SONIC AUTOMOTIVE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes thereto and "Item 1A. Risk Factors" included in this Annual Report on Form 10-K. The financial and statistical data contained in the following discussion for all periods presented reflects ourDecember 31, 2021 classification of dealerships between continuing and discontinued operations in accordance with "Presentation of Financial Statements" in the Accounting Standards Codification (the "ASC"). For comparison and discussion of our results of operations for the year endedDecember 31, 2020 ("2020") compared to our results of operations for the year endedDecember 31, 2019 ("2019"), please refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for 2020. Unless otherwise noted, we present the discussion in this Management's Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis. To the extent that we believe a discussion of the differences among reportable segments will enhance a reader's understanding of our financial condition, cash flows and other changes in financial condition and results of operations, the differences are discussed separately. Unless otherwise noted, all discussion of increases or decreases are for the year endedDecember 31, 2021 ("2021") compared to 2020. The following discussion of Franchised Dealerships Segment new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net, is on a same store basis, except where otherwise noted. All currently operating franchised dealership stores are included within the same store group as of the first full month following the first anniversary of the store's opening or acquisition. All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market's opening.
Overview
We are one of the largest automotive retailers in theU.S. (as measured by total revenue). As a result of the way we manage our business, we had two reportable segments as ofDecember 31, 2021 : (1) the Franchised Dealerships Segment and (2) the EchoPark Segment. For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into "stores." As ofDecember 31, 2021 , we operated 110 stores in the Franchised Dealerships Segment and 46 stores in the EchoPark Segment. The Franchised Dealerships Segment consists of 140 new vehicle franchises (representing 28 different brands of cars and light trucks) and 17 collision repair centers in 17 states. The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales of replacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, "Fixed Operations"); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, "finance and insurance" or "F&I") for our guests. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our guests in pre-owned vehicle specialty retail locations. Our EchoPark business generally operates independently from our franchised dealerships business (except for certain shared back-office functions and corporate overhead costs). Sales operations for EchoPark began in the fourth quarter of 2014, and, as ofDecember 31, 2021 , we operated 46 EchoPark stores in 16 states, including 11 Northwest Motorsport pre-owned vehicle stores acquired in the RFJ Acquisition (as defined below) inDecember 2021 . Under our current EchoPark growth plan, we plan to open 20 to 25 additional EchoPark stores annually through 2025 as we build out a nationwide EchoPark distribution network expected to reach 90% of theU.S. population by 2025.
Executive Summary
Acquisition of RFJ Auto
OnDecember 6, 2021 (the "Closing Date"), Sonic completed the acquisition ofRFJ Auto Partners, Inc. and its subsidiaries (collectively, "RFJ Auto") pursuant to the previously disclosed Agreement and Plan of Merger (the "Merger Agreement") dated as ofSeptember 17, 2021 by and among Sonic, a subsidiary of Sonic ("Merger Sub"),RFJ Auto and The Resolute Fund III, L.P. , solely in its capacity as the representative of RFJ Auto's equityholders. On the Closing Date, pursuant to the Merger Agreement and upon the terms and subject to the conditions therein, RFJ Auto merged with and into Merger Sub, a wholly owned subsidiary of Sonic, with RFJ Auto surviving the merger and becoming a direct, wholly owned subsidiary of Sonic. In connection with the acquisition of RFJ Auto (the "RFJ Acquisition"), Sonic acquired , 33 automotive retail locations in seven states and a portfolio of 16 automotive brands. Beginning on the Closing Date, the results of our Franchised 29 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
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Dealerships Segment include 22 stores acquired in the RFJ Acquisition and our
EchoPark Segment include 11 Northwest Motorsport pre-owned vehicle stores
acquired in the RFJ Acquisition. The aggregate consideration for the RFJ
Acquisition was approximately $950.2 million , of which approximately $222.4
million was funded from borrowings under Sonic's syndicated new and used vehicle
floor plan credit facilities. The consideration for the RFJ Acquisition is
subject to customary post-close adjustments.
Retail Automotive Industry Performance
TheU.S. retail automotive industry's total new vehicle (retail and fleet combined) unit sales volume was approximately 15.0 million vehicles in 2021, an increase of 3.4%, compared to approximately 14.5 million vehicles in 2020, according to thePower Information Network ("PIN") fromJ.D. Power . For 2022, analysts' industry expectation for the new vehicle seasonally adjusted annual rate of sales ("SAAR") ranges from 14.5 million vehicles (a 3.3% decrease compared to 2021) to 16.0 million vehicles (an increase of 6.7% compared to 2021). We estimate the 2022 new vehicle SAAR will be between 15.0 million vehicles (flat compared to 2021) and 15.5 million vehicles (an increase of 3.3% compared to 2021). The ongoing effects of the COVID-19 pandemic, changes in consumer confidence, availability of consumer financing, interest rates, additional federal relief spending by theU.S. government, manufacturer inventory production levels, incentive levels from automotive manufacturers, or shifts in level or timing of consumer demand as a result of natural disasters or other unforeseen circumstances could cause the actual 2022 new vehicle SAAR to vary from expectations. Many factors, including brand and geographic concentrations as well as the industry sales mix between retail and fleet new vehicle unit sales volume, have caused our past results to differ from the industry's overall trend. Our new vehicle sales strategy focuses on our retail new vehicle sales (as opposed to fleet new vehicle sales) and, as a result, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle SAAR (which excludes fleet new vehicle sales). According to PIN fromJ.D. Power , industry retail new vehicle unit sales volume increased 5.6%, to 13.1 million vehicles, in 2021, from 12.4 million vehicles in 2020.
Impact of COVID-19
The ongoing effects of the COVID-19 pandemic continue to evolve. While we currently expect to see continued economic recovery in 2022, the ongoing pandemic may cause changes in consumer behaviors, including a potential reduction in consumer spending for vehicles and automotive repairs, especially if the pandemic worsens or the regulatory environment changes in response to the pandemic or as a result of rising interest rates. This may lead to increased asset recovery and valuation risks, such as impairment of additional indefinite lived intangible assets. In addition, uncertainties in the global economy have negatively impacted our suppliers and other business partners, which may interrupt our vehicle and parts inventory supply chain and require other changes to our operations. We have also seen a tightening in the supply of new and used vehicles due, in part, to the COVID-19 pandemic, which is likely to continue in 2022. These and other COVID-related factors may adversely impact our revenues, operating income and earnings per share financial measures. In addition, the global automotive supply chain has been significantly disrupted during the pandemic, primarily related to the production of semiconductors that are used in many components of modern automobiles, in addition to workforce-related production delays and stoppages. As a result, automobile manufacturing is operating at lower than usual production levels, reducing the amount of new vehicle and certain parts inventory available to our dealerships. These inventory constraints, coupled with strong consumer demand and record levels of consumer savings, have led to a low new vehicle inventory and a high new and used vehicle pricing environment, which drove lower than expected retail new vehicle unit sales volume in 2021. While we believe that new vehicle and parts production levels should begin to improve in the first half of 2022, there is a risk that new vehicle and certain parts inventory levels remain at a low level or worsen, which could cause actual 2022 new vehicle SAAR to vary from our expectations.
Franchised Dealerships Segment
As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2020 and 2021, including the RFJ Acquisition inDecember 2021 , the change in consolidated reported amounts from period to period may not be indicative of the current or future operational or financial performance of our current group of operating stores. Unless otherwise noted, all discussion of increases or decreases are for 2021 compared to 2020. The following discussion is on a same store basis (which excludes results from disposed stores), except where otherwise noted. All currently operating franchised dealership stores are included within the same store group as of the first full month following the first anniversary of the store's opening or acquisition. New vehicle revenue increased 16.4% in 2021, primarily driven by a 7.9% increase in new vehicle unit sales volume and a 7.9% increase in new vehicle sales prices. New vehicle gross profit increased 93.1% in 2021, as a result of higher average selling prices. New vehicle gross profit per unit increased$1,991 per unit, or 78.9%, to$4,513 per unit, due primarily to 30 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
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OPERATIONS
generally increased average selling prices due to inventory shortages in certain
makes and models as a result of vehicle manufacturer supply chain disruptions
and production delays since the onset of the COVID-19 pandemic. As a result of
the new vehicle inventory shortages, our new vehicle inventories are near
historic lows. Many of our new vehicles are being pre-ordered and delivered to
customers shortly after the vehicles arrive at our stores. On a trailing quarter
cost of sales basis, our Franchised Dealerships Segment new vehicle inventory
days' supply was approximately 16 days (11 days excluding the effect of the RFJ
Acquisition in December 2021 , which contributed less than one month of trailing
cost of sales to the days' supply calculation) as of December 31, 2021 , compared
to 40 days as of December 31, 2020 . The level of new vehicle inventory on hand
continues to be below our target level as a result of ongoing automotive supply
chain disruptions and production delays described above, and while we anticipate
that manufacturer production and new vehicle inventory levels will begin to
improve in the first half of 2022, we expect that new vehicle inventory levels
will remain low throughout 2022.
Retail used vehicle revenue increased 22.6% in 2021, driven by a 19.0% increase
in retail used vehicle average sales price and a 3.0% increase in retail used
vehicle unit sales volume. Retail used vehicle gross profit increased 42.8% in
2021, due to an increase in retail used vehicle gross profit per unit of $491
per unit, or 38.6%, to $1,763 per unit as a result of higher retail used vehicle
sales prices due primarily to the impact of low new vehicle inventory levels on
new and used vehicle prices and availability. Wholesale vehicle gross profit
(loss) improved by approximately $8.4 million , to gross profit of $7.9 million
during 2021, due in part to increased demand in the wholesale auction market as
a result of new vehicle inventory shortages, which resulted in higher wholesale
vehicle prices for much of 2021. We generally focus on maintaining used vehicle
inventory days' supply in the 30- to 35-day range, which may fluctuate
seasonally, in order to limit our exposure to market pricing volatility. On a
trailing quarter cost of sales basis, our Franchised Dealerships Segment used
vehicle inventory days' supply was approximately 42 days (36 days excluding the
effect of the RFJ Acquisition in December 2021 , which contributed less than one
month of trailing cost of sales to the days' supply calculation) and 30 days as
of December 31, 2021 and 2020, respectively.
Fixed Operations revenue increased 12.2% and Fixed Operations gross profit
increased 12.9% in 2021 as daily vehicle use and vehicle miles driven began to
recover from pandemic-related declines in 2020. Fixed Operations gross margin
increased 40 basis points, to 50.2%, in 2021, driven primarily by an increase in
customer pay revenue contribution and higher customer pay gross margin.
F&I revenue increased 22.4% in 2021, driven by an increase in F&I gross profit
per retail unit. F&I gross profit per retail unit increased $285 per unit, or
16.3%, to $2,034 per unit, in 2021. We believe that our proprietary software
applications, playbook processes and guest-centric selling approach enable us to
optimize F&I gross profit and penetration rates (the number of F&I products sold
per vehicle) across our F&I product lines. We believe that we will continue to
increase revenue in this area as we refine our processes, train our associates
and continue to sell a high volume of retail new and used vehicles at our
stores.
EchoPark Segment
Unless otherwise noted, all discussion of increases or decreases are for 2021 compared to 2020. Reported total EchoPark Segment revenues increased 65.3% in 2021, driven primarily by new store openings, and increases in retail used vehicle unit sales volume and average selling prices. Reported total gross profit increased 30.3% in 2021, due primarily to higher retail used vehicle unit sales volume, offset partially by lower retail used vehicle gross profit per unit as a result of significant fluctuations in wholesale and retail used vehicle prices during the COVID-19 pandemic. Reported retail used vehicle revenue increased 61.5% and F&I revenue increased 46.6% in 2021, driven primarily by a 36.2% increase in retail used vehicle unit sales volume in 2021. Combined retail used vehicle and F&I gross profit per unit decreased$217 per unit, or 10.9%, to$1,779 per unit in 2021. The decrease in combined retail used vehicle and F&I gross profit per unit was primarily due to higher cost of inventory acquisition as a result of increased demand in the wholesale auction market for much of 2021, partially offset by an increase in F&I product penetration rates. Wholesale vehicle gross profit (loss) improved by approximately$9.3 million to$9.2 million in 2021, due in part to increased demand in the wholesale auction market as a result of new vehicle inventory shortages, which resulted in higher wholesale vehicle prices for much of 2021. We generally focus on maintaining used vehicle inventory days' supply in the 30- to 35-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility. On a trailing quarter cost of sales basis, our used vehicle inventory days' supply in our EchoPark Segment was approximately 70 days (39 days excluding the acquisition of 11 Northwest Motorsport pre-owned vehicle stores in the RFJ Acquisition inDecember 2021 , which contributed less than one month of trailing cost of sales to the days' supply calculation) as ofDecember 31, 2021 , as compared to 41 days as ofDecember 31, 2020 . The elevated level of used vehicle inventory days' supply as ofDecember 31, 2021 was due primarily to the opening of several new EchoPark stores during 2021, which required additional inventory on 31 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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hand but were not yet generating retail used vehicle sales at the rate of a more
mature store, and the acquisition of 11 Northwest Motorsport pre-owned vehicle
stores in the RFJ Acquisition in December 2021 .
EchoPark same market total revenues increased 29.9% in 2021, driven primarily by
a 6.7% increase in retail used vehicle unit sales volume and an increase in
retail used vehicle average selling prices. Same market total gross profit
increased 21.9% in 2021, due primarily to an increase in wholesale and retail
used vehicle unit sales volume, higher average selling prices and an 8.8%
increase in F&I per retail unit.
Results of Operations
The following table summarizes the percentages of total revenues represented by certain items reflected in our consolidated statements of operations:
Percentage of Total Revenues
Year Ended December 31,
2021 2020 2019
Revenues:
New vehicles 41.3 % 43.8 % 46.8 %
Used vehicles 39.3 % 36.5 % 33.4 %
Wholesale vehicles 3.0 % 2.0 % 1.9 %
Parts, service and collision repair 11.3 % 12.6 % 13.3 %
Finance, insurance and other, net 5.1 % 5.1 % 4.6 %
Total revenues 100.0 % 100.0 % 100.0 %
Cost of sales 84.6 % 85.4 % 85.5 %
Gross profit 15.4 % 14.6 % 14.5 %
Selling, general and administrative expenses 10.3 % 10.5 % 10.5 %
Impairment charges - % 2.8 % 0.2 %
Depreciation and amortization 0.8 % 0.9 % 0.9 %
Operating income 4.3 % 0.3 % 2.9 %
Interest expense, floor plan 0.1 % 0.3 % 0.5 %
Interest expense, other, net 0.4 % 0.4 % 0.5 %
Other income (expense), net 0.1 % 0.0 % 0.1 %
Income (loss) from continuing operations before taxes 3.7 % (0.4) % 1.8 %
Provision for income taxes for continuing operations - benefit (expense)
0.9 % 0.2 % 0.5 %
Income (loss) from continuing operations 2.8 % (0.6) % 1.3 %
Results of Operations - Consolidated
As a result of the acquisition, disposition, termination or closure of several
franchised dealership stores in 2020 and 2021, the change in consolidated
reported amounts from period to period may not be indicative of the current or
future operational or financial performance of our current group of operating
stores.
New Vehicles - Consolidated
New vehicle revenues include the sale of new vehicles to retail customers, as
well as the sale of fleet vehicles. New vehicle revenues and gross profit can be
influenced by vehicle manufacturer incentives to consumers (which vary from
cash-back incentives to low interest rate financing, among other things), the
availability of consumer credit and the level and type of manufacturer-to-dealer
incentives, as well as manufacturers providing adequate inventory allocations to
our dealerships to meet consumer demands. The automobile manufacturing industry
is cyclical and historically has experienced periodic downturns characterized by
oversupply and weak demand, both within specific brands and in the industry as a
whole. As an automotive retailer, we seek to mitigate the effects of this sales
cycle by maintaining a diverse brand mix of dealerships. Our brand diversity
allows us to offer a broad range of products at a wide range of prices from
lower-priced/economy vehicles to luxury vehicles.
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The U.S. retail automotive industry's new vehicle unit sales volume below
reflects all brands marketed or sold in the U.S. This industry sales volume
includes brands we do not sell and markets in which we do not operate, therefore
our new vehicle unit sales volume may not trend directly in line with the
industry new vehicle unit sales volume. We believe that the retail new vehicle
industry sales volume is a more meaningful metric for comparing our new vehicle
unit sales volume to the industry due to our minimal fleet vehicle business.
Beginning in the middle of March 2020 , the COVID-19 pandemic began to adversely
impact the retail automotive industry and consequentially also our business
operations by severely impacting the demand portion of our business. State and
local governmental authorities in all of the markets in which we currently
operate began to put in place various levels of shelter-in-place or stay-at-home
orders in the middle of March 2020 , which in many cases significantly restricted
our business operations and suppressed consumer activity, in particular related
to our vehicle sales activities. While the majority of these restrictions have
been relaxed and consumer demand has rebounded significantly in our key
geographic markets, the timing and rate of improvement in demand has not been
uniform across the markets in which we operate. Further, disruptions in the
automotive supply chain have caused lower than expected levels of vehicle
production, which, combined with consumer demand for new vehicles, drove lower
than typical levels of new vehicle inventory during 2021. Low levels of new
vehicle inventory have resulted in higher average selling prices for new
vehicles and we believe had a negative impact on retail new vehicle SAAR for
2021.
Retail new vehicle SAAR, fleet new vehicle SAAR and total new vehicle SAAR were
as follows:
Year Ended December 31, Better / (Worse)
2021 2020 % Change
(In millions of vehicles)
Retail new vehicle SAAR (1) 13.1 12.4 5.6 %
Fleet new vehicle SAAR 1.9 2.1 (9.5) %
Total new vehicle SAAR (2) 15.0 14.5 3.4 %
(1) Source: PIN from J.D. Power
(2) Source: Bloomberg Finance L.P. , provided by Stephens Inc.
For 2022, analysts' industry expectation for the new vehicle SAAR ranges from
14.5 million vehicles (a 3.3% decrease compared to 2021) to 16.0 million
vehicles (an increase of 6.7% compared to 2021). We estimate the 2022 new
vehicle SAAR will be between 15.0 million vehicles (flat compared to 2021) and
15.5 million vehicles (an increase of 3.3% compared to 2021). The ongoing
effects of the COVID-19 pandemic, changes in consumer confidence, availability
of consumer financing, interest rates, additional federal relief spending by the
U.S. government, manufacturer inventory production levels, incentive levels from
automotive manufacturers or shifts in level or timing of consumer demand as a
result of natural disasters or other unforeseen circumstances could cause the
actual 2022 new vehicle SAAR to vary from expectations.
Our consolidated reported new vehicle results (combined retail and fleet data)
were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported new vehicle:
Revenue $ 5,118.0 $ 4,281.2 $ 836.8 19.5 %
Gross profit $ 461.4 $ 234.1 $ 227.3 97.1 %
Unit sales 103,486 93,281 10,205 10.9 %
Revenue per unit $ 49,456 $ 45,896 $ 3,560 7.8 %
Gross profit per unit $ 4,459 $ 2,510 $ 1,949 77.6 %
Gross profit as a % of revenue 9.0 % 5.5 % 350 bps
For further analysis of new vehicle results, see the tables and discussion under
the heading "New Vehicles - Franchised Dealerships Segment" in the Franchised
Dealerships Segment section below.
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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Used Vehicles - Consolidated
Used vehicle revenues are directly affected by a number of factors, including
the pricing and level of manufacturer incentives on new vehicles, the number and
quality of trade-ins and lease turn-ins, the availability and pricing of used
vehicles acquired at wholesale auction and the availability of consumer credit.
As with new vehicles, the COVID-19 pandemic began to adversely impact the retail
automotive industry and consequentially also our business operations beginning
in the middle of March 2020 , by severely impacting the demand portion of our
business. State and local governmental authorities in all of the markets in
which we currently operate began to put in place various levels of
shelter-in-place or stay-at-home orders in the middle of March 2020 , which in
many cases significantly restricted our business operations and suppressed
consumer activity, in particular related to our vehicle sales activities. While
the majority of these restrictions have been relaxed and consumer demand has
rebounded significantly in our key geographic markets, the timing and rate of
improvement in demand has not been uniform across the markets in which we
operate.
As a result of low levels of new vehicle inventory and a recovery in demand for
used vehicles (both by retail consumers and dealers at wholesale auction), used
vehicle prices reached an all-time high during the fourth quarter of 2021.
Depending on the mix of inventory sourcing (trade-in versus wholesale auction),
the days' supply of used vehicle inventory, and the pricing strategy employed by
the dealership, retail used vehicle gross profit per unit and retail used
vehicle gross profit as a percentage of revenue may vary significantly from
historical levels given the current used vehicle environment.
Our consolidated reported retail used vehicle results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported used vehicle:
Revenue $ 4,877.2 $ 3,564.8 $ 1,312.4 36.8 %
Gross profit $ 131.9 $ 106.0 $ 25.9 24.4 %
Unit sales 183,292 159,025 24,267 15.3 %
Revenue per unit $ 26,609 $ 22,417 $ 4,192 18.7 %
Gross profit per unit $ 720 $ 667 $ 53 7.9 %
Gross profit as a % of revenue 2.7 % 3.0 % (30) bps
For further analysis of used vehicle results, see the tables and discussion under the headings "Used Vehicles - Franchised Dealerships Segment" and "Used Vehicles and F&I - EchoPark Segment" in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.
Wholesale Vehicles - Consolidated
Wholesale vehicle revenues are affected by retail new and used vehicle unit sales volume and the associated trade-in volume, as well as short-term, temporary and seasonal fluctuations in wholesale auction pricing. Since the beginning of the COVID-19 pandemic inMarch 2020 , wholesale vehicle prices and supply at auction have experienced periods of volatility, impacting our wholesale vehicle revenues and related gross profit (loss), as well as retail used vehicle revenues and related gross profit. During 2021, wholesale vehicle gross profit increased significantly due in part to increased demand in the wholesale auction market as a result of new vehicle inventory shortages, which resulted in higher wholesale vehicle prices for much of 2021. We believe that the current wholesale vehicle price environment is not sustainable in the long-term and expect that wholesale vehicle pricing and related gross profit (loss) may begin to return toward long-term normalized levels in 2022. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicle inventory and minimize inventory carrying risks. 34 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
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OPERATIONSOur consolidated reported wholesale vehicle results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported wholesale vehicle:
Revenue $ 367.2 $ 197.4 $ 169.8 86.0 %
Gross profit (loss) $ 9.8 $ (0.9) $ 10.7 NM
Unit sales 36,795 32,057 4,738 14.8 %
Revenue per unit $ 9,980 $ 6,157 $ 3823 62.1 %
Gross profit (loss) per unit $ 266 $ (27) $ 293 NM
Gross profit (loss) as a % of revenue 2.7 % (0.4) % 310 bps
NM = Not Meaningful
For further analysis of wholesale vehicle results, see the tables and discussion
under the headings "Wholesale Vehicles - Franchised Dealerships Segment" and
"Wholesale Vehicles - EchoPark Segment" in the Franchised Dealerships Segment
and EchoPark Segment sections, respectively, below.
Fixed Operations - Consolidated
Parts, service and collision repair revenues consist of customer requested
repair orders ("customer pay"), warranty repairs (manufacturer-paid), wholesale
parts and internal, sublet and other. Parts and service revenue is driven by the
mix of warranty repairs versus customer pay repairs, available service capacity
(a combination of service bay count and technician availability), vehicle
quality, manufacturer recalls, customer loyalty, and prepaid or
manufacturer-paid maintenance programs. Internal, sublet and other primarily
relates to preparation and reconditioning work performed on vehicles in
inventory that are later sold to a third party. When that work is performed by
one of our dealerships or stores, the work is classified as internal. In the
event the work is performed by a third party on our behalf, it is classified as
sublet.
We believe that, over time, vehicle quality will continue to improve, but
vehicle complexity and the associated demand for repairs by qualified
technicians at manufacturer-affiliated dealerships may result in market share
gains that could offset any revenue lost from improvement in vehicle quality. We
also believe that, over the long term, we have the ability to continue to
optimize service capacity at our dealerships and stores to further increase
Fixed Operations revenues. Manufacturers continue to extend new vehicle warranty
periods and have also begun to include regular maintenance items in the warranty
or complimentary maintenance program coverage. These factors, over the long
term, combined with the extended manufacturer warranties on CPO vehicles, should
facilitate growth in our parts and service business. Barriers to long-term
growth may include reductions in the rate paid by manufacturers to dealers for
warranty work performed, as well as the improved quality of vehicles that may
affect the level and frequency of future customer pay or warranty-related repair
revenues.
The COVID-19 pandemic had a significant effect on our consolidated Fixed
Operations revenues, as travel restrictions, government-imposed stay-at-home and
shelter-in-place orders and fewer workers undertaking a daily commute combined
to substantially decrease the number of miles driven in the U.S. , which
decreased the demand for maintenance and warranty and collision repair services
beginning in March 2020 . As government imposed restrictions have been relaxed in
our key geographic markets, we have begun to see a recovery in Fixed Operations
revenues to varying degrees depending on the market and type of work being
performed; however, the timing and rate of improvement in demand has not been
uniform across markets.
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSOur consolidated reported Fixed Operations results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Reported Fixed Operations:
Revenue
Customer pay $ 602.3 $ 505.4 $ 96.9 19.2 %
Warranty 214.8 224.9 (10.1) (4.5) %
Wholesale parts 158.8 130.1 28.7 22.1 %
Internal, sublet and other 420.9 373.3 47.6 12.8 %
Total revenue $ 1,396.8 $ 1,233.7 $ 163.1 13.2 %
Gross profit
Customer pay $ 341.9 $ 284.1 $ 57.8 20.3 %
Warranty 125.0 127.9 (2.9) (2.3) %
Wholesale parts 28.0 22.6 5.4 23.9 %
Internal, sublet and other 179.1 159.9 19.2 12.0 %
Total gross profit $ 674.0 $ 594.5 $ 79.5 13.4 %
Gross profit as a % of revenue
Customer pay 56.8 % 56.2 % 60 bps
Warranty 58.2 % 56.8 % 140 bps
Wholesale parts 17.8 % 17.4 % 40 bps
Internal, sublet and other 42.6 % 42.9 % (30) bps
Total gross profit as a % of revenue 48.3 % 48.2 % 10 bps
For further analysis of Fixed Operations results, see the tables and discussion
under the headings "Fixed Operations - Franchised Dealerships Segment" and
"Fixed Operations - EchoPark Segment" in the Franchised Dealerships Segment and
EchoPark Segment sections, respectively, below.
F&I - Consolidated
Finance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties and service contracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&I revenues are affected by the level of new and retail used vehicle unit sales volume, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives, and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage. Yield spread premium is another term for the commission earned by our dealerships for arranging vehicle financing for consumers. The amount of the commission could be zero, a flat fee or an actual spread between the interest rate charged to the consumer and the interest rate provided by the direct financing source (e.g., a commercial bank, credit union or manufacturer captive finance company). We have established caps on the potential yield spread premium our dealerships can earn with all finance sources. We believe the yield spread premium we earn for arranging vehicle financing represents value to the consumer in numerous ways, including the following:
•lower cost, below-market financing is often available only from the manufacturers' captives and franchised dealers;
•ease of access to multiple high-quality lending sources;
•lease-financing alternatives are largely available only from manufacturers' captives or other indirect lenders;
•guests with substandard credit frequently do not have direct access to potential sources of sub-prime financing; and
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
•guests with significant "negative equity" in their current vehicle (i.e., the
guest's current vehicle is worth less than the balance of their vehicle loan or
lease obligation) frequently are unable to pay off the loan on their current
vehicle and finance the purchase or lease of a replacement new or used vehicle
without the assistance of a franchised dealer's network of lending sources.
Our consolidated reported F&I results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported F&I:
Revenue $ 637.2 $ 489.9 $ 147.3 30.1 %
Unit sales 283,235 250,964 32,271 12.9 %
Gross profit per retail unit (excludes
fleet) $ 2,250 $ 1,952 $ 298 15.3 %
For further analysis of F&I results, see the tables and discussion under the
headings "F&I - Franchised Dealerships Segment" and "Used Vehicles and F&I -
EchoPark Segment" in the Franchised Dealerships Segment and EchoPark Segment
sections, respectively, below.
Results of Operations - Franchised Dealerships Segment
As a result of the acquisition, disposition, termination or closure of several
franchised dealership stores in 2021 and 2020, the change in consolidated
reported amounts from period to period may not be indicative of the current or
future operational or financial performance of our current group of operating
stores. The following discussion of new vehicles, used vehicles, wholesale
vehicles, parts, service and collision repair, and finance, insurance and other,
net, is on a same store basis (which excludes results from disposed stores),
except where otherwise noted.
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSNew Vehicles - Franchised Dealerships Segment
The following table provides a reconciliation of Franchised Dealerships Segment
reported basis and same store basis for total new vehicles (combined retail and
fleet data):
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit data)
Total new vehicle revenue:
Same store $ 4,943.3 $ 4,246.1 $ 697.2 16.4 %
Acquisitions, open points, dispositions
and holding company 165.7 35.1 130.6 NM
Total as reported $ 5,109.0 $ 4,281.2 $ 827.8 19.3 %
Total new vehicle gross profit:
Same store $ 448.6 $ 232.3 $ 216.3 93.1 %
Acquisitions, open points, dispositions
and holding company 11.7 1.8 9.9 NM
Total as reported $ 460.3 $ 234.1 $ 226.2 96.6 %
Total new vehicle unit sales:
Same store 99,396 92,124 7,272 7.9 %
Acquisitions, open points, dispositions
and holding company 3,962 1,157 2,805 NM
Total as reported 103,358 93,281 10,077 10.8 %
NM = Not Meaningful
Our Franchised Dealerships Segment reported new vehicle results (combined retail and fleet data) were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported new vehicle:
Revenue $ 5,109.0 $ 4,281.2 $ 827.8 19.3 %
Gross profit $ 460.3 $ 234.1 $ 226.2 96.6 %
Unit sales 103,358 93,281 10,077 10.8 %
Revenue per unit $ 49,430 $ 45,896 $ 3,534 7.7 %
Gross profit per unit $ 4,453 $ 2,510 $ 1,943 77.4 %
Gross profit as a % of revenue 9.0 % 5.5 % 350 bps
Our Franchised Dealerships Segment same store new vehicle results (combined retail and fleet data) were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same store new vehicle:
Revenue $ 4,943.3 $ 4,246.1 $ 697.2 16.4 %
Gross profit $ 448.6 $ 232.3 $ 216.3 93.1 %
Unit sales 99,396 92,124 7,272 7.9 %
Revenue per unit $ 49,733 $ 46,091 $ 3,642 7.9 %
Gross profit per unit $ 4,513 $ 2,522 $ 1,991 78.9 %
Gross profit as a % of revenue 9.1 % 5.5 % 360 bps
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
New vehicle revenue increased 16.4% due primarily to higher average selling
prices and a 7.9% increase in new vehicle unit sales volume, which was driven by
a recovery in demand due to the impact of the COVID-19 pandemic on the prior
year results. New vehicle gross profit increased approximately $216.3 million ,
or 93.1%, as a result of increased new vehicle unit sales volume and higher new
vehicle gross profit per unit. New vehicle gross profit per unit increased
$1,991 per unit, or 78.9%, to $4,513 per unit, due primarily to inventory
shortages as a result of vehicle manufacturer supply chain and production delays
as a result of the COVID-19 pandemic, which have generally increased the average
selling prices of such vehicles.
On a trailing quarter cost of sales basis, our reported Franchised Dealerships
Segment new vehicle inventory days' supply was approximately 16 days (11 days
excluding the effect of the RFJ Acquisition in December 2021 , which contributed
less than one month of trailing cost of sales to the days' supply calculation)
and 40 days as of December 31, 2021 and 2020, respectively. The level of new
vehicle inventory on hand continues to be below our target level as a result of
the ongoing automotive supply chain disruptions and production delays described
above, and while we anticipate that manufacturer production and new vehicle
inventory levels will begin to improve in the first half of 2022, we expect that
new vehicle inventory levels will remain low throughout 2022.
Used Vehicles - Franchised Dealerships Segment
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for retail used vehicles:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit data)
Total used vehicle revenue:
Same store $ 2,846.8 $ 2,321.2 $ 525.6 22.6 %
Acquisitions, open points, dispositions and
holding company 54.2 24.7 29.5 119.4 %
Total as reported $ 2,901.0 $ 2,345.9 $ 555.1 23.7 %
Total used vehicle gross profit:
Same store $ 182.5 $ 127.8 $ 54.7 42.8 %
Acquisitions, open points, dispositions and
holding company 5.6 (4.9) 10.5 214.3 %
Total as reported $ 188.1 $ 122.9 $ 65.2 53.1 %
Total used vehicle unit sales:
Same store 103,529 100,484 3,045 3.0 %
Acquisitions, open points, dispositions and
holding company 1,928 1,380 548 39.7 %
Total as reported 105,457 101,864 3,593 3.5 %
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Franchised Dealerships Segment reported retail used vehicle results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported used vehicle:
Revenue $ 2,901.0 $ 2,345.9 $ 555.1 23.7 %
Gross profit $ 188.1 $ 122.9 $ 65.2 53.1 %
Unit sales 105,457 101,864 3,593 3.5 %
Revenue per unit $ 27,509 $ 23,030 $ 4,479 19.4 %
Gross profit per unit $ 1,784 $ 1,207 $ 577 47.8 %
Gross profit as a % of revenue 6.5 % 5.2 % 130 bps
Our Franchised Dealerships Segment same store retail used vehicle results were
as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same store used vehicle:
Revenue $ 2,846.8 $ 2,321.2 $ 525.6 22.6 %
Gross profit $ 182.5 $ 127.8 $ 54.7 42.8 %
Unit sales 103,529 100,484 3,045 3.0 %
Revenue per unit $ 27,498 $ 23,100 $ 4,398 19.0 %
Gross profit per unit $ 1,763 $ 1,272 $ 491 38.6 %
Gross profit as a % of revenue 6.4 % 5.5 % 90 bps
Retail used vehicle revenue increased approximately $525.6 million or 22.6% and
retail used vehicle revenue per unit increased approximately 19.0%, due to
higher industry used vehicle prices as a result of increased consumer demand
from the impact of new vehicle inventory shortages during 2021. Retail used
vehicle gross profit increased approximately $54.7 million , or 42.8%, driven
primarily by a 38.6% increase in retail used vehicle gross profit per unit, as
well as a 3.0% increase in retail used vehicle unit sales volume due to
increased consumer demand for used vehicles during 2021.
On a trailing quarter cost of sales basis, our reported Franchised Dealerships
Segment used vehicle inventory days' supply was approximately 42 days (36 days
excluding the effect of the RFJ Acquisition in December 2021 , which contributed
less than one month of trailing cost of sales to the days' supply calculation)
and 30 days as of December 31, 2021 and 2020, respectively.
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSWholesale Vehicles - Franchised Dealerships Segment
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for wholesale vehicles:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit data)
Total wholesale vehicle revenue:
Same store $ 248.4 $ 167.2 $ 81.2 48.6 %
Acquisitions, open points, dispositions and
holding company 8.8 1.5 7.3 486.7 %
Total as reported $ 257.2 $ 168.7 $ 88.5 52.5 %
Total wholesale vehicle gross profit (loss):
Same store $ 7.9 $ (0.5) $ 8.4 NM
Acquisitions, open points, dispositions and
holding company (7.3) (0.3) (7.0) NM
Total as reported $ 0.6 $ (0.8) $ 1.4 175.0 %
Total wholesale vehicle unit sales:
Same store 24,583 24,623 (40) (0.2) %
Acquisitions, open points, dispositions and
holding company 545 256 289 112.9 %
Total as reported 25,128 24,879 249 1.0 %
NM = Not Meaningful
Our Franchised Dealerships Segment reported wholesale vehicle results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported wholesale vehicle:
Revenue $ 257.2 $ 168.7 $ 88.5 52.5 %
Gross profit (loss) $ 0.6 $ (0.8) $ 1.4 175.0 %
Unit sales 25,128 24,879 249 1.0 %
Revenue per unit $ 10,236 $ 6,779 $ 3,457 51.0 %
Gross profit (loss) per unit $ 24 $ (32) $ 56 175.0 %
Gross profit (loss) as a % of revenue 0.2 % (0.5) % 70 bps
Our Franchised Dealerships Segment same store wholesale vehicle results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same store wholesale vehicle:
Revenue $ 248.4 $ 167.2 $ 81.2 48.6 %
Gross profit (loss) $ 7.9 $ (0.5) $ 8.4 NM
Unit sales 24,583 24,623 (40) (0.2) %
Revenue per unit $ 10,105 $ 6,790 $ 3,315 48.8 %
Gross profit (loss) per unit $ 321 $ (20) $ 341 NM
Gross profit (loss) as a % of revenue 3.2 % (0.3) % 350 bps
NM = Not Meaningful
Wholesale vehicle revenue increased 48.6%, driven primarily by a 48.8% increase
in wholesale vehicle revenue per unit as a result of decreased wholesale vehicle
supply in the wholesale auction market due to the impact of new vehicle
inventory
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
shortages during 2021. Wholesale vehicle gross profit improved by approximately
$8.4 million , driven primarily by a $341 per unit increase in wholesale vehicle
gross profit per unit as a result of increased demand in the wholesale auction
market due to the impact of new vehicle inventory shortages during 2021.
Fixed Operations - Franchised Dealerships Segment
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for Fixed Operations:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Total Fixed Operations revenue:
Same store $ 1,322.0 $ 1,178.0 $ 144.0 12.2 %
Acquisitions, open points, dispositions and
holding company 18.4 16.4 2.0 12.2 %
Total as reported $ 1,340.4 $ 1,194.4 $ 146.0 12.2 %
Total Fixed Operations gross profit:
Same store $ 663.0 $ 587.0 $ 76.0 12.9 %
Acquisitions, open points, dispositions and
holding company 10.1 8.4 1.7 20.2 %
Total as reported $ 673.1 $ 595.4 $ 77.7 13.1 %
Our Franchised Dealerships Segment reported Fixed Operations results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Reported Fixed Operations:
Revenue
Customer pay $ 600.3 $ 504.5 $ 95.8 19.0 %
Warranty 213.8 224.9 (11.1) (4.9) %
Wholesale parts 158.8 130.1 28.7 22.1 %
Internal, sublet and other 367.5 334.9 32.6 9.7 %
Total revenue $ 1,340.4 $ 1,194.4 $ 146.0 12.2 %
Gross profit
Customer pay $ 341.0 $ 284.1 $ 56.9 20.0 %
Warranty 125.0 127.9 (2.9) (2.3) %
Wholesale parts 28.0 22.6 5.4 23.9 %
Internal, sublet and other 179.1 160.8 18.3 11.4 %
Total gross profit $ 673.1 $ 595.4 $ 77.7 13.1 %
Gross profit as a % of revenue
Customer pay 56.9 % 56.3 % 60 bps
Warranty 58.3 % 56.8 % 150 bps
Wholesale parts 17.8 % 17.4 % 40 bps
Internal, sublet and other 48.7 % 48.0 % 70 bps
Total gross profit as a % of revenue 50.2 % 49.8 % 40 bps
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Franchised Dealerships Segment same store Fixed Operations results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Same store Fixed Operations:
Revenue
Customer pay $ 592.0 $ 495.5 $ 96.5 19.5 %
Warranty 211.8 223.2 (11.4) (5.1) %
Wholesale parts 157.2 129.0 28.2 21.9 %
Internal, sublet and other 361.0 330.3 30.7 9.3 %
Total revenue $ 1,322.0 $ 1,178.0 $ 144.0 12.2 %
Gross profit
Customer pay $ 337.1 $ 279.5 $ 57.6 20.6 %
Warranty 123.3 126.9 (3.6) (2.8) %
Wholesale parts 28.0 22.4 5.6 25.0 %
Internal, sublet and other 174.6 158.2 16.4 10.4 %
Total gross profit $ 663.0 $ 587.0 $ 76.0 12.9 %
Gross profit as a % of revenue
Customer pay 56.9 % 56.4 % 50 bps
Warranty 58.2 % 56.9 % 130 bps
Wholesale parts 17.8 % 17.4 % 40 bps
Internal, sublet and other 48.4 % 47.9 % 50 bps
Total gross profit as a % of revenue 50.2 % 49.8 % 40 bps
Fixed Operations revenue increased approximately $144.0 million , or 12.2%, and
Fixed Operations gross profit increased approximately $76.0 million , or 12.9%.
Customer pay gross profit increased approximately $57.6 million , or 20.6%,
warranty gross profit decreased approximately $3.6 million , or 2.8%, wholesale
parts gross profit increased approximately $5.6 million , or 25.0%, and internal,
sublet and other gross profit increased approximately $16.4 million , or 10.4%.
While our Fixed Operations business was not specifically restricted by state and
local shelter-in-place or stay-at-home orders, consumer behavior was disrupted
by such orders beginning in March 2020 and we experienced lower levels of Fixed
Operations activity through most of 2020. During 2021, daily vehicle use and
vehicle miles driven improved, driving higher levels of Fixed Operations
activity.
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSF&I - Franchised Dealerships Segment
The following table provides a reconciliation of Franchised Dealerships Segment reported basis and same store basis for F&I:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Total F&I revenue:
Same store $ 409.5 $ 334.5 $ 75.0 22.4 %
Acquisitions, open points, dispositions
and holding company 34.0 23.3 10.7 45.9 %
Total as reported $ 443.5 $ 357.8 $ 85.7 24.0 %
Total F&I gross profit per retail unit
(excludes fleet):
Same store $ 2,034 $ 1,749 $ 285 16.3 %
Reported $ 2,160 $ 1,846 $ 314 17.0 %
Total combined retail new and used vehicle
unit sales:
Same store 202,925 192,608 10,317 5.4 %
Acquisitions, open points, dispositions
and holding company 5,890 2,537 3,353 132.2 %
Total as reported 208,815 195,145 13,670 7.0 %
Our Franchised Dealerships Segment reported F&I results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported F&I:
Revenue $ 443.5 $ 357.8 $ 85.7 24.0 %
Unit sales 208,815 195,145 13,670 7.0 %
Gross profit per retail unit (excludes
fleet) $ 2,160 $ 1,846 $ 314 17.0 %
Our Franchised Dealerships Segment same store F&I results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same store F&I:
Revenue $ 409.5 $ 334.5 $ 75.0 22.4 %
Unit sales 202,925 192,608 10,317 5.4 %
Gross profit per retail unit (excludes
fleet) $ 2,034 $ 1,749 $ 285 16.3 %
F&I revenues increased approximately $75.0 million , or 22.4%, due to a 16.3%
increase in F&I gross profit per retail unit, driven by a 5.4% increase in
retail new and used vehicle unit sales volume. F&I gross profit per retail unit
increased $285 per unit, or 16.3%, to $2,034 per unit, primarily due to an
increase in gross profit per finance contract and higher penetration rates
across all F&I products. Finance contract revenue increased 26.9%, primarily due
to a 20.6% increase in gross profit per finance contract and a 5.2% increase in
finance contract volume, offset by a 10-basis point decrease in the combined new
and used vehicle finance contract penetration rate. Service contract revenue
increased 19.1%, due primarily to a 310-basis point increase in the service
contract penetration rate, a 4.2% increase in gross profit per service contract,
and a 14.3% increase in service contract volume. Other aftermarket contract
revenue increased 25.9%, driven primarily by a 16.8% increase in other
44
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSaftermarket contract volume, a 7.8% increase in gross profit per other aftermarket contract, and a 1,560-basis point increase in the other aftermarket contract penetration rate.
Results of Operations - EchoPark Segment
All currently operating EchoPark stores in a local geographic market are included within the same market group as of the first full month following the first anniversary of the market's opening. Due to the ongoing expansion of our EchoPark Segment, same market results may vary significantly from reported results due to newly opened markets that began operations in the last 13 months.
Used Vehicles and F&I - EchoPark Segment
Based on the way we manage the EchoPark Segment, our operating strategy focuses on maximizing total used vehicle-related gross profit (based on a combination of retail used vehicle unit sales volume, front-end retail used vehicle gross profit (loss) per unit and F&I gross profit per unit) rather than realizing traditional levels of front-end retail used vehicle gross profit (loss) per unit. As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is a combined total gross profit per unit, which includes both front-end retail used vehicle gross profit (loss) and F&I gross profit per unit sold. See the discussion under the heading "Results of Operations - Franchised Dealerships Segment" for additional discussion of the macro drivers of used vehicle revenues and F&I revenues. As all Fixed Operations at our EchoPark stores support our used vehicle operations and EchoPark stores do not currently perform customer pay repairs or maintenance work and are not permitted to perform manufacturer-paid warranty repairs, amounts previously classified as Fixed Operations revenues and cost of sales for the EchoPark Segment have been reclassified to used vehicle cost of sales.
The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for retail used vehicles:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit data)
Total used vehicle revenue:
Same market $ 1,588.4 $ 1,253.9 $ 334.5 26.7 %
New markets 444.2 4.3 439.9 NM
Total as reported $ 2,032.6 $ 1,258.2 $ 774.4 61.5 %
Total used vehicle gross profit (loss):
Same market $ (43.4) $ (34.6) $ (8.8) (25.4) %
New markets (11.8) 16.6 (28.4) (171.1) %
Total as reported $ (55.2) $ (18.0) $ (37.2) (206.7) %
Total used vehicle unit sales:
Same market 60,815 56,974 3,841 6.7 %
New markets 17,020 187 16,833 NM
Total as reported 77,835 57,161 20,674 36.2 %
NM = Not Meaningful
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSThe following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for F&I:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Total F&I revenue:
Same market $ 152.6 $ 131.0 $ 21.6 16.5 %
New markets 41.1 1.1 40.0 NM
Total as reported $ 193.7 $ 132.1 $ 61.6 46.6 %
NM = Not Meaningful
Our EchoPark Segment reported retail used vehicle and F&I results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported used vehicle and F&I:
Used vehicle revenue $ 2,032.6 $ 1,258.2 $ 774.4 61.5 %
Used vehicle gross profit (loss) $ (55.2) $ (18.0) $ (37.2) (206.7) %
Used vehicle unit sales 77,835 57,161 20,674 36.2 %
Used vehicle revenue per unit $ 26,114 $ 22,012 $ 4,102 18.6 %
F&I revenue $ 193.7 $ 132.1 $ 61.6 46.6 %
Combined used vehicle gross profit and
F&I revenue $ 138.5 $ 114.1 $ 24.4 21.4 %
Total used vehicle and F&I gross profit
per unit $ 1,779 $ 1,996 $ (217) (10.9) %
Our EchoPark Segment same market retail used vehicle and F&I results were as
follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same market used vehicle and F&I:
Used vehicle revenue $ 1,588.4 $ 1,253.9 $ 334.5 26.7 %
Used vehicle gross profit (loss) $ (43.4) $ (34.6) $ (8.8) (25.4) %
Used vehicle unit sales 60,815 56,974 3,841 6.7 %
Used vehicle revenue per unit $ 26,119 $ 22,008 $ 4,111 18.7 %
F&I revenue $ 152.6 $ 131.0 $ 21.6 16.5 %
Combined used vehicle gross profit and
F&I revenue $ 109.2 $ 96.4 $ 12.8 13.3 %
Total used vehicle and F&I gross profit
per unit $ 1,796 $ 1,692 $ 104 6.1 %
Reported retail used vehicle revenue increased approximately $774.4 million , or
61.5%, due to a 36.2% increase in retail used vehicle unit sales volume, as well
as an 18.6% increase in retail used vehicle revenue per unit. Reported combined
retail used vehicle gross profit and F&I revenue increased approximately $24.4
million , or 21.4%, due to a $61.6 million , or 46.6%, increase in F&I revenue,
offset partially by an approximately $37.2 million increase in retail used
vehicle gross loss. The decrease in total retail used vehicle and F&I gross
profit per unit was due primarily to the higher cost of inventory acquisition as
a result of increased demand in the wholesale auction market for much of 2021,
offset partially by an increase in F&I product penetration rates.
Within F&I revenue, reported finance contract gross profit increased
approximately $18.4 million , or 49.2%, due to a 37.6% increase in total finance
contract volume, as well as an 8.5% increase in gross profit per finance
contract. Reported service contract gross profit increased approximately $31.2
million , or 43.3%, due to a 40.7% increase in total service contract volume, as
well as a 1.9% increase in gross profit per service contract. Reported other
aftermarket product contract gross profit increased approximately $12.1 million ,
or 53.4%, due to a 44.3% increase in total other aftermarket product contract
volume, as well as a 6.5% increase in gross profit per other aftermarket product
contract.
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On a trailing quarter cost of sales basis, our reported used vehicle inventory
days' supply in our EchoPark Segment was approximately 70 days (39 days
excluding the effect of the RFJ Acquisition in December 2021 , which contributed
less than one month of trailing cost of sales to the days' supply calculation)
and 41 days as of December 31, 2021 and 2020, respectively. We generally focus
on maintaining used vehicle inventory days' supply in the 30- to 35-day range,
which may fluctuate seasonally, in order to limit our exposure to market pricing
volatility. The elevated level of used vehicle inventory days' supply as of
December 31, 2021 was due primarily to the opening of several new EchoPark
stores during 2021, which required additional inventory on hand but were not yet
generating retail used vehicle sales at the rate of a more mature store, and the
acquisition of 11 Northwest Motorsport pre-owned vehicle stores in the RFJ
Acquisition in December 2021 .
Same market retail used vehicle revenue increased approximately $334.5 million ,
or 26.7%, driven primarily by an 18.7% increase in retail used vehicle revenue
per unit, as well as a 6.7% increase in retail used vehicle unit sales volume.
Same market combined retail used vehicle gross profit and F&I revenue increased
approximately $12.8 million , or 13.3%, driven primarily by a $21.6 million , or
16.5%, increase in F&I revenue, offset partially by an approximately $8.8
million increase in retail used vehicle gross loss.
Wholesale Vehicles - EchoPark Segment
See the discussion under the heading "Results of Operations - Franchised Dealerships Segment" for additional discussion of the macro drivers of wholesale vehicle revenues.
The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market basis for wholesale vehicles:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit data)
Total wholesale vehicle revenue:
Same market $ 85.8 $ 28.6 $ 57.2 200.0 %
New markets 24.2 0.1 24.1 NM
Total as reported $ 110.0 $ 28.7 $ 81.3 283.3 %
Total wholesale vehicle gross profit
(loss):
Same market $ 7.4 $ (0.1) $ 7.5 NM
New markets 1.8 - 1.8 100.0 %
Total as reported $ 9.2 $ (0.1) $ 9.3 NM
Total wholesale vehicle unit sales:
Same market 8,664 7,154 1,510 21.1 %
New markets 3,003 24 2,979 NM
Total as reported 11,667 7,178 4,489 62.5 %
NM = Not Meaningful
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSOur EchoPark Segment reported wholesale vehicle results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Reported wholesale vehicle:
Revenue $ 110.0 $ 28.7 $ 81.3 283.3 %
Gross profit (loss) $ 9.2 $ (0.1) $ 9.3 NM
Unit sales 11,667 7,178 4,489 62.5 %
Revenue per unit $ 9,428 $ 4,002 $ 5,426 135.6 %
Gross profit (loss) per unit $ 789 $ (11) $ 800 NM
Gross profit (loss) as a % of revenue 8.4 % (0.3) % 870 bps
NM = Not Meaningful
Our EchoPark Segment same market wholesale vehicle results were as follows:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions, except unit and per unit data)
Same market wholesale vehicle:
Revenue $ 85.8 $ 28.6 $ 57.2 200.0 %
Gross profit (loss) $ 7.4 $ (0.1) $ 7.5 NM
Unit sales 8,664 7,154 1,510 21.1 %
Revenue per unit $ 9,903 $ 3,998 $ 5,905 147.7 %
Gross profit (loss) per unit $ 854 $ (14) $ 868 NM
Gross profit (loss) as a % of revenue 8.6 % (0.3) % 890 bps
NM = Not Meaningful
Same market wholesale vehicle revenue increased 200.0% and same market wholesale
vehicle gross profit improved by approximately $7.5 million , due primarily to
higher trade-in volume, which drove a 21.1% increase in same market wholesale
vehicle unit sales volume and an increase in same market wholesale vehicle gross
profit per unit of approximately $868 per unit, due to excess demand in the
wholesale auction market driving higher wholesale pricing. Given EchoPark's
retail inventory mix, the majority of vehicles acquired from guests on trade-ins
cannot be sold as retail at our EchoPark stores and are subsequently sold at
auction or transferred to one of our franchised dealerships to be sold as a
retail used vehicle. However, a successful acquisition of a guest's trade-in
vehicle often facilitates a retail used vehicle sale transaction that otherwise
may not have occurred, driving higher overall gross profit. Our overall EchoPark
inventory acquisition and pricing strategy reduces the risk of aged inventory
that must be sold at auction (which would typically have a higher wholesale
vehicle gross loss per unit) and increases the volume of trade-ins that we
obtain from guests.
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Segment Results Summary
In the following table of financial data, total segment income of the reportable
segments is reconciled to consolidated income (loss) from continuing operations
before taxes and impairment charges. See above for tables and discussion of
results by reportable segment.
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
Segment Revenues: (In millions, except unit data)
Franchised Dealerships Segment Revenues:
New vehicles $ 5,109.0 $ 4,281.2 $ 827.8 19.3 %
Used vehicles 2,901.0 2,345.9 555.1 23.7 %
Wholesale vehicles 257.2 168.7 88.5 52.5 %
Parts, service and collision repair 1,340.4 1,194.4 146.0 12.2 %
Finance, insurance and other, net 443.5 357.8 85.7 24.0 %
Franchised Dealerships Segment revenues $ 10,051.1 $ 8,348.0 $ 1,703.1 20.4 %
EchoPark Segment Revenues:
New vehicles $ 9.0 $ - $ 9.0 100.0 %
Used vehicles $ 2,032.6 $ 1,258.2 $ 774.4 61.5 %
Wholesale vehicles 110.0 28.7 81.3 283.3 %
Finance, insurance and other, net 193.7 132.1 61.6 46.6 %
EchoPark Segment revenues $ 2,345.3 $ 1,419.0 $ 926.3 65.3 %
Total consolidated revenues $ 12,396.4 $ 9,767.0 $ 2,629.4 26.9 %
Segment Income (Loss) (1):
Franchised Dealerships Segment (2) $ 530.3 $ 231.2 $ 299.1 129.4 %
EchoPark Segment (3) (72.0) 4.0 (76.0) NM
Total segment income (loss) $ 458.3 $ 235.2 $ 223.1 94.9 %
Impairment charges (4) (0.1) (270.0) 269.9 100.0 %
Income (loss) from continuing operations
before taxes $ 458.2 $ (34.8) $ 493.0 NM
Retail New and Used Vehicle Unit Sales
Volume:
Franchised Dealerships Segment 208,815 195,145 13,670 7.0 %
EchoPark Segment 77,963 57,161 20,802 36.4 %
Total retail new and used vehicle unit
sales volume 286,778 252,306 34,472 13.7 %
NM = Not Meaningful
(1)Segment income (loss) for each segment is defined as income (loss) from
continuing operations before taxes and impairment charges.
(2)For 2021, the above amount includes approximately $15.5 million of pre-tax
net loss on the extinguishment of debt, approximately $3.0 million of pre-tax
net loss on the acquisition of franchised dealerships, partially offset by
approximately $1.8 million of pre-tax net gain on the disposal of franchised
dealerships. For 2020, the above amount includes approximately $4.0 million of
pre-tax net gain on the disposal of franchised dealerships.
(3)For 2021, the above amount includes approximately $6.5 million of long-term
compensation-related expenses. For 2020, the above amount includes approximately
$5.2 million of pre-tax net gain on the disposal of land and buildings at former
EchoPark locations.
(4)For 2021, the above amount includes approximately $0.1 million of pre-tax
impairment charges for the EchoPark Segment. For 2020, the above amount includes
approximately $270.0 million of pre-tax impairment charges for the Franchised
Dealerships Segment.
49
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SONIC AUTOMOTIVE, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSSelling, General and Administrative ("SG&A") Expenses - Consolidated
Consolidated SG&A expenses are comprised of four major groups: compensation
expense, advertising expense, rent expense and other expense. Compensation
expense primarily relates to store personnel who are paid a commission or a
salary plus commission and support personnel who are generally paid a fixed
salary. Commissions paid to store personnel typically vary depending on gross
profits realized and sales volume objectives. Due to the salary component for
certain store and corporate personnel, gross profits and compensation expense do
not change in direct proportion to one another. Advertising expense and other
expense vary based on the level of actual or anticipated business activity and
the number of dealerships in operation. Rent expense typically varies with the
number of store locations owned, investments made for facility improvements and
interest rates. Other expense includes various fixed and variable expenses,
including gain on disposal of franchises, certain customer-related costs such as
gasoline and service loaners, and insurance, training, legal and IT expenses,
which may not change in proportion to gross profit levels.
The following table sets forth information related to our consolidated reported
SG&A expenses:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
SG&A expenses:
Compensation $ 834.5 $ 659.8 $ (174.7) (26.5) %
Advertising 61.6 42.2 (19.4) (46.0) %
Rent 53.2 54.5 1.3 2.4 %
Other 325.4 272.2 (53.2) (19.5) %
Total SG&A expenses $ 1,274.7 $ 1,028.7 $ (246.0) (23.9) %
SG&A expenses as a % of gross profit:
Compensation 43.6 % 46.3 % 270 bps
Advertising 3.2 % 3.0 % (20) bps
Rent 2.8 % 3.8 % 100 bps
Other 17.0 % 19.2 % 220 bps
Total SG&A expenses as a % of gross profit 66.6 % 72.3 % 570 bps
Overall SG&A expenses increased in dollar amount primarily due to an increase in
compensation expense as a result of higher levels of sales volume, but decreased
as a percentage of gross profit, primarily due to higher overall gross profit
levels and the effects of expense optimization efforts that began in mid-2020.
Compensation expense increased in dollar amount but decreased as a percentage of
gross profit, primarily due to increased sales associate productivity during
2021, as well as higher overall gross profit levels. Advertising expense
increased in both dollar amount and as a percentage of gross profit, due
primarily to higher levels of advertising spend at EchoPark to support our
growth strategy. Rent expense decreased in dollar amount and as a percentage of
gross profit, primarily due to the purchase of several properties that were
previously leased. Other SG&A expenses increased in dollar amount but decreased
as a percentage of gross profit, primarily due primarily to higher gross profit
levels and a continued focus on expense optimization.
SG&A expenses for 2021 include approximately $1.8 million of net gain on the
disposal of franchised dealerships and approximately $6.5 million of long-term
compensation expenses. SG&A expenses for 2020 include approximately $4.0 million
of net gain on the disposal of franchised dealerships and approximately $5.2
million of net gain on disposal of real estate.
Impairment Charges - Consolidated
Impairment charges were approximately$0.1 million and$270.0 million in 2021 and 2020, respectively. Impairment charges for 2021 include approximately$0.1 million of charges related to operating lease right-of-use ("ROU") asset impairment for a former EchoPark location. Impairment charges for 2020 include approximately$268.0 million related to goodwill, and approximately$2.0 million related to the write-off of certain construction project costs. 50 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSDepreciation and Amortization - Consolidated
Depreciation expense increased approximately$10.1 million , or 11.1%, in 2021, due primarily to the opening or acquisition of additional EchoPark stores and the construction projects completed and placed into service in our Franchised Dealerships Segment.
Interest Expense, Floor Plan - Consolidated
Interest expense, floor plan for new vehicles decreased approximately$13.4 million , or 63.0%. The average new vehicle floor plan interest rate was 0.74% in 2021, down from 1.72% in 2020, the effect of which resulted in a decrease in new vehicle floor plan interest expense of approximately$10.5 million . The average new vehicle floor plan notes payable balance decreased approximately$172.3 million , the effect of which decreased new vehicle floor plan interest expense by approximately$3.0 million . Interest expense, floor plan for used vehicles increased approximately$3.0 million , or 50.1%. The average used vehicle floor plan interest rate was 1.75% in 2021, down from 2.02% in 2020, the effect of which resulted in a decrease in used vehicle floor plan interest expense of approximately$1.4 million . The average used vehicle floor plan notes payable balance increased approximately$215.7 million , the effect of which increased used vehicle floor plan interest expense by approximately$4.4 million , partially offsetting the impact of lower interest rates.
Interest Expense, Other, Net - Consolidated
Interest expense, other, net is summarized in the table below:
Year Ended December 31, Better / (Worse)
2021 2020 Change % Change
(In millions)
Stated/coupon interest $ 37.0 $ 33.7 $ (3.3) (9.8) %
Deferred loan cost amortization 3.3 2.9 (0.4) (13.8) %
Interest rate hedge expense (benefit) 1.5 (0.3) (1.8) (600.0) %
Capitalized interest (1.8) (0.7) 1.1 157.1 %
Interest on finance lease liabilities 7.4 5.4 (2.0) (37.0) %
Other interest 0.6 0.6 - - %
Total interest expense, other, net $ 48.0 $ 41.6 $ (6.4) (15.4) %
Interest expense, other, net increased approximately $6.4 million , or 15.4%,
primarily due an increase in principal borrowings related to the issuance of the
4.625% Notes and the 4.875% Notes in October 2021 , an increase in interest rate
hedge expense, and an increase in interest on finance lease liabilities, offset
partially by an increase in capitalized interest.
Provision for Income Taxes - Consolidated
The overall effective tax rate from continuing operations was 23.9% and (45.7)% for 2021 and 2020, respectively. Income tax expense for 2021 includes a$5.3 million discrete benefit related to vested or exercised stock compensation awards, a$0.1 million discrete benefit related to tax credits, a$1.0 million discrete benefit related to the reduction of the valuation allowance for state net operating loss carryforwards, offset partially by a$2.9 million discrete charge related to non-deductible executive compensation and a$1.2 million discrete charge related to changes in uncertain tax positions. Our effective tax rate varies from year to year based on the level of taxable income, the distribution of taxable income between states in which the Company operates and other tax adjustments.
Use of Estimates and Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from
those estimates.
Critical accounting policies are those that management has determined are most
important to the portrayal of our financial position and results of operations
and require the most subjective judgments or estimates. See Note 1, "Description
of
51
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSBusiness and Summary of Significant Accounting Policies," to the accompanying consolidated financial statements for additional discussion regarding our critical accounting policies and estimates.
In accordance with ASC Topic 350, "Intangibles -Goodwill and Other," we test goodwill for impairment at least annually (as ofOctober 1 of each year) or more frequently if indications of impairment exist. The ASC also states that if an entity determines, based on an assessment of certain qualitative factors, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative goodwill impairment test is unnecessary. For purposes of goodwill impairment testing, we have two reporting units, which consist of (1) our traditional franchised dealerships and (2) our EchoPark stores (these reporting units also represent our reportable segments). The carrying value of our goodwill totaled approximately$416.4 million atDecember 31, 2021 ,$251.2 million of which was related to our franchised dealership reporting unit and$165.2 million of which was related to our EchoPark reporting unit. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount of the required goodwill impairment. In conjunction with ourOctober 1, 2021 annual test, we determined it was appropriate to evaluate goodwill for impairment qualitatively as it was determined that it was more likely than not the fair value of the reporting units exceeded the carrying values for both reporting units. Based on this qualitative assessment, we determined no impairment existed for either reporting unit as ofOctober 1, 2021 . See Note 1, "Description of Business and Summary of Significant Accounting Policies," to the accompanying consolidated financial statements for further discussion. Pursuant to the applicable accounting pronouncements, we were required to evaluate the recoverability of our indefinite lived intangible assets during the first quarter of 2020 as a result of the effects of the COVID-19 pandemic on our operations and market value. Based on this evaluation, we determined the carrying value of the goodwill related to our franchised dealership reporting unit was greater than the fair value of the reporting unit. Accordingly, we recorded a non-cash goodwill impairment charge of$268.0 million and a corresponding income tax benefit of$51.3 million to reduce the carrying value to fair value as ofMarch 31, 2020 . We utilized the discounted ("DCF") method, using unobservable inputs (Level 3) to estimate Sonic's enterprise value as ofMarch 31, 2020 and reconciled the discounted cash flows to Sonic's market capitalization, using quoted market price inputs (Level 1). The significant assumptions in our DCF model include projected earnings, a discount rate (and estimates in the discount rate inputs), control premium factors and residual growth rates. Based on the improvement in our business operations and market value during the second, third and fourth quarters of 2020, our future forecast expectations, and the results of our qualitative test, it was determined to be more likely than not that the fair value of our reporting units exceeded the carrying value. In accordance with ASC Topic 350, "Intangibles -Goodwill and Other," we evaluate franchise assets for impairment annually (as ofOctober 1 of each year) or more frequently if indicators of impairment exist. We estimate the fair value of our franchise assets using a DCF model. The DCF model used contains inherent uncertainties, including significant estimates and assumptions related to projected revenue, projected operating margins, a discount rate (and estimates in the discount rate inputs) and residual growth rates. We are subject to financial risk to the extent that our franchise assets become impaired due to deterioration of the underlying businesses. The risk of a franchise asset impairment charge may increase to the extent the underlying businesses' actual earnings or projected earnings experience a significant decline. As a result of our impairment testing as ofOctober 1, 2021 , each of our franchise assets' fair values exceeded its carrying value and no franchise asset impairment charges were recorded in the accompanying consolidated statements of operations. The carrying value of our franchise assets totaled approximately$480.2 million atDecember 31, 2021 , and is included in other intangible assets, net in the accompanying consolidated balance sheet as of such date.
Finance, Insurance and Service Contracts
We arrange financing for our guests through various financial institutions and
receive a commission from the financial institution either in a flat fee amount
or in an amount equal to the difference between the interest rates charged to
our guests and the predetermined interest rates set by the financial
institution. We also receive commissions from the sale of various insurance
contracts and non-recourse third-party extended service contracts. Under these
contracts, the applicable manufacturer or third-party warranty company is
directly liable for all warranties provided within the contract. Retrospective
finance and insurance revenues ("F&I retro revenues") are recognized when the
product contract has been executed with the end customer and the transaction is
estimated each reporting period based on the expected value method using
historical and projected data. F&I retro revenues can vary based on a variety of
factors, including numbers of contracts and history of cancellations and claims.
Accordingly, we utilize this historical and projected data to constrain the
consideration to the extent that it is probable that a significant reversal in
the amount of cumulative revenue will not occur when the uncertainty associated
with the variable
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
consideration is subsequently resolved. Receivables, net in the accompanying
consolidated balance sheets as of December 31, 2021 and 2020 include
approximately $34.9 million and $21.7 million , respectively, related to contract
assets from F&I retro revenue recognition. Changes in contract assets from
December 31, 2020 to December 31, 2021 were primarily due to ordinary business
activity, including the receipt of cash for amounts earned and recognized in
prior periods. Historically, our actual F&I retro revenue amounts earned have
not been materially different from our recorded estimates.
In the event a customer terminates a financing, insurance or extended service
contract prior to the scheduled maturity date, we may be required to return a
portion of the commission revenue originally recorded as income by Sonic to the
third-party provider (known as a "chargeback"). The commission revenue for the
sale of these products and services is recorded net of estimated chargebacks at
the time of sale. Our estimate of future chargebacks is established based on our
historical chargeback rates, termination provisions of the applicable contracts
and data provided by the third-party underwriter of the contracts. While
expected chargeback rates vary depending on the type of contract sold, a
100-basis point change in the estimated chargeback rates used in determining our
estimates of future chargebacks would have changed our estimated reserve for
chargebacks at December 31, 2021 by approximately $3.5 million . Our estimate of
chargebacks was approximately $60.5 million as of December 31, 2021 , compared to
approximately $34.2 million as of December 31, 2020 , primarily driven by higher
F&I revenues and the RFJ Acquisition included beginning in December 2021 . Our
chargeback reserve estimate is influenced by the level of F&I revenues and the
timing and number of early contract termination events, such as vehicle
repossessions, loan refinancing, and early pay-offs. If these events become more
or less common, or if there is a shift in the timing of these cancellations, the
resulting impact could affect our estimated reserve for chargebacks and could
have a material adverse impact on our operating results, financial position and
cash flows. Historically, our actual chargeback experience has not been
materially different from our recorded estimates.
Income Taxes
As a matter of course, we are regularly audited by various taxing authorities and, from time to time, these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes. We believe that our tax positions comply, in all material respects, with applicable tax law and that we have adequately provided for any reasonably foreseeable outcome related to these matters. From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and disposals, including consideration paid or received in connection with such transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. We determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that does not meet the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the consolidated financial statements. The tax position is measured at the largest amount of benefit that is likely to be realized upon ultimate settlement. We adjust our estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent. AtDecember 31, 2021 , there were approximately$5.8 million in reserves that we had provided for these matters (including estimates related to possible interest and penalties) with approximately$0.5 million included in other accrued liabilities and approximately$5.3 million recorded in other long-term liabilities in the accompanying consolidated balance sheet as of such date. The effects on our consolidated financial statements of income tax uncertainties are discussed in Note 7, "Income Taxes," to the accompanying consolidated financial statements. We periodically review all deferred tax asset positions (including state net operating loss carryforwards) to determine whether it is more likely than not that the deferred tax assets will be realized. Certain factors considered in evaluating the potential for realization of deferred tax assets include the time remaining until expiration (related to state net operating loss carryforwards) and various sources of taxable income that may be available under the tax law to realize a tax benefit related to a deferred tax asset. This evaluation requires management to make certain assumptions about future profitability, the execution of tax strategies that may be available to us and the likelihood that these assumptions or execution of tax strategies would occur. This evaluation is highly judgmental. The results of future operations, regulatory framework of these taxing authorities and other related matters cannot be predicted with certainty. Therefore, actual realization of these deferred tax assets may be materially different from management's estimate. As ofDecember 31, 2021 and 2020, we had recorded a valuation allowance amount of approximately$4.1 million and$5.2 million , respectively, related to certain state net operating loss carryforward deferred tax assets as we determined that we 53 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSwould not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.
We make certain estimates, judgments and assumptions in the calculation of our provision for income taxes, in the resulting tax liabilities and in the recoverability of deferred tax assets. These estimates, judgments and assumptions are updated quarterly by our management based on available information and take into consideration estimated income taxes based on prior year income tax returns, changes in income tax law, our income tax strategies and other factors. If our management receives information which causes us to change our estimate of the year-end liability, the amount of expense or expense reduction required to be recorded in any particular quarter could be material to our operating results, financial position and cash flows.
Recent Accounting Pronouncements
InMarch 2020 , theFinancial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (ASC Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides optional guidance for a limited period of time to ease potential accounting impact associated with transitioning away from reference rates that are expected to be discontinued, such as LIBOR. The amendments in this ASU apply only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued. The amendments in ASU 2020-04 could be adopted beginningJanuary 1, 2020 and are effective throughDecember 31, 2022 . InJanuary 2021 , the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in ASC Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. We do not currently have any contracts that have been modified, amended or renegotiated to accommodate a transition to a new reference rate, but we will continue to evaluate any such modifications or amendments to our contracts to determine the applicability of this standard on our consolidated financial statements and related financial statement disclosures.
Liquidity and Capital Resources
We require cash to fund debt service, lease obligations, working capital requirements, facility improvements and other capital improvements, and dividends on our common stock and to finance acquisitions and otherwise invest in our business. We rely on cash flows from operations, borrowings under our revolving credit and floor plan borrowing arrangements, real estate mortgage financing, asset sales and offerings of debt and equity securities to meet these requirements. We were in compliance with all restrictive covenants under our debt agreements as ofDecember 31, 2021 and expect to be in compliance for at least the next 12 months. We closely monitor our available liquidity and projected future operating results in order to remain in compliance with the restrictive covenants under the 2021 Credit Facilities, the 2019 Mortgage Facility, the indentures governing the 4.625% Notes and the 4.875% Notes, and our other debt obligations and lease arrangements. However, our liquidity could be negatively affected if we fail to comply with the financial covenants in our existing debt or lease arrangements. After giving effect to the applicable restrictions on the payment of dividends under our debt agreements, as ofDecember 31, 2021 , we had approximately$399.8 million of net income and retained earnings free of such restrictions. Cash flows provided by our dealerships are derived from various sources. The primary sources include individual consumers, automobile manufacturers, automobile manufacturers' captive finance subsidiaries and other financial institutions. Disruptions in these cash flows could have a material adverse impact on our operations and overall liquidity. Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flows and ability to service our obligations depend to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash. 54 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We had the following liquidity resources available as of December 31, 2021 and
2020:
December 31, 2021 December 31, 2020
(In millions)
Cash and cash equivalents $ 299.4 $ 170.3
Availability under the 2021 Revolving Credit Facility (1) 281.4 214.7
Availability under the 2019 Mortgage Facility 22.2 11.2
Availability under the 2020 Line of Credit Facility (2) - 57.0
Floor plan deposit balance 99.8 73.2
Total available liquidity resources $ 702.8 $ 526.4
(1)The balance as of December 31, 2020 was under the Company's prior revolving
credit facility, which was replaced by the 2021 Revolving Credit Facility on
April 14, 2021 .
(2)The 2020 Line of Credit Facility was terminated on October 1, 2021 .
We participate in a program with two of our lender partners wherein we maintain
a floor plan deposit balance (as shown in the table above) with the lender that
earns interest based on the agreed upon rate, effectively reducing the net floor
plan interest expense with the lender. This deposit balance is not designated as
a prepayment of notes payable - floor plan, nor is it our intent to use this
amount to offset principal amounts owed under notes payable - floor plan in the
future, although we have the right and ability to do so. The deposit balances of
approximately $99.8 million as of December 31, 2021 and approximately $73.2
million as of December 31, 2020 are classified as other current assets in the
accompanying consolidated balance sheets as of December 31, 2021 and 2020.
Long-Term Debt and Credit Facilities
2021 Credit Facilities
OnApril 14, 2021 , we entered into an amended and restated syndicated revolving credit facility (the "2021 Revolving Credit Facility") and amended and restated syndicated new and used vehicle floor plan credit facilities (the "2021 Floor Plan Facilities" and, together with the 2021 Revolving Credit Facility, the "2021 Credit Facilities"). The amendment and restatement of the 2021 Credit Facilities extended the scheduled maturity dates toApril 14, 2025 . OnOctober 8, 2021 , we entered into an amendment to the 2021 Credit Facilities (the "Credit Facility Amendment") to, among other things: (1) increase the aggregate commitments under the 2021 Revolving Credit Facility to the lesser of$350.0 million (which may be increased at the Company's option up to$400.0 million upon satisfaction of certain conditions) and the applicable revolving borrowing base, and the 2021 Floor Plan Facilities to$2.6 billion (which, under certain conditions, may be increased at the Company's option up to$2.85 billion that may be allocated between the 2021 New Vehicle Floor Plan Facility (as defined below) and the 2021 Used Vehicle Floor Plan Facility (as defined below) as the Company requests); and (2) permit the issuance of the 4.625% Notes and the 4.875% Notes. As amended, availability under the 2021 Revolving Credit Facility is calculated as the lesser of$350.0 million or a borrowing base calculated based on certain eligible assets, less the aggregate face amount of any outstanding letters of credit under the 2021 Revolving Credit Facility (the "2021 Revolving Borrowing Base"). The 2021 Revolving Credit Facility may be increased at our option up to$400.0 million upon satisfaction of certain conditions. As ofDecember 31, 2021 , the 2021 Revolving Borrowing Base was approximately$293.7 million based on balances as of such date. As ofDecember 31, 2021 , we had no outstanding borrowings and approximately$12.3 million in outstanding letters of credit under the 2021 Revolving Credit Facility, resulting in$281.4 million remaining borrowing availability under the 2021 Revolving Credit Facility. The 2021 Floor Plan Facilities are composed of a new vehicle revolving floor plan facility (as amended, the "2021 New Vehicle Floor Plan Facility") and a used vehicle revolving floor plan facility (as amended, the "2021 Used Vehicle Floor Plan Facility"), in a combined amount of up to$2.6 billion . We may, under certain conditions, request an increase in the 2021 Floor Plan Facilities to a maximum borrowing limit of up to$2.85 billion , which shall be allocated between the 2021 New Vehicle Floor Plan Facility and the 2021 Used Vehicle Floor Plan Facility as we request, with no more than 40% of the aggregate commitments allocated to the commitments under the 2021 Used Vehicle Floor Plan Facility. Our obligations under the 2021 Credit Facilities are guaranteed by us and certain of our subsidiaries and are secured by a pledge of substantially all of our and our subsidiaries' assets. As of the dates presented in the accompanying consolidated financial statements, the amounts outstanding under the 2021 Credit Facilities bear interest at variable rates based on specified 55 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
percentages above LIBOR. We have agreed under the 2021 Credit Facilities not to
pledge any assets to any third parties (other than those explicitly allowed to
be pledged by the amended terms of the 2021 Credit Facilities), including other
lenders, subject to certain stated exceptions, including floor plan financing
arrangements. In addition, the 2021 Credit Facilities contain certain negative
covenants, including covenants which could restrict or prohibit indebtedness,
liens, the payment of dividends, capital expenditures and material dispositions
and acquisitions of assets, as well as other customary covenants and default
provisions. Specifically, the 2021 Credit Facilities permit quarterly cash
dividends on our Class A and Class B Common Stock up to $0.25 per share so long
as no Event of Default (as defined in the 2021 Credit Facilities) has occurred
and is continuing and provided that we remain in compliance with all financial
covenants under the 2021 Credit Facilities.
6.125% Notes
OnMarch 10, 2017 , we issued$250.0 million in aggregate principal amount of unsecured 6.125% Senior Subordinated Notes, which were scheduled to mature onMarch 15, 2027 (the "6.125% Notes"). OnOctober 28, 2021 , Sonic redeemed all of the outstanding 6.125% Notes using a portion of the net proceeds from the issuance and sale of the 4.625% Notes and the 4.875% Notes (as described below). Sonic paid approximately$263.2 million in cash, including an early redemption premium and accrued and unpaid interest, to extinguish the 6.125% Notes and recognized a loss of approximately$15.6 million on the repurchase of the 6.125% Notes, recorded in other income (expense), net in the accompanying consolidated statements of operations. 4.625% Notes OnOctober 28, 2021 , we issued$650.0 million in aggregate principal amount of 4.625% Notes, which will mature onNovember 15, 2029 . The 4.625% Notes were issued at a price of 100% of the principal amount thereof. Sonic used the net proceeds from the issuance of the 4.625% Notes, along with the net proceeds of the 4.875% Notes, to fund the RFJ Acquisition and repay existing debt. The 4.625% Notes were issued under an Indenture, dated as ofOctober 28, 2021 (the "2029 Indenture"), by and among the Company, certain subsidiary guarantors named therein (collectively, the "Guarantors") andU.S. Bank National Association , as trustee (the "trustee"). The 4.625% Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis initially by all of the Company's operating domestic subsidiaries. The 2029 Indenture provides that interest on the 4.625% Notes will be payable semi-annually in arrears onMay 15 andNovember 15 of each year beginningMay 15, 2022 . The 2029 Indenture also contains other restrictive covenants and default provisions common for an issue of senior notes of this nature. The 4.625% Notes will be redeemable at the Company's option, in whole or in part, at any time on or afterNovember 15, 2024 at the redemption prices (expressed as percentages of the principal amount thereof) set forth below, plus accrued and unpaid interest, if any, to, but excluding, the applicable redemption date, if redeemed during the 12-month period beginning onNovember 15 of the years set forth below: Redemption Price 2024 102.313 % 2025 101.156 % 2026 100.000 % BeforeNovember 15, 2024 , the Company may redeem all or a part of the 4.625% Notes, subject to payment of a make-whole premium. In addition, the Company may redeem on or beforeNovember 15, 2024 up to an aggregate of 35% of the aggregate principal of the 4.625% Notes at a price equal to 104.625% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption, with the net cash proceeds from certain equity offerings.
4.875% Notes
OnOctober 28, 2021 , we issued$500.0 million in aggregate principal amount of 4.875% Notes, which will mature onNovember 15, 2031 . The 4.875% Notes were issued at a price of 100% of the principal amount thereof. Sonic used the net proceeds from the issuance of the 4.875% Notes, along with the net proceeds of the 4.625% Notes to fund the RFJ Acquisition and repay existing debt. The 4.875% Notes were issued under an Indenture, dated as ofOctober 28, 2021 (the "2031 Indenture"), by and among the Company, the Guarantors and the trustee. The 4.875% Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis initially by all of the Company's operating domestic subsidiaries. The 2031 Indenture provides that 56 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
interest on the 4.875% Notes will be payable semi-annually in arrears on May 15
and November 15 of each year beginning May 15, 2022 . The 2031 Indenture also
contains other restrictive covenants and default provisions common for an issue
of senior notes of this nature.
The 4.875% Notes will be redeemable at the Company's option, in whole or in
part, at any time on or after November 15, 2026 at the redemption prices
(expressed as percentages of the principal amount thereof) set forth below, plus
accrued and unpaid interest, if any, to, but excluding, the applicable
redemption date, if redeemed during the 12-month period beginning on November 15
of the years set forth below:
Year Redemption Price
2026 102.438 %
2027 101.625 %
2028 100.813 %
2029 100.000 %
Before November 15, 2026 , the Company may redeem all or a part of the 4.875%
Notes, subject to payment of a make-whole premium. In addition, the Company may
redeem on or before November 15, 2024 up to an aggregate of 35% of the aggregate
principal of the 4.875% Notes at a price equal to 104.875% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to, but
excluding, the date of redemption, with the net cash proceeds from certain
equity offerings.
2019 Mortgage Facility
On
Under the 2019 Mortgage Facility, Sonic has a maximum borrowing limit of$112.2 million , which varies based on the appraised value of the collateral underlying the 2019 Mortgage Facility. The amount available for borrowing under the 2019 Mortgage Facility is subject to compliance with a borrowing base. The borrowing base is calculated based on 75% of the appraised value of certain eligible real estate designated by Sonic and owned by certain of our subsidiaries. Based on balances as ofDecember 31, 2021 , we had approximately$90.0 million of outstanding borrowings under the 2019 Mortgage Facility, resulting in total remaining borrowing availability of approximately$22.2 million under the 2019 Mortgage Facility. Amounts outstanding under the 2019 Mortgage Facility bear interest at (1) a specified rate above LIBOR (as defined in the 2019 Mortgage Facility), ranging from 1.50% to 2.75% per annum according to a performance-based pricing grid determined by the Company's Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility) as of the last day of the immediately preceding fiscal quarter (the "Performance Grid"); or (2) a specified rate above the Base Rate (as defined in the 2019 Mortgage Facility), ranging from 0.50% to 1.75% per annum according to the Performance Grid. Interest on the 2019 Mortgage Facility is paid monthly in arrears calculated using the Base Rate plus the Applicable Rate (as defined in the 2019 Mortgage Facility) according to the Performance Grid. Repayment of principal is paid quarterly commencing onMarch 31, 2020 throughSeptember 30, 2024 at a rate of 2.50% of the aggregate initial principal amount. A balloon payment of the remaining balance will be due at theNovember 22, 2024 maturity date. Prior to theNovember 22, 2024 maturity date, the Company reserves the right to prepay the principal amount outstanding at any time without premium or penalty provided the prepayment amount exceeds$0.5 million . The 2019 Mortgage Facility contains usual and customary representations and warranties, and usual and customary affirmative and negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends and other restricted payments, capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions. Specifically, the 2019 Mortgage Facility permits quarterly cash dividends on our Class A and Class B Common Stock up to$0.25 per share so long as no Event of Default (as defined in the 2019 Mortgage Facility) has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2019 Mortgage Facility. 57 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSMortgage Notes to Finance Companies
As ofDecember 31, 2021 , the weighted-average interest rate of other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 3.50% and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately$346.2 million . These mortgage notes require monthly payments of principal and interest through their respective maturities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range from 2022 to 2033. 2020 Line of Credit Facility OnJune 23, 2020 , we entered into a line of credit agreement withAlly Bank (the "2020 Line of Credit Facility"), which was scheduled to mature onJune 19, 2022 . OnOctober 1, 2021 , Sonic terminated the 2020 Line of Credit Facility.
Floor Plan Facilities
We finance all of our new and certain of our used vehicle inventory through standardized floor plan facilities with manufacturer captive finance companies and a syndicate of manufacturer-affiliated finance companies and commercial banks. These floor plan facilities are due on demand and bear interest at variable rates based on LIBOR or prime plus an additional spread, as applicable. The weighted-average interest rate for our new and used vehicle floor plan facilities was 1.06% and 1.78% for 2021 and 2020, respectively. We receive floor plan assistance in the form of direct payments or credits from certain manufacturers. Floor plan assistance received is capitalized in inventory and recorded as a reduction of cost of sales when the associated inventory is sold. We received approximately$43.5 million and$40.0 million in manufacturer assistance in 2021 and 2020, respectively, and recognized in cost of sales approximately$46.5 million and$40.6 million in manufacturer assistance in 2021 and 2020, 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 vehicles. The total notes payable - floor plan balance of approximately$1.3 billion as ofDecember 31, 2021 is classified as current liabilities in the accompanying consolidated balance sheet as of such date.
Covenants and Default Provisions
Non-compliance with covenants, including a failure to make any payment when due, under the 2021 Credit Facilities, the 2019 Mortgage Facility, our floor plan agreements with various manufacturer-affiliated finance companies, operating lease agreements, mortgage notes to finance companies and the 2029 Indenture and the 2031 Indenture (collectively, the "Significant Debt Agreements") could result in a default and an acceleration of our repayment obligation under the 2021 Credit Facilities. A default under the 2021 Credit Facilities or the 2019 Mortgage Facility would constitute a default under the floor plan facilities we have in place with affiliates of Ford Motor Company (collectively, the "Ford Floor Plan Facilities") and could entitle these lenders to accelerate our repayment obligations under one or more of the floor plan facilities. Certain defaults under the 2021 Credit Facilities, the 2019 Mortgage Facility and one or more of the Ford Floor Plan Facilities or certain other debt obligations would not result in a default under the 2029 Indenture or the 2031 Indenture, unless our repayment obligations under the 2021 Credit Facilities, the 2019 Mortgage Facility, and/or one or more of the Ford Floor Plan Facilities or such other debt obligations were accelerated. An acceleration of our repayment obligation under any of the Significant Debt Agreements could result in an acceleration of our repayment obligations under our other Significant Debt Agreements. The failure to repay principal amounts of the Significant Debt Agreements when due would create cross-default situations related to other indebtedness. The 2021 Credit Facilities and the 2019 Mortgage Facility include the following financial covenants: Covenant Minimum Maximum Minimum Consolidated Consolidated Consolidated Fixed Charge Total Lease Liquidity Coverage Adjusted Leverage Ratio Ratio Ratio Required ratio 1.05 1.20 5.75 December 31, 2021 actual 1.26 2.69 2.46 In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants. The financial covenants under the guarantee agreement are identical to those under the 2021 Credit Facilities and the 2019 Mortgage Facility with the exception of one additional financial covenant related to the ratio of EBITDAR to rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As ofDecember 31, 2021 , the ratio was 12.05 to 1.00. 58 -------------------------------------------------------------------------------- SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We were in compliance with all of the restrictive and financial covenants in all
of our floor plan agreements, long-term debt facilities and lease agreements as
of December 31, 2021 . After giving effect to the applicable restrictions on the
payment of dividends and certain other transactions under our debt agreements,
as of December 31, 2021 , we had at least $399.8 million of net income and
retained earnings free of such restrictions. See Note 6, "Long-Term Debt," to
the accompanying consolidated financial statements for further discussion of the
2021 Credit Facilities.
Acquisitions and Dispositions
During 2021, we acquired 27 franchised dealership businesses and 14 pre-owned businesses, including the RFJ Acquisition, for approximately$1,018.9 million , net of floor plan borrowings. We disposed of one luxury franchised dealership and terminated two luxury franchises in 2021, which generated net cash from dispositions of approximately$6.6 million . See Note 2, "Business Acquisitions and Dispositions," to the accompanying consolidated financial statements for further discussion. Capital Expenditures Our capital expenditures include the purchase of land and buildings, the construction of new franchised dealerships, EchoPark stores and collision repair centers, building improvements and equipment purchased for use in our franchised dealerships and EchoPark stores. We selectively construct or improve new franchised dealership facilities to maintain compliance with manufacturers' image requirements. We typically finance these projects through cash flows from operations, new mortgages or our credit facilities. Capital expenditures for 2021 were approximately$298.2 million , including approximately$204.6 million related to our Franchised Dealerships Segment and approximately$93.6 million related to our EchoPark Segment. Of the total capital expenditures, approximately$112.5 million was related to facility construction projects, approximately$103.1 million was related to acquisitions of real estate (land and buildings), and approximately$82.6 million was for other fixed assets utilized in our operations. Of the$298.2 million in gross capital expenditures in 2021, approximately$16.5 million was funded through mortgage financing and approximately$281.7 million was funded through cash from operations. As ofDecember 31, 2021 , commitments for facility construction projects totaled approximately$19.0 million .
Share Repurchase Program
Our Board of Directors has authorized us to repurchase shares of our Class A Common Stock. Historically, we have used our share repurchase authorization to offset dilution caused by the exercise of stock options or the vesting of equity compensation awards and to maintain our desired capital structure. During 2021, we repurchased approximately 2.0 million shares of our Class A Common Stock for approximately$93.3 million in open-market transactions at prevailing market prices and in connection with tax withholdings on the vesting of equity compensation awards. During 2021, our Board of Directors approved an additional$250.0 million of share repurchase authorization. As ofDecember 31, 2021 , our total remaining repurchase authorization was approximately$226.2 million . Subsequent toDecember 31, 2021 , we repurchased an additional 500,000 shares of Class A Common Stock for approximately$24.1 million , resulting in current remaining availability of approximately$202.0 million . Under the 2021 Credit Facilities, share repurchases are permitted to the extent that no event of default exists and we do not exceed the restrictions set forth in our debt agreements. After giving effect to the applicable restrictions on share repurchases and certain other transactions under our debt agreements, as ofDecember 31, 2021 , we had at least$399.8 million of net income and retained earnings free of such restrictions. Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, the current economic environment and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors and management determine our share repurchase policy in the future.
Dividends
Our Board of Directors approved four quarterly cash dividends on all outstanding shares of Class A and Class B Common Stock totaling$0.46 per share during 2021. Subsequent toDecember 31, 2021 , our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of$0.25 per share for stockholders of record onMarch 15, 2022 to be paid onApril 15, 2022 . Under the 2021 Credit Facilities, dividends are permitted to the extent that no event of default exists and we are in compliance with the financial covenants contained therein. The 2029 Indenture and the 2031 Indenture also contain restrictions on our ability to pay dividends. After giving effect to the applicable restrictions on 59 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
share repurchases and certain other transactions under our debt agreements, as
of December 31, 2021 , we had at least $399.8 million of net income and retained
earnings free of such restrictions. The declaration and payment of any future
dividend is subject to the business judgment of our Board of Directors, taking
into consideration our historical and projected results of operations, financial
condition, cash flows, capital requirements, covenant compliance, share
repurchases, the current economic environment and other factors considered by
our Board of Directors to be relevant. These factors are considered each quarter
and will be scrutinized as our Board of Directors determines our future dividend
policy. There is no guarantee that additional dividends will be declared and
paid at any time in the future. See Note 6, "Long-Term Debt," to the
accompanying consolidated financial statements for a description of restrictions
on the payment of dividends.
Cash Flows
Cash Flows from Operating Activities - Net cash provided by operating activities
was approximately $306.3 million , and $281.1 million for 2021 and 2020,
respectively. The cash provided by operations for 2021, as compared to 2020,
consisted primarily of net income (less non-cash items), a decrease in
inventories and an increase in trade accounts payable and other liabilities,
offset partially by an increase in receivables and a decrease in notes payable -
floor plan - trade. The cash provided by operations for 2020 consisted primarily
of net income (less non-cash items), a decrease in receivables and a decrease in
inventories, offset partially by a decrease in notes payable - floor plan -
trade and a decrease in trade accounts payable and other liabilities.
We arrange our inventory floor plan financing through both manufacturer captive
finance companies and a syndicate of manufacturer-affiliated finance companies
and commercial banks. Our floor plan financed with manufacturer captives is
recorded as trade floor plan liabilities (with the resulting change being
reflected as operating cash flows). Our dealerships that obtain floor plan
financing from a syndicate of manufacturer-affiliated finance companies and
commercial banks record their obligation as non-trade floor plan liabilities
(with the resulting change being reflected as financing cash flows).
Due to the presentation differences for changes in trade floor plan financing
and non-trade floor plan financing in the consolidated statements of cash flows,
decisions made by us to move dealership floor plan financing arrangements from
one finance source to another may cause significant variations in operating and
financing cash flows without affecting our overall liquidity, working capital or
cash flows. Upon entering into the 2021 Floor Plan Facilities in April 2021 , the
majority of our outstanding floor plan liabilities were reclassified from trade
floor plan liabilities to non-trade floor plan liabilities, resulting in a
significant reclassification of related floor plan liability cash flows from
operating activities to financing activities.
Net cash used in combined trade and non-trade floor plan financing was
approximately $55.8 million and $214.8 million for 2021 and 2020, respectively.
Accordingly, if all changes in floor plan notes payable were classified as an
operating activity, the result would have been net cash provided by operating
activities of approximately $745.9 million and $341.9 million for 2021 and 2020,
respectively.
Cash Flows from Investing Activities - Net cash used in investing activities
during 2021 was approximately $1.3 billion . Net cash used in investing
activities during 2020 was approximately $100.2 million . The use of cash during
2021, as compared to 2020, was comprised primarily of purchases of businesses,
net of cash acquired, and purchases of land, property and equipment, offset
partially by proceeds from the sale of property and equipment and proceeds from
the sale franchised dealerships. The use of cash during 2020 was comprised
primarily of proceeds from the sale of franchised dealerships and proceeds from
the sale of property and equipment, offset by purchases of land, property and
equipment. See Note 2, "Business Acquisitions and Dispositions," to the
accompanying consolidated financial statements for additional discussion.
The significant components of capital expenditures relate primarily to
dealership renovations, the purchase of certain existing dealership facilities
which had previously been financed under long-term operating leases, and the
purchase and development of new real estate parcels for the relocation of
existing dealerships and the construction of EchoPark stores. During 2021 and
2020, we generated net proceeds from mortgage financing (excluding the effects
of any refinancing with zero net proceeds) in the amount of approximately $16.5
million and $53.1 million , respectively, to purchase certain existing dealership
facilities and to fund certain capital expenditures.
Cash Flows from Financing Activities - Net cash provided by financing activities
was approximately $1.1 billion for 2021. Net cash used in financing activities
was approximately $39.7 million for 2020. For 2021, cash provided by financing
activities was comprised primarily of proceeds from the issuance of the 4.625%
Notes and the 4.875% Notes, net borrowings on notes payable - floor plan -
non-trade and proceeds from mortgage notes, offset partially by the
extinguishment of the 6.125% Notes, repurchases of treasury stock and scheduled
principal payments of long-term debt. For 2020, cash used in financing
activities was comprised primarily of the repurchases of treasury stock,
scheduled principal payments and repayments of long-
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SONIC AUTOMOTIVE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
term debt and the reduction of finance lease liabilities, offset partially by
net borrowings on notes payable - floor plan - non-trade and proceeds from the
issuance of long-term debt.
Cash Flows from Discontinued Operations - The accompanying consolidated
statements of cash flows include both continuing and discontinued operations.
Net cash flows from operating activities associated with discontinued operations
for 2021 and 2020 were not material to total cash flows.
One metric that management uses to measure operating performance is Adjusted
EBITDA (a non-GAAP financial measure) for each of our reportable segments and on
a consolidated basis. This non-GAAP financial measure is reconciled to net
income (loss) (the nearest comparable GAAP financial measure) in the table
below:
Year Ended December 31, 2021 Year Ended December 31, 2020
Franchised
Dealerships EchoPark Discontinued Franchised EchoPark Discontinued
Segment Segment Operations Total Dealerships Segment Segment Operations Total
(In millions)
Net income (loss) $ 348.9 $ (51.4)
Provision for income taxes 109.3 15.6
Income (loss) before taxes $ 530.3
$ -$ 458.2 $ (39.4)$ 4.1 $ (0.5)$ (35.8) Non-floor plan interest (1) 43.0 1.7 - 44.7 37.8 0.9 - 38.7 Depreciation & amortization (2) 87.9 16.4 - 104.3 82.7 11.2 - 93.9 Stock-based compensation expense 15.0 - - 15.0 11.7 - - 11.7 Asset impairment charges - 0.1 - 0.1 270.0 - - 270.0 Loss (gain) on debt extinguishment 15.6 - - 15.6 - - - - Long-term compensation-related expenses - 8.0 - 8.0 - - - - Acquisition and Disposition-Related (Gain) Loss - (0.4) - (0.4) (3.0) (5.2) - (8.2) Adjusted EBITDA (3) $ 691.8$ (46.3) $ -$ 645.5 $ 359.8$ 11.0 $ (0.5)$ 370.3 (1)Includes interest expense, other, net in the accompanying consolidated statements of operations, net of any amortization of debt issuance costs or net debt discount/premium included in (2) below. (2)Includes the following line items from the accompanying consolidated statements of cash flows: depreciation and amortization of property and equipment; debt issuance cost amortization; and debt discount amortization, net of premium amortization. (3)Adjusted EBITDA is a non-GAAP financial measure. 61 -------------------------------------------------------------------------------- SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSFuture Liquidity Outlook
Our future contractual obligations are as follows, based on the earlier of stated contractual obligation or possible expected payment date:
2022 Thereafter
(In millions)
Notes payable - floor plan $ 1,268.4 $ -
Long-term debt (1) 50.6 1,535.5
Letters of credit 12.3 -
Estimated interest payments on floor plan facilities (2) 2.1 -
Estimated interest payments on long-term debt 12.9 30.0
Operating leases (net of sublease proceeds) 49.0 341.0
Construction contracts 19.0 -
Other purchase obligations (3) 4.2 0.7
Liability for uncertain tax positions (4) 0.5 5.3
Total $ 1,419.0 $ 1,912.5
(1)Long-term debt amounts consist only of principal obligations, excluding debt
issuance costs.
(2)Floor plan facility balances are correlated with the amount of vehicle
inventory and are generally due at the time that a vehicle is sold. Estimated
interest payments were calculated using the December 31, 2021 floor plan
facility balance, the weighted-average interest rate for the three months ended
December 31, 2021 of 0.74% and the assumption that floor plan balances at
December 31, 2021 would be relieved within 60 days in connection with the sale
of the associated vehicle inventory.
(3)Other purchase obligations include contracts for real estate purchases,
office supplies, utilities, acquisition-related obligations and various other
items or other services.
(4)Amount represents recorded liability, including interest and penalties,
related to "Accounting for Uncertain Income Tax Positions" in the ASC. See Note
1, "Description of Business and Summary of Significant Accounting Policies," and
Note 7, "Income Taxes," to the accompanying consolidated financial statements.
We believe our best sources of liquidity for operations and debt service remain
cash flows generated from operations combined with the availability of
borrowings under our floor plan facilities, the 2021 Credit Facilities, the 2019
Mortgage Facility and real estate mortgage financing (or any replacements
thereof), selected dealership and other asset sales and our ability to raise
funds in the capital markets through offerings of debt or equity securities.
Because the majority of our consolidated assets are held by our dealership
subsidiaries, the majority of our cash flows from operations are generated by
these subsidiaries. As a result, our cash flows and ability to service our
obligations depend to a substantial degree on the results of operations of these
subsidiaries and their ability to provide us with cash.
Seasonality
Our operations are subject to seasonal variations. The first quarter historically has contributed less operating profit than the second and third quarters, while the fourth quarter historically has contributed the highest operating profit of any quarter. Due to the abnormal effects of the COVID-19 pandemic on the automotive supply chain and inventory levels, this historical seasonality did not play out in 2021 and may not hold true in 2022. Weather conditions and the timing of manufacturer incentive programs and model changeovers cause seasonality and may adversely affect vehicle demand and, consequently, our profitability. Comparatively, parts and service demand remains stable throughout the year.
Guarantees and Indemnification Obligations
In connection with the operation and disposition of our dealerships, we have entered into various guarantees and indemnification obligations. When we sell dealerships, we attempt to assign any related lease to the buyer of the dealership to eliminate any future liability. However, if we are unable to assign the related leases to the buyer, we will attempt to sublease the leased properties to the buyer at a rate equal to the terms of the original leases. In the event we are unable to sublease the properties to the buyer with terms at least equal to our leases, we may be required to record lease exit accruals. As ofDecember 31, 2021 , our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled 62 --------------------------------------------------------------------------------SONIC AUTOMOTIVE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
approximately $15.5 million . Future sublease payments expected to be received
related to these lease payments were approximately $15.4 million at December 31,
2021 .
In accordance with the terms of agreements entered into for the sale of our
dealerships, we generally agree to indemnify the buyer from certain liabilities
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 agreements. While our exposure with respect to
environmental remediation and repairs is difficult to quantify, our maximum
exposure associated with these general indemnifications was approximately $4.0
million at December 31, 2021 . These indemnifications typically expire within a
period of one to three years following the date of sale. The estimated fair
value of these indemnifications was not material and the amount recorded for
this contingency was not significant at December 31, 2021 .
We also guarantee the floor plan commitments of our 50%-owned joint venture, and
the amount of such guarantee was approximately $4.3 million at December 31,
2021 . We expect the aggregate amount of the obligations we guarantee to
fluctuate based on dealership disposition activity. Although we seek to mitigate
our exposure in connection with these matters, these guarantees and
indemnification obligations, including environmental exposures and the financial
performance of lease assignees and sublessees, cannot be predicted with
certainty. An unfavorable resolution of one or more of these matters could have
a material adverse effect on our liquidity and capital resources. See Note 12,
"Commitments and Contingencies," to the accompanying consolidated financial
statements for further discussion regarding these guarantees and indemnification
obligations.
Legal Proceedings
We are involved, and expect to continue to be involved, in various 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.
Included in other accrued liabilities and other long-term liabilities in the
accompanying consolidated balance sheet as of December 31, 2021 were
approximately $1.5 million and $0.3 million , respectively, in reserves that we
were holding for pending proceedings. Included in other accrued liabilities and
other long-term liabilities in the accompanying consolidated balance sheet as of
December 31, 2020 were approximately $0.3 million and $0.2 million ,
respectively, for such reserves. Except as reflected in such reserves, we are
currently unable to estimate a range of reasonably possible loss, or a range of
reasonably possible loss in excess of the amount accrued, for pending
proceedings. See Note 12, "Commitments and Contingencies," to the accompanying
consolidated financial statements for further discussion regarding these legal
matters.
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