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What changed in SONIC AUTOMOTIVE INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SONIC AUTOMOTIVE INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+465 added−457 removedSource: 10-K (2024-02-22) vs 10-K (2023-02-17)

Top changes in SONIC AUTOMOTIVE INC's 2023 10-K

465 paragraphs added · 457 removed · 379 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

34 edited+5 added−10 removed63 unchanged
Biggest changeOur Business The following charts depict the multiple sources of continuing operations revenue and gross profit for the year ended December 31, 2022: As of December 31, 2022, we operated in the following states: Market Number of Stores in Franchised Dealerships Segment Number of Stores in EchoPark Segment Number of Stores in Powersports Segment Percent of 2022 Total Revenue Texas 29 7 8 26.3 % California 18 2 — 21.9 % Colorado 7 3 — 8.0 % Idaho 3 1 — 6.8 % Tennessee 9 4 — 6.8 % Florida 9 2 — 5.7 % Alabama 4 3 — 4.9 % North Carolina 9 2 — 3.8 % Georgia 1 — — 3.8 % Maryland 4 4 — 2.1 % Virginia 4 2 — 1.7 % South Carolina 2 2 — 1.5 % Nevada 2 1 — 1.5 % Indiana 3 — — 1.3 % Missouri 3 1 — 0.9 % New Mexico 2 — — 0.9 % New York 1 2 — 0.7 % Arizona — 1 — 0.4 % Louisiana — 2 — 0.2 % Washington 1 9 — 0.2 % Kentucky — 1 — 0.1 % Utah — 1 — — % Montana — 1 — — % Oklahoma — 1 — — % Disposed stores and holding companies — — — 0.5 % Total 111 52 8 100.0 % 2 SONIC AUTOMOTIVE, INC.
Biggest changeOur Business The following charts depict the multiple sources of revenue and gross profit for the year ended December 31, 2023: As of December 31, 2023, we operated in the following states: Market Number of Stores in Franchised Dealerships Segment Number of Stores in EchoPark Segment Number of Stores in Powersports Segment Percent of 2023 Total Revenue Texas 29 6 8 27.1 % California 18 1 — 22.8 % Colorado 7 3 — 8.6 % Tennessee 9 1 — 7.3 % Florida 9 — — 5.3 % Alabama 7 1 — 4.7 % North Carolina 3 2 — 4.1 % Georgia 4 1 — 3.7 % Idaho 3 — — 3.0 % Maryland 4 — — 2.1 % Virginia 1 — — 1.8 % Washington 1 7 — 1.8 % Nevada 2 1 — 1.6 % South Carolina 2 — — 1.4 % Indiana 3 — — 1.2 % Missouri 3 1 — 1.0 % New Mexico 2 — — 0.8 % New York 1 — — 0.5 % Arizona — 1 — 0.4 % South Dakota — — 5 0.3 % Disposed stores and holding companies — — — 0.5 % Total 108 25 13 100.0 % 2 SONIC AUTOMOTIVE, INC.
Under the laws of the states in which we currently operate, as well as the laws of other states into which we may expand, we must obtain a license in order to establish, operate or relocate a franchised dealership, EchoPark store or a powersports store or to operate an automotive service and repair center.
Under the laws of the states in which we currently operate, as well as the laws of other states into which we may expand, we must obtain a license in order to establish, operate or relocate a franchised dealership, an EchoPark store or a powersports store or to operate an automotive service and repair center.
Jeff Dyke was elected to the office of President of Sonic in September 2018 and is responsible for direct oversight for all of Sonic’s retail automotive operations. In addition, Mr. Dyke has been a director of Sonic since July 2019. Mr. Dyke served as Sonic’s Executive Vice President of Operations from October 2008 to September 2018.
Jeff Dyke was elected to the office of President of Sonic in September 2018 and is responsible for direct oversight for all of Sonic’s retail operations. In addition, Mr. Dyke has been a director of Sonic since July 2019. Mr. Dyke served as Sonic’s Executive Vice President of Operations from October 2008 to September 2018.
Approximately 200 of our associates, primarily service technicians in northern California, are represented by a labor union. Although only a small percentage of our associates is represented by a labor union, we may be affected by labor strikes, work slowdowns and walkouts at automobile manufacturers’ manufacturing facilities. As we manage our workforce, we focus on associate satisfaction, turnover and training.
Approximately 220 of our associates, primarily service technicians in northern California, are represented by a labor union. Although only a small percentage of our associates is represented by a labor union, we may be affected by labor strikes, work slowdowns and walkouts at automobile manufacturers’ manufacturing facilities. As we manage our workforce, we focus on associate satisfaction, turnover and training.
Except as otherwise stated in these documents, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we transmit to the SEC. 9 SONIC AUTOMOTIVE, INC. RISK FACTORS
Except as otherwise stated in these documents, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we transmit to the SEC. 8 SONIC AUTOMOTIVE, INC. RISK FACTORS
Reportable Segments The Franchised Dealerships Segment provides comprehensive sales and 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 third-party financing, extended warranties, service contracts, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our guests.
Reportable Segments The Franchised Dealerships Segment provides comprehensive sales and 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 third-party financing, extended warranties, service contracts, insurance and other aftermarket products (collectively, “F&I”) for our guests.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of our plans for the use of capital generated from operations. Business Strategy Maintain Diverse Revenue Streams. We have multiple diverse revenue streams among our three operating segments.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” for a discussion of our plans for the use of capital generated from operations. Business Strategy Maintain Diverse Revenue Streams. We have multiple revenue streams across our three operating segments.
Expand Our Omnichannel Capabilities. Automotive consumers have become increasingly more comfortable using technology to research their vehicle buying alternatives, communicate with store personnel, and complete a portion or all of a vehicle purchase online. The internet presents a marketing, advertising and sales channel that we will continue to utilize to drive value for our stores and enhance the guest experience.
Automotive consumers have become increasingly more comfortable using technology to research their vehicle buying alternatives, communicate with store personnel, and complete a portion or all of a vehicle purchase online. The internet presents a marketing, advertising and sales channel that we will continue to utilize to drive value for our stores and enhance the guest experience.
Conditions and competitive pressures affecting the markets in which we operate, such as price-cutting by dealers in these areas, or in any new markets we enter, could adversely affect our results, even though the retail automotive industry as a whole might not be significantly affected.
Conditions and competitive pressures affecting the markets in which we operate, such as price-cutting by dealers in these areas, or in any new markets we enter, could adversely affect our results, even though the retail automotive industry as a whole might not be significantly affected. 6 SONIC AUTOMOTIVE, INC.
The supply of late-model used vehicles is influenced by a variety of factors, including the total number of vehicles in operation; the volume of new vehicle sales, which in turn generate used car trade-ins; and the number of used vehicles sold or remarketed through retail channels, wholesale transactions and automotive auctions.
The supply of late-model used vehicles is influenced by a variety of factors, including the total number of vehicles in operation; the volume of new vehicle sales, which in turn generate used car trade-ins; lease return rates; and the number of used vehicles sold or remarketed through retail channels, wholesale transactions and automotive auctions.
Byrd 56 Executive Vice President and Chief Financial Officer David Bruton Smith was elected as Chairman of the Board in July 2022 and as Chief Executive Officer of Sonic in September 2018. Previously, Mr.
Byrd 57 Executive Vice President and Chief Financial Officer David Bruton Smith was elected as Chairman of the Board in July 2022 and as Chief Executive Officer of Sonic in September 2018. Previously, Mr.
As a result of the way we manage our business, we had three reportable segments as of December 31, 2022: (1) the Franchised Dealerships Segment; (2) the EchoPark Segment; and (3) the Powersports Segment.
As a result of the way we manage our business, we had three reportable segments as of December 31, 2023: (1) the Franchised Dealerships Segment; (2) the EchoPark Segment; and (3) the Powersports Segment.
Our Fixed Operations sales carry a higher gross margin than new and used vehicle sales and generally are not as sensitive to economic conditions as new or used vehicle sales. We also offer guests assistance in obtaining third-party financing and a range of automobile-related warranty, insurance and other aftermarket products. Execute Our EchoPark Expansion Plan.
Our Fixed Operations sales carry a higher gross margin than new and used vehicle sales and generally are not as sensitive to economic conditions as new or used vehicle sales. We also offer guests assistance in obtaining third-party financing and a range of automobile-related warranty, insurance and other aftermarket products. Execute Our EchoPark Segment Strategy.
Smith is also a director, an officer and a co-owner of Sonic Financial Corporation (“SFC”), the largest stockholder of Sonic, and a director and a co-owner of Speedway Motorsports, LLC (“Speedway Motorsports”). He is the brother of B. Scott Smith and Marcus G. Smith, who are also directors of Sonic.
Smith is also a director, an officer and a co-owner of Sonic Financial Corporation (“SFC”), the largest stockholder of Sonic, and a director and a co-owner of Speedway Motorsports, LLC (“Speedway Motorsports”). He is the brother of B. Scott Smith and Marcus G. Smith, who are also directors of Sonic. 7 SONIC AUTOMOTIVE, INC.
Our long-term growth and acquisition strategy is primarily focused on acquiring desirable businesses in markets that meet certain strategic criteria for population growth and vehicle registration rates, among other considerations. A majority of our franchised dealerships are either luxury or mid-line import brands.
Our long-term growth and acquisition strategy is primarily focused on acquiring desirable businesses in markets that meet certain strategic criteria for population growth and vehicle registration rates, among other considerations including shifts in consumer preferences. A majority of our franchised dealerships are either luxury or mid-line import brands.
For 2022, approximately 82.7% of our total new vehicle revenue was generated by luxury and mid-line import dealerships, which typically have higher operating margins, more stable Fixed Operations departments, lower associate turnover and lower inventory levels than other brand categories. We actively evaluate acquisition opportunities and other strategic transactions that we believe will strengthen or diversify our brand portfolio.
For 2023, approximately 86% of our total new vehicle revenue was generated by luxury and mid-line import dealerships, which typically have higher operating margins, more stable Fixed Operations departments, lower associate turnover and lower inventory levels than other brand categories. We actively evaluate acquisition opportunities and other strategic transactions that we believe will strengthen or diversify our brand portfolio.
Our notable health, welfare, retirement and training benefits include: • Company-subsidized health insurance; • 401(k) plan with Company matching contributions; 8 SONIC AUTOMOTIVE, INC. • Company-wide $15 per hour minimum wage for all hourly employees; • paid vacation, sick and bereavement leave; • paid community service and volunteer leave; and • tuition assistance programs and Company-paid training opportunities.
Our notable health, welfare, retirement and training benefits include: • Company-subsidized health insurance; • 401(k) plan with Company matching contributions; • Company-wide $15 per hour minimum wage for all hourly employees; • paid vacation, sick and bereavement leave; • paid community service and volunteer leave; and • tuition assistance programs and Company-paid training opportunities.
Each executive officer of the Company is elected by our Board of Directors and holds office from the date of election until thereafter removed by the Board. Name Age Position(s) and Office(s) with Sonic David Bruton Smith 48 Chairman and Chief Executive Officer Jeff Dyke 55 President and Director Heath R.
Each executive officer of the Company is elected by our Board of Directors and holds office from the date of election until thereafter removed by the Board. Name Age Position(s) and Office(s) with Sonic David Bruton Smith 49 Chairman and Chief Executive Officer Jeff Dyke 56 President and Director Heath R.
We believe that the principal competitive factors in arranging third-party financing are convenience, interest rates and contract terms. 6 SONIC AUTOMOTIVE, INC. Our operating results depend, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitive pressures.
We believe that the principal competitive factors in arranging third-party financing are convenience, interest rates and contract terms. Our operating results depend, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitive pressures.
The following table depicts the breakdown of our Franchised Dealerships Segment new vehicle revenues by brand: Percentage of New Vehicle Revenues Year Ended December 31, Brand 2022 2021 2020 Luxury: BMW 25.7 % 26.3 % 24.4 % Mercedes 12.5 % 12.4 % 12.9 % Audi 5.8 % 6.4 % 6.5 % Lexus 4.5 % 5.0 % 4.9 % Porsche 3.9 % 3.8 % 3.6 % Land Rover 3.1 % 3.8 % 4.9 % Cadillac 2.3 % 2.3 % 2.3 % MINI 1.0 % 1.1 % 1.1 % Other luxury (1) 1.7 % 2.5 % 2.6 % Total Luxury 60.5 % 63.6 % 63.2 % Mid-line Import: Toyota 8.8 % 8.2 % 9.0 % Honda 8.5 % 13.0 % 13.5 % Volkswagen 1.9 % 1.6 % 1.0 % Hyundai 1.5 % 0.9 % 1.0 % Other mid-line imports (2) 1.5 % 0.8 % 0.5 % Total Mid-line Import 22.2 % 24.5 % 25.0 % Domestic: General Motors (3) 7.3 % 4.6 % 5.8 % Chrysler Dodge Jeep RAM 5.5 % 1.1 % — % Ford 4.5 % 6.2 % 6.0 % Total Domestic 17.3 % 11.9 % 11.8 % Total 100.0 % 100.0 % 100.0 % (1) Includes Acura, Alfa Romeo, Infiniti, Jaguar, Maserati and Volvo.
The following table depicts the breakdown of our Franchised Dealerships Segment new vehicle revenues by brand: Percentage of New Vehicle Revenues Year Ended December 31, Brand 2023 2022 2021 Luxury: BMW 25 % 26 % 26 % Mercedes 14 % 13 % 12 % Audi 6 % 6 % 6 % Lexus 5 % 5 % 5 % Land Rover 4 % 3 % 4 % Porsche 4 % 4 % 4 % Cadillac 2 % 2 % 2 % MINI 1 % 1 % 1 % Other luxury (1) 2 % 1 % 3 % Total Luxury 63 % 61 % 63 % Mid-line Import: Honda 10 % 9 % 13 % Toyota 9 % 9 % 8 % Volkswagen 2 % 2 % 2 % Hyundai 1 % 1 % 1 % Other mid-line imports (2) 1 % 1 % 1 % Total Mid-line Import 23 % 22 % 25 % Domestic: General Motors (3) 6 % 7 % 5 % Chrysler Dodge Jeep RAM 4 % 6 % 1 % Ford 4 % 4 % 6 % Total Domestic 14 % 17 % 12 % Total 100 % 100 % 100 % (1) Includes Acura, Alfa Romeo, Infiniti, Jaguar, Maserati and Volvo.
In addition, in connection with our past or future acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. 7 SONIC AUTOMOTIVE, INC.
In addition, in connection with our past or future acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material.
Byrd served as a Manager in the Management Consulting Division of Ernst & Young LLP. Human Capital Resources As of December 31, 2022, we employed approximately 10,300 associates, or teammates, with whom we strive to maintain good relationships, which benefit both our Company and our teammates.
Byrd served as a Manager in the Management Consulting Division of Ernst & Young LLP. Human Capital Resources As of December 31, 2023, we had approximately 10,500 employees, which we refer to as associates or teammates, with whom we strive to maintain good relationships, which benefit both our Company and our teammates.
For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2022, we operated 111 stores in the Franchised Dealerships Segment, 52 stores in the EchoPark Segment, and eight stores in the Powersports Segment.
For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2023, we operated 108 stores in the Franchised Dealerships Segment, 25 stores in the EchoPark Segment, and 13 stores in the Powersports Segment.
Competition The retail automotive industry is highly competitive. Depending on the geographic market, we compete both with dealers offering the same brands and product lines as ours and dealers offering other manufacturers’ vehicles.
Depending on the geographic market, we compete both with dealers offering the same brands and product lines as ours and dealers offering other manufacturers’ vehicles.
The Franchised Dealerships Segment consists of 142 new vehicle franchises (representing 28 different brands of cars and light trucks) and 17 collision repair centers in 18 states.
The Franchised Dealerships Segment consists of 134 new vehicle franchises (representing 28 different brands of cars and light trucks) and 16 collision repair centers in 18 states. The EchoPark Segment operates in 11 states and the Powersports Segment operates in two states.
We also offer our guests the opportunity to purchase extended warranties, service contracts and other aftermarket products from third-party providers whereby we earn a commission for arranging the contract sale. We currently offer a wide range of non-recourse financing, leasing, other aftermarket products, extended warranties, service contracts and insurance products to our guests.
We also offer our guests the opportunity to purchase extended warranties, service contracts and other aftermarket products from third-party providers whereby we earn a commission for arranging the contract sale. We work with a single third-party provider for the majority of our extended warranties, service contracts and other aftermarket products.
The majority of our revenue is related to our Franchised Dealerships Segment. In 2022, EchoPark Segment revenue represented approximately 17.6% of total revenue (compared to 18.9% in 2021). In 2022, Powersports Segment revenue represented approximately 0.4% of total revenue (compared to 0.0% in 2021) as a result of two business acquisitions during the year.
The majority of our revenue is related to our Franchised Dealerships Segment. In 2023, EchoPark Segment revenue represented approximately 16.9% of total revenue (compared to 17.6% in 2022). In 2023, Powersports Segment revenue represented approximately 1.1% of total revenue (compared to 0.4% in 2022).
Sales operations for EchoPark began in the fourth quarter of 2014, and, as of December 31, 2022, we operated 52 stores in the EchoPark Segment in 21 states. Under our current EchoPark growth strategy, we plan to continue to enhance our nationwide EchoPark distribution network, which is expected to reach 90% of the U.S. population by 2025.
Sales operations for EchoPark began in 2014, and, as of December 31, 2023, we operated 25 stores in the EchoPark Segment in 11 states. Under our current EchoPark long-term growth strategy, we plan to continue to enhance our nationwide EchoPark distribution network to reach 90% of the U.S. population at maturity. Expand Our Omnichannel Capabilities.
(2) Includes Mazda, Nissan and Subaru. (3) Includes Buick, Chevrolet and GMC. 4 SONIC AUTOMOTIVE, INC. Increase Sales of Higher-Margin Products and Services . We continue to pursue opportunities to increase our sales of higher-margin products and services by expanding the following: Finance, Insurance and Other Aftermarket Products .
(2) Includes Mazda, Nissan and Subaru. (3) Includes Buick, Chevrolet and GMC. 4 SONIC AUTOMOTIVE, INC. Increase Sales of Higher-Margin Products and Services .
As a result, our franchised dealerships are uniquely qualified and positioned to perform work covered by manufacturer warranties on increasingly complex vehicles.
Each of our franchised dealerships offers a fully integrated service and parts department. Manufacturers permit warranty repair work to be performed only at franchised dealerships such as ours. As a result, our franchised dealerships are uniquely qualified and positioned to perform work covered by manufacturer warranties on increasingly complex vehicles.
According to industry sources, there were approximately 283.0 million light vehicles in operation in the U.S. as of December 31, 2022. During calendar year 2022, approximately 13.7 million new cars and 36.0 million used cars were sold at retail, many of which were accompanied by trade-ins that could then be resold as used vehicles.
During calendar year 2023, approximately 15.5 million new cars and 36.2 million used cars were sold at retail, many of which were accompanied by trade-ins that could then be resold as used vehicles. Competition The retail automotive industry is highly competitive.
See Note 14, “Segment Information,” to the accompanying consolidated financial statements for additional financial information regarding our three reportable segments. Acquisition of RFJ Auto On December 6, 2021, Sonic completed the acquisition of RFJ Auto Partners, Inc. and its subsidiaries (collectively, “RFJ Auto”).
See Note 14, “Segment Information,” to the accompanying consolidated financial statements for additional financial information regarding our three reportable segments. 1 SONIC AUTOMOTIVE, INC.
We emphasize menu-selling techniques and other best practices to increase our sales of F&I products at all of our stores. Parts, Service and Collision Repair . Each of our franchised dealerships offers a fully integrated service and parts department. Manufacturers permit warranty repair work to be performed only at franchised dealerships such as ours.
We currently offer a wide range of non-recourse financing, leasing, other aftermarket products, extended warranties, service contracts and insurance products to our guests. We emphasize menu-selling techniques and other best practices to increase our sales of F&I products at all of our stores. Parts, Service and Collision Repair .
Optimize Our Capital Structure. As we generate cash through operations, we may opportunistically repurchase our Class A Common Stock or our outstanding debt in open-market or structured transactions to maintain our targeted capital structure. 3 SONIC AUTOMOTIVE, INC. Maximize Asset Returns Through Process Execution. We have developed standardized operating processes that are documented in operating playbooks for our stores.
As of December 31, 2023, our total remaining share repurchase authorization was approximately $286.7 million. 3 SONIC AUTOMOTIVE, INC. Maximize Asset Returns Through Process Execution. We have developed standardized operating processes that are documented in operating playbooks for our stores.
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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.
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Optimize Our Capital Structure. As part of our cash management strategy, we periodically repurchase shares of our Class A Common Stock in open-market or structured transactions to maintain our targeted capital structure.
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Beginning on December 6, 2021, the results of our Franchised 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.
Added
In addition to allowing us to return capital to our stockholders, stock repurchases offset dilution caused by the exercise of stock options and the vesting of equity compensation awards.
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Impact of COVID-19 The COVID-19 pandemic began negatively impacting the global economy in the first quarter of 2020 and continued to affect the global economy and supply chain throughout 2022.
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We regularly review repurchase activity and consider a number of factors in determining when to execute repurchases, including, but not limited to, historical and projected results of operations, the current economic environment and the market price of our Class A Common Stock. During 2023, we repurchased approximately 3.3 million shares of our Class A Common Stock for approximately $177.6 million.
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The pandemic has affected both consumer demand and the global supply of automobiles and automobile parts, increasing demand for vehicles at times, while also negatively impacting automobile manufacturers' ability to produce enough inventory to meet demand.
Added
We continue to pursue opportunities to increase our sales of higher-margin products and services by expanding the following, which we believe allows us to withstand the impact of economic cycles and other factors that may adversely impact automobile sales generally: Finance, Insurance and Other Aftermarket Products .
Removed
The global automotive supply chain has been significantly disrupted since the onset of the pandemic, primarily related to the production of semiconductors that are used in many components of new vehicles, in addition to workforce-related production delays and stoppages.
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The supply of late-model used vehicles in 2023 continued to be affected by shortfalls in new vehicle manufacturing which occurred during the COVID-19 pandemic, which caused fewer vehicles to be manufactured in the affected years. According to industry sources, there were approximately 286.0 million light vehicles in operation in the U.S. as of December 31, 2023.
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As a result, automobile manufacturing has operated at lower than usual production levels since the first quarter of 2020, reducing the amount of new vehicle inventory and certain parts inventory available to our dealerships.
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These inventory constraints, coupled with strong consumer demand, have led to low new and used vehicle inventory and a high new and used vehicle pricing environment, which has driven retail new vehicle unit sales volumes lower across the industry since the onset of the COVID-19 pandemic.
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New vehicle and certain parts production levels began to improve in late 2022; however, there is a risk that higher production levels and new vehicle inventory on hand may not result in incremental retail new vehicle sales volume, which could result in vehicle price discounts that could adversely impact our revenues and other financial results. 1 SONIC AUTOMOTIVE, INC.
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During 2022, low levels of new and used vehicle inventory resulted in higher demand for used vehicle inventory by dealers, wholesalers and consumers, which drove significant increases in the cost to acquire used vehicle inventory and generally lower levels of salable used vehicle inventory.
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Notwithstanding the challenges to new and used vehicle supply experienced in 2022, we continue to believe that sources of used vehicles will continue to be sufficient to meet our current and future needs based on the large number of vehicles remarketed each year, consumer acceptance of our appraisal process, our experience and success in acquiring vehicles from auctions and other sources, and the large size of the U.S. auction market relative to our needs.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThe frequency and severity of cyber-security incidents has increased in recent years and adversely impacted organizations of varying sizes.
Biggest changeThe frequency and severity of cybersecurity incidents has increased in recent years and adversely impacted organizations of varying sizes. Although we have attempted to mitigate the cybersecurity risk of both our internal and outsourced functions by implementing various cybersecurity controls, an internal framework for the oversight of cybersecurity risks and other security measures, specifically as described in “Item 1C.
We obtain a significant percentage of our used vehicle inventory through our proprietary appraisal system as this sourcing outlet is generally more profitable and more convenient for our guests and potential guests. A significant portion of our used vehicle inventory is sourced through trade-ins for purchases of new vehicles, which remain limited in supply.
We obtain a significant percentage of our used vehicle inventory through our proprietary trade-in appraisal system as this sourcing outlet is generally more profitable and more convenient for our guests and potential guests. A significant portion of our used vehicle inventory is sourced through trade-ins for purchases of new vehicles, which remain limited in supply.
State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise or dealer agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal.
State dealer franchise laws generally provide that a manufacturer may not terminate or refuse to renew a franchise or dealer agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal.
Without the protection of state dealer laws, it may also be more difficult for our dealerships to renew their franchise or dealer agreements upon expiration. The ability of a manufacturer to grant additional franchises is based on several factors which are not within our control.
Without the protection of state dealer franchise laws, it may also be more difficult for our dealerships to renew their franchise or dealer agreements upon expiration. The ability of a manufacturer to grant additional franchises is based on several factors which are not within our control.
Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws also provide that, unless the Board otherwise consents in writing, to the extent permitted by applicable law, the United States District Court for the District of Delaware shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act or any ancillary claims related thereto which are subject to the ancillary jurisdiction of the federal courts.
Our Amended and Restated Certificate of Incorporation and our Amended and Restated Bylaws also provide that, unless the Board of Directors otherwise consents in writing, to the extent permitted by applicable law, the United States District Court for the District of Delaware shall be the sole and exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act of 1933, as amended (the “Securities Act”), the Exchange Act or any ancillary claims related thereto which are subject to the ancillary jurisdiction of the federal courts.
Loss of sale, involving trades and insufficient levels of inventory, could also force us to purchase a greater percentage of used vehicle inventory from third-party auctions, which is generally less profitable due to high bidding costs and additional costs associated with transporting the acquired used vehicles to our store locations.
Loss of sale, involving trades and insufficient levels of inventory, could also force us to purchase a greater percentage of used vehicle inventory from third-party wholesale auctions, which is generally less profitable due to high bidding costs and additional costs associated with transporting the acquired used vehicles to our store locations.
A limitation or reduction of available consumer financing for these or other reasons could affect consumers’ ability to purchase or lease a vehicle and, thus, could have a material adverse effect on our sales volume. Any deterioration of our relationship with the particular manufacturer-affiliated finance source could adversely affect our relationship with the affiliated manufacturer, and vice versa.
A limitation or reduction of available consumer financing for these or other reasons could affect consumers’ ability to purchase or lease a vehicle and, thus, could have a material adverse effect on our sales volume. Any deterioration of our relationship with the particular manufacturer-affiliated captive finance source could adversely affect our relationship with the affiliated manufacturer, and vice versa.
One of the primary finance sources used by consumers in connection with the purchase or lease of a new or used vehicle is the manufacturer captive finance companies. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financing programs.
One of the primary finance sources used by consumers in connection with the purchase or lease of a new or used vehicle is the manufacturer-affiliated captive finance companies. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financing programs.
In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us.
In addition, we may be subject to broad liabilities arising out of environmental contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us.
If dealer laws are repealed or weakened in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause.
If dealer franchise laws are repealed or weakened in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause.
We have capacity to finance new and used vehicle inventory purchases under floor plan agreements with various manufacturer-affiliated finance companies and other lending institutions (the “Silo Floor Plan Facilities”) as well as the 2021 Floor Plan Facilities.
We have capacity to finance new and used vehicle inventory purchases under floor plan agreements with various manufacturer-affiliated captive finance companies and other lending institutions (the “Silo Floor Plan Facilities”) as well as the 2021 Floor Plan Facilities.
In the event we are not able to arrive at an agreeable resolution, we may be forced to litigate these matters. If we are unsuccessful in litigation, our results of operations and financial position may be negatively impacted. Impairment of our goodwill or other intangible assets could have a material adverse impact on our earnings.
In the event we are not able to arrive at an agreeable resolution, we may be forced to litigate these matters. If we are unsuccessful in litigation, our results of operations and financial position may be negatively impacted. Impairment of our goodwill, other intangible assets or other long-lived assets could have a material adverse impact on our earnings.
Under currently proposed agency models, our franchised dealerships would receive a fee or similar compensation for facilitating the sale by the manufacturer of a new vehicle, but the purchased new vehicle would not be held in inventory. The timing and extent of implementation and relative success of agency sales models in European markets is uncertain and difficult to predict.
Under currently proposed agency models, our franchised dealerships would receive a fee or similar compensation for facilitating the sale by the manufacturer of a new vehicle, but the purchased new vehicle would not be held in inventory. The timing and extent of implementation and relative success of agency sales models in European markets are uncertain and difficult to predict.
Moreover, many of our mortgage notes’ principal and interest payments are based on an amortization period longer than the actual terms (maturity dates) of the notes. We will be required to repay or refinance the remaining principal balances for certain of our mortgages with balloon payments at the notes’ maturity dates, which range from 2023 to 2033.
Moreover, many of our mortgage notes’ principal and interest payments are based on an amortization period longer than the actual terms (maturity dates) of the notes. We will be required to repay or refinance the remaining principal balances for certain of our mortgages with balloon payments at the notes’ maturity dates, which range from 2024 to 2033.
In addition, we receive incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline. If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise and dealer agreements.
In addition, we receive incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline. If state dealer franchise laws are repealed or weakened, our dealerships may be more susceptible to termination, non-renewal or renegotiation of their franchise and dealer agreements.
The Delaware courts or the United States District Court for the District of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than to our stockholders. 21 SONIC AUTOMOTIVE, INC.
The Delaware courts or the United States District Court for the District of Delaware may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than to our stockholders. 19 SONIC AUTOMOTIVE, INC.
Adverse conditions affecting these and other important aspects of manufacturers’ operations and public relations may adversely affect our ability to sell their automobiles and, as a result, significantly and detrimentally affect our business and results of operations. Moreover, our business could be materially adversely impacted by the bankruptcy of a major vehicle manufacturer or related lender.
Adverse conditions affecting these and other important aspects of manufacturers’ operations and public perception may adversely affect our ability to sell their automobiles and, as a result, significantly and detrimentally affect our business and results of operations. Moreover, our business could be materially adversely impacted by the bankruptcy of a major vehicle manufacturer or related lender.
For example, Tesla, Inc. has been challenging state dealer franchise laws in many states with mixed results, but it has achieved success with new vehicle sales business model and its vehicles have been accepted by many consumers, even in states where dealer franchise laws appear to preclude such vehicle sales.
For example, Tesla, Inc. has been challenging state dealer franchise laws in many states with mixed results, but it has achieved success with its direct-to-consumer new vehicle sales business model and its vehicles have been accepted by many consumers, even in states where dealer franchise laws appear to preclude such vehicle sales.
To the extent that used vehicle inventory levels remain low and the costs to acquire high-quality inventory remain high, we may experience decreased sales volume and margins on sales of our used vehicle inventory, which may have a material negative impact on our business, results of operations and profitability, particularly in the EchoPark Segment.
To the extent that used vehicle inventory levels remain low (compared to historical levels) and the costs to acquire high-quality inventory remain high, we may experience decreased sales volume and margins on sales of our used vehicle inventory, which may have a material negative impact on our business, results of operations and profitability, particularly in the EchoPark Segment.
We have up to $350.0 million of maximum borrowing availability under an amended and restated syndicated revolving credit facility (the “2021 Revolving Credit Facility”) and up to $2.6 billion of maximum borrowing availability for combined syndicated new and used vehicle inventory floor plan financing (the “2021 Floor Plan Facilities” and, together with the 2021 Revolving Credit Facility, the “2021 Credit Facilities”).
RISK FACTORS We have up to $350.0 million of maximum borrowing availability under an amended and restated syndicated revolving credit facility (the “2021 Revolving Credit Facility”) and up to $2.6 billion of maximum borrowing availability for combined syndicated new and used vehicle inventory floor plan financing (the “2021 Floor Plan Facilities” and, together with the 2021 Revolving Credit Facility, the “2021 Credit Facilities”).
RISK FACTORS Our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably. A significant portion of our new vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the U.S.
Our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably. A significant portion of our new vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside the U.S.
In addition, many manufacturers attempt to measure customers’ satisfaction with their sales and warranty service experiences through manufacturer-determined CSI scores. The components of CSI vary by manufacturer and are modified periodically. Franchise and dealer agreements may also impose financial and sales performance standards.
RISK FACTORS In addition, many manufacturers attempt to measure customers’ satisfaction with their sales and warranty service experiences through manufacturer-determined CSI scores. The components of CSI vary by manufacturer and are modified periodically. Franchise and dealer agreements may also impose financial and sales performance standards.
Changes in customer demand toward fuel-efficient plug-in hybrid electric vehicles and battery electric vehicles, and resulting shifts by manufacturers to meet demand, could disrupt our ongoing business or have a material adverse effect on our overall business and results of operations.
Changes in consumer demand toward fuel-efficient plug-in hybrid electric vehicles and battery electric vehicles, and resulting shifts by manufacturers to meet demand, could disrupt our ongoing business or have a material adverse effect on our overall business and results of operations.
Our use of hedging transactions could limit our financial gains or result in financial losses. To reduce our exposure to fluctuations in cash flow due to interest rate fluctuations, we have entered into, and in the future expect to enter into, certain derivative instruments (or hedging agreements).
Our use of hedging transactions could limit our financial gains or result in financial losses. To reduce our exposure to fluctuations in cash flow due to interest rate fluctuations, we have entered into, and in the future may enter into, certain derivative instruments (or hedging agreements).
There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under these debt instruments should all or substantial portions of the principal become immediately due and payable.
RISK FACTORS There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under these debt instruments should all or substantial portions of the principal become immediately due and payable.
Our inability to source high-quality used vehicle inventory from third-party auctions could reduce the demand for our used vehicle inventory offerings. See “ Increasing competition among automotive retailers and the use of the internet reduces our profit margins on vehicle sales and related businesses ” above in this “Item 1A. Risk Factors” for further discussion.
Our inability to source high-quality used vehicle inventory from third-party auctions could reduce the demand for our used vehicle inventory offerings. See “ Increasing competition among automotive retailers and the use of the internet in automotive retail may reduce our profit margins on vehicle sales and related businesses ” above in this “Item 1A. Risk Factors” for further discussion.
Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.
Our revenues or profitability could be materially adversely affected if any of our manufacturers awards franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.
These cyber-security risks include vulnerability to cyber-attack of our internal or externally hosted business applications; interruption of service or access to systems may affect our ability to deliver vehicles or complete transactions with customers; unauthorized access or theft of customer or employee personal confidential information, including financial information, or strategically sensitive data; disruption of communications (both internally and externally) that may affect the quality of information used to make informed business decisions; and damage to our reputation as a result of a breach in security that could affect the financial security of our customers.
These cybersecurity risks include vulnerability to cyberattack of our internal or externally hosted business applications; interruption of service or access to systems may affect our ability to deliver vehicles or complete transactions with customers; unauthorized access or theft of customer or employee personal confidential information, including financial information, or strategically sensitive data; disruption of communications (both internally and externally) that may affect the quality of information used to make informed business decisions; and damage to our reputation as a result of a breach in security that could affect the financial security of our customers.
We cannot assure you that manufacturers will approve future acquisitions or do so on a timely basis, which could impair the execution of our acquisition strategy. 10 SONIC AUTOMOTIVE, INC.
We cannot assure you that manufacturers will approve future acquisitions or do so on a timely basis, which could impair the execution of our acquisition strategy. 9 SONIC AUTOMOTIVE, INC.
Our dealerships are concentrated in certain states, including California, Colorado, Florida and Texas, in which actual or threatened natural disasters and severe weather events (such as earthquakes, wildfires, landslides, hail storms, floods and hurricanes) may disrupt our store operations, which may adversely impact our business, financial condition, results of operations and cash flows.
Our dealerships are concentrated in certain states, including California, Colorado, Florida and Texas, in which actual or threatened natural disasters and severe weather events (such as earthquakes, wildfires, landslides, hailstorms, floods and hurricanes) may disrupt our store operations, which may adversely impact our business, financial condition, results of operations and cash flows.
Similarly, many of the dealerships we acquire, including some of our largest acquisitions, do not have financial statements audited or prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We may not have an accurate understanding of the historical financial condition and performance of our acquired entities.
Similarly, many of the dealerships we acquire, including some of our largest acquisitions, do not have financial statements audited or prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). We may not have an accurate understanding of the historical financial condition and performance of our acquired entities prior to acquisition.
Such endeavors may involve significant risks and uncertainties, including allocating management resources away from current operations, insufficient revenues to offset expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings.
Such endeavors involve significant risks and uncertainties, including allocating management resources away from our other operations, insufficient revenues to offset expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our due diligence of such strategies and offerings.
RISK FACTORS We may not have sufficient funds to meet our obligation to repay all or a substantial portion of the outstanding principal amount of our indebtedness when it becomes due.
We may not have sufficient funds to meet our obligation to repay all or a substantial portion of the outstanding principal amount of our indebtedness when it becomes due.
Challenges to the business model of our franchised dealerships from manufacturers and the effect of companies entering into the automotive space may affect our ability to grow or maintain the business over the long term. Large and well-capitalized technology-focused companies have continued to enter into the automotive space in recent years.
Challenges to the business model of our franchised dealerships from existing automobile manufacturers and the effect of new companies entering into the automotive space may affect our ability to grow or maintain the business over the long term. Large and well-capitalized technology-focused companies have continued to enter into the automotive space in recent years.
If manufacturers grant new franchises in areas near or within our existing markets, this could significantly impact our revenues and/or profitability. In addition, current state dealer laws generally restrict the ability of automobile manufacturers to enter the retail market and sell directly to consumers.
If manufacturers grant new franchises in areas near or within our existing markets, this could negatively impact our revenues and/or profitability. In addition, current state dealer franchise laws generally restrict the ability of automobile manufacturers to enter the retail market and sell directly to consumers.
The CFPB has recommended that financial institutions under its jurisdiction take steps to ensure compliance with the Equal Credit Opportunity Act, which may include imposing controls on discretionary markup of wholesale rates offered by financial institutions (“dealer markup”), monitoring and addressing the effects of dealer markup policies and eliminating dealer discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to certain groups of consumers. 12 SONIC AUTOMOTIVE, INC.
The CFPB has recommended that financial institutions under its jurisdiction take steps to ensure compliance with the Equal Credit Opportunity Act, which may include imposing controls on discretionary markup of wholesale interest rates offered by financial institutions (“dealer markup”), monitoring and addressing the effects of dealer markup policies and eliminating dealer discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to certain groups of consumers.
RISK FACTORS We cannot guarantee that any of our existing franchise and dealer agreements will be renewed or that the terms and conditions of such renewals will be favorable to us.
We cannot guarantee that any of our existing franchise and dealer agreements will be renewed or that the terms and conditions of such renewals will be favorable to us.
RISK FACTORS Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise or dealer agreements or to issue additional equity. Some of our franchise and dealer agreements prohibit transfers of any ownership interests of a dealership and, in some cases, its parent, without prior approval of the applicable manufacturer.
Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise or dealer agreements or to issue additional equity. Certain of our franchise and dealer agreements prohibit transfers of any ownership interests of a dealership and, in some cases, its parent, without prior approval of the applicable manufacturer.
Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on our results of operations. 22 SONIC AUTOMOTIVE, INC.
Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on our results of operations. 20 SONIC AUTOMOTIVE, INC.
In the event that interest rates rise further, lenders tighten their credit standards, or there is a decline in the availability of credit in the consumer lending market, the costs of financing could influence consumer buying decisions and the ability of consumers to purchase vehicles could be limited, which could have a material adverse effect on our business, revenues and profitability. 14 SONIC AUTOMOTIVE, INC.
In the event that interest rates rise further, lenders tighten their credit standards, or there is a decline in the availability of credit in the consumer lending market, the costs of financing could influence consumer buying decisions and the ability of consumers to purchase vehicles could be limited, which could have a material adverse effect on our business, revenues and profitability.
Some state dealer laws allow dealers to file protests or petitions or to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Manufacturers’ lobbying efforts may lead to the repeal or revision of state dealer laws.
Some state dealer franchise laws allow dealers to file protests or petitions or to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Certain automobile manufacturers’ lobbying efforts may lead to the repeal or revision of state dealer franchise laws.
Additionally, any such bankruptcy may result in us being required to incur impairment charges with respect to the inventory, fixed assets and intangible assets related to certain dealerships, which could adversely impact our results of operations and financial condition and our ability to remain in compliance with the financial ratios contained in our debt agreements. 17 SONIC AUTOMOTIVE, INC.
Additionally, any such bankruptcy may result in us being required to incur impairment charges with respect to the inventory, fixed assets and intangible assets related to certain dealerships, which could adversely impact our results of operations and financial condition and our ability to remain in compliance with the financial ratios contained in our debt agreements.
Each of our franchise or dealer agreements provides for termination or non-renewal for a variety of causes, including certain changes in the financial condition of the dealerships and any unapproved change of ownership or management. Manufacturers may also have a right of first refusal if we seek to sell dealerships. 15 SONIC AUTOMOTIVE, INC.
Each of our franchise or dealer agreements provides for termination or non-renewal for a variety of causes, including certain changes in the financial condition of the dealerships and any unapproved change of ownership or management. Manufacturers may also have a right of first refusal if we seek to sell dealerships.
Used vehicle inventory is subject to depreciation risk. Accordingly, if we develop excess inventory, the inability to liquidate such inventory at prices that allow us to meet desirable profit margins or to recover our costs could have a material adverse effect on our results of operations.
Used vehicle inventory is subject to depreciation risk. Accordingly, if we develop excess inventory, the inability to liquidate such inventory at prices that allow us to meet desirable profit margins or to recover our costs could have a material adverse effect on our results of operations. 12 SONIC AUTOMOTIVE, INC.
Our failure to comply with certain covenants in these agreements could materially adversely affect our ability to access our borrowing capacity, subject us to acceleration of our outstanding debt, result in a cross default on other indebtedness and have a material adverse effect on our ability to continue our business. 18 SONIC AUTOMOTIVE, INC.
Our failure to comply with certain covenants in these agreements could materially adversely affect our ability to access our borrowing capacity, subject us to acceleration of our outstanding debt, result in a cross default on other indebtedness and have a material adverse effect on our ability to continue our business.
Pursuant to applicable accounting pronouncements, we evaluate goodwill for impairment annually on October 1, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Pursuant to applicable accounting pronouncements, we evaluate goodwill for impairment annually on April 30, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
This may put us in a competitive disadvantage with other competing dealerships and may ultimately result in our decision to sell a franchise when we believe it may be difficult to recover the cost of the required investment to reach the manufacturer’s brand and facility standards.
This may put us in a competitive disadvantage with other competing dealerships and may ultimately result in our decision to sell a franchise when we believe it may be difficult to recover the cost of the required investment to reach the manufacturer’s brand and facility standards. 14 SONIC AUTOMOTIVE, INC.
Any cyber-security breach or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties or damage to our reputation, and cause a loss of confidence in our services, which could materially adversely affect our competitive position, results of operations and financial condition. 23 SONIC AUTOMOTIVE, INC.
Any cybersecurity breach or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties or damage to our reputation, and cause a loss of confidence in our services, which could materially adversely affect our competitive position, results of operations and financial condition. 21 SONIC AUTOMOTIVE, INC.
These risks include, but are not limited to: incurring significantly higher capital expenditures and operating expenses; failing to assimilate the operations and personnel of acquired dealerships; entering new markets with which we are unfamiliar; incurring potential undiscovered liabilities and operational difficulties at acquired dealerships; disrupting our ongoing business; diverting our management resources; failing to maintain uniform standards, controls and policies; impairing relationships with employees, manufacturers and customers as a result of changes in management; the challenge of retaining or attracting appropriate dealership management personnel; incurring increased expenses for accounting and computer systems, as well as integration difficulties; failing to obtain a manufacturer’s consent to the acquisition of one or more of its franchises or to renew the franchise or dealer agreement on terms acceptable to us; and incorrectly valuing entities to be acquired or assessing markets entered.
These risks include, but are not limited to: incurring significantly higher capital expenditures and operating expenses; failing to integrate the operations and personnel of acquired dealerships; entering new markets with which we are unfamiliar; incurring potential undiscovered liabilities and operational difficulties at acquired dealerships; disrupting our ongoing business; diverting our management resources; failing to maintain uniform standards, controls and policies; impairing relationships with employees, manufacturers and customers as a result of changes in management; failing to retain or attract appropriate dealership management personnel; incurring incremental expenses for standardized accounting and computer systems, as well as integration difficulties; failing to obtain a manufacturer’s consent to the acquisition of one or more of its franchises or to renew the franchise or dealer agreement on terms acceptable to us; and incorrectly valuing entities to be acquired or assessing markets entered.
Although our parts and service operations and used vehicle and powersports businesses may serve to offset some of this risk, changes in automobile manufacturers’ vehicle models and consumer demand for particular vehicles may have a material adverse effect on our business. Our business is highly dependent on consumer demand and preferences.
Although our parts and service operations and used vehicle and powersports businesses may serve to offset some of this risk, changes in automobile manufacturers’ vehicle models and consumer demand for particular vehicles may have a material adverse effect on our business.
Manufacturers routinely modify their incentive programs in response to changing market conditions. A reduction or discontinuation of a manufacturer’s incentive programs may materially adversely impact vehicle demand and affect our results of operations. Our sales volume may be materially adversely affected if manufacturer captives change their customer financing programs or are unable to provide floor plan financing.
Manufacturers routinely modify their incentive programs in response to changing market conditions. A reduction or discontinuation of a manufacturer’s incentive programs may materially adversely impact vehicle demand and affect our results of operations. Our sales volume may be materially adversely affected if manufacturer-affiliated captive finance companies change their customer financing programs or are unable to provide floor plan financing.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, established the Consumer Financial Protection Bureau (the “CFPB”), a new independent federal agency funded by the U.S. Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress.
RISK FACTORS The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, established the Consumer Financial Protection Bureau (the “CFPB”), an independent federal agency funded by the U.S. Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress.
Adverse conditions affecting one or more key manufacturers or lenders may negatively impact our results of operations.
RISK FACTORS Adverse conditions affecting one or more key manufacturers or lenders may negatively impact our results of operations.
Variability in customer behavior, including volatile fuel prices and initiatives to increase the use of fuel-efficient and electric vehicles, has affected and may continue to affect customer purchases of new and used vehicles. Manufacturers have also announced increased production focus on the manufacture of fuel-efficient plug-in hybrid electric vehicles (“PHEVs”) and battery electric vehicles (“BEVs”).
Variability in consumer behavior, including volatile fuel prices and initiatives to increase the use of fuel-efficient and electric vehicles, has affected and may continue to affect consumer preferences for new and used vehicles. Manufacturers have also announced increased production focus on the manufacture of fuel-efficient plug-in hybrid electric vehicles (“PHEVs”) and battery electric vehicles (“BEVs”).
The franchised dealer’s participation in that potential future transaction type is unclear and our operations and financial results may be negatively impacted if the role of franchised dealers diminishes. Our dealers depend upon new vehicle sales and, therefore, their success depends in large part upon consumer demand for and manufacturer supply of particular vehicles.
The franchised dealer’s participation in that potential future transaction type is unclear and our operations and financial results may be negatively impacted if the role of franchised dealers diminishes. 11 SONIC AUTOMOTIVE, INC. RISK FACTORS Our dealers depend upon new vehicle sales and, therefore, their success depends in large part upon consumer demand for and manufacturer supply of particular vehicles.
If such events are significant, the profitability of our dealerships related to those manufacturers could be adversely affected and we could experience a material adverse effect on our overall results of operations, financial position and cash flows. 13 SONIC AUTOMOTIVE, INC. RISK FACTORS Further, manufacturers typically allocate their vehicles among dealerships based on the sales history of each dealership.
If such events are significant, the profitability of our dealerships related to those manufacturers could be adversely affected and we could experience a material adverse effect on our overall results of operations, financial position and cash flows. Further, manufacturers typically allocate their vehicles among dealerships based on the sales history of each dealership.
RISK FACTORS Risks Related to the Retail Automotive Industry Our business is dependent on global supply chains that could be adversely affected by natural and man-made disasters, including the effects of pandemics like the COVID-19 pandemic. The automotive manufacturing supply chain spans the globe.
RISK FACTORS Our business is dependent on global supply chains that could be adversely affected by natural and man-made disasters, including the effects of pandemics like the COVID-19 pandemic. The automotive manufacturing supply chain spans the globe.
The perception among the public that these sales or transfers will occur could also contribute to a decline in the market price of our Class A Common Stock. 20 SONIC AUTOMOTIVE, INC.
The perception among the public that these sales or transfers may occur could also contribute to a decline in the market price of our Class A Common Stock. 18 SONIC AUTOMOTIVE, INC.
Recently, we have experienced an imbalance between consumer demand for new vehicles and available supply of new vehicle inventory due to supply chain disruptions and manufacturing delays, and it is uncertain when new vehicle inventories will stabilize and at what level.
In recent years, we experienced an imbalance between consumer demand for new vehicles and available supply of new vehicle inventory due to supply chain disruptions and manufacturing delays, and it is uncertain when new vehicle inventories will stabilize and at what level.
RISK FACTORS Increasing competition among automotive retailers and the use of the internet reduces our profit margins on vehicle sales and related businesses. Automotive retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are larger and have greater financial and marketing resources than we do.
Increasing competition among automotive retailers and the use of the internet in automotive retail may reduce our profit margins on vehicle sales and related businesses. Automotive retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are larger and have greater financial and marketing resources than we do.
The agreements or instruments governing any future debt that we may incur may contain similar provisions regarding repurchases in the event of a change of control triggering event.
The agreements or instruments governing any future debt that we may incur may contain similar provisions regarding repurchases in the event of a change of control triggering event. 17 SONIC AUTOMOTIVE, INC.
As of December 31, 2022, we had approximately $292.9 million available for additional borrowings under the 2021 Revolving Credit Facility based on the borrowing base calculation, which is affected by numerous factors, including eligible asset balances.
As of December 31, 2023, we had approximately $298.6 million available for additional borrowings under the 2021 Revolving Credit Facility based on the borrowing base calculation, which is affected by numerous factors, including eligible asset balances.
However, if manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on us. 16 SONIC AUTOMOTIVE, INC. RISK FACTORS Our sales volume and profit margin on each sale may be materially adversely affected if manufacturers reduce or discontinue their incentive programs.
However, if manufacturers obtain the ability to retail vehicles directly to consumers and choose to do so in our markets, such competition could have a material adverse effect on us. Our sales volume and profit margin on each sale may be materially adversely affected if manufacturers reduce or discontinue their incentive programs.
Our operating results may be materially adversely affected if we do not obtain a sufficient supply of these vehicles on a timely basis. Our business is dependent upon access to quality sources of used vehicle inventory.
Our operating results may be materially adversely affected if we do not obtain a sufficient supply of these vehicles on a timely basis or if our inventory mix does not align with consumer demand. Our business is dependent upon access to quality sources of used vehicle inventory.
RISK FACTORS Our hedging transactions expose us to certain risks and financial losses, including, among other things: counterparty credit risk; available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection; the duration or the amount of the hedge may not match the duration or the amount of the related liability; the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value, downward adjustments or “mark-to-market losses,” which would affect our recorded stockholders’ equity amounts; and all of our hedging instruments contain terms and conditions with which we are required to meet.
Our hedging transactions expose us to certain risks and financial losses, including, among other things: counterparty credit risk; the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value, downward adjustments or “mark-to-market losses,” which would affect our recorded stockholders’ equity amounts; and all of our hedging instruments contain terms and conditions with which we are required to meet.
In recent months, financial markets have experienced increases in interest rates, which may make it more difficult for us to obtain financing on attractive terms. Using cash to complete acquisitions could substantially limit our operating and financial flexibility.
In recent years, financial markets have experienced elevated interest rates, which may make it more difficult for us to obtain financing on attractive terms. Using cash to complete acquisitions or to invest in our EchoPark expansion plans could substantially limit our operating and financial flexibility.
Goodwill is subject to impairment assessments at least annually or more frequently when events or changes in circumstances indicate that an impairment may have occurred.
Goodwill and other intangible assets are subject to impairment assessments at least annually or more frequently when events or changes in circumstances indicate that an impairment may have occurred.
For 2022, approximately 14.7% of our Fixed Operations revenues was for work covered by manufacturer warranties and complimentary maintenance programs. To the extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty repair work, our Fixed Operations revenues and margins could be adversely affected.
For 2023, approximately 13.9% of our Fixed Operations revenues was for work covered by manufacturer warranties and complimentary maintenance programs. To the extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty repair work, our Fixed Operations revenues and margins could be adversely affected. 15 SONIC AUTOMOTIVE, INC.
Our pace and scale of growing our EchoPark business may be limited in the event other sources of capital are unavailable.
The pace and scale of the growth of our EchoPark and powersports businesses may be limited in the event other sources of capital are unavailable.
Similarly, the delivery of vehicles from manufacturers at a time later than scheduled due to supply chain disruptions or other delays, which may occur during critical periods of new product introductions, could limit sales of those vehicles during those periods. We experienced such delays in 2022 and currently expect such delays to improve in 2023.
Similarly, the delivery of vehicles from manufacturers at a time later than scheduled due to supply chain disruptions or other delays, which may occur during critical periods of new product introductions, could limit sales of those vehicles during those periods.
As of December 31, 2022, our total outstanding indebtedness was approximately $3.0 billion, which includes floor plan notes payable, long-term debt and short-term debt.
As of December 31, 2023, our total outstanding indebtedness was approximately $3.3 billion, which includes floor plan notes payable, long-term debt and short-term debt. 16 SONIC AUTOMOTIVE, INC.
As such, supply chain disruptions resulting from widespread public health crises, armed conflict, natural disasters, adverse weather and other events may affect the flow of new vehicle or parts inventory to us or our manufacturing partners.
As such, supply chain disruptions resulting from widespread public health crises, armed conflict, natural disasters, adverse weather and other events may affect the flow of new vehicle or parts inventory to us or our manufacturing partners. Such events could lead to widespread reductions in travel and economic activity, including automobile manufacturing and supply chain disruptions and production delays.
A failure on our part to effectively hedge against interest rate changes may adversely affect our financial condition and results of operations. Reforms to and uncertainty regarding LIBOR may adversely affect our business, financial condition and results of operations.
A failure on our part to effectively hedge interest rate exposure may adversely affect our financial condition and results of operations.
The loss of the services of key employees or the inability to attract additional qualified managers could have a material adverse effect on our results of operations. In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions. Natural disasters, adverse weather and other events can disrupt our business.
In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions. Natural disasters, adverse weather and other events can disrupt our business.
As of April 2019, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in critical status for the plan year commencing January 1, 2019 and is projected to become insolvent in 2031.
As of April 2023, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in Critical Status for the plan year commencing January 1, 2023, with the projected pension liability underfunded by approximately $1.0 billion and projected to become insolvent in the 2032 plan year.
As a result, the holders of Class B Common Stock may be able to control fundamental corporate matters and transactions, subject to the above limitations. The concentration of voting power may also discourage, delay or prevent a change of control of us from a third party even if the action was favored by holders of Class A Common Stock.
The concentration of voting power may also discourage, delay or prevent a change of control of us from a third party even if the action was favored by holders of Class A Common Stock.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A significant amount of our goodwill is related to our franchised dealerships reporting unit, and we have significant other intangible assets associated with acquisitions of franchised dealerships.
We describe the process for testing goodwill and other intangible assets more thoroughly under the heading “Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A significant amount of our goodwill is related to our franchised dealerships reporting unit, and we have significant other intangible assets associated with acquisitions of franchised dealerships.
Three of our dealership subsidiaries in northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”) pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists (the “IAM”) and the International Brotherhood of Teamsters (the “IBT”).
Three of our dealership subsidiaries in northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”) pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists (the “IAM”). The AI Pension Plan is a “multiemployer plan” as defined under the Employee Retirement Income Security Act of 1974, as amended.
Until we actually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. 11 SONIC AUTOMOTIVE, INC.
Until we actually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired entities and their operations. Risks Related to the Retail Automotive Industry Our facilities and operations are subject to extensive governmental laws and regulations.
The holders of Class B Common Stock (which include SFC and the OBS Family, LLC, entities which David Bruton Smith, Sonic’s Chairman and Chief Executive Officer, and his family members, including B. Scott Smith and Marcus Smith, both directors of Sonic, control) currently hold less than a majority of our outstanding common stock, but a majority of our voting power.
The holders of Class B Common Stock (which include SFC and the OBS Family, LLC, entities which David Bruton Smith, Sonic’s Chairman and Chief Executive Officer, and his family members, including B. Scott Smith and Marcus G.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe prefer to acquire dealerships or build dealership facilities located along major thoroughfares, which can be easily visited by prospective guests. For information regarding the states in which we operate and the breakdown of our stores among our operating segments, see the discussion under the heading “Our Business” in “Item 1.
Biggest changeWe prefer to acquire dealerships or build dealership facilities located along major thoroughfares, which can be easily visited by prospective guests. For information regarding the states in which we operate and the breakdown of our stores among our operating segments, see the discussion under the heading “Our Business” in “Item 1. Business.” 24 SONIC AUTOMOTIVE, INC.
Business.” We lease a significant number of the properties utilized by our dealership operations from affiliates of Capital Automotive Real Estate Services, Inc. and other individuals and entities. Under the terms of our franchise and dealer agreements, each of our dealerships must maintain an appropriate appearance and design of its dealership facility and is restricted in its ability to relocate.
We lease a significant number of the properties utilized by our dealership operations from affiliates of Capital Automotive Real Estate Services, Inc. and other individuals and entities. Under the terms of our franchise and dealer agreements, each of our dealerships must maintain an appropriate appearance and design of its dealership facility and is restricted in its ability to relocate.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings. For information regarding legal proceedings, see the discussion under the heading “Legal Proceedings” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Item 4. Mine Safety Disclosures. Not applicable. 26 SONIC AUTOMOTIVE, INC. PART II
Biggest changeItem 3. Legal Proceedings. For information regarding legal proceedings, see the discussion under the heading “Legal Proceedings” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Item 4. Mine Safety Disclosures. Not applicable. 25 SONIC AUTOMOTIVE, INC. PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 26 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 27 Item 6. [Reserved] 28 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 72
Biggest changeItem 4. Mine Safety Disclosures 25 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 26 Item 6. [Reserved] 27 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 28 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 76

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeOur share repurchase program does not have an expiration date and current remaining availability under the program is as follows: (In millions) July 2022 authorization $ 500.0 Total active program repurchases prior to December 31, 2022 (35.7) Current remaining availability as of December 31, 2022 $ 464.3 Subsequent to December 31, 2022, we repurchased an additional 194,294 shares of Class A Common Stock at an average price of $49.17, resulting in current remaining availability of approximately $454.8 million. 27 SONIC AUTOMOTIVE, INC.
Biggest changeOur share repurchase program does not have an expiration date and current remaining availability under the program is as follows: (In millions) July 2022 authorization $ 500.0 Total active program repurchases prior to December 31, 2023 (213.3) Current remaining availability as of December 31, 2023 $ 286.7 26 SONIC AUTOMOTIVE, INC.
The declaration and payment of any future dividend is subject to the business judgment of our Board of Directors, taking into consideration our historic and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, current economic environment and other factors considered by our Board of Directors to be relevant.
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 and covenant compliance, share repurchases, the current economic environment and other factors considered by our Board of Directors to be relevant.
Subsequent to December 31, 2022, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of $0.28 per share for stockholders of record on March 15, 2023 to be paid on April 14, 2023.
Subsequent to December 31, 2023, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of $0.30 per share for stockholders of record on March 15, 2024 to be paid on April 15, 2024.
Issuer Purchases of Equity Securities The following table sets forth information about the shares of Class A Common Stock we repurchased during the three months ended December 31, 2022: Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (In millions, except per share data) October 2022 — $ — — $ — November 2022 — $ — — $ — December 2022 352.9 $ 47.23 352.9 $ 464.3 Total 352.9 352.9 (1) On July 28, 2022, we announced that our Board of Directors had increased the dollar amount authorized for us to repurchase shares of our Class A Common Stock pursuant to our share repurchase program.
Issuer Purchases of Equity Securities The following table sets forth information about the shares of Class A Common Stock we repurchased during the three months ended December 31, 2023: Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) (In millions, except per share data) October 2023 — $ — — $ 286.8 November 2023 — $ 51.27 — $ 286.8 December 2023 — $ 54.14 — $ 286.7 Total — — (1) On July 28, 2022, we announced that our Board of Directors had increased the dollar amount authorized for us to repurchase shares of our Class A Common Stock pursuant to our share repurchase program.
The closing stock price for the Class A Common Stock on February 9, 2023 was $58.11. Our Board of Directors issued four quarterly cash dividends on all outstanding shares of Class A and Class B Common Stock totaling $1.03 per share, $0.46 per share and $0.40 per share during the years ended December 31, 2022, 2021 and 2020, respectively.
Our Board of Directors issued four quarterly cash dividends on all outstanding shares of Class A and Class B Common Stock totaling $1.16 per share, $1.03 per share and $0.46 per share for each of the years ended December 31, 2023, 2022 and 2021, respectively.
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 and the heading “Liquidity and Capital Resources” in “Item 7.
These factors are considered each quarter and will be scrutinized as our Board of Directors determines our dividend policy in the future. There is no guarantee that additional dividends will be declared and paid at any time in the future.
As of February 9, 2023, there were 24,013,107 shares of our Class A Common Stock and 12,029,375 shares of our Class B Common Stock outstanding. As of February 9, 2023, there were 657 record holders of the Class A Common Stock and two record holders of the Class B Common Stock.
As of February 8, 2024, there were 21,953,134 shares of our Class A Common Stock and 12,029,375 shares of our Class B Common Stock outstanding. As of February 8, 2024, there were 632 record holders of the Class A Common Stock and two record holders of the Class B Common Stock.
Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion of dividends and for a description of restrictions on the payment of dividends.
See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements and the heading “Liquidity and Capital Resources” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional discussion of dividends and for a description of restrictions on the payment of dividends.
Added
The closing stock price for the Class A Common Stock on February 8, 2024 was $55.20.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) 2022 2021 Change % Change (In millions, except unit data) Total retail used vehicle revenue: Same market $ 1,623.2 $ 1,993.9 $ (370.7) (19) % New markets 493.6 38.7 454.9 NM Total as reported $ 2,116.8 $ 2,032.6 $ 84.2 4 % Total retail used vehicle gross profit (loss): Same market $ (14.3) $ (56.8) $ 42.5 75 % New markets 18.7 1.6 17.1 NM Total as reported $ 4.4 $ (55.2) $ 59.6 108 % Total retail used vehicle unit sales: Same market 51,336 76,838 (25,502) (33) % New markets 12,771 997 11,774 NM Total as reported 64,107 77,835 (13,728) (18) % 49 SONIC AUTOMOTIVE, INC.
Biggest changeMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market/closed market basis for retail used vehicles: Year Ended December 31, Better / (Worse) 2023 2022 Change % Change (In millions, except unit data) Total retail used vehicle revenue: Same market $ 1,754.7 $ 1,129.2 $ 625.5 55 % New markets/closed markets 389.1 987.6 (598.5) NM Total as reported $ 2,143.8 $ 2,116.8 $ 27.0 1 % Total retail used vehicle gross profit (loss): Same market $ (5.2) $ (17.2) $ 12.0 70 % New markets/closed markets (11.9) 21.6 (33.5) NM Total as reported $ (17.1) $ 4.4 $ (21.5) (489) % Total retail used vehicle unit sales: Same market 65,969 39,933 26,036 65 % New markets/closed markets 7,707 24,174 (16,467) NM Total as reported 73,676 64,107 9,569 15 % NM = Not Meaningful The following table provides a reconciliation of EchoPark Segment reported basis, same market basis and new market/ closed market basis for F&I: Year Ended December 31, Better / (Worse) 2023 2022 Change % Change (In millions) Total F&I revenue: Same market $ 160.1 $ 101.1 $ 59.0 58 % New markets/closed markets 17.8 65.3 (47.5) (73) % Total as reported $ 177.9 $ 166.4 $ 11.5 7 % Our EchoPark Segment reported retail used vehicle and F&I results were as follows: Year Ended December 31, Better / (Worse) 2023 2022 Change % Change (In millions, except unit and per unit data) Reported retail used vehicle and F&I: Retail used vehicle revenue $ 2,143.8 $ 2,116.8 $ 27.0 1 % Retail used vehicle gross profit (loss) $ (17.1) $ 4.4 $ (21.5) (489) % Retail used vehicle unit sales 73,676 64,107 9,569 15 % Retail used vehicle revenue per unit $ 29,098 $ 33,019 $ (3,921) (12) % F&I revenue $ 177.9 $ 166.4 $ 11.5 7 % Combined retail used vehicle gross profit and F&I revenue $ 160.8 $ 170.8 $ (10.0) (6) % Total retail used vehicle and F&I gross profit per unit $ 2,183 $ 2,657 $ (474) (18) % 48 SONIC AUTOMOTIVE, INC.
Used Vehicles and F&I - EchoPark Segment Our EchoPark 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 retail unit) rather than realizing traditional levels of front-end retail used vehicle gross profit (loss) per unit.
Used Vehicles and F&I - EchoPark Segment Our EchoPark 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 retail unit) rather than realizing traditional levels of front-end retail used vehicle gross profit 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 retail unit, which includes both front-end retail used vehicle gross profit (loss) and F&I gross profit per retail unit sold.
As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is a combined total gross profit (loss) per retail unit, which includes both front-end retail used vehicle gross profit (loss) and F&I gross profit per retail unit sold.
We generally focus on maintaining EchoPark Segment used vehicle inventory days’ supply in the 30- to 40-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility.
We generally focus on maintaining EchoPark Segment used vehicle inventory days’ supply in the 30- to 40-day range, which may fluctuate seasonally, in order to limit our exposure to market pricing volatility.
Amounts outstanding under the 2019 Mortgage Facility bear interest at: (1) a specified rate above one-month Term SOFR (as defined in the 2019 Mortgage Facility), ranging from 1.25% to 2.25% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio 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 0.25% to 1.25% per annum according to the Performance Grid.
Amounts outstanding under the 2019 Mortgage Facility bear interest at: (1) a specified rate above one-month Term SOFR, ranging from 1.25% to 2.25% per annum according to a performance-based pricing grid determined by the Company’s Consolidated Total Lease Adjusted Leverage Ratio 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 0.25% to 1.25% per annum according to the Performance Grid.
Floor Plan Facilities We finance all of our new and certain of our used vehicle inventory through standardized floor plan facilities with: (1) certain manufacturer captive finance companies (classified as notes payable - floor plan - trade in the accompanying consolidated balance sheets) and (2) a syndicate of manufacturer-affiliated finance companies and commercial banks (classified as notes payable - floor plan - non-trade in the accompanying consolidated balance sheets).
Floor Plan Facilities We finance all of our new and certain of our used vehicle inventory through standardized floor plan facilities with: (1) certain manufacturer captive finance companies (classified as notes payable - floor plan - trade in the accompanying consolidated balance sheets) and (2) a syndicate of manufacturer-affiliated captive finance companies and commercial banks (classified as notes payable - floor plan - non-trade in the accompanying consolidated balance sheets).
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.
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 and covenant compliance, share repurchases, the current economic environment and other factors considered by our Board of Directors to be relevant.
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 in the consolidated balance sheets as notes payable - floor plan - trade (with the change in balance being reflected in operating cash flows).
We arrange our inventory floor plan financing through both manufacturer captive finance companies and a syndicate of manufacturer-affiliated captive finance companies and commercial banks. Our floor plan financed with manufacturer captives is recorded in the consolidated balance sheets as notes payable - floor plan - trade (with the change in balance being reflected in operating cash flows).
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.
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.
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.
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 captive 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.
The 2021 Credit Facilities permit quarterly cash dividends on our Class A and Class B Common Stock up to $0.12 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.
The 2021 Credit Facilities permit quarterly cash dividends on our Class A and Class B Common Stock up to $0.12 per share so long as no Event of Default has occurred and is continuing and provided that we remain in compliance with all financial covenants under the 2021 Credit Facilities.
In addition, the lenders under the 2019 Mortgage Facility committed to providing, upon the terms set forth in the amendment and upon the pledging of sufficient collateral by the Company, delayed draw-term loans in an aggregate principal amount up to $85.0 million (the “Delayed Draw Credit Facility”), and revolving loans in an aggregate principal amount not to exceed $95.0 million outstanding.
In addition, the lenders under the 2019 Mortgage Facility committed to providing, upon the terms set forth in the Second Mortgage Facility Amendment and upon the pledging of sufficient collateral by the Company, delayed draw-term loans in an aggregate principal amount up to $85.0 million (the “Delayed Draw Credit Facility”) and revolving loans in an aggregate principal amount not to exceed $95.0 million outstanding.
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 and powersports vehicles. The U.S. retail automotive industry’s new vehicle unit sales volume below reflects all brands marketed or sold in the U.S.
Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower-priced economy automobiles to luxury automobiles and powersports vehicles. The U.S. retail automotive industry’s new vehicle unit sales volume below reflects all brands marketed or sold in the U.S.
On October 7, 2022, we entered into an amendment to the 2021 Credit Facilities (the “Second Credit Facility Amendment”) to, among other things: (1) replace the 2021 Credit Facilities’ LIBOR-based Eurodollar reference interest rate option with a reference interest rate option based upon one-month Term SOFR (as defined in the 2021 Credit Facilities); (2) amend the provisions relating to the basis for inclusion of real property owned by the Company or certain of its subsidiaries in the borrowing base for the 2021 Revolving Credit Facility; (3) amend the minimum amount for commitments under the 2021 Revolving Credit Facility and the proportion that such commitments under the 2021 Revolving Credit Facility may compose of the total commitments made by the lenders; and (4) adjust aspects of the offset account used for voluntary reductions to loans under the 2021 Floor Plan Facilities.
On October 7, 2022, we entered into an amendment to the 2021 Credit Facilities (the “Second Credit Facility Amendment”) to, among other things: (1) replace the 2021 Credit Facilities’ LIBOR-based Eurodollar reference interest rate option with a reference interest rate option based upon one-month Term SOFR (as defined in the 2021 Credit Facilities); (2) amend the provisions relating to the basis for inclusion of real property owned by the Company or certain of its subsidiaries in the borrowing base for the 2021 Revolving Credit Facility; (3) amend the minimum amount for commitments under the 2021 Revolving Credit Facility and the proportion that such commitments under the 2021 Revolving Credit Facility may comprise of the total commitments made by the lenders; and (4) adjust aspects of the offset account used for voluntary reductions to loans under the 2021 Floor Plan Facilities.
The increase in total retail used vehicle and F&I gross profit per unit was due primarily to improvement in inventory acquisition cost as a result of sourcing a higher percentage of inventory from non-auction sources, in addition to expanding our inventory to include older vehicles, which typically earn a higher gross profit per unit.
The increase in total used vehicle and F&I gross profit per unit was due primarily to improvement in inventory acquisition cost as a result of sourcing a higher percentage of inventory from non-auction sources, in addition to expanding our inventory to include older vehicles, which typically earn a higher gross profit per unit.
Our dealerships that obtain floor plan financing from a syndicate of manufacturer-affiliated finance companies and commercial banks record their obligation in the consolidated balance sheets as notes payable - floor plan - non-trade (with the change in balance being reflected in financing cash flows).
Our dealerships that obtain floor plan financing from a syndicate of manufacturer-affiliated captive finance companies and commercial banks record their obligation in the consolidated balance sheets as notes payable - floor plan - non-trade (with the change in balance being reflected in financing cash flows).
On November 17, 2022, in connection with the closing of the amendment, the Company incurred a term loan under the 2019 Mortgage Facility with a principal amount of $320.0 million, with a portion of the proceeds used to repay the entire $77.6 million principal amount of the prior term loan.
On November 17, 2022, in connection with the closing of the Second Mortgage Facility Amendment, the Company incurred a term loan under the 2019 Mortgage Facility with a principal amount of $320.0 million, with a portion of the proceeds used to repay the entire $77.6 million principal amount of the prior term loan.
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 37 SONIC AUTOMOTIVE, INC.
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 36 SONIC AUTOMOTIVE, INC.
The amendment also amended the 2019 Mortgage Facility to, among other things: (1) replace the 2019 Mortgage Facility’s LIBOR-based Eurodollar reference interest rate option with a reference interest rate option based upon one-month Term SOFR (as defined in the 2019 Mortgage Facility); and (2) make changes to the pricing grid for loans incurred under the 2019 Mortgage Facility, which price is based on an incremental interest margin calculated based on the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility).
The Second Mortgage Facility Amendment also amended the 2019 Mortgage Facility to, among other things: (1) replace the 2019 Mortgage Facility’s LIBOR-based Eurodollar reference interest rate option with a reference interest rate option based upon one-month Term SOFR (as defined in the 2019 Mortgage Facility); and (2) make changes to the pricing grid for loans incurred under the 2019 Mortgage Facility, which is based on an incremental interest margin calculated based on the Company’s Consolidated Total Lease Adjusted Leverage Ratio (as defined in the 2019 Mortgage Facility).
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: 64 SONIC AUTOMOTIVE, INC.
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: 68 SONIC AUTOMOTIVE, INC.
The Powersports Segment offers guests: (1) sales of both new and used powersports vehicles (such as motorcycles, personal watercraft and all-terrain vehicles); (2) Fixed Operations activities; and (3) F&I services. All three segments generally operate independently of one another with the exception of certain shared back-office functions and corporate overhead costs. 29 SONIC AUTOMOTIVE, INC.
The Powersports Segment offers guests: (1) sales of both new and used powersports vehicles (such as motorcycles, personal watercraft and all-terrain vehicles); (2) Fixed Operations activities; and (3) F&I services. All three segments generally operate independently of one another with the exception of certain shared back-office functions and corporate overhead costs. 28 SONIC AUTOMOTIVE, INC.
Changes in contract assets from December 31, 2021 to December 31, 2022 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.
Changes in contract assets from December 31, 2022 to December 31, 2023 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and covenant compliance, the current economic environment and other factors considered by our Board of Directors and management to be relevant.
Results of Operations - Franchised Dealerships Segment As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2022 and 2021, the change in 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.
Results of Operations - Franchised Dealerships Segment As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2022 and 2023, the change in 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.
Franchised Dealerships Segment As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2021 and 2022, 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.
Franchised Dealerships Segment As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2022 and 2023, 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.
Use of Estimates and Critical Accounting Policies The preparation of financial statements in conformity with GAAP requires Sonic’s 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 accompanying consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires Sonic’s 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 accompanying consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
(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. 69 SONIC AUTOMOTIVE, INC.
(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. 73 SONIC AUTOMOTIVE, INC.
The Franchised Dealerships Segment provides comprehensive sales and 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 third-party financing, extended warranties, service contracts, insurance and other aftermarket products (collectively, “finance and insurance” or “F&I”) for our guests.
The Franchised Dealerships Segment provides comprehensive sales and 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 third-party financing, extended warranties, service contracts, insurance and other aftermarket products (collectively, “F&I”) for our guests.
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 (loss) 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.
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 (loss) of the reportable segments is reconciled to consolidated income (loss) before taxes and impairment charges. See above for tables and discussion of results by reportable segment.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2022 2021 2020 Revenues: New vehicles 40.9 % 41.3 % 43.8 % Used vehicles 39.4 % 39.3 % 36.5 % Wholesale vehicles 3.5 % 3.0 % 2.0 % Parts, service and collision repair 11.4 % 11.3 % 12.6 % Finance, insurance and other, net 4.8 % 5.1 % 5.1 % Total revenues 100.0 % 100.0 % 100.0 % Cost of sales 83.5 % 84.6 % 85.4 % Gross profit 16.5 % 15.4 % 14.6 % Selling, general and administrative expenses 11.1 % 10.3 % 10.5 % Impairment charges 2.3 % — % 2.8 % Depreciation and amortization 0.9 % 0.8 % 0.9 % Operating income 2.2 % 4.3 % 0.3 % Interest expense, floor plan 0.2 % 0.1 % 0.3 % Interest expense, other, net 0.6 % 0.4 % 0.4 % Other income (expense), net 0.0 % 0.1 % 0.0 % Income (loss) from continuing operations before taxes 1.4 % 3.7 % (0.4) % Provision for income taxes for continuing operations - benefit (expense) 0.7 % 0.9 % 0.2 % Income (loss) from continuing operations 0.6 % 2.8 % (0.6) % Results of Operations - Consolidated As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2021 and 2022, 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2023 2022 2021 Revenues: New vehicles 44.5 % 40.9 % 41.3 % Used vehicles 36.3 % 39.4 % 39.3 % Wholesale vehicles 2.2 % 3.5 % 3.0 % Parts, service and collision repair 12.2 % 11.4 % 11.3 % Finance, insurance and other, net 4.8 % 4.8 % 5.1 % Total revenues 100.0 % 100.0 % 100.0 % Cost of sales 84.4 % 83.5 % 84.6 % Gross profit 15.6 % 16.5 % 15.4 % Selling, general and administrative expenses 11.1 % 11.1 % 10.3 % Impairment charges 0.6 % 2.3 % — % Depreciation and amortization 1.0 % 0.9 % 0.8 % Operating income 2.9 % 2.2 % 4.3 % Interest expense, floor plan 0.5 % 0.2 % 0.1 % Interest expense, other, net 0.8 % 0.6 % 0.4 % Other income (expense), net — % — % 0.1 % Income (loss) before taxes 1.7 % 1.4 % 3.7 % Provision for income taxes - benefit (expense) 0.4 % 0.7 % 0.9 % Net income (loss) 1.2 % 0.6 % 2.8 % Results of Operations - Consolidated As a result of the acquisition, disposition, termination or closure of several franchised dealership stores in 2022 and 2023, 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.
Impairment charges for 2022 include approximately $202.9 million of goodwill impairment charges related to the EchoPark Segment, approximately $116.4 million of franchise asset impairment charges, of which approximately $114.4 million is related to the Franchised Dealerships Segment and approximately $2.0 million is related to the EchoPark Segment, and approximately $1.1 million of charges related to the abandonment of certain construction projects in the Franchised Dealerships Segment.
Impairment charges for 2022 included approximately $202.9 million of goodwill related to the EchoPark Segment, approximately $116.4 million of franchise asset impairment charges, of which approximately $114.4 million is related to the Franchised Dealerships Segment and approximately $2.0 million is related to the EchoPark Segment, and approximately $1.1 million of charges related to the abandonment of certain construction projects in the Franchised Dealerships Segment.
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 has historically remained stable throughout the year. 70 SONIC AUTOMOTIVE, INC.
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 has historically remained stable throughout the year. 74 SONIC AUTOMOTIVE, INC.
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 2023 to 2033.
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 2024 to 2033.
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 expected gross profit levels and minimize inventory carrying risks. 35 SONIC AUTOMOTIVE, INC.
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 expected gross profit levels and minimize inventory carrying risks. 34 SONIC AUTOMOTIVE, INC.
Unless otherwise noted, all discussion of increases or decreases are for 2022 compared to 2021. The following discussion is on a same store basis (which excludes results from disposed stores), except where otherwise noted.
Unless otherwise noted, all discussion of increases or decreases are for 2023 compared to 2022. The following discussion is on a same store basis (which excludes results from disposed stores), except where otherwise noted.
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.
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 or acquisition.
As such, reconditioning amounts that are classified as Fixed Operations revenues and cost of sales in our Franchised Dealerships Segment are presented as used vehicle cost of sales for the EchoPark Segment. 48 SONIC AUTOMOTIVE, INC.
As such, reconditioning amounts that are classified as Fixed Operations revenues and cost of sales in our Franchised Dealerships Segment are presented as used vehicle cost of sales for the EchoPark Segment. 47 SONIC AUTOMOTIVE, INC.
We were in compliance with all restrictive covenants under our debt agreements as of December 31, 2022 and expect to be in compliance for at least the next 12 months.
We were in compliance with all restrictive covenants under our debt agreements as of December 31, 2023 and expect to be in compliance for at least the next 12 months.
As a result of the way we manage our business, we had three reportable segments as of December 31, 2022: (1) the Franchised Dealerships Segment; (2) the EchoPark Segment; and (3) the Powersports Segment.
As a result of the way we manage our business, we had three reportable segments as of December 31, 2023: (1) the Franchised Dealerships Segment; (2) the EchoPark Segment; and (3) the Powersports Segment.
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, 2022 by approximately $3.4 million.
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, 2023 by approximately $3.3 million.
Unless otherwise noted, all discussion of increases or decreases are for the year ended December 31, 2022 (“2022”) compared to 2021. 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.
Unless otherwise noted, all discussion of increases or decreases are for the year ended December 31, 2023 (“2023”) compared to 2022. 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.
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”).
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 amount of any outstanding letters of credit and borrowings under the 2021 Revolving Credit Facility (the “2021 Revolving Borrowing Base”).
Recent Accounting Pronouncements In March 2020, the Financial 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.
Recent Accounting Pronouncements In March 2020, the Financial 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 the London InterBank Offered Rate (“LIBOR”).
More recently acquired franchise assets are at a greater risk of impairment than older franchise assets which have significant clearance between fair value and recorded balances. Many factors affect the valuation of franchise assets such as the discount rate and projected revenue amounts. Unfavorable changes in these factors increases the risk of future impairments.
More recently acquired franchise assets are at a greater risk of impairment than older franchise assets which have significant clearance between fair value and recorded balances. Many factors affect the valuation of franchise assets such as the discount rate and projected revenue amounts. Unfavorable changes in these factors increases the risk of future impairments. 63 SONIC AUTOMOTIVE, INC.
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.
Our obligations under the 2021 Credit Facilities are guaranteed by the Company and certain of our subsidiaries and are secured by a pledge of substantially all of our and our subsidiaries’ assets.
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 $1.03 per share during 2022.
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 $1.16 per share during 2023.
On October 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 $2.9 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, with no more than 40% of the aggregate commitments allocated to the commitments under the 2021 Used Vehicle Floor Plan Facility); and (2) permit the issuance of the 4.625% Notes and the 4.875% Notes.
On October 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 $350.0 million (which may be increased at the Company’s option up to $400.0 million upon satisfaction of certain conditions), and the 2021 Floor Plan Facilities to $2.6 billion (which, under certain conditions, may be increased at the Company’s option up to $2.9 billion that may be allocated between the new vehicle revolving floor plan facility and the used vehicle revolving floor plan facility that comprise the 2021 Floor Plan Facilities as the Company requests, with no more than 40% of the aggregate commitments allocated to the used vehicle revolving floor plan facility); and (2) permit the issuance of the 4.625% Notes and the 4.875% Notes.
Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty repair work performed, as well as the improved quality and design of vehicles that may affect the level and frequency of future customer pay or warranty-related repair revenues.
Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty repair work performed, as well as the improved quality and design of vehicles that may affect the level and frequency of future customer pay or warranty-related repair revenues. 35 SONIC AUTOMOTIVE, INC.
The use of cash during 2021 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 of franchised dealerships. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for additional discussion.
The use of cash during 2022 was comprised primarily of purchases of businesses, net of cash acquired, and purchases of land, property and equipment, offset partially by the proceeds from the sale of property and equipment. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for additional discussion.
As of December 31, 2022 and 2021, we had recorded a valuation allowance amount of approximately $5.6 million and $4.1 million, respectively, related to certain state net operating loss carryforward deferred tax assets as we determined that we would not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.
As of December 31, 2023 and 2022, we had recorded a valuation allowance amount of approximately $6.3 million and $5.6 million, respectively, related to certain state net operating loss carryforward deferred tax assets as we determined that we would not be able to generate sufficient state taxable income in the related entities to realize the accumulated net operating loss carryforward balances.
For comparison and discussion of our results of operations for the year ended December 31, 2021 (“2021”) to our results of operations for the year ended December 31, 2020 (“2020”), 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 2021.
For comparison and discussion of our results of operations for the year ended December 31, 2022 (“2022”) to our results of operations for the year ended December 31, 2021 (“2021”), 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 2022.
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.
Depending on the mix of inventory sourcing (trade-ins or purchases from customers 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.
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 of December 31, 2022, we had approximately $331.0 million of net income and retained earnings free of such restrictions.
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 of December 31, 2023, we had approximately $270.4 million of net income and retained earnings free of such restrictions.
The 2021 Credit Facilities and the 2019 Mortgage Facility include the following financial covenants: 66 SONIC AUTOMOTIVE, INC.
The 2021 Credit Facilities and the 2019 Mortgage Facility include the following financial covenants: 70 SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Covenant Minimum Consolidated Liquidity Ratio Minimum Consolidated Fixed Charge Coverage Ratio Maximum Consolidated Total Lease Adjusted Leverage Ratio Required ratio 1.05 1.20 5.75 December 31, 2022 actual 1.38 1.87 2.31 In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Covenant Minimum Consolidated Liquidity Ratio Minimum Consolidated Fixed Charge Coverage Ratio Maximum Consolidated Total Lease Adjusted Leverage Ratio Required ratio 1.05 1.20 5.75 December 31, 2023 actual 1.25 1.93 2.97 In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operating covenants.
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.
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 or acquisition.
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 of December 31, 2022, our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled approximately $10.4 million.
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 of December 31, 2023, our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled approximately $7.2 million.
Subsequent to December 31, 2022, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of $0.28 per share for stockholders of record on March 15, 2023 to be paid on April 14, 2023.
Subsequent to December 31, 2023, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stock of $0.30 per share for stockholders of record on March 15, 2024 to be paid on April 15, 2024.
Accordingly, if all changes in floor plan notes payable were classified as an operating activity (to align changes in floor plan liability balances with the associated changes in inventory balances for cash flow classification), the result would have been net cash provided by operating activities of approximately $340.2 million and $745.9 million for 2022 and 2021, respectively. 68 SONIC AUTOMOTIVE, INC.
Accordingly, if all changes in floor plan notes payable were classified as an operating activity (to align changes in floor plan liability balances with the associated changes in inventory balances for cash flow classification), the result would have been net cash provided by operating activities of approximately $319.2 million and $340.2 million for 2023 and 2022, respectively. 72 SONIC AUTOMOTIVE, INC.
The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a reported basis, except where otherwise noted. 52 SONIC AUTOMOTIVE, INC.
The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other, net is on a reported basis, except where otherwise noted.
Estimated interest payments were calculated using the December 31, 2022 floor plan facility balance, the weighted-average interest rate for the three months ended December 31, 2022 of 1.09% and the assumption that floor plan balances at December 31, 2022 would be relieved within 60 days in connection with the sale of the associated vehicle inventory.
Estimated interest payments were calculated using the December 31, 2023 floor plan facility balance, the weighted-average interest rate for the three months ended December 31, 2023 of 5.21% and the assumption that floor plan balances at December 31, 2023 would be relieved within 60 days in connection with the sale of the associated vehicle inventory.
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. 30 SONIC AUTOMOTIVE, INC.
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.
Receivables, net in the accompanying consolidated balance sheets as of December 31, 2022 and 2021 include approximately $38.7 million and $34.9 million, respectively, related to contract assets from F&I retro revenue recognition.
Receivables, net in the accompanying consolidated balance sheets as of December 31, 2023 and 2022 include approximately $31.8 million and $38.7 million, respectively, related to contract assets from F&I retro revenue recognition.
The total notes payable - floor plan balance of approximately $1.2 billion as of December 31, 2022 is classified as current liabilities in the accompanying consolidated balance sheet as of such date.
The total notes payable - floor plan balance of approximately $1.7 billion as of December 31, 2023 is classified as current liabilities in the accompanying consolidated balance sheet as of such date.
Based on balances as of December 31, 2022, we had approximately $327.0 million of outstanding borrowings under the 2019 Mortgage Facility and additional lender commitments of $173.0 million subject to the appraisal and pledging of additional collateral.
Based on balances as of December 31, 2023, we had $311.0 million of outstanding borrowings under the 2019 Mortgage Facility and additional lender commitments of $173.0 million subject to the appraisal and pledging of additional collateral.
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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, Better / (Worse) 2022 2021 % Change (In millions of vehicles) U.S. industry volume - Retail new vehicle (1) 11.7 13.1 (11) % U.S. industry volume - Fleet new vehicle 2.0 1.9 5 % U.S. industry volume - Total new vehicle (1) 13.7 15.0 (9) % (1) Source: PIN from J.D.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS U.S. retail new vehicle industry volume, fleet new vehicle industry volume, and total new vehicle industry volume were as follows: Year Ended December 31, Better / (Worse) 2023 2022 % Change (In millions of vehicles) U.S. industry volume - Retail new vehicle (1) 12.7 11.7 9 % U.S. industry volume - Fleet new vehicle 2.8 2.0 38 % U.S. industry volume - Total new vehicle (1) 15.5 13.7 13 % (1) Source: PIN from J.D.
After giving effect to the applicable restrictions on the payment of dividends and certain other transactions under our debt agreements, as of December 31, 2022, we had at least $331.0 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.
After giving effect to the applicable restrictions on the payment of dividends and certain other transactions under our debt agreements, as of December 31, 2023, we had approximately $270.4 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary Retail Automotive Industry Performance The U.S. retail automotive industry’s total new vehicle (retail and fleet combined) unit sales volume was approximately 13.7 million vehicles in 2022, a decrease of 9%, compared to approximately 15.0 million vehicles in 2021, according to the Power Information Network (“PIN”) from J.D.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary Retail Automotive Industry Performance The U.S. retail automotive industry’s total new vehicle (retail and fleet combined) unit sales volume was approximately 15.5 million vehicles in 2023, an increase of 13%, compared to approximately 13.7 million vehicles in 2022, according to the Power Information Network (“PIN”) from J.D.
As of December 31, 2022, the ratio was 13.66 to 1.00. 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, 2022.
As of December 31, 2023, the ratio was 11.23 to 1.00. 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, 2023.
Wholesale Vehicles - EchoPark Segment See the discussion under the heading “Results of Operations - Consolidated” for additional discussion of the macro drivers of wholesale vehicle revenues.
Wholesale Vehicles - EchoPark Segment See the discussion under the heading “Results of Operations - Consolidated” for additional discussion of the macro drivers of wholesale vehicle revenues. 49 SONIC AUTOMOTIVE, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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.
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.
At December 31, 2022, there were approximately $5.6 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 $5.1 million recorded in other long-term liabilities in the accompanying consolidated balance sheet as of such date.
At December 31, 2023, there were approximately $10.9 million in reserves that we had provided for these matters (including estimates related to possible interest and penalties) with approximately $6.3 million included in other accrued liabilities and approximately $4.6 million recorded in other long-term liabilities in the accompanying consolidated balance sheet as of such date.
These floor plan facilities are due on demand and currently bear interest at variable rates based on either one-month Term SOFR or prime plus an additional spread, as applicable. The weighted-average interest rate for our new and used vehicle floor plan facilities was 1.99% and 1.06% for 2022 and 2021, respectively.
These floor plan facilities are due on demand and currently bear interest at variable rates based on either one-month Term SOFR or prime plus an additional spread, as applicable. The weighted-average interest rate for our new and used vehicle floor plan facilities was 6.52% and 3.31% for 2023 and 2022, respectively.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flows from Investing Activities - Net cash used in investing activities was approximately $299.7 million and $1.3 billion for 2022 and 2021, respectively.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash Flows from Investing Activities - Net cash used in investing activities was approximately $218.7 million and $0.3 billion for 2023 and 2022, respectively.
After the effect of impairment charges, the carrying value of our franchise assets totaled approximately $396.7 million at December 31, 2022, and is included in other intangible assets, net in the accompanying consolidated balance sheet as of such date. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for further discussion.
The carrying value of our franchise assets totaled approximately $417.4 million at December 31, 2023, and is included in other intangible assets, net in the accompanying consolidated balance sheet as of such date. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements for further discussion.
Under the 2019 Mortgage Facility, Sonic has a maximum borrowing limit of $500.0 million, which varies based on the appraised value of the collateral underlying the 2019 Mortgage Facility.
Under the 2019 Mortgage Facility, Sonic had an initial maximum borrowing limit of $500.0 million, which varies based on the appraised value of the collateral underlying the 2019 Mortgage Facility.
For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2022, we operated 111 stores in the Franchised Dealerships Segment, 52 stores in the EchoPark Segment, and eight stores in the Powersports Segment.
For management and operational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2023, we operated 108 stores in the Franchised Dealerships Segment, 25 stores in the EchoPark Segment, and 13 stores in the Powersports Segment.
The ongoing effects of supply chain disruptions as a result of the COVID-19 pandemic, availability of new and used vehicle inventory, interest rates, changes in consumer confidence, availability of consumer financing, manufacturer inventory production levels, incentive levels from automotive manufacturers or shifts in such levels, or timing of consumer demand as a result of natural disasters or other unforeseen circumstances could cause the actual 2023 new vehicle industry volume to vary from expectations.
The effects of availability of new and used vehicle inventory, interest rates, changes in consumer confidence, availability of consumer financing, manufacturer inventory production levels, incentive levels from automotive manufacturers or shifts in such levels, or timing of consumer demand as a result of economic conditions, natural disasters or other unforeseen circumstances could cause the actual 2024 new vehicle industry volume to vary from expectations.
Mortgage Notes to Finance Companies As of December 31, 2022, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 5.14% (an increase from 3.50% as of December 31, 2021) and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $302.6 million.
Mortgage Notes to Finance Companies As of December 31, 2023, the weighted-average interest rate of our other outstanding mortgage notes (excluding the 2019 Mortgage Facility) was 5.25% (an increase from 5.14% as of December 31, 2022) and the total outstanding mortgage principal balance of these notes (excluding the 2019 Mortgage Facility) was approximately $238.7 million.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+2 added−6 removed1 unchanged
Biggest changeAbsent the acceleration of payments of principal that may result from non-compliance with financial and operational covenants under our various indebtedness, future principal maturities of variable and fixed rate debt and related interest rate caps are as follows: 2023 2024 2025 2026 2027 Thereafter Total Asset (Liability) Fair Value (In millions) Long-term debt: Fixed rate maturities $ 23.6 $ 34.1 $ 72.8 $ 26.0 $ 5.7 $ 1,174.4 $ 1,336.6 Fixed rate outstanding (1) $ 1,336.6 $ 1,313.0 $ 1,278.9 $ 1,206.1 $ 1,180.1 $ 1,174.4 $ 1,083.8 Average rate on fixed outstanding debt (1) 4.67 % 4.67 % 4.67 % 4.71 % 4.73 % 4.73 % Variable rate maturities $ 55.9 $ 26.3 $ 40.4 $ 27.3 $ 286.2 $ 6.9 $ 443.0 Variable rate outstanding (1) $ 443.0 $ 387.0 $ 360.7 $ 320.3 $ 293.1 $ 6.9 $ 434.5 Average rate on variable outstanding debt (1) 5.63 % 5.55 % 5.54 % 5.51 % 5.52 % 6.14 % Cash flow hedge instruments: Interest rate cap notional maturities $ 250.0 $ 125.0 $ — $ — $ — $ — Interest rate cap notional outstanding (1) $ 250.0 $ 125.0 $ — $ — $ — $ — $ 0.5 Average interest income rate on interest rate cap notional outstanding (1) — % — % — % — % — % N/A (1) Based on amounts outstanding at January 1 of each respective period.
Biggest changeAbsent the acceleration of payments of principal that may result from non-compliance with financial and operational covenants under our various indebtedness, future principal maturities of variable and fixed rate debt and related interest rate caps are as follows: 2024 2025 2026 2027 2028 Thereafter Total Asset (Liability) Fair Value (In millions) Long-term debt: Fixed rate maturities $ 34.1 $ 72.8 $ 26.0 $ 5.7 $ 15.7 $ 1,158.7 $ 1,313.0 Fixed rate outstanding (1) $ 1,313.0 $ 1,278.9 $ 1,206.1 $ 1,180.1 $ 1,174.5 $ 1,158.7 $ 1,195.6 Average rate on fixed outstanding debt (1) 4.67 % 4.67 % 4.71 % 4.73 % 4.73 % 4.73 % Variable rate maturities $ 26.0 $ 40.4 $ 27.1 $ 286.6 $ 6.8 $ — $ 386.9 Variable rate outstanding (1) $ 386.6 $ 360.6 $ 320.2 $ 293.1 $ 6.5 $ — $ 386.9 Average rate on variable outstanding debt (1) 6.97 % 6.97 % 6.96 % 6.96 % 7.09 % N/A Cash flow hedge instruments: Interest rate cap notional maturities $ 375.0 $ 500.0 $ — $ — $ — $ — Interest rate cap notional outstanding (1) $ 375.0 $ 500.0 $ — $ — $ — $ — $ 1.0 Average interest income rate on interest rate cap notional outstanding (1) — % — % — % — % — % N/A (1) Based on amounts outstanding at January 1 of each respective period. 77 SONIC AUTOMOTIVE, INC.
As of both December 31, 2022 and 2021, we had interest rate cap agreements designated as hedging instruments to limit our exposure to increases in one-month Term SOFR (as of December 31, 2022) or LIBOR (as of December 31, 2021) rates above certain levels. Under the terms of the interest rate cap agreements, interest rates reset monthly.
As of both December 31, 2023 and 2022, we had interest rate cap agreements designated as hedging instruments to limit our exposure to increases in one-month Term SOFR (as of December 31, 2023) or LIBOR (as of December 31, 2022) above certain levels. Under the terms of the interest rate cap agreements, interest rates reset monthly.
Our consolidated financial statements and the related notes thereto begin on page F-4 herein. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.
Item 8. Financial Statements and Supplementary Data. Our consolidated financial statements and the related notes thereto begin on page F-4 herein. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.
Under the terms of these agreements, we will receive and pay interest based on the following: Notional Amount Cap Rate (1) Receive Rate (1) (2) Start Date Maturing Date (In millions) $ 250.0 3.000% one-month LIBOR July 1, 2021 July 1, 2022 $ 250.0 5.000% one-month Term SOFR October 26, 2022 October 25, 2023 $ 125.0 5.000% one-month Term SOFR October 26, 2023 October 26, 2024 (1) Under these interest rate caps, no payment from the counterparty will occur unless the stated receive rate exceeds the stated cap rate, in which case a net payment to us from the counterparty, based on the spread between the receive rate and the cap rate, will be recognized as a reduction of interest expense, other, net in the accompanying consolidated statements of operations.
Under the terms of these agreements, we will receive and pay interest based on the following: Notional Amount Cap Rate (1) Receive Rate (1) (2) Start Date Maturing Date (In millions) $ 250.0 5.000% one-month SOFR February 26, 2023 February 25, 2024 $ 125.0 5.000% one-month SOFR October 26, 2023 October 26, 2024 $ 500.0 5.000% one-month SOFR February 26, 2024 February 26, 2025 (1) Under these interest rate caps, no payment from the counterparty will occur unless the stated receive rate exceeds the stated cap rate, in which case a net payment to us from the counterparty, based on the spread between the receive rate and the cap rate, will be recognized as a reduction of interest expense, other, net in the accompanying consolidated statements of operations.
The total outstanding balance of such variable instruments, after considering the effect of outstanding cash flow hedge instruments, was approximately $1.4 billion at December 31, 2022 and $1.2 billion at December 31, 2021.
The total outstanding balance of such variable instruments, after considering the effect of outstanding cash flow hedge instruments, was approximately $1.7 billion at December 31, 2023 and $1.4 billion at December 31, 2022.
The fair value of the outstanding interest rate cap position at December 31, 2022 was a net asset of approximately $0.5 million, included in other assets in the accompanying consolidated balance sheet as of such date. The fair value of the outstanding interest rate cap position at December 31, 2021 was not material.
The fair value of the outstanding interest rate cap position was a net asset of approximately $1.0 million at December 31, 2023 and $0.5 million at December 31, 2022, included in other assets in the accompanying consolidated balance sheet as of such date.
The interest rate caps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these instruments are recorded in total other comprehensive income (loss) before taxes in the accompanying consolidated statements of comprehensive operations and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying consolidated statements of cash flows. 72 SONIC AUTOMOTIVE, INC.
(2) One-month SOFR was approximately 5.344% at December 31, 2023. The interest rate caps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these instruments are recorded in total other comprehensive income (loss) before taxes in the accompanying consolidated statements of comprehensive operations. 76 SONIC AUTOMOTIVE, INC.
Removed
A change of 100 basis points in the underlying interest rate would have caused a change in interest expense of approximately $20.1 million in 2022 and approximately $20.6 million in 2021. Of the total change in interest expense, approximately $16.8 million and $18.1 million in 2022 and 2021, respectively, would have resulted from our floor plan facilities.
Added
Based on that amount along with the notional value of interest rate caps in place on that date, a 100 basis point decrease in the underlying interest rates would have reduced interest expense by approximately $16.1 million while a 100 basis point increase would have resulted in approximately $13.6 million of additional interest expense for the 12 months ended December 31, 2023.
Removed
In addition to our variable rate debt, as of both December 31, 2022 and 2021, certain of our dealership lease facilities had monthly lease payments that fluctuated based on LIBOR or one-month Term SOFR interest rates.
Added
Of those changes, approximately $12.2 million of the decrease and approximately $9.7 million of the increase would have resulted from the floor plan, net of offset. The difference between the increases and decreases results from the mitigating effect of the interest rate caps.
Removed
An increase in interest rates of 100 basis points would not have had a significant impact on rent expense in 2022 and 2021 due to the leases containing interest rate floors which were above the actual interest rate in effect during 2022 and 2021.
Removed
(2) The one-month SOFR rate was approximately 4.062% at December 31, 2022.
Removed
Foreign Currency Risk We purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. Dollars, our business is subject to foreign exchange rate risk that may influence automobile manufacturers’ ability to provide their products at competitive prices in the U.S.
Removed
To the extent that we cannot recapture this exchange rate volatility in prices charged to customers or if this volatility negatively impacts consumer demand for our products, this volatility could adversely affect our future operating results. 73 SONIC AUTOMOTIVE, INC. Item 8. Financial Statements and Supplementary Data.

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