e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý |
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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 September 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 ý 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 ý |
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 ý
As of October 22, 2010, there were 40,707,683 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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Third Quarter Ended |
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Nine Months Ended |
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September 30, |
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September 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 |
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$ |
903,716 |
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$ |
937,709 |
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$ |
2,367,236 |
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$ |
2,611,988 |
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Used vehicles |
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379,389 |
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453,815 |
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1,081,855 |
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1,339,323 |
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Wholesale vehicles |
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34,588 |
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47,597 |
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105,451 |
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108,336 |
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Total vehicles |
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1,317,693 |
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1,439,121 |
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3,554,542 |
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4,059,647 |
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Parts, service and collision repair |
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268,801 |
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283,741 |
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807,556 |
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842,697 |
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Finance, insurance and other |
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43,403 |
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47,398 |
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116,558 |
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133,607 |
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Total revenues |
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1,629,897 |
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1,770,260 |
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4,478,656 |
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5,035,951 |
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Cost of Sales: |
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New vehicles |
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(840,173 |
) |
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(877,691 |
) |
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(2,207,435 |
) |
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(2,440,097 |
) |
Used vehicles |
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(347,187 |
) |
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(418,576 |
) |
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(986,355 |
) |
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(1,231,720 |
) |
Wholesale vehicles |
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(36,216 |
) |
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(49,053 |
) |
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(108,275 |
) |
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(112,270 |
) |
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Total vehicles |
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(1,223,576 |
) |
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(1,345,320 |
) |
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(3,302,065 |
) |
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(3,784,087 |
) |
Parts, service and collision repair |
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(132,018 |
) |
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(143,141 |
) |
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(400,328 |
) |
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(421,711 |
) |
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Total cost of sales |
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(1,355,594 |
) |
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(1,488,461 |
) |
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(3,702,393 |
) |
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(4,205,798 |
) |
Gross profit |
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274,303 |
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281,799 |
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776,263 |
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830,153 |
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Selling, general and administrative expenses |
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(214,140 |
) |
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(226,331 |
) |
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(619,560 |
) |
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(672,542 |
) |
Impairment charges |
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(620 |
) |
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(87 |
) |
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(5,707 |
) |
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(132 |
) |
Depreciation and amortization |
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(8,131 |
) |
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(8,731 |
) |
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(23,865 |
) |
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(25,729 |
) |
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Operating income |
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51,412 |
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46,650 |
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127,131 |
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131,750 |
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Other income (expense): |
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Interest expense, floor plan |
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(4,533 |
) |
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(5,430 |
) |
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(14,925 |
) |
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(15,615 |
) |
Interest expense, other, net |
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(18,277 |
) |
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(15,226 |
) |
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(57,998 |
) |
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(48,024 |
) |
Interest expense, non-cash, convertible debt |
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7,818 |
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(1,768 |
) |
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1,556 |
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(5,175 |
) |
Interest expense, non-cash, cash flow swaps |
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(2,180 |
) |
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(1,484 |
) |
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(5,359 |
) |
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(5,402 |
) |
Other income (expense), net |
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2,449 |
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(351 |
) |
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2,519 |
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(7,522 |
) |
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Total other expense |
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(14,723 |
) |
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(24,259 |
) |
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(74,207 |
) |
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(81,738 |
) |
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Income from continuing operations before taxes |
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36,689 |
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22,391 |
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52,924 |
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50,012 |
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Income tax provision |
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(16,510 |
) |
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(8,442 |
) |
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(23,816 |
) |
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(19,905 |
) |
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Income from continuing operations |
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20,179 |
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13,949 |
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29,108 |
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30,107 |
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Discontinued operations: |
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Loss from operations and the sale of discontinued franchises |
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(8,551 |
) |
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(633 |
) |
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(19,203 |
) |
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(6,149 |
) |
Income tax benefit (expense) |
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3,966 |
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(331 |
) |
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7,393 |
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1,617 |
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Loss from discontinued operations |
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(4,585 |
) |
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(964 |
) |
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(11,810 |
) |
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(4,532 |
) |
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Net income |
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$ |
15,594 |
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$ |
12,985 |
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$ |
17,298 |
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$ |
25,575 |
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Basic earnings per share: |
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Earnings per share from continuing operations |
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$ |
0.47 |
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$ |
0.26 |
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$ |
0.70 |
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$ |
0.57 |
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Loss per share from discontinued operations |
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(0.10 |
) |
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(0.01 |
) |
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(0.28 |
) |
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(0.09 |
) |
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Earnings per share |
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$ |
0.37 |
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$ |
0.25 |
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$ |
0.42 |
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$ |
0.48 |
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Weighted average common shares outstanding |
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42,305 |
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52,311 |
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41,130 |
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52,151 |
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Diluted earnings per share: |
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Earnings per share from continuing operations |
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$ |
0.24 |
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$ |
0.25 |
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$ |
0.48 |
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$ |
0.56 |
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Loss per share from discontinued operations |
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(0.07 |
) |
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(0.02 |
) |
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(0.22 |
) |
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(0.07 |
) |
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Earnings per share |
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$ |
0.17 |
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$ |
0.23 |
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$ |
0.26 |
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$ |
0.49 |
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Weighted average common shares outstanding |
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63,195 |
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|
65,851 |
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52,529 |
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65,711 |
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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) |
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December 31, |
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September 30, |
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2009 |
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2010 |
ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
30,035 |
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$ |
10,623 |
|
Receivables, net |
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232,969 |
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|
166,546 |
|
Inventories |
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795,275 |
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|
863,917 |
|
Assets held for sale |
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12,167 |
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13,548 |
|
Other current assets |
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14,937 |
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15,582 |
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Total Current Assets |
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1,085,383 |
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|
1,070,216 |
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Property and Equipment, net |
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382,085 |
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|
392,173 |
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Goodwill |
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469,482 |
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|
468,516 |
|
Other Intangible Assets, net |
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80,806 |
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|
79,563 |
|
Other Assets |
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|
51,099 |
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|
61,633 |
|
|
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|
Total Assets |
|
$ |
2,068,855 |
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$ |
2,072,101 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current Liabilities: |
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Notes
payable - floor plan - trade |
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$ |
214,871 |
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$ |
436,444 |
|
Notes
payable - floor plan - non-trade |
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|
548,493 |
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|
339,117 |
|
Trade accounts payable |
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|
55,345 |
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|
47,968 |
|
Accrued interest |
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|
16,146 |
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|
10,035 |
|
Other accrued liabilities |
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|
144,709 |
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|
145,447 |
|
Liabilities
associated with assets held for sale - non-trade |
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|
3,346 |
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|
|
- |
|
Current maturities of long-term debt |
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|
23,991 |
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|
|
23,704 |
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|
Total Current Liabilities |
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1,006,901 |
|
|
|
1,002,715 |
|
Long-Term Debt |
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|
552,150 |
|
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|
529,632 |
|
Other Long-Term Liabilities |
|
|
141,052 |
|
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|
143,631 |
|
Stockholders Equity: |
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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; 55,635,206 shares issued and 40,657,683 shares outstanding at
September 30, 2010 |
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550 |
|
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|
556 |
|
Class B common stock; $.01 par value; 30,000,000 shares authorized;
12,029,375 shares outstanding at December 31, 2009 and September 30,
2010 |
|
|
121 |
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|
121 |
|
Paid-in capital |
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662,186 |
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|
666,401 |
|
Accumulated deficit |
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(35,180 |
) |
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|
(9,604 |
) |
Accumulated other comprehensive income (loss) |
|
|
(22,350 |
) |
|
|
(23,703 |
) |
Treasury stock, at cost (14,887,316 Class A shares held at December 31, 2009
and 14,977,523 Class A shares held at September 30, 2010) |
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|
(236,575 |
) |
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|
(237,648 |
) |
|
|
|
|
|
Total Stockholders Equity |
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|
368,752 |
|
|
|
396,123 |
|
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|
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|
Total Liabilities and Stockholders Equity |
|
$ |
2,068,855 |
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|
$ |
2,072,101 |
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|
|
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|
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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Accumulated |
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Class A |
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Class B |
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Other |
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Total |
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Compre- |
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Common Stock |
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Common Stock |
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Paid-In |
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Accumulated |
|
|
Treasury |
|
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Comprehensive |
|
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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 |
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Shares awarded under stock compensation plans |
|
|
292 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
1,185 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,188 |
|
|
|
- |
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
Purchases of treasury stock |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,073 |
) |
|
|
- |
|
|
|
(1,073 |
) |
|
|
- |
|
|
|
|
|
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit associated with stock compensation plans |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
636 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
636 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
Income tax benefit associated with convertible note hedge |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
205 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
205 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of interest rate swap agreements, net of tax
benefit of $830 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,353 |
) |
|
|
(1,353 |
) |
|
|
(1,353 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
419 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
419 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock amortization, net of forfeitures |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,773 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,773 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
25,575 |
|
|
|
- |
|
|
|
- |
|
|
|
25,575 |
|
|
|
25,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
356 |
|
|
|
3 |
|
|
|
- |
|
|
|
- |
|
|
|
(3 |
) |
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2010 |
|
|
55,635 |
|
|
|
556 |
|
|
|
12,029 |
|
|
$ |
121 |
|
|
$ |
666,401 |
|
|
$ |
(9,604 |
) |
|
$ |
(237,648 |
) |
|
$ |
(23,703 |
) |
|
$ |
396,123 |
|
|
$ |
24,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
2009 |
|
2010 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,298 |
|
|
$ |
25,575 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment |
|
|
24,905 |
|
|
|
25,938 |
|
Provision for bad debt expense |
|
|
1,255 |
|
|
|
756 |
|
Other amortization |
|
|
1,242 |
|
|
|
1,242 |
|
Debt issuance cost amortization |
|
|
9,909 |
|
|
|
2,702 |
|
Debt discount amortization, net of premium amortization |
|
|
9,957 |
|
|
|
3,872 |
|
Stock - based compensation expense |
|
|
437 |
|
|
|
419 |
|
Amortization of restricted stock |
|
|
1,802 |
|
|
|
1,773 |
|
Restricted stock forfeiture |
|
|
(182 |
) |
|
|
- |
|
Deferred income taxes |
|
|
(2,390 |
) |
|
|
(656 |
) |
Equity interest in earnings of investees |
|
|
(501 |
) |
|
|
(585 |
) |
Asset impairment charges |
|
|
9,116 |
|
|
|
132 |
|
Loss (gain) on disposal of franchises and property and equipment |
|
|
(226 |
) |
|
|
(978 |
) |
Loss on exit of leased dealerships |
|
|
7,511 |
|
|
|
2,321 |
|
Loss (gain) on retirement of debt |
|
|
(2,095 |
) |
|
|
7,665 |
|
Derivative fair value adjustments |
|
|
(11,300 |
) |
|
|
- |
|
Changes in assets and liabilities that relate to operations: |
|
|
|
|
|
|
|
|
Receivables |
|
|
68,535 |
|
|
|
65,667 |
|
Inventories |
|
|
383,205 |
|
|
|
(82,768 |
) |
Other assets |
|
|
(24,362 |
) |
|
|
(14,706 |
) |
Notes payable - floor plan - trade |
|
|
(92,597 |
) |
|
|
221,573 |
|
Trade accounts payable and other liabilities |
|
|
41,207 |
|
|
|
(21,886 |
) |
|
|
|
|
|
Total adjustments |
|
|
425,428 |
|
|
|
212,481 |
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
442,726 |
|
|
|
238,056 |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(36,048 |
) |
|
|
(44,039 |
) |
Proceeds from sales of property and equipment |
|
|
1,797 |
|
|
|
979 |
|
Proceeds from sale of franchises |
|
|
22,839 |
|
|
|
24,644 |
|
Distributions from equity investees |
|
|
300 |
|
|
|
600 |
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(11,112 |
) |
|
|
(17,816 |
) |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (repayments) borrowings on notes payable floor plan - non-trade |
|
|
(369,726 |
) |
|
|
(212,722 |
) |
Borrowings on revolving credit facilities |
|
|
534,585 |
|
|
|
40,000 |
|
Repayments on revolving credit facilities |
|
|
(584,854 |
) |
|
|
(40,000 |
) |
Proceeds from long-term debt |
|
|
167,039 |
|
|
|
209,977 |
|
Principal payments on long-term debt |
|
|
(162,948 |
) |
|
|
(4,673 |
) |
Increase in restricted cash |
|
|
(106,913 |
) |
|
|
- |
|
Settlement of cash flow swaps |
|
|
(16,454 |
) |
|
|
- |
|
Repurchase of debt securities |
|
|
- |
|
|
|
(233,190 |
) |
Purchase of treasury stock |
|
|
(61 |
) |
|
|
(1,073 |
) |
Income tax benefit associated with stock compensation plans |
|
|
- |
|
|
|
636 |
|
Income tax benefit associated with convertible hedge |
|
|
4,442 |
|
|
|
205 |
|
Issuance of shares under stock compensation plans |
|
|
- |
|
|
|
1,188 |
|
Issuance of common stock related to private placement |
|
|
101,812 |
|
|
|
- |
|
|
|
|
|
|
Dividends paid |
|
|
(4,893 |
) |
|
|
- |
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(437,971 |
) |
|
|
(239,652 |
) |
|
|
|
|
|
NET DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(6,357 |
) |
|
|
(19,412 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
6,971 |
|
|
|
30,035 |
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
614 |
|
|
$ |
10,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Change in fair value of cash flow hedging instruments (net of tax expense of $5,859 and tax
benefit of $830 for the nine-month period ended September 30, 2009 and 2010, respectively) |
|
$ |
9,728 |
|
|
$ |
(1,353 |
) |
Issuance of shares related to debt refinance |
|
$ |
3,947 |
|
|
$ |
- |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
Interest, net of amount capitalized |
|
$ |
90,116 |
|
|
$ |
74,778 |
|
Income taxes |
|
$ |
(21,229 |
) |
|
$ |
(15,289 |
) |
|
|
|
|
|
|
|
|
|
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 third quarter and nine-month periods ended September 30, 2009 and 2010 have
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 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 August 18, 2010, Sonic redeemed $20.0 million in aggregate principal
amount of its 8.625% Senior Subordinated Notes at the applicable redemption price (101.438% of
principal redeemed) plus accrued but unpaid interest. Sonic recorded a loss on extinguishment of
debt of $0.4 million related to the redemption. On October 20, 2010, Sonic issued a redemption
notice to holders of the 4.25% Convertible Senior Subordinated Notes due 2015 (the 4.25%
Convertible Notes) to redeem the remaining $16.0 million in aggregate principal amount of its
outstanding 4.25% Convertible Notes. Sonic will use available cash to redeem the $16.0 million in
aggregate principal amount at the applicable redemption price (100.00% of principal redeemed) plus
accrued but unpaid interest on November 30, 2010.
Reclassifications The Condensed Consolidated Statements of Income for the third quarter and
nine-month periods ended September 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 September 30, 2009. The
Condensed Consolidated Statements of Income for the third quarter and nine-month periods ended
September 30, 2009 also reflect the reclassification of balances from discontinued operations to
continuing operations for franchises identified for sale as of September 30, 2009, but which Sonic
has decided to retain and operate as of September 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 |
|
|
2,321 |
|
|
Payments |
|
|
(6,567 |
) |
|
|
|
|
|
Balance, September 30, 2010 |
|
$ |
43,579 |
|
|
|
|
|
|
Income Tax Expense The overall effective tax rates for the third quarter and nine-month
periods ended September 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 37.7% and
39.8% for the third quarter and nine-month periods ended September 30, 2010, respectively. The
overall effective tax rate from continuing operations was 45.0% for both the third quarter and
nine-month periods ended September 30, 2009. The effective rate for the third quarter and
nine-month periods ended September 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, lower expense effects
related to tax positions as a result of Accounting for Uncertainty in Income Taxes in the ASC,
and the effect of gross receipts tax structures in certain states.
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 other assets held
for sale. At September 30, 2010 there were no dealership franchises held for sale. The held for
sale balance
7
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of property and equipment, net, is comprised of real estate held for sale by non-dealership
entities. Assets held for sale consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
December 31, |
|
September 30, |
|
|
2009 |
|
2010 |
Inventories |
|
$ |
4,528 |
|
|
$ |
- |
|
Property and equipment, net |
|
|
4,838 |
|
|
|
13,548 |
|
Goodwill |
|
|
2,801 |
|
|
|
- |
|
|
|
|
|
|
Assets held for sale |
|
$ |
12,167 |
|
|
$ |
13,548 |
|
|
|
|
|
|
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) |
|
|
|
|
Third Quarter Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Loss from operations |
|
$ |
(3,302 |
) |
|
$ |
(1,773 |
) |
|
$ |
(8,548 |
) |
|
$ |
(5,920 |
) |
Gain (loss) on disposal of franchises |
|
|
(103 |
) |
|
|
829 |
|
|
|
(572 |
) |
|
|
2,182 |
|
Lease exit charges |
|
|
(5,146 |
) |
|
|
311 |
|
|
|
(6,675 |
) |
|
|
(2,411 |
) |
Property impairment charges |
|
|
- |
|
|
|
- |
|
|
|
(1,822 |
) |
|
|
- |
|
Goodwill impairment charges |
|
|
- |
|
|
|
- |
|
|
|
(1,586 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(8,551 |
) |
|
$ |
(633 |
) |
|
$ |
(19,203 |
) |
|
$ |
(6,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
74,018 |
|
|
$ |
9,473 |
|
|
$ |
245,935 |
|
|
$ |
55,127 |
|
Lease exit charges recorded for the third quarter and nine-month periods ended September
30, 2009 and 2010 relate to the revision of estimates on previously established lease exit accruals
and the establishment of lease exit accruals in the third quarter ended September 30, 2009. 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 third quarter
ended September 30, 2009 was $0.6 million. Interest allocated to discontinued operations for the
third quarter ended September 30, 2010 was immaterial. Interest allocated to discontinued
operations for the nine-month periods ended September 30, 2009 and 2010 was $2.1 million and $0.2
million, respectively.
3. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
December 31, |
|
September 30, |
|
|
2009 |
|
2010 |
New vehicles |
|
$ |
557,319 |
|
|
$ |
607,742 |
|
Used vehicles |
|
|
138,401 |
|
|
|
149,890 |
|
Parts and accessories |
|
|
51,470 |
|
|
|
50,702 |
|
Other |
|
|
52,613 |
|
|
|
55,583 |
|
|
|
|
|
|
|
|
$ |
799,803 |
|
|
$ |
863,917 |
|
Less inventories classified as assets held for sale |
|
|
(4,528 |
) |
|
|
- |
|
|
|
|
|
|
Inventories |
|
$ |
795,275 |
|
|
$ |
863,917 |
|
|
|
|
|
|
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, |
|
September 30, |
|
|
2009 |
|
2010 |
Land |
|
$ |
61,886 |
|
|
$ |
64,870 |
|
Building and improvements |
|
|
322,632 |
|
|
|
320,389 |
|
Office equipment and fixtures |
|
|
75,801 |
|
|
|
77,939 |
|
Parts and service equipment |
|
|
54,981 |
|
|
|
55,910 |
|
Company vehicles |
|
|
8,440 |
|
|
|
8,151 |
|
Construction in progress |
|
|
40,000 |
|
|
|
51,557 |
|
|
|
|
|
|
Total, at cost |
|
|
563,740 |
|
|
|
578,816 |
|
Less accumulated depreciation |
|
|
(176,817 |
) |
|
|
(173,095 |
) |
|
|
|
|
|
Subtotal |
|
|
386,923 |
|
|
|
405,721 |
|
Less assets held for sale |
|
|
(4,838 |
) |
|
|
(13,548 |
) |
|
|
|
|
|
Property and equipment, net |
|
$ |
382,085 |
|
|
$ |
392,173 |
|
|
|
|
|
|
In both the third quarter and nine-month periods ended September 30, 2010, Sonic recorded
fixed asset impairment charges of $0.1 million, which was recorded in continuing operations. In
the third quarter and nine-month periods ended September 30, 2009, Sonic recorded fixed asset
impairment charges of $0.4 million and $4.3 million, respectively, of which $0.4 million and $2.5
million were recorded in continuing operations, respectively.
5. Goodwill And Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
Franchise |
|
|
|
|
|
Accumulated |
|
|
|
|
Agreements |
|
Gross Goodwill |
|
Impairment |
|
Net Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
64,835 |
|
|
$ |
1,266,207 |
|
|
$ |
(796,725 |
) |
|
$ |
469,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions from sales of franchises |
|
|
- |
|
|
|
(3,767 |
) |
|
|
- |
|
|
|
(3,767 |
) |
Reclassification from assets held for sale, net |
|
|
- |
|
|
|
2,801 |
|
|
|
- |
|
|
|
2,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
$ |
64,835 |
|
|
$ |
1,265,241 |
|
|
$ |
(796,725 |
) |
|
$ |
468,516 |
|
|
|
|
|
|
|
|
|
|
In the third quarter and nine-month periods ended September 30, 2009, Sonic recorded
goodwill impairment charges of $0.2 million and $2.7 million, respectively, of which $0.2 million
and $1.1 million were recorded in continuing operations, respectively. The impairment charges
recorded were based on the determination that recorded values were not recoverable under asset
disposal agreements entered into during the nine-month period ended September 30, 2009. Sonic
recorded franchise asset impairment charges of $2.1 million in continuing operations in the
nine-month period ended September 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 September 30, 2010 was $14.7 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, |
|
September 30, |
|
|
2009 |
|
2010 |
|
|
|
|
|
|
|
|
|
2010 Revolving Credit Facility (1) |
|
$ |
- |
|
|
$ |
- |
|
Senior Subordinated Notes bearing interest at 9.0% |
|
|
- |
|
|
|
210,000 |
|
Senior Subordinated Notes bearing interest at 8.625% |
|
|
275,000 |
|
|
|
42,855 |
|
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 |
|
|
|
16,180 |
|
Mortgage notes to finance companies-fixed rate, bearing interest from 4.50% to 7.03% |
|
|
78,424 |
|
|
|
84,341 |
|
Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 3.30 percentage
points above one-month LIBOR |
|
|
38,251 |
|
|
|
30,842 |
|
Net debt discount and premium (2) |
|
|
(29,199 |
) |
|
|
(25,506 |
) |
Other |
|
|
6,342 |
|
|
|
6,124 |
|
|
|
|
|
|
|
|
$ |
576,141 |
|
|
$ |
553,336 |
|
Less current maturities |
|
|
(23,991 |
) |
|
|
(23,704 |
) |
|
|
|
|
|
Long-term debt |
|
$ |
552,150 |
|
|
$ |
529,632 |
|
|
|
|
|
|
(1) Interest rate was 2.00% above one-month LIBOR at September 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. September 30,
2010 includes $1.4 million discount associated with the 9.0% Notes, $0.2
million discount associated with the 8.625% Notes, $26.0 million discount
associated with the 5.0% Convertible Notes, $0.1 million discount associated
with the 4.25% Convertible Notes, $2.0 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 (collectively the 2006 Credit 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 (the 2010 Revolving Credit Facility) and a syndicated floor plan credit facility (the
2010 Floorplan Facility). The 2010 Revolving Credit Facility and 2010 Floorplan Facility
(collectively the 2010 Credit Facilities) mature on August 15, 2012.
The 2010 Revolving Credit Facility, which is subject to 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 amount available for borrowing under the 2010
Revolving Credit Facility (the 2010 Revolving Borrowing Base) is reduced on a dollar-for-dollar
basis by the aggregate face amount of any outstanding letters of credit under the 2010 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 September 30, 2010, the 2010 Revolving Borrowing Base was approximately $137.6 million.
At September 30, 2010, Sonic had no outstanding borrowings and $49.9 million in outstanding letters
of credit resulting in total borrowing availability of $87.7 million under the 2010 Revolving
Credit Facility.
Outstanding obligations under the 2010 Revolving Credit Facility are secured by a pledge of
substantially all of the assets of Sonic and its 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
10
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 subsidiaries also guarantee its obligations under the 2010 Revolving
Credit Facility.
The 2010 Floorplan Facility is comprised of a new vehicle revolving floor plan facility in an
amount up to $321.0 million (the 2010 New Vehicle Floorplan Facility) and a used vehicle
revolving floor plan facility in an amount up to $50.0 million, subject to a borrowing base (the
2010 Used Vehicle Floorplan Facility). Sonic may, under certain conditions, request an increase
in the 2010 Floorplan Facility by up to $125.0 million, which shall be allocated between the 2010
New Vehicle Floorplan Facility and the 2010 Used Vehicle Floorplan Facility as Sonic requests, with
no more than 15% of the aggregate commitments allocated to the commitments under the 2010 Used
Vehicle Floorplan Facility. Outstanding obligations under the 2010 Floorplan Facility are
guaranteed by Sonic and certain of its subsidiaries and are secured by a pledge of substantially
all of the assets of Sonic and its subsidiaries.
The amounts outstanding under the 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 defined in the 2010 Credit Facilities
agreement) 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
September 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 actual |
|
|
1.15 |
|
|
|
1.29 |
|
|
|
1.12 |
|
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 (as defined in the lease agreements) with a required ratio
of no less than 1.5 to 1.0. At September 30, 2010, the ratio was 1.94 to 1.0.
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. On April 12, 2010, Sonic used the net proceeds, together with cash on
hand, to redeem $200.0 million aggregate principal amount of its 8.625% Notes due 2013. 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.
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:
11
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
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 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, guarantees, 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
September 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 $42.9 million in aggregate principal amount outstanding at
September 30, 2010.
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 $200.0 million in aggregate principal amount of the
outstanding 8.625% Notes at the then 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 of 2010 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. During the third quarter Sonic
redeemed an additional $20.0 million in aggregate principal amount of the outstanding 8.625% Notes
and recorded a loss on extinguishment of debt of approximately $0.4 million related to the
redemption.
The total loss on extinguishment of debt related to repurchases and redemptions of the 8.625%
Notes of $7.7 million for the nine-month period ended September 30, 2010 is recorded in other
income (expense), net in the Condensed Consolidated Statements of Income.
The indenture governing the 8.625% Notes contains certain specified restrictive covenants.
Sonic has agreed not to pledge any assets to any third party lender of senior subordinated debt
except under certain limited circumstances. Sonic also has agreed to certain other limitations or
prohibitions concerning the incurrence of other indebtedness, capital stock, guarantees, asset
sales, investments, cash dividends to shareholders, distributions and redemptions. Specifically,
the indenture
12
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 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. 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 nine-month period ended September 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 had approximately $16.0 million aggregate principal amount of 4.25% Convertible Notes
outstanding at September 30, 2010 classified in current maturities of Long-Term Debt in the
accompanying Condensed Consolidated Balance Sheet. Sonic repurchased approximately $1.0 million of
the aggregate principal amount of the 4.25% Convertible Notes during the second quarter of 2010 at
amounts close to par. On October 20, 2010, Sonic issued a redemption notice to redeem the
remaining $16.0 million in aggregate principal amount. Sonic will use available cash on November
30, 2010 to redeem the $16.0 million in aggregate principal amount at the applicable redemption
price (100.00% of principal redeemed) plus accrued but unpaid interest on November 30, 2010.
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
changes in Sonics Class A common stock, if
any, prior to the conversion date.
13
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 third quarter ended September 30, 2010. The
conversion features were triggered on October 20, 2010 when Sonic called the 4.25% Convertible
Notes for redemption.
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 and is being amortized over the lives of the
Assumed Notes. As of September 30, 2010, the remaining unamortized premium was $2.0 million.
Mortgage Notes
Sonic has mortgage financing related to many 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 occur between June 2013 and December 2029. The weighted
average interest rate was 5.18% at September 30, 2010.
Derivative Instruments and Hedging Activities
At September 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 September 30, 2010 was a liability of $40.0 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 |
$ |
3.6 |
|
|
|
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 |
$ |
11.4 |
|
|
|
4.655% |
|
one-month LIBOR |
|
December 10, 2017 |
$ |
8.8 |
|
|
|
6.860% |
|
one-month LIBOR |
|
August 1, 2017 |
$ |
7.0 |
|
|
|
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 0.256% at September 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 September 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. As a result,
for the third quarter and nine-month periods ended September 30, 2010, non-cash charges of
approximately $1.5 million and $5.4 million, respectively, related to 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 $4.4 million
and $14.1 million for the third quarter and nine-month periods ended September 30, 2009,
respectively, and $4.4 million and $13.1 million for the third quarter and nine-month periods ended
September 30, 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 $12.4 million.
7. 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 several equity compensation plans. The following table illustrates the dilutive
effect of such items on earnings per share for the third quarter and nine-month periods ended
September 30, 2009 and 2010:
15
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter Ended September 30, 2009 |
|
|
|
|
|
|
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 |
|
|
42,305 |
|
|
$ |
20,179 |
|
|
|
|
|
|
$ |
(4,585 |
) |
|
|
|
|
|
$ |
15,594 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
- |
|
|
|
(151 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
42,305 |
|
|
$ |
20,028 |
|
|
$ |
0.47 |
|
|
$ |
(4,585 |
) |
|
$ |
(0.10 |
) |
|
$ |
15,443 |
|
|
$ |
0.37 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Convertible Debt (2009 6.0% Convertibles) |
|
|
19,004 |
|
|
|
(4,720 |
) |
|
|
|
|
|
|
(196 |
) |
|
|
|
|
|
|
(4,916 |
) |
|
|
|
|
Contingently Convertible Debt (2009 5.0% Convertibles) |
|
|
981 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Contingently Convertible Debt (2002 5.25% Convertibles) |
|
|
- |
|
|
|
(15 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
Equity compensation plans |
|
|
905 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
63,195 |
|
|
$ |
15,293 |
|
|
$ |
0.24 |
|
|
$ |
(4,765 |
) |
|
$ |
(0.07 |
) |
|
$ |
10,528 |
|
|
$ |
0.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Third Quarter Ended September 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 |
|
|
52,311 |
|
|
$ |
13,949 |
|
|
|
|
|
|
$ |
(964 |
) |
|
|
|
|
|
$ |
12,985 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
- |
|
|
|
(137 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
52,311 |
|
|
$ |
13,812 |
|
|
$ |
0.26 |
|
|
$ |
(964 |
) |
|
$ |
(0.01 |
) |
|
$ |
12,848 |
|
|
$ |
0.25 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Convertible Debt (2009 5.0% Convertibles) |
|
|
12,890 |
|
|
|
2,498 |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
2,514 |
|
|
|
|
|
Equity compensation plans |
|
|
650 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
65,851 |
|
|
$ |
16,310 |
|
|
$ |
0.25 |
|
|
$ |
(948 |
) |
|
$ |
(0.02 |
) |
|
$ |
15,362 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 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 |
|
|
41,130 |
|
|
$ |
29,108 |
|
|
|
|
|
|
$ |
(11,810 |
) |
|
|
|
|
|
$ |
17,298 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
- |
|
|
|
(224 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(224 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
41,130 |
|
|
$ |
28,884 |
|
|
$ |
0.70 |
|
|
$ |
(11,810 |
) |
|
$ |
(0.28 |
) |
|
$ |
17,074 |
|
|
$ |
0.42 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Convertible Debt (2009 6.0% Convertibles) |
|
|
10,473 |
|
|
|
(3,440 |
) |
|
|
|
|
|
|
(149 |
) |
|
|
|
|
|
|
(3,589 |
) |
|
|
|
|
Contingently Convertible Debt (2009 5.0% Convertibles) |
|
|
331 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Equity compensation plans |
|
|
595 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
52,529 |
|
|
$ |
25,444 |
|
|
$ |
0.48 |
|
|
$ |
(11,959 |
) |
|
$ |
(0.22 |
) |
|
$ |
13,485 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 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 |
|
|
52,151 |
|
|
$ |
30,107 |
|
|
|
|
|
|
$ |
(4,532 |
) |
|
|
|
|
|
$ |
25,575 |
|
|
|
|
|
Effect of Participating Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Restricted Stock and Stock Units |
|
|
- |
|
|
|
(295 |
) |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share |
|
|
52,151 |
|
|
$ |
29,812 |
|
|
$ |
0.57 |
|
|
$ |
(4,532 |
) |
|
$ |
(0.09 |
) |
|
$ |
25,280 |
|
|
$ |
0.48 |
|
Effect of Dilutive Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingently Convertible Debt (2009 5.0% Convertibles) |
|
|
12,890 |
|
|
|
6,709 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
6,737 |
|
|
|
|
|
Equity compensation plans |
|
|
670 |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings (Loss) Per Share |
|
|
65,711 |
|
|
$ |
36,521 |
|
|
$ |
0.56 |
|
|
$ |
(4,504 |
) |
|
$ |
(0.07 |
) |
|
$ |
32,017 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition to the stock options included in the table above, options to purchase 2.4
million shares and 2.3 million shares of Class A common stock were outstanding at September 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.
16
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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 made 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 was filed on
November 15, 2004 in South Carolina state court, York County Court of Common Pleas, against Sonic
Automotive, Inc. and 10 of Sonics South Carolina subsidiaries. The plaintiffs in that lawsuit
were Misty J. Owens, James B. Wright, Vincent J. Astey and Joseph Lee Williams, on behalf of
themselves and all other persons similarly situated, with plaintiffs seeking monetary damages and
injunctive relief on behalf of the purported class. The group of plaintiffs attorneys
representing the plaintiffs in the South Carolina lawsuit also filed another private civil class
action lawsuit against Sonic Automotive, Inc. and 3 of Sonics subsidiaries on February 14, 2005 in
state court in North Carolina, Lincoln County Superior Court, which similarly sought certification
of a multi-state class of plaintiffs and alleged that certain products sold in the finance and
insurance departments were done so in a deceptive or otherwise illegal manner. The plaintiffs in
this North Carolina lawsuit were Robert Price, Carolyn Price, Marcus Cappeletti and Kathy
Cappeletti, on behalf of themselves and all other persons similarly situated, with plaintiffs
seeking monetary damages and injunctive relief on behalf of the purported class. The South
Carolina state court action and the North Carolina state court action have since been consolidated
into a single proceeding in private arbitration before the American Arbitration Association. 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 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. On
July 22, 2010, the plaintiffs in this consolidated arbitration filed a Motion to Confirm the
Arbitrators Partial Final Award on Class Certification in state court in North Carolina, Lincoln
County Superior Court. On August 17, 2010, Sonic filed to remove this North Carolina state court
action to federal court, and simultaneously filed a Petition to Vacate the Arbitrators Partial
Final Award on Class Certification, with both filings made in the United Stated District Court for
the Western District of North Carolina.
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
17
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2010 were
$9.2 million and $9.0 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 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 $16.6 million at
December 31, 2009 and September 30, 2010, respectively. These indemnifications generally expire
within a period of one to two years following the date of sale. The estimated fair value of these
indemnifications was not material.
9. Fair Value Measurements
In determining fair value, Sonic uses various valuation approaches including market,
income and/or cost approaches. Fair Value Measurements and Disclosures in the 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 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
18
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 September
30, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at Reporting Date Using: |
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Other |
|
Significant |
(dollars in millions) |
|
|
|
|
|
Active Markets for |
|
Observable |
|
Unobservable |
|
|
|
|
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Total |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Swaps (1) |
|
$ |
40.0 |
|
|
|
- |
|
|
$ |
40.0 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40.0 |
|
|
$ |
- |
|
|
$ |
40.0 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
(1)
- Included in Other Long-Term Liabilities in the accompanying Condensed Consolidated
Balance Sheet. |
As of December 31, 2009 and September 30, 2010, the fair values of Sonics financial
instruments including receivables, notes receivable from finance contracts, notes payable-floor
plan, trade accounts payable, 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:
19
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
December 31, 2009 |
|
September 30, 2010 |
|
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.00% Senior
Subordinated Notes (1) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
219,870 |
|
|
$ |
208,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.625% Senior
Subordinated Notes (1) |
|
$ |
266,750 |
|
|
$ |
273,455 |
|
|
$ |
38,998 |
|
|
$ |
42,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0% Convertible Senior
Notes (1) |
|
$ |
188,072 |
|
|
$ |
142,743 |
|
|
$ |
181,125 |
|
|
$ |
146,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.25% Convertible Senior
Subordinated Notes (1) |
|
$ |
16,363 |
|
|
$ |
16,423 |
|
|
$ |
16,000 |
|
|
$ |
15,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes (2) |
|
$ |
78,333 |
|
|
$ |
78,424 |
|
|
$ |
84,239 |
|
|
$ |
84,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to a
Finance Company (2) |
|
$ |
17,859 |
|
|
$ |
20,260 |
|
|
$ |
16,243 |
|
|
$ |
18,150 |
|
|
|
|
(1) |
|
As determined by market quotations as of September 30, 2010. |
|
(2) |
|
As determined by discounted cash flows. |
10. Subsequent Events
On October 20, 2010, Sonic issued a redemption notice to holders of the 4.25% Convertible
Notes to redeem $16.0 million in aggregate principal amount of its outstanding 4.25% Convertible
Notes. Sonic will use available cash to redeem the $16.0 million in aggregate principal amount at
the applicable redemption price (100.00% of principal redeemed) plus accrued but unpaid interest on
November 30, 2010.
On October 26, 2010, Sonic declared a quarterly cash dividend of $0.025 per share on each
issued and outstanding share of Sonics Class A common stock and Class B common stock with a record
date of December 15, 2010 and a payment date of January 15, 2011.
20
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 September 30,
2010, we operated 136 dealership franchises, representing 30 different brands of cars and light
trucks, at 117 locations and 25 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 September 30, 2010, we operated
one Hummer franchise at one multi-franchise dealership location. This Hummer franchise is
scheduled to be terminated prior to October 31, 2010 in accordance with the termination agreement
reached with General Motors. For the year ended December 31, 2009, we sold approximately 110
Hummer new vehicle units at retail. As a result, we do not expect the termination of this
franchise to have a material impact on our operations, financial position or cash flows.
In the nine-month period ended September 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 reduced our interest expense, floor plan. As of
September 30, 2010, we operated 11 Toyota franchises. During the nine-month period ended September
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 third quarter and
nine-month periods ended September 30, 2009 and 2010:
21
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 |
|
|
Third Quarter Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Brand (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BMW |
|
16.0% |
|
17.2% |
|
17.0% |
|
16.6% |
Honda |
|
16.6% |
|
13.7% |
|
15.9% |
|
14.4% |
Toyota |
|
12.6% |
|
11.6% |
|
11.7% |
|
11.2% |
Mercedes |
|
9.2% |
|
9.4% |
|
9.4% |
|
9.9% |
Ford |
|
8.7% |
|
8.9% |
|
9.7% |
|
8.9% |
General Motors (2) |
|
6.2% |
|
6.7% |
|
6.5% |
|
6.7% |
Lexus |
|
6.3% |
|
5.5% |
|
5.9% |
|
5.9% |
Cadillac |
|
4.0% |
|
5.6% |
|
4.2% |
|
5.3% |
Other (3) |
|
4.4% |
|
3.8% |
|
4.2% |
|
3.5% |
Audi |
|
2.6% |
|
3.1% |
|
2.6% |
|
3.1% |
Volkswagen |
|
2.1% |
|
2.4% |
|
2.2% |
|
2.3% |
Hyundai |
|
2.2% |
|
2.0% |
|
2.0% |
|
2.1% |
Land Rover |
|
1.7% |
|
1.7% |
|
1.6% |
|
1.9% |
Porsche |
|
1.4% |
|
1.8% |
|
1.4% |
|
1.7% |
Infiniti |
|
1.2% |
|
1.6% |
|
1.2% |
|
1.5% |
Nissan |
|
1.3% |
|
1.3% |
|
1.0% |
|
1.4% |
Volvo |
|
1.5% |
|
1.1% |
|
1.3% |
|
1.2% |
Other Luxury (4) |
|
1.0% |
|
1.3% |
|
1.1% |
|
1.1% |
Acura |
|
0.7% |
|
1.0% |
|
0.8% |
|
1.0% |
Chrysler (5) |
|
0.3% |
|
0.3% |
|
0.3% |
|
0.3% |
|
|
|
|
|
|
|
|
|
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 September 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 Condensed 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 since there have not been any significant dealership franchise
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.
22
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAAR (in millions of vehicles) |
|
|
2009 |
|
2010 |
|
% Change |
Third Quarter Ended September 30, |
|
|
11.6 |
|
|
|
11.6 |
|
|
0.0% |
Nine Months Ended September 30, |
|
|
10.2 |
|
|
|
11.3 |
|
|
10.8% |
|
|
Source: Bloomberg Financial Markets, via Stephens Inc. |
Our reported new vehicle (including fleet) results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
903,716 |
|
|
$ |
937,709 |
|
|
$ |
33,993 |
|
|
|
3.8% |
Gross profit |
|
$ |
63,543 |
|
|
$ |
60,018 |
|
|
$ |
(3,525 |
) |
|
|
(5.5 |
%) |
Unit sales |
|
|
29,075 |
|
|
|
27,800 |
|
|
|
(1,275 |
) |
|
|
(4.4 |
%) |
Revenue per Unit |
|
$ |
31,082 |
|
|
$ |
33,731 |
|
|
$ |
2,649 |
|
|
|
8.5% |
Gross profit per unit |
|
$ |
2,185 |
|
|
$ |
2,159 |
|
|
$ |
(26 |
) |
|
|
(1.2 |
%) |
Gross profit as a % of revenue |
|
|
7.0% |
|
|
|
6.4% |
|
|
(60 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
2,367,236 |
|
|
$ |
2,611,988 |
|
|
$ |
244,752 |
|
|
|
10.3 |
% |
Gross profit |
|
$ |
159,801 |
|
|
$ |
171,891 |
|
|
$ |
12,090 |
|
|
|
7.6 |
% |
Unit sales |
|
|
74,584 |
|
|
|
77,851 |
|
|
|
3,267 |
|
|
|
4.4 |
% |
Revenue per Unit |
|
$ |
31,739 |
|
|
$ |
33,551 |
|
|
$ |
1,812 |
|
|
|
5.7 |
% |
Gross profit per unit |
|
$ |
2,143 |
|
|
$ |
2,208 |
|
|
$ |
65 |
|
|
|
3.0 |
% |
Gross profit as a % of revenue |
|
|
6.8% |
|
|
|
6.6% |
|
|
(20 |
) |
|
bps |
|
|
Year-overyear new vehicle sales comparisons are affected by the impact of the governments
Car Allowance Rebate System (CARS) program in effect in the third quarter of 2009. While overall
industry SAAR was flat at 11.6 million units for the third quarter ended September 30, 2010
compared to the same prior year period, decreases in Toyota and Honda industry volume of
approximately 10% each were offset by increases in Chrysler, Hyundai, Mercedes and Ford new unit
volume of between 9% and 20% each. Our new vehicle unit sales volume declined 4.4% in the third
quarter ended September 30, 2010 compared to the same prior year period, primarily due to the
impact of the CARS program on new vehicle sales volume for certain brands in the third quarter
ended September 30, 2009. This decline was seen primarily in import branded dealerships and was
offset somewhat by an increase in new vehicle unit sales volume at domestic and luxury branded
dealerships. New vehicle revenues for the third quarter ended September 30, 2010 increased from
the same prior year period in spite of the decline in new vehicle unit sales volume due to an
increase in revenue per unit resulting from a shift in sales mix toward our luxury brands. Gross
profit as a percentage of new vehicle revenue declined in the third quarter ended September 30,
2010 due to a higher average selling price caused by the shifts in sales mix.
New vehicle revenues for the nine-month period ended September 30, 2010 increased from the
same prior year period due to higher unit sales volume combined with an increase in revenue per
unit resulting from a shift in sales mix toward our luxury brands. This shift in sales mix led to
an increase in gross profit per unit for the nine-month period ended September 30, 2010 compared to
the prior year, however, gross profit as a percentage of new vehicle revenue declined 20 basis
points due to the higher average selling price per unit associated with luxury vehicles.
Our luxury stores experienced new vehicle revenue increases of 10.0% and 14.7% for the third
quarter and nine-month periods ended September 30, 2010, compared to the same prior year periods,
which led to an increase in our overall average revenue per new vehicle. Increases in new vehicle
revenue were led by our Cadillac, BMW and Mercedes stores. Our luxury new unit volume as a
percentage of total new vehicle unit volume increased 290 basis points and 190 basis points in the
third quarter and nine-month periods ended September 30, 2010, respectively, compared to the same
prior year periods. We believe the increase in new luxury
23
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
unit volume is due primarily to improved economic conditions in 2010 compared to the same prior
year periods as well as a shift in our unit sales from lower line import and domestic brands
(targeted by the CARS program in 2009) to higher priced luxury brands.
Our import new vehicle revenue declined 6.9% for the third quarter ended September 30, 2010
compared to the prior year, primarily due to significant declines in Honda and Toyota new vehicle
revenue, which experienced higher sales volume in the third quarter of 2009 primarily as a result
of the CARS program. For the nine-month period ended September 30, 2010, import new vehicle
revenue improved 6.1% compared to the same prior year period, led by new vehicle revenue increases
at our Toyota, Nissan and Volkswagen stores.
Domestic new vehicle revenue increased 10.1% and 7.3% for the third quarter and nine-month
periods ended September 30, 2010, respectively, compared to the same prior year periods. Domestic
new vehicle revenue per unit increased 7.4% for both the third quarter and nine-month periods ended
September 30, 2010, while new vehicle unit volume at our domestic stores increased 2.5% in the
third quarter ended September 30, 2010 and was flat for the nine-month period ended September 30,
2010, compared to the same prior year period. For the third quarter and nine-month periods ended
September 30, 2010, our non-Cadillac GM stores new vehicle unit volume increased 4.4% and 11.1%,
respectively. Domestic fleet unit volume (included in the discussion above) increased 7.5% for the
third quarter ended September 30, 2010, but decreased 12.0% for the nine-month period ended
September 30, 2010, compared to the same prior year periods.
Used Vehicles
Our reported used vehicle results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
379,389 |
|
|
$ |
453,815 |
|
|
$ |
74,426 |
|
|
|
19.6 |
% |
Gross profit |
|
$ |
32,202 |
|
|
$ |
35,239 |
|
|
$ |
3,037 |
|
|
|
9.4 |
% |
Unit sales |
|
|
20,097 |
|
|
|
22,987 |
|
|
|
2,890 |
|
|
|
14.4 |
% |
Revenue per Unit |
|
$ |
18,878 |
|
|
$ |
19,742 |
|
|
$ |
864 |
|
|
|
4.6 |
% |
Gross profit per unit |
|
$ |
1,602 |
|
|
$ |
1,533 |
|
|
$ |
(69 |
) |
|
|
(4.3 |
%) |
Gross profit as a % of revenue |
|
|
8.5% |
|
|
|
7.8% |
|
|
|
(70 |
) |
|
bps |
|
|
CPO revenue |
|
$ |
182,925 |
|
|
$ |
216,846 |
|
|
$ |
33,921 |
|
|
|
18.5 |
% |
CPO unit sales |
|
|
7,046 |
|
|
|
8,171 |
|
|
|
1,125 |
|
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,081,855 |
|
|
$ |
1,339,323 |
|
|
$ |
257,468 |
|
|
|
23.8 |
% |
Gross profit |
|
$ |
95,500 |
|
|
$ |
107,603 |
|
|
$ |
12,103 |
|
|
|
12.7 |
% |
Unit sales |
|
|
57,457 |
|
|
|
68,861 |
|
|
|
11,404 |
|
|
|
19.8 |
% |
Revenue per Unit |
|
$ |
18,829 |
|
|
$ |
19,450 |
|
|
$ |
621 |
|
|
|
3.3 |
% |
Gross profit per unit |
|
$ |
1,662 |
|
|
$ |
1,563 |
|
|
$ |
(99 |
) |
|
|
(6.0 |
%) |
Gross profit as a % of revenue |
|
|
8.8% |
|
|
|
8.0% |
|
|
|
(80 |
) |
|
bps |
|
|
CPO revenue |
|
$ |
566,423 |
|
|
$ |
641,709 |
|
|
$ |
75,286 |
|
|
|
13.3 |
% |
CPO unit sales |
|
|
22,541 |
|
|
|
24,124 |
|
|
|
1,583 |
|
|
|
7.0 |
% |
Used vehicle unit volume increased by 14.4% and 19.8% for the third quarter and nine-month
periods ended September 30, 2010, respectively, compared to the same prior year periods. This
increase is primarily due to the continued implementation of our used vehicle playbook which
standardizes used vehicle inventory management, pricing and marketing processes. Our used vehicle
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.
For the third quarter and nine-month periods ended September 30, 2010, gross profit per unit
for used vehicles declined by 4.3% and 6.0%, respectively, compared to the same prior year periods.
The reduction in gross profit per unit was primarily driven
24
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
34,588 |
|
|
$ |
47,597 |
|
|
$ |
13,009 |
|
|
|
37.6 |
% |
Gross profit |
|
$ |
(1,628 |
) |
|
$ |
(1,456 |
) |
|
$ |
172 |
|
|
|
10.6 |
% |
Unit sales |
|
|
6,929 |
|
|
|
7,272 |
|
|
|
343 |
|
|
|
5.0 |
% |
Revenue per Unit |
|
$ |
4,992 |
|
|
$ |
6,545 |
|
|
$ |
1,553 |
|
|
|
31.1 |
% |
Gross profit per unit |
|
$ |
(235 |
) |
|
$ |
(200 |
) |
|
$ |
35 |
|
|
|
14.9 |
% |
Gross profit as a % of revenue |
|
|
(4.7% |
) |
|
|
(3.1% |
) |
|
|
160 |
|
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in thousands except units and per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
105,451 |
|
|
$ |
108,336 |
|
|
$ |
2,885 |
|
|
|
2.7% |
Gross profit |
|
$ |
(2,824 |
) |
|
$ |
(3,934 |
) |
|
$ |
(1,110 |
) |
|
|
(39.3 |
%) |
Unit sales |
|
|
18,635 |
|
|
|
17,627 |
|
|
|
(1,008 |
) |
|
|
(5.4 |
%) |
Revenue per Unit |
|
$ |
5,659 |
|
|
$ |
6,146 |
|
|
$ |
487 |
|
|
|
8.6% |
Gross profit per unit |
|
$ |
(152 |
) |
|
$ |
(223 |
) |
|
$ |
(71 |
) |
|
|
(46.7 |
%) |
Gross profit as a % of revenue |
|
|
(2.7% |
) |
|
|
(3.6% |
) |
|
|
(90 |
) |
|
bps |
In the third quarter ended September 30, 2010, wholesale gross loss per unit improved slightly
compared to the same prior year period due to a change in the mix of units that were sold at
auction. During the nine-month period ended September 30, 2010, wholesale vehicle gross loss per
unit increased significantly compared to the same prior year period. 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. See previous heading, Used Vehicles.
Parts, Service and Collision Repair (Fixed Operations)
Our reported fixed operations results are as follows:
25
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in thousands) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
144,669 |
|
|
$ |
150,871 |
|
|
$ |
6,202 |
|
|
|
4.3 |
% |
Service |
|
|
112,517 |
|
|
|
120,620 |
|
|
|
8,103 |
|
|
|
7.2 |
% |
Collision Repair |
|
|
11,615 |
|
|
|
12,250 |
|
|
|
635 |
|
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
268,801 |
|
|
$ |
283,741 |
|
|
$ |
14,940 |
|
|
|
5.6 |
% |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
50,699 |
|
|
$ |
50,348 |
|
|
$ |
(351 |
) |
|
|
(0.7 |
%) |
Service |
|
|
79,500 |
|
|
|
83,533 |
|
|
|
4,033 |
|
|
|
5.1 |
% |
Collision Repair |
|
|
6,584 |
|
|
|
6,719 |
|
|
|
135 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
136,783 |
|
|
$ |
140,600 |
|
|
$ |
3,817 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
Gross profit
as a % of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
|
35.0 |
% |
|
|
33.4 |
% |
|
|
(160 |
) |
|
bps |
Service |
|
|
70.7 |
% |
|
|
69.3 |
% |
|
|
(140 |
) |
|
bps |
Collision Repair |
|
|
56.7 |
% |
|
|
54.8 |
% |
|
|
(190 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50.9 |
% |
|
|
49.6 |
% |
|
|
(130 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in thousands) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
437,433 |
|
|
$ |
446,060 |
|
|
$ |
8,627 |
|
|
|
2.0 |
% |
Service |
|
|
334,111 |
|
|
|
359,683 |
|
|
|
25,572 |
|
|
|
7.7 |
% |
Collision Repair |
|
|
36,012 |
|
|
|
36,954 |
|
|
|
942 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
807,556 |
|
|
$ |
842,697 |
|
|
$ |
35,141 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
$ |
150,197 |
|
|
$ |
148,857 |
|
|
$ |
(1,340 |
) |
|
|
(0.9 |
%) |
Service |
|
|
236,682 |
|
|
|
251,941 |
|
|
|
15,259 |
|
|
|
6.4 |
% |
Collision Repair |
|
|
20,349 |
|
|
|
20,188 |
|
|
|
(161 |
) |
|
|
(0.8 |
%) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
407,228 |
|
|
$ |
420,986 |
|
|
$ |
13,758 |
|
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
Gross profit as a
% of revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parts |
|
|
34.3 |
% |
|
|
33.4 |
% |
|
|
(90 |
) |
|
bps |
Service |
|
|
70.8 |
% |
|
|
70.0 |
% |
|
|
(80 |
) |
|
bps |
Collision Repair |
|
|
56.5 |
% |
|
|
54.6 |
% |
|
|
(190 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
50.4 |
% |
|
|
50.0 |
% |
|
|
(40 |
) |
|
bps |
Our domestic, import, and luxury brands all experienced increases in overall fixed operations
revenue compared to the same prior year period, increasing 11.8%, 5.8%, and 4.5%, respectively, for
the third quarter ended September 30, 2010, and 8.3%, 7.7%, and 2.5%, respectively, for the
nine-month period ended September 30, 2010. These improvements were led by significant increases
in Audi, Cadillac, Ford and Toyota overall fixed operations revenue.
Overall fixed operations customer pay revenue increased 4.2% and 2.9% for the third quarter
and the nine-month periods ended September 30, 2010, respectively, compared to the same prior year
periods. Our Cadillac dealerships experienced a significant increase in customer pay revenue in
the third quarter and the nine-month periods ended September 30, 2010, up 20.7% and 15.3%
respectively, partially due to the closure of competing Cadillac stores. Warranty revenue, which
typically accounts for 16% to 18% of our fixed operations revenue, was unchanged for the third
quarter, but was down 6.5% for the nine-month period ended September 30, 2010, compared to the same
prior year period. Our Lexus warranty revenue increased 7.8% for the third quarter ended September
30, 2010, but decreased 36.5% for the nine-month period ended September 30, 2010, compared to the
same prior year period due to manufacturer recalls in the prior year period. Our Toyota stores
continued to experience significant increases in warranty revenue, increasing 89.4% and 86.0% in
the third quarter and nine-month periods ended September 30, 2010, respectively,
26
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
due to manufacturer 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.
Overall fixed operations gross margin rates decreased 130 basis points and 40 basis points in
the third quarter and nine month periods ended September 30, 2010, respectively, primarily due to
lower customer pay and internal margin rates compared to the same prior year periods. Warranty
gross margin rates increased 150 basis points and 200 basis points in the third quarter and
nine-month periods ended September 30, 2010, respectively, compared to the same prior year periods,
due to the effect of manufacturer recalls and parts warranty margin increases.
Finance, Insurance and Other (F&I)
Our reported F&I results are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in
thousands except per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
43,403 |
|
|
$ |
47,398 |
|
|
$ |
3,995 |
|
|
|
9.2 |
% |
Gross profit per retail unit (excluding fleet) |
|
$ |
920 |
|
|
$ |
972 |
|
|
$ |
52 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in
thousands except per unit data) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
116,558 |
|
|
$ |
133,607 |
|
|
$ |
17,049 |
|
|
|
14.6 |
% |
Gross profit per retail unit (excluding fleet) |
|
$ |
931 |
|
|
$ |
950 |
|
|
$ |
19 |
|
|
|
2.0 |
% |
F&I revenue increased in the third quarter ended September 30, 2010 primarily due to an
increase of 14.4% in used unit volume and a 5.7% increase in revenue per unit retailed compared to
the same prior year period. Used finance contract gross revenue improved 49.6% in the third
quarter ended September 30, 2010 due to an increase in used unit volume, a 580 basis point increase
in used finance contract penetration rates and an 18.1% increase in gross per used finance
contract. New finance contract gross revenue improved 9.0% in the third quarter ended September
30, 2010 in spite of a 4.9% decrease in new unit volume.
F&I revenue increased in the nine-month period ended September 30, 2010 primarily due to
increases in new retail and used unit volume of 5.9% and 19.8%, respectively, compared to the same
prior year period. New finance contract gross revenue improved 18.9% primarily due to the increase
in new unit sales volume and a 460 basis point improvement in new finance contract penetration
rates. Used finance contract gross revenue increased 47.3% for the nine-month period ended
September 30, 2010, led by the increase in used unit volume and a 19.8% increase in gross revenue
per used finance contract. Used service contract gross revenue was consistent with the increase in
used unit volume as increases in gross revenue per service contract were offset by a decline in
used service contract penetration rates.
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 SG&A expenses do not move exactly in proportion with
changes in gross profit, 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:
27
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended September 30, |
|
Better / (Worse) |
(in thousands) |
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
125,438 |
|
|
$ |
132,316 |
|
|
$ |
(6,878 |
) |
|
|
(5.5 |
%) |
Advertising |
|
|
11,345 |
|
|
|
12,642 |
|
|
|
(1,297 |
) |
|
|
(11.4 |
%) |
Rent and Rent Related |
|
|
33,413 |
|
|
|
32,743 |
|
|
|
670 |
|
|
|
2.0 |
% |
Other |
|
|
43,944 |
|
|
|
48,630 |
|
|
|
(4,686 |
) |
|
|
(10.7 |
%) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
214,140 |
|
|
$ |
226,331 |
|
|
$ |
(12,191 |
) |
|
|
(5.7 |
%) |
|
|
|
|
|
|
|
|
|
SG&A as a % of gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
45.7 |
% |
|
|
47.0 |
% |
|
|
(130 |
) |
|
bps |
Advertising |
|
|
4.1 |
% |
|
|
4.5 |
% |
|
|
(40 |
) |
|
bps |
Rent and Rent Related |
|
|
12.2 |
% |
|
|
11.6 |
% |
|
|
60 |
|
|
bps |
Other |
|
|
16.1 |
% |
|
|
17.2 |
% |
|
|
(110 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
Total |
|
|
78.1 |
% |
|
|
80.3 |
% |
|
|
(220 |
) |
|
bps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
Better / (Worse) |
(in thousands) |
|
2009 |
|
2010 |
|
Change |
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
$ |
355,238 |
|
|
$ |
396,067 |
|
|
$ |
(40,829 |
) |
|
|
(11.5 |
%) |
Advertising |
|
|
32,934 |
|
|
|
36,445 |
|
|
|
(3,511 |
) |
|
|
(10.7 |
%) |
Rent and Rent Related |
|
|
97,703 |
|
|
|
98,226 |
|
|
|
(523 |
) |
|
|
(0.5 |
%) |
Other |
|
|
133,685 |
|
|
|
141,804 |
|
|
|
(8,119 |
) |
|
|
(6.1 |
%) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
619,560 |
|
|
$ |
672,542 |
|
|
$ |
(52,982 |
) |
|
|
(8.6 |
%) |
|
|
|
|
|
|
|
|
|
SG&A as a % of gross |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation |
|
|
45.8 |
% |
|
|
47.7 |
% |
|
|
(190 |
) |
|
bps |
Advertising |
|
|
4.2 |
% |
|
|
4.4 |
% |
|
|
(20 |
) |
|
bps |
Rent and Rent Related |
|
|
12.6 |
% |
|
|
11.8 |
% |
|
|
80 |
|
|
bps |
Other |
|
|
17.2 |
% |
|
|
17.1 |
% |
|
|
10 |
|
|
bps |
|
|
|
|
|
|
|
|
|
Total |
|
|
79.8 |
% |
|
|
81.0 |
% |
|
|
(120 |
) |
|
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.
Total advertising costs as a percentage of gross profit increased for the third quarter and
nine-month periods ended September 30, 2010 primarily due to an increase in online and website
advertising related to our ecommerce initiatives.
Compensation costs as a percentage of gross profit increased in third quarter and nine-month
periods ended September 30, 2010 partially due to slightly higher compensation rates at our stores
and lower insurance and vacation expenses in the prior year periods.
Rent and rent related expenses decreased as a percentage of gross profit for the quarter ended
September 30, 2010 primarily due to flat expenses and improved gross profit levels for both the
quarter and nine month periods ended September 30, 2010.
For the third quarter and nine-month periods ended September 30, 2010, other SG&A expenses
increased from the prior year periods primarily due to higher insurance related expenses and
increases in technological infrastructure investments. In addition, a $1.8 million mark-to-market
gain on derivative liabilities recognized in the prior year and an increase in associate training
and development costs contributed to the increase in other SG&A for the nine-month period ended
September 30, 2010 compared to the prior year period.
28
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Impairment Charges
Impairment charges were $0.1 million in both the third quarter and nine-month periods ended
September 30, 2010 and were recorded in continuing operations. In the third quarter and nine-month
periods ended September 30, 2009, Sonic recorded total impairment charges of $0.6 million and $9.1
million, respectively, $0.6 million and $5.7 million of which were recorded in continuing
operations, respectively.
Depreciation and Amortization
Depreciation and amortization expense increased $0.6 million, or 7.4%, in the third quarter
ended September 30, 2010, and increased $1.9 million, or 7.8%, in the nine-month period ended
September 30, 2010, compared to the same prior year period. 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. In accordance
with Property, Plant and Equipment in the ASC, the fixed assets for these stores were not
depreciated while being held for sale in the prior year period.
Interest Expense, Floor Plan
Floor plan interest expense for new vehicles increased approximately $0.8 million, or 20.7%,
and $0.1 million, or 0.9%, in the third quarter and nine-month periods ended September 30, 2010,
respectively, compared to the third quarter and nine-month periods ended September 30, 2009,
respectively. The weighted average new vehicle floor plan interest rate incurred by continuing
dealerships increased slightly to 2.7% for both the third quarter and nine-month periods ended
September 30, 2010, compared to the third quarter and nine-month periods ended September 30, 2009
which had weighted average rates of 2.6% and 2.4%, respectively. The average floor plan balance
for new vehicles increased by approximately $95.9 million and $61.2 million for the third quarter
and nine-month periods ended September 30, 2010, respectively, compared to the same prior year
periods.
Floor plan interest expense for used vehicles increased approximately $0.1 million, or 11.9%,
and $0.6 million, or 47.5%, in the third quarter and nine-month periods ended September 30, 2010,
respectively, compared to the third quarter and nine-month periods ended September 30, 2009. The
weighted average used vehicle floor plan interest rate incurred by continuing dealerships increased
to 3.2% and 2.8% for the third quarter and nine-month periods ended September 30, 2010,
respectively, up from 2.1% for both the third quarter and nine-month periods ended September 30,
2009.
Interest Expense, Other, Net
The change in interest expense, other, between the third quarter and nine-month periods ended
September 30, 2009 and 2010 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) in Interest Expense, Other |
|
|
Third Quarter Ended |
|
Nine Months Ended |
|
|
September 30, 2010 |
|
September 30, 2010 |
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
|
|
|
|
|
|
|
Debt balances |
|
|
|
|
|
|
|
|
- Decrease in debt balances |
|
$ |
(1.1 |
) |
|
$ |
(3.0 |
) |
Other factors |
|
|
|
|
|
|
|
|
- Increase in capitalized interest |
|
|
(0.8 |
) |
|
|
(0.9 |
) |
- Decrease in interest expense related to variable to fixed rate swaps |
|
|
- |
|
|
|
(1.0 |
) |
- Lower deferred loan cost amortization |
|
|
(1.7 |
) |
|
|
(7.7 |
) |
- Lower interest allocation to discontinued operations |
|
|
0.6 |
|
|
|
1.9 |
|
- Other |
|
|
(0.1 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
$ |
(3.1 |
) |
|
$ |
(10.0 |
) |
|
|
|
|
|
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 nine-month period ended
September 30, 2010. Deferred loan cost amortization decreased for the third quarter and nine-month
periods ended September 30, 2010 compared to the prior year as a result of debt restructuring
charges incurred in the prior year periods.
29
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 third quarter and nine-month periods ended September 30, 2010, non-cash convertible
debt interest expense increased by approximately $9.6 million and $6.7 million, respectively,
compared to the third quarter and nine-month periods ended September 30, 2009. These increases are
primarily the result of an $11.4 million gain on the mark to market of the derivative liability
associated with the 6% Convertible Notes recorded in the third quarter ended September 30, 2009.
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 September 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. 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 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 third quarter and nine-month periods ended
September 30, 2010 were $1.5 million and $5.4 million, respectively, and for the third quarter and
nine-month periods ended September 30, 2009 were $2.2 million and $5.4 million, respectively.
Changes in the fair value of the notional amount of certain cash flow swaps will be recognized
through earnings. See the heading Derivative Instruments and Hedging Activities in Note 6,
Long-Term Debt, in the notes to the accompanying 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 $4.4 million
and $13.1 million in the third quarter and nine-month periods ended September 30, 2010,
respectively, and $4.4 million and $14.1 million in the third quarter and nine-month periods ended
September 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 $12.4 million.
Other Income / (Expense)
Sonic recorded a loss on extinguishment of debt of approximately $0.4 million and $7.7 million
in the third quarter and nine-month periods ended September 30, 2010, respectively, related to the
retirement of $20.0 million and $232.1 million in aggregate principal amount of the 8.625% Notes,
respectively. Other income for the third quarter and nine-month periods ending September 30, 2009
includes a gain of approximately $0.4 million on the repurchase of a portion of the 4.25%
Convertible Notes at a discount and a gain of approximately $2.1 million related to the
derecognition of liability and equity components of the 4.25% Convertible Notes in accordance with
the provisions of ASC 470, Debt, upon repurchase of a portion of the 4.25% Convertible Notes.
These amounts are reflected in other income (expense), net in the accompanying Consolidated
Statements of Income for the third quarter and nine-month periods ended September 30, 2010 and
2009. See Note 6, Long-Term Debt, in the notes to the accompanying Unaudited Condensed
Consolidated Financial Statements for further discussion.
Income Taxes
The overall effective tax rate from continuing operations was 37.7% and 39.8% for the third
quarter and nine-month periods ended September 30, 2010, respectively. The overall effective tax
rate from continuing operations was 45.0% for both the third
30
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
quarter and nine-month periods ended September 30, 2009. The effective rate for the third quarter
and nine-month periods ended September 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, lower expense
effects related to tax positions as a result of Accounting for Uncertainty in Income Taxes in the
ASC, and the effect of gross receipt tax structures in certain states. 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 September 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 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 38.0% to 41.0%.
Discontinued Operations
Significant components of results from discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
Third Quarter Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2009 |
|
2010 |
|
2009 |
|
2010 |
Loss from operations |
|
$ |
(3,302 |
) |
|
$ |
(1,773 |
) |
|
$ |
(8,548 |
) |
|
$ |
(5,920 |
) |
Gain (loss) on disposal of franchises |
|
|
(103 |
) |
|
|
829 |
|
|
|
(572 |
) |
|
|
2,182 |
|
Lease exit charges |
|
|
(5,146 |
) |
|
|
311 |
|
|
|
(6,675 |
) |
|
|
(2,411 |
) |
Property impairment charges |
|
|
- |
|
|
|
- |
|
|
|
(1,822 |
) |
|
|
- |
|
Goodwill impairment charges |
|
|
- |
|
|
|
- |
|
|
|
(1,586 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Pre-tax loss |
|
$ |
(8,551 |
) |
|
$ |
(633 |
) |
|
$ |
(19,203 |
) |
|
$ |
(6,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
74,018 |
|
|
$ |
9,473 |
|
|
$ |
245,935 |
|
|
$ |
55,127 |
|
Lease exit charges recorded for the third quarter and nine-month periods ended September 30,
2009 and 2010 relate to the revision of estimates on previously established lease exit accruals and
the establishment of additional lease exit accruals in the third quarter ended September 30, 2009.
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 the third quarter
and nine-month periods ended September 30, 2009, the average SAAR of new vehicle sales was 11.6
million and 10.2 million units compared to 11.6 million and 11.3 million units for the third
quarter and nine-month periods ended September 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.
31
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Floor Plan Facilities
The weighted average interest rate for all of our new vehicle floor plan facilities (both
continuing and discontinued operations) increased slightly to 2.7% for both the third quarter and
nine-month periods ended September 30, 2010, compared to the third quarter and nine-month periods
ended September 30, 2009, which had weighted average rates of 2.6% and 2.4%, respectively.
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 floor plan financed vehicles. We
were in compliance with all restrictive covenants under our floor plan facilities as of September
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 3.2% and 2.8% for the third quarter and nine-month periods ended
September 30, 2010, respectively, compared to 2.1% for both the third quarter and nine-month
periods ended September 30, 2009, respectively.
Long-Term Debt and Credit Facilities
See Note 6, Long-Term Debt, in the notes to the accompanying Unaudited Condensed
Consolidated 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 and redemptions of $32.1 million in aggregate principal amount of our
8.625% Notes and $1.0 million in aggregate principal amount of our 4.25% Convertible Notes. Also
see Note 6, Long-Term Debt, in the notes to the accompanying Unaudited Condensed Consolidated
Financial Statements for discussions of compliance with debt covenants.
Dealership Dispositions
During the nine-month period ended September 30, 2010, we disposed of eight dealerships. These
dispositions generated cash of $24.6 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 third quarter and nine-month periods ended September
30, 2010 were approximately $33.6 million and $46.1 million, respectively. As of September 30,
2010, contractual commitments to contractors for facility construction projects totaled
approximately $24.5 million.
Stock Repurchase Program
As of September 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
repurchase or redeem securities convertible into Class A common stock. We have curtailed our open
market stock repurchase activities and do not anticipate significant activity during the remainder
of 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 third quarter and nine-month periods ended September 30, 2010
relate to tax withholding activities 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 covenants contained
therein. See Note 6, Long-Term Debt, in the notes to the accompanying Unaudited Condensed
Consolidated Financial Statements for a discussion of limitations on our ability to pay dividends.
The payment of any future dividend is subject to these limitations and 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,
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 in future
periods. On October 26, 2010, we declared a quarterly cash dividend of $0.025 per share on each
issued and outstanding share of our Class A common stock
32
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
and Class B common stock with a record date of December 15, 2010 and a payment date of January 15,
2011. There is no guarantee that dividends will be declared and paid at any time in the future.
Cash Flows
For the nine-month period ended September 30, 2010, net cash provided by operating activities
was approximately $238.1 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
nine-month period ended September 30, 2010 was approximately $17.8 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 nine-month period ended
September 30, 2010 was approximately $239.7 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 2010.
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 notes payable financed with manufacturer captives are
recorded as trade floor plan liabilities (with the resulting change being reflected as an operating
cash flow). Our dealerships that obtain floor plan notes payable 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 $73.0 million and $25.3
million for the nine-month periods ended September 30, 2009 and 2010, respectively. The shift
between trade floor plan and non-trade floor plan during the nine-month period ended September 30,
2010 was primarily due to the realignment in floor plan providers under the new 2010 Credit
Facilities.
Guarantees and Indemnification Obligations
In connection with the operation and disposition of dealership franchises, we have entered
into various guarantees and indemnification obligations. See Note 8, Contingencies, in the notes
to the accompanying Unaudited Condensed Consolidated Financial Statements. See also Managements
Discussion and Analysis of Financial Condition and Results of Operations and Note 12, Commitments
and Contingencies, to the Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2009.
Future Liquidity Outlook
See Note 6, Long-Term Debt, in 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.
33
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $806.4 million at September 30,
2010 ($410.6 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 $3.2
million in the nine-month period ended September 30, 2010, substantially all of which would have
resulted from notes payablefloor plan.
In addition to our variable rate debt, as of September 30, 2010, approximately 18% 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 as it has been during 2010.
Consequently, a change of 100 basis points in LIBOR would not cause a significant change in
interest expense in the third quarter and nine-month periods ended September 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 September 30, 2010 was a liability of $40.0 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 |
$ |
3.6 |
|
|
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 |
$ |
11.4 |
|
|
4.655%
|
|
one-month LIBOR
|
|
December 10, 2017 |
$ |
8.8 |
|
|
6.860%
|
|
one-month LIBOR
|
|
August 1, 2017 |
$ |
7.0 |
|
|
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 0.256% at September 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 made 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 was filed on
November 15, 2004 in South Carolina state court, York County Court of Common Pleas, against Sonic
Automotive, Inc. and 10 of our South Carolina subsidiaries. The plaintiffs in that lawsuit were
Misty J. Owens, James B. Wright, Vincent J. Astey and Joseph Lee Williams, on behalf of themselves
and all other persons similarly situated, with plaintiffs seeking monetary damages and injunctive
relief on behalf of the purported class. The group of plaintiffs attorneys representing the
plaintiffs in the South Carolina lawsuit also filed another private civil class action lawsuit
against Sonic Automotive, Inc. and 3 of our subsidiaries on February 14, 2005 in state court in
North Carolina, Lincoln County Superior Court, which similarly sought certification of a
multi-state class of plaintiffs and alleged that certain products sold in the finance and insurance
departments were done so in a deceptive or otherwise illegal manner. The plaintiffs in this North
Carolina lawsuit were Robert Price, Carolyn Price, Marcus Cappeletti and Kathy Cappeletti, on
behalf of themselves and all other persons similarly situated, with plaintiffs seeking monetary
damages and injunctive relief on behalf of the purported class. The South Carolina state court
action and the North Carolina state court action have since been consolidated into a single
proceeding in private arbitration before the American Arbitration Association. 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 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. On
July 22, 2010, the plaintiffs in this consolidated arbitration filed a Motion to Confirm the
Arbitrators Partial Final Award on Class Certification in state court in North Carolina, Lincoln
County Superior Court. On August 17, 2010, Sonic filed to remove this North Carolina state court
action to federal court, and simultaneously filed a Petition to Vacate the Arbitrators Partial
Final Award on Class Certification, with both filings made in the United Stated District Court for
the Western District of North Carolina.
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.
37
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.
38
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 September 30, 2010, our total outstanding indebtedness was approximately $1.3 billion,
including the following:
|
|
|
$775.6 million under the secured new and used inventory floor plan facilities that is
classified as current; |
|
|
|
|
$208.6 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 $1.4 million; |
|
|
|
|
$146.5 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 $26.0 million; |
|
|
|
|
$15.9 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 $0.1 million, all of which is classified as
current; |
|
|
|
|
$42.7 million in 8.625% Senior Subordinated Notes due 2013 (the 8.625% Notes),
representing $42.9 million in aggregate principal amount outstanding less unamortized net
discount of approximately $0.2 million; |
|
|
|
|
$115.4 million of mortgage notes, representing $115.2 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 5.2%;
and |
|
|
|
|
$24.3 million of other secured debt, representing $22.3 million in aggregate
principal amount plus unamortized premium of approximately
$2.0 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 September 30, 2010, we had $87.7 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 September 30, 2010, we had approximately $791.6 million of debt payable in 2010. This
amount included $775.6 million outstanding related to our 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. On October 20, 2010, we issued a notice to redeem all $16.0 million in outstanding
aggregate principal amount of our 4.25% Convertible Notes. See Note 6, Long-Term Debt, in the
notes to the accompanying
39
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
Unaudited Condensed Consolidated Financial Statements for further discussion of the terms
under the 2010 Credit Facilities and Silo Floor Plan Facilities.
The outcome of legal and administrative proceedings we are or may become involved in could have a
material adverse effect on our future business, results of operations, financial condition and cash
flows.
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.
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 Sonic Automotive, Inc. 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.
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 made 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 was filed on
November 15, 2004 in South Carolina state court, York County Court of Common Pleas, against Sonic
Automotive, Inc. and 10 of our South Carolina subsidiaries. The plaintiffs in that lawsuit were
Misty J. Owens, James B. Wright, Vincent J. Astey and Joseph Lee Williams, on behalf of themselves
and all other persons similarly situated, with plaintiffs seeking monetary damages and injunctive
relief on behalf of the purported class. The group of plaintiffs attorneys representing the
plaintiffs in the South Carolina lawsuit also filed another private civil class action lawsuit
against Sonic Automotive, Inc. and 3 of our subsidiaries on February 14, 2005 in state court in
North Carolina, Lincoln County Superior Court, which similarly sought certification of a
multi-state class of plaintiffs and alleged that certain products sold in the finance and insurance
departments were done so in a deceptive or otherwise illegal manner. The plaintiffs in this North
Carolina lawsuit were Robert Price, Carolyn Price, Marcus Cappeletti and Kathy Cappeletti, on
behalf of themselves and all other persons similarly situated, with plaintiffs seeking monetary
damages and injunctive relief on behalf of the purported class. The South Carolina state court
action and the North Carolina state court action have since been consolidated into a single
proceeding in private arbitration before the American Arbitration Association. 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 one of our dealerships a vehicle with the Etch product as part of the transaction, but
not including customers who purchased or leased such vehicles from one of our dealerships 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 stayed the Arbitration for thirty days to
allow either party to petition a court of competent jurisdiction to confirm or vacate the award.
We will seek review of the class certification ruling by a court of competent jurisdiction and will
continue to press our argument that this action is not suitable for a class-based arbitration. On
July 22, 2010, the plaintiffs in this consolidated arbitration filed a Motion to Confirm the
Arbitrators Partial Final Award on Class Certification in state court in North Carolina, Lincoln
County Superior Court. On August 17, 2010, we filed to remove this North Carolina state court
action to federal court, and simultaneously filed a Petition to Vacate the Arbitrators Partial
Final Award on Class Certification, with both filings made in the United Stated District Court for
the Western District of North Carolina.
40
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
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.
The outcomes of the civil actions brought by plaintiffs purporting to represent a class of
customers, as well as other pending and future legal 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 result in
the payment of significant costs and damages, which could have a material adverse effect on our
business, financial condition, results of operations, cash flows or prospects.
41
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 third quarter ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( in thousands, except price per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Value of Shares That |
|
|
|
Total Number of |
|
Average |
|
|
Part of Publicly |
|
May Yet Be Purchased |
|
|
|
Shares Purchased |
|
Price Paid |
|
|
Announced Plans or |
|
Under the Plans or |
|
|
|
(1) |
|
per Share |
|
|
Programs (2) |
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2010 |
|
1 |
|
$ |
8.64 |
|
|
1 |
|
$ |
43,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2010 |
|
2 |
|
$ |
8.85 |
|
|
2 |
|
$ |
43,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2010 |
|
|
|
$ |
|
|
|
|
|
$ |
43,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
3 |
|
$ |
8.78 |
|
|
3 |
|
$ |
43,551 |
|
(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
certain covenants contained therein. See Note 6, Long-term Debt, in the notes to the
accompanying Unaudited Condensed Consolidated 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.
42
Item 6: Exhibits.
(a) Exhibits:
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.24
|
|
Promissory Note, dated August 12, 2010, executed by Sonic in
favor of VW Credit, Inc., pursuant to the Credit Agreement. |
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 |
43
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 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 our ability to successfully integrate recent and potential future
acquisitions; and |
|
|
|
|
the rate and timing of overall economic recovery or additional decline. |
44
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
SONIC AUTOMOTIVE, INC. |
|
|
|
|
|
Date: October 28, 2010
|
|
By:
|
|
/s/ O. BRUTON SMITH |
|
|
|
|
|
|
|
|
|
O. Bruton Smith |
|
|
|
|
Chairman and Chief Executive Officer |
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|
|
|
Date: October 28, 2010
|
|
By:
|
|
/s/ DAVID P. COSPER |
|
|
|
|
|
|
|
|
|
David P. Cosper |
|
|
|
|
Vice Chairman and Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
45
SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
|
10.24
|
|
Promissory Note, dated August 12, 2010, executed by Sonic in favor of
VW Credit, Inc., pursuant to the Credit Agreement. |
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 |
46