Sonic Automotive(US:SAH)2021-02-22 22:34PART I Business Overview Sonic Automotive operates as a major U.S. automotive retailer with Franchised Dealerships and EchoPark segments, offering vehicle sales, fixed operations, and F&I products, with 2020 operations impacted by COVID-19 and an ongoing EchoPark expansion - Sonic Automotive operates two reportable segments: Franchised Dealerships (84 stores, 96 new vehicle franchises, 14 collision repair centers in 12 states) and EchoPark (16 stores)16 - The COVID-19 pandemic negatively impacted global economy and company operations in 2020, leading to decreased revenues in Q1 (-3%), Q2 (-19%), and Q3 (-6%) compared to prior year quarters, but Q4 saw a 2% increase1820 - The company recorded a non-cash goodwill impairment charge of $268.0 million in Q1 2020 due to the decline in market value caused by the COVID-19 pandemic24 - EchoPark Segment revenue represented approximately 14.5% of total revenue in 2020, up from 11.1% in 2019, with plans to open 25 additional EchoPark stores annually from 2021 to 2025, aiming for a 140-plus point nationwide network3031 New Vehicle Revenues by Brand (2020) | Brand Category | Percentage of New Vehicle Revenues (2020) | | :--------------- | :---------------------------------------- | | Total Luxury | 63.2 % | | Total Mid-line Import | 25.0 % | | Total Domestic | 11.8 % | | Total | 100.0 % | - The company focuses on increasing sales of higher-margin products and services, including Finance, Insurance and Other Aftermarket Products, Parts, Service and Collision Repair, and Certified Pre-Owned Vehicles444546 - As of December 31, 2020, the company employed approximately 8,100 associates and offers comprehensive benefits including health insurance, 401(k) with matching, paid leave, and tuition assistance7779 Risk Factors The company faces significant risks including those related to growth strategies, industry competition, manufacturer relationships, financing, liquidity, and extensive governmental regulations - Investments in new business strategies, such as EchoPark expansion, are inherently risky and could divert management resources or fail to generate sufficient returns86 - The company's ability to make acquisitions and grow organically is restricted by capital availability, terms of long-term debt, and the need for manufacturer consent8790 - The COVID-19 pandemic caused supply chain disruptions, production delays, and reduced economic activity, which could continue to adversely impact the business, financial condition, and cash flows97 - The retail automotive industry is subject to extensive federal, state, and local laws and regulations, with violations potentially leading to significant liabilities or operational restrictions98100 - Increasing competition from other dealerships, online services, and new technology-focused entrants can reduce profit margins and challenge existing business models103105109 - The company's significant indebtedness, approximately $2.0 billion as of December 31, 2020, could adversely affect financial health, limit future financing, and prevent fulfillment of financial obligations139 - Concentration of voting power by Class B Common Stockholders and anti-takeover provisions may reduce the likelihood of a third-party change of control156158 - Impairment of goodwill, as experienced in Q1 2020 with a $268.0 million charge, could materially adversely impact earnings180 Unresolved Staff Comments No unresolved staff comments are reported Properties The company's principal executive offices are in Charlotte, NC, with dealerships strategically located, many of which are leased or pledged as security - Principal executive offices are located at 4401 Colwick Road, Charlotte, North Carolina185 - Dealerships are generally located along major U.S. or interstate highways, with location being a principal factor in acquisition evaluation186 - Many dealership properties are leased from affiliates of Capital Automotive Real Estate Services, Inc. and other entities, while owned properties are pledged as security for credit facilities and mortgage financing187 Legal Proceedings Legal proceedings information is cross-referenced to Item 7, Management's Discussion and Analysis Mine Safety Disclosures This item is not applicable to the company PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details common stock trading, outstanding shares, dividend policy, and share repurchase activities for Q4 2020 - Class A Common Stock trades on the NYSE under the symbol 'SAH'; Class B Common Stock is not publicly traded191 Common Stock Outstanding (as of February 18, 2021) | Class of Stock | Shares Outstanding | | :--------------- | :----------------- | | Class A Common Stock | 29,797,727 | | Class B Common Stock | 12,029,375 | - The Board of Directors approved quarterly cash dividends of $0.40 per share for 2020 and $0.10 per share for Q1 2021, subject to business judgment and compliance with debt covenants193 Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :-------------- | :--------------------- | :--------------------------- | | October 2020 | 333,103 | $38.67 | | November 2020 | 55,000 | $36.20 | | December 2020 | — | — | | Total | 388,103 | | - As of December 31, 2020, the remaining share repurchase authorization was approximately $69.5 million194 Selected Financial Data This item is not applicable to the company Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's 2020 financial condition, operations, and cash flows, covering segment performance, expenses, impairment, taxes, and liquidity - U.S. retail automotive industry new vehicle unit sales volume decreased 8.1% in 2020 to 12.4 million vehicles203204221222 - The COVID-19 pandemic significantly impacted operations, with initial demand suppression and supply chain disruptions, but vehicle sales and fixed operations began to improve in late Q2 and Q3 202020220 Consolidated Revenue and Gross Profit Percentages (2020 vs. 2019) | Metric | 2020 | 2019 | | :-------------------------------------- | :------ | :------ | | Revenues: | | | | New vehicles | 43.8 % | 46.8 % | | Used vehicles | 36.5 % | 33.4 % | | Wholesale vehicles | 2.0 % | 1.9 % | | Parts, service and collision repair | 12.6 % | 13.3 % | | Finance, insurance and other, net | 5.0 % | 4.6 % | | Total revenues | 100.0 % | 100.0 % | | Cost of sales | 85.4 % | 85.5 % | | Gross profit | 14.6 % | 14.5 % | | Selling, general and administrative expenses | 10.5 % | 10.5 % | | Impairment charges | 2.8 % | 0.2 % | | Depreciation and amortization | 0.9 % | 0.9 % | | Operating income (loss) | 0.3 % | 2.9 % | | Interest expense, floor plan | 0.3 % | 0.5 % | | Interest expense, other, net | 0.4 % | 0.5 % | | Other (income) expense, net | 0.0 % | 0.1 % | | Income (loss) from continuing operations before taxes | (0.4)% | 1.9 % | | Provision for income taxes for continuing operations - (benefit) expense | 0.2 % | 0.5 % | | Income (loss) from continuing operations | (0.5)% | 1.4 % | Consolidated Same Store New Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $4,258,098 | $4,654,982 | $(396,884) | (8.5)% | | Gross profit | $231,871 | $223,661 | $8,210 | 3.7 % | | Unit sales | 92,445 | 106,170 | (13,725) | (12.9)% | | Revenue per unit | $46,061 | $43,845 | $2,216 | 5.1 % | | Gross profit per unit | $2,508 | $2,107 | $401 | 19.0 % | | Gross profit as % of revenue | 5.4 % | 4.8 % | 60 bps | | Consolidated Same Store Retail Used Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $3,358,527 | $3,370,272 | $(11,745) | (0.3)% | | Gross profit | $97,920 | $129,428 | $(31,508) | (24.3)% | | Unit sales | 149,429 | 155,031 | (5,602) | (3.6)% | | Revenue per unit | $22,476 | $21,739 | $737 | 3.4 % | | Gross profit per unit | $655 | $835 | $(180) | (21.6)% | | Gross profit as % of revenue | 2.9 % | 3.8 % | (90) bps | | Consolidated Same Store Fixed Operations Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total revenue | $1,219,196 | $1,337,711 | $(118,515) | (8.9)% | | Total gross profit | $590,413 | $639,121 | $(48,708) | (7.6)% | | Total gross profit as % of revenue | 48.4 % | 47.8 % | 60 bps | | Consolidated Same Store F&I Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $448,098 | $444,751 | $3,347 | 0.8 % | | Total combined retail new and used vehicle unit sales | 240,532 | 258,569 | (18,037) | (7.0)% | | Gross profit per retail unit (excludes fleet) | $1,863 | $1,720 | $143 | 8.3 % | EchoPark Segment Reported Retail Used Vehicle and F&I Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Used vehicle revenue | $1,218,896 | $996,505 | $222,391 | 22.3 % | | Used vehicle gross profit (loss) | $(16,950) | $(145) | $(16,805) | NM | | Used vehicle unit sales | 57,161 | 49,520 | 7,641 | 15.4 % | | Used vehicle revenue per unit | $21,324 | $20,123 | $1,201 | 6.0 % | | F&I revenue | $132,026 | $113,834 | $18,192 | 16.0 % | | Combined used vehicle gross profit and F&I revenue | $115,076 | $113,689 | $1,387 | 1.2 % | | Total used vehicle and F&I gross profit per unit | $2,013 | $2,296 | $(283) | (12.3)% | Consolidated SG&A Expenses (2020 vs. 2019) | Expense Category | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :--------------- | :----------------- | :----------------- | :------------------- | :------- | | Compensation | $659,834 | $733,925 | $74,091 | 10.1 % | | Advertising | $42,186 | $60,831 | $18,645 | 30.7 % | | Rent | $54,494 | $54,611 | $117 | 0.2 % | | Other | $272,152 | $250,007 | $(22,145) | (8.9)% | | Total SG&A | $1,028,666 | $1,099,374 | $70,708 | 6.4 %| - Impairment charges were $270.0 million in 2020, primarily due to a $268.0 million goodwill impairment charge for the Franchised Dealerships Segment287 - Net cash provided by operating activities was $281.1 million in 2020, up from $170.9 million in 2019, driven by net income (less non-cash items), decreased receivables, and decreased inventories349 Liquidity Resources Available (as of December 31, 2020 vs. 2019) | Resource | 2020 ($ thousands) | 2019 ($ thousands) | | :---------------------------------------- | :----------------- | :----------------- | | Cash and cash equivalents | $170,313 | $29,103 | | Availability under 2016 Revolving Credit Facility | 214,672 | 230,689 | | Availability under used vehicle floor plan facilities | — | 17,090 | | Availability under 2019 Mortgage Facility | 11,272 | 3,090 | | Availability under 2020 Line of Credit Facility | 56,973 | — | | Floor plan deposit balance | 73,180 | — | | Total available liquidity resources | $526,410 | $279,972 | Future Contractual Obligations (as of December 31, 2020) | Obligation Category | 2021 ($ thousands) | Thereafter ($ thousands) | | :-------------------------------------- | :----------------- | :----------------------- | | Notes payable - floor plan | $1,324,244 | — | | Long-term debt (principal) | 68,244 | 659,686 | | Letters of credit | 12,999 | — | | Estimated interest payments on floor plan facilities | 3,113 | — | | Estimated interest payments on long-term debt | 29,536 | 121,098 | | Operating leases (net of sublease proceeds) | 53,979 | 383,385 | | Construction contracts | 56,891 | — | | Other purchase obligations | 9,979 | 1,514 | | Liability for uncertain tax positions | 500 | 4,076 | | Total | $1,559,485 | $1,169,759 | Overview Sonic Automotive is a major U.S. automotive retailer with Franchised Dealerships and EchoPark segments, offering diverse vehicle sales and services with expansion plans - Sonic Automotive is one of the largest automotive retailers in the U.S., operating 84 Franchised Dealerships and 16 EchoPark stores as of December 31, 2020201202 - The Franchised Dealerships Segment offers new and used car sales, parts and service, and F&I products, while the EchoPark Segment focuses on used car sales and F&I products in specialty retail locations202 - The company announced an accelerated EchoPark growth plan in 2020, aiming to open 25 additional stores annually from 2021 to 2025, building a 140-plus point nationwide network202 Executive Summary The U.S. retail automotive industry saw a 14.7% decrease in new vehicle sales in 2020 due to COVID-19, with a 2021 recovery anticipated despite ongoing uncertainties - U.S. retail automotive industry's total new vehicle unit sales volume decreased by 14.7% in 2020 to 14.5 million vehicles, with retail new vehicle unit sales volume decreasing 8.1% to 12.4 million vehicles203204221 - For 2021, analysts' industry expectation for new vehicle SAAR ranges from 14.5 million to 16.0 million vehicles; Sonic Automotive estimates 15.5 million to 16.0 million vehicles203222 - Ongoing effects of the COVID-19 pandemic, consumer confidence, financing availability, manufacturer production levels, and natural disasters could cause 2021 SAAR to vary from expectations, with Texas locations already affected by extreme winter weather in February 2021203 Franchised Dealerships Segment Summary The Franchised Dealerships Segment saw new vehicle revenue decrease by 8.5% in 2020, while new vehicle gross profit increased due to higher per-unit profit, and F&I revenue also grew - New vehicle revenue for the Franchised Dealerships Segment decreased 8.5% in 2020, primarily due to a 12.9% decrease in new vehicle unit sales volume, largely impacted by the COVID-19 pandemic206 - New vehicle gross profit increased 3.7% in 2020, driven by a 19.0% increase in new vehicle gross profit per unit to $2,508, mainly due to inventory shortages and higher average selling prices206 - Retail used vehicle revenue decreased 1.9%, and gross profit decreased 12.8% due to a $112 per unit (8.8%) decrease in gross profit per unit, reflecting significant price fluctuations during the pandemic207 - Fixed Operations revenue decreased 9.5% and gross profit decreased 7.7%, primarily due to lower consumer demand for repairs; however, Fixed Operations gross margin increased 100 basis points to 49.9%208 - F&I revenue increased 1.2% in 2020, with F&I gross profit per retail unit increasing $161 (10.1%) to $1,748, attributed to proprietary software, playbook processes, and a guest-centric selling approach209 EchoPark Segment Summary The EchoPark Segment's total revenues increased by 22.1% in 2020 due to expansion, despite a 12.3% decrease in combined retail used vehicle and F&I gross profit per unit - Total EchoPark revenues increased 22.1% in 2020, driven by new store openings, increased retail used vehicle unit sales volume, and average selling price210 - Combined retail used vehicle and F&I gross profit per unit decreased $283 (12.3%) to $2,013 in 2020, primarily due to higher inventory acquisition costs from increased wholesale auction market demand211 - Wholesale vehicle gross loss improved by 75.3% to $0.1 million in 2020, attributed to higher average wholesale prices212 - EchoPark's used vehicle inventory days' supply was approximately 41 days as of December 31, 2020, exceeding the target 30-35 day range due to inventory for three new stores opened in Q4 2020213 Results of Operations - Consolidated Consolidated 2020 results show a revenue mix shift towards used vehicles and F&I, with a stable gross profit margin, reflecting varied COVID-19 impacts across revenue streams Consolidated Revenue and Gross Profit Percentages (2020 vs. 2019) | Metric | 2020 | 2019 | | :-------------------------------------- | :------ | :------ | | Revenues: | | |\n| New vehicles | 43.8 % | 46.8 % |\n| Used vehicles | 36.5 % | 33.4 % |\n| Wholesale vehicles | 2.0 % | 1.9 % |\n| Parts, service and collision repair | 12.6 % | 13.3 % |\n| Finance, insurance and other, net | 5.0 % | 4.6 % |\n| Total revenues | 100.0 % | 100.0 % |\n| Cost of sales | 85.4 % | 85.5 % |\n| Gross profit | 14.6 % | 14.5 % |\n| Selling, general and administrative expenses | 10.5 % | 10.5 % |\n| Impairment charges | 2.8 % | 0.2 % |\n| Depreciation and amortization | 0.9 % | 0.9 % |\n| Operating income (loss) | 0.3 % | 2.9 % |\n| Interest expense, floor plan | 0.3 % | 0.5 % |\n| Interest expense, other, net | 0.4 % | 0.5 % |\n| Other (income) expense, net | 0.0 % | 0.1 % |\n| Income (loss) from continuing operations before taxes | (0.4)% | 1.9 % |\n| Provision for income taxes for continuing operations - (benefit) expense | 0.2 % | 0.5 % |\n| Income (loss) from continuing operations | (0.5)% | 1.4 % | Consolidated Same Store New Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $4,258,098 | $4,654,982 | $(396,884) | (8.5)% | | Gross profit | $231,871 | $223,661 | $8,210 | 3.7 % | | Unit sales | 92,445 | 106,170 | (13,725) | (12.9)% | | Revenue per unit | $46,061 | $43,845 | $2,216 | 5.1 % | | Gross profit per unit | $2,508 | $2,107 | $401 | 19.0 % | | Gross profit as % of revenue | 5.4 % | 4.8 % | 60 bps | | Consolidated Same Store Retail Used Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $3,358,527 | $3,370,272 | $(11,745) | (0.3)% | | Gross profit | $97,920 | $129,428 | $(31,508) | (24.3)% | | Unit sales | 149,429 | 155,031 | (5,602) | (3.6)% | | Revenue per unit | $22,476 | $21,739 | $737 | 3.4 % | | Gross profit per unit | $655 | $835 | $(180) | (21.6)% | | Gross profit as % of revenue | 2.9 % | 3.8 % | (90) bps | | Consolidated Same Store Wholesale Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $192,531 | $195,233 | $(2,702) | (1.4)% | | Gross profit (loss) | $(678) | $(3,714) | $3,036 | 81.7 % | | Unit sales | 31,089 | 31,888 | (799) | (2.5)% | | Revenue per unit | $6,193 | $6,122 | $71 | 1.2 % | | Gross profit (loss) per unit | $(22) | $(116) | $94 | 81.0 % | | Gross profit (loss) as % of revenue | (0.4)% | (1.9)% | 150 bps | | Consolidated Same Store Fixed Operations Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total revenue | $1,219,196 | $1,337,711 | $(118,515) | (8.9)% | | Total gross profit | $590,413 | $639,121 | $(48,708) | (7.6)% | | Total gross profit as % of revenue | 48.4 % | 47.8 % | 60 bps | | Consolidated Same Store F&I Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $448,098 | $444,751 | $3,347 | 0.8 % | | Total combined retail new and used vehicle unit sales | 240,532 | 258,569 | (18,037) | (7.0)% | | Gross profit per retail unit (excludes fleet) | $1,863 | $1,720 | $143 | 8.3 % | Results of Operations - Franchised Dealerships Segment The Franchised Dealerships Segment saw new vehicle revenue decline by 8.5% in 2020 due to COVID-19, yet new vehicle gross profit increased, and F&I revenues also grew Franchised Dealerships Segment Same Store New Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $4,258,098 | $4,654,982 | $(396,884) | (8.5)% | | Gross profit | $231,871 | $223,661 | $8,210 | 3.7 % | | Unit sales | 92,445 | 106,170 | (13,725) | (12.9)% | | Revenue per unit | $46,061 | $43,845 | $2,216 | 5.1 % | | Gross profit per unit | $2,508 | $2,107 | $401 | 19.0 % | | Gross profit as % of revenue | 5.4 % | 4.8 % | 60 bps | | - New vehicle inventory days' supply for franchised dealerships was approximately 38 days as of December 31, 2020, below the target level due to manufacturer supply chain disruptions249 Franchised Dealerships Segment Same Store Retail Used Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $2,332,150 | $2,376,141 | $(43,991) | (1.9)% | | Gross profit | $117,903 | $135,259 | $(17,356) | (12.8)% | | Unit sales | 100,983 | 105,639 | (4,656) | (4.4)% | | Revenue per unit | $23,094 | $22,493 | $601 | 2.7 % | | Gross profit per unit | $1,168 | $1,280 | $(112) | (8.8)% | | Gross profit as % of revenue | 5.1 % | 5.7 % | (60) bps | | - Used vehicle inventory days' supply for franchised dealerships was approximately 30 days as of December 31, 2020, in line with the target of 30 to 35 days252 Franchised Dealerships Segment Same Store Wholesale Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $167,794 | $172,306 | $(4,512) | (2.6)% | | Gross profit (loss) | $(520) | $(3,382) | $2,862 | 84.6 % | | Unit sales | 24,701 | 26,114 | (1,413) | (5.4)% | | Revenue per unit | $6,793 | $6,598 | $195 | 3.0 % | | Gross profit (loss) per unit | $(21) | $(130) | $109 | 83.8 % | | Gross profit (loss) as % of revenue | (0.3)% | (2.0)% | 170 bps | | Franchised Dealerships Segment Same Store Fixed Operations Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total revenue | $1,184,428 | $1,309,201 | $(124,773) | (9.5)% | | Total gross profit | $590,946 | $640,015 | $(49,069) | (7.7)% | | Total gross profit as % of revenue | 49.9 % | 48.9 % | 100 bps | | Franchised Dealerships Segment Same Store F&I Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $335,695 | $331,860 | $3,835 | 1.2 % | | Total combined retail new and used vehicle unit sales | 192,086 | 209,177 | (17,091) | (8.2)% | | Gross profit per retail unit (excludes fleet) | $1,748 | $1,587 | $161 | 10.1 % | Results of Operations - EchoPark Segment The EchoPark Segment's retail used vehicle revenue increased 22.3% in 2020, driven by new stores, despite a 12.3% decrease in combined gross profit per unit EchoPark Segment Reported Retail Used Vehicle and F&I Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Used vehicle revenue | $1,218,896 | $996,505 | $222,391 | 22.3 % | | Used vehicle gross profit (loss) | $(16,950) | $(145) | $(16,805) | NM | | Used vehicle unit sales | 57,161 | 49,520 | 7,641 | 15.4 % | | Used vehicle revenue per unit | $21,324 | $20,123 | $1,201 | 6.0 % | | F&I revenue | $132,026 | $113,834 | $18,192 | 16.0 % | | Combined used vehicle gross profit and F&I revenue | $115,076 | $113,689 | $1,387 | 1.2 % | | Total used vehicle and F&I gross profit per unit | $2,013 | $2,296 | $(283) | (12.3)% | - Reported finance contract gross profit increased 14.3%, service contract gross profit increased 14.5%, and other aftermarket product gross profit increased 24.1% in 2020 for the EchoPark Segment269 - EchoPark's used vehicle inventory days' supply was approximately 41 days as of December 31, 2020, higher than the target 30-35 day range due to new store openings270 EchoPark Segment Reported Wholesale Vehicle Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $28,723 | $22,926 | $5,797 | 25.3 % | | Gross profit (loss) | $(82) | $(332) | $250 | 75.3 % | | Unit sales | 7,178 | 5,774 | 1,404 | 24.3 % | | Revenue per unit | $4,002 | $3,971 | $31 | 0.8 % | | Gross profit (loss) per unit | $(11) | $(57) | $46 | 80.7 % | | Gross profit (loss) as % of revenue | (0.3)% | (1.4)% | 110 bps | | EchoPark Segment Reported Fixed Operations Performance (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :---------------------- | :----------------- | :----------------- | :------------------- | :------- | | Revenue | $39,341 | $28,753 | $10,588 | 36.8 % | | Gross profit (loss) | $(789) | $(943) | $154 | 16.3 % | | Gross profit (loss) as % of revenue | (2.0)% | (3.3)% | 130 bps | | Segment Results Summary In 2020, Franchised Dealerships revenue decreased by 10.2% to $8.3 billion, while EchoPark revenue increased by 22.1% to $1.4 billion, with consolidated income before taxes showing a loss due to impairment charges Segment Revenues and Income (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :-------------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Franchised Dealerships Segment revenues | $8,348,056 | $9,292,325 | $(944,269) | (10.2)% | | EchoPark Segment revenues | $1,418,986 | $1,162,018 | $256,968 | 22.1 % | | Total consolidated revenues | $9,767,042 | $10,454,343 | $(687,301) | (6.6)% | | Franchised Dealerships Segment income | $231,175 | $211,267 | $19,908 | 9.4 % | | EchoPark Segment income | $4,078 | $9,146 | $(5,068) | (55.4)% | | Total segment income (loss) | $235,253 | $220,413 | $14,840 | 6.7 % | | Impairment charges | $(270,017) | $(20,768) | $(249,249) | NM | | Income (loss) from continuing operations before taxes | $(34,764) | $199,645 | $(234,409) | (117.4)% | - Franchised Dealerships Segment income for 2020 includes a $4.0 million pre-tax net gain on disposal of dealerships281 - EchoPark Segment income for 2020 includes a $5.2 million pre-tax net gain on disposal of land and buildings282 - Impairment charges for 2020 include $270.0 million for the Franchised Dealerships Segment, primarily goodwill impairment283 Selling, General and Administrative ("SG&A") Expenses - Consolidated Consolidated SG&A expenses decreased by 6.4% to $1.03 billion in 2020, primarily due to reduced compensation and advertising, remaining flat as a percentage of gross profit Consolidated SG&A Expenses (2020 vs. 2019) | Expense Category | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :--------------- | :----------------- | :----------------- | :------------------- | :------- | | Compensation | $659,834 | $733,925 | $74,091 | 10.1 % | | Advertising | $42,186 | $60,831 | $18,645 | 30.7 % | | Rent | $54,494 | $54,611 | $117 | 0.2 % | | Other | $272,152 | $250,007 | $(22,145) | (8.9)% | | Total SG&A | $1,028,666 | $1,099,374 | $70,708 | 6.4 %| - Overall SG&A expenses decreased by 6.4% and were flat as a percentage of gross profit (72.3%) in 2020, primarily due to reduced compensation and advertising expenses285 - Other SG&A expenses increased due to a $76.0 million pre-tax net gain on disposal of franchised dealerships in 2019, which offset current year reductions in loaner vehicle and other fixed costs285286 Impairment Charges - Consolidated Consolidated impairment charges surged to $270.0 million in 2020, primarily from a $268.0 million goodwill impairment for the Franchised Dealerships Segment - Impairment charges were approximately $270.0 million in 2020, a substantial increase from $20.8 million in 2019287 - The 2020 impairment charges include $268.0 million related to goodwill for the Franchised Dealerships Segment and $2.0 million for abandoned construction projects287 Depreciation and Amortization - Consolidated Consolidated depreciation expense decreased by $2.1 million (2.3%) in 2020, mainly due to franchised dealership dispositions - Depreciation expense decreased by approximately $2.1 million (2.3%) in 2020, mainly due to the disposition of franchised dealerships288 Interest Expense, Floor Plan - Consolidated Consolidated floor plan interest expense significantly decreased in 2020, driven by lower average interest rates for both new and used vehicle floor plans - New vehicle floor plan interest expense decreased by $20.7 million (49.2%) in 2020, driven by a lower average interest rate (1.72% vs. 3.03%) and a $145.5 million decrease in average notes payable balance289 - Used vehicle floor plan interest expense decreased by $0.6 million (9.2%) in 2020, due to a lower average interest rate (2.02% vs. 3.10%), partially offset by an $82.3 million increase in average notes payable balance290 Interest Expense, Other, Net - Consolidated Consolidated other net interest expense decreased by $11.4 million (21.5%) in 2020, primarily due to lower stated interest from debt repurchases Consolidated Interest Expense, Other, Net (2020 vs. 2019) | Expense Category | 2020 ($ thousands) | 2019 ($ thousands) | Change ($ thousands) | % Change | | :------------------------------ | :----------------- | :----------------- | :------------------- | :------- | | Stated/coupon interest | $33,723 | $49,291 | $15,568 | 31.6 % | | Deferred loan cost amortization | $2,900 | $2,478 | $(422) | (17.0)% | | Interest rate hedge expense (benefit) | $(339) | $(2,876) | $(2,537) | (88.2)% | | Capitalized interest | $(774) | $(1,583) | $(809) | (51.1)% | | Interest on finance lease liabilities | $5,432 | $5,097 | $(335) | (6.6)% | | Other interest | $630 | $546 | $(84) | (15.4)% | | Total interest expense, other, net | $41,572 | $52,953 | $11,381 | 21.5 %| - The decrease was primarily due to lower stated/coupon interest from the repurchase of 5.0% Senior Subordinated Notes due 2023 in December 2019291 Provision for Income Taxes - Consolidated The effective tax rate from continuing operations was (45.7%) in 2020, significantly impacted by a $20.9 million federal discrete charge from non-deductible goodwill impairment - The overall effective tax rate from continuing operations was (45.7%) in 2020, compared to 27.6% in 2019292 - Income tax expense for 2020 includes a $20.9 million federal discrete charge related to the non-deductible portion of the $268.0 million goodwill impairment charge292 Discontinued Operations Income from discontinued operations was a loss of $1.002 million in 2020, with no significant future activity anticipated due to accounting standard changes Income (Loss) from Discontinued Operations Before Taxes (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | | Income (loss) from discontinued operations | $(1,002) | $(554) | | Lease exit accrual adjustments and charges | — | — | | Income (loss) from discontinued operations before taxes | $(1,002) | $(554) | - The company does not expect significant activity in discontinued operations in the future due to the change in the definition of a discontinued operation as a result of ASU 2014-08293 Use of Estimates and Critical Accounting Policies Financial statement preparation requires significant management estimates and subjective judgments for critical accounting policies, including intangible assets, deferred taxes, and various reserves - Financial statements rely on management estimates and assumptions, particularly for intangible asset values, deferred tax assets, tax reserves, legal and insurance reserves, and retrospective F&I revenue294295 Goodwill and Other Intangible Assets A $268.0 million goodwill impairment charge was recorded in Q1 2020 for the franchised dealership reporting unit due to COVID-19, with no further impairment identified by year-end - Goodwill is tested for impairment at least annually (October 1) or more frequently if impairment indicators exist296 - A $268.0 million non-cash goodwill impairment charge was recorded in Q1 2020 for the franchised dealership reporting unit due to the COVID-19 pandemic's impact on market capitalization298 - As of December 31, 2020, the carrying value of goodwill was $214.0 million ($147.3 million for franchised dealerships, $66.7 million for EchoPark)297 - Franchise assets, totaling $64.3 million at December 31, 2020, are evaluated annually for impairment using a DCF model; no impairment charges were recorded in 2020302 Finance, Insurance and Service Contracts The company earns F&I commissions, recognizing retrospective revenues based on expected value and recording them net of estimated chargebacks, which totaled $34.2 million at year-end 2020 - Commissions are earned from arranging vehicle financing and selling third-party extended warranties, service contracts, and other aftermarket products303 - Retrospective F&I revenues are recognized based on the expected value method, using historical and projected data, and are constrained to prevent significant reversals303 - Commission revenue is recorded net of estimated chargebacks, which were approximately $34.2 million as of December 31, 2020; a 100-basis point change in estimated chargeback rates would impact the reserve by approximately $3.2 million304 Insurance Reserves The company maintains self-insured programs, accruing $25.8 million in reserves for estimated ultimate claim liabilities as of December 31, 2020, based on actuarial analyses - The company uses self-insured and high deductible insurance programs, requiring estimates for ultimate claim liabilities305 - As of December 31, 2020, the estimated ultimate liability for these programs was between $24.2 million and $26.7 million, with $25.8 million reserved305 - A 10% change in the volume of claims would have a proportional effect on recorded reserves305 Legal Proceedings The company is involved in various legal proceedings, with $0.5 million reserved for pending matters as of December 31, 2020, though a wider loss range is uncertain - The company is involved in various legal and administrative proceedings, including regulatory investigations and private civil actions306 - As of December 31, 2020, approximately $0.5 million was reserved for pending proceedings; a range of reasonably possible loss in excess of this amount cannot be estimated with certainty307 Income Taxes Income taxes are provided for current and deferred effects, with $4.6 million reserved for uncertain tax positions and a $5.2 million valuation allowance for state net operating loss carryforwards - The company is regularly audited by tax authorities and maintains reserves for uncertain tax positions, totaling approximately $4.6 million as of December 31, 2020308309 - As of December 31, 2020, a valuation allowance of approximately $5.2 million was recorded for state net operating loss carryforwards, as realization was deemed unlikely313 - The company has approximately $203.5 million in gross state net operating loss carryforwards expiring between 2021 and 2039545 Recent Accounting Pronouncements The company adopted ASU 2016-13 with no material impact and is evaluating ASU 2020-04 regarding LIBOR transition - Adopted ASU 2016-13, 'Financial Instruments - Credit Losses,' on January 1, 2020, with no material impact on consolidated financial statements315 - Evaluating ASU 2020-04, 'Reference Rate Reform,' for potential accounting impacts related to LIBOR transition, but currently has no modified contracts316 Liquidity and Capital Resources The company relies on diverse funding sources, was compliant with debt covenants at year-end 2020, and saw total available liquidity resources increase significantly to $526.4 million - The company relies on cash flows from operations, credit facilities, mortgage financing, asset sales, and debt/equity offerings for liquidity317 - As of December 31, 2020, the company was in compliance with all debt covenants and had approximately $303.3 million of net income and retained earnings free of restrictions317 Liquidity Resources Available (as of December 31, 2020 vs. 2019) | Resource | 2020 ($ thousands) | 2019 ($ thousands) | | :---------------------------------------- | :----------------- | :----------------- | | Cash and cash equivalents | $170,313 | $29,103 | | Availability under 2016 Revolving Credit Facility | 214,672 | 230,689 | | Availability under used vehicle floor plan facilities | — | 17,090 | | Availability under 2019 Mortgage Facility | 11,272 | 3,090 | | Availability under 2020 Line of Credit Facility | 56,973 | — | | Floor plan deposit balance | 73,180 | — | | Total available liquidity resources | $526,410 | $279,972 | Long-Term Debt and Credit Facilities The company's long-term debt and credit facilities, including the 2016 Credit Facilities and 6.125% Senior Subordinated Notes, are subject to specific covenants and restrictions - The 2016 Credit Facilities (revolving credit and floor plan) were amended in September 2020 to extend maturity to November 30, 2022321 - As of December 31, 2020, the 2016 Revolving Credit Facility had $214.7 million in borrowing availability, and the 2016 Floor Plan Facilities had a combined limit of up to $966.0 million322323 - The 6.125% Senior Subordinated Notes due 2027 have an aggregate principal amount of $250.0 million and are unsecured325 - The 2019 Mortgage Facility has a maximum borrowing limit of $112.2 million, with $11.3 million available as of December 31, 2020, and matures in November 2024329330 - The 2020 Line of Credit Facility provides up to $57.0 million in borrowing availability for general corporate purposes, maturing in June 2021335 - All debt agreements contain covenants restricting indebtedness, liens, dividends, capital expenditures, and material dispositions/acquisitions324327332336 - The weighted-average interest rate for new and used vehicle floor plan facilities was 1.78% in 2020, down from 3.04% in 2019337 Covenants and Default Provisions The company was in compliance with all restrictive and financial covenants under its Significant Debt Agreements as of December 31, 2020, with non-compliance posing acceleration and cross-default risks - The company was in compliance with all restrictive and financial covenants under its Significant Debt Agreements as of December 31, 2020339340 Financial Covenants Compliance (as of December 31, 2020) | Covenant | Required Ratio | December 31, 2020 Actual | | :-------------------------------------- | :------------- | :----------------------- | | Minimum Consolidated Liquidity Ratio | 1.05 | 1.18 | | Minimum Consolidated Fixed Charge Coverage Ratio | 1.20 | 2.07 | | Maximum Consolidated Total Lease Adjusted Leverage Ratio | 5.75 | 2.78 | - Non-compliance with covenants could result in acceleration of repayment obligations and cross-defaults across various debt agreements339 Acquisitions and Dispositions In 2020, the company acquired two pre-owned businesses for $19.7 million and disposed of one franchised dealership, generating $9.6 million in net cash - In 2020, the company acquired two pre-owned businesses for approximately $19.7 million341 - Disposed of one mid-line import franchised dealership and terminated two luxury franchises in 2020, generating net cash of approximately $9.6 million341 - Dealership acquisitions are restricted by the 2016 Credit Facilities if aggregate costs exceed specific amounts without lender consent342 Capital Expenditures Capital expenditures totaled $127.2 million in 2020, primarily for facility construction and real estate, with $53.1 million financed by mortgages and $56.9 million committed for future projects - Capital expenditures for 2020 were approximately $127.2 million, with $92.3 million for Franchised Dealerships and $34.9 million for EchoPark344 - Expenditures included $72.6 million for facility construction, $33.2 million for real estate acquisitions, and $21.4 million for other fixed assets344 - Approximately $53.1 million of capital expenditures were funded through mortgage financing, and $74.1 million from cash from operations345 - Commitments for facility construction projects totaled approximately $56.9 million as of December 31, 2020345 Share Repurchase Program In 2020, the company repurchased 2.2 million Class A Common Stock shares for $71.7 million, with $69.5 million remaining under authorization, subject to debt restrictions - In 2020, the company repurchased approximately 2.2 million shares of Class A Common Stock for $71.7 million346 - An additional $60.0 million share repurchase authorization was approved in 2020, with $69.5 million remaining as of December 31, 2020346 - Share repurchases are subject to debt agreement restrictions and management's business judgment346347 Dividends The Board approved $0.40 per share in quarterly cash dividends for 2020, with future declarations subject to financial performance and debt covenant compliance - The Board approved $0.40 per share in quarterly cash dividends for 2020 and a $0.10 per share dividend for Q1 2021348 - Future dividends are subject to Board discretion, financial performance, and compliance with debt covenants, including restrictions from the 2016 Credit Facilities and 6.125% Notes indenture348 - As of December 31, 2020, $303.3 million of net income and retained earnings were free of dividend restrictions348 Cash Flows Net cash from operating activities increased to $281.1 million in 2020, while investing activities used $100.2 million and financing activities used $39.7 million - Net cash provided by operating activities was $281.1 million in 2020, up from $170.9 million in 2019349 - Net cash used in investing activities was $100.2 million in 2020, primarily for purchases of land, property, equipment, and businesses354 - Net cash used in financing activities was $39.7 million in 2020, mainly due to treasury stock repurchases and debt repayments356 - If all changes in floor plan notes payable were classified as operating activities, net cash provided by operating activities would have been $341.9 million in 2020353 Adjusted EBITDA Adjusted EBITDA, a non-GAAP measure, increased to $370.3 million in 2020, with the Franchised Dealerships Segment contributing $360.3 million Adjusted EBITDA (2020 vs. 2019) | Metric | 2020 ($ thousands) | 2019 ($ thousands) | | :-------------------------------------- | :----------------- | :----------------- | | Net income (loss) | $(51,385) | $144,137 | | Provision for income taxes | $15,619 | $54,954 | | Income (loss) before taxes | $(35,766) | $199,091 | | Non-floor plan interest | $38,672 | $50,475 | | Depreciation & amortization | $93,922 | $95,646 | | Stock-based compensation expense | $11,704 | $10,797 | | Asset impairment charges | $270,017 | $20,768 | | Loss (gain) on franchise and real estate disposals | $(8,247) | $(74,812) | | Adjusted EBITDA | $370,302 | $308,485 | - Adjusted EBITDA increased to $370.3 million in 2020, with Franchised Dealerships contributing $360.3 million and EchoPark contributing $11.0 million359 Future Liquidity Outlook The company's liquidity relies on operations, credit facilities, and asset sales, with $1.32 billion in floor plan notes and $68.2 million in long-term debt due in 2021 - Primary liquidity sources include cash flows from operations, credit facilities, mortgage financing, asset sales, and capital market offerings363 Future Contractual Obligations (as of December 31, 2020) | Obligation Category | 2021 ($ thousands) | Thereafter ($ thousands) | | :-------------------------------------- | :----------------- | :----------------------- | | Notes payable - floor plan | $1,324,244 | — | | Long-term debt (principal) | 68,244 | 659,686 | | Letters of credit | 12,999 | — | | Estimated interest payments on floor plan facilities | 3,113 | — | | Estimated interest payments on long-term debt | 29,536 | 121,098 | | Operating leases (net of sublease proceeds) | 53,979 | 383,385 | | Construction contracts | 56,891 | — | | Other purchase obligations | 9,979 | 1,514 | | Liability for uncertain tax positions | 500 | 4,076 | | Total | $1,559,485 | $1,169,759 | Seasonality Operations are seasonal, with Q4 typically yielding the highest operating profit, influenced by weather, manufacturer incentives, and model changeovers - Operations are seasonal, with Q1 historically having lower operating profit, Q2 and Q3 higher, and Q4 the highest364 - Seasonality is influenced by weather, manufacturer incentive programs, and model changeovers, affecting vehicle demand and profitability364 - Parts and service demand remains stable throughout the year364 Guarantees and Indemnification Obligations The company has various guarantees and indemnification obligations, including retained lease responsibilities and environmental exposure, with a maximum exposure of $25.0 million - The company retains responsibility for lease obligations when properties are subleased to buyers of disposed dealerships; future gross minimum lease payments for these totaled $29.9 million at December 31, 2020365 - Indemnifies buyers of dealerships for certain liabilities, including environmental exposure, with a maximum exposure of approximately $25.0 million at December 31, 2020366 - Guarantees floor plan commitments of its 50%-owned joint venture, amounting to approximately $4.3 million at December 31, 2020367 Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to interest rate risk from $1.2 billion in variable rate debt, mitigated by interest rate cap agreements, and foreign currency risk - The company's variable rate debt, approximately $1.2 billion at December 31, 2020, exposes it to interest rate fluctuations; a 100 basis point change in interest rates would impact interest expense by approximately $19.8 million in 2020370 - Interest rate cap agreements are used to limit exposure to increases in LIBOR rates, designated as cash flow hedges372 Interest Rate Cap Agreements (as of December 31, 2020) | Notional Amount ($ millions) | Cap Rate | Receive Rate | Start Date | Maturing Date | | :--------------------------- | :------- | :-------------- | :----------- | :------------ | | $225.0 | 3.000% | one-month LIBOR | July 1, 2020 | June 30, 2021 | | $150.0 | 2.000% | one-month LIBOR | July 1, 2020 | July 1, 2021 | | $250.0 | 3.000% | one-month LIBOR | July 1, 2021 | July 1, 2022 | - The company faces foreign currency risk from purchasing new vehicle and parts inventories from foreign manufacturers, which could affect competitive pricing and consumer demand374 Financial Statements and Supplementary Data Consolidated financial statements and notes are located starting on page F-4 (document page 85) of this Annual Report Changes in and Disagreements With Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure have occurred Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes in Q4 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2020378 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework380 - No material changes in internal control over financial reporting occurred during the fourth quarter ended December 31, 2020382 [Other Information](index=73&type=section&id=Item%209B.%20Other%20Inf