

 

7.0

%

 

 

10

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,747,254

 

 

$

1,625,006

 

 

$

122,248

 

 

 

7.5

%

 

 

Gross profit

 

$

119,412

 

 

$

114,615

 

 

$

4,797

 

 

 

4.2

%

 

 

Unit sales

 

 

83,707

 

 

 

80,700

 

 

 

3,007

 

 

 

3.7

%

 

 

Revenue per unit

 

$

20,873

 

 

$

20,136

 

 

$

737

 

 

 

3.7

%

 

 

Gross profit per unit

 

$

1,427

 

 

$

1,420

 

 

$

7

 

 

 

0.5

%

 

 

Gross profit as a % of revenue

 

 

6.8

%

 

 

7.1

%

 

 

(30

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


27


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our same store used vehicle results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

569,226

 

 

$

544,018

 

 

$

25,208

 

 

 

4.6

%

 

 

Gross profit

 

$

40,617

 

 

$

38,074

 

 

$

2,543

 

 

 

6.7

%

 

 

Unit sales

 

 

27,000

 

 

 

26,953

 

 

 

47

 

 

 

0.2

%

 

 

Revenue per unit

 

$

21,082

 

 

$

20,184

 

 

$

898

 

 

 

4.4

%

 

 

Gross profit per unit

 

$

1,504

 

 

$

1,413

 

 

$

91

 

 

 

6.4

%

 

 

Gross profit as a % of revenue

 

 

7.1

%

 

 

7.0

%

 

 

10

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,677,794

 

 

$

1,580,336

 

 

$

97,458

 

 

 

6.2

%

 

 

Gross profit

 

$

115,743

 

 

$

111,673

 

 

$

4,070

 

 

 

3.6

%

 

 

Unit sales

 

 

80,928

 

 

 

78,785

 

 

 

2,143

 

 

 

2.7

%

 

 

Revenue per unit

 

$

20,732

 

 

$

20,059

 

 

$

673

 

 

 

3.4

%

 

 

Gross profit per unit

 

$

1,430

 

 

$

1,417

 

 

$

13

 

 

 

0.9

%

 

 

Gross profit as a % of revenue

 

 

6.9

%

 

 

7.1

%

 

 

(20

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In the third quarter and nine-month periods ended September 30, 2014, our used vehicle unit volume increased 0.2% and 2.7%, respectively. Gross profit per used unit for the third quarter and nine-month periods ended September 30, 2014, increased 6.4% and 0.9%, respectively, as a result of better control over the procurement, pricing and placement of used inventory through our centralized retail trade center. As we move toward our national One Sonic-One Experience launch and continue to test our used car pricing model with True Price®, we believe we will have the opportunity to experience gains in our used vehicle unit volume and used vehicle revenue levels.


28


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Wholesale Vehicles

Wholesale vehicle revenues are highly correlated with new and used vehicle retail sales and the associated trade-in volume and are also significantly affected by our corporate inventory management policies, which are designed to optimize our total used vehicle inventory.

Our reported wholesale vehicle results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

41,433

 

 

$

42,731

 

 

$

(1,298

)

 

 

(3.0

%)

 

 

Gross profit (loss)

 

$

(1,086

)

 

$

(3,197

)

 

$

2,111

 

 

 

66.0

%

 

 

Unit sales

 

 

7,916

 

 

 

7,641

 

 

 

275

 

 

 

3.6

%

 

 

Revenue per unit

 

$

5,234

 

 

$

5,592

 

 

$

(358

)

 

 

(6.4

%)

 

 

Gross profit (loss) per unit

 

$

(137

)

 

$

(418

)

 

$

281

 

 

 

67.2

%

 

 

Gross profit (loss) as a % of revenue

 

 

(2.6

%)

 

 

(7.5

%)

 

 

490

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

127,797

 

 

$

134,556

 

 

$

(6,759

)

 

 

(5.0

%)

 

 

Gross profit (loss)

 

$

(2,493

)

 

$

(6,343

)

 

$

3,850

 

 

 

60.7

%

 

 

Unit sales

 

 

23,034

 

 

 

23,291

 

 

 

(257

)

 

 

(1.1

%)

 

 

Revenue per unit

 

$

5,548

 

 

$

5,777

 

 

$

(229

)

 

 

(4.0

%)

 

 

Gross profit (loss) per unit

 

$

(108

)

 

$

(272

)

 

$

164

 

 

 

60.3

%

 

 

Gross profit (loss) as a % of revenue

 

 

(2.0

%)

 

 

(4.7

%)

 

 

270

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


29


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our same store wholesale vehicle results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

40,894

 

 

$

42,141

 

 

$

(1,247

)

 

 

(3.0

%)

 

 

Gross profit (loss)

 

$

(1,043

)

 

$

(3,105

)

 

$

2,062

 

 

 

66.4

%

 

 

Unit sales

 

 

7,829

 

 

 

7,545

 

 

 

284

 

 

 

3.8

%

 

 

Revenue per unit

 

$

5,223

 

 

$

5,585

 

 

$

(362

)

 

 

(6.5

%)

 

 

Gross profit (loss) per unit

 

$

(133

)

 

$

(412

)

 

$

279

 

 

 

67.7

%

 

 

Gross profit (loss) as a % of revenue

 

 

(2.6

%)

 

 

(7.4

%)

 

 

480

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands, except units and per unit data)

 

 

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

123,962

 

 

$

132,528

 

 

$

(8,566

)

 

 

(6.5

%)

 

 

Gross profit (loss)

 

$

(2,262

)

 

$

(6,019

)

 

$

3,757

 

 

 

62.4

%

 

 

Unit sales

 

 

22,509

 

 

 

22,987

 

 

 

(478

)

 

 

(2.1

%)

 

 

Revenue per unit

 

$

5,507

 

 

$

5,765

 

 

$

(258

)

 

 

(4.5

%)

 

 

Gross profit (loss) per unit

 

$

(100

)

 

$

(262

)

 

$

162

 

 

 

61.8

%

 

 

Gross profit (loss) as a % of revenue

 

 

(1.8

%)

 

 

(4.5

%)

 

 

270

 

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale vehicle revenue and unit sales volume fluctuations are typically a result of new and used retail vehicle unit volumes that generate additional trade-in vehicle volume that we are not always able to sell as retail used vehicles and choose to sell at auction. Wholesale gross profit for the third quarter and nine-month periods ended September 30, 2014, increased 66.4% and 62.4%, respectively. Wholesale vehicle revenue decreased in the third quarter and nine-month periods ended September 30, 2014 as a result of our focus on acquiring the right used inventory at our dealerships, pricing the vehicles effectively and turning our used inventory quickly.


30


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Parts, Service and Collision Repair (“Fixed Operations”)

Parts and service revenue consists of customer requested parts and service orders (“customer pay”), warranty repairs, wholesale parts and collision repairs. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality, customer loyalty and manufacturer warranty programs.

Our reported Fixed Operations results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

Reported:

 

(In thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

141,458

 

 

$

137,106

 

 

$

4,352

 

 

 

3.2

%

 

 

Warranty

 

 

48,431

 

 

 

45,405

 

 

 

3,026

 

 

 

6.7

%

 

 

Wholesale parts

 

 

46,983

 

 

 

43,349

 

 

 

3,634

 

 

 

8.4

%

 

 

Internal, sublet and other

 

 

88,868

 

 

 

83,740

 

 

 

5,128

 

 

 

6.1

%

 

 

Total

 

$

325,740

 

 

$

309,600

 

 

$

16,140

 

 

 

5.2

%

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

77,546

 

 

$

75,203

 

 

$

2,343

 

 

 

3.1

%

 

 

Warranty

 

 

26,254

 

 

 

24,374

 

 

 

1,880

 

 

 

7.7

%

 

 

Wholesale parts

 

 

8,122

 

 

 

7,881

 

 

 

241

 

 

 

3.1

%

 

 

Internal, sublet and other

 

 

43,358

 

 

 

41,689

 

 

 

1,669

 

 

 

4.0

%

 

 

Total

 

$

155,280

 

 

$

149,147

 

 

$

6,133

 

 

 

4.1

%

 

 

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

 

54.8

%

 

 

54.9

%

 

 

(10

)

 

bps

 

 

 

Warranty

 

 

54.2

%

 

 

53.7

%

 

 

50

 

 

bps

 

 

 

Wholesale parts

 

 

17.3

%

 

 

18.2

%

 

 

(90

)

 

bps

 

 

 

Internal, sublet and other

 

 

48.8

%

 

 

49.8

%

 

 

(100

)

 

bps

 

 

 

Total

 

 

47.7

%

 

 

48.2

%

 

 

(50

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

Reported:

 

(In thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

427,620

 

 

$

407,252

 

 

$

20,368

 

 

 

5.0

%

 

 

Warranty

 

 

142,072

 

 

 

137,489

 

 

 

4,583

 

 

 

3.3

%

 

 

Wholesale parts

 

 

142,071

 

 

 

124,870

 

 

 

17,201

 

 

 

13.8

%

 

 

Internal, sublet and other

 

 

261,883

 

 

 

243,679

 

 

 

18,204

 

 

 

7.5

%

 

 

Total

 

$

973,646

 

 

$

913,290

 

 

$

60,356

 

 

 

6.6

%

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

235,151

 

 

$

224,485

 

 

$

10,666

 

 

 

4.8

%

 

 

Warranty

 

 

77,163

 

 

 

74,657

 

 

 

2,506

 

 

 

3.4

%

 

 

Wholesale parts

 

 

24,590

 

 

 

23,158

 

 

 

1,432

 

 

 

6.2

%

 

 

Internal, sublet and other

 

 

130,381

 

 

 

122,206

 

 

 

8,175

 

 

 

6.7

%

 

 

Total

 

$

467,285

 

 

$

444,506

 

 

$

22,779

 

 

 

5.1

%

 

 

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

 

55.0

%

 

 

55.1

%

 

 

(10

)

 

bps

 

 

 

Warranty

 

 

54.3

%

 

 

54.3

%

 

 

0

 

 

bps

 

 

 

Wholesale parts

 

 

17.3

%

 

 

18.5

%

 

 

(120

)

 

bps

 

 

 

Internal, sublet and other

 

 

49.8

%

 

 

50.2

%

 

 

(40

)

 

bps

 

 

 

Total

 

 

48.0

%

 

 

48.7

%

 

 

(70

)

 

bps

 

 

31


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Our same store Fixed Operations results are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

Same Store:

 

(In thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

137,639

 

 

$

133,451

 

 

$

4,188

 

 

 

3.1

%

 

 

Warranty

 

 

47,383

 

 

 

44,118

 

 

 

3,265

 

 

 

7.4

%

 

 

Wholesale parts

 

 

45,945

 

 

 

42,649

 

 

 

3,296

 

 

 

7.7

%

 

 

Internal, sublet and other

 

 

87,166

 

 

 

81,964

 

 

 

5,202

 

 

 

6.3

%

 

 

Total

 

$

318,133

 

 

$

302,182

 

 

$

15,951

 

 

 

5.3

%

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

75,546

 

 

$

73,255

 

 

$

2,291

 

 

 

3.1

%

 

 

Warranty

 

 

25,766

 

 

 

23,660

 

 

 

2,106

 

 

 

8.9

%

 

 

Wholesale parts

 

 

7,859

 

 

 

7,717

 

 

 

142

 

 

 

1.8

%

 

 

Internal, sublet and other

 

 

42,411

 

 

 

40,498

 

 

 

1,913

 

 

 

4.7

%

 

 

Total

 

$

151,582

 

 

$

145,130

 

 

$

6,452

 

 

 

4.4

%

 

 

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

 

54.9

%

 

 

54.9

%

 

 

0

 

 

bps

 

 

 

Warranty

 

 

54.4

%

 

 

53.6

%

 

 

80

 

 

bps

 

 

 

Wholesale parts

 

 

17.1

%

 

 

18.1

%

 

 

(100

)

 

bps

 

 

 

Internal, sublet and other

 

 

48.7

%

 

 

49.4

%

 

 

(70

)

 

bps

 

 

 

Total

 

 

47.6

%

 

 

48.0

%

 

 

(40

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

Same Store:

 

(In thousands)

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

408,504

 

 

$

398,444

 

 

$

10,060

 

 

 

2.5

%

 

 

Warranty

 

 

136,337

 

 

 

133,952

 

 

 

2,385

 

 

 

1.8

%

 

 

Wholesale parts

 

 

137,461

 

 

 

123,360

 

 

 

14,101

 

 

 

11.4

%

 

 

Internal, sublet and other

 

 

253,720

 

 

 

238,881

 

 

 

14,839

 

 

 

6.2

%

 

 

Total

 

$

936,022

 

 

$

894,637

 

 

$

41,385

 

 

 

4.6

%

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

$

225,232

 

 

$

219,888

 

 

$

5,344

 

 

 

2.4

%

 

 

Warranty

 

 

74,190

 

 

 

73,048

 

 

 

1,142

 

 

 

1.6

%

 

 

Wholesale parts

 

 

23,343

 

 

 

22,808

 

 

 

535

 

 

 

2.3

%

 

 

Internal, sublet and other

 

 

125,740

 

 

 

119,252

 

 

 

6,488

 

 

 

5.4

%

 

 

Total

 

$

448,505

 

 

$

434,996

 

 

$

13,509

 

 

 

3.1

%

 

 

Gross profit as a % of revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer pay

 

 

55.1

%

 

 

55.2

%

 

 

(10

)

 

bps

 

 

 

Warranty

 

 

54.4

%

 

 

54.5

%

 

 

(10

)

 

bps

 

 

 

Wholesale parts

 

 

17.0

%

 

 

18.5

%

 

 

(150

)

 

bps

 

 

 

Internal, sublet and other

 

 

49.6

%

 

 

49.9

%

 

 

(30

)

 

bps

 

 

 

Total

 

 

47.9

%

 

 

48.6

%

 

 

(70

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the third quarter ended September 30, 2014, our total Fixed Operations customer pay revenue increased 3.1%. During the nine-month period ended September 30, 2014, our total Fixed Operations customer pay revenue increased 2.5%, in spite of lost

32


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

days at our Texas, Southeast, and Mid-Atlantic stores due to winter storms during the first quarter ended March 31, 2014. Our warranty revenue increased during the third quarter and nine-month periods ended September 30, 2014, by 7.4% and 1.8%, respectively, driven primarily by our General Motors (including Cadillac) and Audi dealerships. Our wholesale parts revenue increased 7.7% and 11.4% during the third quarter and nine-month periods ended September 30, 2014, respectively, driven primarily by an increase in bulk wholesale parts sales at some of our large luxury stores in California. Internal, sublet and other revenue increased 6.3% and 6.2% for the third quarter and nine-month periods ended September 30, 2014, respectively, due in part to increased trade-in activity as a result of higher levels of retail unit sales volume.

Fixed Operations gross profit grew at a lower rate than the revenue increase as a result of changes in the mix of revenue between categories for the third quarter and nine-month periods ended September 30, 2014. Revenue growth in the lower-margin wholesale parts and internal, sublet and other categories outpaced that of the higher-margin customer pay and warranty categories for both the third quarter and nine-month periods ended September 30, 2014. From a rate and volume perspective, for the third quarter ended September 30, 2014, the increase in gross profit of approximately $6.5 million resulted from a $7.7 million increase as a result of higher Fixed Operations sales volume, offset partially by a $1.2 million decrease as a result of a 40 basis point decline in the gross margin rate. For the nine-month period ended September 30, 2014, the increase in gross profit of approximately $13.5 million resulted from a $20.1 million increase as a result of higher Fixed Operations sales volume, offset partially by a $6.6 million decrease as a result of a 70 basis point decline in the gross margin rate.

Finance, Insurance and Other (“F&I”)

Finance, insurance and other revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles and other aftermarket products. In connection with vehicle financing, extended warranties, service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts.

Our reported F&I results are as follows:

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except per unit data)

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

77,024

 

 

$

68,747

 

 

$

8,277

 

 

 

12.0

%

Gross profit per retail unit (excludes fleet)

 

$

1,207

 

 

$

1,114

 

 

$

93

 

 

 

8.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except per unit data)

 

Reported:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

223,340

 

 

$

203,461

 

 

$

19,879

 

 

 

9.8

%

Gross profit per retail unit (excludes fleet)

 

$

1,208

 

 

$

1,136

 

 

$

72

 

 

 

6.3

%

 


33


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Our same store F&I results are as follows:

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except per unit data)

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

76,386

 

 

$

67,611

 

 

$

8,775

 

 

 

13.0

%

Gross profit per retail unit (excludes fleet)

 

$

1,213

 

 

$

1,118

 

 

$

95

 

 

 

8.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

(In thousands, except per unit data)

 

Same Store:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

218,160

 

 

$

200,589

 

 

$

17,571

 

 

 

8.8

%

Gross profit per retail unit (excludes fleet)

 

$

1,211

 

 

$

1,141

 

 

$

70

 

 

 

6.1

%

F&I revenues and F&I gross profit per unit increased during the third quarter and nine-month periods ended September 30, 2014, primarily due to improved penetration rates on service contracts and aftermarket products as a result of increased visibility into performance drivers provided by our proprietary internal software applications. In addition, F&I revenues improved due to increases in total new and used retail (excluding fleet) unit volume of 4.1% and 2.5% for the third quarter and nine-month periods ended September 30, 2014, respectively.

Finance contract revenue increased 6.9% and 4.6% for the third quarter and nine-month periods ended September 30, 2014, respectively, compared to the prior year period, primarily due to increases in contract volume of 4.1% and 3.4%, respectively. The increase in finance contract revenue in the third quarter and nine-month periods ended September 30, 2014 was further driven by increases in gross profit per contract of 2.7% and 1.1%, respectively. Finance contract revenue may experience compression if manufacturers offer attractive financing rates from their captive finance affiliates because we tend to earn lower commissions under these programs.

Service contract revenue increased 12.5% and 11.4% in the third quarter and nine-month periods ended September 30, 2014, respectively. Total service contract volume increased 8.5% and 6.4% for the third quarter and nine-month periods ended September 30, 2014, respectively, driven by a service contract penetration rate increase of 130 basis points and 120 basis points for the third quarter and nine-month periods ended September 30, 2014, respectively. Gross profit per service contract increased 3.7% and 4.7% for the third quarter and nine-month periods ended September 30, 2014, respectively, also driving the increase in service contract revenue.

Other aftermarket contract revenue increased 18.3% and 14.1% in the third quarter and nine-month periods ended September 30, 2014, respectively. Other aftermarket contract volume increased 15.2% and 12.2% for third quarter and nine-month periods ended September 30, 2014, respectively, driven by other aftermarket contract penetration rate increases of 1,300 basis points and 1,170 basis points for the third quarter and nine-month periods ended September 30, 2014.

Selling, General and Administrative (“SG&A”) Expenses

SG&A expenses are comprised of four major groups: compensation expense, advertising expense, rent expense and other expense. Compensation expense primarily relates to dealership personnel who are paid a commission or a salary plus commission and support personnel who are paid a fixed salary. Commissions paid to dealership personnel typically vary depending on gross profits realized. Due to the salary component for certain dealership and corporate personnel, gross profits and compensation expense do not change in direct proportion to one another. Advertising expense and other expense vary based on the level of actual or anticipated business activity and number of dealerships owned. Rent expense typically varies with the number of dealerships owned, investments made for facility improvements and interest rates. Although not completely correlated, we believe the best way to measure SG&A expenses are as a percentage of gross profit.


34


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Following is information related to our reported SG&A expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

SG&A expenses

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

$

163,230

 

 

$

151,683

 

 

$

(11,547

)

 

 

(7.6

%)

 

 

Advertising

 

 

14,045

 

 

 

14,132

 

 

 

87

 

 

 

0.6

%

 

 

Rent

 

 

18,145

 

 

 

18,901

 

 

 

756

 

 

 

4.0

%

 

 

Other

 

 

74,724

 

 

 

69,848

 

 

 

(4,876

)

 

 

(7.0

%)

 

 

Total

 

$

270,144

 

 

$

254,564

 

 

$

(15,580

)

 

 

(6.1

%)

 

 

SG&A expenses as a % of gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

47.8

%

 

 

46.5

%

 

 

(130

)

 

bps

 

 

 

Advertising

 

 

4.1

%

 

 

4.3

%

 

 

20

 

 

bps

 

 

 

Rent

 

 

5.3

%

 

 

5.8

%

 

 

50

 

 

bps

 

 

 

Other

 

 

21.9

%

 

 

21.5

%

 

 

(40

)

 

bps

 

 

 

Total

 

 

79.1

%

 

 

78.1

%

 

 

(100

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

SG&A expenses

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

$

483,493

 

 

$

449,791

 

 

$

(33,702

)

 

 

(7.5

%)

 

 

Advertising

 

 

42,027

 

 

 

41,282

 

 

 

(745

)

 

 

(1.8

%)

 

 

Rent

 

 

55,324

 

 

 

56,344

 

 

 

1,020

 

 

 

1.8

%

 

 

Other

 

 

222,187

 

 

 

201,062

 

 

 

(21,125

)

 

 

(10.5

%)

 

 

Total

 

$

803,031

 

 

$

748,479

 

 

$

(54,552

)

 

 

(7.3

%)

 

 

SG&A expenses as a % of gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

 

47.5

%

 

 

46.7

%

 

 

(80

)

 

bps

 

 

 

Advertising

 

 

4.1

%

 

 

4.3

%

 

 

20

 

 

bps

 

 

 

Rent

 

 

5.4

%

 

 

5.9

%

 

 

50

 

 

bps

 

 

 

Other

 

 

21.9

%

 

 

20.8

%

 

 

(110

)

 

bps

 

 

 

Total

 

 

78.9

%

 

 

77.7

%

 

 

(120

)

 

bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Overall SG&A expenses increased in the third quarter and nine-month periods ended September 30, 2014, primarily due to increases in unit sales volume driving higher variable compensation costs and the other SG&A expenses discussed below. Overall SG&A expenses as a percentage of gross profit increased 100 and 120 basis points in the third quarter and nine-month periods ended September 30, 2014, respectively.

Included in total SG&A expenses are costs related to our recently announced stand-alone pre-owned initiative, EchoPark®, the implementation of One Sonic-One Experience and the centralization of certain accounting and business office functions. The combined effect of these strategic initiatives on total SG&A as a percentage of gross profit was an increase of 120 basis points and 80 basis points in the third quarter and nine month periods ended September 30, 2014, respectively, compared to the prior year periods. Excluding costs related to these initiatives, total SG&A as a percentage of gross profit would have decreased 20 basis points for the third quarter ended September 30, 2014 and increased 40 basis points for the nine month period ended September 30, 2014, compared to the prior year periods. Compensation costs as a percentage of gross profit increased 130 and 80 basis points in the third quarter and nine-month periods ended September 30, 2014, respectively, primarily due to variable compensation costs, medical insurance claims and increased headcount related to demand from higher Fixed Operations activity levels and EchoPark® staffing.

In the third quarter and nine-month periods ended September 30, 2014 total advertising expense decreased as a percentage of gross profit due to higher levels of gross profit and a focus on specific targeted advertising spend.

35


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Rent expense as a percentage of gross profit decreased 50 basis points in both the third quarter and nine-month periods ended September 30, 2014, primarily due to higher gross profit levels and the purchase of properties that were previously leased.

Other SG&A expenses increased in dollar amount and as a percentage of gross profit during the third quarter and nine-month periods ended September 30, 2014, primarily due to outside contractor and IT expenses related to EchoPark® and One Sonic-One Experience, higher customer delivery costs and legal fees. Included in other SG&A expenses for the third quarter and nine month periods ended September 30, 2014, is approximately $2.0 million and $3.0 million, respectively, of storm-related physical damage offset by gain on sale of dealerships of approximately $3.2 million and $10.5 million, respectively.

Depreciation and Amortization

Depreciation and amortization expense increased approximately $0.5 million, or 3.6%, and $4.0 million, or 10.3%, during the third quarter and nine-month periods ended September 30, 2014, respectively. The increase is primarily related to completed construction projects that were placed in service subsequent to September 30, 2013 and the purchase of dealership properties that were previously leased.

Interest Expense, Floor Plan

Interest expense, floor plan for new vehicles incurred by continuing operations decreased approximately $0.8 million, or 16.1%, and $1.7 million, or 11.3%, in the third quarter and nine-month periods ended September 30, 2014, respectively. The average new vehicle floor plan notes payable balance for continuing operations increased approximately $30.6 million and $69.7 million in the third quarter and nine-month periods ended September 30, 2014, respectively, resulting in an increase in new vehicle floor plan interest expense of approximately $0.1 million and $1.0 million for the same periods. The average new vehicle floor plan interest rate incurred by continuing dealerships was 1.50% and 1.58% in the third quarter and nine-month periods ended September 30, 2014, respectively, compared to 1.84% and 1.90% in the third quarter and nine-month periods ended September 30, 2013, respectively, which resulted in a decrease in interest expense of approximately $0.9 million and $2.7 million during the third quarter and nine-month periods ended September 30, 2014, respectively, offsetting the increases due to higher average floor plan notes payable balances discussed above.

Interest expense, floor plan for used vehicles incurred by continuing operations decreased approximately $0.3 million, or 49.9%, and $0.7 million, or 43.4%, in the third quarter and nine-month periods ended September 30, 2014, respectively. The average used vehicle floor plan notes payable balance for continuing operations decreased approximately $11.8 million and $11.0 million in the third quarter and nine-month periods ended September 30, 2014, respectively, resulting in a decrease in used vehicle floor plan interest expense of approximately $0.1 million and $0.2 million for the same periods. The average used vehicle floor plan interest rate incurred by continuing dealerships was 1.74% in the third quarter ended September 30, 2014, compared to 2.91% in the third quarter ended September 30, 2013, which resulted in a decrease in interest expense of approximately $0.2 million, further contributing to the decrease due to the lower average floor plan notes payable balance discussed above. The average used vehicle floor plan interest rate incurred by continuing dealerships was 1.84% in the nine-month period ended September 30, 2014, compared 2.76% in the nine-month period ended September 30, 2013, which resulted in a decrease in interest expense of approximately $0.5 million during the nine-month period ended September 30, 3014.


36


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Interest Expense, Other, Net

Interest expense, other, net, includes both cash and non-cash interest charges, and is summarized in the schedule below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stated/coupon interest

 

$

10,383

 

 

$

10,290

 

 

$

(93

)

 

 

(0.9

%)

 

 

Discount/premium amortization

 

 

36

 

 

 

33

 

 

 

(3

)

 

 

(9.1

%)

 

 

Deferred loan cost amortization

 

 

645

 

 

 

674

 

 

 

29

 

 

 

4.3

%

 

 

Cash flow swap interest

 

 

2,148

 

 

 

2,923

 

 

 

775

 

 

 

26.5

%

 

 

Capitalized interest

 

 

(502

)

 

 

(562

)

 

 

(60

)

 

 

(10.7

%)

 

 

Other interest

 

 

183

 

 

 

195

 

 

 

12

 

 

 

6.2

%

 

 

Total

 

$

12,893

 

 

$

13,553

 

 

$

660

 

 

 

4.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

Better / (Worse)

 

 

 

 

 

2014

 

 

2013

 

 

Change

 

 

% Change

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stated/coupon interest

 

$

31,094

 

 

$

33,105

 

 

$

2,011

 

 

 

6.1

%

 

 

Discount/premium amortization

 

 

105

 

 

 

163

 

 

 

58

 

 

 

35.6

%

 

 

Deferred loan cost amortization

 

 

2,059

 

 

 

2,028

 

 

 

(31

)

 

 

(1.5

%)

 

 

Cash flow swap interest

 

 

7,865

 

 

 

8,087

 

 

 

222

 

 

 

2.7

%

 

 

Capitalized interest

 

 

(1,073

)

 

 

(1,677

)

 

 

(604

)

 

 

(36.0

%)

 

 

Other interest

 

 

526

 

 

 

596

 

 

 

70

 

 

 

11.7

%

 

 

Total

 

$

40,576

 

 

$

42,302

 

 

$

1,726

 

 

 

4.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, other, net, decreased approximately $0.7 million during the third quarter ended September 30, 2014, primarily due to a decrease in cash flow swap interest payments due to the expiration of two interest rate swaps during the third quarter ended September 30, 2014. Interest expense, other, net, decreased approximately $1.7 million during the nine months ended September 30, 2014, primarily due to a decrease in coupon interest related to the net impact of the issuance of the 5.0% Notes and the extinguishment of the 9.0% Senior Subordinated Notes due 2018 (the “9.0% Notes”) in May 2013, offset partially by lower amounts of capitalized interest. Included in stated/coupon interest in the nine-month period ended September 30, 2013 is approximately $0.8 million of double-carry interest while both the 5.0% Notes and 9.0% Notes were outstanding in May 2013.

Other Income (Expense), Net

Other income expense, net, decreased approximately $28.2 million during the nine-month period ended September 30, 2014, primarily due to a charge of approximately $28.2 million related to the extinguishment of the 9.0% Notes in the second quarter of 2013.

Income Taxes

The overall effective tax rate from continuing operations was 38.0% and 38.7% for the third quarter and nine-month periods ended September 30, 2014, respectively, and was 36.3% and 37.8% for the third quarter and nine-month periods ended September 30, 2013, respectively. The effective rate for the third quarter and nine-month periods ended September 30, 2014 was higher than the prior year periods as a result of the favorable resolution of previously outstanding tax matters in the prior year periods. We expect the effective tax rate for continuing operations in future quarterly periods to fall within a range of 38.0% to 40.0%.

 

 


37


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Discontinued Operations

Significant components of results from discontinued operations were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

$

(900

)

 

$

(1,389

)

 

$

(1,670

)

 

$

(22

)

 

 

Gain (loss) on disposal

 

 

148

 

 

 

(57

)

 

 

201

 

 

 

(435

)

 

 

Lease exit accrual adjustments and charges

 

 

1,006

 

 

 

(611

)

 

 

631

 

 

 

(1,977

)

 

 

Pre-tax income (loss)

 

$

254

 

 

$

(2,057

)

 

$

(838

)

 

$

(2,434

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the third quarter ended September 30, 2014, we recognized a $1.4 million favorable lease exit accrual adjustment related to the extension of a sublease at a vacated dealership facility. During the third quarter ended September 30, 2013, we recognized a $1.4 million gain from business interruption insurance proceeds related to a dealership that was sold in 2012. See the discussion of our adoption of ASU 2014-08 in Note 1, “Summary of Significant Accounting Policies,” to the accompanying Unaudited Condensed Consolidated Financial Statements. We do not expect significant activity classified as discontinued operations in the future due to the change in the definition of a discontinued operation. The results of operations for those dealerships and franchises that were classified as discontinued operations as of March 31, 2014 will continue to be reported within discontinued operations in the future.

Liquidity and Capital Resources

We require cash to fund debt service, operating lease obligations, working capital requirements, facility improvements and other capital improvements, dividends on our Common Stock and to finance acquisitions and otherwise invest in our business. We rely on cash flows from operations, borrowings under our revolving credit and floor plan borrowing arrangements, real estate mortgage financing, asset sales and offerings of debt and equity securities to meet these requirements. We closely monitor our available liquidity and projected future operating results in order to remain in compliance with restrictive covenants under our 2014 Credit Facilities and other debt obligations and lease arrangements. However, our liquidity could be negatively affected if we fail to comply with the financial covenants in our existing debt or lease arrangements. Cash flows provided by our dealerships are derived from various sources. The primary sources include individual consumers, automobile manufacturers, automobile manufacturers’ captive finance subsidiaries and finance companies. Disruptions in these cash flows can have a material and adverse impact on our operations and overall liquidity.

Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and ability to service our obligations depends to a substantial degree on the cash generated from the operations of these dealership subsidiaries.

We had the following liquidity resources available as of September 30, 2014 and December 31, 2013:

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

December 31, 2013

 

 

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,664

 

 

$

3,016

 

 

 

Availability under our revolving credit facility

 

 

105,177

 

 

 

125,959

 

 

 

Availability under our used floor plan facilities

 

 

46,657

 

 

 

27,127

 

 

 

Floor plan deposit balance

 

 

107,500

 

 

 

65,000

 

 

 

     Total available liquidity resources

 

$

260,998

 

 

$

221,102

 

 

 

 

 

 

 

 

 

 

 

 

 

We participate in a program with two of our manufacturer-affiliated finance companies (the floor plan deposit balance in the table above) wherein we maintain a deposit balance with the lender that earns interest based on the lowest interest rate charged on new vehicle floor plan balances held with the lender. This deposit balance is not designated as a pre-payment of notes payable – floor plan, nor is it our intent to use this amount to offset principal amounts owed under notes payable – floor plan in the future, although we have

38


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

the right and ability to do so. The deposit balance of $107.5 million and $65.0 million as of September 30, 2014 and December 31, 2013, respectively, is classified in other current assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. Changes in this deposit balance are classified as changes in other assets in the cash flows from operating activities section of the accompanying Unaudited Condensed Consolidated Statements of Cash Flows. The interest rebate as a result of this deposit balance is classified as a reduction of interest expense, floor plan, in the accompanying Unaudited Condensed Consolidated Statements of Income. In the third quarter and nine-month periods ended September 30, 2014, the reduction in interest expense, floor plan, was approximately $0.6 million and $1.5 million, respectively. In the third quarter and nine-month periods ended September 30, 2013, the reduction in interest expense, floor plan, was approximately $0.1 million and $0.6 million, respectively.

Floor Plan Facilities

We finance our new and certain of our used vehicle inventory through standardized floor plan facilities with manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. These floor plan facilities are due on demand and bear interest at variable rates based on either LIBOR or the prime rate. The weighted average interest rate for our new and used floor plan facilities for continuing operations was 1.52% and 1.59% in the third quarter and nine-month periods ended September 30, 2014, and 1.91% and 1.95% in the third quarter and nine-month periods ended September 30, 2013, respectively.

We receive floor plan assistance from certain manufacturers. Floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated inventory is sold. We received approximately $10.3 million and $29.3 million of floor plan assistance in the third quarter and nine-month periods ended September 30, 2014, respectively, and $9.6 million and $27.3 million in the third quarter and nine-month periods ended September 30, 2013, respectively. We recognized manufacturer floor plan assistance in cost of sales for continuing operations of approximately $9.9 million and $28.4 million in the third quarter and nine-month periods ended September 30, 2014, respectively, and $9.8 million and $27.6 million in the third quarter and nine-month periods ended September 30, 2013, respectively. Interest payments under each of our floor plan facilities are due monthly and we are not required to make principal repayments prior to the sale of the vehicles.

Long-Term Debt and Credit Facilities

See Note 6, “Long-Term Debt,” to the accompanying Unaudited Condensed Consolidated Financial Statements for discussion of our long-term debt and credit facilities and compliance with debt covenants.

Dealership Acquisitions and Dispositions

We acquired one mid-line import franchise and one luxury franchise during the nine-month period ended September 30, 2014 for a combined aggregate purchase price of approximately $15.3 million and disposed of five franchises which generated net cash from disposition of approximately $30.1 million. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying Unaudited Condensed Consolidated Financial Statements for further discussion.

Capital Expenditures

Our capital expenditures include the purchase of land and buildings, construction of new dealerships and collision repair centers, building improvements and equipment purchased for use in our dealerships. We selectively construct or improve new dealership facilities to maintain compliance with manufacturers’ image requirements. We typically finance these projects through new mortgages, or, alternatively, through our credit facilities. We also fund these improvements through cash flows from operations.

Capital expenditures in the third quarter and nine-month periods ended September 30, 2014 were approximately $41.3 million and $89.9 million, respectively. Of this amount, approximately $22.8 million and $42.6 million was related to facility construction projects in the third quarter and nine-month periods ended September 30, 2014, respectively. Real estate acquisitions accounted for approximately $9.0 million and $18.7 million of capital expenditures in the projects in the third quarter and nine-month periods ended September 30, 2014, and fixed assets utilized in our dealership operations accounted for the remaining $9.5 million and $28.6 million for the third quarter and nine-month periods ended September 30, 2014, respectively.

39


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

All of the capital expenditures in the third quarter and nine-month periods ended September 30, 2014, were funded through cash from operations and use of our credit facilities. In the nine-month period ended September 30, 2014, we issued mortgages totaling approximately $40.4 million on real estate purchased in periods prior to December 31, 2013. As of September 30, 2014, commitments for facilities construction projects totaled approximately $48.4 million. We expect investments related to capital expenditures to be partly dependent upon our overall liquidity position and the availability of mortgage financing to fund significant capital projects.

Stock Repurchase Program

Our Board of Directors has authorized us to repurchase shares of our Class A Common Stock. Historically, we have used our share repurchase authorization to offset dilution caused by the exercise of stock options or the vesting of equity compensation awards and to maintain our desired capital structure. During the third quarter and nine-month periods ended September 30, 2014, we repurchased approximately 1.2 million shares and 1.7 million shares, respectively, of our Class A Common Stock for approximately $28.4 million and $39.5 million, respectively, in open-market transactions and in connection with tax withholdings on the vesting of equity compensation awards. During the third quarter and nine-month periods ended September 30, 2013, we repurchased approximately 0.1 million shares and 0.6 million shares, respectively, of our Class A Common Stock, for approximately $0.3 million and $14.5 million, respectively, in open-market transactions and in connection with tax withholdings on the vesting of equity compensation awards. As of September 30, 2014, our total remaining repurchase authorization was approximately $93.0 million. Under our 2014 Credit Facilities, share repurchases are permitted to the extent that no event of default exists and we have the pro forma liquidity amount required by the repurchase test (as defined in the 2014 Credit Facilities) and the result of such test has been accepted by the administrative agent.

Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance and economic and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors and management determine our share repurchase policy in the future.

Dividends

During the third quarter ended September 30, 2014, our Board of Directors approved a cash dividend of $0.025 per share on all outstanding shares of Class A and Class B Common Stock as of September 15, 2014 to be paid on October 15, 2014. Subsequent to September 30, 2014, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of $0.025 per share for stockholders of record on December 15, 2014 to be paid on January 15, 2015. Under our 2014 Credit Facilities, dividends are permitted to the extent that no event of default exists and we are in compliance with the financial covenants, including pro forma liquidity requirements, contained therein. The indentures governing our outstanding 5.0% Notes and 7.0% Notes contain restrictions on our ability to pay dividends. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” to the accompanying Unaudited Condensed Consolidated Financial Statements for a description of restrictions on the payment of dividends.

Cash Flows

In the nine-month period ended September 30, 2014, net cash provided by operating activities was approximately $155.5 million. This provision of cash was comprised primarily of cash inflows related to operating profits and decreases in receivables and inventories, offset partially by increases in other assets and decreases in notes payable – floor plan – trade. In the nine-month period ended September 30, 2013, net cash provided by operating activities was approximately $180.6 million. This provision of cash was comprised primarily of cash inflows related to operating profits and decreases in receivables, offset partially by increases in inventories and decreases in trade accounts payable and other liabilities.

Net cash used in investing activities in the nine-month period ended September 30, 2014 was approximately $47.0 million. This use of cash was primarily comprised of purchases of land, property and equipment and the acquisition of two franchise operations, offset partially by proceeds from sales of dealerships. Net cash used in investing activities in the nine-month period ended September 30, 2013 was approximately $214.5 million. This use of cash was primarily comprised of the acquisition of two franchise operations and purchases of land, property and equipment, including the purchase of dealership facilities that were previously leased.

Net cash used in financing activities in the nine-month period ended September 30, 2014 was approximately $109.9 million. This use of cash was primarily related to a decrease in notes payable – floor plan – non-trade and purchases of treasury stock, offset partially by proceeds from issuance of mortgage-related long-term debt. Net cash provided by financing activities in the nine-month period ended September 30, 2013 was approximately $39.5 million. This provision of cash was primarily related to proceeds from

40


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

issuance of long-term debt, offset partially by repurchase of debt securities, principal payments on long-term debt, purchases of treasury stock and repayments of notes payable floor plan – non-trade.

We arrange our inventory floor plan financing through both manufacturer captive finance companies and a syndicate of manufacturer captive finance companies and commercial banks. Our floor plan financed with manufacturer captives is recorded as trade floor plan liabilities (with the resulting change being reflected as operating cash flows). Our dealerships that obtain floor plan financing from a syndicate of manufacturer captives and commercial banks record their obligation as non-trade floor plan liabilities (with the resulting change being reflected as financing cash flows).

Due to the presentation differences for changes in trade floor plan and non-trade floor plan in the Unaudited Condensed Consolidated Statements of Cash Flows, decisions made by us to move dealership floor plan financing arrangements from one finance source to another may cause significant variations in operating and financing cash flows without affecting our overall liquidity, working capital or cash flow. Net cash used in combined trade and non-trade floor plan financing was approximately $151.7 million and $40.7 million in the nine-month periods ended September 30, 2014 and 2013, respectively. Accordingly, if all changes in floor plan notes payable were classified as an operating activity, the result would have been net cash provided by operating activities of approximately $54.2 million and $142.8 million in the nine-month periods ended September 30, 2014 and 2013, respectively.

Guarantees and Indemnification Obligations

In connection with the operation and disposition of dealership franchises, we have entered into various guarantees and indemnification obligations. See Note 8, “Contingencies,” to the accompanying Unaudited Condensed Consolidated Financial Statements. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 12, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013.

Future Liquidity Outlook

We believe our best source of liquidity for operations and debt service remains cash flows generated from operations combined with our availability of borrowings under the 2014 Credit Facilities (or any replacements thereof), real estate mortgage financing, selected dealership and other asset sales and our ability to raise funds in the capital markets through offerings of debt or equity securities. Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and ability to service debt depends to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash. We expect to generate sufficient cash flow to fund our debt service, working capital requirements and operating requirements for the next twelve months and for the foreseeable future.

Off-Balance Sheet Arrangements

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Off-Balance Sheet Arrangements” in our Annual Report on Form 10-K for the year ended December 31, 2013.

Seasonality

Our operations are subject to seasonal variations. The first quarter normally contributes less operating profit than the second, third and fourth quarters. Weather conditions, the timing of manufacturer incentive programs and model changeovers cause seasonality and may adversely affect vehicle demand, and consequently, our profitability. Comparatively, parts and service demand remains stable throughout the year.

 

41


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

Item 3: Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

Our variable rate floor plan facilities, 2014 Revolving Credit Facility borrowings and other variable rate notes expose us to risks caused by fluctuations in the applicable interest rates. The total outstanding balance of such variable instruments after considering the effect of our interest rate swaps (see below) was approximately $900.2 million at September 30, 2014. A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $6.6 million in the nine-month period ended September 30, 2014. Of the total change in interest expense, approximately $6.0 million would have resulted from the floor plan facilities.

In addition to our variable rate debt, certain of our dealership lease facilities have monthly lease payments that fluctuate based on LIBOR interest rates. An increase in interest rates of 100 basis points would not have had a significant impact on rent expense in the third quarter and nine-month periods ended September 30, 2014 due to the leases containing LIBOR floors which were above the LIBOR rate during the third quarter and nine-month periods ended September 30, 2014.

We also have various cash flow swaps to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. Under the terms of these cash flow swaps, interest rates reset monthly. The fair value of these swap positions at September 30, 2014 was a net liability of approximately $10.6 million, with $9.3 million included in other accrued liabilities and $3.3 million included in other long-term liabilities, offset partially by an asset of approximately $2.0 million included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. Under the terms of these cash flow swaps, Sonic will receive and pay interest based on the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

Amount

 

 

Pay

Rate

 

 

Receive Rate (1)

 

Maturing Date

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

$

2.8

 

 

 

7.100%

 

 

one-month LIBOR + 1.50%

 

July 10, 2017

 

 

$

8.8

 

 

 

4.655%

 

 

one-month LIBOR

 

December 10, 2017

 

 

$

7.5

 

(2)

 

6.860%

 

 

one-month LIBOR + 1.25%

 

August 1, 2017

 

 

$

100.0

 

 

 

3.280%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

100.0

 

 

 

3.300%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

6.4

 

(2)

 

6.410%

 

 

one-month LIBOR + 1.25%

 

September 12, 2017

 

 

$

50.0

 

 

 

3.240%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

50.0

 

 

 

3.070%

 

 

one-month LIBOR

 

July 1, 2015

 

 

$

100.0

 

(3)

 

2.065%

 

 

one-month LIBOR

 

June 30, 2017

 

 

$

100.0

 

(3)

 

2.015%

 

 

one-month LIBOR

 

June 30, 2017

 

 

$

200.0

 

(3)

 

0.788%

 

 

one-month LIBOR

 

July 1, 2016

 

 

$

50.0

 

(4)

 

1.320%

 

 

one-month LIBOR

 

July 1, 2017

 

 

$

250.0

 

(5)

 

1.887%

 

 

one-month LIBOR

 

June 30, 2018

 

 

$

25.0

 

(4)

 

2.080%

 

 

one-month LIBOR

 

July 1, 2017

 

 

$

100.0

 

(3)

 

1.560%

 

 

one-month LIBOR

 

July 1, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) The one-month LIBOR rate was 0.153% at September 30, 2014.

 

 

(2) Changes in fair value are recorded through earnings.

 

 

(3) The effective date of these forward-starting swaps is July 1, 2015.

 

 

(4) The effective date of these forward-starting swaps is July 1, 2016.

 

 

(5) The effective date of this forward-starting swap is July 3, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Risk

We purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. Dollars, our business is subject to foreign exchange rate risk that may influence automobile manufacturers’ ability to provide their products at competitive prices in the United States. To the extent that we cannot recapture this volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results.


42


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

Item 4: Controls and Procedures.

Disclosure Controls and Procedures – Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2014. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2014.

Changes in Internal Control over Financial Reporting – There has been no change in our internal control over financial reporting during the third quarter ended September 30, 2014, that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance that the objectives of the control system are met and may not prevent or detect misstatements. In addition, any evaluation of the effectiveness of internal controls over financial reporting in future periods is subject to risk that those internal controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

43


 

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

PART II – OTHER INFORMATION

Item 1A: Risk Factors

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results.

 

 

 

44


 

SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information about the shares of Class A Common Stock we repurchased during the third quarter ended September 30, 2014:

 

 

 

Total

Number

of Shares

Purchased (1)

 

 

Average

Price Paid

per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs (2)

 

 

Approximate Dollar

Value of Shares

That May Yet Be

Purchased Under

the Plans or Programs

 

 

 

(In thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2014

 

 

250

 

 

$

24.72

 

 

 

250

 

 

$

115,198

 

August 2014

 

 

487

 

 

 

24.30

 

 

 

487

 

 

 

103,364

 

September 2014

 

 

433

 

 

 

23.94

 

 

 

433

 

 

 

92,997

 

Total

 

 

1,170

 

 

$

24.26

 

 

 

1,170

 

 

$

92,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   All shares repurchased were part of publicly announced share repurchase programs.

 

(2)   Our active publicly announced Class A common stock repurchase authorization plans

 

and current remaining availability are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

February 2013 authorization

 

 

$

100,000

 

Total active plan repurchases prior to September 30, 2014

 

 

 

(7,003

)

Current remaining availability as of September 30, 2014

 

 

$

92,997

 

See Note 6, “Long-term Debt,” to the accompanying Unaudited Condensed Consolidated Financial Statements and Item 2: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion of restrictions on share repurchases and payment of dividends.

 

 

 

45


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

Item 6: Exhibits.

(a) Exhibits:

 

Exhibit No.

  

Description

 

 

 

10.1

 

Director Compensation Policy (incorporated by reference to Exhibit 10.1 to Sonic’s Current Report on Form 8-K filed October 15, 2014). (1)

 

 

 

10.2

 

Third Amended and Restated Credit Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc.; each lender a party thereto; Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer; and Wells Fargo Bank, National Association, as an L/C Issuer.

 

 

 

10.3

 

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc., as borrower, in favor of each of the lenders to the Third Amended and Restated Credit Agreement.

 

 

 

10.4

 

Third Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic named therein, as Guarantors, to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.5

 

Third Amended and Restated Securities Pledge Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.6

 

Third Amended and Restated Escrow and Security Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.7

 

Third Amended and Restated Security Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.8

 

Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated July 23, 2014, among Sonic Automotive, Inc.; the subsidiaries of Sonic named therein; each lender a party thereto; Bank of America, N.A., as Administrative Agent, New Vehicle Swing Line Lender and Used Vehicle Swing Line Lender; and Bank of America, N.A. as Revolving Administrative Agent.

 

 

 

10.9

 

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic named therein, as borrowers, in favor of each of the lenders to the Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement.

 

 

 

10.10

 

Second Amended and Restated Company Guaranty Agreement, dated July 23, 2014, by Sonic Automotive, Inc. to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.11

 

Second Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic named therein, as Guarantors, to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

31.1

  

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

 

 

31.2

  

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)

 

 

32.1

  

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

  

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS

  

XBRL Instance Document

 

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

  

XBRL Taxonomy Definition Linkbase Document

 

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

(1)

 

Indicates a management contract or compensatory plan or arrangement.

 

 

 

46


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

Forward-looking Statements

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,” “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 of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013 and elsewhere in this report, as well as:

·

the number of new and used cars 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 capital expenditures, our share repurchase program, dividends on our Common Stock, acquisitions and general operating activities;

·

our business and growth strategies, including references to our EchoPark® initiative and One Sonic-One Experience initiative;

·

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;

·

adverse resolutions of one or more significant legal proceedings against us or our dealerships;

·

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

·

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 automotive retailing 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.

 

 

 

47


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

SONIC AUTOMOTIVE, INC.

 

 

 

 

Date: October 23, 2014

 

 

 

By:

 

/s/ O. BRUTON SMITH

 

 

 

 

 

 

O. Bruton Smith

 

 

 

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

Date: October 23, 2014

 

 

 

By:

 

/s/ HEATH R. BYRD

 

 

 

 

 

 

Heath R. Byrd

 

 

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

48


SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES

 

EXHIBIT INDEX

 

Exhibit No.

  

Description

 

 

10.1

 

Director Compensation Policy (incorporated by reference to Exhibit 10.1 to Sonic’s Current Report on Form 8-K filed October 15, 2014). (1)

 

 

 

10.2

 

Third Amended and Restated Credit Agreement, dated as of July 23, 2014, among Sonic Automotive, Inc.; each lender a party thereto; Bank of America, N.A., as Administrative Agent, Swing Line Lender and an L/C Issuer; and Wells Fargo Bank, National Association, as an L/C Issuer.

 

 

 

10.3

 

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc., as borrower, in favor of each of the lenders to the Third Amended and Restated Credit Agreement.

 

 

 

10.4

 

Third Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic named therein, as Guarantors, to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.5

 

Third Amended and Restated Securities Pledge Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.6

 

Third Amended and Restated Escrow and Security Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.7

 

Third Amended and Restated Security Agreement, dated as of July 23, 2014, by Sonic Automotive, Inc., the subsidiaries of Sonic named therein and Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.8

 

Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated July 23, 2014, among Sonic Automotive, Inc.; the subsidiaries of Sonic named therein; each lender a party thereto; Bank of America, N.A., as Administrative Agent, New Vehicle Swing Line Lender and Used Vehicle Swing Line Lender; and Bank of America, N.A. as Revolving Administrative Agent.

 

 

 

10.9

 

Form of Promissory Note, dated July 23, 2014, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic named therein, as borrowers, in favor of each of the lenders to the Second Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement.

 

 

 

10.10

 

Second Amended and Restated Company Guaranty Agreement, dated July 23, 2014, by Sonic Automotive, Inc. to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

 

10.11

 

Second Amended and Restated Subsidiary Guaranty Agreement, dated as of July 23, 2014, by the subsidiaries of Sonic named therein, as Guarantors, to Bank of America, N.A., as Administrative Agent for the lenders.

 

 

31.1

  

Certification of Principal Financial Officer pursuant to Rule 13a-14(a)

 

 

31.2

  

Certification of Principal Executive Officer pursuant to Rule 13a-14(a)

 

 

32.1

  

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.2

  

 

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS

  

XBRL Instance Document

 

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

  

XBRL Taxonomy Definition Linkbase Document

 

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

(1)

 

Indicates a management contract or compensatory plan or arrangement.

 

 

 

49