##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission files number 1-13395
 
 SONIC AUTOMOTIVE, INC.
 (Exact name of registrant as specified in its charter)
 
 DELAWARE
(State or other jurisdiction of 
incorporation or organization)
    
    56-2010790
(I.R.S. Employer
Identification No.)
 6415 Idlewild Road, Suite 109, Charlotte, North Carolina
    
    28212(Address of principal executive offices)
    
    (Zip Code)
 (704) 566-2400
(Registrants telephone number, including area code)
 
 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer þ
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o o þ




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##### 



INDEX TO FORM 10-Q
 PagePART I  FINANCIAL INFORMATION
    
    
    3ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Income  Second Quarter and Six-month Period Ended June 30, 2009 and June 30, 2010
    
    
    3Condensed Consolidated Balance Sheets  December 31, 2009 and June 30, 2010
    
    
    4Condensed Consolidated Statement of Stockholders Equity  Six-month Period Ended June 30, 2010
    
    
    5Condensed Consolidated Statements of Cash Flows  Six-month Period Ended June 30, 2009 and June 30, 2010
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35ITEM 4. Controls and Procedures
    
    
    36PART II  OTHER INFORMATION
    
    
    37ITEM 1. Legal Proceedings
    
    
    37ITEM 1A. Risk Factors
    
    
    38ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39ITEM 6. Exhibits
    
    
    40SIGNATURES
    
    
    42EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1: Condensed Consolidated Financial Statements.
 
 SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands except per share amounts)
(Unaudited)
 Second Quarter Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Revenues:New vehicles
    
    $
    772,296
    
    
    $
    902,452
    
    
    $
    1,477,819
    
    
    $
    1,687,050Used vehicles
    
    
    382,091
    
    
    
    470,365
    
    
    
    710,381
    
    
    
    892,656Wholesale vehicles
    
    
    33,903
    
    
    
    30,111
    
    
    
    71,359
    
    
    
    61,389Total vehicles
    
    
    1,188,290
    
    
    
    1,402,928
    
    
    
    2,259,559
    
    
    
    2,641,095Parts, service and collision repair
    
    
    274,032
    
    
    
    287,095
    
    
    
    544,701
    
    
    
    565,682Finance, insurance and other
    
    
    38,847
    
    
    
    45,985
    
    
    
    74,000
    
    
    
    86,959Total revenues
    
    
    1,501,169
    
    
    
    1,736,008
    
    
    
    2,878,260
    
    
    
    3,293,736Cost of Sales:New vehicles
    
    
    (720,073
    )
    
    
    (841,331
    )
    
    
    (1,378,757
    )
    
    
    (1,571,430
    )Used vehicles
    
    
    (351,011
    )
    
    
    (433,932
    )
    
    
    (648,535
    )
    
    
    (822,806
    )Wholesale vehicles
    
    
    (35,145
    )
    
    
    (31,958
    )
    
    
    (72,666
    )
    
    
    (63,912
    )Total vehicles
    
    
    (1,106,229
    )
    
    
    (1,307,221
    )
    
    
    (2,099,958
    )
    
    
    (2,458,148
    )Parts, service and collision repair
    
    
    (135,241
    )
    
    
    (143,768
    )
    
    
    (271,630
    )
    
    
    (282,245
    )Total cost of sales
    
    
    (1,241,470
    )
    
    
    (1,450,989
    )
    
    
    (2,371,588
    )
    
    
    (2,740,393
    )Gross profit
    
    
    259,699
    
    
    
    285,019
    
    
    
    506,672
    
    
    
    553,343Selling, general and administrative expenses
    
    
    (205,767
    )
    
    
    (228,372
    )
    
    
    (411,231
    )
    
    
    (451,865
    )Impairment charges
    
    
    (5,030
    )
    
    
    (1
    )
    
    
    (5,087
    )
    
    
    (45
    )Depreciation and amortization
    
    
    (8,183
    )
    
    
    (8,675
    )
    
    
    (15,776
    )
    
    
    (17,000
    )Operating income
    
    
    40,719
    
    
    
    47,971
    
    
    
    74,578
    
    
    
    84,433Other income (expense):Interest expense, floor plan
    
    
    (5,492
    )
    
    
    (5,507
    )
    
    
    (10,660
    )
    
    
    (10,413
    )Interest expense, other, net
    
    
    (23,216
    )
    
    
    (15,683
    )
    
    
    (39,950
    )
    
    
    (32,873
    )Interest expense, non-cash, convertible debt
    
    
    (3,643
    )
    
    
    (1,730
    )
    
    
    (6,262
    )
    
    
    (3,406
    )Interest expense, non-cash, cash flow swaps
    
    
    (1,908
    )
    
    
    (2,235
    )
    
    
    (3,179
    )
    
    
    (3,918
    )Other income (expense), net
    
    
    20
    
    
    
    (7,235
    )
    
    
    70
    
    
    
    (7,171
    )Total other expense
    
    
    (34,239
    )
    
    
    (32,390
    )
    
    
    (59,981
    )
    
    
    (57,781
    )Income from continuing operations before taxes
    
    
    6,480
    
    
    
    15,581
    
    
    
    14,597
    
    
    
    26,652Income tax provision
    
    
    (2,916
    )
    
    
    (6,300
    )
    
    
    (6,569
    )
    
    
    (11,061
    )Income from continuing operations
    
    
    3,564
    
    
    
    9,281
    
    
    
    8,028
    
    
    
    15,591Discontinued operations:Loss from operations and the sale of discontinued franchises
    
    
    (5,067
    )
    
    
    (1,015
    )
    
    
    (9,013
    )
    
    
    (4,547
    )Income tax benefit
    
    
    1,529
    
    
    
    170
    
    
    
    2,689
    
    
    
    1,546Loss from discontinued operations
    
    
    (3,538
    )
    
    
    (845
    )
    
    
    (6,324
    )
    
    
    (3,001
    )Net income
    
    $
    26
    
    
    $
    8,436
    
    
    $
    1,704
    
    
    $
    12,590Basic earnings per share:Earnings per share from continuing operations
    
    $
    0.09
    
    
    $
    0.18
    
    
    $
    0.20
    
    
    $
    0.30Loss per share from discontinued operations
    
    
    (0.09
    )
    
    
    (0.02
    )
    
    
    (0.16
    )
    
    
    (0.06
    )Earnings per share
    
    $
    
    
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.24Weighted average common shares outstanding
    
    
    40,968
    
    
    
    52,249
    
    
    
    40,536
    
    
    
    52,070Diluted earnings per share:Earnings per share from continuing operations
    
    $
    0.08
    
    
    $
    0.17
    
    
    $
    0.19
    
    
    $
    0.29Loss per share from discontinued operations
    
    
    (0.08
    )
    
    
    (0.01
    )
    
    
    (0.15
    )
    
    
    (0.05
    )Earnings per share
    
    $
    
    
    
    $
    0.16
    
    
    $
    0.04
    
    
    $
    0.24Weighted average common shares outstanding
    
    
    41,604
    
    
    
    65,807
    
    
    
    40,974
    
    
    
    52,749
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 (Unaudited)December 31,
    
    
    June 30,2009
    
    
    2010ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    30,035
    
    
    $
    20,122Receivables, net
    
    
    232,969
    
    
    
    193,842Inventories
    
    
    795,275
    
    
    
    868,686Assets held for sale
    
    
    12,167
    
    
    
    5,777Other current assets
    
    
    14,937
    
    
    
    16,171Total Current Assets
    
    
    1,085,383
    
    
    
    1,104,598Property and Equipment, net
    
    
    382,085
    
    
    
    386,289Goodwill
    
    
    469,482
    
    
    
    469,993Other Intangible Assets, net
    
    
    80,806
    
    
    
    79,978Other Assets
    
    
    51,099
    
    
    
    59,944Total Assets
    
    $
    2,068,855
    
    
    $
    2,100,802LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Notes payable  floor plan  trade
    
    $
    214,871
    
    
    $
    447,709Notes payable  floor plan  non-trade
    
    
    548,493
    
    
    
    350,906Trade accounts payable
    
    
    55,345
    
    
    
    53,188Accrued interest
    
    
    16,146
    
    
    
    13,924Other accrued liabilities
    
    
    144,709
    
    
    
    134,120Liabilities associated with assets held for sale  non-trade
    
    
    3,346
    
    
    
    1,361Current maturities of long-term debt
    
    
    23,991
    
    
    
    23,458Total Current Liabilities
    
    
    1,006,901
    
    
    
    1,024,666Long-Term Debt
    
    
    552,150
    
    
    
    550,182Other Long-Term Liabilities
    
    
    141,052
    
    
    
    142,204Stockholders Equity:Class A convertible preferred stock, none issued
    
    
    
    
    
    
    Class A common stock, $.01 par value; 100,000,000 shares authorized;
54,986,875 shares issued and 40,099,559 shares outstanding at December
31, 2009; 55,621,998 shares issued and 40,647,198 shares outstanding at
June 30, 2010
    
    
    550
    
    
    
    556Class B common stock; $.01 par value; 30,000,000 shares authorized;
12,029,375 shares outstanding at December 31, 2009 and June 30, 2010
    
    
    121
    
    
    
    121Paid-in capital
    
    
    662,186
    
    
    
    665,624Accumulated deficit
    
    
    (35,180
    )
    
    
    (22,589
    )Accumulated other comprehensive income (loss)
    
    
    (22,350
    )
    
    
    (22,338
    )Treasury stock, at cost (14,887,316 Class A shares held at December
31, 2009
and 14,974,800 Class A shares held at June 30, 2010)
    
    
    (236,575
    )
    
    
    (237,624
    )Total Stockholders Equity
    
    
    368,752
    
    
    
    383,750Total Liabilities and Stockholders Equity
    
    $
    2,068,855
    
    
    $
    2,100,802
  4




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Dollars and shares in thousands)
(Unaudited)
 AccumulatedClass A
    
    
    Class B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Total
    
    
    Compre-Common Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Treasury
    
    
    Comprehensive
    
    
    Stockholders
    
    
    hensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    Income (Loss)
    
    
    Equity
    
    
    IncomeBALANCE AT DECEMBER 31, 2009
    
    
    54,987
    
    
    
    550
    
    
    
    12,029
    
    
    
    121
    
    
    
    662,186
    
    
    
    (35,180
    )
    
    
    (236,575
    )
    
    
    (22,350
    )
    
    
    368,752Shares awarded under stock
compensation plans
    
    
    279
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    1,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,176
    
    
    
    Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,049
    )
    
    
    
    
    
    
    (1,049
    )
    
    
    Income tax benefit associated
with stock compensation plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    595
    
    
    
    Income tax benefit associated
with convertible note hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134
    
    
    
    Fair value of interest rate
swap agreements, net of tax
expense of $7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    12
    
    
    
    12Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    Restricted stock amortization,
net of forfeitures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,239
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,590
    
    
    
    
    
    
    
    
    
    
    
    12,590
    
    
    
    12,590Other
    
    
    356
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    BALANCE AT JUNE 30, 2010
    
    
    55,622
    
    
    
    556
    
    
    
    12,029
    
    
    $
    121
    
    
    $
    665,624
    
    
    $
    (22,589
    )
    
    $
    (237,624
    )
    
    $
    (22,338
    )
    
    $
    383,750
    
    
    $
    12,602
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
 Six Months EndedJune 30,2009
    
    
    2010CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,704
    
    
    $
    12,590Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of property, plant and equipment
    
    
    16,562
    
    
    
    17,233Provision for bad debt expense
    
    
    678
    
    
    
    602Other amortization
    
    
    828
    
    
    
    828Debt issuance cost amortization
    
    
    7,326
    
    
    
    1,636Debt discount amortization, net of premium amortization
    
    
    6,545
    
    
    
    2,673Stock  based compensation expense
    
    
    296
    
    
    
    300Amortization of restricted stock
    
    
    1,202
    
    
    
    1,239Restricted stock forfeiture
    
    
    (110
    )
    
    
    Deferred income taxes
    
    
    (2,422
    )
    
    
    (463
    )Equity interest in earnings of investees
    
    
    (328
    )
    
    
    (414
    )Asset impairment charges
    
    
    8,495
    
    
    
    45Loss (gain) on disposal of franchises and property and equipment
    
    
    (194
    )
    
    
    (596
    )Loss on exit of leased dealerships
    
    
    2,085
    
    
    
    2,766Loss on retirement of debt
    
    
    
    
    
    
    7,259Derivative fair value adjustments
    
    
    100
    
    
    
    Changes in assets and liabilities that relate to operations:Receivables
    
    
    46,799
    
    
    
    38,525Inventories
    
    
    225,230
    
    
    
    (77,900
    )Other assets
    
    
    (30,245
    )
    
    
    (13,693
    )Notes payable  floor plan  trade
    
    
    (51,013
    )
    
    
    232,838Trade accounts payable and other liabilities
    
    
    31,815
    
    
    
    (20,768
    )Total adjustments
    
    
    263,649
    
    
    
    192,110Net cash provided by operating activities
    
    
    265,353
    
    
    
    204,700CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (28,046
    )
    
    
    (20,424
    )Proceeds from sales of property and equipment
    
    
    1,951
    
    
    
    86Proceeds from sale of franchises
    
    
    20,677
    
    
    
    10,728Distributions from equity investees
    
    
    300
    
    
    
    Net cash used in investing activities
    
    
    (5,118
    )
    
    
    (9,610
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (repayments) borrowings on notes payable floor plan  non-trade
    
    
    (235,223
    )
    
    
    (199,572
    )Borrowings on revolving credit facilities
    
    
    431,719
    
    
    
    40,000Repayments on revolving credit facilities
    
    
    (422,550
    )
    
    
    (40,000
    )Proceeds from long-term debt
    
    
    
    
    
    
    209,983Principal payments on long-term debt
    
    
    (18,534
    )
    
    
    (3,080
    )Settlement of cash flow swaps
    
    
    (16,454
    )
    
    
    Repurchase of debt securities
    
    
    
    
    
    
    (213,190
    )Purchase of treasury stock
    
    
    (61
    )
    
    
    (1,049
    )Income tax benefit associated with stock compensation plans
    
    
    
    
    
    
    595Income tax benefit associated with convertible hedge
    
    
    1,157
    
    
    
    134Issuance of shares under stock compensation plans
    
    
    
    
    
    
    1,176Issuance of common stock related to private placement
    
    
    2,800
    
    
    
    Dividends paid
    
    
    (4,897
    )
    
    
    Net cash used in financing activities
    
    
    (262,043
    )
    
    
    (205,003
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,808
    )
    
    
    (9,913
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    6,971
    
    
    
    30,035CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    5,163
    
    
    $
    20,122SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:Change in fair value of cash flow hedging instruments (net of tax expense
of $7,300 and $7 for the six-month period ended June 30, 2009 and 2010, respectively)
    
    $
    11,910
    
    
    $
    12Issuance of shares related to debt refinance
    
    $
    3,948
    
    
    $
    SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the year for:Interest, net of amount capitalized
    
    $
    53,477
    
    
    $
    48,473Income taxes
    
    $
    (21,820
    )
    
    $
    (16,441
    )
  
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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Basis of Presentation
 Recent Developments
 Reclassifications
 Lease Exit Accruals 
 (dollars inthousands)Balance, December 31, 2009
    
    $
    47,825Lease exit expense
    
    
    2,766Payments
    
    
    (4,608
    )Balance, June 30, 2010
    
    $
    45,983
  Income Tax Expense 
  Dispositions
 7




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (dollars in thousands)December 31,
    
    
    June 30,2009
    
    
    2010Inventories
    
    $
    4,528
    
    
    $
    1,555Property and equipment, net
    
    
    4,838
    
    
    
    3,966Goodwill
    
    
    2,801
    
    
    
    256Assets held for sale
    
    $
    12,167
    
    
    $
    5,777
  (dollars in thousands)Second Quarter Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Loss from operations
    
    $
    (2,000
    )
    
    $
    (1,020
    )
    
    $
    (3,341
    )
    
    $
    (3,178
    )Gain (loss) on disposal of franchises
    
    
    (388
    )
    
    
    1,082
    
    
    
    (469
    )
    
    
    1,353Lease exit charges
    
    
    (800
    )
    
    
    (1,077
    )
    
    
    (1,795
    )
    
    
    (2,722
    )Property impairment charges
    
    
    (1,692
    )
    
    
    
    
    
    
    (1,822
    )
    
    
    Goodwill impairment charges
    
    
    (187
    )
    
    
    
    
    
    
    (1,586
    )
    
    
    Pre-tax loss
    
    $
    (5,067
    )
    
    $
    (1,015
    )
    
    $
    (9,013
    )
    
    $
    (4,547
    )Total Revenues
    
    $
    68,715
    
    
    $
    6,399
    
    
    $
    142,416
    
    
    $
    17,609
   Inventories
  (dollars in thousands)December 31,
    
    
    June 30,2009
    
    
    2010New vehicles
    
    $
    557,319
    
    
    $
    599,013Used vehicles
    
    
    138,401
    
    
    
    166,345Parts and accessories
    
    
    51,470
    
    
    
    50,434Other
    
    
    52,613
    
    
    
    54,449$
    799,803
    
    
    $
    870,241Less inventories classified as assets held for sale
    
    
    (4,528
    )
    
    
    (1,555
    )Inventories
    
    $
    795,275
    
    
    $
    868,686
 8




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Property and Equipment
  (dollars in thousands)December 31,
    
    
    June 30,2009
    
    
    2010Land
    
    $
    61,886
    
    
    $
    62,205Building and improvements
    
    
    322,632
    
    
    
    313,700Office equipment and fixtures
    
    
    75,801
    
    
    
    75,522Parts and service equipment
    
    
    54,981
    
    
    
    54,946Company vehicles
    
    
    8,440
    
    
    
    8,283Construction in progress
    
    
    40,000
    
    
    
    41,873Total, at cost
    
    
    563,740
    
    
    
    556,529Less accumulated depreciation
    
    
    (176,817
    )
    
    
    (166,274
    )Subtotal
    
    
    386,923
    
    
    
    390,255Less assets held for sale
    
    
    (4,838
    )
    
    
    (3,966
    )Property and equipment, net
    
    $
    382,085
    
    
    $
    386,289
  Goodwill and Intangible Assets
 (dollars in thousands)AccumulatedFranchise Agreements
    
    
    Gross Goodwill
    
    
    Impairment
    
    
    Net GoodwillBalance, December 31, 2009
    
    $
    64,835
    
    
    $
    1,266,207
    
    
    $
    (796,725
    )
    
    $
    469,482Reductions from sales of franchises
    
    
    
    
    
    
    (2,034
    )
    
    
    
    
    
    
    (2,034
    )Reclassification from assets held
for sale, net
    
    
    
    
    
    
    2,545
    
    
    
    
    
    
    
    2,545Balance, June 30, 2010
    
    $
    64,835
    
    
    $
    1,266,718
    
    
    $
    (796,725
    )
    
    $
    469,993
   Long-Term Debt
  9




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (dollars in thousands)December 31,
    
    
    June 30,2009
    
    
    20102010 Revolving Credit Facilities (1)
    
    $
    
    
    
    $
    Senior Subordinated Notes bearing interest at 9.0%
    
    
    
    
    
    
    210,000Senior Subordinated Notes bearing interest at 8.625%
    
    
    275,000
    
    
    
    62,855Convertible Senior Notes bearing interest at 5.0%
    
    
    172,500
    
    
    
    172,500Convertible Senior Subordinated Notes bearing interest at 4.25%
    
    
    17,045
    
    
    
    16,000Notes payable to a finance company bearing interest from 9.52% to 10.52% (with
a weighted average of 10.19%)
    
    
    17,778
    
    
    
    16,714Mortgage notes to finance companies-fixed rate, bearing interest from 5.80%
to 7.03%
    
    
    78,424
    
    
    
    77,270Mortgage notes to finance companies-variable rate,
bearing interest at 1.25 to 3.30 percentage
points above one-month LIBOR
    
    
    38,251
    
    
    
    38,926Net debt discount and premium (2)
    
    
    (29,199
    )
    
    
    (26,824
    )Other
    
    
    6,342
    
    
    
    6,199$
    576,141
    
    
    $
    573,640Less current maturities
    
    
    (23,991
    )
    
    
    (23,458
    )Long-term debt
    
    $
    552,150
    
    
    $
    550,182
 
 (1)
    
    Interest rate was 2.25% above LIBOR at June 30, 2010.(2)
    
    December 31, 2009 includes $1.5 million discount associated with the 8.625% Notes, $29.8 million discount associated with the 5.0% Convertible Notes, $0.6 million discount associated with the 4.25% Convertible Notes, $2.5 million premium associated with notes payable to a finance company and $0.2 million premium associated with mortgage notes payable. June 30, 2010 includes $1.3 million discount associated
with the 9.0% Notes, $0.4 million discount associated with the 8.625% Notes, $27.3 million discount associated with the 5.0% Convertible Notes, $0.3 million discount associated with the 4.25% Convertible Notes, $2.2 million premium associated with notes payable to a finance company and $0.2 million premium associated with mortgage notes payable. 2006 Credit Facility
  2010 Credit Facilities
    10




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Covenants
  CovenantConsolidated
    
    ConsolidatedConsolidated
    
    Fixed Charge
    
    Total SeniorLiquidity
    
    Coverage
    
    Secured Debt toRatio
    
    Ratio
    
    EBITDA RatioThrough March 30, 2011
    
    
    ≥ 1.00
    
    
    
    ≥ 1.10
    
    
    
    £ 2.25March 31, 2011 through and including March 30, 2012
    
    
    ≥ 1.05
    
    
    
    ≥ 1.15
    
    
    
    £ 2.25March 31, 2012 and thereafter
    
    
    ≥ 1.10
    
    
    
    ≥ 1.20
    
    
    
    £ 2.25June 30, 2010 actual
    
    
    1.16
    
    
    
    1.55
    
    
    
    1.23
   9.0% Senior Subordinated Notes (9.0% Notes)
  11




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  RedemptionPriceBeginning on March 15, 2014
    
    
    104.50
    %Beginning on March 15, 2015
    
    
    102.25
    %Beginning on March 15, 2016 and thereafter
    
    
    100.00
    %
     8.625% Senior Subordinated Notes (8.625% Notes)
   12




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   5.0% Convertible Senior Notes (5.0% Convertible Notes)
    4.25% Convertible Senior Subordinated Notes (4.25% Convertible Notes)
   13




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Notes Payable to a Finance Company
  Mortgage Notes
  Derivative Instruments and Hedging Activities
  Notional Amount
    
    Pay Rate
    
    Receive Rate (1)
    
    Maturing Date(in millions)$
    200.0
    
    
    
    4.935
    %
    
    one-month LIBOR
    
    May 1, 2012$
    100.0
    
    
    
    5.265
    %
    
    one-month LIBOR
    
    June 1, 2012$
    3.7
    
    
    
    7.100
    %
    
    one-month LIBOR
    
    July 10, 2017$
    25.0
    (2)
    
    
    5.160
    %
    
    one-month LIBOR
    
    September 1, 2012$
    15.0
    (2)
    
    
    4.965
    %
    
    one-month LIBOR
    
    September 1, 2012$
    25.0
    (2)
    
    
    4.885
    %
    
    one-month LIBOR
    
    October 1, 2012$
    11.6
    
    
    
    4.655
    %
    
    one-month LIBOR
    
    December 10, 2017$
    8.8
    
    
    
    6.860
    %
    
    one-month LIBOR
    
    August 1, 2017$
    7.1
    
    
    
    4.330
    %
    
    one-month LIBOR
    
    July 1, 2013$
    100.0
    (3)
    
    
    3.280
    %
    
    one-month LIBOR
    
    July 1, 2015$
    100.0
    (3)
    
    
    3.300
    %
    
    one-month LIBOR
    
    July 1, 2015
 (1)
    
    One-month LIBOR was 0.348% at June 30, 2010.(2)
    
    After December 31, 2009 changes in fair value are recorded through earnings.(3)
    
    The effective date of these forward-starting swaps is July 2, 2012.  14




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    7. Stock-Based Compensation
  15




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Weighted AverageOptions
    
    
    Exercise Price
    
    
    Weighted Average
    
    
    Remaining
    
    
    AggregateOutstanding
    
    
    Per Share
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic Value(in thousands)
    
    
    
    
    
    
    
    
    (in years)
    
    
    (in thousands)Balance  December 31, 2009
    
    
    4,014
    
    
    $
    1.81 - $37.50
    
    
    $
    15.48
    
    
    
    5.9
    
    
    $
    12,349Exercised
    
    
    (238
    )
    
    $
    1.81 - $11.19
    
    
    
    5.31Forfeited
    
    
    (65
    )
    
    $
    1.81 - $37.50
    
    
    
    17.33Balance  June 30, 2010
    
    
    3,711
    
    
    $
    1.81 - $37.50
    
    
    $
    16.10
    
    
    
    5.4
    
    
    $
    8,379Exercisable
    
    
    2,790
    
    
    $
    1.81 - $37.50
    
    
    $
    20.73
    
    
    
    4.3
    
    
    $
    2,235
 Six Months Ended(dollars in thousands)
    
    June 30, 2010Fair Value of Options Vested
    
    $
    1,307Intrinsic Value of Options Exercised
    
    $
    1,567
   Unvested Restricted
    
    
    Weighted AverageStock and Restricted
    
    
    Grant Date FairStock Units
    
    
    Value(in thousands)Balance  December 31, 2009
    
    
    313
    
    
    $
    17.45Granted
    
    
    502
    
    
    
    10.34Forfeited
    
    
    (4
    )
    
    
    10.30Vested
    
    
    (291
    )
    
    
    17.16Balance  June 30, 2010
    
    
    520
    
    
    $
    10.89
  16




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Per Share Data and Stockholders Equity
  17




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the Second Quarter Ended June 30, 2009Income
    
    
    LossFrom Continuing
    
    
    From DiscontinuedOperations
    
    
    Operations
    
    
    Net Income (Loss)Class A & B
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per CommonShares
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount(dollars in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    40,968
    
    
    $
    3,564
    
    
    
    
    
    
    $
    (3,538
    )
    
    
    
    
    
    $
    26Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )Basic Earnings (Loss) Per Share
    
    
    40,968
    
    
    $
    3,536
    
    
    $
    0.09
    
    
    $
    (3,538
    )
    
    $
    (0.09
    )
    
    $
    (2
    )
    
    $
    Effect of Dilutive Securities:Stock Plans
    
    
    636
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted Earnings (Loss) Per Share
    
    
    41,604
    
    
    $
    3,536
    
    
    $
    0.08
    
    
    $
    (3,538
    )
    
    $
    (0.08
    )
    
    $
    (2
    )
    
    $
    
 For the Second Quarter Ended June 30, 2010Income
    
    
    LossFrom Continuing
    
    
    From DiscontinuedOperations
    
    
    Operations
    
    
    Net IncomeClass A & B
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per CommonShares
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount(dollars in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    52,249
    
    
    $
    9,281
    
    
    
    
    
    
    $
    (845
    )
    
    
    
    
    
    $
    8,436Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    
    
    
    
    (91
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91
    )Basic Earnings (Loss) Per Share
    
    
    52,249
    
    
    $
    9,190
    
    
    $
    0.18
    
    
    $
    (845
    )
    
    $
    (0.02
    )
    
    $
    8,345
    
    
    $
    0.16Effect of Dilutive Securities:Contingently ConvertibleDebt (2009 5.0% Convertibles)
    
    
    12,890
    
    
    
    2,116
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    2,127Stock Plans
    
    
    668
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted Earnings (Loss) Per Share
    
    
    65,807
    
    
    $
    11,306
    
    
    $
    0.17
    
    
    $
    (834
    )
    
    $
    (0.01
    )
    
    $
    10,472
    
    
    $
    0.16
 For the Six Months Ended June 30, 2009Income
    
    
    LossFrom Continuing
    
    
    From DiscontinuedOperations
    
    
    Operations
    
    
    Net IncomePer Common
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per CommonShares
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount(amounts in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    40,536
    
    
    $
    8,028
    
    
    
    
    
    
    $
    (6,324
    )
    
    
    
    
    
    $
    1,704Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )Basic Earnings (Loss) Per Share
    
    
    40,536
    
    
    $
    7,966
    
    
    $
    0.20
    
    
    $
    (6,324
    )
    
    $
    (0.16
    )
    
    $
    1,642
    
    
    $
    0.04Effect of Dilutive Securities:Stock Plans
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted Earnings (Loss) Per Share
    
    
    40,974
    
    
    $
    7,966
    
    
    $
    0.19
    
    
    $
    (6,324
    )
    
    $
    (0.15
    )
    
    $
    1,642
    
    
    $
    0.04
 For the Six Months Ended June 30, 2010Income
    
    
    LossFrom Continuing
    
    
    From DiscontinuedOperations
    
    
    Operations
    
    
    Net IncomePer Common
    
    
    
    
    
    
    Per Common
    
    
    
    
    
    
    Per CommonShares
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount
    
    
    Amount
    
    
    Share Amount(amounts in thousands except per share amounts)Earnings (Loss) and Shares
    
    
    52,070
    
    
    $
    15,591
    
    
    
    
    
    
    $
    (3,001
    )
    
    
    
    
    
    $
    12,590Effect of Participating Securities:Unvested Restricted Stock and Stock Units
    
    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )Basic Earnings (Loss) Per Share
    
    
    52,070
    
    
    $
    15,437
    
    
    $
    0.30
    
    
    $
    (3,001
    )
    
    $
    (0.06
    )
    
    $
    12,436
    
    
    $
    0.24Effect of Dilutive Securities:Stock Plans
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted Earnings (Loss) Per Share
    
    
    52,749
    
    
    $
    15,437
    
    
    $
    0.29
    
    
    $
    (3,001
    )
    
    $
    (0.05
    )
    
    $
    12,436
    
    
    $
    0.24
  18




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Contingencies
 Legal and Other Proceedings:
      Guarantees and Indemnification Obligations:
  19




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Fair Value Measurements
        20




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Fair Value at Reporting Date Using:SignificantQuoted Prices in
    
    
    Other
    
    
    SignificantActive Markets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    Inputs(dollars in millions)
    
    Total
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash Flow Swaps (1)
    
    $
    36.3
    
    
    
    
    
    
    $
    36.3
    
    
    
    Total
    
    $
    36.3
    
    
    $
    
    
    
    $
    36.3
    
    
    $
    
 (1)
    
     Included in Other Long-Term Liabilities in the accompanying Condensed Consolidated Balance
Sheet.   (dollars in thousands)December 31, 2009
    
    June 30, 2010Fair Value
    
    Carrying Value
    
    Fair Value
    
    Carrying Value9.00% Senior Subordinated Notes (1)
    
    $
    
    
    
    $
    
    
    
    $
    212,100
    
    
    $
    208,6848.625% Senior Subordinated Notes (1)
    
    $
    266,750
    
    
    $
    273,455
    
    
    $
    63,722
    
    
    $
    62,5445.0% Convertible Senior Notes (1)
    
    $
    188,072
    
    
    $
    142,743
    
    
    $
    167,325
    
    
    $
    145,2064.25% Convertible Senior Subordinated Notes (1)
    
    $
    16,363
    
    
    $
    16,423
    
    
    $
    16,000
    
    
    $
    15,726Mortgage Notes (2)
    
    $
    78,333
    
    
    $
    78,424
    
    
    $
    77,175
    
    
    $
    77,270Notes Payable to a Finance Company (2)
    
    $
    17,859
    
    
    $
    20,260
    
    
    $
    16,783
    
    
    $
    18,850
 (1)
    
    As determined by market quotations as of June 30, 2010.(2)
    
    As determined by discounted cash flows. Subsequent Events
  21




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
     22




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Percentage of New Vehicle Revenue
    
    Percentage of New Vehicle RevenueSecond Quarter Ended June 30,
    
    Six Months Ended June 30,2009
    
    2010
    
    2009
    
    2010Brand (1)BMW
    
    
    16.7
    %
    
    
    16.2
    %
    
    
    17.4
    %
    
    
    16.1
    %Honda
    
    
    15.8
    %
    
    
    15.1
    %
    
    
    15.3
    %
    
    
    14.7
    %Toyota
    
    
    11.1
    %
    
    
    11.0
    %
    
    
    11.0
    %
    
    
    11.0
    %Mercedes
    
    
    8.4
    %
    
    
    9.6
    %
    
    
    9.5
    %
    
    
    10.1
    %Ford
    
    
    10.7
    %
    
    
    8.7
    %
    
    
    10.3
    %
    
    
    8.8
    %General Motors (2)
    
    
    7.6
    %
    
    
    7.3
    %
    
    
    7.2
    %
    
    
    7.1
    %Lexus
    
    
    5.6
    %
    
    
    5.8
    %
    
    
    5.6
    %
    
    
    6.1
    %Cadillac
    
    
    3.7
    %
    
    
    4.9
    %
    
    
    4.2
    %
    
    
    5.1
    %Other (3)
    
    
    4.0
    %
    
    
    3.5
    %
    
    
    4.0
    %
    
    
    3.4
    %Audi
    
    
    2.8
    %
    
    
    3.0
    %
    
    
    2.6
    %
    
    
    3.0
    %Volkswagen
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    2.2
    %
    
    
    2.3
    %Hyundai
    
    
    1.9
    %
    
    
    2.2
    %
    
    
    1.9
    %
    
    
    2.1
    %Land Rover
    
    
    1.6
    %
    
    
    2.1
    %
    
    
    1.6
    %
    
    
    2.0
    %Porsche
    
    
    1.6
    %
    
    
    1.7
    %
    
    
    1.4
    %
    
    
    1.7
    %Infiniti
    
    
    1.2
    %
    
    
    1.4
    %
    
    
    1.2
    %
    
    
    1.4
    %Nissan
    
    
    0.8
    %
    
    
    1.3
    %
    
    
    0.8
    %
    
    
    1.4
    %Volvo
    
    
    1.5
    %
    
    
    1.3
    %
    
    
    1.2
    %
    
    
    1.3
    %Other Luxury (4)
    
    
    1.2
    %
    
    
    1.0
    %
    
    
    1.1
    %
    
    
    1.0
    %Acura
    
    
    0.7
    %
    
    
    0.9
    %
    
    
    0.8
    %
    
    
    0.9
    %Chrysler (5)
    
    
    0.6
    %
    
    
    0.5
    %
    
    
    0.7
    %
    
    
    0.5
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 (1)
    
    In accordance with the provisions of Presentation of Financial Statements in the
Accounting Standards Codification (the ASC), prior years income statement data reflect
reclassifications to exclude franchises sold, identified for sale, or terminated subsequent to
June 30, 2009 which had not been previously included in discontinued operations, or include
previously held for sale franchises which subsequently were reclassified to held and used. See
Notes 1 and 2 to our accompanying unaudited Consolidated Financial Statements which discuss these
and other factors that affect the comparability of the information for the periods presented.(2)
    
    Includes Buick, GMC and Chevrolet.(3)
    
    Includes KIA, Mini, Scion and Subaru.(4)
    
    Includes Hummer, Jaguar and Saab.(5)
    
    Includes Chrysler, Dodge and Jeep. Results of Operations
  New Vehicles
  23




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 SAAR (in millions of vehicles)2009
    
    2010
    
    % ChangeSecond Quarter Ended June 30,
    
    
    9.6
    
    
    
    11.3
    
    
    
    17.7
    %Six Months Ended June 30,
    
    
    9.6
    
    
    
    11.2
    
    
    
    16.7
    %
  Second Quarter Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    772,296
    
    
    $
    902,452
    
    
    $
    130,156
    
    
    
    16.9
    %Gross profit
    
    $
    52,223
    
    
    $
    61,121
    
    
    $
    8,898
    
    
    
    17.0
    %Unit sales
    
    
    24,146
    
    
    
    27,126
    
    
    
    2,980
    
    
    
    12.3
    %Revenue per Unit
    
    $
    31,984
    
    
    $
    33,269
    
    
    $
    1,285
    
    
    
    4.0
    %Gross profit per unit
    
    $
    2,163
    
    
    $
    2,253
    
    
    $
    90
    
    
    
    4.2
    %Gross profit as a % of revenue
    
    
    6.8
    %
    
    
    6.8
    %
    
    
    bps
 Six Months Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    1,477,819
    
    
    $
    1,687,050
    
    
    $
    209,231
    
    
    
    14.2
    %Gross profit
    
    $
    99,063
    
    
    $
    115,620
    
    
    $
    16,557
    
    
    
    16.7
    %Unit sales
    
    
    45,995
    
    
    
    50,462
    
    
    
    4,467
    
    
    
    9.7
    %Revenue per Unit
    
    $
    32,130
    
    
    $
    33,432
    
    
    $
    1,302
    
    
    
    4.1
    %Gross profit per unit
    
    $
    2,154
    
    
    $
    2,291
    
    
    $
    137
    
    
    
    6.4
    %Gross profit as a % of revenue
    
    
    6.7
    %
    
    
    6.9
    %
    
    20
    bps
     24




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
     Used Vehicles
  Second Quarter Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    382,091
    
    
    $
    470,365
    
    
    $
    88,274
    
    
    
    23.1
    %Gross profit
    
    $
    31,081
    
    
    $
    36,432
    
    
    $
    5,351
    
    
    
    17.2
    %Unit sales
    
    
    20,568
    
    
    
    24,624
    
    
    
    4,056
    
    
    
    19.7
    %Revenue per Unit
    
    $
    18,577
    
    
    $
    19,102
    
    
    $
    525
    
    
    
    2.8
    %Gross profit per unit
    
    $
    1,511
    
    
    $
    1,480
    
    
    $
    (31
    )
    
    
    (2.1
    %)Gross profit as a % of revenue
    
    
    8.1
    %
    
    
    7.7
    %
    
    (40
    )
    bpsCPO revenue
    
    $
    196,861
    
    
    $
    222,464
    
    
    $
    25,603
    
    
    
    13.0
    %CPO unit sales
    
    
    7,814
    
    
    
    8,431
    
    
    
    617
    
    
    
    7.9
    %Six Months Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    710,381
    
    
    $
    892,656
    
    
    $
    182,275
    
    
    
    25.7
    %Gross profit
    
    $
    61,846
    
    
    $
    69,850
    
    
    $
    8,004
    
    
    
    12.9
    %Unit sales
    
    
    37,924
    
    
    
    46,326
    
    
    
    8,402
    
    
    
    22.2
    %Revenue per Unit
    
    $
    18,732
    
    
    $
    19,269
    
    
    $
    537
    
    
    
    2.9
    %Gross profit per unit
    
    $
    1,631
    
    
    $
    1,508
    
    
    $
    (123
    )
    
    
    (7.5
    %)Gross profit as a % of revenue
    
    
    8.7
    %
    
    
    7.8
    %
    
    (90
    )
    bpsCPO revenue
    
    $
    383,558
    
    
    $
    428,261
    
    
    $
    44,703
    
    
    
    11.7
    %CPO unit sales
    
    
    15,498
    
    
    
    16,125
    
    
    
    627
    
    
    
    4.0
    %
  25




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Wholesale Vehicles
  Second Quarter Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    33,903
    
    
    $
    30,111
    
    
    $
    (3,792
    )
    
    
    (11.2
    %)Gross profit
    
    $
    (1,242
    )
    
    $
    (1,847
    )
    
    $
    (605
    )
    
    
    (48.7
    %)Unit sales
    
    
    5,313
    
    
    
    5,266
    
    
    
    (47
    )
    
    
    (0.9
    %)Revenue per Unit
    
    $
    6,381
    
    
    $
    5,718
    
    
    $
    (663
    )
    
    
    (10.4
    %)Gross profit per unit
    
    $
    (234
    )
    
    $
    (351
    )
    
    $
    (117
    )
    
    
    (50.0
    %)Gross profit as a % of revenue
    
    
    (3.7
    %)
    
    
    (6.1
    %)
    
    (240
    )
    bpsSix Months Ended June 30,
    
    Better / (Worse)(in thousands except units and per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    71,359
    
    
    $
    61,389
    
    
    $
    (9,970
    )
    
    
    (14.0
    %)Gross profit
    
    $
    (1,307
    )
    
    $
    (2,523
    )
    
    $
    (1,216
    )
    
    
    (93.0
    %)Unit sales
    
    
    11,826
    
    
    
    10,459
    
    
    
    (1,367
    )
    
    
    (11.6
    %)Revenue per Unit
    
    $
    6,034
    
    
    $
    5,870
    
    
    $
    (164
    )
    
    
    (2.7
    %)Gross profit per unit
    
    $
    (111
    )
    
    $
    (241
    )
    
    $
    (130
    )
    
    
    (117.1
    %)Gross profit as a % of revenue
    
    
    (1.8
    %)
    
    
    (4.1
    %)
    
    (230
    )
    bps
  Parts, Service and Collision Repair (Fixed Operations)
  26




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Second Quarter Ended June 30,
    
    
    Better / (Worse)(in thousands)
    
    2009
    
    
    2010
    
    
    Change
    
    
    % ChangeReported:RevenueParts
    
    $
    147,546
    
    
    $
    150,969
    
    
    $
    3,423
    
    
    
    2.3
    %Service
    
    
    114,079
    
    
    
    123,082
    
    
    
    9,003
    
    
    
    7.9
    %Collision Repair
    
    
    12,407
    
    
    
    13,044
    
    
    
    637
    
    
    
    5.1
    %Total
    
    $
    274,032
    
    
    $
    287,095
    
    
    $
    13,063
    
    
    
    4.8
    %Gross profitParts
    
    $
    50,838
    
    
    $
    50,204
    
    
    $
    (634
    )
    
    
    (1.2
    %)Service
    
    
    80,948
    
    
    
    86,125
    
    
    
    5,177
    
    
    
    6.4
    %Collision Repair
    
    
    7,005
    
    
    
    6,997
    
    
    
    (8
    )
    
    
    (0.1
    %)Total
    
    $
    138,791
    
    
    $
    143,326
    
    
    $
    4,535
    
    
    
    3.3
    %Gross profit as a % of revenueParts
    
    
    34.5
    %
    
    
    33.3
    %
    
    (120)
    
    bpsService
    
    
    71.0
    %
    
    
    70.0
    %
    
    (100)
    
    bpsCollision Repair
    
    
    56.5
    %
    
    
    53.6
    %
    
    (290)
    
    bpsTotal
    
    
    50.6
    %
    
    
    49.9
    %
    
    (70)
    
    bpsSix Months Ended June 30,
    
    
    Better / (Worse)(in thousands)
    
    2009
    
    
    2010
    
    
    Change
    
    
    % ChangeReported:RevenueParts
    
    $
    295,837
    
    
    $
    298,846
    
    
    $
    3,009
    
    
    
    1.0
    %Service
    
    
    223,683
    
    
    
    241,327
    
    
    
    17,644
    
    
    
    7.9
    %Collision Repair
    
    
    25,181
    
    
    
    25,509
    
    
    
    328
    
    
    
    1.3
    %Total
    
    $
    544,701
    
    
    $
    565,682
    
    
    $
    20,981
    
    
    
    3.9
    %Gross profitParts
    
    $
    100,427
    
    
    $
    99,682
    
    
    $
    (745
    )
    
    
    (0.7
    %)Service
    
    
    158,435
    
    
    
    169,837
    
    
    
    11,402
    
    
    
    7.2
    %Collision Repair
    
    
    14,208
    
    
    
    13,918
    
    
    
    (290
    )
    
    
    (2.0
    %)Total
    
    $
    273,070
    
    
    $
    283,437
    
    
    $
    10,367
    
    
    
    3.8
    %Gross profit as a % of revenueParts
    
    
    33.9
    %
    
    
    33.4
    %
    
    (50)
    
    bpsService
    
    
    70.8
    %
    
    
    70.4
    %
    
    (40)
    
    bpsCollision Repair
    
    
    56.4
    %
    
    
    54.6
    %
    
    (180)
    
    bpsTotal
    
    
    50.1
    %
    
    
    50.1
    %
    
    0
    
    bps
   27




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Finance, Insurance and Other (F&I)
  Second Quarter Ended June 30,
    
    Better / (Worse)(in thousands except per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    38,847
    
    
    $
    45,985
    
    
    $
    7,138
    
    
    
    18.4
    %Gross profit per retail unit
(excluding fleet)
    
    $
    922
    
    
    $
    929
    
    
    $
    7
    
    
    
    0.8
    %
 Six Months Ended June 30,
    
    Better / (Worse)(in thousands except per unit data)
    
    2009
    
    2010
    
    Change
    
    % ChangeReported:Revenue
    
    $
    74,000
    
    
    $
    86,959
    
    
    $
    12,959
    
    
    
    17.5
    %Gross profit per retail unit
(excluding fleet)
    
    $
    936
    
    
    $
    937
    
    
    $
    1
    
    
    
    0.1
    %
  Selling, General and Administrative Expenses
   28




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Second Quarter Ended June 30,
    
    
    Better / (Worse)(in thousands)
    
    2009
    
    
    2010
    
    
    Change
    
    
    % ChangeReported Expense:Compensation
    
    $
    117,740
    
    
    $
    135,845
    
    
    $
    (18,105
    )
    
    
    (15.4
    %)Advertising
    
    
    11,220
    
    
    
    12,964
    
    
    
    (1,744
    )
    
    
    (15.5
    %)Rent and Rent Related
    
    
    32,132
    
    
    
    32,717
    
    
    
    (585
    )
    
    
    (1.8
    %)Other
    
    
    44,675
    
    
    
    46,846
    
    
    
    (2,171
    )
    
    
    (4.9
    %)Total
    
    $
    205,767
    
    
    $
    228,372
    
    
    $
    (22,605
    )
    
    
    (11.0
    %)SG&A as a % of grossCompensation
    
    
    45.3
    %
    
    
    47.7
    %
    
    (240
    )
    bpsAdvertising
    
    
    4.3
    %
    
    
    4.5
    %
    
    (20
    )
    bpsRent and Rent Related
    
    
    17.3
    %
    
    
    16.5
    %
    
    80
    
    bpsOther
    
    
    12.3
    %
    
    
    11.4
    %
    
    90
    
    bpsTotal
    
    
    79.2
    %
    
    
    80.1
    %
    
    (90
    )
    bpsSix Months Ended  June 30,
    
    
    Better / (Worse)(in thousands)
    
    2009
    
    
    2010
    
    
    Change
    
    
    % ChangeReported Expense:Compensation
    
    $
    232,858
    
    
    $
    266,821
    
    
    $
    (33,963
    )
    
    
    (14.6
    %)Advertising
    
    
    22,115
    
    
    
    24,294
    
    
    
    (2,179
    )
    
    
    (9.9
    %)Rent and Rent Related
    
    
    65,111
    
    
    
    66,328
    
    
    
    (1,217
    )
    
    
    (1.9
    %)Other
    
    
    91,147
    
    
    
    94,422
    
    
    
    (3,275
    )
    
    
    (3.6
    %)Total
    
    $
    411,231
    
    
    $
    451,865
    
    
    $
    (40,634
    )
    
    
    (9.9
    %)SG&A as a % of grossCompensation
    
    
    45.9
    %
    
    
    48.3
    %
    
    (240
    )
    bpsAdvertising
    
    
    4.4
    %
    
    
    4.4
    %
    
    0
    
    bpsRent and Rent Related
    
    
    18.0
    %
    
    
    17.0
    %
    
    100
    
    bpsOther
    
    
    12.9
    %
    
    
    12.0
    %
    
    90
    
    bpsTotal
    
    
    81.2
    %
    
    
    81.7
    %
    
    (50
    )
    bps
     Impairment Charges
  29




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Depreciation and Amortization
  Interest Expense, Floor Plan
   Interest Expense, Other, Net
  Increase / (Decrease) in 
Interest Expense, OtherSecond Quarter Ended
    
    
    Six Months Ended(dollars in millions)
    
    June 30, 2010
    
    
    June 30, 2010Debt balances  Decrease in debt balances
    
    $
    (1.1
    )
    
    $
    (1.9
    )Other factors  Increase in capitalized interest
    
    
    (0.3
    )
    
    
    (0.1
    ) Decrease in interest expense related to variable to
fixed rate swaps
    
    
    (0.5
    )
    
    
    (1.0
    ) Lower deferred loan cost amortization
    
    
    (6.4
    )
    
    
    (6.0
    ) Lower interest allocation to discontinued operations
    
    
    0.4
    
    
    
    1.2 Other
    
    
    0.4
    
    
    
    0.7$
    (7.5
    )
    
    $
    (7.1
    )
  Interest Expense, Non-Cash, Convertible Debt
  30




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Interest Expense, Non-Cash, Cash Flow Swaps
   Other Income / (Expense)
  Income Taxes
  31




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
  Discontinued Operations
  (dollars in thousands)Second Quarter Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Loss from operations
    
    $
    (2,000
    )
    
    $
    (1,020
    )
    
    $
    (3,341
    )
    
    $
    (3,178
    )Gain (loss) on disposal of franchises
    
    
    (388
    )
    
    
    1,082
    
    
    
    (469
    )
    
    
    1,353Lease exit charges
    
    
    (800
    )
    
    
    (1,077
    )
    
    
    (1,795
    )
    
    
    (2,722
    )Property impairment charges
    
    
    (1,692
    )
    
    
    
    
    
    
    (1,822
    )
    
    
    Goodwill impairment charges
    
    
    (187
    )
    
    
    
    
    
    
    (1,586
    )
    
    
    Pre-tax loss
    
    $
    (5,067
    )
    
    $
    (1,015
    )
    
    $
    (9,013
    )
    
    $
    (4,547
    )Total Revenues
    
    $
    68,715
    
    
    $
    6,399
    
    
    $
    142,416
    
    
    $
    17,609
  Liquidity and Capital Resources
   Floor Plan Facilities
   32




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##### Table of Contents



SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Long-Term Debt and Credit Facilities
  Dealership Dispositions
  Capital Expenditures
  Stock Repurchase Program
  Dividends
  Cash Flows
   33




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
   Guarantees and Indemnification Obligations
  Future Liquidity Outlook
   Off-Balance Sheet Arrangements
  Seasonality
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 3: Quantitative and Qualitative Disclosures About Market Risk.
 Interest Rate Risk
    Notional Amount
    
    Pay Rate
    
    Receive Rate (1)
    
    Maturing Date(in millions)$
    200.0
    
    
    
    4.935
    %
    
    one-month LIBOR
    
    May 1, 2012$
    100.0
    
    
    
    5.265
    %
    
    one-month LIBOR
    
    June 1, 2012$
    3.7
    
    
    
    7.100
    %
    
    one-month LIBOR
    
    July 10, 2017$
    25.0
    (2)
    
    
    5.160
    %
    
    one-month LIBOR
    
    September 1, 2012$
    15.0
    (2)
    
    
    4.965
    %
    
    one-month LIBOR
    
    September 1, 2012$
    25.0
    (2)
    
    
    4.885
    %
    
    one-month LIBOR
    
    October 1, 2012$
    11.6
    
    
    
    4.655
    %
    
    one-month LIBOR
    
    December 10, 2017$
    8.8
    
    
    
    6.860
    %
    
    one-month LIBOR
    
    August 1, 2017$
    7.1
    
    
    
    4.330
    %
    
    one-month LIBOR
    
    July 1, 2013$
    100.0
    (3)
    
    
    3.280
    %
    
    one-month LIBOR
    
    July 1, 2015$
    100.0
    (3)
    
    
    3.300
    %
    
    one-month LIBOR
    
    July 1, 2015
 (1
    )
    
    One-month LIBOR was 0.348% at June 30, 2010.(2
    )
    
    After December 31, 2009 changes in fair value are recorded through earnings.(3
    )
    
    The effective date of these forward-starting swaps is July 2, 2012.
 Foreign Currency Risk
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 4: Controls and Procedures.
  36




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 PART II  OTHER INFORMATION
 
 Item 1: Legal Proceedings.
      37




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
RISK FACTORS
 
 Item 1A: Risk Factors
  Our significant indebtedness could materially adversely affect our financial health, limit our
ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our
financial obligations.
  
    
    $800.0 million under the secured new and used inventory floor plan facilities that is
classified as current, including $1.4 million classified as liabilities associated with
assets held for sale;
    
    $208.7 million in 9.0% Senior Subordinated Notes due 2018 (the 9.0% Notes),
representing $210.0 million in aggregate principal amount outstanding less unamortized
discount of approximately $1.3 million;
    
    $145.2 million in 5.0% Convertible Senior Notes due 2029 which are redeemable by us
and putable by the holders after October 1, 2014 (the 5.0% Convertible Notes),
representing $172.5 million in aggregate principal amount outstanding less unamortized
discount of approximately $27.3 million;
    
    $15.7 million in 4.25% Convertible Senior Subordinated Notes due 2015 (the 4.25%
Convertible Notes), representing $16.0 million in aggregate principal amount outstanding
less unamortized discount of approximately $0.3 million, all of which is classified as
current;
    
    $62.5 million in 8.625% Senior Subordinated Notes due 2013 (the 8.625% Notes),
representing $62.9 million in aggregate principal amount outstanding less unamortized net
discount of approximately $0.4 million;
    
    $116.4 million of mortgage notes, representing $116.2 million in aggregate principal
amount plus unamortized premium of approximately $0.2 million, due from June 2013 to
December 2029, with a weighted average interest rate of 5.1%; and
    
    $25.1 million of other secured debt, representing $22.9 million in aggregate
principal amount plus unamortized premium of approximately $2.2 million.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Repurchases of Equity Securities
  ( in thousands, except price per share amounts)Total Number of
    
    Approximate DollarShares Purchased
    
    Value of Shares ThatAverage
    
    as Part of Publicly
    
    May Yet Be PurchasedTotal Number of
    
    Price Paid
    
    Announced Plans or
    
    Under the Plans orShares Purchased (1)
    
    per Share
    
    Programs (2)
    
    ProgramsApril 2010
    
    
    22
    
    
    $
    12.12
    
    
    
    22
    
    
    $
    43,575May 2010
    
    
    0
    
    
    $
    
    
    
    
    0
    
    
    $
    43,575June 2010
    
    
    0
    
    
    $
    
    
    
    
    0
    
    
    $
    43,575Total
    
    
    22
    
    
    $
    12.12
    
    
    
    22
    
    
    $
    43,575
 (1
    )
    
    Shares repurchased were a result of the delivery of shares by or withholding of shares from
employees, including officers, and directors in satisfaction of withholding tax obligations upon
vesting of restricted stock and restricted stock units and the exercise price of stock options.(2
    )
    
    Our publicly announced Class A Common Stock repurchase authorizations occurred as follows:
 ( in thousands)November 1999
    
    $
    25,000February 2000
    
    
    25,000December 2000
    
    
    25,000May 2001
    
    
    25,000August 2002
    
    
    25,000February 2003
    
    
    20,000December 2003
    
    
    20,000July 2004
    
    
    20,000July 2007
    
    
    30,000October 2007
    
    
    40,000April 2008
    
    
    40,000Total
    
    $
    295,000
  39




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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 Item 6: Exhibits.
 (a) Exhibits:
 Exhibit No.
    
    Description31.1
    
    Certification of Mr. David P. Cosper pursuant to rule 13a-14(a)31.2
    
    Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a)32.1
    
    Certification of Mr. David P. Cosper pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 Forward Looking Statements
  
    
    future acquisitions or dispositions;
    
    industry trends;
    
    future liquidity trends or needs;
    
    general economic trends, including employment rates and consumer confidence levels;
    
    vehicle sales rates and same store sales growth;
    
    future covenant compliance;
    
    our financing plans and our ability to repay or refinance existing debt when due; and
    
    our business and growth strategies.
  
    
    the number of new and used cars sold in the United States generally, and as compared
to our expectations and the expectations of the market;
    
    our ability to generate sufficient cash flows or obtain additional financing to
refinance existing debt and to fund acquisitions, capital expenditures, our share
repurchase program, dividends on our Common Stock and general operating activities;
    
    the reputation and financial condition of vehicle manufacturers whose brands we
represent, the terms of any bailout of any such manufacturer by the U.S. government or
other government and the success or failure of such a bailout, the financial incentives
vehicle manufacturers offer and their ability to design, manufacture, deliver and market
their vehicles successfully;
    
    our relationships with manufacturers, which may affect our ability to complete
additional acquisitions;
    
    adverse resolutions of one or more significant legal proceedings against us or our
dealerships;
    
    changes in laws and regulations governing the operation of automobile franchises,
accounting standards, taxation requirements, and environmental laws;
    
    general economic conditions in the markets in which we operate, including
fluctuations in interest rates, employment levels, the level of consumer spending and
consumer credit availability;
    
    the terms of any refinancing of our existing indebtedness;
    
    high competition in the automotive retailing industry, which not only creates pricing
pressures on the products and services we offer, but on businesses we seek to acquire;
    
    the timing of and our ability to generate liquidity through asset dispositions, as
well as the timing of our ability to successfully integrate recent and potential future
acquisitions; and
    
    the rate and timing of overall economic recovery or additional decline.
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
 SIGNATURES
  SONIC AUTOMOTIVE, INC.Date: July 29, 2010
    
    By:
    
    /s/ O. BRUTON SMITHO. Bruton SmithChairman and Chief Executive OfficerDate: July 29, 2010
    
    By:
    
    /s/ DAVID P. COSPERDavid P. CosperVice Chairman and Chief Financial Officer(Principal Financial Officer)
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SONIC AUTOMOTIVE, INC. AND SUBSIDIARIES
 
  Exhibit No.
    
    Description31.1
    
    Certification of Mr. David P. Cosper pursuant to rule 13a-14(a)31.2
    
    Certification of Mr. O. Bruton Smith pursuant to rule 13a-14(a)32.1
    
    Certification of Mr. David P. Cosper pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    Certification of Mr. O. Bruton Smith pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 43