e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission files number 1-13395
SONIC AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE
(State or other jurisdiction of
incorporation or organization)
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56-2010790
(I.R.S. Employer
Identification No.) |
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6415 Idlewild Road, Suite 109, Charlotte, North Carolina
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28212 |
(Address of principal executive offices)
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(Zip Code) |
(704) 566-2400
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, 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 file).
Yes o No o
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 definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (check one).
Large Accelerated Filer o |
Accelerated Filer þ |
Non-Accelerated Filer o
(Do not check if a smaller reporting company) |
Smaller Reporting Company o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of July 25, 2010, there were 40,650,859 shares of Class A Common Stock and 12,029,375 shares of
Class B Common Stock outstanding.
PART I FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements.
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
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Second Quarter Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2009 |
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2010 |
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2009 |
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2010 |
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Revenues: |
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New vehicles |
|
$ |
772,296 |
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$ |
902,452 |
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$ |
1,477,819 |
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$ |
1,687,050 |
|
Used vehicles |
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382,091 |
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470,365 |
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710,381 |
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892,656 |
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Wholesale vehicles |
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33,903 |
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30,111 |
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71,359 |
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61,389 |
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|
|
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|
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Total vehicles |
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1,188,290 |
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1,402,928 |
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2,259,559 |
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2,641,095 |
|
Parts, service and collision repair |
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274,032 |
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287,095 |
|
|
|
544,701 |
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565,682 |
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Finance, insurance and other |
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38,847 |
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45,985 |
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74,000 |
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86,959 |
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Total revenues |
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1,501,169 |
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1,736,008 |
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2,878,260 |
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3,293,736 |
|
Cost of Sales: |
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|
|
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|
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New vehicles |
|
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(720,073 |
) |
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(841,331 |
) |
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(1,378,757 |
) |
|
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(1,571,430 |
) |
Used vehicles |
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(351,011 |
) |
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(433,932 |
) |
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(648,535 |
) |
|
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(822,806 |
) |
Wholesale vehicles |
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(35,145 |
) |
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(31,958 |
) |
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(72,666 |
) |
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(63,912 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total vehicles |
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(1,106,229 |
) |
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(1,307,221 |
) |
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(2,099,958 |
) |
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(2,458,148 |
) |
Parts, service and collision repair |
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(135,241 |
) |
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(143,768 |
) |
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(271,630 |
) |
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(282,245 |
) |
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|
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|
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Total cost of sales |
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(1,241,470 |
) |
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(1,450,989 |
) |
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(2,371,588 |
) |
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(2,740,393 |
) |
Gross profit |
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259,699 |
|
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|
285,019 |
|
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506,672 |
|
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553,343 |
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Selling, general and administrative expenses |
|
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(205,767 |
) |
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(228,372 |
) |
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(411,231 |
) |
|
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(451,865 |
) |
Impairment charges |
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(5,030 |
) |
|
|
(1 |
) |
|
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(5,087 |
) |
|
|
(45 |
) |
Depreciation and amortization |
|
|
(8,183 |
) |
|
|
(8,675 |
) |
|
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(15,776 |
) |
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|
(17,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
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Operating income |
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40,719 |
|
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|
47,971 |
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74,578 |
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84,433 |
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Other income (expense): |
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Interest expense, floor plan |
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(5,492 |
) |
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(5,507 |
) |
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(10,660 |
) |
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(10,413 |
) |
Interest expense, other, net |
|
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(23,216 |
) |
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(15,683 |
) |
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(39,950 |
) |
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(32,873 |
) |
Interest expense, non-cash, convertible debt |
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(3,643 |
) |
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(1,730 |
) |
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(6,262 |
) |
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(3,406 |
) |
Interest expense, non-cash, cash flow swaps |
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(1,908 |
) |
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(2,235 |
) |
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(3,179 |
) |
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(3,918 |
) |
Other income (expense), net |
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|
20 |
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(7,235 |
) |
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|
70 |
|
|
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(7,171 |
) |
|
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|
|
|
|
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Total other expense |
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(34,239 |
) |
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(32,390 |
) |
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(59,981 |
) |
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(57,781 |
) |
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|
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|
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Income from continuing operations before taxes |
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|
6,480 |
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|
15,581 |
|
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|
14,597 |
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|
26,652 |
|
Income tax provision |
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(2,916 |
) |
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(6,300 |
) |
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(6,569 |
) |
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(11,061 |
) |
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Income from continuing operations |
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3,564 |
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|
9,281 |
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|
8,028 |
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|
15,591 |
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Discontinued operations: |
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Loss from operations and the sale of discontinued franchises |
|
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(5,067 |
) |
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(1,015 |
) |
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(9,013 |
) |
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(4,547 |
) |
Income tax benefit |
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|
1,529 |
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|
170 |
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2,689 |
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1,546 |
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Loss from discontinued operations |
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(3,538 |
) |
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(845 |
) |
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(6,324 |
) |
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(3,001 |
) |
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Net income |
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$ |
26 |
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$ |
8,436 |
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$ |
1,704 |
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$ |
12,590 |
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Basic earnings per share: |
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Earnings per share from continuing operations |
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$ |
0.09 |
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$ |
0.18 |
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$ |
0.20 |
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$ |
0.30 |
|
Loss per share from discontinued operations |
|
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(0.09 |
) |
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(0.02 |
) |
|
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(0.16 |
) |
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(0.06 |
) |
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Earnings per share |
|
$ |
|
|
|
$ |
0.16 |
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$ |
0.04 |
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$ |
0.24 |
|
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|
Weighted average common shares outstanding |
|
|
40,968 |
|
|
|
52,249 |
|
|
|
40,536 |
|
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|
52,070 |
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Diluted earnings per share: |
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Earnings per share from continuing operations |
|
$ |
0.08 |
|
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
0.29 |
|
Loss per share from discontinued operations |
|
|
(0.08 |
) |
|
|
(0.01 |
) |
|
|
(0.15 |
) |
|
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(0.05 |
) |
|
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|
Earnings per share |
|
$ |
|
|
|
$ |
0.16 |
|
|
$ |
0.04 |
|
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$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average common shares outstanding |
|
|
41,604 |
|
|
|
65,807 |
|
|
|
40,974 |
|
|
|
52,749 |
|
|
|
|
|
|
|
|
|
|
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|
See notes to unaudited condensed consolidated financial statements.
3
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
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|
(Unaudited) |
|
|
|
December 31, |
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June 30, |
|
|
|
2009 |
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|
2010 |
|
ASSETS
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Current Assets: |
|
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|
|
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|
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|
Cash and cash equivalents |
|
$ |
30,035 |
|
|
$ |
20,122 |
|
Receivables, net |
|
|
232,969 |
|
|
|
193,842 |
|
Inventories |
|
|
795,275 |
|
|
|
868,686 |
|
Assets held for sale |
|
|
12,167 |
|
|
|
5,777 |
|
Other current assets |
|
|
14,937 |
|
|
|
16,171 |
|
|
|
|
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|
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|
Total Current Assets |
|
|
1,085,383 |
|
|
|
1,104,598 |
|
Property and Equipment, net |
|
|
382,085 |
|
|
|
386,289 |
|
Goodwill |
|
|
469,482 |
|
|
|
469,993 |
|
Other Intangible Assets, net |
|
|
80,806 |
|
|
|
79,978 |
|
Other Assets |
|
|
51,099 |
|
|
|
59,944 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,068,855 |
|
|
$ |
2,100,802 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
LIABILITIES AND STOCKHOLDERS EQUITY
|
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Current Liabilities: |
|
|
|
|
|
|
|
|
Notes payable floor plan trade |
|
$ |
214,871 |
|
|
$ |
447,709 |
|
Notes payable floor plan non-trade |
|
|
548,493 |
|
|
|
350,906 |
|
Trade accounts payable |
|
|
55,345 |
|
|
|
53,188 |
|
Accrued interest |
|
|
16,146 |
|
|
|
13,924 |
|
Other accrued liabilities |
|
|
144,709 |
|
|
|
134,120 |
|
Liabilities associated with assets held for sale non-trade |
|
|
3,346 |
|
|
|
1,361 |
|
Current maturities of long-term debt |
|
|
23,991 |
|
|
|
23,458 |
|
|
|
|
|
|
|
|
Total Current Liabilities |
|
|
1,006,901 |
|
|
|
1,024,666 |
|
Long-Term Debt |
|
|
552,150 |
|
|
|
550,182 |
|
Other Long-Term Liabilities |
|
|
141,052 |
|
|
|
142,204 |
|
Stockholders Equity: |
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|
|
|
|
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|
Class A convertible preferred stock, none issued |
|
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|
|
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|
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|
Class A common stock, $.01 par value; 100,000,000 shares authorized;
54,986,875 shares issued and 40,099,559 shares outstanding at December
31, 2009; 55,621,998 shares issued and 40,647,198 shares outstanding at
June 30, 2010 |
|
|
550 |
|
|
|
556 |
|
Class B common stock; $.01 par value; 30,000,000 shares authorized;
12,029,375 shares outstanding at December 31, 2009 and June 30, 2010 |
|
|
121 |
|
|
|
121 |
|
Paid-in capital |
|
|
662,186 |
|
|
|
665,624 |
|
Accumulated deficit |
|
|
(35,180 |
) |
|
|
(22,589 |
) |
Accumulated other comprehensive income (loss) |
|
|
(22,350 |
) |
|
|
(22,338 |
) |
Treasury stock, at cost (14,887,316 Class A shares held at December
31, 2009
and 14,974,800 Class A shares held at June 30, 2010) |
|
|
(236,575 |
) |
|
|
(237,624 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
368,752 |
|
|
|
383,750 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,068,855 |
|
|
$ |
2,100,802 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Dollars and shares in thousands)
(Unaudited)
|
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|
|
|
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|
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|
|
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|
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|
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|
|
|
|
|
|
|
|
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|
|
|
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|
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Accumulated |
|
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|
|
|
|
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|
Class A |
|
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Class B |
|
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|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
Compre- |
|
|
|
Common Stock |
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Treasury |
|
|
Comprehensive |
|
|
Stockholders |
|
|
hensive |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Stock |
|
|
Income (Loss) |
|
|
Equity |
|
|
Income |
|
BALANCE AT DECEMBER 31, 2009 |
|
|
54,987 |
|
|
|
550 |
|
|
|
12,029 |
|
|
|
121 |
|
|
|
662,186 |
|
|
|
(35,180 |
) |
|
|
(236,575 |
) |
|
|
(22,350 |
) |
|
|
368,752 |
|
|
|
|
|
Shares awarded under stock
compensation plans |
|
|
279 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
1,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,176 |
|
|
|
|
|
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,049 |
) |
|
|
|
|
|
|
(1,049 |
) |
|
|
|
|
Income tax benefit associated
with stock compensation plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595 |
|
|
|
|
|
Income tax benefit associated
with convertible note hedge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134 |
|
|
|
|
|
Fair value of interest rate
swap agreements, net of tax
expense of $7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
12 |
|
|
|
12 |
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300 |
|
|
|
|
|
Restricted stock amortization,
net of forfeitures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,239 |
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,590 |
|
|
|
|
|
|
|
|
|
|
|
12,590 |
|
|
|
12,590 |
|
Other |
|
|
356 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JUNE 30, 2010 |
|
|
55,622 |
|
|
|
556 |
|
|
|
12,029 |
|
|
$ |
121 |
|
|
$ |
665,624 |
|
|
$ |
(22,589 |
) |
|
$ |
(237,624 |
) |
|
$ |
(22,338 |
) |
|
$ |
383,750 |
|
|
$ |
12,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2010 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,704 |
|
|
$ |
12,590 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment |
|
|
16,562 |
|
|
|
17,233 |
|
Provision for bad debt expense |
|
|
678 |
|
|
|
602 |
|
Other amortization |
|
|
828 |
|
|
|
828 |
|
Debt issuance cost amortization |
|
|
7,326 |
|
|
|
1,636 |
|
Debt discount amortization, net of premium amortization |
|
|
6,545 |
|
|
|
2,673 |
|
Stock based compensation expense |
|
|
296 |
|
|
|
300 |
|
Amortization of restricted stock |
|
|
1,202 |
|
|
|
1,239 |
|
Restricted stock forfeiture |
|
|
(110 |
) |
|
|
|
|
Deferred income taxes |
|
|
(2,422 |
) |
|
|
(463 |
) |
Equity interest in earnings of investees |
|
|
(328 |
) |
|
|
(414 |
) |
Asset impairment charges |
|
|
8,495 |
|
|
|
45 |
|
Loss (gain) on disposal of franchises and property and equipment |
|
|
(194 |
) |
|
|
(596 |
) |
Loss on exit of leased dealerships |
|
|
2,085 |
|
|
|
2,766 |
|
Loss on retirement of debt |
|
|
|
|
|
|
7,259 |
|
Derivative fair value adjustments |
|
|
100 |
|
|
|
|
|
Changes in assets and liabilities that relate to operations: |
|
|
|
|
|
|
|
|
Receivables |
|
|
46,799 |
|
|
|
38,525 |
|
Inventories |
|
|
225,230 |
|
|
|
(77,900 |
) |
Other assets |
|
|
(30,245 |
) |
|
|
(13,693 |
) |
Notes payable floor plan trade |
|
|
(51,013 |
) |
|
|
232,838 |
|
Trade accounts payable and other liabilities |
|
|
31,815 |
|
|
|
(20,768 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
263,649 |
|
|
|
192,110 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
265,353 |
|
|
|
204,700 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(28,046 |
) |
|
|
(20,424 |
) |
Proceeds from sales of property and equipment |
|
|
1,951 |
|
|
|
86 |
|
Proceeds from sale of franchises |
|
|
20,677 |
|
|
|
10,728 |
|
Distributions from equity investees |
|
|
300 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,118 |
) |
|
|
(9,610 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (repayments) borrowings on notes payable floor plan non-trade |
|
|
(235,223 |
) |
|
|
(199,572 |
) |
Borrowings on revolving credit facilities |
|
|
431,719 |
|
|
|
40,000 |
|
Repayments on revolving credit facilities |
|
|
(422,550 |
) |
|
|
(40,000 |
) |
Proceeds from long-term debt |
|
|
|
|
|
|
209,983 |
|
Principal payments on long-term debt |
|
|
(18,534 |
) |
|
|
(3,080 |
) |
Settlement of cash flow swaps |
|
|
(16,454 |
) |
|
|
|
|
Repurchase of debt securities |
|
|
|
|
|
|
(213,190 |
) |
Purchase of treasury stock |
|
|
(61 |
) |
|
|
(1,049 |
) |
Income tax benefit associated with stock compensation plans |
|
|
|
|
|
|
595 |
|
Income tax benefit associated with convertible hedge |
|
|
1,157 |
|
|
|
134 |
|
Issuance of shares under stock compensation plans |
|
|
|
|
|
|
1,176 |
|
Issuance of common stock related to private placement |
|
|
2,800 |
|
|
|
|
|
Dividends paid |
|
|
(4,897 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(262,043 |
) |
|
|
(205,003 |
) |
|
|
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(1,808 |
) |
|
|
(9,913 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
6,971 |
|
|
|
30,035 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
5,163 |
|
|
$ |
20,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedging instruments (net of tax expense
of $7,300 and $7 for the six-month period ended June 30, 2009 and 2010, respectively) |
|
$ |
11,910 |
|
|
$ |
12 |
|
Issuance of shares related to debt refinance |
|
$ |
3,948 |
|
|
$ |
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest, net of amount capitalized |
|
$ |
53,477 |
|
|
$ |
48,473 |
|
Income taxes |
|
$ |
(21,820 |
) |
|
$ |
(16,441 |
) |
See notes to unaudited condensed consolidated financial statements.
6
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The accompanying unaudited condensed consolidated financial
information for the second quarter and six-month period ended June 30, 2009 and 2010 has been
prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the
SEC). All significant intercompany accounts and transactions have been eliminated. These
Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all
material adjustments (which include only normal recurring adjustments) necessary to fairly state
the financial position and the results of operations for the periods presented. The results for
interim periods are not necessarily indicative of the results to be expected for the entire fiscal
year. These interim financial statements should be read in conjunction with the audited
Consolidated Financial Statements of Sonic Automotive, Inc. (Sonic or the Company) for the year
ended December 31, 2009, which were included in Sonics Annual Report on Form 10-K .
Recent Developments On March 12, 2010, Sonic issued $210.0 million in aggregate principal
amount of 9.0% Senior Subordinated Notes due in 2018 (the 9.0% Notes). The notes were issued at
99.299% of par. Net proceeds received from the issuance of the 9.0% Notes were approximately
$203.8 million, after deducting applicable discounts and commissions. On April 12, 2010, Sonic used
these net proceeds, together with cash on hand, to redeem $200.0 million of the Companys 8.625%
Senior Subordinated Notes due in 2013 (the 8.625% Notes). See Note 6 for further discussion of
the 9.0% Notes and 8.625% Notes.
Reclassifications The Condensed Consolidated Statements of Income for the second quarter and
six-month period ended June 30, 2009 reflect the reclassification of balances from continuing
operations to discontinued operations from the prior year presentation for additional franchises
sold and terminated or identified for sale subsequent to June 30, 2009. The Condensed Consolidated
Statements of Income for the second quarter and six-month period ended June 30, 2009 also reflect
the reclassification of balances from discontinued operations to continuing operations for
franchises identified for sale as of June 30, 2009, but which Sonic has decided to retain and
operate as of June 30, 2010.
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
sublease proceeds, for the remaining life of the operating leases and other accruals necessary to
satisfy the lease commitment to the landlord. A summary of the activity of these lease exit
accruals consists of the following:
|
|
|
|
|
|
|
(dollars in |
|
|
|
thousands) |
|
Balance, December 31, 2009 |
|
$ |
47,825 |
|
Lease exit expense |
|
|
2,766 |
|
Payments |
|
|
(4,608 |
) |
|
|
|
|
Balance, June 30, 2010 |
|
$ |
45,983 |
|
|
|
|
|
Of the $2.8 million lease exit expense recorded in the six-month period ended June 30, 2010,
approximately $2.7 million was recorded in discontinued operations.
Income Tax Expense The overall effective tax rates for the second quarter and six-month
period ended June 30, 2009 and 2010 are higher than federal statutory rates due to the effect of
state income taxes. The overall effective tax rate from continuing operations was 40.4% and 41.5%
for the second quarter and six-month period ended June 30, 2010, respectively. The overall
effective tax rate from continuing operations was 45.0% for both the second quarter and six-month
period ended June 30, 2009. The effective rate for the second quarter and six-month period ended
June 30, 2010 was lower than the prior year periods due to the shift in the distribution of taxable
income between states in which Sonic operates and lower expense effects related to tax positions as
a result of Accounting for Uncertainty in Income Taxes in the ASC.
2. DISCONTINUED OPERATIONS
Dispositions The operating results of franchises held for sale are included in the loss
from discontinued operations in Sonics Condensed Consolidated Statements of Income. Assets to be
disposed of in connection with franchises held for sale but not yet sold have been classified in
assets held for sale in Sonics Condensed Consolidated Balance Sheets along with
7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
other assets held
for sale. At June 30, 2010, the held for sale balance of property and equipment, net is comprised
of real estate held for sale by non-dealership entities. The major components of assets held for
sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2010 |
|
Inventories |
|
$ |
4,528 |
|
|
$ |
1,555 |
|
Property and equipment, net |
|
|
4,838 |
|
|
|
3,966 |
|
Goodwill |
|
|
2,801 |
|
|
|
256 |
|
|
|
|
|
|
|
|
Assets held for sale |
|
$ |
12,167 |
|
|
$ |
5,777 |
|
|
|
|
|
|
|
|
Liabilities to be disposed in connection with these dispositions are comprised primarily of
notes payable floor plan and are classified as liabilities associated with assets held for sale
on Sonics balance sheets. Revenues and other activities associated with franchises classified as
discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Loss from operations |
|
$ |
(2,000 |
) |
|
$ |
(1,020 |
) |
|
$ |
(3,341 |
) |
|
$ |
(3,178 |
) |
Gain (loss) on disposal of franchises |
|
|
(388 |
) |
|
|
1,082 |
|
|
|
(469 |
) |
|
|
1,353 |
|
Lease exit charges |
|
|
(800 |
) |
|
|
(1,077 |
) |
|
|
(1,795 |
) |
|
|
(2,722 |
) |
Property impairment charges |
|
|
(1,692 |
) |
|
|
|
|
|
|
(1,822 |
) |
|
|
|
|
Goodwill impairment charges |
|
|
(187 |
) |
|
|
|
|
|
|
(1,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(5,067 |
) |
|
$ |
(1,015 |
) |
|
$ |
(9,013 |
) |
|
$ |
(4,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
68,715 |
|
|
$ |
6,399 |
|
|
$ |
142,416 |
|
|
$ |
17,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease exit charges recorded for the second quarter and six-month period ended June 30, 2009
and 2010 relate to the revision of estimates on previously established lease exit accruals. The
lease exit accruals are calculated by either discounting the remaining lease payments, net of
estimated sublease proceeds, or estimating the amount necessary to satisfy the lease commitment to
the landlord. See Note 4 for a discussion of property impairment charges and see Note 5 for a
discussion of goodwill impairment charges.
Sonic allocates interest expense to discontinued operations based on the net assets of the
discontinued operations group. Interest allocated to discontinued operations for the second
quarter ended June 30, 2009 and 2010 was $0.5 million and $0.1 million, respectively. Interest
allocated to discontinued operations for the six-month period ended June 30, 2009 and 2010 was $1.3
million and $0.1 million, respectively.
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2010 |
|
New vehicles |
|
$ |
557,319 |
|
|
$ |
599,013 |
|
Used vehicles |
|
|
138,401 |
|
|
|
166,345 |
|
Parts and accessories |
|
|
51,470 |
|
|
|
50,434 |
|
Other |
|
|
52,613 |
|
|
|
54,449 |
|
|
|
|
|
|
|
|
|
|
$ |
799,803 |
|
|
$ |
870,241 |
|
Less inventories classified as assets held for sale |
|
|
(4,528 |
) |
|
|
(1,555 |
) |
|
|
|
|
|
|
|
Inventories |
|
$ |
795,275 |
|
|
$ |
868,686 |
|
|
|
|
|
|
|
|
8
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2010 |
|
Land |
|
$ |
61,886 |
|
|
$ |
62,205 |
|
Building and improvements |
|
|
322,632 |
|
|
|
313,700 |
|
Office equipment and fixtures |
|
|
75,801 |
|
|
|
75,522 |
|
Parts and service equipment |
|
|
54,981 |
|
|
|
54,946 |
|
Company vehicles |
|
|
8,440 |
|
|
|
8,283 |
|
Construction in progress |
|
|
40,000 |
|
|
|
41,873 |
|
|
|
|
|
|
|
|
Total, at cost |
|
|
563,740 |
|
|
|
556,529 |
|
Less accumulated depreciation |
|
|
(176,817 |
) |
|
|
(166,274 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
386,923 |
|
|
|
390,255 |
|
Less assets held for sale |
|
|
(4,838 |
) |
|
|
(3,966 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
382,085 |
|
|
$ |
386,289 |
|
|
|
|
|
|
|
|
In the second quarter and six-month period ended June 30, 2009, Sonic recorded fixed asset
impairment charges of $3.7 million and $3.9 million, respectively, $2.0 million and $2.1 million of
which were recorded in continuing operations, respectively.
5. Goodwill and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Franchise Agreements |
|
|
Gross Goodwill |
|
|
Impairment |
|
|
Net Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
64,835 |
|
|
$ |
1,266,207 |
|
|
$ |
(796,725 |
) |
|
$ |
469,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions from sales of franchises |
|
|
|
|
|
|
(2,034 |
) |
|
|
|
|
|
|
(2,034 |
) |
Reclassification from assets held
for sale, net |
|
|
|
|
|
|
2,545 |
|
|
|
|
|
|
|
2,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2010 |
|
$ |
64,835 |
|
|
$ |
1,266,718 |
|
|
$ |
(796,725 |
) |
|
$ |
469,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter and six-month period ended June 30, 2009, Sonic recorded goodwill
impairment charges of $1.1 million and $2.5 million, respectively, $0.9 million of which was
recorded in continuing operations in each period. The impairment charges recorded were based on
the determination that recorded values were not recoverable under asset disposal agreements entered
into during the six-month period ended June 30, 2009. Sonic recorded franchise asset impairment
charges of $2.1 million in continuing operations in each of the second quarter and six-month period
ended June 30, 2009.
At December 31, 2009, Sonic had $16.0 million of definite life intangibles recorded relating
to favorable lease agreements. After the effect of amortization of the definite life intangibles,
the balance recorded at June 30, 2010 was $15.1 million and was included in other intangible
assets, net, in the accompanying Condensed Consolidated Balance Sheets.
6. Long-Term Debt
Long-term debt consists of the following:
9
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
December 31, |
|
|
June 30, |
|
|
|
2009 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
2010 Revolving Credit Facilities (1) |
|
$ |
|
|
|
$ |
|
|
Senior Subordinated Notes bearing interest at 9.0% |
|
|
|
|
|
|
210,000 |
|
Senior Subordinated Notes bearing interest at 8.625% |
|
|
275,000 |
|
|
|
62,855 |
|
Convertible Senior Notes bearing interest at 5.0% |
|
|
172,500 |
|
|
|
172,500 |
|
Convertible Senior Subordinated Notes bearing interest at 4.25% |
|
|
17,045 |
|
|
|
16,000 |
|
Notes payable to a finance company bearing interest from 9.52% to 10.52% (with
a weighted average of 10.19%) |
|
|
17,778 |
|
|
|
16,714 |
|
Mortgage notes to finance companies-fixed rate, bearing interest from 5.80%
to 7.03% |
|
|
78,424 |
|
|
|
77,270 |
|
Mortgage notes to finance companies-variable rate,
bearing interest at 1.25 to 3.30 percentage
points above one-month LIBOR |
|
|
38,251 |
|
|
|
38,926 |
|
Net debt discount and premium (2) |
|
|
(29,199 |
) |
|
|
(26,824 |
) |
Other |
|
|
6,342 |
|
|
|
6,199 |
|
|
|
|
|
|
|
|
|
|
$ |
576,141 |
|
|
$ |
573,640 |
|
Less current maturities |
|
|
(23,991 |
) |
|
|
(23,458 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
552,150 |
|
|
$ |
550,182 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest rate was 2.25% above LIBOR at June 30, 2010. |
|
(2) |
|
December 31, 2009 includes $1.5 million discount associated with the 8.625% Notes, $29.8 million discount associated with the 5.0% Convertible Notes, $0.6 million discount associated with the 4.25% Convertible Notes, $2.5 million premium associated with notes payable to a finance company and $0.2 million premium associated with mortgage notes payable. June 30, 2010 includes $1.3 million discount associated
with the 9.0% Notes, $0.4 million discount associated with the 8.625% Notes, $27.3 million discount associated with the 5.0% Convertible Notes, $0.3 million discount associated with the 4.25% Convertible Notes, $2.2 million premium associated with notes payable to a finance company and $0.2 million premium associated with mortgage notes payable. |
2006 Credit Facility
The 2006 Revolving Credit Sub-Facility, the 2006 New Vehicle Floor Plan Sub-Facility and the
2006 Used Vehicle Floor Plan Sub-Facility would have matured on February 17, 2010. The 2006 Credit
Facility was refinanced on January 15, 2010. See 2010 Credit Facilities discussion below.
2010 Credit Facilities
On January 15, 2010, Sonic entered into an amended and restated syndicated revolving credit
agreement with five financial institutions and three manufacturer captive finance companies as
lenders (the Revolving Credit Facility) and a syndicated floor plan credit facility with four
financial institutions as lenders (the Floorplan Facility). The Revolving Credit Facility and
Floorplan Facility (collectively the 2010 Credit Facilities) mature on August 15, 2012.
The Revolving Credit Facility, which is subject to compliance with a borrowing base, has a
borrowing limit of $150.0 million, which may be expanded up to $215.0 million in total credit
availability upon satisfaction of certain conditions. The Revolving Credit Facility is available
for acquisitions, capital expenditures, working capital and general corporate purposes. The amount
available for borrowing under the Revolving Credit Facility is reduced on a dollar-for-dollar basis
by the aggregate face amount of any outstanding letters of credit under the Revolving Credit
Facility. The borrowing base is calculated based on the value of eligible accounts, eligible
inventory, eligible equipment and 5,000,000 shares of common stock of Speedway Motorsports, Inc.
(SMI) pledged as collateral by one of Sonics affiliates, Sonic Financial Corporation (SFC).
As of June 30, 2010, the 2010 Revolving Borrowing Base was approximately $135.3 million. At
June 30, 2010, Sonic had no outstanding borrowings and $49.9 million in outstanding letters of
credit resulting in total borrowing availability of $85.4 million under the 2010 Revolving Credit
Facility.
10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Outstanding obligations under the Revolving Credit Facility are secured by a pledge of
substantially all of Sonics assets and the assets of substantially all of its domestic
subsidiaries, and by the pledge of 5,000,000 shares of common stock of SMI by SFC. The collateral
also provides for the pledge of the franchise agreements and stock or equity interests of Sonics
dealership franchise subsidiaries, except for those dealership franchise subsidiaries where the
applicable manufacturer prohibits such a pledge, in which cases the stock or equity interests of
the dealership franchise subsidiary is subject to an escrow arrangement with the administrative
agent. Substantially all of Sonics domestic subsidiaries also guarantee its obligations under the
Revolving Credit Facility.
The Floorplan Facility is comprised of a new vehicle revolving floor plan facility in an
amount up to $321.0 million (the New Vehicle Floorplan Facility) and a used vehicle revolving
floor plan facility in an amount up to $50.0 million, subject to compliance and a borrowing base
(the Used Vehicle Floorplan Facility). Sonic may, under certain conditions, request an increase
in the Floorplan Facility by up to $125.0 million, which shall be allocated between the New Vehicle
Floorplan Facility and the Used Vehicle Floorplan Facility as Sonic requests, with no more than 15%
of the aggregate commitments allocated to the commitments under the Used Vehicle Floorplan
Facility. Outstanding obligations under the Floorplan Facility are guaranteed by Sonic and certain
of its subsidiaries and are secured by a pledge of substantially all of Sonics assets and the
assets of certain of its domestic subsidiaries.
The amounts outstanding under the 2010 Credit Facilities bear interest at variable rates based
on specified percentages above LIBOR according to a performance-based pricing grid determined by
Sonics Consolidated Total Debt to EBITDA Ratio as of the last day of the immediately preceding
fiscal quarter.
Covenants
The 2010 Credit Facilities contain certain covenants, including covenants which could restrict
or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material
dispositions and acquisitions of assets as well as other customary covenants and default
provisions. Sonic was in compliance with the covenants under the 2010 Credit Facilities as of June
30, 2010 and expects to be in compliance with the covenants for the foreseeable future. Financial
covenants include required specified ratios (as each is defined in the 2010 Credit Facilities) of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenant |
|
|
|
|
|
|
Consolidated |
|
Consolidated |
|
|
Consolidated |
|
Fixed Charge |
|
Total Senior |
|
|
Liquidity |
|
Coverage |
|
Secured Debt to |
|
|
Ratio |
|
Ratio |
|
EBITDA Ratio |
|
|
|
|
|
|
|
|
|
|
|
|
|
Through March 30, 2011 |
|
|
≥ 1.00 |
|
|
|
≥ 1.10 |
|
|
|
£ 2.25 |
|
March 31, 2011 through and including March 30, 2012 |
|
|
≥ 1.05 |
|
|
|
≥ 1.15 |
|
|
|
£ 2.25 |
|
March 31, 2012 and thereafter |
|
|
≥ 1.10 |
|
|
|
≥ 1.20 |
|
|
|
£ 2.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 actual |
|
|
1.16 |
|
|
|
1.55 |
|
|
|
1.23 |
|
The 2010 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 occurrence of an event of default, Sonic could be required
to immediately repay all outstanding amounts under the 2010 Credit Facilities.
In addition, many of Sonics 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 2010 Credit Facilities with the exception of one financial covenant
related to the ratio of EBTDAR to Rent with a required ratio of no less than 1.5 to 1.0. At June
30, 2010, the ratio was 1.94 to 1.00.
9.0% Senior Subordinated Notes (9.0% Notes)
On March 12, 2010, Sonic issued $210.0 million aggregate principal amount of 9.0% Notes which
mature on March 15, 2018. Sonic received approximately $203.8 million in net proceeds from the
offering, after deducting applicable discounts and commissions. Sonic used these net proceeds,
together with cash on hand, to redeem $200.0 million aggregate
11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
principal amount of its 8.625% Notes due 2013 on April 12, 2010. The 9.0% Notes are unsecured
senior subordinated obligations of Sonic and are guaranteed by Sonics domestic operating
subsidiaries. Interest is payable semi-annually on March 15 and September 15 each year (beginning
on September 15, 2010). Sonic may redeem the 9.0% Notes in whole or in part at any time after
March 15, 2014 at the following redemption prices, which are expressed as percentages of the
principal amount.
|
|
|
|
|
|
|
Redemption |
|
|
Price |
Beginning on March 15, 2014 |
|
|
104.50 |
% |
Beginning on March 15, 2015 |
|
|
102.25 |
% |
Beginning on March 15, 2016 and thereafter |
|
|
100.00 |
% |
In addition, on or before March 15, 2013, Sonic may redeem up to 35% of the aggregate
principal amount of the 9.0% Notes at par value plus accrued interest with proceeds from certain
equity offerings. The Indenture also provides that holders of 9.0% Notes may require Sonic to
repurchase the 9.0% Notes at 101% of the par value of the 9.0% Notes, plus accrued interest if
Sonic undergoes a change of control as defined in the Indenture.
The indenture governing the 9.0% Notes contains certain specified restrictive and required
financial 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, capital stock,
guaranties, asset sales, investments, cash dividends to stockholders, distributions and
redemptions. Specifically, the indenture governing Sonics 9.0% Notes limits Sonics ability to pay
quarterly cash dividends on Sonics Class A and B common stock in excess of $0.10 per share. Sonic
may only pay quarterly cash dividends on Sonics Class A and B common stock if Sonic complies with
the terms of the indenture governing the 9.0% Notes. Sonic was in compliance with all restrictive
covenants as of June 30, 2010.
Balances outstanding under Sonics 9.0% Notes are guaranteed by all of Sonics 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 as defined by the SEC.
Sonics obligations under the 9.0% Notes may be accelerated by the holders of 25% of the
outstanding principal amount of the 9.0% 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 Sonics covenants under the 9.0% Notes; and (3) certain defaults under
other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of
$35.0 million.
8.625% Senior Subordinated Notes (8.625% Notes)
The 8.625% Notes are unsecured obligations that rank equal in right of payment to all of
Sonics existing and future senior subordinated indebtedness, mature on August 15, 2013 and are
redeemable at Sonics option after August 15, 2008. Of the original $275.0 million principal
amount of the 8.625% Notes, Sonic had $62.9 million of aggregate principal amount outstanding at
June 30, 2010. Subsequent to June 30, 2010, Sonic called for redemption of an additional $20.0
million aggregate principal amount of 8.625% Notes.
On March 12, 2010, Sonic issued a redemption notice to holders of the 8.625% Notes to redeem
$200.0 million in aggregate principal amount of its outstanding 8.625% Notes. On April 12, 2010,
Sonic used the net proceeds obtained from the issuance of the 9.0% Notes, together with cash on
hand, to redeem the $200.0 million of aggregate principal amount at the applicable redemption price
(102.875% of principal redeemed) plus accrued but unpaid interest. Sonic recorded a loss on
extinguishment of debt of approximately $7.0 million related to the redemption which was recognized
in the second quarter ended June 30, 2010. During the second quarter Sonic repurchased
approximately $12.1 million of additional principal amount of the 8.625% Notes and recorded an
additional loss on extinguishment of debt of approximately $0.3 million related to these
repurchases. The total loss on extinguishment of $7.3 million is recorded in other income
(expense), net in the Condensed Consolidated Statements of Income.
12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The indenture governing the 8.625% Notes contains certain specified restrictive and required
financial 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, capital stock,
guaranties, asset sales, investments, cash dividends to shareholders, distributions and
redemptions. Specifically, the indenture governing Sonics 8.625% Notes limits Sonics ability to
pay quarterly cash dividends on Sonics Class A and B common stock in excess of $0.10 per share.
Sonic may only pay quarterly cash dividends on Sonics Class A and B common stock if Sonic complies
with the terms of the indenture governing the 8.625% Notes. Sonic was in compliance with all
restrictive covenants as of June 30, 2010.
Balances outstanding under Sonics 8.625% Notes are guaranteed by all of Sonics 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 as defined by the SEC.
5.0% Convertible Senior Notes (5.0% Convertible Notes)
Sonic has $172.5 million in aggregate principal amount of 5.0% Convertible Notes outstanding.
The 5.0% Convertible Notes bear interest at a rate of 5.0% per year, payable semiannually in
arrears on April 1 and October 1 of each year, beginning on April 1, 2010. The 5.0% Convertible
Notes mature on October 1, 2029. Sonic may redeem some or all of the 5.0% Convertible Notes for
cash at any time subsequent to October 1, 2014 at a repurchase price equal to 100% of the principal
amount of the Notes. Holders have the right to require Sonic to purchase the 5.0% Convertible
Notes on each of October 1, 2014, October 1, 2019 and October 1, 2024 or in the event of a change
in control for cash at a purchase price equal to 100% of the principal amount of the notes.
Holders of the 5.0% Convertible Notes may convert their notes at their option prior to the
close of business on the business day immediately preceding July 1, 2029 only under the following
circumstances: (1) during any fiscal quarter commencing after December 31, 2009, if the last
reported sale price of the Class A common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the
preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on
each applicable trading day; (2) during the five business day period after any 10 consecutive
trading day period (the measurement period) in which the trading price (as defined below) per
$1,000 principal amount of notes for each day of that measurement period was less than 98% of the
product of the last reported sale price of Sonics Class A common stock and the applicable
conversion rate on each such day; (3) if Sonic calls any or all of the notes for redemption, at any
time prior to the close of business on the third scheduled trading day prior to the redemption
date; or (4) upon the occurrence of specified corporate events. On and after July 1, 2029 to (and
including) the close of business on the third scheduled trading day immediately preceding the
maturity date, holders may convert their notes at any time, regardless of the foregoing
circumstances. The conversion rate is 74.7245 shares of Class A common stock per $1,000 principal
amount of notes, which is equivalent to a conversion price of approximately $13.38 per share of
Class A common stock. None of the conversion features on the 5.0% Convertible Notes were
triggered in the six-month period ended June 30, 2010.
To recognize the equity component of the convertible borrowing instrument, upon issuance of
the 5.0% Convertible Notes in September 2009, Sonic recorded a debt discount of $31.0 million and a
corresponding amount (net of taxes of $12.8 million) to equity. The debt discount is being
amortized to interest expense through October 2014, the earliest redemption date of the 5.0%
Convertible Notes.
4.25% Convertible Senior Subordinated Notes (4.25% Convertible Notes)
Sonic has approximately $16.0 million aggregate principal amount of 4.25% Notes outstanding.
Sonic repurchased approximately $1.0 million of the aggregate principal of the 4.25% Notes during
the second quarter of 2010 at amounts close to par.
The 4.25% Convertible Notes bear interest at an annual rate of 4.25% until November 30, 2010
and 4.75% thereafter. The 4.25% Convertible Notes are unsecured obligations that rank equal in
right of payment to all of Sonics existing and future senior subordinated indebtedness, mature on
November 30, 2015 and are redeemable by Sonic or the holders on or after November 30, 2010.
Sonics obligations under the 4.25% Convertible Notes are not guaranteed by any of Sonics
subsidiaries. Holders of the 4.25% Convertible Notes may convert them into cash and shares of
Sonics Class A common stock at an initial conversion rate of 41.4185 shares per $1,000 of
principal amount, subject to distributions on, or other
13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
changes in Sonics Class A common stock, if any, prior to the conversion date.
The 4.25% Convertible Notes are convertible into cash and shares of Sonics Class A common
stock if prior to October 31, 2010, during the five business day period after any five consecutive
trading day period in which the trading price per $1,000 principal amount of 4.25% Convertible
Notes was less than 103% of the product of the closing price of Sonics Class A common stock and
the applicable conversion rate for the 4.25% Convertible Notes; if Sonic calls the 4.25%
Convertible Notes for redemption; upon the occurrence of certain corporate transactions; or on or
after October 31, 2010. Upon conversion of the 4.25% Convertible Notes, Sonic will be required to
deliver cash equal to the lesser of the aggregate principal amount of the 4.25% Convertible Notes
being converted and Sonics total conversion obligation. If Sonics total conversion obligation
exceeds the aggregate principal amount of the 4.25% Convertible Notes being converted, Sonic will
deliver shares of Class A common stock to the extent of the excess amount, if any. None of the
conversion features on the 4.25% Convertible Notes were triggered in the second quarter ended June
30, 2010.
Notes Payable to a Finance Company
Three notes payable (due October 2015 and August 2016) were assumed in connection with an
acquisition in 2005 (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 will be amortized over the lives of the
Assumed Notes. As of June 30, 2010, the remaining unamortized premium was $2.1 million.
Mortgage Notes
Sonic has mortgage financing related to several of its dealership properties. These mortgage
notes require monthly payments of principal and interest through maturity and are secured by the
underlying properties. Maturity dates range between June 2013 and December 2029. The weighted
average interest rate was 5.11% at June 30, 2010.
Derivative Instruments and Hedging Activities
At June 30, 2010 Sonic had interest rate swap agreements (the Fixed Swaps) to effectively
convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these
swap positions at June 30, 2010 was a liability of $36.3 million included in other long-term
liabilities in the accompanying Condensed Consolidated Balance Sheets. Under the terms of the
Fixed Swaps, Sonic will receive and pay interest based on the following:
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Pay Rate |
|
Receive Rate (1) |
|
Maturing Date |
(in millions) |
|
|
|
|
|
|
|
|
$ |
200.0 |
|
|
|
4.935 |
% |
|
one-month LIBOR |
|
May 1, 2012 |
$ |
100.0 |
|
|
|
5.265 |
% |
|
one-month LIBOR |
|
June 1, 2012 |
$ |
3.7 |
|
|
|
7.100 |
% |
|
one-month LIBOR |
|
July 10, 2017 |
$ |
25.0 |
(2) |
|
|
5.160 |
% |
|
one-month LIBOR |
|
September 1, 2012 |
$ |
15.0 |
(2) |
|
|
4.965 |
% |
|
one-month LIBOR |
|
September 1, 2012 |
$ |
25.0 |
(2) |
|
|
4.885 |
% |
|
one-month LIBOR |
|
October 1, 2012 |
$ |
11.6 |
|
|
|
4.655 |
% |
|
one-month LIBOR |
|
December 10, 2017 |
$ |
8.8 |
|
|
|
6.860 |
% |
|
one-month LIBOR |
|
August 1, 2017 |
$ |
7.1 |
|
|
|
4.330 |
% |
|
one-month LIBOR |
|
July 1, 2013 |
$ |
100.0 |
(3) |
|
|
3.280 |
% |
|
one-month LIBOR |
|
July 1, 2015 |
$ |
100.0 |
(3) |
|
|
3.300 |
% |
|
one-month LIBOR |
|
July 1, 2015 |
|
|
|
|
|
|
(1) |
|
One-month LIBOR was 0.348% at June 30, 2010.
|
|
|
(2) |
|
After December 31, 2009 changes in fair value are recorded through earnings.
|
|
|
(3) |
|
The effective date of these forward-starting swaps is July 2, 2012.
|
During the first quarter ended March 31, 2009, Sonic settled two $100.0 million notional fixed
swaps with a payment to the counterparty of $16.5 million. This settlement loss was deferred and
is being amortized into earnings over the swaps initial remaining term.
14
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the second quarter ended June 30, 2010, Sonic entered into two $100.0 million notional
forward-starting interest rate swap agreements which become effective in July 2012 and terminate in
July 2015. 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 will be recorded in other comprehensive income
(loss), net of related income taxes, in the Condensed Consolidated Statements of Stockholders
Equity.
As a result of the refinancing of Sonics 2006 Credit Facility and the new terms of the 2010
Credit Facilities, at December 31, 2009 it was determined that it was no longer probable that Sonic
would incur interest payments that match the terms of certain Fixed Swaps that previously were
designated and qualified as cash flow hedges. Of the Fixed Swaps (including the two $100.0 million
notional swaps which were settled in 2009), $565.0 million of the notional amount had previously
been documented as hedges against the variability of cash flows related to interest payments on
certain debt obligations. At June 30, 2010, Sonic estimates that under the new 2010 Credit
Facilities and other facilities with matching terms, it is probable that the expected debt balance
with interest payments that match the terms of the Fixed Swaps will be $400.0 million and it is
reasonably possible that the expected debt balance with interest payments that match the terms of
the Fixed Swaps will be between $400.0 million and $450.0 million. As a result, for the second
quarter and six-month period ended June 30, 2010, non-cash charges of approximately $2.2 million
and $3.9 million, respectively, related to $65.0 million in notional of the Fixed Swaps and
amortization of amounts in accumulated other comprehensive income (loss) related to other existing
and terminated cash flow swaps were included in interest expense, non-cash, cash flow swaps in the
accompanying Condensed Consolidated Statements of Income.
For the Fixed Swaps which 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
Condensed Consolidated Statements of Stockholders Equity. The incremental interest expense (the
difference between interest paid and interest received) related to the Fixed Swaps was $4.3 million
and $3.7 million for the second quarter ended June 30, 2009 and 2010, respectively, and $9.7
million and $8.7 million for the six-month period ended June 30, 2009 and 2010, respectively. This
expense is included in interest expense, other, net in the accompanying Condensed Consolidated
Statements of Income. The estimated net expense expected to be reclassified out of other
comprehensive income (loss) into results of operations during the next twelve months is
approximately $4.7 million.
7. Stock-Based Compensation
Sonic currently has two active stock compensation plans and two inactive stock compensation
plans which only have grants outstanding (collectively, the Stock Plans). See Sonics Annual
Report on Form 10-K for the year ended December 31, 2009 for a more detailed description of the
Stock Plans. A summary of the status of the stock options related to the Stock Plans is presented
below:
15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Options |
|
|
Exercise Price |
|
|
Weighted Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Outstanding |
|
|
Per Share |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
Intrinsic Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
(in years) |
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
4,014 |
|
|
$ |
1.81 - $37.50 |
|
|
$ |
15.48 |
|
|
|
5.9 |
|
|
$ |
12,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(238 |
) |
|
$ |
1.81 - $11.19 |
|
|
|
5.31 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(65 |
) |
|
$ |
1.81 - $37.50 |
|
|
|
17.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010 |
|
|
3,711 |
|
|
$ |
1.81 - $37.50 |
|
|
$ |
16.10 |
|
|
|
5.4 |
|
|
$ |
8,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable |
|
|
2,790 |
|
|
$ |
1.81 - $37.50 |
|
|
$ |
20.73 |
|
|
|
4.3 |
|
|
$ |
2,235 |
|
|
|
|
|
|
|
|
Six Months Ended |
(dollars in thousands) |
|
June 30, 2010 |
|
|
|
|
|
Fair Value of Options Vested |
|
$ |
1,307 |
|
Intrinsic Value of Options Exercised |
|
$ |
1,567 |
|
Sonic recognized compensation expense related to stock options within selling, general and
administrative expenses of $0.2 million and $0.1 million in the second quarter ended June 30, 2009
and 2010, respectively, and $0.3 million in each of the six-month periods ended June 30, 2009 and
2010. Tax benefits recognized related to the compensation expenses were $0.1 million for each of
the second quarter and six-month period ended June 30, 2009 and 2010. The total compensation cost
related to unvested options not yet recognized at June 30, 2010 was $0.8 million and is expected to
be recognized over a weighted average period of 1.7 years.
A summary of the status of restricted stock and restricted stock unit grants related to the
Stock Plans is presented below:
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted |
|
|
Weighted Average |
|
|
|
Stock and Restricted |
|
|
Grant Date Fair |
|
|
|
Stock Units |
|
|
Value |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009 |
|
|
313 |
|
|
$ |
17.45 |
|
Granted |
|
|
502 |
|
|
|
10.34 |
|
Forfeited |
|
|
(4 |
) |
|
|
10.30 |
|
Vested |
|
|
(291 |
) |
|
|
17.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2010 |
|
|
520 |
|
|
$ |
10.89 |
|
|
|
|
|
|
|
|
In the six-month period ended June 30, 2010, 472,305 restricted shares of Class A common
stock and restricted stock units were awarded to Sonics executive officers and certain other
officers and employees under the Stock Plans. Awards made in the six-month period ended June 30,
2010 vest one-third annually over a three year period from the grant date. The shares and units
granted in conjunction with 2010 incentive compensation for executive officers are subject to
forfeiture, in whole or in part, based upon specified measures of Sonics earnings per share and
customer satisfaction index performance for the 2010 fiscal year, continuation of employment and
compliance with any restrictive covenants contained in any agreement between Sonic and the
respective officer. These awards are generally subject to the same restrictions and rights as the
awards granted in prior years to certain executive officers. In the second quarter ended June 30,
2010, 30,000 restricted shares of Class A common stock were awarded to Sonics Non-Employee
Directors. These awards vest in full on the first anniversary of the grant date and are not
subject to any performance criteria.
16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sonic recognized compensation expense related to restricted stock and restricted stock
units within selling, general and administrative expenses of $0.4 million and $0.6 million in the
second quarter ended June 30, 2009 and 2010, respectively, and $1.1 million and $1.2 million in the
six-month period ended June 30, 2009 and 2010, respectively. Sonic recognized $0.1 million and
$0.2 million of tax benefit related to the compensation expenses for the second quarter ended June
30, 2009 and 2010, respectively, and $0.4 million and $0.5 million for the six-month period ended
June 30, 2009 and 2010, respectively. Total compensation cost related to unvested restricted stock
and restricted stock units not yet recognized at June 30, 2010 was $4.6 million, and is expected to
be recognized over a weighted average period of 2.5 years.
8. Per Share Data and Stockholders Equity
The calculation of diluted earnings per share considers the potential dilutive effect of
Sonics contingently convertible debt issuances and stock options to purchase shares of Class A
common stock under the Stock Plans. The following table illustrates the dilutive effect of such
items on earnings per share for the second quarter and six-month period ended June 30, 2009 and
2010:
17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Second Quarter Ended June 30, 2009 |
|
|
|
|
|
|
|
Income |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
From Continuing |
|
|
From Discontinued |
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Net Income (Loss) |
|
|
|
Class A & B |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
Shares |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
|
(dollars in thousands except per share amounts) |
|
Earnings (Loss) and Shares |
|
|
40,968 |
|
|
$ |
3,564 |
|
|
|
|
|
|
$ |
(3,538 |
) |
|
|
|
|
|
$ |
26 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
40,968 |
|
|
$ |
3,536 |
|
|
$ |
0.09 |
|
|
$ |
(3,538 |
) |
|
$ |
(0.09 |
) |
|
$ |
(2 |
) |
|
$ |
|
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Plans |
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
41,604 |
|
|
$ |
3,536 |
|
|
$ |
0.08 |
|
|
$ |
(3,538 |
) |
|
$ |
(0.08 |
) |
|
$ |
(2 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Second Quarter Ended June 30, 2010 |
|
|
|
|
|
|
|
Income |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
From Continuing |
|
|
From Discontinued |
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Net Income |
|
|
|
Class A & B |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
Shares |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
|
(dollars in thousands except per share amounts) |
|
Earnings (Loss) and Shares |
|
|
52,249 |
|
|
$ |
9,281 |
|
|
|
|
|
|
$ |
(845 |
) |
|
|
|
|
|
$ |
8,436 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
52,249 |
|
|
$ |
9,190 |
|
|
$ |
0.18 |
|
|
$ |
(845 |
) |
|
$ |
(0.02 |
) |
|
$ |
8,345 |
|
|
$ |
0.16 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Convertible |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (2009 5.0% Convertibles) |
|
|
12,890 |
|
|
|
2,116 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
2,127 |
|
|
|
|
|
Stock Plans |
|
|
668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
65,807 |
|
|
$ |
11,306 |
|
|
$ |
0.17 |
|
|
$ |
(834 |
) |
|
$ |
(0.01 |
) |
|
$ |
10,472 |
|
|
$ |
0.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
Income |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
From Continuing |
|
|
From Discontinued |
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
Shares |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
|
(amounts in thousands except per share amounts) |
|
Earnings (Loss) and Shares |
|
|
40,536 |
|
|
$ |
8,028 |
|
|
|
|
|
|
$ |
(6,324 |
) |
|
|
|
|
|
$ |
1,704 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
40,536 |
|
|
$ |
7,966 |
|
|
$ |
0.20 |
|
|
$ |
(6,324 |
) |
|
$ |
(0.16 |
) |
|
$ |
1,642 |
|
|
$ |
0.04 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Plans |
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
40,974 |
|
|
$ |
7,966 |
|
|
$ |
0.19 |
|
|
$ |
(6,324 |
) |
|
$ |
(0.15 |
) |
|
$ |
1,642 |
|
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, 2010 |
|
|
|
|
|
|
|
Income |
|
|
Loss |
|
|
|
|
|
|
|
|
|
|
From Continuing |
|
|
From Discontinued |
|
|
|
|
|
|
|
|
|
|
Operations |
|
|
Operations |
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
|
|
|
Per Common |
|
|
|
Shares |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
Amount |
|
|
Share Amount |
|
|
|
(amounts in thousands except per share amounts) |
|
Earnings (Loss) and Shares |
|
|
52,070 |
|
|
$ |
15,591 |
|
|
|
|
|
|
$ |
(3,001 |
) |
|
|
|
|
|
$ |
12,590 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
|
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
52,070 |
|
|
$ |
15,437 |
|
|
$ |
0.30 |
|
|
$ |
(3,001 |
) |
|
$ |
(0.06 |
) |
|
$ |
12,436 |
|
|
$ |
0.24 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Plans |
|
|
679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
52,749 |
|
|
$ |
15,437 |
|
|
$ |
0.29 |
|
|
$ |
(3,001 |
) |
|
$ |
(0.05 |
) |
|
$ |
12,436 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the stock options included in the table above, options to purchase 2.8
million shares and 2.3 million shares of Class A common stock were outstanding at June 30, 2009 and
2010, respectively, but were not included in the computation of diluted earnings per share because
the options were not dilutive. In addition, in the event the effect of potentially dilutive shares
associated with any of Sonics convertible notes were anti-dilutive, the effect of those shares
have also been excluded from the computation of diluted earnings per share.
18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. Contingencies
Legal and Other Proceedings:
Sonic is a defendant in the matter of Galura, et al. v. Sonic Automotive, Inc., a private
civil action filed in the Circuit Court of Hillsborough County, Florida. In this action, originally
filed on December 30, 2002, the plaintiffs allege that Sonic and its Florida dealerships sold an
antitheft protection product in a deceptive or otherwise illegal manner, and further sought
representation on behalf of any customer of any of Sonics Florida dealerships who purchased the
antitheft protection product since December 30, 1998. The plaintiffs are seeking monetary damages
and injunctive relief on behalf of this class of customers. In June 2005, the court granted the
plaintiffs motion for certification of the requested class of customers, but the court has made no
finding to date regarding actual liability in this lawsuit. Sonic subsequently filed a notice of
appeal of the courts class certification ruling with the Florida Court of Appeals. In April 2007,
the Florida Court of Appeals affirmed a portion of the trial courts class certification, and
overruled a portion of the trial courts class certification. The Florida trial court granted
Summary Judgment in Sonics favor against Plaintiff Enrique Galura, and his claim has been
dismissed. Virginia Galuras claim is still pending. Sonic currently intends to continue its
vigorous appeal and defense of this lawsuit and to assert available defenses. However, an adverse
resolution of this lawsuit could result in the payment of significant costs and damages, which
could have a material adverse effect on Sonics future results of operations, financial condition
and cash flows.
Several private civil actions have been filed against Sonic Automotive, Inc. and several of
its dealership subsidiaries that purport to represent classes of customers as potential plaintiffs
and make allegations that certain products sold in the finance and insurance departments were done
so in a deceptive or otherwise illegal manner. One of these private civil actions has been filed
in South Carolina state court against Sonic Automotive, Inc. and 10 of Sonics South Carolina
subsidiaries. This group of plaintiffs attorneys has filed another private civil class action
lawsuit in state court in North Carolina seeking certification of a multi-state class of
plaintiffs. The South Carolina state court action and the North Carolina state court action have
since been consolidated into a single proceeding in private arbitration. On November 12, 2008,
claimants in the consolidated arbitration filed a Motion for Class Certification as a national
class action including all of the states in which Sonic operates dealerships. Claimants are
seeking monetary damages and injunctive relief on behalf of this class of customers. The parties
have briefed and argued the issue of class certification.
On July 19, 2010, the Arbitrator issued a Partial Final Award on Class Certification,
certifying a class which includes all customers who, on or after November 15, 2000, purchased or
leased from a Sonic dealership a vehicle with the Etch product as part of the transaction, but not
including customers who purchased or leased such vehicles from a Sonic dealership in Florida. The
Partial Final Award on Class Certification is not a final decision on the merits of the action.
The merits of Claimants assertions and potential damages will still have to be proven through the
remainder of the arbitration. The Arbitrator has stayed the Arbitration for thirty days to allow
either party to petition a court of competent jurisdiction to confirm or vacate the award. Sonic
will seek review of the class certification ruling by a court of competent jurisdiction and will
continue to press its argument that this action is not suitable for a class-based arbitration.
Sonic intends to continue its vigorous defense of this arbitration and to assert all available
defenses. However, an adverse resolution of this arbitration could result in the payment of
significant costs and damages, which could have a material adverse effect on Sonics future results
of operations, financial condition and cash flows.
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 Sonics 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 Sonics business, financial condition, results of
operations, cash flows or prospects. Recorded at December 31, 2009 and June 30, 2010 were $9.2
million and $8.4 million, respectively, in reserves that Sonic has provided for pending
proceedings.
Guarantees and Indemnification Obligations:
In connection with franchise dispositions, certain of Sonics dealership subsidiaries have
assigned or sublet to the buyer its interests in real property leases associated with such
dealerships. In general, Sonics dealership subsidiaries retain responsibility for the performance
of certain obligations under such leases, including rent payments, and repairs to leased
19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. The total amount relating to this risk was approximately $106.0 million as
of December 31, 2009. See Sonics Annual Report on Form 10-K for the year ended December 31, 2009
for further discussion.
In accordance with the terms of agreements entered into for the sale of Sonics franchises,
Sonic generally agrees to indemnify the buyer from certain exposure and costs arising subsequent 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 Sonics exposure with
respect to environmental remediation and repairs is difficult to quantify, Sonic estimates that the
maximum exposure associated with these general indemnifications if the counterparties failed to
perform under their contractual obligations was approximately $13.9 million and $14.2 million at
December 31, 2009 and June 30, 2010, respectively. These indemnifications generally expire within
a period of one to three years following the date of sale. The estimated fair value of these
indemnifications was not material.
10.
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 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 Sonics 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 fair value and cash flow swap
instruments.
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 under Property, Plant and Equipment in the ASC and those used in the
reporting unit valuation in the first step of the annual goodwill impairment
evaluation. For instance, certain assets held for sale in the accompanying
Condensed Consolidated Balance Sheets are valued based on estimated proceeds to be
received in connection with the disposal of those assets.
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 instruments 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.
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, Sonics 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 Sonics control.
Assets or liabilities recorded at fair value in the accompanying balance sheet as of June 30,
2010 are as follows:
20
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using: |
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
(dollars in millions) |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Cash Flow Swaps (1) |
|
$ |
36.3 |
|
|
|
|
|
|
$ |
36.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
36.3 |
|
|
$ |
|
|
|
$ |
36.3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in Other Long-Term Liabilities in the accompanying Condensed Consolidated Balance
Sheet. |
As of December 31, 2009 and June 30, 2010, the fair values of Sonics financial instruments
including receivables, notes receivable from finance contracts, notes payable-floor plan, trade
accounts payable, payables for acquisitions, borrowings under the revolving 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.
The fair value and carrying value of Sonics fixed rate long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
December 31, 2009 |
|
June 30, 2010 |
|
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.00% Senior Subordinated Notes (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
212,100 |
|
|
$ |
208,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.625% Senior Subordinated Notes (1) |
|
$ |
266,750 |
|
|
$ |
273,455 |
|
|
$ |
63,722 |
|
|
$ |
62,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0% Convertible Senior Notes (1) |
|
$ |
188,072 |
|
|
$ |
142,743 |
|
|
$ |
167,325 |
|
|
$ |
145,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25% Convertible Senior Subordinated Notes (1) |
|
$ |
16,363 |
|
|
$ |
16,423 |
|
|
$ |
16,000 |
|
|
$ |
15,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes (2) |
|
$ |
78,333 |
|
|
$ |
78,424 |
|
|
$ |
77,175 |
|
|
$ |
77,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to a Finance Company (2) |
|
$ |
17,859 |
|
|
$ |
20,260 |
|
|
$ |
16,783 |
|
|
$ |
18,850 |
|
|
|
|
|
|
(1) |
|
As determined by market quotations as of June 30, 2010. |
|
|
(2) |
|
As determined by discounted cash flows. |
11. Subsequent Events
On July 19, 2010, Sonic issued a notice of redemption to redeem $20.0 million aggregate
principal amount of the 8.625% Notes at the applicable redemption price (101.438% of the principal
redeemed) plus accrued but unpaid interest, with redemption to occur on August 18, 2010. Sonic will
record a loss on extinguishment of debt of approximately $0.3 million upon redemption. See Note 6
for further discussion of the 8.625% Notes.
21
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Item 2: Managements 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 the related notes thereto appearing elsewhere in this report,
as well as the audited financial statements and related notes and Managements 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, 2009.
Overview
We are one of the largest automotive retailers in the United States. As of June 30, 2010, we
operated 142 dealership franchises, representing 29 different brands of cars and light trucks, at
119 locations and 26 collision repair centers in 15 states. Our dealerships provide comprehensive
services including sales of both new and used cars and light trucks, sales of replacement parts,
performance of vehicle maintenance, manufacturer warranty repairs, paint and collision repair
services, and arrangement of extended service contracts, financing, insurance and other aftermarket
products for our customers.
Although General Motors had attempted to sell its Hummer brand, on April 7, 2010, General
Motors announced it plans to discontinue its Hummer brand. As of June 30, 2010, we operated three
Hummer franchises at three multi-franchise dealership locations. All three of our Hummer
franchises are scheduled to be terminated prior to October 31, 2010 in accordance with the
termination agreement reached with General Motors. In the year ended December 31, 2009, we only
sold approximately 110 Hummer new vehicle units at retail. As a result, we do not expect the
terminations of these franchises to have a material impact on our operations, financial position or
cash flows.
In the six-month period ended June 30, 2010, Toyota Motor Corporation issued recalls
affecting certain of its most popular models in certain model years due to design problems with
accelerator pedals and anti-lock brake systems. Toyota Motor Corporation had also instructed its
dealerships to stop selling vehicles affected by the accelerator pedal recall until it developed a
solution to the design problem and provided the necessary parts and instructions to fix the issue.
During the period of time when affected vehicles could not be sold, Toyota Motor Corporation
offered its dealers floor plan assistance to help reduce dealers cost of carrying vehicles which
dealers could not sell due to the recall, which helped to reduce our interest expense, floor plan.
As of June 30, 2010, we operated 11 Toyota franchises. During the six-month period ended June 30,
2010, we experienced a benefit to our fixed operations business as a result of work performed on
vehicles affected by the recall which was paid for by the manufacturer and provided free of charge
to the customer. We cannot estimate how this recall will affect consumer preferences over the
long-term.
The following is a detail of our new vehicle revenues by brand for the second quarter and
six-month period ended June 30, 2009 and 2010:
22
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of New Vehicle Revenue |
|
Percentage of New Vehicle Revenue |
|
|
Second Quarter Ended June 30, |
|
Six Months Ended June 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Brand (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW |
|
|
16.7 |
% |
|
|
16.2 |
% |
|
|
17.4 |
% |
|
|
16.1 |
% |
Honda |
|
|
15.8 |
% |
|
|
15.1 |
% |
|
|
15.3 |
% |
|
|
14.7 |
% |
Toyota |
|
|
11.1 |
% |
|
|
11.0 |
% |
|
|
11.0 |
% |
|
|
11.0 |
% |
Mercedes |
|
|
8.4 |
% |
|
|
9.6 |
% |
|
|
9.5 |
% |
|
|
10.1 |
% |
Ford |
|
|
10.7 |
% |
|
|
8.7 |
% |
|
|
10.3 |
% |
|
|
8.8 |
% |
General Motors (2) |
|
|
7.6 |
% |
|
|
7.3 |
% |
|
|
7.2 |
% |
|
|
7.1 |
% |
Lexus |
|
|
5.6 |
% |
|
|
5.8 |
% |
|
|
5.6 |
% |
|
|
6.1 |
% |
Cadillac |
|
|
3.7 |
% |
|
|
4.9 |
% |
|
|
4.2 |
% |
|
|
5.1 |
% |
Other (3) |
|
|
4.0 |
% |
|
|
3.5 |
% |
|
|
4.0 |
% |
|
|
3.4 |
% |
Audi |
|
|
2.8 |
% |
|
|
3.0 |
% |
|
|
2.6 |
% |
|
|
3.0 |
% |
Volkswagen |
|
|
2.5 |
% |
|
|
2.5 |
% |
|
|
2.2 |
% |
|
|
2.3 |
% |
Hyundai |
|
|
1.9 |
% |
|
|
2.2 |
% |
|
|
1.9 |
% |
|
|
2.1 |
% |
Land Rover |
|
|
1.6 |
% |
|
|
2.1 |
% |
|
|
1.6 |
% |
|
|
2.0 |
% |
Porsche |
|
|
1.6 |
% |
|
|
1.7 |
% |
|
|
1.4 |
% |
|
|
1.7 |
% |
Infiniti |
|
|
1.2 |
% |
|
|
1.4 |
% |
|
|
1.2 |
% |
|
|
1.4 |
% |
Nissan |
|
|
0.8 |
% |
|
|
1.3 |
% |
|
|
0.8 |
% |
|
|
1.4 |
% |
Volvo |
|
|
1.5 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
|
|
1.3 |
% |
Other Luxury (4) |
|
|
1.2 |
% |
|
|
1.0 |
% |
|
|
1.1 |
% |
|
|
1.0 |
% |
Acura |
|
|
0.7 |
% |
|
|
0.9 |
% |
|
|
0.8 |
% |
|
|
0.9 |
% |
Chrysler (5) |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
0.7 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In accordance with the provisions of Presentation of Financial Statements in the
Accounting Standards Codification (the ASC), prior years income statement data reflect
reclassifications to exclude franchises sold, identified for sale, or terminated subsequent to
June 30, 2009 which had not been previously included in discontinued operations, or include
previously held for sale franchises which subsequently were reclassified to held and used. See
Notes 1 and 2 to our accompanying unaudited Consolidated Financial Statements which discuss these
and other factors that affect the comparability of the information for the periods presented. |
|
|
(2) |
|
Includes Buick, GMC and Chevrolet. |
|
|
(3) |
|
Includes KIA, Mini, Scion and Subaru. |
|
|
(4) |
|
Includes Hummer, Jaguar and Saab. |
|
|
(5) |
|
Includes Chrysler, Dodge and Jeep. |
Results of Operations
The following discussions are based on reported figures. Same store amounts do not vary
significantly from reported totals because there have not been any significant acquisitions in the
last 24 months.
New Vehicles
The automobile retail industry uses the Seasonally Adjusted Annual Rate (SAAR) to measure
the amount of 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 locations in which we do not operate.
23
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAAR (in millions of vehicles) |
|
|
2009 |
|
2010 |
|
% Change |
Second Quarter Ended June 30, |
|
|
9.6 |
|
|
|
11.3 |
|
|
|
17.7 |
% |
Six Months Ended June 30, |
|
|
9.6 |
|
|
|
11.2 |
|
|
|
16.7 |
% |
Our reported new vehicle (including fleet) results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
772,296 |
|
|
$ |
902,452 |
|
|
$ |
130,156 |
|
|
|
16.9 |
% |
Gross profit |
|
$ |
52,223 |
|
|
$ |
61,121 |
|
|
$ |
8,898 |
|
|
|
17.0 |
% |
Unit sales |
|
|
24,146 |
|
|
|
27,126 |
|
|
|
2,980 |
|
|
|
12.3 |
% |
Revenue per Unit |
|
$ |
31,984 |
|
|
$ |
33,269 |
|
|
$ |
1,285 |
|
|
|
4.0 |
% |
Gross profit per unit |
|
$ |
2,163 |
|
|
$ |
2,253 |
|
|
$ |
90 |
|
|
|
4.2 |
% |
Gross profit as a % of revenue |
|
|
6.8 |
% |
|
|
6.8 |
% |
|
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,477,819 |
|
|
$ |
1,687,050 |
|
|
$ |
209,231 |
|
|
|
14.2 |
% |
Gross profit |
|
$ |
99,063 |
|
|
$ |
115,620 |
|
|
$ |
16,557 |
|
|
|
16.7 |
% |
Unit sales |
|
|
45,995 |
|
|
|
50,462 |
|
|
|
4,467 |
|
|
|
9.7 |
% |
Revenue per Unit |
|
$ |
32,130 |
|
|
$ |
33,432 |
|
|
$ |
1,302 |
|
|
|
4.1 |
% |
Gross profit per unit |
|
$ |
2,154 |
|
|
$ |
2,291 |
|
|
$ |
137 |
|
|
|
6.4 |
% |
Gross profit as a % of revenue |
|
|
6.7 |
% |
|
|
6.9 |
% |
|
20 |
bps |
|
|
|
|
New vehicle revenues for the second quarter and six-month period ended June 30, 2010 increased
from the same periods in the prior year due to higher new unit sales volume coupled with an
increase in revenue per unit. Our luxury, import and domestic stores experienced increases of
22.1%, 17.7% and 2.8%, respectively, during the second quarter ended June 30, 2010 and increases of
17.6%, 14.9% and 6.2%, respectively, for the six-month period ended June 30, 2010.
New vehicle unit volume increased at our luxury stores in the second quarter and six-month
period ended June 30, 2010 by 18.4% and 13.7%, respectively, when compared to the same prior year
periods. The increase in luxury new vehicle unit sales volume was led by our Cadillac and Mercedes
stores, which posted increases of 56.2% and 28.0%, respectively, during the second quarter ended
June 30, 2010 and 36.6% and 15.4%, respectively, for the six-month period ended June 30, 2010.
During the second quarter ended June 30, 2010, our Cadillac stores outperformed the Cadillac
national industry new unit sales, while our Mercedes stores performed consistently with the
Mercedes national industry new unit increase. When compared to national industry new unit increases
for the six-month period ended June 30, 2010, our Cadillac stores outperformed the Cadillac
national industry new unit increase while our Mercedes stores underperformed their respective brand
national industry new unit increases.
New vehicle unit volume increased at our import stores in the second quarter and six-month
period ended June 30, 2010 by 16.1% and 13.0%, respectively, when compared to the same prior year
periods. The increase in import new vehicle unit sales was led by our Toyota and Honda stores,
which posted increases of 12.1% and 11.3%, respectively, during the second quarter ended June 30,
2010 and 8.9% and 8.1%, respectively, for the six-month period ended June 30, 2010. During the
second quarter and six-month period ended June 30, 2010, our Toyota and Honda stores underperformed
the Toyota and Honda national industry unit sales volume.
New vehicle unit volume (including fleet) decreased at our domestic stores in the second
quarter and six-month period ended June 30, 2010 by 2.9% and 2.1%, respectively, when compared to
the same prior year periods, primarily due to fleet unit volume decreases of 22.1% and 20.0%,
respectively. Excluding fleet units, domestic new retail unit volume increased 11.1% and 11.2% for
the second quarter and six-month period ended June 30, 2010, respectively, when compared to the
same prior year periods. During
the second quarter and six-month period ended June 30, 2010, our Ford stores (including fleet)
experienced decreases of 11.7% and
24
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
9.4%, respectively. Excluding fleet units, our Ford new retail
unit volume increased 17.5% and 20.5% for the second quarter and six-month period ended June 30,
2010, respectively, when compared to the same prior year periods. Our non-Cadillac GM stores new
vehicle unit volume (including fleet) increased 12.8% for each of the second quarter and six-month
period ended June 30, 2010. During the second quarter and six-month period ended June 30, 2010,
our non-Cadillac GM and Ford stores underperformed their respective national industry unit
increases.
New vehicle unit volume increases were led by our North Carolina, San Francisco North Bay,
South Los Angeles and Florida markets. Collectively, these markets generated 24.9% and 25.5% of
our new vehicle unit volume in the second quarter and six-month period ended June 30, 2010,
respectively. The increase in our North Carolina market was primarily due to strong performance in
our Cadillac business. Increases in our California and Florida markets were a result of improving
business conditions and the significant declines in these regions in the same prior year periods.
For the second quarter and six-month period ended June 30, 2010, new vehicle revenue per unit
increased 4.0% and 4.1%, respectively, over the same period in the prior year. This increase is
due primarily to shifts in our sales mix. Our new luxury and import unit volume as a percentage of
total new vehicle unit volume increased 430 basis points and 330 basis points in the second quarter
and six-month period ended June 30, 2010, respectively, compared to the same prior year period. We
believe the increase in new luxury and import unit volume is due primarily to improved economic
conditions compared to the same prior year period.
Increases in new vehicle gross profit for the second quarter and six-month period ended June
30, 2010, as compared to the same period in the prior year, were primarily due to a higher mix of
luxury and import vehicles which generally generate higher gross profit dollars per vehicle. The
increase in import and luxury new vehicle units retailed is primarily due to the improved economic
conditions as compared to the same period in the prior year.
Used Vehicles
Our reported used vehicle results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
382,091 |
|
|
$ |
470,365 |
|
|
$ |
88,274 |
|
|
|
23.1 |
% |
Gross profit |
|
$ |
31,081 |
|
|
$ |
36,432 |
|
|
$ |
5,351 |
|
|
|
17.2 |
% |
Unit sales |
|
|
20,568 |
|
|
|
24,624 |
|
|
|
4,056 |
|
|
|
19.7 |
% |
Revenue per Unit |
|
$ |
18,577 |
|
|
$ |
19,102 |
|
|
$ |
525 |
|
|
|
2.8 |
% |
Gross profit per unit |
|
$ |
1,511 |
|
|
$ |
1,480 |
|
|
$ |
(31 |
) |
|
|
(2.1 |
%) |
Gross profit as a % of revenue |
|
|
8.1 |
% |
|
|
7.7 |
% |
|
(40 |
) |
bps |
|
|
|
CPO revenue |
|
$ |
196,861 |
|
|
$ |
222,464 |
|
|
$ |
25,603 |
|
|
|
13.0 |
% |
CPO unit sales |
|
|
7,814 |
|
|
|
8,431 |
|
|
|
617 |
|
|
|
7.9 |
% |
|
|
|
Six Months Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
710,381 |
|
|
$ |
892,656 |
|
|
$ |
182,275 |
|
|
|
25.7 |
% |
Gross profit |
|
$ |
61,846 |
|
|
$ |
69,850 |
|
|
$ |
8,004 |
|
|
|
12.9 |
% |
Unit sales |
|
|
37,924 |
|
|
|
46,326 |
|
|
|
8,402 |
|
|
|
22.2 |
% |
Revenue per Unit |
|
$ |
18,732 |
|
|
$ |
19,269 |
|
|
$ |
537 |
|
|
|
2.9 |
% |
Gross profit per unit |
|
$ |
1,631 |
|
|
$ |
1,508 |
|
|
$ |
(123 |
) |
|
|
(7.5 |
%) |
Gross profit as a % of revenue |
|
|
8.7 |
% |
|
|
7.8 |
% |
|
(90 |
) |
bps |
|
|
|
CPO revenue |
|
$ |
383,558 |
|
|
$ |
428,261 |
|
|
$ |
44,703 |
|
|
|
11.7 |
% |
CPO unit sales |
|
|
15,498 |
|
|
|
16,125 |
|
|
|
627 |
|
|
|
4.0 |
% |
Used vehicle unit volume increased by 19.7% and 22.2% for the second quarter and six-month
period ended June 30, 2010, respectively, as compared to the same period in the prior year. This
increase is primarily due to the implementation of our used vehicle
playbook which standardizes used vehicle inventory management, pricing and marketing
processes. Our used vehicle
25
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
playbook focuses on better management of trade-ins and used vehicle
inventory to improve the quantity and quality of used vehicles at each of our stores, thereby
increasing the number of used vehicle units that can be sold at retail versus those sold through
wholesale channels. Our California and Mid-Atlantic markets experienced significant used vehicle
unit volume increases in both the second quarter and six-month period ended June 30, 2010 as
compared to the same prior year periods, primarily as a result of the implementation of our used
vehicle playbook.
For the second quarter and six-month period ended June 30, 2010, gross profit per unit for
used vehicles declined by 2.1% and 7.5%, respectively, over the same prior year period. The
reduction in gross profit per unit was primarily driven by our effort to retail a higher volume of
units and improve management of our inventory. We believe the higher used vehicle gross profit
dollars generated by our used vehicle department through volume increases along with the benefits
to our fixed operations business (reconditioning used vehicles) and effects of incremental F&I
activity more than offset the effects of lower gross profit per used vehicle unit.
Wholesale Vehicles
Our reported wholesale results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
33,903 |
|
|
$ |
30,111 |
|
|
$ |
(3,792 |
) |
|
|
(11.2 |
%) |
Gross profit |
|
$ |
(1,242 |
) |
|
$ |
(1,847 |
) |
|
$ |
(605 |
) |
|
|
(48.7 |
%) |
Unit sales |
|
|
5,313 |
|
|
|
5,266 |
|
|
|
(47 |
) |
|
|
(0.9 |
%) |
Revenue per Unit |
|
$ |
6,381 |
|
|
$ |
5,718 |
|
|
$ |
(663 |
) |
|
|
(10.4 |
%) |
Gross profit per unit |
|
$ |
(234 |
) |
|
$ |
(351 |
) |
|
$ |
(117 |
) |
|
|
(50.0 |
%) |
Gross profit as a % of revenue |
|
|
(3.7 |
%) |
|
|
(6.1 |
%) |
|
(240 |
) |
bps |
|
|
|
|
|
|
Six Months Ended June 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
71,359 |
|
|
$ |
61,389 |
|
|
$ |
(9,970 |
) |
|
|
(14.0 |
%) |
Gross profit |
|
$ |
(1,307 |
) |
|
$ |
(2,523 |
) |
|
$ |
(1,216 |
) |
|
|
(93.0 |
%) |
Unit sales |
|
|
11,826 |
|
|
|
10,459 |
|
|
|
(1,367 |
) |
|
|
(11.6 |
%) |
Revenue per Unit |
|
$ |
6,034 |
|
|
$ |
5,870 |
|
|
$ |
(164 |
) |
|
|
(2.7 |
%) |
Gross profit per unit |
|
$ |
(111 |
) |
|
$ |
(241 |
) |
|
$ |
(130 |
) |
|
|
(117.1 |
%) |
Gross profit as a % of revenue |
|
|
(1.8 |
%) |
|
|
(4.1 |
%) |
|
(230 |
) |
bps |
|
|
|
During the second quarter and six-month period ended June 30, 2010, wholesale vehicle gross
loss per unit increased significantly compared to the same period in the prior year. This is
primarily due to the increased focus on retailing used vehicles at a potential higher profit that
were previously disposed through our wholesale channels. In addition, our used vehicle retail
strategy has necessitated higher unit inventory balances, which combined with our strict inventory
control practices results in a greater risk that aged units that cannot generate positive gross
profit through the retail channel will end up being liquidated through wholesale channels. See
previous heading, Used Vehicles.
Parts, Service and Collision Repair (Fixed Operations)
Our reported fixed operations results are as follows:
26
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
|
Better / (Worse) |
|
(in thousands) |
|
2009 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
147,546 |
|
|
$ |
150,969 |
|
|
$ |
3,423 |
|
|
|
2.3 |
% |
Service |
|
|
114,079 |
|
|
|
123,082 |
|
|
|
9,003 |
|
|
|
7.9 |
% |
Collision Repair |
|
|
12,407 |
|
|
|
13,044 |
|
|
|
637 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
274,032 |
|
|
$ |
287,095 |
|
|
$ |
13,063 |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
50,838 |
|
|
$ |
50,204 |
|
|
$ |
(634 |
) |
|
|
(1.2 |
%) |
Service |
|
|
80,948 |
|
|
|
86,125 |
|
|
|
5,177 |
|
|
|
6.4 |
% |
Collision Repair |
|
|
7,005 |
|
|
|
6,997 |
|
|
|
(8 |
) |
|
|
(0.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
138,791 |
|
|
$ |
143,326 |
|
|
$ |
4,535 |
|
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a % of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
|
34.5 |
% |
|
|
33.3 |
% |
|
(120) |
|
bps |
|
|
|
Service |
|
|
71.0 |
% |
|
|
70.0 |
% |
|
(100) |
|
bps |
|
|
|
Collision Repair |
|
|
56.5 |
% |
|
|
53.6 |
% |
|
(290) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50.6 |
% |
|
|
49.9 |
% |
|
(70) |
|
bps |
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Better / (Worse) |
|
(in thousands) |
|
2009 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
295,837 |
|
|
$ |
298,846 |
|
|
$ |
3,009 |
|
|
|
1.0 |
% |
Service |
|
|
223,683 |
|
|
|
241,327 |
|
|
|
17,644 |
|
|
|
7.9 |
% |
Collision Repair |
|
|
25,181 |
|
|
|
25,509 |
|
|
|
328 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
544,701 |
|
|
$ |
565,682 |
|
|
$ |
20,981 |
|
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
100,427 |
|
|
$ |
99,682 |
|
|
$ |
(745 |
) |
|
|
(0.7 |
%) |
Service |
|
|
158,435 |
|
|
|
169,837 |
|
|
|
11,402 |
|
|
|
7.2 |
% |
Collision Repair |
|
|
14,208 |
|
|
|
13,918 |
|
|
|
(290 |
) |
|
|
(2.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
273,070 |
|
|
$ |
283,437 |
|
|
$ |
10,367 |
|
|
|
3.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit as a % of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
|
33.9 |
% |
|
|
33.4 |
% |
|
(50) |
|
bps |
|
|
|
Service |
|
|
70.8 |
% |
|
|
70.4 |
% |
|
(40) |
|
bps |
|
|
|
Collision Repair |
|
|
56.4 |
% |
|
|
54.6 |
% |
|
(180) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50.1 |
% |
|
|
50.1 |
% |
|
0 |
|
bps |
|
|
|
Overall fixed operations gross margin rates decreased 70 basis points for the second quarter
ended June 30, 2010, primarily due to lower customer pay and internal margin rates compared to the
same prior year period, and were flat for the six-month period ended June 30, 2010, compared to the
same prior year period. Warranty gross margin rates increased 210 basis points and 230 basis
points in the second quarter and six-month period ended June 30, 2010, respectively, over the
comparative prior year period, primarily due to the Toyota recalls that occurred in 2010. The
increase in sublet gross margin rates of 150 basis points and 140 basis points for the quarter and
six-month period ended June 30, 2010, respectively, was driven by the large number of hail damage
claims in the current period.
Our domestic, import, and luxury brands all experienced increases in overall fixed operations
revenue, as compared to the same period in 2009, increasing 10.6%, 9.9%, and 1.7%, respectively,
for the second quarter ended June 30, 2010, and 7.2%, 8.7%, and
1.5%, respectively, for the six-month period ended June 30, 2010. Ford, Toyota, and Cadillac
experienced significant increases in overall fixed operations revenue, increasing 14.3%, 15.7%, and
11.2%, respectively, for the second quarter ended June 30, 2010, and 5.8%, 12.7%, and 10.3%,
respectively, for the six-month period ended June 30, 2010 when compared to the same prior year
period.
27
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overall fixed operations customer pay revenue increased 2.1% and 2.4% for the second quarter
and six-month period ended June 30, 2010, respectively, compared to the same period in the prior
year. Our Cadillac dealerships had the most significant increase in customer pay revenue in the
second quarter, up 12.5%, partially due to the closure of competing Cadillac stores. Lexus
dealerships had the most significant increase in customer pay revenue during the six-month period
ended June 30, 2010, up 15.4% as compared to the same prior year period. Warranty revenue, which
typically accounts for 16% to 18% of our fixed operations revenue, declined 7.7% and 9.3% for the
second quarter and six-month period ended June 30, 2010, respectively, compared to the same prior
year period. Our Lexus dealerships experienced significant decreases in warranty revenue, declining
46.8% and 47.2% in the second quarter and six-month period ended June 30, 2010, respectively,
compared to the same prior year period due to recalls in the prior year period. Our Toyota stores
continued to experience significant increases in warranty revenue, increasing 67.0% and 84.6% in
the second quarter and six-month period ended June 30, 2010, respectively, due to recalls that
occurred in 2010. The mix of customer pay and warranty revenue can be affected by consumer
spending habits and changes in manufacturer warranty programs.
Finance, Insurance and Other (F&I)
Our reported F&I results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
Better / (Worse) |
(in thousands except per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
38,847 |
|
|
$ |
45,985 |
|
|
$ |
7,138 |
|
|
|
18.4 |
% |
Gross profit per retail unit
(excluding fleet) |
|
$ |
922 |
|
|
$ |
929 |
|
|
$ |
7 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
Better / (Worse) |
(in thousands except per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
Reported: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
74,000 |
|
|
$ |
86,959 |
|
|
$ |
12,959 |
|
|
|
17.5 |
% |
Gross profit per retail unit
(excluding fleet) |
|
$ |
936 |
|
|
$ |
937 |
|
|
$ |
1 |
|
|
|
0.1 |
% |
F&I revenue increased in the second quarter ended June 30, 2010 primarily due to increases in
new retail and used unit volume of 15.2% and 19.7%, respectively, as compared to the same prior
year period. Likewise, F&I revenue increased in the six-month period ended June 30, 2010 due to
increases in new retail and used unit volume of 12.8% and 22.2%, respectively, as compared to the
same prior year period. These increases in unit volume resulted in increases in new and used
finance contract gross revenue of 26.9% and 42.9%, respectively, for the second quarter ended June
30, 2010. New and used finance contract gross revenue also increased for the six-month period
ended June 30, 2010 by 25.3% and 45.6%, respectively. Penetration rates continued to deteriorate
for the second quarter and six-month period ended June 30, 2010. However, this was offset by an
increase in F&I revenue per unit of 0.8% and 0.2% for the second quarter and six-month period ended
June 30, 2010, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses are comprised of four major groups:
compensation expense, advertising expense, rent and rent related expense, and other expense.
Compensation expense primarily relates to dealership personnel who are paid a commission or a
modest salary plus commission (which typically vary depending on gross profits realized) and
support personnel who are paid a fixed salary. Due to the salary component for certain dealership
and corporate personnel, gross profits and compensation expense are not 100% correlated.
Advertising expense and other expenses vary based on the level of actual or anticipated business
activity and number of dealerships owned. Rent and rent related 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 is as a
percentage of gross profit.
Our SG&A reported results are as follows:
28
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
|
Better / (Worse) |
|
(in thousands) |
|
2009 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Reported Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
117,740 |
|
|
$ |
135,845 |
|
|
$ |
(18,105 |
) |
|
|
(15.4 |
%) |
Advertising |
|
|
11,220 |
|
|
|
12,964 |
|
|
|
(1,744 |
) |
|
|
(15.5 |
%) |
Rent and Rent Related |
|
|
32,132 |
|
|
|
32,717 |
|
|
|
(585 |
) |
|
|
(1.8 |
%) |
Other |
|
|
44,675 |
|
|
|
46,846 |
|
|
|
(2,171 |
) |
|
|
(4.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
205,767 |
|
|
$ |
228,372 |
|
|
$ |
(22,605 |
) |
|
|
(11.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
45.3 |
% |
|
|
47.7 |
% |
|
(240 |
) |
bps |
|
|
|
Advertising |
|
|
4.3 |
% |
|
|
4.5 |
% |
|
(20 |
) |
bps |
|
|
|
Rent and Rent Related |
|
|
17.3 |
% |
|
|
16.5 |
% |
|
80 |
|
bps |
|
|
|
Other |
|
|
12.3 |
% |
|
|
11.4 |
% |
|
90 |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
79.2 |
% |
|
|
80.1 |
% |
|
(90 |
) |
bps |
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
Better / (Worse) |
|
(in thousands) |
|
2009 |
|
|
2010 |
|
|
Change |
|
|
% Change |
|
Reported Expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
232,858 |
|
|
$ |
266,821 |
|
|
$ |
(33,963 |
) |
|
|
(14.6 |
%) |
Advertising |
|
|
22,115 |
|
|
|
24,294 |
|
|
|
(2,179 |
) |
|
|
(9.9 |
%) |
Rent and Rent Related |
|
|
65,111 |
|
|
|
66,328 |
|
|
|
(1,217 |
) |
|
|
(1.9 |
%) |
Other |
|
|
91,147 |
|
|
|
94,422 |
|
|
|
(3,275 |
) |
|
|
(3.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
411,231 |
|
|
$ |
451,865 |
|
|
$ |
(40,634 |
) |
|
|
(9.9 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A as a % of gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
45.9 |
% |
|
|
48.3 |
% |
|
(240 |
) |
bps |
|
|
|
Advertising |
|
|
4.4 |
% |
|
|
4.4 |
% |
|
0 |
|
bps |
|
|
|
Rent and Rent Related |
|
|
18.0 |
% |
|
|
17.0 |
% |
|
100 |
|
bps |
|
|
|
Other |
|
|
12.9 |
% |
|
|
12.0 |
% |
|
90 |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
81.2 |
% |
|
|
81.7 |
% |
|
(50 |
) |
bps |
|
|
|
The increase in overall SG&A expense can largely be attributed to a greater level of business
activity (revenues and gross profit) as well as higher compensation costs related to ecommerce and
centralized used vehicle buying initiatives.
Total advertising costs as a percentage of gross profit increased slightly for the second
quarter ended June 30, 2010 and were flat for the six-month period ended June 30, 2010, compared to
the same prior year period.
Rent and rent related expenses decreased as a percentage of gross profit primarily due to
improved gross profit levels for both the quarter and six-month period ended June 30, 2010,
compared to the same prior year period.
For the six-month period ended June 30, 2010, other SG&A expenses increased from the prior
year period primarily related to a $2.4 million mark-to-market gain on derivative liabilities
recognized in the prior year period in addition to a loss of approximately $0.6 million from hail
damage in our Mid-Atlantic region in the second quarter ended June 30, 2010. Adjusted for these
items, overall SG&A as a percentage of gross profit would have improved slightly compared to the
prior year period for both the second quarter and six-month period ended June 30, 2010.
Impairment Charges
Impairment charges were immaterial in the second quarter and six-month period ended June 30,
2010. In the second quarter and six-month period ended June 30, 2009, Sonic recorded total
impairment charges of $6.9 million and $8.5 million, respectively, $5.0 million and $5.1 million of
which were recorded in continuing operations in the second quarter and six-month period ended June
30, 2009, respectively.
29
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Depreciation and Amortization
Reported depreciation and amortization expense increased $0.5 million, or 6.0%, in the second
quarter ended June 30, 2010, and increased $1.2 million, or 7.8%, in the six-month period ended
June 30, 2010, as compared to the same period last year. These increases are primarily related to
stores that were classified as continuing operations for the current period but were previously
held for sale in discontinued operations during the same period of the prior year. While being held
for sale in the prior year period, the fixed assets for these stores were not depreciated in
accordance with Property, Plant and Equipment in the ASC.
Interest Expense, Floor Plan
Floor plan interest expense for new vehicles decreased approximately $0.3 million, or 6.4% and
$0.8 million, or 7.9%, in the second quarter and six-month period ended June 30, 2010,
respectively, compared to the second quarter and six-month period ended June 30, 2009,
respectively. The weighted average new vehicle floor plan interest rate incurred by continuing
dealerships was relatively flat at 2.7% for both the second quarter and six-month period ended June
30, 2010 when compared to the second quarter and six-month period ended June 30, 2009. The average
floor plan balance for new vehicles decreased by approximately $28.0 million and $75.5 million for
the second quarter and six-month period ended June 30, 2010, respectively, compared to the same
periods in the prior year.
Floor plan interest expense for used vehicles increased approximately $0.3 million, or 72.3%,
and $0.5 million, or 74.0%, in the second quarter and six-month period ended June 30, 2010,
respectively, compared to the second quarter and six-month period ended June 30, 2009. The
weighted average used vehicle floor plan interest rate incurred by continuing dealerships increased
to 3.4% and 2.6% for the second quarter and six-month period ended June 30, 2010, respectively,
from 2.2% and 1.8% for the second quarter and six-month period ended June 30, 2009, which accounts
for the majority of the increase in floor plan interest expense.
Interest Expense, Other, Net
The change in interest expense, other, between the second quarter and six-month period ended
June 30, 2009 and 2010 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) in
Interest Expense, Other |
|
|
|
Second Quarter Ended |
|
|
Six Months Ended |
|
(dollars in millions) |
|
June 30, 2010 |
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
Debt balances |
|
|
|
|
|
|
|
|
Decrease in debt balances |
|
$ |
(1.1 |
) |
|
$ |
(1.9 |
) |
Other factors |
|
|
|
|
|
|
|
|
Increase in capitalized interest |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
Decrease in interest expense related to variable to
fixed rate swaps |
|
|
(0.5 |
) |
|
|
(1.0 |
) |
Lower deferred loan cost amortization |
|
|
(6.4 |
) |
|
|
(6.0 |
) |
Lower interest allocation to discontinued operations |
|
|
0.4 |
|
|
|
1.2 |
|
Other |
|
|
0.4 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
$ |
(7.5 |
) |
|
$ |
(7.1 |
) |
|
|
|
|
|
|
|
For approximately half of the month of March 2010 and half of the month of April 2010, we
carried and incurred interest expense for both the 9.0% Notes issued March 12, 2010 and the $200.0
million in aggregate principal of our 8.625% Notes which we redeemed on April 12, 2010 using the
net proceeds from the 9.0% Notes issuance and cash on hand. As such, this double carry effect
increased our interest expense by approximately $1.5 million, which partially offset the amount
shown in the decrease in debt balances caption in the table above for the second quarter and
six-month period ended June 30, 2010. Deferred loan cost amortization decreased for the second
quarter and six-month period ended June 30, 2010 when compared to the prior year as a result of
debt restructuring charges incurred in the prior year period.
Interest Expense, Non-Cash, Convertible Debt
Non-cash convertible debt interest expense is comprised of the amortization of the debt
discount and deferred loan costs associated with our various convertible notes. The initial debt
discount was determined based on a valuation of the debt component
30
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
of these notes and is being amortized monthly to interest expense over the life of the notes.
See our Annual Report on Form 10-K for the year ended December 31, 2009 for a discussion of the
adoption of Debt with Conversion and Other Options in the ASC.
For the second quarter and six-month period ended June 30, 2010, non-cash convertible debt
interest expense decreased by approximately $1.9 million and $2.9 million, respectively, when
compared to the second quarter and six-month period ended June 30, 2009. These decreases are
primarily a result of decreases in non-cash amortization of debt discount related to our various
convertible notes due to the extinguishment or partial redemption of certain convertible note
principal amounts.
Interest Expense, Non-Cash, Cash Flow Swaps
We have entered into interest rate swap agreements (the Fixed Swaps) to effectively convert
a portion of our LIBOR-based variable rate debt to a fixed rate, in order to reduce our exposure to
market risks from fluctuations in interest rates. As a result of the refinancing of our 2006
Credit Facility and the new terms of the 2010 Credit Facilities, at December 31, 2009 we determined
it was no longer probable that we would incur interest payments that match the terms of certain
Fixed Swaps that previously were designated and qualified as cash flow hedges. Of the Fixed Swaps
(including the two $100.0 million notional swaps which were settled in 2009), $565.0 million of the
notional amount had previously been documented as hedges against the variability of cash flows
related to interest payments on certain debt obligations. At June 30, 2010, we estimate that under
the new 2010 Credit Facilities and other facilities with matching terms, it is probable that the
expected debt balance with interest payments that match the terms of the Fixed Swaps will be $400.0
million and it is reasonably possible that the expected debt balance with interest payments that
match the terms of the Fixed Swaps will be between $400.0 million and $450.0 million. As a result,
non-cash charges were recorded in interest expense, non-cash, cash flow swaps in the accompanying
Consolidated Statements of Income related to $65.0 million in notional of the Fixed Swaps and
amortization of amounts in accumulated other comprehensive income (loss) related to other
terminated cash flow swaps. The non-cash charges for the second quarter and six-month period ended
June 30, 2010 were $2.2 million and $3.9 million, respectively, and for the second quarter and
six-month period ended June 30, 2009 were $1.9 million and $3.2 million, respectively. Changes in
the fair value of $65.0 million of notional amount of certain cash flow swaps will be recognized
through earnings. See Note 6 Derivative Instruments and Hedging Activities in the accompanying
notes to the Unaudited Condensed Consolidated Financial Statements for further discussion.
For the Fixed Swaps which 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
Condensed Consolidated Statements of Stockholders Equity. The incremental interest expense (the
difference between interest paid and interest received) related to the Fixed Swaps was $3.7 million
and $8.7 million in the second quarter and six-month period ended June 30, 2010, respectively, and
$4.3 million and $9.7 million in the second quarter and six-month period ended June 30, 2009,
respectively, and is included in interest expense, other, net in the accompanying Condensed
Consolidated Statements of Income. The estimated net expense expected to be reclassified out of
other comprehensive income (loss) into results of operations during the next twelve months is
approximately $4.7 million.
Other Income / (Expense)
Sonic recorded a loss on extinguishment of debt of approximately $7.3 million in the second
quarter ended June 30, 2010 related to the retirement of $212.1 million aggregate principal amount
of the 8.625% Notes, discussed in Note 6 Long-Term Debt. The loss on extinguishment of debt is
reflected in other income (expense), net in the accompanying Consolidated Statements of Income for
the second quarter and six-month period ended June 30, 2010.
Income Taxes
The overall effective tax rate from continuing operations was 40.4% and 41.5% for the second
quarter and six-month period ended June 30, 2010, respectively. The overall effective tax rate from
continuing operations was 45.0% for both the second quarter and six-month period ended June 30,
2009. The effective rate for the second quarter and six-month period ended June 30, 2010 was lower
than the same prior year periods due to the shift in the distribution of taxable income between
states in which we operate and lower expense effects related to tax positions as a result of
Accounting for Uncertainty in Income Taxes in the ASC. At the end of 2009, income tax valuation
allowances totaling $46.0 million were recorded related to certain deferred tax assets based on our
judgment that it was more likely than not that we would not be able to realize recorded balances.
This judgment was based on our operating loss generated in 2008 as a result of a goodwill
impairment charge, results of operations in 2009 and the overall downturn in the economy of the
United States and, in particular, the automotive retail industry. As of June 30, 2010, in our
judgment, there is still significant uncertainty related to our ability to realize the recorded
deferred tax assets. However, in the event circumstances change during the remainder of 2010, a
portion or all of the valuation allowances currently recorded, with the exception of those related
to state net operating loss carryforwards, may not be necessary. Accordingly, in the event we do
reduce the level of
31
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
valuation allowances recorded, our effective tax rate could be materially affected. Absent
any activity related to income tax valuation allowances, we expect the effective tax rate for
continuing operations in future periods to fall within a range of 39.0% to 43.0%.
Discontinued Operations
The pre-tax losses from operations and the sale of discontinued franchises were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
Second Quarter Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
Loss from operations |
|
$ |
(2,000 |
) |
|
$ |
(1,020 |
) |
|
$ |
(3,341 |
) |
|
$ |
(3,178 |
) |
Gain (loss) on disposal of franchises |
|
|
(388 |
) |
|
|
1,082 |
|
|
|
(469 |
) |
|
|
1,353 |
|
Lease exit charges |
|
|
(800 |
) |
|
|
(1,077 |
) |
|
|
(1,795 |
) |
|
|
(2,722 |
) |
Property impairment charges |
|
|
(1,692 |
) |
|
|
|
|
|
|
(1,822 |
) |
|
|
|
|
Goodwill impairment charges |
|
|
(187 |
) |
|
|
|
|
|
|
(1,586 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(5,067 |
) |
|
$ |
(1,015 |
) |
|
$ |
(9,013 |
) |
|
$ |
(4,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
68,715 |
|
|
$ |
6,399 |
|
|
$ |
142,416 |
|
|
$ |
17,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease exit charges recorded relate to the revision of estimates on previously established
lease exit accruals. The lease exit accruals are calculated by either discounting the remaining
lease payments, net of estimated sublease proceeds or estimating the amount necessary to satisfy
the lease commitment to the landlord. Property impairment charges were recorded based on the
estimated fair value of the property and equipment to be sold in connection with the disposal of
associated franchises and recorded values. Goodwill impairment charges were recorded based on the
determination that a portion of the goodwill allocated to franchises held for sale was not
recoverable based on estimated proceeds.
Liquidity and Capital Resources
We require cash to fund debt service and working capital requirements. 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. Our liquidity could be negatively affected if we fail to comply with the financial
covenants in our existing debt or lease arrangements.
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 and are dependent,
to a substantial degree, on the results of operations of these subsidiaries. For both the second
quarter and six-month period ended June 30, 2009, the average SAAR of new vehicle sales was 9.6
million units compared to 11.3 million and 11.2 million units for the second quarter and six-month
period ended June 30, 2010. At the current level of SAAR, we believe we will continue to be able to
generate positive adjusted cash flows from operations (defined as cash flows from operating
activities, net of net borrowings on notes payable floor plan non-trade, which is included in
cash flows from financing activities) in the foreseeable future.
Floor Plan Facilities
The weighted average interest rate for all of our new vehicle floor plan facilities (both
continuing and discontinued operations) was relatively flat at 2.7% for both the second quarter and
six-month period ended June 30, 2010 when compared to the second quarter and six-month period ended
June 30, 2009. Interest payments under each of our floor plan facilities are due monthly, and we
are generally not required to make principal repayments prior to the sale of the particular
vehicles. We were in compliance with all restrictive covenants under our floor plan facilities as
of June 30, 2010, and expect to be in compliance with the covenants for the foreseeable future.
The weighted average interest rate for our used vehicle floor plan facility (both continuing
and discontinued operations) was 3.4% and 2.6% for the second quarter and six-month period ended
June 30, 2010, respectively, compared to 2.2% and 1.8% for the second quarter and six-month period
ended June 30, 2009, respectively.
32
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Long-Term Debt and Credit Facilities
See Note 6, Long-Term Debt in the notes to the accompanying unaudited financial statements
for a discussion of the replacement of the 2006 Credit Facility with the new 2010 Credit
Facilities, the issuance of $210.0 million in aggregate principal amount of 9.0% Notes, the
redemption of $200.0 million in aggregate principal amount of our 8.625% Notes, and subsequent
repurchases of $12.1 million of principal of our 8.625% Notes and $1.0 million of principal of our
4.25% Notes. Also see Note 6 in the notes to the accompanying unaudited financial statements for
discussions of compliance with debt covenants.
Dealership Dispositions
During the six-month period ended June 30, 2010, we disposed of four dealerships. These
dispositions generated cash of $10.7 million.
Capital Expenditures
Our capital expenditures generally include purchases of land, the construction of new
dealerships and collision repair centers, building improvements and equipment purchased for use in
our dealerships. Capital expenditures in the second quarter and six-month period ended June 30,
2010 were approximately $12.5 million and $21.2 million, respectively. As of June 30, 2010,
contractual commitments to contractors for facility construction projects totaled approximately
$29.9 million.
Stock Repurchase Program
As of June 30, 2010, pursuant to previous authorizations from our Board of Directors, we had
approximately $43.6 million available to repurchase shares of our Class A common stock or redeem
securities convertible into Class A common stock. Due to current economic conditions and liquidity
concerns, we have curtailed our stock repurchase activities and do not anticipate significant
activity during 2010. Under our 2010 Credit Facilities, share repurchases are permitted to the
extent that no event of default exists and we are in compliance with the financial covenants
contained therein. Stock repurchases executed in the second quarter and six-month period ended
June 30, 2010 relate to tax withholdings related to vesting of restricted stock and restricted
stock units and the exercise of stock options.
Dividends
Under our 2010 Credit Facilities, the 8.625% Notes and the 9.0% Notes, dividends are permitted
to the extent that no event of default exists and we are in compliance with the financial covenants
contained therein. See Note 6, Long-Term Debt in the notes to the accompanying unaudited
financial statements for a discussion of limitations on our ability to pay dividends. The payment
of any future dividend is subject to the business judgment of our Board of Directors, taking into
consideration our historic and projected results of operations, financial condition, cash flows,
capital requirements, covenant compliance, share repurchases, current economic environment and
other factors considered relevant. These factors are considered each quarter and will be
scrutinized as our Board of Directors determines our dividend policy throughout 2010. There is no
guarantee that dividends will be paid at any time in the future.
Cash Flows
For the six-month period ended June 30, 2010, net cash provided by operating activities was
approximately $204.7 million. This provision of cash was comprised primarily of cash inflows
related to an increase in notes payable floor plan trade and a reduction in receivables,
partially offset by an increase in inventories. Net cash used in investing activities during the
six-month period ended June 30, 2010 was approximately $9.6 million. This use of cash was primarily
comprised of purchases of property and equipment, partially offset by proceeds received from sales
of franchises. Net cash used in financing activities for the six-month period ended June 30, 2010
was approximately $205.0 million. This use of cash was primarily comprised of net repayments of
our notes payable floor plan non-trade, as the proceeds from long-term debt provided by the
issuance of our 9.0% Notes were offset by the redemption of the 8.625% Notes and other debt
repurchases during the second quarter.
We arrange our inventory floor plan financing through both manufacturer captive finance
companies and a syndicate consisting of commercial banks and manufacturer captive finance
companies. Generally, our floor plan financed with manufacturer captives is recorded as trade
floor plan liabilities (with the resulting change being reflected as an operating cash flow). Our
dealerships that
33
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
obtain floor plan financing from a syndicate of captive finance companies and commercial banks
record their obligation as non-trade floor plan liabilities (with the resulting change being
reflected as a financing cash flow).
Due to the presentation differences for changes in trade floor plan and non-trade floor plan
in the statement 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.
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 $30.1 million and $5.1
million for the six-month period ended June 30, 2009 and 2010, respectively. The shift between
trade floor plan and non-trade floor plan during the six-month period ended June 30, 2010 was
primarily due to the realignment in floor plan providers under the new 2010 Credit Facilities in
combination with increasing inventory levels.
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 9 in the notes to the
accompanying unaudited financial statements. See also Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 12 to the Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2009.
Future Liquidity Outlook
See Notes 1 and 6 of the notes to the accompanying Unaudited Condensed Consolidated Financial
Statements for a discussion of the issuance of 9.0% Notes and our replacement of the 2006 Credit
Facility with the new 2010 Credit Facilities.
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 our floor plan
facilities (or any replacements thereof), our 2010 Credit Facilities, selected dealership and other
asset sales and our ability to raise funds in the capital markets. 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.
Off-Balance Sheet Arrangements
See Managements 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,
2009 for a description of our off-balance sheet arrangements.
Seasonality
Our business is subject to seasonal variations in revenues. In our experience, demand for
automobiles is generally lower during the first and fourth quarters of each year. We therefore
receive a disproportionate amount of revenues generally in the second and third quarters, and
expect our revenues and operating results to be generally lower in the first and fourth quarters.
Consequently, if conditions surface during the second and third quarters that impair vehicle sales,
such as higher fuel costs, depressed economic conditions or similar adverse conditions, our
revenues for the year could suffer a disproportionate adverse effect.
34
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
Our variable rate notes payablefloor plan, 2010 Credit Facilities borrowings and other
variable rate notes expose us to risks caused by fluctuations in the underlying interest rates. The
total outstanding balance of such instruments was approximately $838.9 million at June 30, 2010
($442.7 million net of the effect of our cash flow swaps). A change of 100 basis points in the
underlying interest rate would have caused a change in interest expense of approximately $2.2
million in the six-month period ended June 30, 2010, substantially all of which would have resulted
from notes payablefloor plan.
In addition to our variable rate debt, as of June 30, 2010, approximately 20% of our
dealership lease facilities have monthly lease payments that fluctuate based on LIBOR interest
rates. Many of our lease agreements have interest rate floors whereby our lease expense would not
fluctuate significantly in periods when LIBOR is relatively low. Consequently, a change of 100
basis points in LIBOR would not cause a significant change in interest expense in the second
quarter and six-month period ended June 30, 2010.
We also have the Fixed Swaps to effectively convert a portion of our LIBOR based variable rate
debt to a fixed rate. Under the terms of the Fixed Swaps interest rates reset monthly. The fair
value of these swap positions at June 30, 2010 was a liability of $36.3 million included in Other
Long-Term Liabilities in the accompanying Consolidated Balance Sheets. See the previous discussion
of Interest Expense, Non-Cash, Cash Flow Swaps in Item 2: Managements Discussion and Analysis of
Financial Condition and Results of Operations. We will receive and pay interest based on the
following:
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Pay Rate |
|
Receive Rate (1) |
|
Maturing Date |
(in millions) |
|
|
|
|
|
|
|
|
$ |
200.0 |
|
|
|
4.935 |
% |
|
one-month LIBOR |
|
May 1, 2012 |
$ |
100.0 |
|
|
|
5.265 |
% |
|
one-month LIBOR |
|
June 1, 2012 |
$ |
3.7 |
|
|
|
7.100 |
% |
|
one-month LIBOR |
|
July 10, 2017 |
$ |
25.0 |
(2) |
|
|
5.160 |
% |
|
one-month LIBOR |
|
September 1, 2012 |
$ |
15.0 |
(2) |
|
|
4.965 |
% |
|
one-month LIBOR |
|
September 1, 2012 |
$ |
25.0 |
(2) |
|
|
4.885 |
% |
|
one-month LIBOR |
|
October 1, 2012 |
$ |
11.6 |
|
|
|
4.655 |
% |
|
one-month LIBOR |
|
December 10, 2017 |
$ |
8.8 |
|
|
|
6.860 |
% |
|
one-month LIBOR |
|
August 1, 2017 |
$ |
7.1 |
|
|
|
4.330 |
% |
|
one-month LIBOR |
|
July 1, 2013 |
$ |
100.0 |
(3) |
|
|
3.280 |
% |
|
one-month LIBOR |
|
July 1, 2015 |
$ |
100.0 |
(3) |
|
|
3.300 |
% |
|
one-month LIBOR |
|
July 1, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
One-month LIBOR was 0.348% at June 30, 2010. |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
After December 31, 2009 changes in fair value are recorded through earnings. |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
The effective date of these forward-starting swaps is July 2, 2012. |
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, which may influence automobile manufacturers ability to provide their products at
competitive prices in the United States. To the extent this volatility negatively impacts consumer
demand through higher retail prices for our products, it could adversely affect our future
operations results.
35
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 4: Controls and Procedures.
Our management, under the supervision and with the participation of our principal
executive officer and principal financial officer, evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and
principal financial officer have concluded that the design and operation of our disclosure controls
and procedures were effective as of the end of the period covered by this Quarterly Report on Form
10-Q. During our last fiscal quarter, there were no changes in our internal control over financial
reporting that materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
36
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1: Legal Proceedings.
We are a defendant in the matter of Galura, et al. v. Sonic Automotive, Inc., a private civil
action filed in the Circuit Court of Hillsborough County, Florida. In this action, originally filed
on December 30, 2002, the plaintiffs allege that we and our Florida dealerships sold an antitheft
protection product in a deceptive or otherwise illegal manner, and further sought representation on
behalf of any customer of any of our Florida dealerships who purchased the antitheft protection
product since December 30, 1998. The plaintiffs are seeking monetary damages and injunctive relief
on behalf of this class of customers. In June 2005, the court granted the plaintiffs motion for
certification of the requested class of customers, but the court has made no finding to date
regarding actual liability in this lawsuit. We subsequently filed a notice of appeal of the courts
class certification ruling with the Florida Court of Appeals. In April 2007, the Florida Court of
Appeals affirmed a portion of the trial courts class certification, and overruled a portion of the
trial courts class certification. The Florida trial court granted Summary Judgment in our favor
against Plaintiff Enrique Galura, and his claim has been dismissed. Virginia Galuras claim is
still pending. We currently intend to continue our vigorous appeal and defense of this lawsuit and
to assert available defenses. However, an adverse resolution of this lawsuit could result in the
payment of significant costs and damages, which could have a material adverse effect on our future
results of operations, financial condition and cash flows. Currently, we are unable to estimate a
range of potential loss related to this matter.
Several private civil actions have been filed against Sonic Automotive, Inc. and several of
our dealership subsidiaries that purport to represent classes of customers as potential plaintiffs
and make allegations that certain products sold in the finance and insurance departments were done
so in a deceptive or otherwise illegal manner. One of these private civil actions has been filed
in South Carolina state court against Sonic Automotive, Inc. and 10 of our South Carolina
subsidiaries. This group of plaintiffs attorneys has filed another private civil class action
lawsuit in state court in North Carolina seeking certification of a multi-state class of
plaintiffs. The South Carolina state court action and the North Carolina state court action have
since been consolidated into a single proceeding in private arbitration. On November 12, 2008,
claimants in the consolidated arbitration filed a Motion for Class Certification as a national
class action including all of the states in which we operate dealerships. Claimants are seeking
monetary damages and injunctive relief on behalf of this class of customers. The parties have
briefed and argued the issue of class certification.
On July 19, 2010, the Arbitrator issued a Partial Final Award on Class Certification,
certifying a class which includes all customers who, on or after November 15, 2000, purchased or
leased from a Sonic dealership a vehicle with the Etch product as part of the transaction, but not
including customers who purchased or leased such vehicles from a Sonic dealership in Florida. The
Partial Final Award on Class Certification is not a final decision on the merits of the action.
The merits of Claimants assertions and potential damages will still have to be proven through the
remainder of the arbitration. The Arbitrator has stayed the Arbitration for thirty days to allow
either party to petition a court of competent jurisdiction to confirm or vacate the award. Sonic
will seek review of the class certification ruling by a court of competent jurisdiction and will
continue to press its argument that this action is not suitable for a class-based arbitration.
We intend to continue our vigorous defense of this arbitration and to assert all available
defenses. However, an adverse resolution of this arbitration could result in the payment of
significant costs and damages, which could have a material adverse effect on our future results of
operations, financial condition and cash flows. Currently, we are unable to estimate a range of
potential loss related to this matter.
We are involved, and expect to continue to be involved, in numerous legal and administrative
proceedings arising out of the conduct of our 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 we vigorously defend ourselves in all legal and administrative
proceedings, the outcomes of pending and future proceedings arising out of the conduct of our
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 our business, financial condition, results of operations, cash flows or
prospects.
37
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
Item 1A: Risk Factors
In addition to the information below and other 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, 2009, which could materially affect our business,
financial condition or future results.
Our significant indebtedness could materially adversely affect our financial health, limit our
ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our
financial obligations.
As of June 30, 2010, our total outstanding indebtedness was approximately $1.4 billion,
including the following:
|
|
|
$800.0 million under the secured new and used inventory floor plan facilities that is
classified as current, including $1.4 million classified as liabilities associated with
assets held for sale; |
|
|
|
|
$208.7 million in 9.0% Senior Subordinated Notes due 2018 (the 9.0% Notes),
representing $210.0 million in aggregate principal amount outstanding less unamortized
discount of approximately $1.3 million; |
|
|
|
|
$145.2 million in 5.0% Convertible Senior Notes due 2029 which are redeemable by us
and putable by the holders after October 1, 2014 (the 5.0% Convertible Notes),
representing $172.5 million in aggregate principal amount outstanding less unamortized
discount of approximately $27.3 million; |
|
|
|
|
$15.7 million in 4.25% Convertible Senior Subordinated Notes due 2015 (the 4.25%
Convertible Notes), representing $16.0 million in aggregate principal amount outstanding
less unamortized discount of approximately $0.3 million, all of which is classified as
current; |
|
|
|
|
$62.5 million in 8.625% Senior Subordinated Notes due 2013 (the 8.625% Notes),
representing $62.9 million in aggregate principal amount outstanding less unamortized net
discount of approximately $0.4 million; |
|
|
|
|
$116.4 million of mortgage notes, representing $116.2 million in aggregate principal
amount plus unamortized premium of approximately $0.2 million, due from June 2013 to
December 2029, with a weighted average interest rate of 5.1%; and |
|
|
|
|
$25.1 million of other secured debt, representing $22.9 million in aggregate
principal amount plus unamortized premium of approximately $2.2 million. |
We refer to the borrowing availability of up to $150.0 million under a syndicated revolving
credit facility (the 2010 Revolving Credit Facility), up to $321.0 million in borrowing
availability for new vehicle inventory floor plan financing and up to $50.0 million in borrowing
availability for used vehicle inventory floor plan financing (the 2010 Floor Plan Facilities).
We refer to the 2010 Revolving Credit Facility and 2010 Floor Plan Facilities collectively as our
2010 Credit Facilities. As of June 30, 2010, we had $85.4 million available for additional
borrowings under the 2010 Revolving Credit Facility based on the borrowing base calculation, which
is affected by numerous factors including eligible asset balances, and the market value of certain
additional collateral. We are able to borrow under our 2010 Revolving Credit Facility only if, at
the time of the borrowing we have met all representations and warranties and are in compliance with
all financial and other covenants contained therein. We also have capacity to finance new and used
vehicle inventory purchases under bilateral floor plan agreements with various
manufacturer-affiliated finance companies and other lending institutions (Silo Floor Plan
Facilities) as well as our 2010 Floor Plan Facilities. In addition, the indentures relating to our
8.625% Notes, 9.0% Notes, 5.0% Convertible Notes, 4.25% Convertible Notes and our other debt
instruments allow us to incur additional indebtedness, including secured indebtedness, as long as
we are in compliance with the applicable terms of the respective indentures.
In addition, the majority of our dealership properties are leased under long-term operating
lease arrangements that generally have initial terms of fifteen to twenty years with one or two
ten-year renewal options. These operating leases require compliance with financial and operating
covenants similar to those under our 2010 Credit Facilities, and monthly payments of rent that may
fluctuate based on interest rates and local consumer price indices. The total future minimum lease
payments related to these operating leases and certain equipment leases are significant and are
disclosed in the notes to our financial statements under the heading Commitments and
Contingencies in our Annual Report on Form 10-K for the year ended December 31, 2009.
As of June 30, 2010, we had approximately $816.0 million of debt payable in 2010. This amount
included $800.0 million outstanding related to our revolving credit and new and used floor plan
financing under the 2010 Credit Facilities and new and used floor plan financing under the Silo
Floor Plan Facilities, in addition to $16.0 million principal outstanding related to our 4.25%
Convertible Notes. See Note 6 in the notes to the accompanying unaudited financial statements for
further discussion of the terms under the 2010 Credit Facilities and Silo Floor Plan Facilities.
38
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities
The following table sets forth information about the shares of Class A Common Stock we
repurchased during the second quarter ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( in thousands, except price per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Value of Shares That |
|
|
|
|
Average |
|
as Part of Publicly |
|
May Yet Be Purchased |
|
|
Total Number of |
|
Price Paid |
|
Announced Plans or |
|
Under the Plans or |
|
|
Shares Purchased (1) |
|
per Share |
|
Programs (2) |
|
Programs |
April 2010 |
|
|
22 |
|
|
$ |
12.12 |
|
|
|
22 |
|
|
$ |
43,575 |
|
May 2010 |
|
|
0 |
|
|
$ |
|
|
|
|
0 |
|
|
$ |
43,575 |
|
June 2010 |
|
|
0 |
|
|
$ |
|
|
|
|
0 |
|
|
$ |
43,575 |
|
|
Total |
|
|
22 |
|
|
$ |
12.12 |
|
|
|
22 |
|
|
$ |
43,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Shares repurchased were a result of the delivery of shares by or withholding of shares from
employees, including officers, and directors in satisfaction of withholding tax obligations upon
vesting of restricted stock and restricted stock units and the exercise price of stock options. |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
Our publicly announced Class A Common Stock repurchase authorizations occurred as follows: |
|
|
|
|
|
|
|
( in thousands) |
|
November 1999 |
|
$ |
25,000 |
|
February 2000 |
|
|
25,000 |
|
December 2000 |
|
|
25,000 |
|
May 2001 |
|
|
25,000 |
|
August 2002 |
|
|
25,000 |
|
February 2003 |
|
|
20,000 |
|
December 2003 |
|
|
20,000 |
|
July 2004 |
|
|
20,000 |
|
July 2007 |
|
|
30,000 |
|
October 2007 |
|
|
40,000 |
|
April 2008 |
|
|
40,000 |
|
|
|
|
|
Total |
|
$ |
295,000 |
|
Under our 2010 Credit Facilities, 8.625% Notes and the 9.0% Notes, share repurchases and
dividends are permitted to the extent that no event of default exists and we are in compliance with
the financial covenants contained therein. See Note 6 to the accompanying unaudited financial
statements and Item 2: Managements Discussion and Analysis of Financial Condition and Results of
Operations for additional discussion of dividends and for a description of additional restrictions
on the payment of dividends.
39
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
Item 6: Exhibits.
(a) Exhibits:
|
|
|
Exhibit No. |
|
Description |
|
|
|
31.1
|
|
Certification of Mr. David P. Cosper pursuant to rule 13a-14(a) |
|
|
|
31.2
|
|
Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a) |
|
|
|
32.1
|
|
Certification of Mr. David P. Cosper 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 Mr. O. Bruton Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 |
40
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
Forward Looking Statements
This Quarterly Report on Form 10-Q contains numerous 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, and can generally be identified by
words such as may, will, should, believe, expect, anticipate, intend, plan,
foresee and other similar words or phrases. Specific events addressed by these forward-looking
statements include, but are not limited to:
|
|
|
future acquisitions or dispositions; |
|
|
|
|
industry trends; |
|
|
|
|
future liquidity trends or needs; |
|
|
|
|
general economic trends, including employment rates and consumer confidence levels; |
|
|
|
|
vehicle sales rates and same store sales growth; |
|
|
|
|
future covenant compliance; |
|
|
|
|
our financing plans and our ability to repay or refinance existing debt when due; and |
|
|
|
|
our business and growth strategies. |
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 1 of our
Annual Report on Form 10-K for the year ended December 31, 2009 and Item 1A of this Form 10-Q and
elsewhere in this report, as well as:
|
|
|
the number of new and used cars sold in the United States generally, and as compared
to our expectations and the expectations of the market; |
|
|
|
|
our ability to generate sufficient cash flows or obtain additional financing to
refinance existing debt and to fund acquisitions, capital expenditures, our share
repurchase program, dividends on our Common Stock and general operating activities; |
|
|
|
|
the reputation and financial condition of vehicle manufacturers whose brands we
represent, the terms of any bailout of any such manufacturer by the U.S. government or
other government and the success or failure of such a bailout, 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 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; |
|
|
|
|
the terms of any refinancing of our existing indebtedness; |
|
|
|
|
high competition in the automotive retailing industry, which not only creates pricing
pressures on the products and services we offer, but on businesses we seek to acquire; |
|
|
|
|
the timing of and our ability to generate liquidity through asset dispositions, as
well as the timing of our ability to successfully integrate recent and potential future
acquisitions; and |
|
|
|
|
the rate and timing of overall economic recovery or additional decline. |
41
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: July 29, 2010
|
|
By:
|
|
/s/ O. BRUTON SMITH |
|
|
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O. Bruton Smith |
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Chairman and Chief Executive Officer |
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Date: July 29, 2010
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By:
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/s/ DAVID P. COSPER |
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David P. Cosper |
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Vice Chairman and Chief Financial Officer |
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(Principal Financial Officer) |
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42
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1
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Certification of Mr. David P. Cosper pursuant to rule 13a-14(a) |
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31.2
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Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a) |
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32.1
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Certification of Mr. David P. Cosper pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
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32.2
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Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
43