Sonic Automotive
Annual Report 2017

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K ☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2017or☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 1-13395 SONIC AUTOMOTIVE, INC.(Exact name of registrant as specified in its charter) Delaware 56-2010790(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.) 4401 Colwick Road Charlotte, North Carolina 28211(Address of principal executive offices) (Zip Code) Registrant’s telephone number, including area code: (704) 566-2400 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registeredClass A common stock, $0.01 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ NoIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files). ☒ Yes ☐ NoIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Large accelerated filer ☒Accelerated filer ☐Non-accelerated filer ☐ (Do not check if a smaller reporting company)Smaller reporting company ☐Emerging growth company ☐If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ NoThe aggregate market value of the voting common stock held by non-affiliates of the registrant was approximately $592.7 million based upon the closing sales price of theregistrant’s Class A common stock on June 30, 2017 of $19.45 per share.As of February 27, 2018, there were 30,384,481 shares of Class A common stock, par value $0.01 per share, and 12,029,375 shares of Class B common stock, par value $0.01 pershare, outstanding.Documents incorporated by reference. Portions of the registrant’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders to be held April 25, 2018 areincorporated by reference into Part III of this Form 10-K.  UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION This Annual Report on Form 10-K contains, and written or oral statements made from time to time by us or by our authorized officers may contain,“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address ourfuture objectives, plans and goals, as well as our intent, beliefs and current expectations regarding future operating performance, results and events, and cangenerally be identified by words such as “may,” “will,” “should,” “believe,” “expect,” “estimate,” “anticipate,” “intend,” “plan,” “foresee” and other similarwords or phrases.These forward-looking statements are based on our current estimates and assumptions and involve various risks and uncertainties. As a result, you arecautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projectedin these forward-looking statements. Factors which may cause actual results to differ materially from our projections include those risks described in “Item1A. Risk Factors” of this Annual Report on Form 10-K and elsewhere in this report, as well as: •the number of new and used vehicles sold in the United States as compared to our expectations and the expectations of the market; •our ability to generate sufficient cash flows or obtain additional financing to fund our pre-owned expansion, our One Sonic-One Experienceinitiative, capital expenditures, our share repurchase program, dividends on our common stock, acquisitions and general operating activities; •our business and growth strategies, including, but not limited to, our stand-alone pre-owned store initiative and our One Sonic-One Experienceinitiative; •the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives vehicle manufacturers offerand their ability to design, manufacture, deliver and market their vehicles successfully; •our relationships with manufacturers, which may affect our ability to obtain desirable new vehicle models in inventory or complete additionalacquisitions; •the adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or pre-owned stores; •changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements andenvironmental laws; •general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level ofconsumer spending and consumer credit availability; •high competition in the automotive retailing industry, which not only creates pricing pressures on the products and services we offer, but alsoon businesses we may seek to acquire; •our ability to successfully integrate potential future acquisitions; and •the rate and timing of overall economic recovery or decline.These forward-looking statements speak only as of the date of this report or when made, and we undertake no obligation to revise or update thesestatements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules and regulations of the Securitiesand Exchange Commission.  SONIC AUTOMOTIVE, INC. ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2017TABLE OF CONTENTS PAGEPART I Item 1. Business 1Item 1A. Risk Factors 9Item 1B. Unresolved Staff Comments 23Item 2. Properties 23Item 3. Legal Proceedings 23Item 4. Mine Safety Disclosures 23PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24Item 6. Selected Financial Data 26Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27Item 7A. Quantitative and Qualitative Disclosures About Market Risk 81Item 8. Financial Statements and Supplementary Data 82Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 82Item 9A. Controls and Procedures 82Item 9B. Other Information 83PART III Item 10. Directors, Executive Officers and Corporate Governance 84Item 11. Executive Compensation 84Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 84Item 13. Certain Relationships and Related Transactions, and Director Independence 84Item 14. Principal Accountant Fees and Services 84PART IV Item 15. Exhibits and Financial Statement Schedules 85Item 16. Form 10-K Summary 90SIGNATURES 91CONSOLIDATED FINANCIAL STATEMENTS F-1 SONIC AUTOMOTIVE, INC. PART I Item 1. Business.Sonic Automotive, Inc. was incorporated in Delaware in 1997. We are one of the largest automotive retailers in the United States (as measured by totalrevenue). As of December 31, 2017, we operated 114 new vehicle franchises in 13 states (representing 23 different brands of cars and light trucks), 18collision repair centers and nine pre-owned vehicle stores. As a result of the way we manage our business, we had two operating segments as of December 31,2017: (1) the Franchised Dealerships Segment and (2) the Pre-Owned Stores Segment. For management and operational reporting purposes, we group certainfranchises together that share management and inventory (principally used vehicles) into “stores.” As of December 31, 2017, we operated 103 stores in theFranchised Dealerships Segment and nine stores in the Pre-Owned Stores Segment.The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales ofreplacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “FixedOperations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “F&I”) for ourcustomers. The Pre-Owned Stores Segment provides the same services (excluding new vehicle sales and manufacturer warranty repairs) in stand-alone pre-owned vehicle specialty retail locations and includes our EchoPark stores. Our pre-owned stores business operates independently from our franchiseddealerships business. Sales operations in our first EchoPark market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2017, we hadsix EchoPark stores in operation in Colorado and one in Texas, as well as two pre-owned stores in Florida and Texas operating under other names. By the endof 2018, we expect to open additional EchoPark stores in North Carolina and Texas. We believe that the expansion of our pre-owned stores business willprovide long-term benefits to our Company, our stockholders and our guests. However, in the short term, this strategic initiative may negatively impact ouroverall operating results as we allocate management and capital resources to this business.References to “Sonic,” the “Company,” “we,” “us,” and “our” used throughout this Annual Report on Form 10-K refer to Sonic Automotive, Inc. andits subsidiaries.The following charts depict the multiple sources of continuing operations revenue and gross profit for the year ended December 31, 2017 (“2017”): 1 SONIC AUTOMOTIVE, INC. As of December 31, 2017, we operated in the following states: Market Number ofFranchised Stores Number ofPre-Owned Stores Percent of2017 TotalRevenue California 25 - 29.8%Texas 21 2 25.9%Tennessee 12 - 7.2%Colorado 4 6 6.4%Florida 10 1 6.3%Alabama 10 - 5.2%North Carolina 4 - 3.3%Ohio 5 - 2.9%Georgia 3 - 2.7%Virginia 2 - 2.7%Maryland 2 - 2.7%Nevada 3 - 2.0%South Carolina 2 - 1.5%Disposed franchises and holding companies - - 1.4%Total 103 9 100.0% In the future, we may purchase dealerships and open new stores that we believe will enrich our portfolio and divest dealerships or close stores that webelieve will not yield acceptable returns over the long term. The automotive retailing industry remains highly fragmented, and we believe that furtherconsolidation may occur. We believe that attractive acquisition opportunities continue to exist for dealership groups with the capital and experience toidentify, acquire and professionally manage dealerships. Our ability to complete acquisitions and open new stores in the future will depend on many factors,including the availability of financing and the existence of any contractual provisions that may restrict our acquisition activity.See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for adiscussion of our plans for the use of capital generated from operations.Operating SegmentsAs of December 31, 2017, we had two operating segments: (1) the Franchised Dealerships Segment and (2) the Pre-Owned Stores Segment. TheFranchised Dealerships Segment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts,perform vehicle repair and maintenance services, and arrange finance and insurance products. The Pre-Owned Stores Segment is comprised of stand-alone pre-owned vehicle specialty retail locations that provide customers an opportunity to search, buy, service, finance and sell pre-owned vehicles.For 2017, Pre-Owned Stores Segment revenue represented approximately 2.6% of total revenue. See Note 14, “Segment Information,” to theaccompanying consolidated financial statements for additional financial information regarding our two operating segments.Unless otherwise noted, the following discussion of our business is presented on a consolidated basis.Business StrategyExecute our Stand-Alone Pre-Owned Store Initiative. We have augmented our manufacturer-franchised dealership operations with our stand-alonepre-owned vehicle specialty retail locations, which includes our EchoPark stores. Our pre-owned stores business operates independently from our franchiseddealerships business. Sales operations for our stand-alone pre-owned store initiative began in Denver, Colorado in the fourth quarter of 2014. As of December31, 2017, we had six EchoPark stores in operation in Colorado and one in Texas, as well as two pre-owned stores in Florida and Texas operating under othernames. We expect to open additional EchoPark stores in North Carolina and Texas during 2018.Execute our Customer Experience Initiative. Our One Sonic-One Experience (“OSOE”) initiative includes several new processes and proprietarytechnologies from inventory management, electronic desking and pricing tools to a fully developed “customer-centric” Customer Relationship Managementtool. We believe that the development of these processes and technologies will allow us to better serve our customers across our entire platform of stores. Ourgoal is to allow our guests to control the buying2 SONIC AUTOMOTIVE, INC. process and move at their pace so that once the vehicle has been selected our team can utilize these processes and technologies to allow our guests tocomplete a new or pre-owned vehicle sales transaction in less than an hour. During the latter half of 2014 and throughout 2015, we rolled out the OSOEinitiative at our dealerships in Charlotte, North Carolina. In 2016, we introduced the technology component of the initiative to 14 additional stores in ourAlabama, California and Tennessee markets. In the first half of 2017, we launched OSOE at our BMW dealership in Greenville, South Carolina and our Audiand Honda dealerships in Pensacola, Florida. We do not currently plan to expand the OSOE rollout to additional existing stores until the model has maturedand proven it can provide the required financial returns.Achieve High Levels of Customer Satisfaction. We focus on maintaining high levels of customer satisfaction. Our personalized sales process isdesigned to satisfy customers by providing high-quality vehicles and service in a positive, “consumer friendly” buying environment. Several manufacturersoffer specific financial incentives on a per vehicle basis if certain Customer Satisfaction Index (“CSI”) levels (which vary by manufacturer) are achieved by adealership. In addition, all manufacturers consider CSI scores in approving acquisitions or awarding new dealership open points. To keep dealership andexecutive management focused on customer satisfaction, we include CSI results as a component of our incentive-based compensation programs for certaingroups of associates.Invest in Dealership Properties. Historically, we have operated our dealerships primarily on property financed through long-term operating leases. Asthese leases mature, or as we have an opportunity to purchase the underlying real estate prior to renewal, we take actions to own more of our dealershipproperties when the effect is financially or operationally favorable to us. We remain opportunistic in purchasing existing properties or relocating dealershipoperations to owned real estate where the returns are favorable. We believe owning our properties will, over the long term, strengthen our balance sheet andreduce our overall cost of operating and financing our facilities.Improve Capital Structure. As we generate cash through operations, we may continue to opportunistically repurchase our Class A common stock inopen-market or structured transactions.Maximize Asset Returns Through Process Execution. We have developed standardized operating processes that are documented in operatingplaybooks for our dealerships. Through the continued implementation of our operating playbooks, we believe organic growth opportunities exist by offeringa more favorable buying experience to our customers and creating efficiencies in our business processes. We believe the development, refinement andimplementation of these operating processes will enhance the customer experience, make us more competitive in the markets we serve and drive profit growthacross each of our revenue streams.Maintain Diverse Revenue Streams. We have multiple revenue streams. In addition to new vehicle sales, our revenue sources include used vehiclesales, which we believe are less sensitive to economic cycles and seasonal influences that exist with new vehicle sales. Our Fixed Operations sales carry ahigher gross margin than new and used vehicle sales and, in the past, have not been as economically sensitive as new vehicle sales. We also offer customersassistance in obtaining financing and a range of automobile related warranty, aftermarket and insurance products.Manage Portfolio. Our long-term growth and acquisition strategy is focused on large metropolitan markets, predominantly in the Southeast, Texasand California. We seek to add like-branded dealerships to our portfolio that exist in regions in which we already operate; however, we may look outside ofour existing geographic footprint when considering the location of new EchoPark stores. A majority of our franchised dealerships are either luxury or mid-line import brands. For 2017, approximately 88.8% of our total new vehicle revenue was generated by luxury and mid-line import dealerships, which usuallyhave higher operating margins, more stable Fixed Operations departments, lower associate turnover and lower inventory levels.3 SONIC AUTOMOTIVE, INC. The following table depicts the breakdown of our new vehicle revenues from continuing operations by brand: Percentage of New Vehicle Revenues Year Ended December 31, Brand 2017 2016 2015 Luxury: BMW 19.6% 20.2% 21.7%Mercedes 10.7% 10.6% 9.7%Audi 6.0% 5.3% 4.8%Lexus 5.8% 5.9% 5.6%Land Rover 3.2% 3.3% 4.0%Cadillac 2.7% 3.3% 3.2%Porsche 2.4% 2.3% 2.5%MINI 1.3% 1.6% 1.9%Other luxury (1) 2.9% 3.0% 3.1%Total Luxury 54.6% 55.5% 56.5%Mid-line Import: Honda 17.3% 16.8% 15.5%Toyota 11.9% 11.4% 11.1%Volkswagen 1.8% 1.5% 1.7%Hyundai 1.5% 1.2% 1.4%Other imports (2) 1.7% 1.7% 1.6%Total Mid-line Import 34.2% 32.6% 31.3%Domestic: Ford 6.8% 6.8% 6.8%General Motors (3) 4.4% 5.1% 5.4%Total Domestic 11.2% 11.9% 12.2% Total 100.0% 100.0% 100.0% (1)Includes Acura, Infiniti, Jaguar, Smart and Volvo.(2)Includes Kia, Nissan, Scion and Subaru.(3)Includes Buick, Chevrolet and GMC.Expand our eCommerce Capabilities. Automotive customers have become increasingly more comfortable using technology to research their vehiclebuying alternatives and communicate with dealership personnel. The internet presents a marketing, advertising and automotive sales channel that we willcontinue to utilize to drive value for our dealerships and enhance the customer experience. Our technology platforms give us the ability to leveragetechnology to efficiently integrate systems, customize our dealership websites and use our data to improve the effectiveness of our advertising andinteraction with our customers. These platforms also allow us to market all of our products and services to a national audience and, at the same time, supportthe local market penetration of our individual dealerships.Train, Develop and Retain Associates. We believe our associates are the cornerstone of our business and crucial to our financial success. Our goal is todevelop our associates and foster an environment where our associates can contribute and grow with the Company. Associate satisfaction is very important tous, and we believe a high level of associate satisfaction reduces associate turnover and enhances our customers’ experience at our dealerships by pairing ourcustomers with well-trained associates. We believe that our comprehensive training of all employees provides us with a competitive advantage over otherdealership groups.Increase Sales of Higher-Margin Products and Services. We continue to pursue opportunities to increase our sales of higher-margin products andservices by expanding the following:Finance, Insurance and Other Aftermarket Products. Each sale of a new or used vehicle gives us an opportunity to provide our customers withfinancing and insurance options and earn financing fees and insurance commissions. We also offer our customers the opportunity to purchase extendedwarranties, service contracts and other aftermarket products. We currently offer a wide range of non-recourse financing, leasing, other aftermarket products,extended warranties, service contracts and insurance products to our4 SONIC AUTOMOTIVE, INC. customers. We emphasize menu-selling techniques and other best practices to increase our sales of F&I products at our franchised dealerships and pre-ownedstores.Parts, Service and Collision Repair. Each of our franchised dealerships offers a fully integrated service and parts department. Manufacturers permitwarranty work to be performed only at franchised dealerships such as ours. As a result, our franchised dealerships are uniquely qualified and positioned toperform work covered by manufacturer warranties on increasingly complex vehicles. We believe we can continue to grow our profitable parts and servicebusiness over the long term by increasing service capacity, investing in sophisticated equipment and well-trained technicians, using variable rate pricingstructures, focusing on customer service and efficiently managing our parts inventory. In addition, we believe our emphasis on selling extended servicecontracts associated with new and used vehicle retail sales will drive further service and parts business in our dealerships as we increase the potential to retaincurrent customers beyond the term of the standard manufacturer warranty period.Certified Pre-Owned Vehicles. Various manufacturers provide franchised dealers the opportunity to sell certified pre-owned (“CPO”) vehicles. Thiscertification process extends the standard manufacturer warranty on the CPO vehicle, which we believe increases our potential to retain the pre-ownedpurchaser as a future parts and service customer. As CPO vehicles can only be sold by franchised dealerships and CPO warranty work can only be performedat franchised dealerships, we believe CPO vehicles add additional sales volume and will increase our Fixed Operations business. Relationships with ManufacturersEach of our dealerships operates under a separate franchise or dealer agreement that governs the relationship between the dealership and themanufacturer. Each franchise or dealer agreement specifies the location of the dealership for the sale of vehicles and for the performance of certain approvedservices in a specified market area. The designation of such areas generally does not guarantee exclusivity within a specified territory. In addition, mostmanufacturers allocate vehicles on a “turn and earn” basis that rewards high unit sales volume. A franchise or dealer agreement incentivizes the dealer to meetspecified standards regarding showrooms, facilities and equipment for servicing vehicles, inventories, minimum net working capital, personnel training andother aspects of the business. Each franchise or dealer agreement also gives the related manufacturer the right to approve the dealer operator and any materialchange in management or ownership of the dealership. Each manufacturer may terminate a franchise or dealer agreement under certain circumstances, such asa change in control of the dealership without manufacturer approval, the impairment of the reputation or financial condition of the dealership, the death,removal or withdrawal of the dealer operator, the conviction of the dealership or the dealership’s owner or dealer operator of certain crimes, the failure toadequately operate the dealership or maintain new vehicle financing arrangements, insolvency or bankruptcy of the dealership or a material breach of otherprovisions of the applicable franchise or dealer agreement.Many automobile manufacturers have developed and implemented policies regarding public ownership of dealerships, which include the ability toforce the sale of their respective franchises: •upon a change in control of our Company or a material change in the composition of our Board of Directors; •if an automobile manufacturer or distributor acquires more than 5% of the voting power of our securities; or •if an individual or entity (other than an automobile manufacturer or distributor) acquires more than 20% of the voting power of our securities,and the manufacturer disapproves of such individual’s or entity’s ownership interest.To the extent that new or amended manufacturer policies restrict the number of dealerships that may be owned by a dealership group or thetransferability of our common stock, such policies could have a material adverse effect on us. We believe that we will be able to renew at expiration all of ourexisting franchise and dealer agreements.Many states have placed limitations upon manufacturers’ and distributors’ ability to sell new motor vehicles directly to customers in their respectivestates in an effort to protect dealers from practices they believe constitute unfair competition. In general, these statutes make it unlawful for a manufacturer ordistributor to compete with a new motor vehicle dealer in the same brand operating under an agreement or franchise from the manufacturer or distributor inthe relevant market area. Certain states, including Florida, Georgia, North Carolina, South Carolina and Virginia, limit the amount of time that a manufactureror distributor may temporarily operate a dealership. These statutes have been increasingly challenged by new entrants into the automotive industry and, tothe extent that these statutes are repealed or weakened, such changes could have a material adverse effect on our business. In addition, all of the states in which our dealerships currently do business require manufacturers or distributors to show “good cause” for terminatingor failing to renew a dealer’s franchise or dealer agreement. Further, each of these states provides some method for dealers to challenge manufacturer attemptsto establish dealerships of the same brand in their relevant market area.5 SONIC AUTOMOTIVE, INC. CompetitionThe retail automotive industry is highly competitive. Depending on the geographic market, we compete both with dealers offering the same brandsand product lines as ours and dealers offering other manufacturers’ vehicles. We also compete for vehicle sales with auto brokers, leasing companies andservices offered on the internet that provide customer referrals to other dealerships or who broker vehicle sales between customers and other dealerships. Wecompete with small, local dealerships and with large multi-franchise and pre-owned automotive dealership groups.We believe that the principal competitive factors in vehicle sales are the customer experience provided, the location of dealerships, the marketingcampaigns conducted by manufacturers, the ability of dealerships to offer an attractive selection of the most popular vehicles, the quality of services andpricing (including manufacturer rebates and other special offers). In particular, pricing has become more important as a result of well-informed customersusing sources available on the internet to determine current market retail prices. Other competitive factors include customer preference for makes ofautomobiles and coverage under manufacturer warranties.In addition to competition for vehicle sales, we also compete with other auto dealers, service stores, auto parts retailers and independent mechanics inproviding parts and service. We believe that the principal competitive factors in parts and service sales are price, the use of factory-approved replacementparts, factory-trained technicians, the familiarity with a manufacturer’s makes and models and the quality of customer service. A number of regional andnational chains offer selected parts and services at prices that may be lower than our prices.In arranging or providing financing for our customers’ vehicle purchases, we compete with a broad range of financial institutions. In addition,financial institutions are now offering F&I products through the internet. We believe the principal competitive factors in providing financing areconvenience, interest rates and contract terms.Our success depends, in part, on national and regional automobile-buying trends, local and regional economic factors and other regional competitivepressures. Conditions and competitive pressures affecting the markets in which we operate, such as price-cutting by dealers in these areas, or in any newmarkets we enter, could adversely affect us, even though the retail automobile industry as a whole might not be affected.Governmental Regulations and Environmental MattersNumerous federal and state regulations govern our business of marketing, selling, financing and servicing automobiles. We are also subject to lawsand regulations relating to business corporations.Under the laws of the states in which we currently operate, as well as the laws of other states into which we may expand, we must obtain a license inorder to establish, operate or relocate a franchised dealership or pre-owned store or operate an automotive repair service. These laws also regulate our conductof business, including our sales, operating, advertising, financing and employment practices, including federal and state wage-hour, anti-discrimination andother employment practices laws.Our financing activities with customers are subject to federal truth-in-lending, consumer privacy, consumer leasing and equal credit opportunityregulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws. Some states regulatefinance fees that may be paid as a result of vehicle sales.Federal, state and local environmental regulations, including regulations governing air and water quality, the clean-up of contaminated property andthe use, storage, handling, recycling and disposal of gasoline, oil and other materials, also apply to us and our franchised dealership and pre-owned storeproperties.As with automobile dealerships generally, and service, parts and body shop operations in particular, our business involves the use, storage, handlingand contracting for recycling or disposal of hazardous or toxic substances or wastes and other environmentally sensitive materials. Our business also involvesthe past and current operation and/or removal of above ground and underground storage tanks containing such substances, wastes or materials. Accordingly,we are subject to regulation by federal, state and local authorities that establish health and environmental quality standards, provide for liability related tothose standards and provide penalties for violations of those standards. We are also subject to laws, ordinances and regulations governing remediation ofcontamination at facilities we own or operate or to which we send hazardous or toxic substances or wastes and other environmentally sensitive materials fortreatment, recycling or disposal.We do not have any known material environmental liabilities, and we believe that compliance with environmental laws and regulations will not,individually or in the aggregate, have a material adverse effect on our results of operations, financial condition6 SONIC AUTOMOTIVE, INC. and cash flows. However, soil and groundwater contamination is known to exist at certain properties owned and used by us. Further, environmental laws andregulations are complex and subject to frequent change. In addition, in connection with our past or future acquisitions, it is possible that we will assume orbecome subject to new or unforeseen environmental costs or liabilities, some of which may be material.Executive Officers of the RegistrantOur executive officers as of the date of this Annual Report on Form 10-K are as follows: Name Age Position(s) with Sonic O. Bruton Smith 90 Executive Chairman and DirectorB. Scott Smith 50 Chief Executive Officer, President and DirectorDavid Bruton Smith 43 Vice Chairman and DirectorHeath R. Byrd 51 Executive Vice President and Chief Financial OfficerJeff Dyke 50 Executive Vice President of Operations O. Bruton Smith is the Founder of Sonic and has served as Sonic’s Executive Chairman since July 2015. Prior to his appointment as ExecutiveChairman, Mr. Smith had served as Chairman and Chief Executive Officer of the Company since its organization in January 1997. Mr. Smith has also servedas a director of Sonic since its organization in January 1997. Mr. Smith is also a director of many of Sonic’s subsidiaries. Mr. Smith has worked in the retailautomobile industry since 1966. Mr. Smith is also the Executive Chairman and a director of Speedway Motorsports, Inc. (“SMI”), which is controlled by Mr.Smith and his family. SMI is a public company whose shares are traded on the New York Stock Exchange (the “NYSE”). Among other things, SMI owns andoperates the following speedways: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Kentucky Speedway, Las Vegas MotorSpeedway, New Hampshire Motor Speedway, Sonoma Raceway and Texas Motor Speedway. He is also a director of most of SMI’s operating subsidiaries.B. Scott Smith is the Co-Founder of Sonic. He is also Chief Executive Officer, President and a director of Sonic. Prior to his appointment as ChiefExecutive Officer in July 2015, Mr. Smith had served as President and Chief Strategic Officer of Sonic since March 2007. Prior to that, Mr. Smith served asSonic’s Vice Chairman and Chief Strategic Officer from October 2002 to March 2007 and President and Chief Operating Officer from April 1997 toOctober 2002. Mr. Smith has been a director of Sonic since its organization in January 1997. Mr. Smith also serves as a director and executive officer ofmany of Sonic’s subsidiaries. Mr. Smith, who is the son of Mr. O. Bruton Smith and the brother of Mr. David Bruton Smith, has been an executive officer ofTown & Country Ford since 1993, and was a minority owner of both Town & Country Ford and Fort Mill Ford before Sonic’s acquisition of those dealershipsin 1997. Mr. Smith became the General Manager of Town & Country Ford in November 1992 where he remained until his appointment as President andChief Operating Officer of Sonic in April 1997. Mr. Smith has over 28 years of experience in the automobile dealership industry.David Bruton Smith was appointed to the office of Vice Chairman in March 2013. He has served as Executive Vice President and a director of Sonicsince October 2008 and has served in Sonic’s organization since 1998. Prior to being named a director and Executive Vice President in 2008, Mr. Smith hadserved as Sonic’s Senior Vice President of Corporate Development since March 2007. Mr. Smith served as Sonic’s Vice President of Corporate Strategy fromOctober 2005 to March 2007, and also served prior to that time as Dealer Operator and General Manager of several Sonic dealerships. He is the son of Mr.O. Bruton Smith and the brother of Mr. B. Scott Smith.Heath R. Byrd has served as Sonic’s Executive Vice President and Chief Financial Officer since April 2013. Mr. Byrd was previously a Vice Presidentand Sonic’s Chief Information Officer from December 2007 to March 2013, and has served our organization since 2007. Prior to joining Sonic, Mr. Byrdserved in a variety of management positions at HR America, Inc., a workforce management firm that provided customized human resource and workforcedevelopment through co-sourcing arrangements, including as a director, as President and Chief Operating Officer and as Chief Financial Officer and ChiefInformation Officer. Prior to HR America, Mr. Byrd served as a Manager in the Management Consulting Division of Ernst & Young LLP.Jeff Dyke has served as Sonic’s Executive Vice President of Operations since October 2008 and is responsible for direct oversight for all of Sonic’sretail automotive operations. From March 2007 to October 2008, Mr. Dyke served as our Division Chief Operating Officer – Southeast Division, where heoversaw retail automotive operations for the states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. Mr. Dyke first joinedSonic in October 2005 as our Vice President of Retail Strategy, a position that he held until April 2006, when he was promoted to Division Vice President –Eastern Division, a position he held from April 2006 to March 2007. Prior to joining Sonic, Mr. Dyke worked in the automotive retail industry at AutoNation,Inc. from 1996 to 2005, where he held several positions in divisional, regional and dealership management with that company.7 SONIC AUTOMOTIVE, INC. EmployeesAs of December 31, 2017, we employed approximately 9,750 associates. We believe that our relationships with our associates are good.Approximately 265 of our associates, primarily service technicians in our northern California markets, are represented by a labor union. Although only asmall percentage of our associates is represented by a labor union, we may be affected by labor strikes, work slowdowns and walkouts at automobilemanufacturers’ manufacturing facilities.Company InformationOur website is located at www.sonicautomotive.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-Kand all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), as well as proxy statements and other information we file with, or furnish to, the Securities and Exchange Commission (the “SEC”) are available free ofcharge on our website. We make these documents available as soon as reasonably practicable after we electronically transmit them to the SEC. Except asotherwise stated in these documents, the information contained on our website or available by hyperlink from our website is not incorporated into thisAnnual Report on Form 10-K or other documents we transmit to the SEC. 8 SONIC AUTOMOTIVE, INC.RISK FACTORS Item 1A. Risk Factors.Our business, financial condition, results of operations, cash flows and prospects and the prevailing market price and performance of our Class Acommon stock may be adversely affected by a number of factors, including the material risks noted below. Our stockholders and prospective investors shouldconsider these risks, uncertainties and other factors prior to making an investment decision.Risks Related to Our Sources of Financing and LiquidityOur significant indebtedness could materially adversely affect our financial health, limit our ability to finance future acquisitions, expansion plans andcapital expenditures and prevent us from fulfilling our financial obligations.As of December 31, 2017, our total outstanding indebtedness was approximately $2.5 billion, which includes floor plan notes payable, long-term debtand short-term debt.We have up to $250.0 million of maximum borrowing availability under a syndicated revolving credit facility (the “2016 Revolving Credit Facility”)and up to $1.0 billion of maximum borrowing availability for combined syndicated new and used vehicle inventory floor plan financing (the “2016 FloorPlan Facilities”). We refer to the 2016 Revolving Credit Facility and the 2016 Floor Plan Facilities collectively as the “2016 Credit Facilities.” As ofDecember 31, 2017, we had approximately $155.3 million available for additional borrowings under the 2016 Revolving Credit Facility based on theborrowing base calculation, which is affected by numerous factors, including eligible asset balances. We are able to borrow under the 2016 Revolving CreditFacility only if, at the time of the borrowing, we have met all representations and warranties and are in compliance with all financial and other covenantscontained therein. We also have capacity to finance new and used vehicle inventory purchases under floor plan agreements with various manufacturer-affiliated finance companies and other lending institutions (the “Silo Floor Plan Facilities”) as well as the 2016 Floor Plan Facilities. In addition, theindentures relating to our 5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”), our 6.125% Senior Subordinated Notes due 2027 (the “6.125%Notes”) and our other debt instruments allow us to incur additional indebtedness, including secured indebtedness, as long as we comply with the termsthereunder.In addition, the majority of our dealership properties are leased under long-term operating lease arrangements that commonly have initial terms of 15to 20 years with renewal options generally ranging from five to 10 years. These operating leases require compliance with financial and operating covenantssimilar to those under the 2016 Credit Facilities, and monthly payments of rent that may fluctuate based on interest rates and local consumer price indices.The total future minimum lease payments related to these operating leases and certain equipment leases are significant and are disclosed in Note 12,“Commitments and Contingencies,” to the accompanying consolidated financial statements.Our failure to comply with certain covenants in these agreements or indentures could materially adversely affect our ability to access our borrowingcapacity, subject us to acceleration of our outstanding debt, result in a cross default on other indebtedness and could have a material adverse effect on ourability to continue our business.An acceleration of our obligation to repay all or a substantial portion of our outstanding indebtedness or lease obligations would have a material adverseeffect on our business, financial condition or results of operations.The 2016 Credit Facilities, the indentures governing the 5.0% Notes and the 6.125% Notes and many of our operating leases contain numerousfinancial and operating covenants. A breach of any of these covenants could result in a default under the applicable agreement or indenture. In addition, adefault under one agreement or indenture could result in a cross default and acceleration of our repayment obligations under the other agreements orindentures, including the indentures governing the 5.0% Notes and the 6.125% Notes. If a default or cross default were to occur, we may not be able to payour debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. If a default were tooccur, we may be unable to adequately finance our operations and the value of our common stock would be materially adversely affected because ofacceleration and cross-default provisions. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions thatwe otherwise might take, in order to comply with the covenants in these agreements and indentures.9 SONIC AUTOMOTIVE, INC.RISK FACTORS Our ability to make interest and principal payments when due to holders of our debt securities depends upon our future performance and our receipt ofsufficient funds from our subsidiaries.Our ability to meet our debt obligations and other expenses will depend on our future performance, which will be affected by financial, business,domestic and foreign economic conditions, the regulatory environment and other factors, many of which we are unable to control. Substantially all of ourconsolidated assets are held by our subsidiaries and substantially all of our consolidated cash flow and net income are generated by our subsidiaries.Accordingly, our cash flow and ability to service debt depend to a substantial degree on the results of operations of our subsidiaries and upon the ability ofour subsidiaries to provide us with cash. We may receive cash from our subsidiaries in the form of dividends, loans or distributions. We may use this cash toservice our debt obligations or for working capital. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, todistribute cash to us or to make funds available to service debt.If our cash flow is not sufficient to service our debt as it becomes due, we may be required to refinance the debt, sell assets or sell shares of our commonstock on terms that we do not find attractive. Further, our failure to comply with the financial and other restrictive covenants relating to the 2016 CreditFacilities and the indentures pertaining to our outstanding notes could result in a default under these agreements and indentures that would prevent us fromborrowing under the 2016 Credit Facilities, which could materially adversely affect our business, financial condition and results of operations. If a defaultand acceleration of repayment were to occur, we may be unable to adequately finance our operations and the value of our Class A common stock could bematerially adversely affected.We have financed the purchase of certain dealership properties with mortgage notes that require balloon payments at the end of the notes’ terms.Many of our mortgage notes’ principal and interest payments are based on an amortization period longer than the actual terms (maturity dates) of thenotes. We will be required to repay or refinance the remaining principal balances for certain of our mortgages with balloon payments at the notes’ maturitydates, which range from 2018 to 2033. The amounts to be repaid or refinanced at the maturity dates could be significant. We may not have sufficient liquidityto make such payments at the notes’ maturity dates. In the event we do not have sufficient liquidity to completely repay the remaining principal balances atmaturity, we may not be able to refinance the notes at interest rates that are acceptable to us or, depending on market conditions, refinance the notes at all.Our inability to repay or refinance these notes could have a material adverse effect on our business, financial condition and results of operations.We depend on the performance of subleases to offset costs related to certain of our lease agreements.In many cases, when we sell a dealership, the buyer of the dealership will sublease the dealership property from us, but we are not released from theunderlying lease obligation to the primary landlord. We rely on the sublease income from the buyer to offset the expense incurred related to our obligation topay the primary landlord. We also rely on the buyer to maintain the property in accordance with the terms of the sublease (which in most cases mirror theterms of the lease we have with the primary landlord). Although we assess the financial condition of a buyer at the time we sell the dealership, and seek toobtain guarantees of the buyer’s sublease obligation from the stockholders or affiliates of the buyer, the financial condition of the buyer and/or the subleaseguarantors may deteriorate over time. In the event the buyer does not perform under the terms of the sublease agreement (due to the buyer’s financialcondition or other factors), we may not be able to recover amounts owed to us under the terms of the sublease agreement or the related guarantees. Ouroperating results, financial condition and cash flows may be materially adversely affected if sublessees do not perform their obligations under the terms of thesublease agreements.Our use of hedging transactions could limit our financial gains or result in financial losses.To reduce our exposure to fluctuations in cash flow due to interest rate fluctuations, we have entered into, and in the future expect to enter into, certainderivative instruments (or hedging agreements). No hedging activity can completely insulate us from the risks associated with changes in interest rates. As ofDecember 31, 2017, we had interest rate swap and interest rate cap agreements to effectively convert a portion of our LIBOR-based variable rate debt to afixed rate or to limit our exposure to rising interest rates. See the heading “Derivative Instruments and Hedging Activities” under Note 6, “Long-Term Debt,”to the accompanying consolidated financial statements. We intend to hedge as much of our interest rate risk as management determines is in our best interestsgiven the cost of such hedging transactions.Our hedging transactions expose us to certain risks and financial losses, including, among other things: •counterparty credit risk; •available interest rate hedging may not correspond directly with the interest rate risk for which we seek protection;10 SONIC AUTOMOTIVE, INC.RISK FACTORS •the duration or the amount of the hedge may not match the duration or the amount of the related liability; •the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fairvalue, downward adjustments or “mark-to-market losses,” which would affect our stockholders’ equity; and •all of our hedging instruments contain terms and conditions with which we are required to meet. In the event those terms and conditions are notmet, we may be required to settle the instruments prior to the instruments’ maturity with cash payments, which could significantly affect ourliquidity.A failure on our part to effectively hedge against interest rate changes may adversely affect our financial condition and results of operations.We may not be able to satisfy our debt obligations upon the occurrence of a change of control.Upon the occurrence of a change of control, as defined in the 5.0% Notes and the 6.125% Notes, holders of these instruments will have the right torequire us to purchase all or any part of such holders’ notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any.The events that constitute a change of control under these indentures may also constitute a default under the 2016 Credit Facilities. Any future debtinstruments that we may incur may contain similar provisions regarding repurchases in the event of a change of control triggering event. There can be noassurance that we would have sufficient resources available to satisfy all of our obligations under these debt instruments in the event of a change of control.In the event we were unable to satisfy these obligations, it could have a material adverse impact on our business and our stockholders.Risks Related to Our Relationships with Vehicle ManufacturersOur operations may be adversely affected if one or more of our manufacturer franchise or dealer agreements is terminated or not renewed.Each of our dealerships operates under a separate franchise or dealer agreement with the applicable automobile manufacturer. Without a franchise ordealer agreement, we cannot obtain new vehicles from a manufacturer or advertise as an authorized factory service center. As a result, we are significantlydependent on our relationships with the manufacturers.Moreover, manufacturers exercise a great degree of control over the operations of our dealerships through the franchise and dealer agreements. Thefranchise and dealer agreements govern, among other things, our ability to purchase vehicles from the manufacturer and to sell vehicles to customers. Each ofour franchise or dealer agreements provides for termination or non-renewal for a variety of causes, including certain changes in the financial condition of thedealerships and any unapproved change of ownership or management. Manufacturers may also have a right of first refusal if we seek to sell dealerships.We cannot guarantee that any of our existing franchise and dealer agreements will be renewed or that the terms and conditions of such renewals will befavorable to us. Actions taken by manufacturers to exploit their superior bargaining position in negotiating the terms of franchise and dealer agreements orrenewals of these agreements or otherwise could also have a material adverse effect on our business, results of operations, financial condition and cash flows.Our failure to meet a manufacturer’s customer satisfaction, financial and sales performance and facility requirements may adversely affect ourprofitability and our ability to acquire new dealerships.A manufacturer may condition its allotment of vehicles, participation in bonus programs or acquisition of additional franchises upon our compliancewith its brand and facility standards. These standards may require investments in technology and facilities that we otherwise would not make. This may putus in a competitive disadvantage with other competing dealerships and may ultimately result in our decision to sell a franchise when we believe it may bedifficult to recover the cost of the required investment to reach the manufacturer’s brand and facility standards.11 SONIC AUTOMOTIVE, INC.RISK FACTORS In addition, many manufacturers attempt to measure customers’ satisfaction with their sales and warranty service experiences through manufacturer-determined CSI scores. The components of CSI vary by manufacturer and are modified periodically. Franchise and dealer agreements may also imposefinancial and sales performance standards. Under our agreements with certain manufacturers, a dealership’s CSI scores and financial and sales performancestandards may be considered as factors in evaluating applications for additional dealership acquisitions. From time to time, some of our dealerships have haddifficulty meeting various manufacturers’ CSI requirements or performance standards. We cannot assure you that our dealerships will be able to comply withthese requirements or performance standards in the future. A manufacturer may refuse to consent to an acquisition of one of its franchises if it determines ourdealerships do not comply with its CSI requirements or performance standards, which could impair the execution of our acquisition strategy. In addition, wereceive incentive payments from the manufacturers based, in part, on CSI scores, which could be materially adversely affected if our CSI scores decline.If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise anddealer agreements.State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise or dealer agreement unless it has first providedthe dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Some state dealer laws allow dealers to fileprotests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Manufacturers’lobbying efforts may lead to the repeal or revision of state dealer laws. If dealer laws are repealed or weakened in the states in which we operate,manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without theprotection of state dealer laws, it may also be more difficult for our dealerships to renew their franchise or dealer agreements upon expiration.The ability of a manufacturer to grant additional franchises is based on several factors which are not within our control. If manufacturers grant newfranchises in areas near or within our existing markets, this could significantly impact our revenues and/or profitability. In addition, current state dealer lawsgenerally restrict the ability of automobile manufacturers to enter the retail market and sell directly to consumers. However, if manufacturers obtain theability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on us.Our sales volume and profit margin on each sale may be materially adversely affected if manufacturers discontinue or change their incentive programs.Our dealerships depend on the manufacturers for certain sales incentives, warranties and other programs that are intended to promote and supportdealership new vehicle sales. Manufacturers routinely modify their incentive programs in response to changing market conditions. Some of the key incentiveprograms include: •customer rebates or below market financing on new and used vehicles; •employee pricing; •dealer incentives on new vehicles; •manufacturer floor plan interest and advertising assistance; •warranties on new and used vehicles; and •sponsorship of CPO vehicle sales by authorized new vehicle dealers.Manufacturers frequently offer incentives to potential customers. A reduction or discontinuation of a manufacturer’s incentive programs maymaterially adversely impact vehicle demand and affect our results of operations.Our sales volume may be materially adversely affected if manufacturer captives change their customer financing programs or are unable to provide floorplan financing.One of the primary finance sources used by consumers in connection with the purchase of a new or used vehicle is the manufacturer captive financecompanies. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financingprograms. In addition, the captive finance companies will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio.A limitation or reduction of available consumer financing for these or other reasons could affect consumers’ ability to purchase a vehicle and, thus, couldhave a material adverse effect on our sales volume.12 SONIC AUTOMOTIVE, INC.RISK FACTORS Our parts and service sales volume and margins are dependent on manufacturer warranty programs.Franchised automotive retailers perform factory authorized service work and sell original replacement parts on vehicles covered by warranties issuedby the automotive manufacturer. Dealerships which perform work covered by a manufacturer warranty are reimbursed at rates established by the manufacturer.For 2017, approximately 20.0% of our parts, service and collision repair revenues was for work covered by manufacturer warranties. To the extent amanufacturer reduces the labor rates or markup of replacement parts for such warranty work, our parts and service sales volume and margins could beadversely affected.Adverse conditions affecting one or more key manufacturers or lenders may negatively impact our results of operations.Our results of operations depend on the products, services, and financing and incentive programs offered by major automobile manufacturers, andcould be negatively impacted by any significant changes to these manufacturers’ financial condition, marketing strategy, vehicle design, publicityconcerning a particular manufacturer or vehicle model, production capabilities, management, reputation and labor relations.Events such as labor strikes or other disruptions in production, including those caused by natural disasters, that may adversely affect a manufacturermay also adversely affect us. In particular, labor strikes at a manufacturer that continue for a substantial period of time could have a material adverse effect onour business. Similarly, the delivery of vehicles from manufacturers at a time later than scheduled, which may occur during critical periods of new productintroductions, could limit sales of those vehicles during those periods. This has been experienced at some of our dealerships from time to time. Adverseconditions affecting these and other important aspects of manufacturers’ operations and public relations may adversely affect our ability to sell theirautomobiles and, as a result, significantly and detrimentally affect our business and results of operations.Moreover, our business could be materially adversely impacted by the bankruptcy of a major vehicle manufacturer or related lender. For example: •a manufacturer in bankruptcy could attempt to terminate all or certain of our franchises, in which case we may not receive adequatecompensation for our franchises; •consumer demand for such manufacturer’s products could be substantially reduced; •a lender in bankruptcy could attempt to terminate our floor plan financing and demand repayment of any amounts outstanding; •we may be unable to arrange financing for our customers for their vehicle purchases and leases through such lender, in which case we would berequired to seek financing with alternate financing sources, which may be difficult to obtain on similar terms, if at all; •we may be unable to collect some or all of our significant receivables that are due from such manufacturer or lender, and we may be subject topreference claims relating to payments made by such manufacturer or lender prior to bankruptcy; and •such manufacturer may be relieved of its indemnification obligations with respect to product liability claims.Additionally, any such bankruptcy may result in us being required to incur impairment charges with respect to the inventory, fixed assets andintangible assets related to certain dealerships, which could adversely impact our results of operations, financial condition and our ability to remain incompliance with the financial ratios contained in our debt agreements.Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise or dealer agreements or issue additional equity.Some of our franchise and dealer agreements prohibit transfers of any ownership interests of a dealership and, in some cases, its parent, without priorapproval of the applicable manufacturer. Our existing franchise and dealer agreements could be terminated if a person or entity acquires a substantialownership interest in us or acquires voting power above certain levels without the applicable manufacturer’s approval. While the holders of our Class Bcommon stock currently maintain voting control of Sonic, their future investment decisions as well as those of holders of our Class A common stock aregenerally outside of our control and could result in the termination or non-renewal of existing franchise or dealer agreements or impair our ability tonegotiate new franchise or dealer agreements for dealerships we acquire in the future. In addition, if we cannot obtain any requisite approvals on a timelybasis, we may not be able to issue additional equity or otherwise raise capital on terms acceptable to us. These restrictions may also prevent or deter aprospective acquirer from acquiring control of us.13 SONIC AUTOMOTIVE, INC.RISK FACTORS We depend on manufacturers to supply us with sufficient numbers of popular new models.Manufacturers typically allocate their vehicles among dealerships based on the sales history of each dealership. Supplies of popular new vehicles maybe limited by the applicable manufacturer’s production capabilities. Popular new vehicles that are in limited supply typically produce the highest profitmargins. We depend on manufacturers to provide us with a desirable mix of popular new vehicles. Our operating results may be materially adversely affectedif we do not obtain a sufficient supply of these vehicles on a timely basis.A decline in the quality of vehicles we sell, or consumers’ perception of the quality of those vehicles, may adversely affect our business.Our business is highly dependent on consumer demand and preferences. Events such as manufacturer recalls and negative publicity (for example,Volkswagen and Audi emissions-related issues in recent years) or legal proceedings related to these events may have a negative impact on the products wesell. If such events are significant, the profitability of our dealerships related to those manufacturers could be adversely affected and we could experience amaterial adverse effect on our overall results of operations, financial position and cash flows.Risks Related to Our Growth StrategyOur investment in new business strategies, services and technologies is inherently risky, and could disrupt our ongoing business or have a material adverseeffect on our overall business and results of operations.We have invested and expect to continue to invest in new business strategies, services and technologies, including our stand-alone pre-owned storeinitiative and our OSOE initiative. Such endeavors may involve significant risks and uncertainties, including allocating management resources away fromcurrent operations, insufficient revenues to offset expenses associated with these new investments, inadequate return of capital on our investments andunidentified issues not discovered in our due diligence of such strategies and offerings. Because these ventures are inherently risky, no assurance can begiven that such strategies and offerings will be successful and will not have a material adverse effect on our reputation, financial condition and operatingresults.Our ability to make acquisitions, execute our stand-alone pre-owned store initiative and grow organically may be restricted by the terms and limits of the2016 Credit Facilities and the indentures which govern our outstanding notes.The amount of capital available to us is limited to the liquidity available under the 2016 Credit Facilities and capital generated through operatingactivities. Pursuant to the 2016 Credit Facilities, we are restricted from making dealership acquisitions in any fiscal year if the aggregate cost of all suchacquisitions is in excess of certain amounts, without the written consent of the Required Lenders (as that term is defined in the 2016 Credit Facilities). Ourpace and scale of growing our stand-alone pre-owned store initiative may be limited in the event other sources of capital are unavailable. These restrictionsmay limit our growth strategy.We may not be able to capitalize on future real estate and dealership acquisition opportunities because our ability to obtain capital to fund theseacquisitions is limited.We intend to finance future real estate and dealership acquisitions with cash generated from operations, through issuances of our stock or debtsecurities and through borrowings under credit arrangements. We may not be able to obtain additional financing by issuing stock or debt securities due to themarket price of our Class A common stock, overall market conditions or covenants under the 2016 Credit Facilities that restrict our ability to issue additionalindebtedness, or the need for manufacturer consent to the issuance of equity securities. Using cash to complete acquisitions could substantially limit ouroperating or financial flexibility.In addition, we are dependent to a significant extent on our ability to finance our new and certain of our used vehicle inventory under the 2016 FloorPlan Facilities or the Silo Floor Plan Facilities (collectively, “Floor Plan Financing”). Floor Plan Financing arrangements allow us to borrow money to buy aparticular new vehicle from the manufacturer or a used vehicle on trade-in or at auction and pay off the loan when we sell that particular vehicle. We mustobtain Floor Plan Financing or obtain consents to assume existing floor plan notes payable in connection with our acquisition of dealerships. In the eventthat we are unable to obtain such financing, our ability to complete dealership acquisitions could be limited.Substantially all the assets of our dealerships are pledged to secure the indebtedness under the 2016 Credit Facilities and the Silo Floor Plan Facilities.These pledges may impede our ability to borrow from other sources. Moreover, because certain lending institutions are either owned by or affiliated with anautomobile manufacturer, any deterioration of our relationship with the particular manufacturer-affiliated finance subsidiary could adversely affect ourrelationship with the affiliated manufacturer, and vice versa.14 SONIC AUTOMOTIVE, INC.RISK FACTORS Manufacturers’ restrictions on acquisitions could limit our future growth.We are required to obtain the approval of the applicable manufacturer before we can acquire an additional franchise of that manufacturer. Indetermining whether to approve an acquisition, manufacturers may consider many factors, such as our financial condition and CSI scores.Certain manufacturers also limit the number of its dealerships that we may own in total, the number of dealerships we may own in a particulargeographic area, or our national market share of that manufacturer’s sales of new vehicles. In addition, under an applicable franchise or dealer agreement orunder state law, a manufacturer may have a right of first refusal to acquire a dealership that we seek to acquire.A manufacturer may condition approval of an acquisition on the implementation of material changes in our operations or extraordinary corporatetransactions, facilities improvements or other capital expenditures. If we are unable or unwilling to comply with these conditions, we may be required to sellthe assets of that manufacturer’s dealerships or terminate our franchise or dealer agreement. We cannot assure you that manufacturers will approve futureacquisitions or do so on a timely basis, which could impair the execution of our acquisition strategy.Failure to effectively integrate acquired dealerships with our existing operations could adversely affect our future operating results.Our future operating results depend on our ability to integrate the operations of acquired dealerships with our existing operations. In particular, weneed to integrate our management information systems, procedures and organizational structures, which can be difficult. Our growth strategy has focused onthe pursuit of strategic acquisitions or brand development that either expand or complement our business.We cannot assure you that we will effectively and profitably integrate the operations of these dealerships without substantial costs, delays oroperational or financial problems, due to: •the difficulties of managing operations located in geographic areas where we have not previously operated; •the management time and attention required to integrate and manage newly acquired dealerships; •the difficulties of assimilating and retaining employees; •the challenges of keeping customers; and •the challenge of retaining or attracting appropriate dealership management personnel.These factors could have a material adverse effect on our financial condition and results of operations.We may not adequately anticipate all of the demands that growth through acquisitions or brand development will impose.We face risks growing through acquisitions or expansion. These risks include, but are not limited to: •incurring significantly higher capital expenditures and operating expenses; •failing to assimilate the operations and personnel of acquired dealerships; •entering new markets with which we are unfamiliar; •incurring potential undiscovered liabilities and operational difficulties at acquired dealerships; •disrupting our ongoing business; •diverting our management resources; •failing to maintain uniform standards, controls and policies; •impairing relationships with employees, manufacturers and customers as a result of changes in management; •incurring increased expenses for accounting and computer systems, as well as integration difficulties;15 SONIC AUTOMOTIVE, INC.RISK FACTORS •failing to obtain a manufacturer’s consent to the acquisition of one or more of its franchises or to renew the franchise or dealer agreement onterms acceptable to us; and •incorrectly valuing entities to be acquired or assessing markets entered.We may not adequately anticipate all of the demands that growth will impose on our business.We may not be able to execute our growth strategy without the costs escalating.We have grown our business primarily through acquisitions in the past. We may not be able to consummate any future acquisitions at acceptableprices and terms or identify suitable candidates. In addition, increased competition for acquisition candidates could result in fewer acquisition opportunitiesfor us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions or growth opportunities will depend upon variousfactors, including: •the availability of suitable acquisition candidates; •competition with other dealer groups or institutional investors for suitable acquisitions; •the negotiation of acceptable terms with the seller and with the manufacturer; •our financial capabilities and ability to obtain financing on acceptable terms; •our stock price; and •the availability of skilled employees to manage the acquired companies.We may not be able to determine the actual financial condition of dealerships we acquire until after we complete the acquisition and take control of thedealerships.The operating and financial condition of acquired businesses cannot be determined accurately until we assume control. Although we conduct what webelieve to be a prudent level of due diligence regarding the operating and financial condition of the businesses we purchase, in light of the circumstances ofeach transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Similarly, many of the dealerships weacquire, including some of our largest acquisitions, do not have financial statements audited or prepared in accordance with U.S. generally acceptedaccounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired entities. Until weactually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of theacquired entities and their operations.Risks Related to the Automotive Retail IndustryOur facilities and operations are subject to extensive governmental laws and regulations. If we are found to be in violation of, or subject to liabilitiesunder, any of these laws or regulations or if new laws or regulations are enacted that adversely affect our operations, then our business, operating results,financial condition, cash flows and prospects could suffer.The automotive retail industry, including our facilities and operations, is subject to a wide range of federal, state, and local laws and regulations, suchas those relating to motor vehicle sales, retail installment sales, leasing, sales of finance, insurance and vehicle protection products, licensing, consumerprotection, consumer privacy, employment practices, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and healthand safety. With respect to motor vehicle sales, retail installment sales, leasing, and sales of finance, insurance and vehicle protection products at our stores,we are subject to various laws and regulations, the violation of which could subject us to consumer class action or other lawsuits or governmentalinvestigations and adverse publicity, in addition to administrative, civil or criminal sanctions. With respect to employment practices, we are subject tovarious laws and regulations, including complex federal, state, and local wage and hour and anti-discrimination laws. We are also subject to lawsuits andgovernmental investigations alleging violations of these laws and regulations, including purported class action lawsuits, which could result in significantliability, fines and penalties. The violation of other laws and regulations to which we are subject also can result in administrative, civil or criminal sanctionsagainst us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subjectbusiness, as well as significant liability, fines and penalties. We currently devote significant resources to comply with applicable federal, state and localregulation of health, safety, environmental, zoning and land use regulations, and we may need to spend additional time, effort and money to keep ouroperations and existing or acquired facilities in compliance. In addition, we may be subject to broad liabilities arising out of contamination at our currentlyand formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related toentities formerly affiliated with us. Although for some such liabilities we believe we are entitled to indemnification from other entities, we cannot assure youthat such entities will view their obligations as we do or will be able to16 SONIC AUTOMOTIVE, INC.RISK FACTORS satisfy them. Failure to comply with applicable laws and regulations may have an adverse effect on our operations, business, operating results, financialcondition, cash flows and prospects.The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was signed into law on July 21, 2010, establishedthe Consumer Financial Protection Bureau (the “CFPB”), a new independent federal agency funded by the U.S. Federal Reserve with broad regulatory powersand limited oversight from the U.S. Congress. Although automotive dealers are generally excluded, the Dodd-Frank Act has led to additional, indirectregulation of automotive dealers, in particular, their sale and marketing of finance and insurance products, through its regulation of automotive financecompanies and other financial institutions. In March 2013, the CFPB issued supervisory guidance highlighting its concern that the practice of automotivedealers being compensated for arranging customer financing through discretionary markup of wholesale rates offered by financial institutions (“dealermarkup”) results in a significant risk of pricing disparity in violation of The Equal Credit Opportunity Act (the “ECOA”). The CFPB recommended thatfinancial institutions under its jurisdiction take steps to ensure compliance with the ECOA, which may include imposing controls on dealer markup,monitoring and addressing the effects of dealer markup policies, and eliminating dealer discretion to markup buy rates and fairly compensating dealers usinga different mechanism that does not result in disparate impact to certain groups of consumers. In addition, we believe that the Patient Protection andAffordable Care Act, which was signed into law on March 23, 2010, has increased and will continue to increase our annual employee health care costs that wefund, and has also increased our cost of compliance and compliance risk related to offering health care benefits.Furthermore, we expect that new laws and regulations, particularly at the federal level, may be enacted, which could also materially adversely impactour business. For example, the labor policy of the prior administration led to increased unionization efforts for U.S. companies, which could lead to higherlabor costs for our Company, disrupt our store operations and adversely affect our results of operations.Climate change legislation or regulations restricting emission of greenhouse gases could result in increased operating costs and reduced demand for thevehicles we sell.The U.S. Environmental Protection Agency has adopted rules under existing provisions of the federal Clean Air Act that require (1) a reduction inemissions of greenhouse gases from motor vehicles, (2) certain construction and operating permit reviews for greenhouse gas emissions from certain largestationary sources and (3) monitoring and reporting of greenhouse gas emissions from specified sources on an annual basis. The adoption of any laws orregulations requiring significant increases in fuel economy requirements or new federal or state restrictions on emissions of greenhouse gases from ouroperations or on vehicles and automotive fuels in the United States could adversely affect demand for those vehicles and require us to incur costs to reduceemissions of greenhouse gases associated with our operations.Increasing competition among automotive retailers and the use of the internet reduces our profit margins on vehicle sales and related businesses.Automobile retailing is a highly competitive business. Our competitors include publicly and privately owned dealerships, some of which are largerand have greater financial and marketing resources than we do. Many of our competitors sell the same or similar makes of new and used vehicles that we offerin our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to economies of scale orotherwise. We typically rely on advertising, merchandising, sales expertise, customer service reputation and dealership location to sell new vehicles. Ourrevenues and profitability could be materially adversely affected if certain state dealer franchise laws are relaxed to permit manufacturers to enter the retailmarket directly.Our F&I business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition fromvarious financial institutions and other third parties.Moreover, customers are using the internet to compare pricing for vehicles and related F&I services, which may further reduce margins for new andused vehicles and profits for related F&I services. If internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, ourbusiness could be materially adversely affected. In addition, other dealership groups have aligned themselves with services offered on the internet or areinvesting heavily in the development of their own internet capabilities, which could materially adversely affect our business.Our franchise and dealer agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenuesor profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or ifexisting franchised dealers increase their market share in our markets.17 SONIC AUTOMOTIVE, INC.RISK FACTORS We may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins maydecline over time as we expand into markets where we do not have a leading position.The effect of companies entering into the automotive space may affect our ability to grow or maintain the business over the long-term.Large and well-capitalized technology companies have continued to enter into the automotive space in recent years. Companies such as Amazon,Apple, Google, Lyft, Tesla and Uber may challenge the existing automotive manufacturing, transportation and retail models. Tesla has been challengingstate dealer franchise laws in many states with mixed results, but its business model has been accepted by many consumers. Although Tesla’s participation inthe competitive landscape has had minimal impact on the overall retail automotive space thus far, these other large technology-based companies maycontinue to change consumers’ view on how automobiles should be manufactured, equipped, used and retailed in the future. Because these companies havethe ability to connect with each individual consumer easily through their technology platforms, we may ultimately be at a competitive disadvantage inmarketing, financing, selling and servicing vehicles. In addition, certain manufacturers have expressed interest in selling directly to customers. The dealer’sparticipation in that potential future transaction type is unclear and may negatively impact our operations and financial results.Our dealers depend upon new vehicle sales and, therefore, their success depends in large part upon customer demand for the particular vehicles they carry.The success of our dealerships depends in large part on the overall success of the vehicle lines they carry. New vehicle sales generate the majority ofour total revenue and lead to sales of higher-margin products and services such as finance, insurance, vehicle protection products and other aftermarketproducts, and parts and service operations. Our new vehicle sales operations are comprised primarily of luxury and mid-line import brands, which exposes usto manufacturer concentration risks. Although our parts and service operations and used vehicle business may serve to offset some of this risk, changes inautomobile manufacturers’ vehicle models and customer demand for particular vehicles may have a material adverse effect on our business.Our business will be harmed if overall consumer demand suffers from a severe or sustained downturn.Our business is heavily dependent on consumer demand and preferences. Retail vehicle sales are cyclical and historically have experienced periodicdownturns characterized by oversupply and weak demand. These cycles are often dependent on economic conditions, consumer confidence, the level ofdiscretionary personal income and credit availability. Deterioration in any of these conditions may have a material adverse effect on our retail business,particularly sales of new and used automobiles.In addition, severe or sustained changes in gasoline prices may lead to a shift in consumer buying patterns. Availability of preferred models may notexist in sufficient quantities to satisfy consumer demand and allow our stores to meet sales expectations. A decline of available financing in the lending market may adversely affect our vehicle sales volume.A significant portion of vehicle buyers finance their purchases of automobiles. Sub-prime lenders have historically provided financing for consumerswho, for a variety of reasons including poor credit histories and lack of down payment, do not have access to more traditional finance sources. In the eventlenders tighten their credit standards or there is a decline in the availability of credit in the lending market, the ability of these consumers to purchasevehicles could be limited, which could have a material adverse effect on our business, revenues and profitability.Our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably.A significant portion of our new vehicle business involves the sale of vehicles, parts or vehicles composed of parts that are manufactured outside theUnited States. As a result, our operations are subject to risks of importing merchandise, including fluctuations in the relative values of currencies, importduties or tariffs, exchange controls, trade restrictions, work stoppages and general political and socio-economic conditions in other countries. The UnitedStates or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presentlyprevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.Natural disasters and adverse weather events can disrupt our business.Our dealerships are concentrated in states and regions in the United States, including California, Colorado, Florida and Texas, in which actual orthreatened natural disasters and severe weather events (such as hail storms, floods, hurricanes, earthquakes, fires and landslides) may disrupt our storeoperations, which may adversely impact our business, financial condition, results of operations and18 SONIC AUTOMOTIVE, INC.RISK FACTORS cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significantconcentration of property values at store locations. Although we have substantial insurance, subject to certain deductibles, limitations and exclusions, wemay be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations orcash flows.In addition, the automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters andadverse weather events may affect the flow of inventory or parts to us or our manufacturing partners. Such disruptions could have a material adverse effect onour business, financial condition, results of operations or cash flows.Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation tosuffer.We have invested in internal and external business applications to execute our strategy of employing technology to benefit our business. In theordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of ourcustomers, suppliers and business partners, and personally identifiable information of our customers and employees. Although we have attempted to mitigatethe cyber-security risk of both our internal and outsourced functions by implementing various cyber-security controls, we remain subject to cyber-securityrisks.These cyber-security risks include: •vulnerability to cyber-attack of our internal or externally hosted business applications; •interruption of service or access to systems may affect our ability to deliver vehicles or complete transactions with customers; •unauthorized access or theft of customer or employee personal confidential information, including financial information, or strategicallysensitive data; •disruption of communications (both internally and externally) that may affect the quality of information used to make informed businessdecisions; and •damage to our reputation as a result of a breach in security that could affect the financial security of our customers.Moreover, significant technology-related business functions of ours are outsourced, including: •payroll and human resources management systems, including expense reimbursement management; •customer relationship management, ecommerce hosting and marketing campaign management; •dealer management, inventory management and financial reporting systems; •consumer credit application management, fund transfers/ACH/online banking; and •IP telephony and WAN/LAN administration (switch & router configuration).Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breaches due to employeeerror, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publiclydisclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protectthe privacy of personal information, regulatory penalties or damage to our reputation, and cause a loss of confidence in our services, which could materiallyadversely affect our competitive position, results of operations and financial condition.General Risks Related to Investing in Our SecuritiesConcentration of voting power and anti-takeover provisions of our charter, our bylaws, Delaware law and our franchise and dealer agreements mayreduce the likelihood of a potential change of control from a third party. At the same time, such voting power concentration also could increase thelikelihood of a change of control notwithstanding other factors.Our common stock is divided into two classes with different voting rights. This dual class stock ownership allows the present holders of the Class Bcommon stock to control us. Holders of Class A common stock have one vote per share on all matters. Holders of Class B common stock have 10 votes pershare on all matters, except that they have only one vote per share on any transaction19 SONIC AUTOMOTIVE, INC.RISK FACTORS proposed or approved by the Board of Directors or a Class B common stockholder or otherwise benefiting the Class B common stockholders constituting a: •“going private” transaction; •disposition of substantially all of our assets; •transfer resulting in a change in the nature of our business; or •merger or consolidation in which current holders of common stock would own less than 50% of the common stock following such transaction.The holders of Class B common stock (which include Mr. O. Bruton Smith, Sonic’s Executive Chairman and Director, his family members and entitiesthey control) currently hold less than a majority of our outstanding common stock, but a majority of our voting power. As a result, the holders of Class Bcommon stock may be able to control fundamental corporate matters and transactions, subject to the above limitations. The concentration of voting powermay also discourage, delay or prevent a change of control of us from a third party even if the action was favored by holders of Class A common stock. Inaddition, a sale or transfer of shares by one or more of the holders of Class B common stock could result in a change of control or put downward pressure onthe market price of our Class A common stock. The perception among the public that these sales or transfers will occur could also contribute to a decline inthe market price of our Class A common stock.Our charter and bylaws make it more difficult for our stockholders to take corporate actions at stockholders’ meetings. In addition, stock options,restricted stock and restricted stock units granted under the Sonic Automotive, Inc. 2012 Stock Incentive Plan or the Sonic Automotive, Inc. 2012 FormulaRestricted Stock and Deferral Plan for Non-Employee Directors and other obligations become immediately exercisable or automatically vest upon a changein control. Delaware law also makes it difficult for stockholders who have recently acquired a large interest in a company to consummate a businesscombination transaction with the company against its directors’ wishes. Finally, restrictions imposed by our franchise and dealer agreements may impede orprevent any potential takeover bid. Our franchise and dealer agreements allow the manufacturers the right to terminate the agreements upon a change ofcontrol of our Company and impose restrictions upon the transferability of any significant percentage of our stock to any one person or entity that may beunqualified, as defined by the manufacturer, to own one of its dealerships. The inability of a person or entity to qualify with one or more of our manufacturersmay prevent or seriously impede a potential takeover bid. In addition, there may be provisions of our lending arrangements that create an event of defaultupon a change in control. These agreements, corporate governance documents and laws may have the effect of discouraging, delaying or preventing a changein control or preventing stockholders from realizing a premium on the sale of their shares if we were acquired.The outcome of legal and administrative proceedings we are or may become involved in could have a material adverse effect on our future business,financial condition, results of operations, cash flows or prospects.We are involved, and expect to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of our business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has beencertified.Although we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out ofthe conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actions andactions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have amaterial adverse effect on our business, financial condition, results of operations, cash flows or prospects.Our business may be adversely affected by claims alleging violations of laws and regulations in our advertising, sales and finance and insurance activities.Our business is highly regulated. In the past several years, private plaintiffs and state attorneys general have increased their scrutiny of advertising,sales and finance and insurance activities in the sale and leasing of motor vehicles. The conduct of our business is subject to numerous federal, state and locallaws and regulations regarding unfair, deceptive and/or fraudulent trade practices (including advertising, marketing, sales, insurance, repair and promotionpractices), truth-in-lending, consumer leasing, fair credit practices, equal credit opportunity, privacy, insurance, motor vehicle finance, installment finance,closed-end credit, usury and other installment sales. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealersby individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions mayexpose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and20 SONIC AUTOMOTIVE, INC.RISK FACTORS civil fines and penalties, including suspension or revocation of our licenses and franchise or dealer agreements to conduct dealership operations.Our business may be adversely affected by unfavorable conditions in our local markets, even if those conditions are not prominent nationally.Our performance is subject to local economic, competitive, weather and other conditions prevailing in geographic areas where we operate. We may notbe able to expand geographically and any geographic expansion may not adequately insulate us from the adverse effects of local or regional economicconditions. In addition, due to the provisions and terms contained in our franchise or dealer agreements or operating lease agreements, we may not be able torelocate a dealership operation to a more favorable location without incurring significant costs or penalties.The loss of key personnel and limited management and personnel resources could adversely affect our operations and growth.Our success depends to a significant degree upon the continued contributions of our management team, particularly our senior management, andservice and sales personnel. Additionally, franchise or dealer agreements may require the prior approval of the applicable manufacturer before any change ismade in dealership general managers. We do not have employment agreements with most members of our senior management team, our dealership managersand other key dealership personnel. Consequently, the loss of the services of one or more of these key employees could have a material adverse effect on ourresults of operations.In addition, as we expand, we may need to hire additional managers. The market for qualified employees in the industry and in the regions in whichwe operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs duringperiods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managers could have a materialadverse effect on our results of operations. In addition, the lack of qualified management or employees employed by potential acquisition candidates maylimit our ability to consummate future acquisitions.Potential conflicts of interest between us and our officers or directors could adversely affect our future performance.Mr. O. Bruton Smith serves as the Executive Chairman of SMI. Accordingly, we compete with SMI for the management time of Mr. Smith.We have in the past and will likely in the future enter into transactions with Mr. Smith, entities controlled by Mr. Smith and his family or our otheraffiliates. We believe that all of our existing arrangements with affiliates are as favorable to us as if the arrangements were negotiated between unaffiliatedparties, although the majority of these transactions have neither been verified by third parties in that regard nor are likely to be so verified in the future.Potential conflicts of interest could arise in the future between us and our officers or directors in the enforcement, amendment or termination of arrangementsexisting between them.We may be subject to substantial withdrawal liability assessments in the future related to a multiemployer pension plan to which certain of ourdealerships make contributions pursuant to collective bargaining agreements.Six of our dealership subsidiaries in northern California currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AIPension Plan”) pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists (the “IAM”) and theInternational Brotherhood of Teamsters (the “IBT”). The AI Pension Plan is a “multiemployer plan” as defined under the Employee Retirement IncomeSecurity Act of 1974, as amended, and our six dealership subsidiaries are among approximately 201 employers that are obligated to make contributions tothe AI Pension Plan pursuant to collective bargaining agreements with the IAM, the IBT and other unions. In March 2008, the AI Pension Plan’s actuary, inaccordance with the requirements of the federal Pension Protection Act of 2006, issued a certification that the AI Pension Plan was in critical status effectivewith the plan year commencing January 1, 2008. In conjunction with the AI Pension Plan’s critical status, the Board of Trustees of the AI Pension Planimplemented a requirement on all participating employers to increase employer contributions to the AI Pension Plan for a seven-year period commencing in2013. As of April 2015, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in critical status for the plan year commencing January 1,2015. According to publicly available information, in September 2016, the AI Pension Plan made a formal application for approval of suspension of benefitswith the U.S. Treasury Department, which, if approved by the U.S. Treasury Department, would have implemented a benefit reduction effective July 1, 2017for participants in the AI Pension Plan. The filing included an Actuarial Certification of Plan Status as of January 1, 2016 that the AI Pension Plan previouslyfiled with the U.S. Internal Revenue Service on March 30, 2016, which reported that the AI Pension Plan was in critical and declining status as of January 1,2016 and further notified that the AI Pension Plan is making the scheduled progress in meeting the requirements of the plan’s previously-adoptedrehabilitation plan. The September 2016 filing with the U.S. Treasury Department also included an Actuarial Certification of Plan Solvency as of July 1, 2016with the actuarial firm’s projection that the proposed suspensions of benefits are reasonably estimated to enable the AI Pension Plan to avoid21 SONIC AUTOMOTIVE, INC.RISK FACTORS insolvency assuming the proposed suspensions of benefits continue indefinitely. In May 2017, the U.S. Treasury Department denied the application tosuspend benefits but noted that it remains willing to discuss the issues presented in the September 2016 formal application for suspension of benefits. Underapplicable federal law, any employer contributing to a multiemployer pension plan that completely ceases participating in the plan while the plan isunderfunded is subject to payment of such employer’s assessed share of the aggregate unfunded vested benefits of the plan. In certain circumstances, anemployer can be assessed withdrawal liability for a partial withdrawal from a multiemployer pension plan. If any of these adverse events were to occur in thefuture, it could result in a substantial withdrawal liability assessment that could have a material adverse effect on our business, financial condition, results ofoperations or cash flows.Tax positions may exist related to our tax filings that could be challenged by governmental agencies and result in higher income tax expenses and affectour overall liquidity if we are unable to successfully defend these tax positions.We are subject to audits by federal and state governmental income tax agencies on a continual basis. During the course of those audits, the agenciesmay disagree or challenge tax positions taken on tax returns filed for Sonic and its subsidiaries. As a result of these audits, the agencies may issueassessments and penalties based on their understanding of the underlying facts and circumstances. In the event, we are not able to arrive at an agreeableresolution, we may be forced to litigate these matters. If we are unsuccessful in litigation, our results of operations and financial position may be negativelyimpacted.A change in historical experience and/or assumptions used to estimate reserves could have a material impact on our earnings.As described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Use of Estimates and CriticalAccounting Policies,” management relies on estimates in various areas of accounting and financial reporting. For example, our estimates for finance,insurance and service contracts and insurance reserves are based on historical experience and assumptions. Differences between actual results and ourhistorical experiences and/or our assumptions could have a material impact on our earnings in the period of the change and in periods subsequent to thechange.Our internal control over financial reporting may not be effective.If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improvedcontrols, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could incurremediation costs, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls, or fail tomeet our reporting obligations under SEC regulations and the terms of our debt agreements on a timely basis and there could be a material adverse effect onthe price of our Class A common stock.Impairment of our goodwill could have a material adverse impact on our earnings.Pursuant to applicable accounting pronouncements, we evaluate goodwill for impairment annually or more frequently if an event occurs orcircumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We describe the process for testinggoodwill more thoroughly in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Use of Estimates andCritical Accounting Policies.” If we determine that the amount of our goodwill is impaired at any point in time, we are required to reduce goodwill on ourbalance sheet. If goodwill is impaired based on a future impairment test, we will be required to record a significant non-cash impairment charge that may alsohave a material adverse effect on our results of operations for the period in which the impairment of goodwill occurs. As of December 31, 2017, our balancesheet reflected a carrying amount of approximately $525.8 million in goodwill. 22  SONIC AUTOMOTIVE, INC. Item 1B. Unresolved Staff Comments.None. Item 2. Properties.Our principal executive offices are located at a property owned by us at 4401 Colwick Road, Charlotte, North Carolina 28211, and our telephonenumber at that location is (704) 566-2400.Our dealerships are generally located along major U.S. or interstate highways. One of the principal factors we consider in evaluating a potentialacquisition is its location. We prefer to acquire dealerships or build dealership facilities located along major thoroughfares, which can be easily visited byprospective customers.We lease the majority of the properties utilized by our dealership operations from affiliates of Capital Automotive REIT and other individuals andentities. Under the terms of our franchise and dealer agreements, each of our dealerships must maintain an appropriate appearance and design of its dealershipfacility and is restricted in its ability to relocate. The properties utilized by our dealership operations that are owned by us or one of our subsidiaries arepledged as security for the 2016 Credit Facilities or mortgage financing arrangements. We believe that our facilities are adequate for our current needs. Item 3. Legal Proceedings.We are involved, and expect to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of our business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has beencertified. Although we vigorously defend ourselves in all legal and administrative proceedings, the outcomes of pending and future proceedings arising outof the conduct of our business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actionsand actions brought by governmental authorities, cannot be predicted with certainty. Similarly, except as reflected in reserves we have provided for in otheraccrued liabilities and other long-term liabilities in the accompanying consolidated balance sheets, we are currently unable to estimate a range of reasonablypossible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings. An unfavorable resolution of one or more ofthese matters could have a material adverse effect on our business, financial condition, results of operations, cash flows or prospects. Included in otheraccrued liabilities and other long-term liabilities at December 31, 2017 was approximately $3.0 million and $0.2 million, respectively, in reserves that wewere holding for pending proceedings. Item 4. Mine Safety Disclosures.Not applicable. 23 SONIC AUTOMOTIVE, INC. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Our Class A common stock is currently traded on the NYSE under the symbol “SAH.” Our Class B common stock is not traded on a public market.As of February 27, 2018, there were 30,384,481 shares of our Class A common stock and 12,029,375 shares of our Class B common stock outstanding.As of February 27, 2018, there were 1,149 record holders of the Class A common stock and four record holders of the Class B common stock. The closingstock price for the Class A common stock on February 27, 2018 was $20.05.Our Board of Directors approved four quarterly cash dividends on all outstanding shares of common stock totaling $0.20 per share, $0.20 per shareand $0.11 per share during 2017, 2016 and 2015, respectively. Subsequent to December 31, 2017, our Board of Directors approved a cash dividend on alloutstanding shares of common stock of $0.06 per share for stockholders of record on March 15, 2018 to be paid on April 13, 2018. The declaration andpayment of any future dividend is subject to the business judgment of our Board of Directors, taking into consideration our historic and projected results ofoperations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, current economic environment and other factorsconsidered by our Board of Directors to be relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors determines ourfuture dividend policy. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” tothe accompanying consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources” for additional discussion of dividends and for a description of restrictions on the payment of dividends.The following table sets forth the high and low closing sales prices for our Class A common stock for each calendar quarter during the periodsindicated as reported by the NYSE Composite Tape and the dividends declared during such periods: Market Price Cash Dividend High Low Declared 2017 Fourth Quarter $21.90 $18.45 $0.05 Third Quarter $20.40 $16.40 $0.05 Second Quarter $20.70 $17.65 $0.05 First Quarter $25.95 $19.90 $0.05 2016 Fourth Quarter $24.00 $16.90 $0.05 Third Quarter $19.19 $16.68 $0.05 Second Quarter $19.04 $16.15 $0.05 First Quarter $22.35 $15.91 $0.05 24 SONIC AUTOMOTIVE, INC. Issuer Purchases of Equity SecuritiesThe following table sets forth information about the shares of Class A common stock we repurchased during the three months ended December 31,2017: TotalNumberof SharesPurchased AveragePrice Paidper Share Total Numberof Shares Purchasedas Part of PubliclyAnnounced Plansor Programs (1) Approximate DollarValue of Sharesthat May Yet BePurchased Underthe Plans or Programs(1) (In thousands, except per share data) October 2017 - $- - $107,686 November 2017 - $- - $107,686 December 2017 - $- - $107,686 Total - - (1) On January 20, 2016 and February 13, 2017, we announced that our Board of Directors had increased the dollar amount authorized for us torepurchase shares of our Class A common stock pursuant to our previously announced share repurchase program. Our share repurchase program does nothave an expiration date and current remaining availability under the program is as follows: (In thousands) January 2016 authorization $100,000 February 2017 authorization 100,000 Total active program repurchases prior to December 31, 2017 (92,314)Current remaining availability as of December 31, 2017 $107,686 25 SONIC AUTOMOTIVE, INC. Item 6. Selected Financial Data.This selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.We have accounted for all of our dealership acquisitions using the purchase method of accounting and, as a result, we do not include in ourconsolidated financial statements the results of operations of these dealerships prior to the date we acquired them. Our selected consolidated financial datareflects the results of operations and financial positions of each of our dealerships acquired prior to December 31, 2017. As a result of the effects of ouracquisitions and other potential factors in the future, the historical consolidated financial information described in the selected consolidated financial data isnot necessarily indicative of the results of our operations and financial position in the future or the results of our operations and financial position that wouldhave resulted had such acquisitions occurred at the beginning of the periods presented in the selected consolidated financial data. Year Ended December 31, 2017 2016 2015 2014 2013 (In millions, except per share data) Income Statement Data (1): Total revenues $9,867.2 $9,731.8 $9,624.3 $9,197.1 $8,843.2 Impairment charges $9.4 $8.1 $18.0 $6.6 $9.9 Income (loss) from continuing operations before taxes $108.1 $155.2 $145.2 $161.7 $129.0 Income (loss) from continuing operations $94.2 $94.5 $88.1 $98.6 $84.7 Basic earnings (loss) per share from continuing operations $2.14 $2.07 $1.74 $1.89 $1.60 Diluted earnings (loss) per share from continuing operations $2.12 $2.06 $1.73 $1.87 $1.59 Balance Sheet Data (1): Total assets $3,818.5 $3,639.3 $3,562.4 $3,168.3 $3,036.8 Current maturities of long-term debt $61.3 $43.0 $33.4 $30.8 $18.2 Total long-term debt (including current maturities of long-term debt) $1,024.7 $882.7 $814.6 $758.5 $734.0 Total long-term liabilities (including current maturities of long-term debt) $1,138.2 $1,020.3 $952.1 $885.3 $846.9 Cash dividends declared per common share $0.20 $0.20 $0.11 $0.10 $0.10 (1)As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources”and Note 2, “Business Acquisitions and Dispositions,” Note 5, “Intangible Assets and Goodwill,” and Note 6, “Long-Term Debt,” to theaccompanying consolidated financial statements, impairment charges, business combinations and dispositions and debt refinancings have had amaterial impact on our reported historical consolidated financial information. 26 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financialstatements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. The financial and statistical data contained in the followingdiscussion for all periods presented reflects our December 31, 2017 classification of dealerships between continuing and discontinued operations inaccordance with “Presentation of Financial Statements” in the Accounting Standards Codification (the “ASC”).Unless otherwise noted, we present the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations on aconsolidated basis. To the extent that differences among operating segments are material to an understanding of our business taken as a whole, they arediscussed separately.All discussion of increases or decreases are compared to the prior year period ended December 31, as applicable. The following discussion of newvehicles, used vehicles, wholesale vehicles, parts, service and collision repair and finance, insurance and other are on a same store basis, except whereotherwise noted. All continuing operations stores are included within the same store group in the first full month following the first anniversary of the store’sopening or acquisition. During the year ended December 31, 2017 (“2017”), we acquired one stand-alone pre-owned vehicle store, opened one newmanufacturer-awarded open point franchised dealership and opened two new EchoPark stores, which are included in reported amounts for 2017, but areexcluded from same store reporting for all periods. During the year ended December 31, 2016 (“2016”), we acquired one stand-alone pre-owned vehicle store,opened two new manufacturer-awarded open point franchised dealerships and opened two new EchoPark stores, which are included in reported amounts forall periods and same store reporting for 2017 compared to 2016, but are excluded from same store reporting for 2016 compared to 2015. During 2015, weopened one new EchoPark store, which is included in reported and same store amounts for all periods.We disposed of three dealership franchises and closed two stand-alone pre-owned vehicle stores during 2017 and had no franchises held for sale as ofDecember 31, 2017. We did not dispose of any dealership franchises during 2016. We disposed of four dealership franchises during 2015. The results ofoperations of these disposed dealership franchises and closed stores are included in continuing operations on the accompanying consolidated statements ofincome for all periods presented. We elected to adopt and apply the guidance of Accounting Standards Update (“ASU”) 2014-08 beginning with ourQuarterly Report on Form 10-Q for the period ended June 30, 2014. Dealership franchises disposed of subsequent to March 31, 2014 have not beenreclassified to discontinued operations since they did not meet the criteria in ASU 2014-08. See Note 2, “Business Acquisitions and Dispositions,” to theaccompanying consolidated financial statements for tabular disclosure of the effects of disposed dealership franchises that remain in continuing operations.OverviewWe are one of the largest automotive retailers in the United States (as measured by total revenue). As of December 31, 2017, we operated 114 newvehicle franchises in 13 states (representing 23 different brands of cars and light trucks), 18 collision repair centers and nine pre-owned stores. As a result ofthe way we manage our business, we had two operating segments as of December 31, 2017: (1) the Franchised Dealerships Segment and (2) the Pre-OwnedStores Segment. For management and operational reporting purposes, we group certain franchises together that share management and inventory (principallyused vehicles) into “stores.” As of December 31, 2017, we operated 103 stores in the Franchised Dealerships Segment and nine stores in the Pre-Owned StoresSegment.The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales ofreplacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “FixedOperations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “F&I”) for ourcustomers. The Pre-Owned Stores Segment provides the same services (excluding new vehicle sales and manufacturer warranty repairs) in stand-alone pre-owned vehicle specialty retail locations and includes our EchoPark stores. Our pre-owned stores business operates independently from our franchiseddealerships business. Sales operations in our first EchoPark market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2017, we hadsix EchoPark stores in operation in Colorado and one in Texas. By the end of 2018, we expect to open additional EchoPark stores in North Carolina andTexas. We believe that the expansion of our pre-owned stores business will provide long-term benefits to our Company, our stockholders and our guests.However, in the short term, this strategic initiative may negatively impact our overall operating results as we allocate management and capital resources tothis business.27 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS In the fourth quarter of 2013, we announced a new customer experience initiative known as “One Sonic-One Experience” (“OSOE”). This initiativeincludes several new processes and proprietary technologies from inventory management, electronic desking and pricing tools to a fully developed“customer-centric” Customer Relationship Management tool. We believe that the development of these processes and technologies will allow us to betterserve our customers across our entire platform of stores. Our goal is to allow our guests to control the buying process and move at their pace so that once thevehicle has been selected our team can utilize these processes and technologies to allow our guests to complete a new or pre-owned vehicle sales transactionin less than an hour. During the latter half of 2014 and throughout 2015, we rolled out the OSOE initiative at our dealerships in Charlotte, North Carolina.During 2016, we introduced the technology component of the initiative to 14 additional stores in our Alabama, California and Tennessee markets, and, in thefirst half of 2017, we launched OSOE at our BMW dealership in Greenville, South Carolina and our Audi and Honda dealerships in Pensacola, Florida. We donot currently plan to expand the OSOE rollout to additional existing stores until the model has matured and proven it can provide the required financialreturns.We are continually evaluating the landscape of human mobility and the risks and opportunities that are on the horizon that may reshape our business.We believe the dealership model will continue to serve as the primary resource for consumers for quite some time, but as consumers gravitate toward andaccept other sources of mobility, we want to position Sonic to participate in those offerings. This would include partnerships or relationships with ridehailing, fractional ownership, subscription service or manufacturer promoted programs that satisfy a customer demand or need.Executive SummaryThe U.S. retail automotive industry’s total new vehicle unit sales volume decreased 1.7%, to 17.2 million vehicles, in 2017, from 17.5 million vehiclesin 2016, according to Bloomberg Financial Markets, provided by Stephens Inc. For 2018, analysts’ average industry expectation for the new vehicleseasonally adjusted annual rate of sales (“SAAR”) is approximately 16.8 million vehicles, a 2.3% decrease compared to the industry volume level in 2017.We estimate the 2018 new vehicle SAAR will be between 16.75 million and 17.0 million vehicles. Changes in consumer confidence, availability ofconsumer financing or changes in the financial stability of automotive manufacturers could cause actual 2018 new vehicle SAAR to vary from expectations.Many factors such as brand and geographic concentrations have caused our past results to differ from the industry’s overall trend, as well as the industry salesmix between retail and fleet new vehicle sales volume. Our current operational goal focuses on growing our retail new vehicle sales, as opposed to fleet newvehicle sales, and, as a result, we believe it is appropriate to compare our retail new vehicle unit sales volume to the retail new vehicle SAAR (which excludesfleet new vehicle sales). According to the Power Information Network (“PIN”) from J.D. Power, industry retail new vehicle unit sales volume decreased 1.4%,to 13.9 million vehicles, in 2017, from 14.1 million vehicles in 2016.We operate 19 franchise stores and five collision repair centers in the greater Houston market, which represent approximately 20.0% of our totalrevenues. Hurricane Harvey affected store operations at all of our Houston market locations, resulting in temporary store closures in late August and earlySeptember 2017, as well as significant inventory and facility damage at certain locations. As the Houston market began to recover from the effects ofHurricane Harvey, we experienced increased demand for new and used vehicle sales as a result of replacement vehicle demand in September and into thebeginning of the fourth quarter of 2017. We do not expect this replacement vehicle demand in the Houston market to continue into 2018. Hurricane Irmaaffected store operations in the Alabama, Florida and Georgia markets to varying degrees, resulting in temporary store closures during September 2017.Twenty-four stores in these markets were impacted by Hurricane Irma, with the most significant operational impact at 11 of our Florida stores. We did notexperience the same level of increased vehicle sales activity in these markets as we did in the Houston market, due to less flooding as a result of HurricaneIrma as compared to Hurricane Harvey.Our same store new vehicle revenue increased 0.7% during 2017 despite a 0.4% decrease in new vehicle unit sales volume. New vehicle gross profitdecreased 0.2% due to lower new vehicle unit sales volume, partially offset by new vehicle gross profit per unit, which increased $4 per unit, or 0.2%, to$1,948 per unit. While the availability of vehicle pricing information to consumers, increased competition for sales between similar branded dealerships andhigher overall inventory levels have resulted in downward pressure on new vehicle pricing, we believe that new vehicle gross margins have stabilized and donot anticipate significant declines in future periods.Our same store retail used vehicle revenue decreased 0.5% during 2017, driven by a 0.5% decrease in retail used vehicle unit sales volume. Retail usedvehicle gross profit decreased 3.0%, driven by a decrease in retail used vehicle gross profit per unit of $32 per unit, or 2.5%, to $1,240 per unit. Our samestore wholesale vehicle gross loss increased approximately $1.5 million, or 22.2%, during 2017, primarily driven by higher losses per unit. We focus onmaintaining used vehicle inventory days’ supply in the 30- to 40-28 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS day range in order to limit our exposure to market pricing volatility. Our used vehicle inventory days’ supply was approximately 34 and 36 days as ofDecember 31, 2017 and 2016, respectively.Our same store Fixed Operations revenue was flat during 2017, while our Fixed Operations gross profit increased 1.1%. Fixed Operations gross marginincreased 50 basis points, to 48.3%, during 2017. Although vehicle sales and sales of associated finance, insurance and other aftermarket products arecyclical and are affected by many factors, including overall economic conditions, consumer confidence, levels of discretionary personal income, interest ratesand available credit, our parts, service and collision repair services are not closely tied to vehicle sales and are not as dependent upon near-term sales volume.However, significant changes to the level of manufacturer recall and warranty activity could negatively impact our Fixed Operations results in the future.Our same store F&I revenue increased 2.9% during 2017, driven by a 3.5% increase in F&I gross profit per retail unit, partially offset by a 0.5%decrease in combined retail new and used vehicle unit sales volume. F&I gross profit per retail unit increased $47 per unit, to $1,392 per unit, for 2017. Webelieve that our proprietary software applications, playbook processes and customer-centric selling approach enable us to maximize gross profit per F&Icontract and penetration rates (the number of F&I products sold per vehicle) across our F&I product lines. We believe we will continue to increase revenue inthis area as we refine our processes, train our associates and continue to sell high levels of retail new and used vehicles at our stores.Results of OperationsThe following table summarizes the percentages of total revenues represented by certain items reflected in our consolidated statements of income: Percentage of Total Revenues Year Ended December 31, 2017 2016 2015 Revenues: New vehicles 53.7% 53.8% 54.7%Used vehicles 26.6% 26.0% 26.1%Wholesale vehicles 1.7% 2.2% 1.6%Parts, service and collision repair 14.4% 14.5% 14.2%Finance, insurance and other, net 3.6% 3.5% 3.4%Total revenues 100.0% 100.0% 100.0%Cost of sales 85.2% 85.3% 85.3%Gross profit 14.8% 14.7% 14.7%Selling, general and administrative expenses 11.6% 11.4% 11.5%Impairment charges 0.1% 0.1% 0.2%Depreciation and amortization 1.0% 0.8% 0.7%Operating income (loss) 2.1% 2.4% 2.3%Interest expense, floor plan 0.4% 0.3% 0.2%Interest expense, other, net 0.5% 0.5% 0.6%Other (income) expense, net 0.1% 0.0% 0.0%Income (loss) from continuing operations before taxes 1.1% 1.6% 1.5%Provision for income taxes for continuing operations - (benefit) expense 0.1% 0.6% 0.6%Income (loss) from continuing operations 1.0% 1.0% 0.9% Results of Operations - ConsolidatedNew Vehicles – ConsolidatedNew vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues and gross profitcan be influenced by manufacturer incentives to consumers, which vary from cash-back incentives to low interest rate financing, among other things. Newvehicle revenues and gross profit are also dependent on vehicle manufacturers providing adequate inventory allocations to our dealerships to meet customerdemands and the availability of consumer credit. The automobile manufacturing industry is cyclical and historically has experienced periodic downturnscharacterized by oversupply and weak demand. As an automotive retailer, we seek to mitigate the effects of this cyclicality by maintaining a diverse brandmix of29 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower priced/economy vehicles to luxury vehicles.The U.S. retail automotive industry’s new vehicle unit sales volume below reflects all brands marketed or sold in the United States. This industry salesvolume includes brands we do not sell and markets in which we do not operate, therefore our new vehicle sales volume may not trend directly in line withindustry sales volume. We believe that retail unit sales volume is a more meaningful metric for comparing our new vehicles sales volume to the industry dueto our minimal fleet vehicle business. Year Ended December 31, Year Ended December 31, (In millions of vehicles)2017 2016 % Change 2016 2015 % Change U.S. industry volume - Retail (1) 13.9 14.1 (1.4%) 14.1 14.2 (0.7%)U.S. industry volume - Fleet 3.3 3.4 (2.9%) 3.4 3.2 6.3%U.S. industry volume - Total (2) 17.2 17.5 (1.7%) 17.5 17.4 0.6% (1)Source: PIN from J.D. Power(2)Source: Bloomberg Financial Markets, provided by Stephens Inc. According to industry analysts, industry volume expectations for 2018 range from 16.75 million to 17.0 million vehicles, which would represent adecrease of 1.2% to 4.1% compared to the industry volume for 2017.The following tables provide a reconciliation of consolidated same store basis and reported basis for total new vehicles (combined retail and fleetdata): Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total new vehicle revenue: Same store $5,204,867 $5,170,372 $34,495 0.7%Acquisitions, open points and dispositions 90,184 64,133 26,051 NM Total as reported $5,295,051 $5,234,505 $60,546 1.2% Total new vehicle gross profit: Same store $259,220 $259,668 $(448) (0.2%)Acquisitions, open points and dispositions 5,706 926 4,780 NM Total as reported $264,926 $260,594 $4,332 1.7% Total new vehicle unit sales: Same store 133,047 133,606 (559) (0.4%)Acquisitions, open points and dispositions 2,616 2,397 219 NM Total as reported 135,663 136,003 (340) (0.2%) NM = Not Meaningful 30 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total new vehicle revenue: Same store $5,186,149 $5,200,257 $(14,108) (0.3%)Acquisitions, open points and dispositions 48,356 65,144 (16,788) NM Total as reported $5,234,505 $5,265,401 $(30,896) (0.6%) Total new vehicle gross profit: Same store $258,227 $265,679 $(7,452) (2.8%)Acquisitions, open points and dispositions 2,367 2,250 117 NM Total as reported $260,594 $267,929 $(7,335) (2.7%) Total new vehicle unit sales: Same store 134,768 138,206 (3,438) (2.5%)Acquisitions, open points and dispositions 1,235 1,795 (560) NM Total as reported 136,003 140,001 (3,998) (2.9%) NM = Not Meaningful Our consolidated reported new vehicle results (combined retail and fleet data) are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported new vehicle: Revenue $5,295,051 $5,234,505 $60,546 1.2%Gross profit $264,926 $260,594 $4,332 1.7%Unit sales 135,663 136,003 (340) (0.2%)Revenue per unit $39,031 $38,488 $543 1.4%Gross profit per unit $1,953 $1,916 $37 1.9%Gross profit as a % of revenue 5.0% 5.0% 0 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported new vehicle: Revenue $5,234,505 $5,265,401 $(30,896) (0.6%)Gross profit $260,594 $267,929 $(7,335) (2.7%)Unit sales 136,003 140,001 (3,998) (2.9%)Revenue per unit $38,488 $37,610 $878 2.3%Gross profit per unit $1,916 $1,914 $2 0.1%Gross profit as a % of revenue 5.0% 5.1% (10) bps 31 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our consolidated same store new vehicle results (combined retail and fleet data) are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store new vehicle: Revenue $5,204,867 $5,170,372 $34,495 0.7%Gross profit $259,220 $259,668 $(448) (0.2%)Unit sales 133,047 133,606 (559) (0.4%)Revenue per unit $39,121 $38,699 $422 1.1%Gross profit per unit $1,948 $1,944 $4 0.2%Gross profit as a % of revenue 5.0% 5.0% 0 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store new vehicle: Revenue $5,186,149 $5,200,257 $(14,108) (0.3%)Gross profit $258,227 $265,679 $(7,452) (2.8%)Unit sales 134,768 138,206 (3,438) (2.5%)Revenue per unit $38,482 $37,627 $855 2.3%Gross profit per unit $1,916 $1,922 $(6) (0.3%)Gross profit as a % of revenue 5.0% 5.1% (10) bps For further analysis of new vehicle results, see the tables and discussion under the heading “New Vehicles – Franchised Dealerships Segment” in theFranchised Dealerships Segment section below.Used Vehicles – ConsolidatedUsed vehicle revenues are directly affected by a number of factors, including the level of manufacturer incentives on new vehicles, the number andquality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and the availability of consumer credit.The following tables provide a reconciliation of consolidated same store basis and reported basis for retail used vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store $2,476,967 $2,488,866 $(11,899) (0.5%)Acquisitions, open points and dispositions 145,086 44,256 100,830 NM Total as reported $2,622,053 $2,533,122 $88,931 3.5% Total used vehicle gross profit: Same store $143,690 $148,069 $(4,379) (3.0%)Acquisitions, open points and dispositions 11,213 10,516 697 NM Total as reported $154,903 $158,585 $(3,682) (2.3%) Total used vehicle unit sales: Same store 115,916 116,450 (534) (0.5%)Acquisitions, open points and dispositions 7,573 2,724 4,849 NM Total as reported 123,489 119,174 4,315 3.6%32 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store $2,480,370 $2,460,827 $19,543 0.8%Acquisitions, open points and dispositions 52,752 51,197 1,555 NM Total as reported $2,533,122 $2,512,024 $21,098 0.8% Total used vehicle gross profit: Same store $155,784 $160,633 $(4,849) (3.0%)Acquisitions, open points and dispositions 2,801 1,409 1,392 NM Total as reported $158,585 $162,042 $(3,457) (2.1%) Total used vehicle unit sales: Same store 116,497 114,261 2,236 2.0%Acquisitions, open points and dispositions 2,677 2,862 (185) NM Total as reported 119,174 117,123 2,051 1.8% NM = Not Meaningful Our consolidated reported used vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported used vehicle: Revenue $2,622,053 $2,533,122 $88,931 3.5%Gross profit $154,903 $158,585 $(3,682) (2.3%)Unit sales 123,489 119,174 4,315 3.6%Revenue per unit $21,233 $21,256 $(23) (0.1%)Gross profit per unit $1,254 $1,331 $(77) (5.8%)Gross profit as a % of revenue 5.9% 6.3% (40) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported used vehicle: Revenue $2,533,122 $2,512,024 $21,098 0.8%Gross profit $158,585 $162,042 $(3,457) (2.1%)Unit sales 119,174 117,123 2,051 1.8%Revenue per unit $21,256 $21,448 $(192) (0.9%)Gross profit per unit $1,331 $1,384 $(53) (3.8%)Gross profit as a % of revenue 6.3% 6.5% (20) bps 33 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our consolidated same store used vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store used vehicle: Revenue $2,476,967 $2,488,866 $(11,899) (0.5%)Gross profit $143,690 $148,069 $(4,379) (3.0%)Unit sales 115,916 116,450 (534) (0.5%)Revenue per unit $21,369 $21,373 $(4) (0.0%)Gross profit per unit $1,240 $1,272 $(32) (2.5%)Gross profit as a % of revenue 5.8% 5.9% (10) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store used vehicle: Revenue $2,480,370 $2,460,827 $19,543 0.8%Gross profit $155,784 $160,633 $(4,849) (3.0%)Unit sales 116,497 114,261 2,236 2.0%Revenue per unit $21,291 $21,537 $(246) (1.1%)Gross profit per unit $1,337 $1,406 $(69) (4.9%)Gross profit as a % of revenue 6.3% 6.5% (20) bps For further analysis of used vehicle results, see the tables and discussion under the headings “Used Vehicles – Franchised Dealerships Segment” and“Used Vehicles and F&I - Pre-Owned Stores Segment” in the Franchised Dealerships Segment and Pre-Owned Stores Segment sections below.Wholesale Vehicles - ConsolidatedWholesale vehicle revenues are highly correlated with new and used vehicle retail sales and the associated trade-in volume. Wholesale vehiclerevenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicleinventory.The following tables provide a reconciliation of consolidated same store basis and reported basis for wholesale vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $165,308 $207,263 $(41,955) (20.2%)Acquisitions, open points and dispositions 5,756 3,785 1,971 NM Total as reported $171,064 $211,048 $(39,984) (18.9%) Total wholesale vehicle gross profit (loss): Same store $(8,181) $(6,694) $(1,487) (22.2%)Acquisitions, open points and dispositions (533) (622) 89 NM Total as reported $(8,714) $(7,316) $(1,398) (19.1%) Total wholesale vehicle unit sales: Same store 29,978 34,108 (4,130) (12.1%)Acquisitions, open points and dispositions 1,407 990 417 NM Total as reported 31,385 35,098 (3,713) (10.6%)34 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $207,324 $152,426 $54,898 36.0%Acquisitions, open points and dispositions 3,724 2,913 811 NM Total as reported $211,048 $155,339 $55,709 35.9% Total wholesale vehicle gross profit (loss): Same store $(6,767) $(6,748) $(19) (0.3%)Acquisitions, open points and dispositions (549) (620) 71 NM Total as reported $(7,316) $(7,368) $52 0.7% Total wholesale vehicle unit sales: Same store 34,354 29,558 4,796 16.2%Acquisitions, open points and dispositions 744 610 134 NM Total as reported 35,098 30,168 4,930 16.3%NM = Not MeaningfulOur consolidated reported wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $171,064 $211,048 $(39,984) (18.9%)Gross profit (loss) $(8,714) $(7,316) $(1,398) (19.1%)Unit sales 31,385 35,098 (3,713) (10.6%)Revenue per unit $5,451 $6,013 $(562) (9.3%)Gross profit (loss) per unit $(278) $(208) $(70) (33.7%)Gross profit (loss) as a % of revenue (5.1%) (3.5%) (160) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $211,048 $155,339 $55,709 35.9%Gross profit (loss) $(7,316) $(7,368) $52 0.7%Unit sales 35,098 30,168 4,930 16.3%Revenue per unit $6,013 $5,149 $864 16.8%Gross profit (loss) per unit $(208) $(244) $36 14.8%Gross profit (loss) as a % of revenue (3.5%) (4.7%) 120 bps 35 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our consolidated same store wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $165,308 $207,263 $(41,955) (20.2%)Gross profit (loss) $(8,181) $(6,694) $(1,487) (22.2%)Unit sales 29,978 34,108 (4,130) (12.1%)Revenue per unit $5,514 $6,077 $(563) (9.3%)Gross profit (loss) per unit $(273) $(196) $(77) (39.3%)Gross profit (loss) as a % of revenue (4.9%) (3.2%) (170) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $207,324 $152,426 $54,898 36.0%Gross profit (loss) $(6,767) $(6,748) $(19) (0.3%)Unit sales 34,354 29,558 4,796 16.2%Revenue per unit $6,035 $5,157 $878 17.0%Gross profit (loss) per unit $(197) $(228) $31 13.6%Gross profit (loss) as a % of revenue (3.3%) (4.4%) 110 bps For further analysis of wholesale vehicle results, see the tables and discussion under the headings “Wholesale Vehicles – Franchised DealershipsSegment” and “Wholesale Vehicles - Pre-Owned Stores Segment” in the Franchised Dealerships Segment and Pre-Owned Stores Segment sections below.Fixed Operations - ConsolidatedParts, service and collision repair revenues consist of customer requested orders (“customer pay”), warranty repairs, wholesale parts and internal, subletand other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality,manufacturer recalls, customer loyalty and prepaid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning workperformed on vehicles that are sold to customers. When that work is performed by one of our dealerships, the work is classified as internal. In the event thework is performed by a third party on our behalf, it is classified as sublet. In 2017, we changed the character of certain manufacturer-offered complimentarymaintenance repair orders from customer pay to warranty. Accordingly, the customer pay and warranty amounts in the tables below reflect this change for2017, but not for 2016 or 2015, as it was administratively impractical to recalculate the 2016 and 2015 amounts.We believe that over time, vehicle quality will improve, but vehicle complexity and the associated demand for repairs at franchised dealerships willoffset any revenue lost from improvement in vehicle quality. We also believe that over the long term we have the ability to continue to add service capacityand increase revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in thewarranty coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitatelong-term growth in our service and parts business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers forwarranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future warranty-related revenues.36 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS The following tables provide a reconciliation of consolidated same store basis and reported basis for Fixed Operations: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Total Fixed Operations revenue: Same store $1,391,183 $1,391,188 $(5) (0.0%)Acquisitions, open points and dispositions 24,827 18,631 6,196 NM Total as reported $1,416,010 $1,409,819 $6,191 0.4% Total Fixed Operations gross profit: Same store $671,398 $664,358 $7,040 1.1%Acquisitions, open points and dispositions 12,133 9,768 2,365 NM Total as reported $683,531 $674,126 $9,405 1.4% NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Total Fixed Operations revenue: Same store $1,397,987 $1,340,547 $57,440 4.3%Acquisitions, open points and dispositions 11,832 24,400 (12,568) NM Total as reported $1,409,819 $1,364,947 $44,872 3.3% Total Fixed Operations gross profit: Same store $667,998 $653,657 $14,341 2.2%Acquisitions, open points and dispositions 6,128 11,764 (5,636) NM Total as reported $674,126 $665,421 $8,705 1.3%37 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not MeaningfulOur consolidated reported Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $555,463 $582,557 $(27,094) (4.7%)Warranty 282,926 240,415 42,511 17.7%Wholesale parts 168,459 176,870 (8,411) (4.8%)Internal, sublet and other 409,162 409,977 (815) (0.2%)Total revenue $1,416,010 $1,409,819 $6,191 0.4%Gross profit Customer pay $296,834 $314,791 $(17,957) (5.7%)Warranty 156,082 129,924 26,158 20.1%Wholesale parts 28,989 30,754 (1,765) (5.7%)Internal, sublet and other 201,626 198,657 2,969 1.5%Total gross profit $683,531 $674,126 $9,405 1.4%Gross profit as a % of revenue Customer pay 53.4% 54.0% (60) bps Warranty 55.2% 54.0% 120 bps Wholesale parts 17.2% 17.4% (20) bps Internal, sublet and other 49.3% 48.5% 80 bps Total gross profit as a % of revenue 48.3% 47.8% 50 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $582,557 $577,265 $5,292 0.9%Warranty 240,415 228,093 12,322 5.4%Wholesale parts 176,870 181,296 (4,426) (2.4%)Internal, sublet and other 409,977 378,293 31,684 8.4%Total revenue $1,409,819 $1,364,947 $44,872 3.3%Gross profit Customer pay $314,791 $316,026 $(1,235) (0.4%)Warranty 129,924 126,571 3,353 2.6%Wholesale parts 30,754 32,249 (1,495) (4.6%)Internal, sublet and other 198,657 190,575 8,082 4.2%Total gross profit $674,126 $665,421 $8,705 1.3%Gross profit as a % of revenue Customer pay 54.0% 54.7% (70) bps Warranty 54.0% 55.5% (150) bps Wholesale parts 17.4% 17.8% (40) bps Internal, sublet and other 48.5% 50.4% (190) bps Total gross profit as a % of revenue 47.8% 48.8% (100) bps 38 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our consolidated same store Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $548,768 $575,641 $(26,873) (4.7%)Warranty 278,882 236,931 41,951 17.7%Wholesale parts 166,831 174,962 (8,131) (4.6%)Internal, sublet and other 396,702 403,654 (6,952) (1.7%)Total revenue $1,391,183 $1,391,188 $(5) (0.0%)Gross profit Customer pay $293,272 $310,919 $(17,647) (5.7%)Warranty 154,025 128,161 25,864 20.2%Wholesale parts 28,669 30,443 (1,774) (5.8%)Internal, sublet and other 195,432 194,835 597 0.3%Total gross profit $671,398 $664,358 $7,040 1.1%Gross profit as a % of revenue Customer pay 53.4% 54.0% (60) bps Warranty 55.2% 54.1% 110 bps Wholesale parts 17.2% 17.4% (20) bps Internal, sublet and other 49.3% 48.3% 100 bps Total gross profit as a % of revenue 48.3% 47.8% 50 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $579,026 $567,526 $11,500 2.0%Warranty 238,568 224,071 14,497 6.5%Wholesale parts 175,965 177,845 (1,880) (1.1%)Internal, sublet and other 404,428 371,105 33,323 9.0%Total revenue $1,397,987 $1,340,547 $57,440 4.3%Gross profit Customer pay $312,912 $310,593 $2,319 0.7%Warranty 129,046 124,535 4,511 3.6%Wholesale parts 30,606 31,576 (970) (3.1%)Internal, sublet and other 195,434 186,953 8,481 4.5%Total gross profit $667,998 $653,657 $14,341 2.2%Gross profit as a % of revenue Customer pay 54.0% 54.7% (70) bps Warranty 54.1% 55.6% (150) bps Wholesale parts 17.4% 17.8% (40) bps Internal, sublet and other 48.3% 50.4% (210) bps Total gross profit as a % of revenue 47.8% 48.8% (100) bps For further analysis of Fixed Operations results, see the tables and discussion under the headings “Fixed Operations – Franchised DealershipsSegment” and “Fixed Operations - Pre-Owned Stores Segment” in the Franchised Dealerships Segment and Pre-Owned Stores Segment sections below.39 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS F&I - ConsolidatedFinance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extendedwarranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties, servicecontracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues arerecognized net of estimated chargebacks and other costs associated with originating contracts. F&I revenues are affected by the level of new and used vehicleunit sales, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives and our F&I penetration rate.The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurancecontracts that we are able to originate per vehicle sold, expressed as a percentage.Rate spread is another term for the commission earned by our dealerships for arranging vehicle financing for consumers. The amount of thecommission could be zero, a flat fee or an actual spread between the interest rate charged to the consumer and the interest rate provided by the directfinancing source (a commercial bank, credit union or manufacturer captive finance company). We have established caps on the potential rate spread ourdealerships can earn with all finance sources. We believe the rate spread we earn for arranging financing represents value to the consumer in numerous ways,including the following: •lower cost, below-market financing is often available only from the manufacturers’ captives and franchised dealers; •generally easy access to multiple high-quality lending sources; •lease-financing alternatives are largely available only from manufacturers’ captives or other indirect lenders; •customers with substandard credit frequently do not have direct access to potential sources of sub-prime financing; and •customers with significant “negative equity” in their current vehicle (i.e., the customer’s current vehicle is worth less than the balance of theirvehicle loan or lease obligation) frequently are unable to pay off the loan on their current vehicle and finance the purchase or lease of areplacement new or used vehicle without the assistance of a franchised dealer.The following tables provide a reconciliation of consolidated same store basis and reported basis for F&I: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Total F&I revenue: Same store$343,987 $334,205 $9,782 2.9%Acquisitions, open points and dispositions 19,043 9,080 9,963 NM Total as reported$363,030 $343,285 $19,745 5.8% Total F&I gross profit per retail unit (excludes fleet): Same store$1,392 $1,345 $47 3.5%Total as reported$1,411 $1,354 $57 4.2%40 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Total F&I revenue: Same store$335,221 $320,572 $14,649 4.6%Acquisitions, open points and dispositions 8,064 6,016 2,048 NM Total as reported$343,285 $326,588 $16,697 5.1% Total F&I gross profit per retail unit (excludes fleet): Same store$1,343 $1,279 $64 5.0%Total as reported$1,354 $1,279 $75 5.9% NM = Not Meaningful Our consolidated reported F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Reported F&I: Revenue$363,030 $343,285 $19,745 5.8%Gross profit per retail unit (excludes fleet)$1,411 $1,354 $57 4.2% Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Reported F&I: Revenue$343,285 $326,588 $16,697 5.1%Gross profit per retail unit (excludes fleet)$1,354 $1,279 $75 5.9% Our consolidated same store F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Same Store F&I: Revenue$343,987 $334,205 $9,782 2.9%Gross profit per retail unit (excludes fleet)$1,392 $1,345 $47 3.5% Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Same Store F&I: Revenue$335,221 $320,572 $14,649 4.6%Gross profit per retail unit (excludes fleet)$1,343 $1,279 $64 5.0% For further analysis of F&I results, see the tables and discussion under the headings “F&I – Franchised Dealerships Segment” and “Used Vehicles andF&I - Pre-Owned Stores Segment” in the Franchised Dealerships Segment and Pre-Owned Stores Segment sections below.41 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Results of Operations - Franchised Dealerships SegmentNew Vehicles – Franchised Dealerships SegmentNew vehicle revenues include the sale of new vehicles to retail customers, as well as the sale of fleet vehicles. New vehicle revenues and gross profitcan be influenced by manufacturer incentives to consumers, which vary from cash-back incentives to low interest rate financing, among other things. Newvehicle revenues and gross profit are also dependent on vehicle manufacturers providing adequate inventory allocations to our dealerships to meet customerdemands and the availability of consumer credit. The automobile manufacturing industry is cyclical and historically has experienced periodic downturnscharacterized by oversupply and weak demand. As an automotive retailer, we seek to mitigate the effects of this cyclicality by maintaining a diverse brandmix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower priced/economy vehicles, to luxuryvehicles.The following tables provide a reconciliation of Franchised Dealerships Segment same store basis and reported basis for total new vehicles (combinedretail and fleet data): Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total new vehicle revenue: Same store $5,204,867 $5,170,372 $34,495 0.7%Acquisitions, open points and dispositions 90,184 64,133 26,051 NM Total as reported $5,295,051 $5,234,505 $60,546 1.2% Total new vehicle gross profit: Same store $259,220 $259,668 $(448) (0.2%)Acquisitions, open points and dispositions 5,706 926 4,780 NM Total as reported $264,926 $260,594 $4,332 1.7% Total new vehicle unit sales: Same store 133,047 133,606 (559) (0.4%)Acquisitions, open points and dispositions 2,616 2,397 219 NM Total as reported 135,663 136,003 (340) (0.2%) NM = Not Meaningful 42 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total new vehicle revenue: Same store $5,186,149 $5,200,257 $(14,108) (0.3%)Acquisitions, open points and dispositions 48,356 65,144 (16,788) NM Total as reported $5,234,505 $5,265,401 $(30,896) (0.6%) Total new vehicle gross profit: Same store $258,227 $265,679 $(7,452) (2.8%)Acquisitions, open points and dispositions 2,367 2,250 117 NM Total as reported $260,594 $267,929 $(7,335) (2.7%) Total new vehicle unit sales: Same store 134,768 138,206 (3,438) (2.5%)Acquisitions, open points and dispositions 1,235 1,795 (560) NM Total as reported 136,003 140,001 (3,998) (2.9%) NM = Not Meaningful Our Franchised Dealerships Segment reported new vehicle results (combined retail and fleet data) are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported new vehicle: Revenue $5,295,051 $5,234,505 $60,546 1.2%Gross profit $264,926 $260,594 $4,332 1.7%Unit sales 135,663 136,003 (340) (0.2%)Revenue per unit $39,031 $38,488 $543 1.4%Gross profit per unit $1,953 $1,916 $37 1.9%Gross profit as a % of revenue 5.0% 5.0% 0 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported new vehicle: Revenue $5,234,505 $5,265,401 $(30,896) (0.6%)Gross profit $260,594 $267,929 $(7,335) (2.7%)Unit sales 136,003 140,001 (3,998) (2.9%)Revenue per unit $38,488 $37,610 $878 2.3%Gross profit per unit $1,916 $1,914 $2 0.1%Gross profit as a % of revenue 5.0% 5.1% (10) bps43 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Franchised Dealerships Segment same store new vehicle results (combined retail and fleet data) are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store new vehicle: Revenue $5,204,867 $5,170,372 $34,495 0.7%Gross profit $259,220 $259,668 $(448) (0.2%)Unit sales 133,047 133,606 (559) (0.4%)Revenue per unit $39,121 $38,699 $422 1.1%Gross profit per unit $1,948 $1,944 $4 0.2%Gross profit as a % of revenue 5.0% 5.0% 0 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store new vehicle: Revenue $5,186,149 $5,200,257 $(14,108) (0.3%)Gross profit $258,227 $265,679 $(7,452) (2.8%)Unit sales 134,768 138,206 (3,438) (2.5%)Revenue per unit $38,482 $37,627 $855 2.3%Gross profit per unit $1,916 $1,922 $(6) (0.3%)Gross profit as a % of revenue 5.0% 5.1% (10) bpsFranchised Dealerships Segment New Vehicles - 2017 Compared to 2016Our new vehicle revenue increased 0.7% and our new vehicle unit sales volume decreased 0.4%, driven primarily by decreases in new vehicle unitsales volume at our General Motors (excluding Cadillac), Mercedes and Cadillac dealerships, offset partially by increases in new vehicle unit sales volume atour Toyota, Honda and Hyundai dealerships. Our new vehicle gross profit decreased approximately $0.4 million, or 0.2%, primarily driven by decreases innew vehicle gross profit at our Cadillac, General Motors (excluding Cadillac) and Lexus dealerships, offset partially by increases in new vehicle gross profitat our BMW, Ford and Honda dealerships. Our gross profit per new unit increased $4 per unit, or 0.2%, to $1,948 per unit, primarily driven by increases ingross profit per new unit at our BMW, Honda and Ford dealerships, offset partially by decreases in gross profit per new unit at our Cadillac, General Motors(excluding Cadillac) and Lexus dealerships.As a result of increased replacement vehicle demand due to Hurricane Harvey, our Houston market experienced increases in new vehicle unit salesvolume and gross profit per new vehicle unit during the third quarter of 2017. Higher new vehicle sales volume and gross profit in the third and fourthquarters of 2017 partially offset lower new vehicle unit sales volume and gross profit during the first half of 2017 as a result of continued headwinds in theenergy markets, resulting in relatively flat new vehicle unit sales volume and gross profit for 2017.Franchised Dealerships Segment New Vehicles - 2016 Compared to 2015Our new vehicle revenue decreased 0.3% and our new vehicle unit sales volume decreased 2.5%, driven primarily by decreases in new vehicle unitsales volume at our BMW, Toyota and MINI dealerships, offset partially by increases in new vehicle unit sales volume at our Honda, Jaguar and Audidealerships. Our new vehicle gross profit decreased approximately $7.5 million, or 2.8%, primarily driven by decreases in new vehicle gross profit at ourLand Rover, General Motors (excluding Cadillac) and Porsche dealerships, offset partially by increases in new vehicle gross profit at our Honda, Audi andJaguar dealerships. Our gross profit per new unit decreased $6 per unit, or 0.3%, to $1,916 per unit, primarily driven by decreases in gross profit per new unitat our Land Rover, General Motors (excluding Cadillac) and Porsche dealerships, offset partially by increases in gross profit per new unit at our Honda, Audiand Jaguar dealerships.During 2016, we believe our new vehicle unit sales volume was negatively affected by “stop-sale” vehicles held in inventory as a result of open safetyrecalls on certain models for which the manufacturer instructed dealers not to sell the particular model until the recall work was performed. These “stop-sale”vehicles increased our inventory on-hand and associated floor plan interest expense44 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS during much of 2016. As of December 31, 2016, we had approximately 400 “stop-sale” new vehicles in our inventory, which increased our new vehicle days’supply by approximately one day.Used Vehicles – Franchised Dealerships SegmentUsed vehicle revenues are directly affected by a number of factors, including the level of manufacturer incentives on new vehicles, the number andquality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and the availability of consumer credit.The following tables provide a reconciliation of Franchised Dealerships Segment same store basis and reported basis for retail used vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store $2,355,814 $2,381,533 $(25,719) (1.1%)Acquisitions, open points and dispositions 50,593 37,622 12,971 NM Total as reported $2,406,407 $2,419,155 $(12,748) (0.5%) Total used vehicle gross profit: Same store $138,766 $142,321 $(3,555) (2.5%)Acquisitions, open points and dispositions 9,283 9,939 (656) NM Total as reported $148,049 $152,260 $(4,211) (2.8%) Total used vehicle unit sales: Same store 109,943 111,427 (1,484) (1.3%)Acquisitions, open points and dispositions 2,928 2,400 528 NM Total as reported 112,871 113,827 (956) (0.8%)NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store $2,388,364 $2,396,356 $(7,992) (0.3%)Acquisitions, open points and dispositions 30,791 51,197 (20,406) NM Total as reported $2,419,155 $2,447,553 $(28,398) (1.2%) Total used vehicle gross profit: Same store $150,835 $156,108 $(5,273) (3.4%)Acquisitions, open points and dispositions 1,425 1,608 (183) NM Total as reported $152,260 $157,716 $(5,456) (3.5%) Total used vehicle unit sales: Same store 112,162 111,036 1,126 1.0%Acquisitions, open points and dispositions 1,665 2,862 (1,197) NM Total as reported 113,827 113,898 (71) (0.1%)45 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not Meaningful Our Franchised Dealerships Segment reported used vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported used vehicle: Revenue $2,406,407 $2,419,155 $(12,748) (0.5%)Gross profit $148,049 $152,260 $(4,211) (2.8%)Unit sales 112,871 113,827 (956) (0.8%)Revenue per unit $21,320 $21,253 $67 0.3%Gross profit per unit $1,312 $1,338 $(26) (1.9%)Gross profit as a % of revenue 6.2% 6.3% (10) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported used vehicle: Revenue $2,419,155 $2,447,553 $(28,398) (1.2%)Gross profit $152,260 $157,716 $(5,456) (3.5%)Unit sales 113,827 113,898 (71) (0.1%)Revenue per unit $21,253 $21,489 $(236) (1.1%)Gross profit per unit $1,338 $1,385 $(47) (3.4%)Gross profit as a % of revenue 6.3% 6.4% (10) bps Our Franchised Dealerships Segment same store used vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store used vehicle: Revenue $2,355,814 $2,381,533 $(25,719) (1.1%)Gross profit $138,766 $142,321 $(3,555) (2.5%)Unit sales 109,943 111,427 (1,484) (1.3%)Revenue per unit $21,428 $21,373 $55 0.3%Gross profit per unit $1,262 $1,277 $(15) (1.2%)Gross profit as a % of revenue 5.9% 6.0% (10) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store used vehicle: Revenue $2,388,364 $2,396,356 $(7,992) (0.3%)Gross profit $150,835 $156,108 $(5,273) (3.4%)Unit sales 112,162 111,036 1,126 1.0%Revenue per unit $21,294 $21,582 $(288) (1.3%)Gross profit per unit $1,345 $1,406 $(61) (4.3%)Gross profit as a % of revenue 6.3% 6.5% (20) bps46 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Franchised Dealerships Segment Used Vehicles - 2017 Compared to 2016Retail used vehicle revenue decreased 1.1%, driven primarily by a 1.3% decrease in retail used vehicle unit sales volume. This decrease in retail usedvehicle unit sales volume was primarily driven by decreases in retail used vehicle unit sales volume at our Mercedes, Toyota, Ford and General Motors(excluding Cadillac) dealerships, offset partially by increases in retail used vehicle unit sales volume at our BMW and Audi dealerships. Retail used vehiclegross profit decreased approximately $3.6 million, or 2.5%, driven primarily by lower retail used vehicle unit sales volume and retail used vehicle gross profitper unit at our dealerships in the Houston market as a result of economic challenges in that market in the first half of 2017. Retail used vehicle gross profit perunit decreased $15 per unit, or 1.2%, driven primarily by lower retail used vehicle gross profit per unit at our BMW and General Motors (excluding Cadillac)dealerships.Franchised Dealerships Segment Used Vehicles - 2016 Compared to 2015Retail used vehicle revenue decreased 0.3%, primarily as a result of a shift in brand and model mix, which was partially offset by a 1.0% increase inretail used vehicle unit sales volume. This increase in retail used vehicle unit sales volume was primarily driven by increases in retail used vehicle unit salesvolume at our BMW, Mercedes and Toyota dealerships, offset partially by decreases in retail used vehicle unit sales volume at our Honda, Ford and GeneralMotors (excluding Cadillac) dealerships. Retail used vehicle gross profit decreased approximately $5.3 million, or 3.4%, driven primarily by lower retailused vehicle gross profit per unit at our dealerships in the Houston market as a result of ongoing economic challenges in that market. Retail used vehiclegross profit per unit decreased $61 per unit, or 4.3%, driven primarily by lower retail used vehicle gross profit per unit at our Honda, General Motors(excluding Cadillac) and Mercedes dealerships.During 2016, we believe our retail used vehicle unit sales volume and gross profit were negatively affected by “stop-sale” vehicles held in inventoryas a result of open safety recalls on certain models for which the manufacturer instructed dealers not to sell the particular model until the recall work wasperformed. These “stop-sale” vehicles increased our inventory on-hand and associated floor plan interest expense during much of 2016. As of December 31,2016, we had approximately 600 “stop-sale” retail used vehicles in our inventory, which increased our used vehicle days’ supply by approximately two days.Wholesale Vehicles - Franchised Dealerships SegmentWholesale vehicle revenues are highly correlated with new and used vehicle retail sales and the associated trade-in volume. Wholesale vehiclerevenues are also significantly affected by our corporate inventory management strategy and policies, which are designed to optimize our total used vehicleinventory.The following tables provide a reconciliation of Franchised Dealerships Segment same store basis and reported basis for wholesale vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $157,547 $197,143 $(39,596) (20.1%)Acquisitions, open points and dispositions 4,034 3,214 820 NM Total as reported $161,581 $200,357 $(38,776) (19.4%) Total wholesale vehicle gross profit (loss): Same store $(7,870) $(6,632) $(1,238) (18.7%)Acquisitions, open points and dispositions (608) (480) (128) NM Total as reported $(8,478) $(7,112) $(1,366) (19.2%) Total wholesale vehicle unit sales: Same store 27,969 32,271 (4,302) (13.3%)Acquisitions, open points and dispositions 914 871 43 NM Total as reported 28,883 33,142 (4,259) (12.9%)47 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $197,535 $149,002 $48,533 32.6%Acquisitions, open points and dispositions 2,822 2,913 (91) NM Total as reported $200,357 $151,915 $48,442 31.9% Total wholesale vehicle gross profit (loss): Same store $(6,737) $(6,601) $(136) (2.1%)Acquisitions, open points and dispositions (375) (621) 246 NM Total as reported $(7,112) $(7,222) $110 1.5% Total wholesale vehicle unit sales: Same store 32,581 28,683 3,898 13.6%Acquisitions, open points and dispositions 561 610 (49) NM Total as reported 33,142 29,293 3,849 13.1% NM = Not Meaningful Our Franchised Dealerships Segment reported wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $161,581 $200,357 $(38,776) (19.4%)Gross profit (loss) $(8,478) $(7,112) $(1,366) (19.2%)Unit sales 28,883 33,142 (4,259) (12.9%)Revenue per unit $5,594 $6,045 $(451) (7.5%)Gross profit (loss) per unit $(294) $(215) $(79) (36.7%)Gross profit (loss) as a % of revenue (5.2%) (3.5%) (170) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $200,357 $151,915 $48,442 31.9%Gross profit (loss) $(7,112) $(7,222) $110 1.5%Unit sales 33,142 29,293 3,849 13.1%Revenue per unit $6,045 $5,186 $859 16.6%Gross profit (loss) per unit $(215) $(247) $32 13.0%Gross profit (loss) as a % of revenue (3.5%) (4.8%) 130 bps48 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Franchised Dealerships Segment same store wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $157,547 $197,143 $(39,596) (20.1%)Gross profit (loss) $(7,870) $(6,632) $(1,238) (18.7%)Unit sales 27,969 32,271 (4,302) (13.3%)Revenue per unit $5,633 $6,109 $(476) (7.8%)Gross profit (loss) per unit $(281) $(206) $(75) (36.4%)Gross profit (loss) as a % of revenue (5.0%) (3.4%) (160) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $197,535 $149,002 $48,533 32.6%Gross profit (loss) $(6,737) $(6,601) $(136) (2.1%)Unit sales 32,581 28,683 3,898 13.6%Revenue per unit $6,063 $5,195 $868 16.7%Gross profit (loss) per unit $(207) $(230) $23 10.0%Gross profit (loss) as a % of revenue (3.4%) (4.4%) 100 bps Franchised Dealerships Segment Wholesale Vehicles - 2017 Compared to 2016Wholesale vehicle revenue and unit sales volume decreased, while wholesale gross loss increased due to higher gross loss per unit. The increase inwholesale vehicle gross loss per unit was primarily driven by declining used vehicle valuations due in part to increasing off-lease unit sales volume and theseasonal fluctuations in the pre-owned vehicle market.Franchised Dealerships Segment Wholesale Vehicles - 2016 Compared to 2015Wholesale vehicle revenue, gross loss and unit sales volume increased due to higher levels of wholesale activity as a result of elevated inventorylevels during the first quarter of 2016.Fixed Operations - Franchised Dealerships SegmentParts, service and collision repair revenues consist of customer requested orders (“customer pay”), warranty repairs, wholesale parts and internal, subletand other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality,manufacturer recalls, customer loyalty and prepaid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning workperformed on vehicles that are sold to customers. When that work is performed by one of our dealerships, the work is classified as internal. In the event thework is performed by a third party on our behalf, it is classified as sublet. In 2017, we changed the character of certain manufacturer-offered complimentarymaintenance repair orders from customer pay to warranty. Accordingly, the customer pay and warranty amounts in the tables below reflect this change for2017, but not for 2016 or 2015, as it was administratively impractical to recalculate the 2016 and 2015 amounts.We believe that over time, vehicle quality will improve, but vehicle complexity and the associated demand for repairs at franchised dealerships willoffset any revenue lost from improvement in vehicle quality. We also believe that over the long term we have the ability to continue to add service capacityand increase revenues. Manufacturers continue to extend new vehicle warranty periods and have also begun to include regular maintenance items in thewarranty coverage. These factors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitatelong-term growth in our service and parts business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers forwarranty work performed, as well as the improved quality of vehicles that may affect the level and frequency of future warranty related revenues.49 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS The following tables provide a reconciliation of Franchised Dealerships Segment same store basis and reported basis for Fixed Operations: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Total Fixed Operations revenue: Same store $1,380,968 $1,382,218 $(1,250) (0.1%)Acquisitions, open points and dispositions 20,834 18,070 2,764 NM Total as reported $1,401,802 $1,400,288 $1,514 0.1% Total Fixed Operations gross profit: Same store $666,728 $660,479 $6,249 0.9%Acquisitions, open points and dispositions 10,701 9,442 1,259 NM Total as reported $677,429 $669,921 $7,508 1.1% NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Total Fixed Operations revenue: Same store $1,389,945 $1,334,420 $55,525 4.2%Acquisitions, open points and dispositions 10,343 24,400 (14,057) NM Total as reported $1,400,288 $1,358,820 $41,468 3.1% Total Fixed Operations gross profit: Same store $664,655 $651,145 $13,510 2.1%Acquisitions, open points and dispositions 5,266 11,764 (6,498) NM Total as reported $669,921 $662,909 $7,012 1.1% NM = Not Meaningful50 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Franchised Dealerships Segment reported Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $554,080 $581,612 $(27,532) (4.7%)Warranty 282,926 240,415 42,511 17.7%Wholesale parts 168,459 176,870 (8,411) (4.8%)Internal, sublet and other 396,337 401,391 (5,054) (1.3%)Total revenue $1,401,802 $1,400,288 $1,514 0.1%Gross profit Customer pay $296,348 $314,439 $(18,091) (5.8%)Warranty 156,082 129,924 26,158 20.1%Wholesale parts 28,989 30,754 (1,765) (5.7%)Internal, sublet and other 196,010 194,804 1,206 0.6%Total gross profit $677,429 $669,921 $7,508 1.1%Gross profit as a % of revenue Customer pay 53.5% 54.1% (60) bps Warranty 55.2% 54.0% 120 bps Wholesale parts 17.2% 17.4% (20) bps Internal, sublet and other 49.5% 48.5% 100 bps Total gross profit as a % of revenue 48.3% 47.8% 50 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $581,612 $576,753 $4,859 0.8%Warranty 240,415 228,093 12,322 5.4%Wholesale parts 176,870 181,296 (4,426) (2.4%)Internal, sublet and other 401,391 372,678 28,713 7.7%Total revenue $1,400,288 $1,358,820 $41,468 3.1%Gross profit Customer pay $314,439 $315,837 $(1,398) (0.4%)Warranty 129,924 126,571 3,353 2.6%Wholesale parts 30,754 32,249 (1,495) (4.6%)Internal, sublet and other 194,804 188,252 6,552 3.5%Total gross profit $669,921 $662,909 $7,012 1.1%Gross profit as a % of revenue Customer pay 54.1% 54.8% (70) bps Warranty 54.0% 55.5% (150) bps Wholesale parts 17.4% 17.8% (40) bps Internal, sublet and other 48.5% 50.5% (200) bps Total gross profit as a % of revenue 47.8% 48.8% (100) bps51 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Franchised Dealerships Segment same store Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $547,681 $574,740 $(27,059) (4.7%)Warranty 278,882 236,931 41,951 17.7%Wholesale parts 166,831 174,962 (8,131) (4.6%)Internal, sublet and other 387,574 395,585 (8,011) (2.0%)Total revenue $1,380,968 $1,382,218 $(1,250) (0.1%)Gross profit Customer pay $292,883 $310,583 $(17,700) (5.7%)Warranty 154,025 128,161 25,864 20.2%Wholesale parts 28,669 30,443 (1,774) (5.8%)Internal, sublet and other 191,151 191,292 (141) (0.1%)Total gross profit $666,728 $660,479 $6,249 0.9%Gross profit as a % of revenue Customer pay 53.5% 54.0% (50) bps Warranty 55.2% 54.1% 110 bps Wholesale parts 17.2% 17.4% (20) bps Internal, sublet and other 49.3% 48.4% 90 bps Total gross profit as a % of revenue 48.3% 47.8% 50 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $578,262 $567,013 $11,249 2.0%Warranty 238,568 224,071 14,497 6.5%Wholesale parts 175,965 177,845 (1,880) (1.1%)Internal, sublet and other 397,150 365,491 31,659 8.7%Total revenue $1,389,945 $1,334,420 $55,525 4.2%Gross profit Customer pay $312,618 $310,403 $2,215 0.7%Warranty 129,046 124,535 4,511 3.6%Wholesale parts 30,606 31,576 (970) (3.1%)Internal, sublet and other 192,385 184,631 7,754 4.2%Total gross profit $664,655 $651,145 $13,510 2.1%Gross profit as a % of revenue Customer pay 54.1% 54.7% (60) bps Warranty 54.1% 55.6% (150) bps Wholesale parts 17.4% 17.8% (40) bps Internal, sublet and other 48.4% 50.5% (210) bps Total gross profit as a % of revenue 47.8% 48.8% (100) bps Franchised Dealerships Segment Fixed Operations - 2017 Compared to 2016Our Fixed Operations revenue decreased approximately $1.3 million, or 0.1%, driven primarily by our Mercedes, Honda, Ford and General Motors(excluding Cadillac) dealerships, while our Fixed Operations gross profit increased approximately $6.3 million,52 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS or 0.9%, driven primarily by our Lexus and Audi dealerships. Combined customer pay and warranty gross profit increased approximately $8.2 million, or1.9%.Franchised Dealerships Segment Fixed Operations - 2016 Compared to 2015Our Fixed Operations revenue increased approximately $55.5 million, or 4.2%, driven primarily by our Honda, Toyota, Ford and General Motors(excluding Cadillac) dealerships, and our Fixed Operations gross profit increased approximately $13.5 million, or 2.1%, driven primarily by our Honda,Toyota, Ford and General Motors (excluding Cadillac) dealerships. Combined customer pay and warranty gross profit increased approximately $6.7 million,or 1.5%.F&I - Franchised Dealerships SegmentFinance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extendedwarranties and service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties, servicecontracts, other aftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues arerecognized net of estimated chargebacks and other costs associated with originating contracts. F&I revenues are affected by the level of new and used vehicleunit sales, the age and average selling price of vehicles sold, the level of manufacturer financing specials or leasing incentives and our F&I penetration rate.The F&I penetration rate represents the number of finance contracts, extended warranties and service contracts, other aftermarket products or insurancecontracts that we are able to originate per vehicle sold, expressed as a percentage.Rate spread is another term for the commission earned by our dealerships for arranging vehicle financing for consumers. The amount of thecommission could be zero, a flat fee or an actual spread between the interest rate charged to the consumer and the interest rate provided by the directfinancing source (a commercial bank, credit union or manufacturer captive finance company). We have established caps on the potential rate spread ourdealerships can earn with all finance sources. We believe the rate spread we earn for arranging financing represents value to the consumer in numerous ways,including the following: •lower cost, below-market financing is often available only from the manufacturers’ captives and franchised dealers; •generally easy access to multiple high-quality lending sources; •lease-financing alternatives are largely available only from manufacturers’ captives or other indirect lenders; •customers with substandard credit frequently do not have direct access to potential sources of sub-prime financing; and •customers with significant “negative equity” in their current vehicle (i.e., the customer’s current vehicle is worth less than the balance of theirvehicle loan or lease obligation) frequently are unable to pay off the loan on their current vehicle and finance the purchase or lease of areplacement new or used vehicle without the assistance of a franchised dealer.The following tables provide a reconciliation of Franchised Dealerships Segment same store basis and reported basis for F&I: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Total F&I revenue: Same store$337,762 $328,715 $9,047 2.8%Acquisitions, open points and dispositions 10,296 7,632 2,664 NM Total as reported$348,058 $336,347 $11,711 3.5% Total F&I gross profit per retail unit (excludes fleet): Same store$1,401 $1,351 $50 3.7%Total as reported$1,411 $1,356 $55 4.1% NM = Not Meaningful53 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Total F&I revenue: Same store$330,427 $317,532 $12,895 4.1%Acquisitions, open points and dispositions 5,920 6,016 (96) NM Total as reported$336,347 $323,548 $12,799 4.0% Total F&I gross profit per retail unit (excludes fleet): Same store$1,347 $1,284 $63 4.9%Total as reported$1,356 $1,284 $72 5.6% NM = Not Meaningful Our Franchised Dealerships Segment reported F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Reported F&I: Revenue$348,058 $336,347 $11,711 3.5%Gross profit per retail unit (excludes fleet)$1,411 $1,356 $55 4.1% Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Reported F&I: Revenue$336,347 $323,548 $12,799 4.0%Gross profit per retail unit (excludes fleet)$1,356 $1,284 $72 5.6% Our Franchised Dealerships Segment same store F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except per unit data) Same Store F&I: Revenue$337,762 $328,715 $9,047 2.8%Gross profit per retail unit (excludes fleet)$1,401 $1,351 $50 3.7% Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except per unit data) Same Store F&I: Revenue$330,427 $317,532 $12,895 4.1%Gross profit per retail unit (excludes fleet)$1,347 $1,284 $63 4.9% Franchised Dealerships Segment F&I – 2017 Compared to 2016F&I revenues increased approximately $9.0 million, or 2.8%, and F&I gross profit per retail unit increased $50 per unit, or 3.7%, to $1,401 per unit.The growth in F&I revenues and gross profit per retail unit is primarily attributed to an increase in gross profit per service contract and gross profit per otheraftermarket contract due to additional product offerings and increased visibility into performance drivers provided by our proprietary internal softwareapplications. These increases in gross profit per contract more than offset the impact of a 0.9% decrease in combined retail new and used vehicle unit salesvolume and lower penetration rates. Finance contract revenue decreased 3.4%, primarily due to a 90 basis point decrease in the combined new and usedvehicle finance contract penetration rate and a 1.4% decrease in gross profit per finance contract. Service contract revenue increased 4.8% due54 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS primarily to a 10.4% increase in gross profit per service contract, offset partially by a 140 basis point decrease in the service contract penetration rate. Otheraftermarket contract revenue increased 7.4%, driven primarily by a 9.9% increase in gross profit per other aftermarket contract, offset partially by a 170 basispoint decrease in the other aftermarket contract penetration rate.Franchised Dealerships Segment F&I – 2016 Compared to 2015F&I revenues increased approximately $12.9 million, or 4.1%, and F&I gross profit per retail unit increased $63 per unit, or 4.9%, to $1,347 per unit.Finance contract revenue increased 1.9% due to a 290 basis point increase in the combined new and used vehicle finance contract penetration rate and a2.9% increase in finance contract sales volume, partially offset by a 1.0% decrease in gross profit per finance contract. Service contract gross profit increased11.1% due to a 190 basis point increase in the service contract penetration rate and a 4.6% increase in service contract sales volume, in addition to a 6.1%increase in gross profit per service contract. Other aftermarket contract gross profit decreased 0.2% due to a 990 basis point decrease in the other aftermarketcontract penetration rate, driven by a decrease of 7.9% in total aftermarket contracts. Results of Operations - Pre-Owned Stores SegmentPre-Owned Stores Segment same store results consist of results of operations from five EchoPark stores in Denver, Colorado and one stand-alone pre-owned vehicle store in Florida for 2017 compared to 2016, and five EchoPark stores in Denver, Colorado for 2016 compared to 2015. Due to the ongoingexpansion of our Pre-Owned Stores Segment, same store results may vary significantly from reported results due to stores that began operations or wereacquired in the last 12 months.Used Vehicles and F&I - Pre-Owned Stores SegmentBased on the way we manage the Pre-Owned Stores Segment, we believe the best measure of gross profit performance at our pre-owned stores is acombined total gross profit per unit, which includes both retail used vehicle gross profit and F&I gross profit per transaction.See the discussion in Franchised Dealership Segment Results of Operations for a discussion of the macro drivers of used vehicle revenues and F&Irevenues.The following tables provide a reconciliation of Pre-Owned Stores Segment same store basis and reported basis for retail used vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store$121,153 $107,333 $13,820 12.9%Acquisitions, store openings and closures 94,493 6,634 87,859 NM Total as reported$215,646 $113,967 $101,679 89.2% Total used vehicle gross profit: Same store$4,924 $5,748 $(824) (14.3%)Acquisitions, store openings and closures 1,930 577 1,353 NM Total as reported$6,854 $6,325 $529 8.4% Total used vehicle unit sales: Same store 5,973 5,023 950 18.9%Acquisitions, store openings and closures 4,645 324 4,321 NM Total as reported 10,618 5,347 5,271 98.6%NM = Not Meaningful55 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total used vehicle revenue: Same store$92,006 $64,471 $27,535 42.7%Acquisitions, store openings and closures 21,961 - 21,961 NM Total as reported$113,967 $64,471 $49,496 76.8% Total used vehicle gross profit: Same store$4,949 $4,525 $424 9.4%Acquisitions, store openings and closures 1,376 (199) 1,575 NM Total as reported$6,325 $4,326 $1,999 46.2% Total used vehicle unit sales: Same store 4,335 3,225 1,110 34.4%Acquisitions, store openings and closures 1,012 - 1,012 NM Total as reported 5,347 3,225 2,122 65.8%NM = Not MeaningfulThe following tables provide a reconciliation of Pre-Owned Stores Segment same store basis and reported basis for F&I: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Total F&I revenue: Same store$6,225 $5,490 $735 13.4%Acquisitions, store openings and closures 8,747 1,448 7,299 NM Total as reported$14,972 $6,938 $8,034 115.8% NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Total F&I revenue: Same store$4,794 $3,040 $1,754 57.7%Acquisitions, store openings and closures 2,144 - 2,144 NM Total as reported$6,938 $3,040 $3,898 128.2%NM = Not Meaningful56 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Pre-Owned Stores Segment reported used vehicle and F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported used vehicle and F&I: Used vehicle revenue$215,646 $113,967 $101,679 89.2%Used vehicle gross profit$6,854 $6,325 $529 8.4%Used vehicle unit sales 10,618 5,347 5,271 98.6%Used vehicle revenue per unit$20,309 $21,314 $(1,005) (4.7%)F&I revenue$14,972 $6,938 $8,034 115.8%Combined used vehicle gross profit and F&I revenue$21,826 $13,263 $8,563 64.6%Total used vehicle and F&I gross profit per unit$2,056 $2,480 $(424) (17.1%) Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported used vehicle and F&I: Used vehicle revenue$113,967 $64,471 $49,496 76.8%Used vehicle gross profit$6,325 $4,326 $1,999 46.2%Used vehicle unit sales 5,347 3,225 2,122 65.8%Used vehicle revenue per unit$21,314 $19,991 $1,323 6.6%F&I revenue$6,938 $3,040 $3,898 128.2%Combined used vehicle gross profit and F&I revenue$13,263 $7,366 $5,897 80.1%Total used vehicle and F&I gross profit per unit$2,480 $2,284 $196 8.6%Our Pre-Owned Stores Segment same store used vehicle and F&I results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store used vehicle and F&I: Used vehicle revenue$121,153 $107,333 $13,820 12.9%Used vehicle gross profit$4,924 $5,748 $(824) (14.3%)Used vehicle unit sales 5,973 5,023 950 18.9%Used vehicle revenue per unit$20,283 $21,368 $(1,085) (5.1%)F&I revenue$6,225 $5,490 $735 13.4%Combined used vehicle gross profit and F&I revenue$11,149 $11,238 $(89) (0.8%)Total used vehicle and F&I gross profit per unit$1,867 $2,237 $(370) (16.5%) Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store used vehicle and F&I: Used vehicle revenue$92,006 $64,471 $27,535 42.7%Used vehicle gross profit$4,949 $4,525 $424 9.4%Used vehicle unit sales 4,335 3,225 1,110 34.4%Used vehicle revenue per unit$21,224 $19,991 $1,233 6.2%F&I revenue$4,794 $3,040 $1,754 57.7%Combined used vehicle gross profit and F&I revenue$9,743 $7,565 $2,178 28.8%Total used vehicle and F&I gross profit per unit$2,248 $2,346 $(98) (4.2%)57 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Pre-Owned Stores Segment Used Vehicles and F&I - 2017 Compared to 2016Retail used vehicle revenue increased 12.9%, driven primarily by an 18.9% increase in retail used vehicle unit sales volume. This increase in retailused vehicle unit sales volume was driven primarily by increases in retail used vehicle unit sales volume at our EchoPark stores in the Denver market.Combined retail used vehicle and F&I gross profit per unit decreased approximately $370 per unit, or 16.5%, to $1,867 per unit, driven primarily by lowerretail used vehicle gross profit, partially offset by an increase in F&I gross profit. We believe that the decrease in overall retail used vehicle gross profit perunit is due in part to the positive effects of newly redesigned models in certain brands on new vehicle demand, which, in turn, put downward pricing pressureon similar pre-owned models in those brands. F&I revenues increased approximately $0.7 million, or 13.4%, driven by an increase in gross profit per servicecontract due to additional product offerings and increased visibility into performance drivers provided by our proprietary internal software applications.Finance contract revenue increased 6.5%, primarily due to a 14.8% increase in finance contract sales volume, partially offset by a 280 basis point decrease inthe used vehicle finance contract penetration rate and a 7.3% decrease in gross profit per finance contract. Service contract revenue increased 23.9% dueprimarily to an 18.8% increase in service contract sales volume and a 4.3% increase in gross profit per service contract, despite a 10 basis point decrease inthe service contract penetration rate. Other aftermarket contract revenue increased 9.4%, driven primarily by a 20.5% increase in other aftermarket contractsales volume and a 100 basis point increase in the other aftermarket contract penetration rate, partially offset by a 9.2% decrease in gross profit per otheraftermarket contract. F&I penetration rates are generally higher in our Pre-Owned Stores Segment than in our Franchised Dealerships Segment.Pre-Owned Stores Segment Used Vehicles and F&I - 2016 Compared to 2015Retail used vehicle revenue increased 42.7%, driven primarily by a 34.4% increase in retail used vehicle unit sales volume. This increase in retail usedvehicle unit sales volume was driven by increases in retail used vehicle unit sales volume at our EchoPark stores in the Denver market. We believe that thedecrease in overall retail used vehicle gross profit per unit is due in part to the positive effects of newly redesigned models in certain brands on new vehicledemand, which, in turn, put downward pricing pressure on similar pre-owned models in those brands, and our desire to drive more volume through thesestores by sacrificing margin in order to generate higher overall gross profit dollars. F&I revenues increased approximately $1.8 million, or 57.7%. Financecontract revenue increased 48.1% due primarily to a 46.5% increase in finance contract sales volume, a 690 basis point increase in the used vehicle financecontract penetration rate and a 1.1% increase in gross profit per finance contract. Service contract gross profit increased 58.5% due primarily to a 60.7%increase in service contract sales volume and a 790 basis point increase in the service contract penetration rate, partially offset by a 1.4% decrease in grossprofit per service contract. Other aftermarket contract gross profit increased 88.9% due primarily to a 76.0% increase in aftermarket contract sales volume, a1,720 basis point increase in the other aftermarket contract penetration rate and a 7.3% increase in gross profit per other aftermarket contract. Wholesale Vehicles - Pre-Owned Stores SegmentSee the discussion in Franchised Dealership Segment Results of Operations for a discussion of the macro drivers of wholesale vehicle revenues.58 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS The following tables provide a reconciliation of Pre-Owned Stores Segment same store basis and reported basis for wholesale vehicles: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $7,761 $10,120 $(2,359) (23.3%)Acquisitions, store openings and closures 1,722 571 1,151 NM Total as reported $9,483 $10,691 $(1,208) (11.3%) Total wholesale vehicle gross profit (loss): Same store $(311) $(62) $(249) (401.6%)Acquisitions, store openings and closures 75 (142) 217 NM Total as reported $(236) $(204) $(32) (15.7%) Total wholesale vehicle unit sales: Same store 2,009 1,837 172 9.4%Acquisitions, store openings and closures 493 119 374 NM Total as reported 2,502 1,956 546 27.9%NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Total wholesale vehicle revenue: Same store $9,789 $3,424 $6,365 185.9%Acquisitions, store openings and closures 902 - 902 NM Total as reported $10,691 $3,424 $7,267 212.2% Total wholesale vehicle gross profit (loss): Same store $(30) $(147) $117 79.6%Acquisitions, store openings and closures (174) 1 (175) NM Total as reported $(204) $(146) $(58) (39.7%) Total wholesale vehicle unit sales: Same store 1,773 875 898 102.6%Acquisitions, store openings and closures 183 - 183 NM Total as reported 1,956 875 1,081 123.5%NM = Not Meaningful59 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Pre-Owned Stores Segment reported wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $9,483 $10,691 $(1,208) (11.3%)Gross profit (loss) $(236) $(204) $(32) (15.7%)Unit sales 2,502 1,956 546 27.9%Revenue per unit $3,790 $5,466 $(1,676) (30.7%)Gross profit (loss) per unit $(94) $(104) $10 9.6%Gross profit (loss) as a % of revenue (2.5%) (1.9%) (60) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Reported wholesale vehicle: Revenue $10,691 $3,424 $7,267 212.2%Gross profit (loss) $(204) $(146) $(58) (39.7%)Unit sales 1,956 875 1,081 123.5%Revenue per unit $5,466 $3,913 $1,553 39.7%Gross profit (loss) per unit $(104) $(167) $63 37.7%Gross profit (loss) as a % of revenue (1.9%) (4.3%) 240 bps Our Pre-Owned Stores Segment same store wholesale vehicle results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $7,761 $10,120 $(2,359) (23.3%)Gross profit (loss) $(311) $(62) $(249) (401.6%)Unit sales 2,009 1,837 172 9.4%Revenue per unit $3,863 $5,509 $(1,646) (29.9%)Gross profit (loss) per unit $(155) $(34) $(121) (355.9%)Gross profit (loss) as a % of revenue (4.0%) (0.6%) (340) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit and per unit data) Same store wholesale vehicle: Revenue $9,789 $3,424 $6,365 185.9%Gross profit (loss) $(30) $(147) $117 79.6%Unit sales 1,773 875 898 102.6%Revenue per unit $5,521 $3,913 $1,608 41.1%Gross profit (loss) per unit $(17) $(168) $151 89.9%Gross profit (loss) as a % of revenue (0.3%) (4.3%) 400 bps Pre-Owned Stores Segment Wholesale Vehicles - 2017 Compared to 2016Wholesale vehicle revenue decreased, while wholesale unit sales volume and wholesale gross loss increased due to higher gross loss per unit. Theincrease in wholesale vehicle unit sales volume was primarily driven by reductions of inventory units due to the trend of lower used vehicle valuations.60 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Pre-Owned Stores Segment Wholesale Vehicles - 2016 Compared to 2015Wholesale vehicle revenue and unit sales volume increased, while wholesale gross loss decreased due to higher levels of wholesale activity as a resultof elevated inventory levels during the first quarter of 2016.Fixed Operations - Pre-Owned Stores SegmentSee the discussion in Franchised Dealership Segment Results of Operations for a discussion of the macro drivers of Fixed Operations revenues.The following tables provide a reconciliation of Pre-Owned Stores Segment same store basis and reported basis for Fixed Operations: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Total Fixed Operations revenue: Same store $10,215 $8,970 $1,245 13.9%Acquisitions, store openings and closures 3,993 561 3,432 NM Total as reported $14,208 $9,531 $4,677 49.1% Total Fixed Operations gross profit: Same store $4,670 $3,879 $791 20.4%Acquisitions, store openings and closures 1,432 326 1,106 NM Total as reported $6,102 $4,205 $1,897 45.1%NM = Not Meaningful Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Total Fixed Operations revenue: Same store $8,042 $6,127 $1,915 31.3%Acquisitions, store openings and closures 1,489 - 1,489 NM Total as reported $9,531 $6,127 $3,404 55.6% Total Fixed Operations gross profit: Same store $3,343 $2,512 $831 33.1%Acquisitions, store openings and closures 862 - 862 NM Total as reported $4,205 $2,512 $1,693 67.4%NM = Not Meaningful61 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Pre-Owned Stores Segment reported Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $1,383 $945 $438 46.3%Internal, sublet and other 12,825 8,586 4,239 49.4%Total revenue $14,208 $9,531 $4,677 49.1%Gross profit Customer pay $486 $352 $134 38.1%Internal, sublet and other 5,616 3,853 1,763 45.8%Total gross profit $6,102 $4,205 $1,897 45.1%Gross profit as a % of revenue Customer pay 35.1% 37.2% (210) bps Internal, sublet and other 43.8% 44.9% (110) bps Total gross profit as a % of revenue 42.9% 44.1% (120) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Reported Fixed Operations: Revenue Customer pay $945 $512 $433 84.6%Internal, sublet and other 8,586 5,615 2,971 52.9%Total revenue $9,531 $6,127 $3,404 55.6%Gross profit Customer pay $352 $189 $163 86.2%Internal, sublet and other 3,853 2,323 1,530 65.9%Total gross profit $4,205 $2,512 $1,693 67.4%Gross profit as a % of revenue Customer pay 37.2% 36.9% 30 bps Internal, sublet and other 44.9% 41.4% 350 bps Total gross profit as a % of revenue 44.1% 41.0% 310 bps62 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our Pre-Owned Stores Segment same store Fixed Operations results are as follows: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $1,087 $901 $186 20.6%Internal, sublet and other 9,128 8,069 1,059 13.1%Total revenue $10,215 $8,970 $1,245 13.9%Gross profit Customer pay $389 $336 $53 15.8%Internal, sublet and other 4,281 3,543 738 20.8%Total gross profit $4,670 $3,879 $791 20.4%Gross profit as a % of revenue Customer pay 35.8% 37.3% (150) bps Internal, sublet and other 46.9% 43.9% 300 bps Total gross profit as a % of revenue 45.7% 43.2% 250 bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Same store Fixed Operations: Revenue Customer pay $764 $513 $251 48.9%Internal, sublet and other 7,278 5,614 1,664 29.6%Total revenue $8,042 $6,127 $1,915 31.3%Gross profit Customer pay $294 $190 $104 54.7%Internal, sublet and other 3,049 2,322 727 31.3%Total gross profit $3,343 $2,512 $831 33.1%Gross profit as a % of revenue Customer pay 38.5% 37.0% 150 bps Internal, sublet and other 41.9% 41.4% 50 bps Total gross profit as a % of revenue 41.6% 41.0% 60 bpsPre-Owned Stores Segment Fixed Operations - 2017 Compared to 2016Our Fixed Operations revenue increased approximately $1.2 million, or 13.9%, and Fixed Operations gross profit increased approximately $0.8million, or 20.4%. Customer pay gross profit increased approximately $0.1 million, or 15.8%, and internal, sublet and other gross profit increasedapproximately $0.7 million, or 20.8%, on higher levels of used vehicle reconditioning, which supported higher retail unit sales. We believe there may beopportunity to increase customer pay revenues at our EchoPark stores in the future; however, at this point in the EchoPark development cycle, we are notactively marketing these services.Pre-Owned Stores Segment Fixed Operations - 2016 Compared to 2015Our Fixed Operations revenue increased approximately $1.9 million, or 31.3%, and Fixed Operations gross profit increased approximately $0.8million, or 33.1%. Customer pay gross profit increased approximately $0.1 million, or 54.7%, and internal, sublet and other gross profit increasedapproximately $0.7 million, or 31.3%, on higher levels of used vehicle reconditioning, which supported higher retail unit sales. 63 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Segment Results SummaryIn the following table of financial data, total segment income of the operating segments is reconciled to consolidated operating income, less floor planinterest expense. See above for tables and discussion of results by operating segment. Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands, except unit data) Revenues: Franchised Dealerships Segment $9,612,899 $9,590,752 $22,147 0.2%Pre-Owned Stores Segment 254,309 141,027 113,282 80.3%Total consolidated revenues $9,867,208 $9,731,779 $135,429 1.4%Segment income (loss) (1): Franchised Dealerships Segment $196,897 $218,769 $(21,872) (10.0%)Pre-Owned Stores Segment (21,727) (13,576) (8,151) (60.0%)Total segment income (loss) 175,170 205,193 (30,023) (14.6%)Interest expense, other, net (52,524) (50,106) (2,418) (4.8%)Other income (expense), net (14,522) 125 (14,647) (11717.6%)Income (loss) from continuing operations before taxes $108,124 $155,212 $(47,088) (30.3%) Retail new and used vehicle unit sales volume: Franchised Dealerships Segment 248,534 249,830 (1,296) (0.5%)Pre-Owned Stores Segment 10,618 5,347 5,271 98.6%Total retail new and used vehicle unit sales volume 259,152 255,177 3,975 1.6%(1)Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan. Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands, except unit data) Revenues: Franchised Dealerships Segment $9,590,752 $9,547,236 $43,516 0.5%Pre-Owned Stores Segment 141,027 77,063 63,964 83.0%Total consolidated revenues $9,731,779 $9,624,299 $107,480 1.1%Segment income (loss) (1): Franchised Dealerships Segment $218,769 $213,224 $5,545 2.6%Pre-Owned Stores Segment (13,576) (17,257) 3,681 21.3%Total segment income (loss) 205,193 195,967 9,226 4.7%Interest expense, other, net (50,106) (50,910) 804 1.6%Other income (expense), net 125 99 26 26.3%Income (loss) from continuing operations before taxes $155,212 $145,156 $10,056 6.9% Retail new and used vehicle unit sales volume: Franchised Dealerships Segment 249,830 253,889 (4,059) (1.6%)Pre-Owned Stores Segment 5,347 3,225 2,122 65.8%Total retail new and used vehicle unit sales volume 255,177 257,114 (1,937) (0.8%) (1)Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan. 64 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Selling, General and Administrative (“SG&A”) Expenses - ConsolidatedConsolidated SG&A expenses are comprised of four major groups: compensation expense, advertising expense, rent expense and other expense.Compensation expense primarily relates to store personnel who are paid a commission or a salary plus commission and support personnel who are paid afixed salary. Commissions paid to store personnel typically vary depending on gross profits realized and sales volume objectives. Due to the salarycomponent for certain store and corporate personnel, gross profits and compensation expense do not change in direct proportion to one another. Advertisingexpense and other expense vary based on the level of actual or anticipated business activity and number of dealerships in operation. Rent expense typicallyvaries with the number of store locations owned, investments made for facility improvements and interest rates. Other expense includes various fixed andvariable expenses, including certain customer-related costs, insurance, training, legal and IT expenses, which may not change in proportion to gross profitlevels.The following tables set forth information related to our consolidated reported SG&A expenses: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) SG&A expenses: Compensation $692,935 $674,617 $(18,318) (2.7%)Advertising 61,563 61,674 111 0.2%Rent 73,022 73,903 881 1.2%Other 320,253 300,662 (19,591) (6.5%)Total SG&A expenses $1,147,773 $1,110,856 $(36,917) (3.3%) SG&A expenses as a % of gross profit: Compensation 47.5% 47.2% (30) bps Advertising 4.2% 4.3% 10 bps Rent 5.0% 5.2% 20 bps Other 22.0% 21.0% (100) bps Total SG&A expenses as a % of gross profit 78.7% 77.7% (100) bps Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) SG&A expenses: Compensation $674,617 $666,668 $(7,949) (1.2%)Advertising 61,674 61,630 (44) (0.1%)Rent 73,903 73,539 (364) (0.5%)Other 300,662 308,728 8,066 2.6%Total SG&A expenses $1,110,856 $1,110,565 $(291) (0.0%) SG&A expenses as a % of gross profit: Compensation 47.2% 47.1% (10) bps Advertising 4.3% 4.4% 10 bps Rent 5.2% 5.2% - bps Other 21.0% 21.8% 80 bps Total SG&A expenses as a % of gross profit 77.7% 78.5% 80 bps 2017 Compared to 2016Overall SG&A expenses increased both in dollar amount and as a percentage of gross profit, primarily due to higher compensation and employeebenefit-related expenses, storm-related physical damage costs, IT expenses, customer-related costs and a manufacturer legal settlement benefit in 2016, offsetpartially by a net gain on the disposal of franchised dealerships. Compensation costs increased both in dollar amount and as a percentage of gross profit,primarily due to higher levels of compensation and employee65 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS benefit-related expenses related to new manufacturer-awarded open points and pre-owned store openings. Advertising expense was relatively flat both indollar amount and as a percentage of gross profit as we focused on targeted advertising where we would expect the best returns for our business. Rent expensedecreased both in dollar amount and as a percentage of gross profit, primarily due to our strategy to own more of our dealership properties, offset by lease exitcharges related to the relocation of a dealership and the closure of two stand-alone pre-owned vehicle stores acquired in 2016. Other SG&A expensesincreased both in dollar amount and as a percentage of gross profit, primarily due to higher storm-related physical damage costs, IT expenses, customer-related costs and a manufacturer legal settlement benefit in 2016, offset partially by a net gain on the disposal of franchised dealerships. On an adjusted basis,SG&A expenses as a percentage of gross profit were 78.6% in 2017, up 10 basis points from the prior year. For 2017, adjusted SG&A expenses excludeapproximately $8.6 million of expense due to storm-related physical damage, approximately $2.3 million of legal and other charges and approximately $1.0million of lease exit charges, offset partially by a net gain of approximately $10.0 million on the disposal of franchised dealerships. For 2016, adjusted SG&Aexpenses exclude a manufacturer legal settlement benefit of approximately $14.8 million, offset partially by charges of approximately $3.0 million related tohail damage and approximately $0.3 million of lease exit and other charges.2016 Compared to 2015Overall SG&A expenses were flat in dollar amount and decreased 80 basis points as a percentage of gross profit, primarily due to a manufacturer legalsettlement benefit, offset partially by higher compensation and employee benefit-related expenses and IT expenses. Compensation costs increased both indollar amount and as a percentage of gross profit, primarily due to higher levels of employee benefit-related expenses, Fixed Operations compensation andF&I compensation, offset partially by lower medical insurance costs. Advertising expense was relatively flat both in dollar amount and as a percentage ofgross profit as we focused on targeted advertising where we would expect the best returns for our business. Rent expense was relatively flat both in dollaramount and as a percentage of gross profit, primarily due to our strategy to own more of our dealership properties, offset by higher rent expense for additionalinventory storage needs. Other SG&A expenses decreased both in dollar amount and as a percentage of gross profit, primarily due to a $14.8 million benefitas a result of a manufacturer legal settlement, offset partially by higher IT expenses, repair and maintenance expenses and a net gain on disposal of franchisesin the prior year. On an adjusted basis, SG&A expenses as a percentage of gross profit were 78.5% in 2016, flat compared to the prior year. For 2016, adjustedSG&A expenses exclude a manufacturer legal settlement benefit of approximately $14.8 million, offset partially by charges of approximately $3.0 millionrelated to hail damage and approximately $0.3 million of lease exit and other charges. For 2015, adjusted SG&A expenses exclude charges of approximately$3.5 million related to storm-related physical damage and approximately $1.7 million of legal and severance expenses, offset partially by a net gain ondisposal of franchises of approximately $3.3 million. Impairment Charges – ConsolidatedImpairment charges were approximately $9.4 million, $8.1 million and $18.0 million in 2017, 2016 and 2015, respectively. Impairment charges for2017 include approximately $4.9 million of property and equipment charges due to the abandonment of construction and software development projects aswell as our estimate that certain dealerships would not be able to recover recorded balances through operating activities, approximately $3.6 million offranchise asset impairment charges and approximately $0.9 million of goodwill impairment charges related to the write-off of goodwill due to the closure oftwo stand-alone pre-owned vehicle stores that were acquired in 2016. Impairment charges for 2016 include approximately $8.1 million of property andequipment charges due to the abandonment of construction and software development projects as well as our estimate that certain dealerships would not beable to recover recorded balances through operating activities. Impairment charges for 2015 include approximately $6.1 million of franchise assetimpairment charges, approximately $4.8 million of goodwill and franchise asset impairment charges related to the disposition of a dealership franchise andapproximately $7.1 million of property and equipment charges due to the abandonment of construction and software development projects as well as ourestimate that certain dealerships would not be able to recover recorded balances through operating activities.Depreciation and Amortization – ConsolidatedDepreciation expense increased approximately $11.5 million, or 14.8%, in 2017 and approximately $8.6 million, or 12.6%, in 2016, compared to theprior year. The increases were primarily related to net additions to gross property and equipment (excluding land and construction in progress) ofapproximately $157.1 million and $144.1 million in 2017 and 2016, respectively. 66 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Interest Expense, Floor Plan - Consolidated2017 Compared to 2016Interest expense, floor plan for new vehicles increased approximately $7.2 million, or 28.6%. The average new vehicle floor plan notes payablebalance increased approximately $3.6 million, resulting in an increase in new vehicle floor plan interest expense of approximately $0.1 million. The averagenew vehicle floor plan interest rate was 2.37%, up from 1.85% in the prior year, which resulted in an increase in interest expense of approximately $7.1million.Interest expense, floor plan for used vehicles increased approximately $1.5 million, or 57.3%. The average used vehicle floor plan notes payablebalance increased approximately $10.9 million, resulting in an increase in used vehicle floor plan interest expense of approximately $0.2 million. Theaverage used vehicle floor plan interest rate was 2.61%, up from 1.78% in the prior year, which resulted in an increase in interest expense of approximately$1.3 million.2016 Compared to 2015Interest expense, floor plan for new vehicles increased approximately $5.5 million, or 27.8%. The average new vehicle floor plan notes payablebalance increased approximately $137.5 million, resulting in an increase in new vehicle floor plan interest expense of approximately $2.2 million. Theaverage new vehicle floor plan interest rate was 1.85%, up from 1.61% in the prior year, which resulted in an increase in interest expense of approximately$3.3 million.Interest expense, floor plan for used vehicles increased approximately $0.9 million, or 54.7%. The average used vehicle floor plan notes payablebalance increased approximately $49.3 million, resulting in an increase in used vehicle floor plan interest expense of approximately $0.8 million. Theaverage used vehicle floor plan interest rate was 1.78%, up from 1.72% in the prior year, which resulted in an increase in interest expense of approximately$0.1 million.Interest Expense, Other, Net - ConsolidatedInterest expense, other, net is summarized in the tables below: Year Ended December 31, Better / (Worse) 2017 2016 Change % Change (In thousands) Stated/coupon interest $49,092 $44,689 $(4,403) (9.9%)Discount/premium amortization 28 163 135 82.8%Deferred loan cost amortization 2,383 2,641 258 9.8%Cash flow swap interest 2,736 4,934 2,198 44.5%Capitalized interest (2,172) (2,750) (578) (21.0%)Other interest 457 429 (28) (6.5%)Total interest expense, other, net $52,524 $50,106 $(2,418) (4.8%) Year Ended December 31, Better / (Worse) 2016 2015 Change % Change (In thousands) Stated/coupon interest $44,689 $42,321 $(2,368) (5.6%)Discount/premium amortization 163 152 (11) (7.2%)Deferred loan cost amortization 2,641 2,489 (152) (6.1%)Cash flow swap interest 4,934 7,178 2,244 31.3%Capitalized interest (2,750) (1,912) 838 43.8%Other interest 429 682 253 37.1%Total interest expense, other, net $50,106 $50,910 $804 1.6% 2017 Compared to 2016Interest expense, other, net increased approximately $2.4 million, primarily due to a $4.4 million increase in stated/coupon interest as a result ofadditional mortgage notes payable and bond principal outstanding and a $0.6 million decrease in capitalized67 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS interest associated with construction and software development projects, offset partially by a $2.2 million decrease in cash flow swap interest as a result of theexpiration of several interest rate cash flow swaps that were replaced with cash flow swaps at a lower fixed rate.2016 Compared to 2015Interest expense, other, net decreased approximately $0.8 million, primarily due to a $2.2 million decrease in cash flow swap interest as a result of theexpiration of several interest rate cash flow swaps that were replaced with cash flow swaps at a lower fixed rate and a $0.8 million increase in capitalizedinterest associated with construction and software development projects, offset partially by a $2.4 million increase in stated/coupon interest as a result ofadditional mortgage notes payable. Provision for Income Taxes - ConsolidatedThe overall effective tax rate from continuing operations was 12.9%, 39.1% and 39.3% for 2017, 2016 and 2015, respectively. Income tax expense for2017 includes a $28.4 million benefit (with the effect of reducing the effective tax rate by 26.3 percentage points) related to the remeasurement of a netdeferred tax liability as of December 31, 2017 due to a reduction in the U.S. statutory federal income tax rate from 35.0% to 21.0% (beginning in 2018) thatwas signed into law in December 2017. In addition, 2017 tax expense includes the effect of a $0.3 million discrete charge related to a non-deductible assetimpairment charge. Our effective tax rate varies from year to year based on the distribution of taxable income between states in which we operate and othertax adjustments. We expect the effective tax rate in future periods to fall within a range of 26.0% to 28.0% before the impact, if any, of changes in valuationallowances related to deferred income tax assets or unusual discrete tax adjustments. The effective tax rate in the future will continue to be impacted by therequired adoption of ASU 2016-09 which requires all book-tax differences related to the exercise of stock options or vesting of restricted stock or restrictedstock units to flow through the provision for income taxes. Discontinued OperationsThe pre-tax losses from discontinued operations and the sale of dealerships were as follows: Year Ended December 31, 2017 2016 2015 (In thousands) Income (loss) from operations $(741) $(1,100) $(1,421)Gain (loss) on disposal 6 (1) - Lease exit accrual adjustments and charges (1,207) (1,020) (1,462)Pre-tax income (loss) $(1,942) $(2,121) $(2,883)Total revenues $- $- $- We do not expect significant activity in discontinued operations in the future due to the change in the definition of a discontinued operation as aresult of ASU 2014-08. The results of operations for those dealerships and franchises that were classified as discontinued operations as of March 31, 2014 willcontinue to be reported within discontinued operations in the future. See the discussion of our adoption of ASU 2014-08 in Note 1, “Description of Businessand Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements. Use of Estimates and Critical Accounting PoliciesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.Critical accounting policies are those that are most important to the portrayal of our financial position and results of operations and require the mostsubjective and complex judgments. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanyingconsolidated financial statements for additional discussion regarding our critical accounting policies and estimates.68 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Finance, Insurance and Service ContractsWe arrange financing for customers through various financial institutions and receive a commission from the financial institution either in a flat feeamount or in an amount equal to the difference between the interest rates charged to customers and the predetermined interest rates set by the financialinstitution. We also receive commissions from the sale of various insurance contracts and non-recourse third-party extended service contracts to customers.Under these contracts, the applicable manufacturer or third-party warranty company is directly liable for all warranties provided within the contract.In the event a customer terminates a financing, insurance or extended service contract prior to the original termination date, we may be required toreturn a portion of the commission revenue originally recorded to the third-party provider (“chargebacks”). The commission revenue for the sale of theseproducts and services is recorded net of estimated chargebacks at the time of sale. Our estimate of future chargebacks is established based on our historicalchargeback rates, termination provisions of the applicable contracts and industry data. While chargeback rates vary depending on the type of contract sold, a100 basis point change in the estimated chargeback rates used in determining our estimates of future chargebacks would have changed our estimated reservefor chargebacks at December 31, 2017 by approximately $1.5 million. Our estimate of chargebacks (approximately $20.9 million as of December 31, 2017) isinfluenced by early contract termination events such as vehicle repossessions, refinancing and early pay-offs. If these factors negatively change, the resultingimpact would affect our future estimate for chargebacks and could have a material adverse impact on our operations, financial position and cash flows. Ouractual chargeback experience has not been materially different from our recorded estimates. Goodwill and Franchise AssetsIn accordance with “Intangibles – Goodwill and Other” in the ASC, we test goodwill for impairment at least annually, or more frequently when eventsor circumstances indicate that impairment might have occurred. The ASC also states that if an entity determines, based on an assessment of certain qualitativefactors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative goodwill impairment test isunnecessary.For purposes of goodwill impairment testing, we have two reporting units, which consist of (1) our traditional franchised dealerships and (2) our stand-alone pre-owned vehicle stores. The carrying value of our goodwill totaled approximately $525.8 million at December 31, 2017, of which $465.8 million isrelated to our franchised dealerships reporting unit and $60.0 million is related to our pre-owned stores reporting unit. As the $60.0 million of goodwillcarrying value related to the pre-owned stores reporting unit was acquired immediately preceding the testing date, we evaluated impairment on a qualitativebasis and determined there was no indication of impairment. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than itscarrying value, the difference would represent the amount of required goodwill impairment. For our franchised dealerships reporting unit, we utilized theMarket Price (“MP”) method to estimate its enterprise value as of October 1, 2017. The significant inputs in the MP method include debt value, stock priceand control premium. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputs that would result inlower valuation results, it could cause the carrying value of the reporting unit to exceed its fair value and thus require us to record goodwill impairment asdescribed under the heading “Goodwill,” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanyingconsolidated financial statements.Based on the results of our quantitative test as of October 1, 2017, our franchised dealerships reporting unit’s fair value exceeded its carrying value.The MP method is dependent on the inputs used and is sensitive to changes in those inputs. In order to determine the effects of changes in our inputs on theMP method and, consequently, our goodwill valuation, we ran multiple scenarios adjusting the debt value, stock price and control premium. In the event ourdebt value decreased by 10.0%, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2017 would change byapproximately $107.6 million. In the event our stock price decreased by 20.0%, assuming all other factors remain the same, the calculated fair value estimateas of October 1, 2017 would change by approximately $193.9 million. Although we assumed a 10.0% control premium, in the event of no control premium,assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2017 would change by approximately $88.1 million. In theevent all three inputs changed as previously described, the calculated fair value estimate as of October 1, 2017 would change by approximately $371.9million. Based on the MP method, none of the realistic scenarios tested, if realized, would have resulted in lowering the fair value of the reporting unit belowthe reporting unit’s carrying value. As such, we were not required to record goodwill impairment for either of our reporting units according to “Intangibles –Goodwill and Other” in the ASC. See Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidatedfinancial statements for further discussion.In accordance with “Intangibles – Goodwill and Other” in the ASC, we evaluate franchise assets for impairment annually (as of October 1) or morefrequently if indicators of impairment exist. We estimate the fair value of our franchise assets using a discounted69 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS cash flow (“DCF”) model. The DCF model used contains inherent uncertainties, including significant estimates and assumptions related to growth rates,projected earnings and cost of capital. We are subject to financial risk to the extent that our franchise assets become impaired due to deterioration of theunderlying businesses. The risk of a franchise asset impairment loss may increase to the extent the underlying businesses’ earnings or projected earningsdecline. As a result of our impairment testing as of October 1, 2017, we recorded approximately $3.6 million in impairment charges in the accompanyingconsolidated statements of income. The carrying value of our franchise assets totaled approximately $69.9 million at December 31, 2017, and is included inother intangible assets, net, in the accompanying consolidated balance sheets. Insurance ReservesWe have various high deductible retention and insurance policies that require us to make estimates in determining the ultimate liability we may incurfor claims arising under these policies. We accrue for insurance reserves throughout the year based on current information available. As of December 31,2017, we estimated the ultimate liability under these programs to be between $20.5 million and $22.7 million, and had approximately $22.0 million reservedfor such programs. Changes in significant assumptions used in the development of the ultimate liability for these programs could have a material impact onthe level of reserves and our operating results, financial position and cash flows. These significant assumptions could include the volume of claims, medicalcost trends, claims handling and reporting patterns, historical claims experience, the effect of related court rulings, current or projected changes in state lawsor an assumed discount rate. From a sensitivity analysis perspective, it is difficult to quantify the effect of changes in any of these significant assumptionswith the exception of the volume of claims. We believe a 10% change in the volume of claims would have a proportional effect on our reserves. Our actualloss experience has not been materially different from our recorded estimates.Lease Exit AccrualsThe majority of our dealership properties are leased under long-term operating lease arrangements. When leased properties are no longer utilized inoperations, we record lease exit accruals. These situations could include the relocation of an existing facility or the sale of a dealership when the buyer willnot be subleasing the property for either the remaining term of the lease or for an amount equal to our obligation under the lease, or situations in which a storeis closed as a result of the associated franchise being terminated by us or the manufacturer and no other operations continue on the leased property. The leaseexit accruals represent the present value of the lease payments, net of estimated sublease rentals, for the remaining life of the operating leases and otheraccruals necessary to satisfy lease commitments to the landlords. As of December 31, 2017, we had approximately $6.5 million accrued for lease exit costs. Inaddition, based on the terms and conditions negotiated in the sale of dealerships in the future, additional accruals may be necessary if the purchaser of thedealership does not assume any associated lease, or we are unable to negotiate a sublease with the buyer of the dealership on terms that are identical to orbetter than those associated with the original lease.A summary of the activity of these operating lease exit accruals consists of the following: (In thousands) Balance at December 31, 2016 $9,790 Lease exit expense (1) 2,157 Payments (2) (3,592)Lease buyout/other (3) (1,877)Balance at December 31, 2017 $6,478 (1)Expense of approximately $0.1 million is recorded in interest expense, other, net and expense of approximately $0.9 million is recorded in selling,general and administrative expenses in the accompanying consolidated statements of income. In addition, expense of approximately $1.2 million isrecorded in income (loss) from discontinued operations in the accompanying consolidated statements of income.(2)Amount is recorded as an offset to rent expense in selling, general and administrative expenses in the accompanying consolidated statements ofincome, with approximately $1.1 million in continuing operations and approximately $2.5 million in income (loss) from discontinued operations.(3)Amount represents cash paid to settle deferred maintenance costs related to terminating and exiting leased properties.Legal ProceedingsWe are involved, and expect to continue to be involved, in numerous legal proceedings arising out of the conduct of our business, including litigationwith customers, employment-related lawsuits, contractual disputes, class actions, purported class actions and actions brought by governmental authorities. Asof December 31, 2017, we had accrued approximately $3.2 million in legal70 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS reserves. Although we vigorously defend ourselves in all legal proceedings, the outcomes of pending and future proceedings arising out of the conduct of ourbusiness cannot be predicted with certainty. Income TaxesAs a matter of course, we are regularly audited by various taxing authorities and, from time to time, these audits result in proposed assessments wherethe ultimate resolution may result in us owing additional taxes. We believe that our tax positions comply, in all material respects, with applicable tax law andthat we have adequately provided for any reasonably foreseeable outcome related to these matters. From time to time, we engage in transactions in which thetax consequences may be subject to uncertainty. Examples of such transactions include business acquisitions and disposals, including consideration paid orreceived in connection with such transactions. Significant judgment is required in assessing and estimating the tax consequences of these transactions. Wedetermine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, wepresume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that doesnot meet the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in the financial statements. The taxposition is measured at the largest amount of benefit that is likely to be realized upon ultimate settlement. We adjust our estimates periodically because ofongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations and precedent.At December 31, 2017, there were approximately $5.3 million in reserves that we have provided for these matters (including estimates related topossible interest and penalties) with $0.5 million included in other accrued liabilities and approximately $4.8 million recorded in other long-term liabilitiesin the accompanying consolidated balance sheets. The effects on our consolidated financial statements of income tax uncertainties are discussed in Note 7,“Income Taxes,” to the accompanying consolidated financial statements.We periodically review all deferred tax asset positions (including state net operating loss carryforwards) to determine whether it is more likely than notthat the deferred tax assets will be realized. Certain factors considered in evaluating the potential for realization of deferred tax assets include the timeremaining until expiration (related to state net operating loss carryforwards) and various sources of taxable income that may be available under the tax law torealize a tax benefit related to a deferred tax asset. This evaluation requires management to make certain assumptions about future profitability, the executionof tax strategies that may be available to us and the likelihood that these assumptions or execution of tax strategies would occur. This evaluation is highlyjudgmental. The results of future operations, regulatory framework of these taxing authorities and other related matters cannot be predicted with certainty.Therefore, actual realization of these deferred tax assets may be materially different from management’s estimate.As of December 31, 2017 and 2016, we had a valuation allowance recorded totaling approximately $8.0 million and $7.2 million, respectively, relatedto certain state net operating loss carryforwards because we concluded we would not be able to generate sufficient state taxable income in the related entitiesto realize the accumulated net operating loss carryforward balances.We accrue for income taxes on a pro-rata basis throughout the year based on the expected year-end liability. These estimates, judgments andassumptions are updated quarterly by our management based on available information and take into consideration estimated income taxes based on prioryear income tax returns, changes in income tax law, our income tax strategies and other factors. If our management receives information which causes us tochange our estimate of the year-end liability, the amount of expense or expense reduction required to be recorded in any particular quarter could be materialto our operating results, financial position and cash flows.Recent Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 as well as severalsubsequent amendments to amend the accounting guidance on revenue recognition. The amendments to the standard are intended to provide a more robustframework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The amendments tothis standard must be applied using either of the following transition methods: (1) a full retrospective approach reflecting the application of the standard ineach prior reporting period with the option to elect certain practical expedients or (2) a modified retrospective approach with the cumulative effect of initiallyadopting the standard recognized at the date of adoption (which requires additional footnote disclosures). These amendments are effective for reportingperiods beginning after December 15, 2017. Earlier application is permitted only as of reporting periods beginning after December 15, 2016. We adopted thisASU effective January 1, 2018 using the modified retrospective transition approach applied to71 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS contracts not completed as of the date of adoption, with no restatement of comparative periods and a cumulative effect adjustment to retained earningsrecognized as of the date of adoption.Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects theconsideration that the entity expects to receive in exchange for those goods or services. The principles apply a five-step model that includes: (1) identifyingthe contract(s) with the customer; (2) identifying the performance obligation(s) in the contract; (3) determining the transaction price; (4) allocating thetransaction price to the performance obligation(s) in the contract; and (5) recognizing revenue as the performance obligation(s) are satisfied. The standardalso requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.During the implementation process, management evaluated its established business processes, revenue transaction streams and accounting policies,and generally expects similar performance obligations to result under the new standard as compared with prior U.S. generally accepted accounting principlesand does not expect the adoption of this standard to have a material impact on its consolidated financial statements, revenue recognition practices,accounting policies or internal controls. Management identified its material revenue streams to be (1) the sale of new vehicles; (2) the sale of used vehicles toretail customers; (3) the sale of used vehicles at wholesale auction; (4) arrangement of vehicle financing and the sale of service and other insurance contracts;and (5) the performance of vehicle maintenance and repair services and sale of related parts and accessories. As a result of its analysis during theimplementation process, management expects the amounts and timing of revenue recognition to generally remain the same, with the exception of the timingof revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certainretrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenue”), bothof which are subject to accelerated recognition under the new standard. While management is finalizing the cumulative effect adjustment to retainedearnings, the expected impact on our consolidated financial statements as a result of the changes in revenue recognition practices described above is notexpected to be material. We estimate that the adoption of the new revenue recognition standard will result in a net, after-tax cumulative effect adjustment toincrease retained earnings of approximately $3.0 million as of January 1, 2018.In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets andlease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that leases areclassified as either finance or operating leases, a right-of-use asset and lease liability is recognized in the statement of financial position, and repayments areclassified within operating activities in the statement of cash flows. The amendments in this ASU are to be applied using a modified retrospective approachand are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). We plan toadopt this ASU effective January 1, 2019. While management is still evaluating the impact of adopting the provisions of this ASU, management expects thatupon adoption of this ASU, the presentation of certain items in our consolidated financial position, cash flows and other disclosures will be materiallyimpacted, primarily due to the recognition of a right-of-use asset and an associated liability and a change in the timing and classification of certain items inour results of operations as a result of the derecognition of the lease liability.In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based payment transactions. For publiccompanies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 (early adoption ispermitted). We adopted this ASU effective January 1, 2017. Upon adoption of this ASU, interim period and annual income tax expense is affected by stockoption exercises and restricted stock and restricted stock unit vesting activity, potentially creating volatility in our effective income tax rate from period toperiod. See the heading “Provision for Income Taxes - Consolidated” above for further discussion of the impact of the adoption of this ASU on our effectiveincome tax rate for the 2017.In January 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by eliminating step two from the goodwillimpairment test. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019(early adoption is permitted for impairment testing dates after January 1, 2017). Sonic adopted this ASU prior to its impairment test as of October 1, 2017.In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC 815. This ASUexpands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of thehedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements to simplify the application of currentguidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginningafter December 15, 2018 (early adoption is permitted). We are currently in the process of evaluating the effects of this pronouncement on our consolidatedfinancial statements. 72 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Liquidity and Capital ResourcesWe require cash to fund debt service, operating lease obligations, working capital requirements, facility improvements and other capitalimprovements, and dividends on our common stock and to finance acquisitions and otherwise invest in our business. We rely on cash flows from operations,borrowings under our revolving credit and floor plan borrowing arrangements, real estate mortgage financing, asset sales and offerings of debt and equitysecurities to meet these requirements. We closely monitor our available liquidity and projected future operating results in order to remain in compliance withrestrictive covenants under the 2016 Credit Facilities and other debt obligations and lease arrangements. However, our liquidity could be negatively affectedif we fail to comply with the financial covenants in our existing debt or lease arrangements. After giving effect to the applicable restrictions on the paymentof dividends under our debt agreements, as of December 31, 2017, we had at least $148.7 million of net income and retained earnings free of such restrictions.Cash flows provided by our dealerships are derived from various sources. The primary sources include individual consumers, automobile manufacturers,automobile manufacturers’ captive finance subsidiaries and finance companies. Disruptions in these cash flows could have a material adverse impact on ouroperations and overall liquidity.Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated bythese subsidiaries. As a result, our cash flows and ability to service our obligations depend to a substantial degree on the results of operations of thesesubsidiaries and their ability to provide us with cash.We had the following liquidity resources available as of December 31, 2017 and 2016: December 31, 2017 December 31, 2016 (In thousands) Cash and cash equivalents $6,352 $3,108 Availability under the 2016 Revolving Credit Facility 155,304 207,053 Availability under our used vehicle floor plan facilities 7,104 46,423 Floor plan deposit balance 3,000 10,000 Total available liquidity resources $171,760 $266,584 We participate in a program with two of our manufacturer-affiliated finance companies and one commercial bank wherein we maintain a depositbalance (included in the table above) with the lender that earns interest based on the agreed upon rate. This deposit balance is not designated as a pre-payment of notes payable – floor plan, nor is it our intent to use this amount to offset principal amounts owed under notes payable – floor plan in the future,although we have the right and ability to do so. The deposit balance of $3.0 million and $10.0 million as of December 31, 2017 and 2016, respectively, isclassified in other current assets in the accompanying consolidated balance sheets. See the discussion under the heading “Concentrations of Credit andBusiness Risk” in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financialstatements for further information.Long-Term Debt and Credit Facilities2016 Credit Facilities On November 30, 2016, we entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) andamended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 RevolvingCredit Facility, the “2016 Credit Facilities”), which are scheduled to mature on November 30, 2021. The amendment and restatement of the 2016 CreditFacilities extended the scheduled maturity date, increased availability under the 2016 Revolving Credit Facility by $25.0 million and increased availabilityunder the 2016 Floor Plan Facilities by $215.0 million, among other things.Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certaineligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving BorrowingBase”). The 2016 Revolving Credit Facility may be increased at our option up to $300.0 million upon satisfaction of certain conditions. Based on balancesas of December 31, 2017, the 2016 Revolving Borrowing Base was approximately $247.6 million. As of December 31, 2017, we had approximately $75.0million of outstanding borrowings and approximately $17.3 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting intotal borrowing availability of approximately $155.3 million under the 2016 Revolving Credit Facility.73 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2016 New Vehicle Floor Plan Facility”) and a usedvehicle revolving floor plan facility (the “2016 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount up to $1.015 billion.We may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.265 billion, which shall beallocated between the 2016 New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as we request, with no more than 30% of theaggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2016 Floor PlanFacilities are guaranteed by us and certain of our subsidiaries and are secured by a pledge of substantially all of our and our subsidiaries’ assets. The amountsoutstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.We agreed under the 2016 Credit Facilities not to pledge any assets to any third party (other than those explicitly allowed under the amended terms ofthe 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends,capital expenditures and material dispositions and acquisitions of assets as well as other customary covenants and default provisions. Specifically, the 2016Credit Facilities permit cash dividends on our Class A and Class B common stock so long as no event of default (as defined in the 2016 Credit Facilities) hasoccurred and is continuing and provided that we remain in compliance with all financial covenants under the 2016 Credit Facilities.7.0% NotesOn July 2, 2012, we issued $200.0 million in aggregate principal amount of 7.0% Notes which were scheduled to mature on July 15, 2022. On March27, 2017, we repurchased all of the outstanding 7.0% Notes using net proceeds from the issuance of the 6.125% Notes. We paid approximately $213.7million in cash, including an early redemption premium and accrued and unpaid interest, to extinguish the 7.0% Notes and recognized a loss ofapproximately $14.6 million on the repurchase of the 7.0% Notes, recorded in other income (expense), net in the accompanying consolidated statements ofincome. For the period during which both the 7.0% Notes and the 6.125% Notes were outstanding, we incurred double-carry interest expense ofapproximately $0.7 million.5.0% NotesOn May 9, 2013, we issued $300.0 million in aggregate principal amount of 5.0% Notes which mature on May 15, 2023. The 5.0% Notes were issuedat a price of 100.0% of the principal amount thereof. The 5.0% Notes are guaranteed by our domestic operating subsidiaries. Interest on the 5.0% Notes ispayable semi-annually in arrears on May 15 and November 15 of each year. During 2016, we repurchased approximately $10.7 million of our outstanding5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest related thereto.We may redeem the 5.0% Notes, in whole or in part, at any time on or after May 15, 2018 at the following redemption prices, which are expressed aspercentages of the principal amount. RedemptionPrice Beginning on May 15, 2018 102.500%Beginning on May 15, 2019 101.667%Beginning on May 15, 2020 100.833%Beginning on May 15, 2021 and thereafter 100.000% Before May 15, 2018, we may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of theprincipal amount of the 5.0% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 5.0% Notes) and any accrued andunpaid interest, if any, to the redemption date. The indenture governing the 5.0% Notes also provides that holders of the 5.0% Notes may require us torepurchase the 5.0% Notes at a purchase price equal to 101% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if any, to the date ofpurchase if we undergo a Change of Control (as defined in the indenture governing the 5.0% Notes).The indenture governing the 5.0% Notes contains certain specified restrictive covenants. We have agreed not to pledge any assets to any third-partylender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain other limitations or prohibitions concerningthe incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance ofpreferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets.Specifically, the indenture governing the 5.0% Notes limits our ability to pay quarterly cash dividends on our Class A and Class B common stock in excessof $0.10 per share. We74 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS may only pay quarterly cash dividends on our Class A and Class B common stock if we comply with the terms of the indenture governing the 5.0%Notes. We were in compliance with all restrictive covenants in the indenture governing the 5.0% Notes as of December 31, 2017.Our obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0% Notes thenoutstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, orbreach, of our covenants under the 5.0% Notes; and (3) certain defaults under other agreements under which we or our subsidiaries have outstandingindebtedness in excess of $50.0 million. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for further discussion of the5.0% Notes.6.125% NotesOn March 10, 2017, we issued $250.0 million in aggregate principal amount of 6.125% Notes which mature on March 15, 2027. The 6.125% Noteswere issued at a price of 100.0% of the principal amount thereof. We used the net proceeds from the issuance of the 6.125% Notes to repurchase all of theoutstanding 7.0% Notes on March 27, 2017. Remaining proceeds from the issuance of the 6.125% Notes will be used for general corporate purposes. The6.125% Notes are guaranteed by our domestic operating subsidiaries. Interest on the 6.125% Notes is payable semi-annually in arrears on March 15 andSeptember 15 of each year. We may redeem the 6.125% Notes, in whole or in part, at any time on or after March 15, 2022 at the following redemption prices,which are expressed as percentages of the principal amount: RedemptionPrice Beginning on March 15, 2022 103.063%Beginning on March 15, 2023 102.042%Beginning on March 15, 2024 101.021%Beginning on March 15, 2025 and thereafter 100.000% Before March 15, 2022, we may redeem all or a part of the aggregate principal amount of the 6.125% Notes at a redemption price equal to 100% of theprincipal amount of the 6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and any accruedand unpaid interest, if any, to the redemption date. In addition, on or before March 15, 2020, we may redeem up to 35% of the aggregate principal amount ofthe 6.125% Notes at a redemption price equal to 106.125% of the par value of the 6.125% Notes redeemed, plus accrued and unpaid interest, if any, to theredemption date with proceeds from certain equity offerings. The indenture governing the 6.125% Notes also provides that holders of the 6.125% Notes mayrequire us to repurchase the 6.125% Notes at a purchase price equal to 101% of the par value of the 6.125% Notes, plus accrued and unpaid interest, if any, tothe date of purchase if we undergo a Change of Control (as defined in the indenture governing the 6.125% Notes).The indenture governing the 6.125% Notes contains certain specified restrictive covenants. We have agreed not to pledge any assets to any third-partylender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain other limitations or prohibitions concerningthe incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance ofpreferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets.Specifically, the indenture governing the 6.125% Notes limits our ability to pay quarterly cash dividends on our Class A and Class B common stock inexcess of $0.12 per share. We may only pay quarterly cash dividends on our Class A and Class B common stock if we comply with the terms of the indenturegoverning the 6.125% Notes. We were in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as of December 31, 2017.75 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our obligations under the 6.125% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 6.125% Notes thenoutstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, orbreach, of our covenants under the 6.125% Notes; and (3) certain defaults under other agreements under which we or our subsidiaries have outstandingindebtedness in excess of $50.0 million. See Note 6, “Long-Term Debt”, to the accompanying consolidated financial statements for further discussion of the6.125% Notes.Mortgage NotesDuring 2017, we obtained approximately $52.5 million in mortgage financing related to 10 of our operating locations. As of December 31, 2017, theweighted average interest rate was 4.22% and the total outstanding mortgage principal balance of all mortgage financing was approximately $419.7 million,related to approximately 45% of our operating locations. These mortgage notes require monthly payments of principal and interest through their respectivematurities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2018and 2033.Operating LeasesWe lease facilities for the majority of our dealership operations under operating lease arrangements. These facility lease arrangements normally have15- to 20-year terms with one or two five- to 10-year renewal options and do not contain provisions for contingent rent related to the dealership’s operations.Many of the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. Approximately10% of these facility leases have payments that vary based on interest rates. See the table under the heading “Future Liquidity Outlook” below for our futureminimum lease payment obligations, net of sublease proceeds.Floor Plan FacilitiesWe finance our new and certain of our used vehicle inventory through standardized floor plan facilities with manufacturer captive finance companiesand a syndicate of manufacturer-affiliated finance companies and commercial banks. These floor plan facilities are due on demand and bear interest atvariable rates based on LIBOR or prime. The weighted average interest rate for our new and used floor plan facilities was 2.40%, 1.84% and 1.62% for 2017,2016 and 2015, respectively. We receive floor plan assistance from certain manufacturers. Floor plan assistance received is capitalized in inventory andcharged against cost of sales when the associated inventory is sold. We received approximately $44.8 million, $45.3 million and $42.3 million inmanufacturer assistance in 2017, 2016 and 2015, respectively, and recognized in cost of sales approximately $45.3 million, $45.0 million and $42.1 millionin manufacturer assistance in 2017, 2016 and 2015, respectively. Interest payments under each of our floor plan facilities are due monthly and we aregenerally not required to make principal repayments prior to the sale of the vehicles.Covenants and Default ProvisionsNon-compliance with covenants, including a failure to make any payment when due, under the 2016 Credit Facilities, the Silo Floor Plan Facilities,operating lease agreements, mortgage notes, the 5.0% Notes and the 6.125% Notes (collectively, our “Significant Debt Agreements”) could result in a defaultand an acceleration of our repayment obligation under the 2016 Credit Facilities. A default under the 2016 Credit Facilities would constitute a default underthe Silo Floor Plan Facilities and could entitle these lenders to accelerate our repayment obligations under one or more of the floor plan facilities. Certaindefaults under the 2016 Credit Facilities and one or more Silo Floor Plan Facilities, or certain other debt obligations would not result in a default under the5.0% Notes or the 6.125% Notes unless our repayment obligations under the 2016 Credit Facilities and/or one or more of the Silo Floor Plan Facilities orsuch other debt obligations were accelerated. An acceleration of our repayment obligation under any of our Significant Debt Agreements could result in anacceleration of our repayment obligations under our other Significant Debt Agreements. The failure to repay principal amounts of the Significant DebtAgreements when due would create cross-default situations related to other indebtedness. The 2016 Credit Facilities include the following financialcovenants: Covenant MinimumConsolidatedLiquidityRatio MinimumConsolidatedFixed ChargeCoverageRatio MaximumConsolidatedTotal LeaseAdjusted LeverageRatio Required ratio 1.05 1.20 5.75 December 31, 2017 actual 1.13 1.65 4.72 76 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS In addition, many of our facility leases are governed by a guarantee agreement between the landlord and us that contains financial and operatingcovenants. The financial covenants are identical to those under the 2016 Credit Facilities with the exception of one financial covenant related to the ratio ofEBTDAR to rent (as such term is defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As of December 31, 2017, the ratio was3.85 to 1.00.We were in compliance with all of the restrictive and financial covenants on all of our floor plan, long-term debt facilities and lease agreements as ofDecember 31, 2017. After giving effect to the applicable restrictions on the payment of dividends and certain other transactions under our debt agreements, asof December 31, 2017, we had at least $148.7 million of net income and retained earnings free of such restrictions. See Note 6, “Long-Term Debt,” to theaccompanying consolidated financial statements for further discussion of the 2016 Credit Facilities.Acquisitions and DispositionsDuring 2017, we acquired one stand-alone pre-owned vehicle store for approximately $76.6 million and disposed of two mid-line import franchisedealerships and one domestic franchise dealership, which generated net cash from dispositions of approximately $38.2 million. The purchase agreementrequires a deferred payment of $10.0 million after two years from the date of the acquisition. We also may be required to make additional variable paymentsof up to $80.0 million over a ten-year period based on the financial performance of the acquired business. These deferred and variable payments would be tothe former owner who we hired in connection with the acquisition. We will not be obligated to make the additional variable payments of up to $80.0 millionto this employee if the employee resigns or is terminated under certain circumstances. We therefore are recognizing the accrual of the deferred and variablepayments as compensation expense. From the acquisition date to December 31, 2017, we have not paid any deferred or variable payments. See Note 2,“Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for further discussion.Under the 2016 Credit Facilities, we are restricted from making dealership acquisitions in any fiscal year if the aggregate cost of all such acquisitionsoccurring in any fiscal year is above specific amounts without the written consent of the Required Lenders (as that term is defined in the 2016 CreditFacilities). Capital ExpendituresOur capital expenditures include the purchase of land and buildings, construction of new franchised dealerships, pre-owned stores and collision repaircenters, building improvements and equipment purchased for use in our franchised dealerships and pre-owned stores. We selectively construct or improvenew franchised dealership facilities to maintain compliance with manufacturers’ image requirements. We typically finance these projects through newmortgages or, alternatively, through our credit facilities. We also fund these improvements through cash flows from operations.Capital expenditures for 2017 were approximately $234.2 million. Of this amount, approximately $111.2 million was related to facility constructionprojects, $88.1 million was related to real estate acquisitions and $34.9 million was for other fixed assets utilized in our dealership operations. Of the capitalexpenditures in 2017, approximately $52.5 million was funded through mortgage financing and approximately $181.7 million was funded through cash fromoperations and use of our credit facilities. We expect to receive approximately $54.2 million of additional mortgage funding in 2018 related to capitalexpenditures that occurred prior to December 31, 2017. As of December 31, 2017, commitments for facilities construction projects totaled approximately$31.9 million. We expect investments related to capital expenditures to be partly dependent upon the availability of mortgage financing to fund significantcapital projects. Stock Repurchase ProgramOur Board of Directors has authorized us to repurchase shares of our Class A common stock. Historically, we have used our share repurchaseauthorization to offset dilution caused by the exercise of stock options or the vesting of equity compensation awards and to maintain our desired capitalstructure. During 2017, we repurchased approximately 2.0 million shares of our Class A common stock for approximately $37.3 million in open-markettransactions at prevailing market prices and in connection with tax withholdings on the vesting of equity compensation awards. As of December 31, 2017,our total remaining repurchase authorization was approximately $107.7 million. Under the 2016 Credit Facilities, share repurchases are permitted to theextent that no event of default exists and we do not exceed the restrictions set forth in the agreements. After giving effect to the applicable restrictions onshare repurchases and certain other transactions under our debt agreements, as of December 31, 2017, we had at least $148.7 million of net income andretained earnings free of such restrictions.77 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our historicaland projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, current economic environment and otherfactors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directors and management determine our sharerepurchase policy in the future.DividendsOur Board of Directors approved four quarterly cash dividends on all outstanding shares of Class A and Class B common stock totaling $0.20 pershare during 2017. Subsequent to December 31, 2017, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class Bcommon stock of $0.06 per share for stockholders of record on March 15, 2018 to be paid on April 13, 2018. Under the 2016 Credit Facilities, dividends arepermitted to the extent that no event of default exists and we are in compliance with the financial covenants contained therein. The indentures governing the5.0% Notes and the 6.125% Notes also contain restrictions on our ability to pay dividends. After giving effect to the applicable restrictions on sharerepurchases and certain other transactions under our debt agreements, as of December 31, 2017, we had at least $148.7 million of net income and retainedearnings free of such restrictions. The payment of any future dividend is subject to the business judgment of our Board of Directors, taking into considerationour historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, share repurchases, currenteconomic environment and other factors considered relevant. These factors are considered each quarter and will be scrutinized as our Board of Directorsdetermines our future dividend policy. There is no guarantee that additional dividends will be declared and paid at any time in the future. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for a description of restrictions on the payment of dividends. Cash FlowsCash Flows from Operating Activities - Net cash provided by operating activities was approximately $162.9 million, $216.4 million and $69.7million for 2017, 2016 and 2015, respectively. The net cash provided by operations for 2017 consisted primarily of net income (less non-cash items) and adecrease in inventories, offset partially by an increase in receivables and a decrease in notes payable - floor plan – trade. The net cash provided by operationsfor 2016 consisted primarily of net income (less non-cash items) and a decrease in inventory and other assets, offset partially by a decrease in notes payable -floor plan – trade. The net cash provided by operations for 2015 consisted primarily of net income (less non-cash items) and an increase in notes payable -floor plan – trade, offset partially by an increase in inventory.We arrange our inventory floor plan financing through both manufacturer captive finance companies and a syndicate of manufacturer-affiliatedfinance companies and commercial banks. Our floor plan financed with manufacturer captives is recorded as trade floor plan liabilities (with the resultingchange being reflected as operating cash flows). Our dealerships that obtain floor plan financing from a syndicate of manufacturer-affiliated financecompanies and commercial banks record their obligation as non-trade floor plan liabilities (with the resulting change being reflected as financing cash flows).Due to the presentation differences for changes in trade floor plan and non-trade floor plan in the consolidated statements of cash flows, decisionsmade by us to move dealership floor plan financing arrangements from one finance source to another may cause significant variations in operating andfinancing cash flows without affecting our overall liquidity, working capital or cash flow.Net cash used in combined trade and non-trade floor plan financing was approximately $12.6 million for 2017. Net cash provided by combined tradeand non-trade floor plan financing was approximately $7.1 million and $256.1 million for 2016 and 2015, respectively. Accordingly, if all changes in floorplan notes payable were classified as an operating activity, the result would have been net cash provided by operating activities of approximately $196.6million, $266.4 million and $144.0 million for 2017, 2016 and 2015, respectively.Cash Flows from Investing Activities – Net cash used in investing activities during 2017, 2016 and 2015 was approximately $272.1 million,$220.8 million and $163.9 million, respectively. The use of cash during 2017 was comprised primarily of purchases of land, property and equipment and theacquisition of one stand-alone pre-owned vehicle store, offset partially by proceeds from the sale of three franchised dealerships. The use of cash during 2016was primarily comprised of purchases of land, property and equipment and the acquisition of three stand-alone pre-owned vehicle stores. The use of cashduring 2015 was primarily comprised of purchases of land, property and equipment, offset partially by proceeds from sales of dealerships.The significant components of capital expenditures relate primarily to dealership renovations, the purchase of certain existing dealership facilitieswhich had previously been financed under long-term operating leases, and the purchase and development of new real estate parcels for the relocation ofexisting dealerships and construction of pre-owned stores. During 2017, 2016 and 2015, we78 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS generated net proceeds from mortgage financing in the amount of approximately $52.5 million, $103.4 million and $69.1 million, respectively, to purchasecertain existing dealership facilities and to fund certain capital expenditures.Cash Flows from Financing Activities - Net cash provided by financing activities was approximately $112.5 million, $3.9 million and $93.6 millionfor 2017, 2016 and 2015, respectively. For 2017, cash provided by financing activities was comprised primarily of proceeds from the issuance of the 6.125%Notes, net borrowings on notes payable - floor plan - non-trade and proceeds from mortgage notes, offset partially by the extinguishment of the 7.0% Notes,repurchases of treasury stock and scheduled principal payments and repayments of long-term debt. For 2016 and 2015, cash provided by financing activitieswas comprised primarily of net borrowings on notes payable – floor plan – non-trade and proceeds from mortgage notes, offset partially by repurchases oftreasury stock and scheduled principal payments and repayments of long-term debt.Cash Flows from Discontinued Operations – The accompanying consolidated statements of cash flows include both continuing and discontinuedoperations. Net cash flows from operating activities associated with discontinued operations for 2017, 2016 and 2015 consist primarily of changes in deferredincome taxes and were not material to total cash flows. Future Liquidity OutlookOur future contractual obligations are as follows: 2018 2019 2020 2021 2022 Thereafter Total (In thousands) Floor plan facilities $1,513,336 $- $- $- $- $- $1,513,336 Long-term debt (1) 61,314 25,179 57,919 126,532 40,617 726,350 1,037,911 Letters of credit 75,000 - - - - - 75,000 Estimated interest payments on floor plan facilities (2) 6,509 - - - - - 6,509 Estimated interest payments on long-term debt (3) 32,566 30,218 27,569 25,860 23,616 43,902 183,731 Operating leases (net of sublease rentals) 86,941 73,080 47,761 35,636 26,760 95,949 366,127 Construction contracts 31,858 - - - - - 31,858 Other purchase obligations (4) 24,670 12,900 - - - - 37,570 Liability for uncertain tax positions (5) 500 - - - - 4,758 5,258 Total $1,832,694 $141,377 $133,249 $188,028 $90,993 $870,959 $3,257,300(1)Long-term debt amounts consist only of principal obligations.(2)Floor plan facilities balances are correlated with the amount of vehicle inventory and are generally due at the time that a vehicle is sold. Estimatedinterest payments were calculated using the December 31, 2017 floor plan facilities balance, the weighted average interest rate for the three monthsended December 31, 2017 of 2.58% and the assumption that floor plan balances at December 31, 2017 would be relieved within 60 days inconnection with the sale of the associated vehicle inventory.(3)Estimated interest payments include payments related to interest rate swaps.(4)Other purchase obligations include contracts for real estate purchases, office supplies, utilities, acquisition related obligations and various other itemsor other services.(5)Amount represents recorded liability, including interest and penalties, related to “Accounting for Uncertain Income Tax Positions” in the ASC. SeeNote 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 7, “Income Taxes,” to the accompanying consolidatedfinancial statements.We believe our best sources of liquidity for operations and debt service remain cash flows generated from operations combined with our availability ofborrowings under our floor plan facilities (or any replacements thereof), the 2016 Credit Facilities, real estate mortgage financing, selected dealership andother asset sales and our ability to raise funds in the capital markets through offerings of debt or equity securities. Because the majority of our consolidatedassets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated by these subsidiaries. As a result, our cash flowsand ability to service our obligations depend to a substantial degree on the results of operations of these subsidiaries and their ability to provide us with cash.79 SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS SeasonalityOur operations are subject to seasonal variations. The first quarter normally contributes less operating profit than the second and third quarters, whilethe fourth quarter normally contributes the highest operating profit of any quarter. Weather conditions, the timing of manufacturer incentive programs andmodel changeovers cause seasonality and may adversely affect vehicle demand and, consequently, our profitability. Comparatively, parts and servicedemand remains stable throughout the year.Off-Balance Sheet ArrangementsGuarantees and Indemnification ObligationsIn connection with the operation and disposition of our dealerships, we have entered into various guarantees and indemnification obligations. Whenwe sell dealerships, we attempt to assign any related lease to the buyer of the dealership to eliminate any future liability. However, if we are unable to assignthe related leases to the buyer, we will attempt to sublease the leased properties to the buyer at a rate equal to the terms of the original leases. In the event weare unable to sublease the properties to the buyer with terms at least equal to our lease, we may be required to record lease exit accruals. As of December 31,2017, our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled approximately $45.6 million. Futuresublease payments expected to be received related to these lease payments were approximately $32.8 million at December 31, 2017.In accordance with the terms of agreements entered into for the sale of our dealerships, we generally agree to indemnify the buyer from certainliabilities and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations orwarranties made in accordance with the agreement. While our exposure with respect to environmental remediation and repairs is difficult to quantify, ourmaximum exposure associated with these general indemnifications was approximately $5.0 million at December 31, 2017. These indemnifications expirewithin a period of one year following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded for thiscontingency was not significant at December 31, 2017. We also guarantee the floor plan commitments of our 50%-owned joint venture, the amount of whichwas approximately $2.8 million at December 31, 2017. We expect the aggregate amount of the obligations we guarantee to fluctuate based on dealershipdisposition activity. Although we seek to mitigate our exposure in connection with these matters, these guarantees and indemnification obligations,including environmental exposures and the financial performance of lease assignees and sublessees, cannot be predicted with certainty. An unfavorableresolution of one or more of these matters could have a material adverse effect on our liquidity and capital resources. See Note 12, “Commitments andContingencies,” to the accompanying consolidated financial statements for further discussion regarding these guarantees and indemnification obligations. 80 SONIC AUTOMOTIVE, INC. Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Interest Rate RiskOur variable rate floor plan facilities, 2016 Revolving Credit Facility borrowings and other variable rate notes expose us to risks caused byfluctuations in the applicable interest rates. The total outstanding balance of such variable instruments after considering the effect of our interest rate swapsand rate caps (see below) was approximately $1.1 billion at December 31, 2017 and approximately $1.2 billion at December 31, 2016. A change of 100 basispoints in the underlying interest rate would have caused a change in interest expense of approximately $10.4 million in 2017 and approximately $11.7million in 2016. Of the total change in interest expense, approximately $8.1 million and $10.0 million in 2017 and 2016, respectively, would have resultedfrom the floor plan facilities.In addition to our variable rate debt, as of December 31, 2017 and 2016, certain of our dealership lease facilities had monthly lease payments thatfluctuated based on LIBOR interest rates. An increase in interest rates of 100 basis points would not have had a significant impact on rent expense in 2017and 2016 due to the leases containing LIBOR floors which were above the LIBOR rate during 2017 and 2016.We also have interest rate cash flow swap agreements to effectively convert a portion of our LIBOR-based variable rate debt to a fixed rate. In addition,we have interest rate cap agreements to limit our exposure to increases in LIBOR rates above certain levels. Under the terms of these cash flow swaps andinterest rate caps, interest rates reset monthly. The fair value of these interest rate swap and rate cap positions at December 31, 2017 was a net asset ofapproximately $4.7 million, with approximately $5.1 million included in other assets and approximately $0.9 million included in other current assets in theaccompanying consolidated balance sheets, offset partially by approximately $1.0 million included in other accrued liabilities and approximately $0.3million included in other long-term liabilities in the accompanying consolidated balance sheets. The fair value of these interest rate swap positions atDecember 31, 2016 was a net liability of approximately $3.7 million, with approximately $4.1 million included in other accrued liabilities andapproximately $2.4 million included in other long-term liabilities in the accompanying consolidated balance sheets, offset partially by approximately $2.8million included in other assets in the accompanying consolidated balance sheets. Under the terms of these agreements, we will receive and pay interestbased on the following: NotionalAmount PayRate Receive Rate (1) Maturing Date(In millions) $250.0 1.887% one-month LIBOR June 30, 2018$125.0 1.900% one-month LIBOR July 1, 2018$50.0 (2)2.320% one-month LIBOR July 1, 2019$200.0 (2)2.313% one-month LIBOR July 1, 2019$100.0 (3)1.384% one-month LIBOR July 1, 2020$125.0 (2)1.158% one-month LIBOR July 1, 2019$150.0 (3)1.310% one-month LIBOR July 1, 2020$125.0 1.020% one-month LIBOR July 1, 2018$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021 (1)The one-month LIBOR rate was approximately 1.564% at December 31, 2017.(2)The effective date of these forward-starting swaps is July 2, 2018.(3)The effective date of these forward-starting swaps is July 1, 2019.(4)The notional amount of these interest rate caps adjusts over the term of the agreement as follows: $62.5 million from September 1, 2017 to June 30,2018, $93.75 million from July 1, 2018 to June 30, 2019, $78.125 million from July 1, 2019 to June 30, 2020 and $37.5 million from July 1, 2020 toJuly 1, 2021.(5)Under these interest rate caps, no payment will occur unless the stated receive rate exceeds the stated pay rate. If this occurs, a net payment to Sonicfrom the counterparty based on the spread between the receive rate and the pay rate will be recognized as a reduction of interest expense, other, net inthe accompanying consolidated statements of income.During 2017, we entered into four interest rate cap agreements. These interest rate caps have been designated and qualify as cash flow hedges and, as aresult, changes in the fair value of these caps are recorded in total other comprehensive income (loss) before taxes in the accompanying consolidatedstatements of comprehensive income.81 SONIC AUTOMOTIVE, INC. Absent the acceleration of payments of principal that may result from non-compliance with financial and operational covenants under our variousindebtedness, future principal maturities of variable and fixed rate debt and related interest rate swaps are as follows: 2018 2019 2020 2021 2022 Thereafter Total Asset(Liability)Fair Value (In thousands) Long-term debt: Fixed rate maturities $36,585 $10,873 $15,888 $11,476 $21,693 $646,677 $743,192 Fixed rate outstanding (1) $743,192 $706,607 $695,734 $679,846 $668,370 $(734,689)Average rate on fixed outstanding debt (1) 3.27% 3.19% 3.17% 3.14% 3.28% 3.04% Variable rate maturities $24,729 $14,306 $42,031 $115,056 $18,924 $79,673 $294,719 Variable rate outstanding (1) $294,719 $269,990 $255,684 $213,653 $98,597 $(296,357)Average rate on variable outstanding debt (1) 3.79% 3.81% 3.81% 3.84% 3.94% 3.96% Cash flow hedge instruments: Variable to fixed maturities $750,000 $750,000 $562,500 $150,000 $- $- $2,212,500 Variable to fixed outstanding (1) $750,000 $562,500 $150,000 $- $- $- $4,681 Average rate on outstanding swaps (1) 1.96% 1.71% 2.00% N/A N/A N/A (1)Based on amounts outstanding at January 1 of each respective period.Foreign Currency RiskWe purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase our inventories in U.S. Dollars, ourbusiness is subject to foreign exchange rate risk that may influence automobile manufacturers’ ability to provide their products at competitive prices in theUnited States. To the extent that we cannot recapture this volatility in prices charged to customers or if this volatility negatively impacts consumer demandfor our products, this volatility could adversely affect our future operating results. Item 8. Financial Statements and Supplementary Data.Our consolidated financial statements and the related notes begin on page F-1 herein.Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.None.Item 9A. Controls and Procedures.Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer(“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2017. Based upon that evaluation, our CEO and CFO concluded that our disclosure controlsand procedures were effective as of December 31, 2017.Our CEO and CFO have each concluded that the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in allmaterial respects, the financial position, results of operations and cash flows of the Company and its subsidiaries in conformity with U.S. generally acceptedaccounting principles.Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation ofour management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as ofDecember 31, 2017 based on the framework in Internal Control - Integrated Framework published in 2013 by the Committee of Sponsoring Organizations ofthe Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as ofDecember 31,82 SONIC AUTOMOTIVE, INC. 2017. The attestation report of our independent registered public accounting firm on the Company’s internal control over financial reporting is set forth in‘‘Item 8. Financial Statements and Supplementary Data’’ in this Annual Report on Form 10-K.Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance that the objectives of the controlsystem are met and may not prevent or detect misstatements. In addition, any evaluation of the effectiveness of internal controls over financial reporting infuture periods is subject to risk that those internal controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.Changes in Internal Control over Financial Reporting. There has been no change in Sonic’s internal control over financial reporting during thefourth quarter ended December 31, 2017, that has materially affected, or is reasonably likely to materially affect, Sonic’s internal control over financialreporting.Item 9B. Other Information.None. 83 SONIC AUTOMOTIVE, INC. PART III Item 10. Directors, Executive Officers and Corporate Governance.The information required by this item with respect to our executive officers appears in Part I of this Annual Report on Form 10-K under the heading“Executive Officers of the Registrant.” The other information required by this item is furnished by incorporation by reference to the information under theheadings “Election of Directors,” “Corporate Governance and Board of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and“Additional Corporate Governance and Other Information – Corporate Governance Guidelines, Code of Business Conduct and Ethics and CommitteeCharters” in the definitive Proxy Statement (to be filed hereafter) for our 2018 Annual Meeting of Stockholders (the “Proxy Statement”).Item 11. Executive Compensation.The information required by this item is furnished by incorporation by reference to the information under the headings “Executive Compensation”and “Director Compensation” in the Proxy Statement.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this item is furnished by incorporation by reference to the information under the headings “Security Ownership of CertainBeneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this item is furnished by incorporation by reference to the information under the headings “Corporate Governance andBoard of Directors – Policies and Procedures for Review, Approval or Ratification of Transactions with Affiliates,” “Corporate Governance and Board ofDirectors – Transactions with Affiliates” and “Corporate Governance and Board of Directors - Director Independence” in the Proxy Statement.Item 14. Principal Accountant Fees and Services.The information required by this item is furnished by incorporation by reference to the information under the heading “Ratification of theAppointment of Independent Registered Public Accounting Firm” in the Proxy Statement. 84 SONIC AUTOMOTIVE, INC. PART IV Item 15. Exhibits and Financial Statement Schedules.The exhibits and other documents filed as a part of this Annual Report on Form 10-K, including those exhibits that are incorporated by referenceherein, are:(1)Financial Statements: consolidated balance sheets as of December 31, 2017 and 2016. Consolidated statements of income for the Years EndedDecember 31, 2017, 2016 and 2015. Consolidated statements of comprehensive income for the Years Ended December 31, 2017, 2016 and 2015.Consolidated statements of stockholders’ equity for the Years Ended December 31, 2017, 2016 and 2015. Consolidated statements of cash flows forthe Years Ended December 31, 2017, 2016 and 2015.(2)Financial Statement Schedules: No financial statement schedules are required to be filed (no respective financial statement captions) as part of thisAnnual Report on Form 10-K.(3)Exhibits: Exhibits required in connection with this Annual Report on Form 10-K are listed below. Certain of such exhibits are hereby incorporated byreference to other documents on file with the SEC with which they are physically filed, to be a part hereof as of their respective dates. EXHIBIT NO. DESCRIPTION3.1 Amended and Restated Certificate of Incorporation of Sonic Automotive, Inc., dated August 7, 1997 (incorporated by reference toExhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-13395)). 3.2 Certificate of Designation, Preferences and Rights of Class A Convertible Preferred Stock, dated March 20, 1998 (incorporated byreference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-13395)). 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Sonic Automotive, Inc., dated June 16, 1999(incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-13395)). 3.4 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Sonic Automotive, Inc., dated April 18, 2017(incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-13395)). 3.5 Amended and Restated Bylaws of Sonic Automotive, Inc., dated July 27, 2017 (incorporated by reference to Exhibit 3.5 to the QuarterlyReport on Form 10-Q for the quarter ended June 30, 2017 (File No. 001-13395)). 4.1 Specimen Class A Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1/Afiled October 17, 1997 (File No. 333-33295)). 4.2 Registration Rights Agreement, dated as of May 9, 2013, by and among Sonic Automotive, Inc., the guarantors set forth on thesignature pages thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers(incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed May 13, 2013 (File No. 001-13395)). 4.3 Indenture, dated as of May 9, 2013, by and among Sonic Automotive, Inc., the guarantors named therein and U.S. Bank NationalAssociation, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed May 13, 2013 (File No. 001-13395)). 4.4 Form of 5.0% Senior Subordinated Notes due 2023 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filedMay 13, 2013 (File No. 001-13395)). 4.5 Registration Rights Agreement, dated as of March 10, 2017, by and among Sonic Automotive, Inc., the guarantors set forth on thesignature pages thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers(incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed March 14, 2017 (File No. 001-13395)).85 SONIC AUTOMOTIVE, INC. EXHIBIT NO. DESCRIPTION 4.6 Indenture, dated as of March 10, 2017, by and among Sonic Automotive, Inc., the guarantors named therein and U.S. Bank NationalAssociation, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed March 14, 2017 (File No. 001-13395)). 4.7 Form of 6.125% Senior Subordinated Notes due 2027 (incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K filedMarch 14, 2017 (File No. 001-13395)). 10.1 Fourth Amended and Restated Credit Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc.; each lender a partythereto; Bank of America, N.A., as administrative agent, swing line lender and an l/c issuer; and Wells Fargo Bank, NationalAssociation, as an l/c issuer (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year endedDecember 31, 2016 (File No. 001-13395)). 10.2 Form of Promissory Note, dated November 30, 2016, executed by Sonic Automotive, Inc., as borrower, in favor of each of the lenders tothe Fourth Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.12 to the Annual Report on Form 10-K forthe year ended December 31, 2016 (File No. 001-13395)). 10.3 Fourth Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of SonicAutomotive, Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the lenders (incorporated byreference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)). 10.4 Fourth Amended and Restated Securities Pledge Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc., thesubsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporatedby reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)). 10.5 Fourth Amended and Restated Escrow and Security Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc., thesubsidiaries of Sonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporatedby reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)). 10.6 Fourth Amended and Restated Security Agreement, dated as of November 30, 2016, among Sonic Automotive, Inc., the subsidiaries ofSonic Automotive, Inc. named therein and Bank of America, N.A., as administrative agent for the lenders (incorporated by reference toExhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)). 10.7 Third Amended and Restated Syndicated New and Used Vehicle Floorplan Credit Agreement, dated as of November 30, 2016, amongSonic Automotive, Inc.; the subsidiaries of Sonic Automotive, Inc. named therein; each lender a party thereto; Bank of America, N.A., asadministrative agent, new vehicle swing line lender and used vehicle swing line lender; and Bank of America, N.A., as revolvingadministrative agent (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31,2016 (File No. 001-13395)). 10.8 Form of Promissory Note, dated November 30, 2016, executed by Sonic Automotive, Inc. and the subsidiaries of Sonic Automotive, Inc.named therein, as borrowers, in favor of each of the lenders to the Third Amended and Restated Syndicated New and Used VehicleFloorplan Credit Agreement (incorporated by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year endedDecember 31, 2016 (File No. 001-13395)). 10.9 Third Amended and Restated Company Guaranty Agreement, dated as of November 30, 2016, by Sonic Automotive, Inc. to Bank ofAmerica, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-Kfor the year ended December 31, 2016 (File No. 001-13395)). 86 SONIC AUTOMOTIVE, INC. EXHIBIT NO. DESCRIPTION10.10 Third Amended and Restated Subsidiary Guaranty Agreement, dated as of November 30, 2016, by the subsidiaries of Sonic Automotive,Inc. named therein, as guarantors, to Bank of America, N.A., as administrative agent for the lenders (incorporated by reference to Exhibit10.20 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)). 10.11 Standard Form of Lease executed with Capital Automotive L.P. or its affiliates (incorporated by reference to Exhibit 10.38 to theAnnual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)). 10.12 Standard Form of Lease Guaranty executed with Capital Automotive L.P. or its affiliates (incorporated by reference to Exhibit 10.39 tothe Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)). 10.13 Amendment to Guaranty and Subordination Agreements, dated as of January 1, 2005, by and between Sonic Automotive, Inc., asguarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference to Exhibit 10.40 to theAnnual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)). 10.14 Second Amendment to Guaranty and Subordination Agreements, dated as of March 12, 2009, by and between Sonic Automotive, Inc.,as guarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference to Exhibit 10.41 to theAnnual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)). 10.15 Side Letter to Second Amendment to Guaranty and Subordination Agreements, dated as of March 12, 2009, by and between SonicAutomotive, Inc., as guarantor, and Capital Automotive L.P. and its affiliates named therein, as landlord (incorporated by reference toExhibit 10.42 to the Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)). 10.16 Sonic Automotive, Inc. Employee Stock Purchase Plan, amended and restated as of May 8, 2002 (incorporated by reference to Exhibit10.15 to the Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-13395)). (1) 10.17 Sonic Automotive, Inc. Nonqualified Employee Stock Purchase Plan, amended and restated as of October 23, 2002 (incorporated byreference to Exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 001-13395)). (1) 10.18 Sonic Automotive, Inc. 1997 Stock Option Plan, amended and restated as of April 22, 2003 (incorporated by reference to Exhibit 10.10to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (File No. 001-13395)). (1) 10.19 Sonic Automotive, Inc. 2004 Stock Incentive Plan, amended and restated as of February 11, 2009 (incorporated by reference to Exhibit4 to the Registration Statement on Form S-8 filed June 2, 2009 (File No. 333-159674)). (1) 10.20 Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Unit Award Agreement (incorporatedby reference to Exhibit 10.33 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1) 10.21 Sonic Automotive, Inc. 2004 Stock Incentive Plan Form of Performance-Based Restricted Stock Award Agreement (incorporated byreference to Exhibit 10.34 to the Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 001-13395)). (1) 10.22 Sonic Automotive, Inc. Incentive Compensation Plan, amended and restated as of October 16, 2013 (incorporated by reference toAppendix A to the Definitive Proxy Statement on Schedule 14A filed March 4, 2014 (File No. 001-13395)). (1) 87 SONIC AUTOMOTIVE, INC. EXHIBIT NO. DESCRIPTION10.23 Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated by reference to Exhibit 10.46to the Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-13395)). (1) 10.24 First Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated byreference to Exhibit 10.47 to the Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-13395)). (1) 10.25 Second Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated byreference to Exhibit 10.59 to the Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 001-13395)). (1) 10.26 Third Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective February 12, 2015 (incorporated byreference to Exhibit 10.1 to the Current Report on Form 8-K filed February 13, 2015 (File No. 001-13395)). (1) 10.27 Sonic Automotive, Inc. 2012 Stock Incentive Plan, amended and restated as of February 11, 2015 (incorporated by reference toAppendix A to the Definitive Proxy Statement on Schedule 14A filed March 3, 2015 (File No. 001-13395)). (1) 10.28 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Incentive Stock Option Award Agreement (incorporated by reference toExhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.29 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Nonstatutory Stock Option Award Agreement (incorporated by reference toExhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.30 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Performance-Based Restricted Stock Award Agreement (incorporated byreference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.31 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Performance-Based Restricted Stock Unit Award Agreement (incorporatedby reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.32 Sonic Automotive, Inc. 2012 Stock Incentive Plan Performance-Based Restricted Stock Unit Award Agreement for Retention Grant,dated May 6, 2015, between Sonic Automotive, Inc. and Jeff Dyke (incorporated by reference to Exhibit 10.1 to the Current Report onForm 8-K filed May 8, 2015 (File No. 001-13395)). (1) 10.33 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit10.5 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.34 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Restricted Stock Unit Award Agreement (incorporated by reference toExhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 10.35 Sonic Automotive, Inc. 2012 Stock Incentive Plan Form of Stock Appreciation Rights Award Agreement (incorporated by reference toExhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (File No. 001-13395)). (1) 88 SONIC AUTOMOTIVE, INC. EXHIBIT NO. DESCRIPTION10.36 Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors, amended and restated effective asof April 18, 2017 (incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed March 6, 2017(File No. 001-13395)). (1) 10.37 Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors Form of Restricted Stock AwardAgreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (FileNo. 001-13395)). (1) 10.38 Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors Form of Deferred Restricted StockUnit Award Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended March 31,2017 (File No. 001-13395)). (1) 10.39* Director Compensation Policy. (1) 10.40 Employment Agreement of Heath R. Byrd, dated October 18, 2007, as amended December 19, 2008 (incorporated by reference toExhibit 10.54 to the Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 001-13395)). (1) 10.41 Form of Change in Control Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed May 8, 2015(File No. 001-13395)). (1) 12.1* Computation of Ratio of Earnings to Fixed Charges.21.1* Subsidiaries of Sonic Automotive, Inc. 23.1* Consent of KPMG LLP.31.1* Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. *Filed herewith.**Furnished herewith.(1)Indicates a management contract or compensatory plan or arrangement. 89 SONIC AUTOMOTIVE, INC. Item 16. Form 10-K Summary.None. 90 SONIC AUTOMOTIVE, INC. SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. SONIC AUTOMOTIVE, INC. Date: February 28, 2018 By: /s/ HEATH R. BYRD Heath R. Byrd Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated. Signature Title Date /s/ O. BRUTON SMITH Executive Chairman and Director February 28, 2018O. Bruton Smith /s/ B. SCOTT SMITH President, Chief Executive Officer and Director February 28, 2018B. Scott Smith (Principal Executive Officer) /s/ HEATH R. BYRD Executive Vice President and Chief Financial Officer February 28, 2018Heath R. Byrd (Principal Financial Officer and Principal Accounting Officer) /s/ DAVID BRUTON SMITH Vice Chairman and Director February 28, 2018David Bruton Smith /s/ WILLIAM I. BELK Director February 28, 2018William I. Belk /s/ WILLIAM R. BROOKS Director February 28, 2018William R. Brooks /s/ VICTOR H. DOOLAN Director February 28, 2018Victor H. Doolan /s/ JOHN W. HARRIS III Director February 28, 2018John W. Harris III /s/ ROBERT HELLER Director February 28, 2018Robert Heller /s/ R. EUGENE TAYLOR Director February 28, 2018R. Eugene Taylor 91  Report of Independent Registered Public Accounting Firm To the Stockholders and Board of DirectorsSonic Automotive, Inc.:Opinion on the Consolidated Financial StatementsWe have audited the accompanying consolidated balance sheets of Sonic Automotive, Inc. and its subsidiaries (the “Company”) as of December 31, 2017and 2016, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financialstatements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operationsand its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the Company’sinternal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued bythe Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.Basis for OpinionThese consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performingprocedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures thatrespond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financialstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2014. Charlotte, North CarolinaFebruary 28, 2018 F-1 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of DirectorsSonic Automotive, Inc.:Opinion on Internal Control Over Financial ReportingWe have audited Sonic Automotive, Inc.’s and its subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based oncriteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteriaestablished in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”), the consolidatedbalance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financialstatements”), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Ourresponsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firmregistered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financialreporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures aswe considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /s/ KPMG LLP Charlotte, North CarolinaFebruary 28, 2018 F-2 SONIC AUTOMOTIVE, INC.CONSOLIDATED BALANCE SHEETS December 31, December 31, 2017 2016 (Dollars in thousands) ASSETS Current Assets: Cash and cash equivalents $6,352 $3,108 Receivables, net 482,126 430,242 Inventories 1,512,745 1,570,701 Other current assets 18,574 26,993 Total current assets 2,019,797 2,031,044 Property and Equipment, net 1,146,881 1,010,380 Goodwill 525,780 472,437 Other Intangible Assets, net 74,589 80,233 Other Assets 51,471 45,242 Total Assets $3,818,518 $3,639,336 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Notes payable - floor plan - trade $804,238 $850,537 Notes payable - floor plan - non-trade 709,098 675,353 Trade accounts payable 129,903 117,740 Accrued interest 12,316 13,265 Other accrued liabilities 237,963 236,982 Current maturities of long-term debt 61,314 43,003 Total current liabilities 1,954,832 1,936,880 Long-Term Debt 963,389 839,675 Other Long-Term Liabilities 61,918 61,170 Deferred Income Taxes 51,619 76,447 Commitments and Contingencies Stockholders’ Equity: Class A convertible preferred stock, none issued - - Class A common stock, $0.01 par value; 100,000,000 shares authorized; 63,456,698 shares issued and 31,166,205 shares outstanding at December 31, 2017; 62,967,061 shares issued and 32,703,865 shares outstanding at December 31, 2016 635 630 Class B common stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued and outstanding at December 31, 2017 and December 31, 2016 121 121 Paid-in capital 732,854 721,695 Retained earnings 625,356 541,146 Accumulated other comprehensive income (loss) 1,307 (2,262)Treasury stock, at cost; 32,290,493 Class A common stock shares held at December 31, 2017 and 30,263,196 Class A common stock shares held at December 31, 2016 (573,513) (536,166)Total Stockholders’ Equity 786,760 725,164 Total Liabilities and Stockholders’ Equity $3,818,518 $3,639,336See notes to consolidated financial statements.F-3 SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2017 2016 2015 (Dollars and shares in thousands, except per share amounts) Revenues: New vehicles $5,295,051 $5,234,505 $5,265,401 Used vehicles 2,622,053 2,533,122 2,512,024 Wholesale vehicles 171,064 211,048 155,339 Total vehicles 8,088,168 7,978,675 7,932,764 Parts, service and collision repair 1,416,010 1,409,819 1,364,947 Finance, insurance and other, net 363,030 343,285 326,588 Total revenues 9,867,208 9,731,779 9,624,299 Cost of Sales: New vehicles (5,030,125) (4,973,911) (4,997,472)Used vehicles (2,467,150) (2,374,537) (2,349,982)Wholesale vehicles (179,778) (218,364) (162,707)Total vehicles (7,677,053) (7,566,812) (7,510,161)Parts, service and collision repair (732,479) (735,693) (699,526)Total cost of sales (8,409,532) (8,302,505) (8,209,687)Gross profit 1,457,676 1,429,274 1,414,612 Selling, general and administrative expenses (1,147,773) (1,110,856) (1,110,565)Impairment charges (9,394) (8,063) (17,955)Depreciation and amortization (88,944) (77,446) (68,799)Operating income (loss) 211,565 232,909 217,293 Other income (expense): Interest expense, floor plan (36,395) (27,716) (21,326)Interest expense, other, net (52,524) (50,106) (50,910)Other income (expense), net (14,522) 125 99 Total other income (expense) (103,441) (77,697) (72,137)Income (loss) from continuing operations before taxes 108,124 155,212 145,156 Provision for income taxes for continuing operations - benefit (expense) (13,971) (60,696) (57,065)Income (loss) from continuing operations 94,153 94,516 88,091 Discontinued operations: Income (loss) from discontinued operations before taxes (1,942) (2,121) (2,883)Provision for income taxes for discontinued operations - benefit (expense) 772 798 1,103 Income (loss) from discontinued operations (1,170) (1,323) (1,780)Net income (loss) $92,983 $93,193 $86,311 Basic earnings (loss) per common share: Earnings (loss) per share from continuing operations $2.14 $2.07 $1.74 Earnings (loss) per share from discontinued operations (0.03) (0.03) (0.03)Earnings (loss) per common share $2.11 $2.04 $1.71 Weighted average common shares outstanding 43,997 45,637 50,489 Diluted earnings (loss) per common share: Earnings (loss) per share from continuing operations $2.12 $2.06 $1.73 Earnings (loss) per share from discontinued operations (0.03) (0.03) (0.03)Earnings (loss) per common share $2.09 $2.03 $1.70 Weighted average common shares outstanding 44,358 45,948 50,883 Dividends declared per common share $0.20 $0.20 $0.11 See notes to consolidated financial statements. F-4 SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2017 2016 2015 (Dollars in thousands) Net income (loss) $92,983 $93,193 $86,311 Other comprehensive income (loss) before taxes: Change in fair value of interest rate swap and rate cap agreements 6,186 5,731 540 Pension actuarial income (loss) (429) (295) 737 Total other comprehensive income (loss) before taxes 5,757 5,436 1,277 Provision for income tax benefit (expense) related to components of other comprehensive income (loss) (2,188) (2,066) (485)Other comprehensive income (loss) 3,569 3,370 792 Comprehensive income (loss) $96,552 $96,563 $87,103 See notes to consolidated financial statements. F-5 SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Accumulated Class A Class A Class B Other Total Common Stock Treasury Stock Common Stock Paid-In Retained Comprehensive Stockholders’ Shares Amount Shares Amount Shares Amount Capital Earnings Income (Loss) Equity (Dollars in thousands) Balance at December 31, 2014 62,047 $620 (23,156) $(401,712) 12,029 $121 $697,760 $376,353 $(6,424) $666,718 Shares awarded under stock compensationplans 518 6 - - - - 3,656 - - 3,662 Purchases of treasury stock - - (1,519) (34,483) - - - - - (34,483)Income tax benefit associated with stock compensation plans - - - - - - 1,888 - - 1,888 Change in fair value of interest rate swap agreements, net of tax expense of $205 - - - - - - - - 335 335 Pension actuarial income, net of tax expenseof $280 - - - - - - - - 457 457 Restricted stock amortization - - - - - - 9,814 - - 9,814 Other 21 - - - - - - - - - Net income (loss) - - - - - - - 86,311 - 86,311 Dividends declared - - - - - - - (5,654) - (5,654)Balance at December 31, 2015 62,586 $626 (24,675) $(436,195) 12,029 $121 $713,118 $457,010 $(5,632) $729,048 Shares awarded under stock compensationplans 381 4 - - - - 23 - - 27 Purchases of treasury stock - - (5,588) (99,971) - - - - - (99,971)Income tax expense associated with stock compensation plans - - - - - - (2,611) - - (2,611)Change in fair value of interest rate swap agreements, net of tax expense of $2,178 - - - - - - - - 3,553 3,553 Pension actuarial loss, net of tax benefit of$112 - - - - - - - - (183) (183)Restricted stock amortization - - - - - - 11,165 - - 11,165 Net income (loss) - - - - - - - 93,193 - 93,193 Dividends declared - - - - - - - (9,057) - (9,057)Balance at December 31, 2016 62,967 $630 (30,263) $(536,166) 12,029 $121 $721,695 $541,146 $(2,262) $725,164 Shares awarded under stock compensationplans 490 5 - - - - 40 - - 45 Purchases of treasury stock - - (2,027) (37,347) - - - - - (37,347)Change in fair value of interest rate swap andrate cap agreements, net of tax expense of$2,351 - - - - - - - - 3,835 3,835 Pension actuarial loss, net of tax benefit of$163 - - - - - - - - (266) (266)Restricted stock amortization - - - - - - 11,119 - - 11,119 Net income (loss) - - - - - - - 92,983 - 92,983 Dividends declared - - - - - - - (8,773) - (8,773)Balance at December 31, 2017 63,457 $635 (32,290) $(573,513) 12,029 $121 $732,854 $625,356 $1,307 $786,760 See notes to consolidated financial statements. F-6 SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2017 2016 2015 (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $92,983 $93,193 $86,311 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 88,938 77,532 68,793 Provision for bad debt expense 748 389 1,909 Other amortization 649 649 649 Debt issuance cost amortization 2,383 2,641 2,489 Debt discount amortization, net of premium amortization 157 303 199 Stock-based compensation expense 11,119 11,165 9,814 Deferred income taxes (27,760) 14,465 15,996 Net distributions from equity investee (138) (300) (263)Asset impairment charges 9,394 8,063 17,955 Loss (gain) on disposal of dealerships and property and equipment (10,194) (331) (3,089)Loss (gain) on exit of leased dealerships 2,157 1,386 1,848 Loss (gain) on retirement of debt 14,607 - - Changes in assets and liabilities that relate to operations: Receivables (52,989) (62,894) (9,048)Inventories 57,250 35,545 (291,100)Other assets 3,266 62,538 (19,785)Notes payable - floor plan - trade (46,299) (42,929) 181,848 Trade accounts payable and other liabilities 16,612 14,953 5,190 Total adjustments 69,900 123,175 (16,595)Net cash provided by (used in) operating activities 162,883 216,368 69,716 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of businesses, net of cash acquired (76,610) (15,861) - Purchases of land, property and equipment (234,245) (206,232) (173,249)Proceeds from sales of property and equipment 596 1,319 1,397 Proceeds from sales of dealerships 38,150 - 7,978 Net cash provided by (used in) investing activities (272,109) (220,774) (163,874)CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on notes payable - floor plan - non-trade 33,745 49,986 74,249 Borrowings on revolving credit facilities 327,070 209,287 402,093 Repayments on revolving credit facilities (252,070) (213,490) (397,890)Proceeds from issuance of long-term debt 302,483 103,395 69,075 Debt issuance costs (4,855) (3,084) (491)Principal payments and repurchase of long-term debt (36,836) (30,949) (19,424)Repurchase of debt securities (210,914) - - Purchases of treasury stock (37,347) (99,971) (34,483)Income tax benefit (expense) associated with stock compensation plans - (2,611) 1,888 Issuance of shares under stock compensation plans 45 27 3,662 Dividends paid (8,851) (8,701) (5,078)Net cash provided by (used in) financing activities 112,470 3,889 93,601 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,244 (517) (557)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,108 3,625 4,182 CASH AND CASH EQUIVALENTS, END OF YEAR $6,352 $3,108 $3,625 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Change in fair value of interest rate swap and rate cap agreements (net of tax expense of $2,351, $2,178 and $205 in the years ended December 31, 2017, 2016 and 2015, respectively) $3,835 $3,553 $335 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest, including amount capitalized $89,525 $77,289 $71,328 Income taxes $42,907 $28,459 $38,474 See notes to consolidated financial statements. F-7 SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Description of Business and Summary of Significant Accounting PoliciesOrganization and Business - Sonic Automotive, Inc. (“Sonic” or the “Company”) is one of the largest automotive retailers in the United States (asmeasured by total revenue). As of December 31, 2017, Sonic operated 114 new vehicle franchises in 13 states (representing 23 different brands of cars andlight trucks), 18 collision repair centers and nine pre-owned stores. As a result of the way management operates the business, Sonic had two operatingsegments as of December 31, 2017: (1) the Franchised Dealerships Segment and (2) the Pre-Owned Stores Segment. For management and operationalreporting purposes, Sonic groups certain franchises together that share management and inventory (principally used vehicles) into “stores.” As of December31, 2017, Sonic operated 103 stores in the Franchised Dealerships Segment and nine stores in the Pre-Owned Stores Segment.The Franchised Dealerships Segment provides comprehensive services, including (1) sales of both new and used cars and light trucks; (2) sales ofreplacement parts and performance of vehicle maintenance, manufacturer warranty repairs, and paint and collision repair services (collectively, “FixedOperations”); and (3) arrangement of extended warranties, service contracts, financing, insurance and other aftermarket products (collectively, “F&I”) for itscustomers. The Pre-Owned Stores Segment provides the same services (excluding new vehicle sales and manufacturer warranty repairs) in stand-alone pre-owned vehicle specialty retail locations and includes Sonic’s EchoPark stores. Sonic’s pre-owned stores business operates independently from its franchiseddealerships business.Principles of Consolidation - All of Sonic’s dealership and non-dealership subsidiaries are wholly owned and consolidated in the accompanyingconsolidated financial statements except for one 50%-owned dealership that is accounted for under the equity method. All material intercompany balancesand transactions have been eliminated in the accompanying consolidated financial statements.Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update(“ASU”) 2014-09 as well as several subsequent amendments to amend the accounting guidance on revenue recognition. The amendments to the standard areintended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosurerequirements. The amendments to this standard must be applied using either of the following transition methods: (1) a full retrospective approach reflectingthe application of the standard in each prior reporting period with the option to elect certain practical expedients or (2) a modified retrospective approachwith the cumulative effect of initially adopting the standard recognized at the date of adoption (which requires additional footnote disclosures). Theseamendments are effective for reporting periods beginning after December 15, 2017. Earlier application is permitted only as of reporting periods beginningafter December 15, 2016. Sonic adopted this ASU effective January 1, 2018 using the modified retrospective transition approach applied to contracts notcompleted as of the date of adoption, with no restatement of comparative periods and a cumulative effect adjustment to retained earnings recognized as of thedate of adoption.Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflects theconsideration that the entity expects to receive in exchange for those goods or services. The principles apply a five-step model that includes: (1) identifyingthe contract(s) with the customer; (2) identifying the performance obligation(s) in the contract; (3) determining the transaction price; (4) allocating thetransaction price to the performance obligation(s) in the contract; and (5) recognizing revenue as the performance obligation(s) are satisfied. The standardalso requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.During the implementation process, management evaluated its established business processes, revenue transaction streams and accounting policies,and generally expects similar performance obligations to result under the new standard as compared with prior U.S. generally accepted accounting principlesand does not expect the adoption of this standard to have a material impact on its consolidated financial statements, revenue recognition practices,accounting policies or internal controls. Management identified its material revenue streams to be (1) the sale of new vehicles; (2) the sale of used vehicles toretail customers; (3) the sale of used vehicles at wholesale auction; (4) arrangement of vehicle financing and the sale of service and other insurance contracts;and (5) the performance of vehicle maintenance and repair services and sale of related parts and accessories. As a result of its analysis during theimplementation process, management expects the amounts and timing of revenue recognition to generally remain the same, with the exception of the timingof revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certainretrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retro revenue”), bothof which are subject to accelerated recognition under the new standard. While management is finalizing the cumulative effect adjustment to retainedearnings, the expected impact on Sonic’s consolidated financial statements as a result of the changes in revenue recognition practices described above is notexpected to be material.F-8 SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Management estimates that the adoption of the new revenue recognition standard will result in a net, after-tax cumulative effect adjustment to increaseretained earnings of approximately $3.0 million as of January 1, 2018. In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets andlease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU require that leases areclassified as either finance or operating leases, a right-of-use asset and lease liability is recognized in the statement of financial position, and repayments areclassified within operating activities in the statement of cash flows. The amendments in this ASU are to be applied using a modified retrospective approachand are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). Sonic plansto adopt this ASU effective January 1, 2019. While management is still evaluating the impact of adopting the provisions of this ASU, management expectsthat upon adoption of this ASU, the presentation of certain items in Sonic’s consolidated financial position, cash flows and other disclosures will bematerially impacted, primarily due to the recognition of a right-of-use asset and an associated liability and a change in the timing and classification of certainitems in Sonic’s results of operations as a result of the derecognition of the lease liability. In March 2016, the FASB issued ASU 2016-09 to simplify several aspects of the accounting for share-based payment transactions. For publiccompanies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 (early adoption ispermitted). Sonic adopted this ASU effective January 1, 2017. Upon adoption of this ASU, interim period and annual income tax expense is affected by stockoption exercises and restricted stock and restricted stock unit vesting activity, potentially creating volatility in Sonic’s effective income tax rate from periodto period. See the heading “Income Taxes” below for further discussion of the impact of the adoption of this ASU on Sonic’s effective income tax rate for2017. In January 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by eliminating step two from the goodwillimpairment test. For public companies, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019(early adoption is permitted for impairment testing dates after January 1, 2017). Sonic adopted this ASU prior to its impairment test as of October 1, 2017. In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in AccountingStandards Codification (“ASC”) 815. This ASU expands and refines hedge accounting for both nonfinancial and financial risk components and aligns therecognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targetedimprovements to simplify the application of current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, andinterim periods within those fiscal years, beginning after December 15, 2018 (early adoption is permitted). Sonic is currently in the process of evaluating theeffects of this pronouncement on its consolidated financial statements. Reclassifications - Prior to Sonic’s adoption of ASU 2014-08 beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014,individual dealership franchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of thesedealership franchises sold or terminated prior to March 31, 2014 are reported as discontinued operations for all periods presented. Dealership franchises soldon or after to March 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-08. If, in future periods,Sonic determines that a dealership franchise should be reclassified from continuing operations to discontinued operations, previously reported consolidatedstatements of income will be reclassified in order to reflect the most recent classification. Use of Estimates - The preparation of financial statements in conformity with U.S. GAAP requires Sonic’s management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the accompanyingconsolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from thoseestimates, particularly related to allowance for credit loss, realization of inventory, intangible asset and deferred tax asset values, reserves for taxcontingencies, legal matters, reserves for future commission revenue to be returned to the third-party provider for early termination of customer contracts(“chargebacks”), results reported as continuing and discontinued operations, insurance reserves, lease exit accruals and certain accrued expenses.Cash and Cash Equivalents - Sonic classifies cash and all highly liquid investments with a maturity of three months or less at the date of purchase,including short-term time deposits and government agency and corporate obligations, as cash and cash equivalents. In the event that Sonic is in a bookoverdraft cash position as of a reporting date, the book overdraft position is reclassified from cash and cash equivalents to trade accounts payable in theaccompanying consolidated balance sheets and is reflected as activity in trade accounts payable and other liabilities in the accompanying consolidatedstatements of cash flows. Sonic was in a book overdraft position in an amount of approximately $6.9 million and $8.0 million, as of December 31, 2017 and2016, respectively.F-9SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Revenue Recognition - Sonic records revenue when vehicles are delivered to customers, when vehicle service work is performed and when parts aredelivered. Conditions for completing a sale include having an agreement with the customer, including pricing, and the sales price must be reasonablyexpected to be collected. See the previous heading “Recent Accounting Pronouncements” for discussion of changes to revenue recognition effective January1, 2018 upon adoption of ASC 2014-09.Sonic arranges financing for customers through various financial institutions and receives a commission from the financial institution either in a flatfee amount or in an amount equal to the difference between the interest rates charged to customers and the predetermined interest rates set by the financialinstitution. Sonic also receives commissions from the sale of various insurance contracts and non-recourse third-party extended service contracts tocustomers. Sonic may be assessed a chargeback fee in the event of early cancellation of a loan or insurance contract by the customer. Finance and insurancecommission revenue is recorded net of estimated chargebacks at the time the related contract is placed with the financial institution.Sonic also receives commissions from the sale of non-recourse third-party extended service contracts to customers. Under these contracts, theapplicable manufacturer or third-party warranty company is directly liable for all warranties provided within the contract. Commission revenue from the saleof these third-party extended service contracts is recorded net of estimated chargebacks at the time of sale.As of December 31, 2017 and 2016, the amounts recorded as allowances for finance, insurance and service contract commission chargeback reserveswere $20.9 million and $19.2 million, respectively, and were classified as other accrued liabilities and other long-term liabilities in the accompanyingconsolidated balance sheets.Floor Plan Assistance - Sonic receives floor plan assistance payments from certain manufacturers. This assistance reduces the carrying value ofSonic’s new vehicle inventory and is recognized as a reduction of cost of sales at the time the vehicle is sold. Amounts recognized as a reduction of cost ofsales were $45.3 million, $45.0 million and $42.1 million for 2017, 2016 and 2015, respectively.Contracts in Transit - Contracts in transit represent customer finance contracts evidencing loan agreements or lease agreements between Sonic, ascreditor, and the customer, as borrower, to acquire or lease a vehicle in situations where a third-party finance source has given Sonic initial, non-bindingapproval to assume Sonic’s position as creditor. Funding and final approval from the finance source is provided upon the finance source’s review of the loanor lease agreement and related documentation executed by the customer at the dealership. These finance contracts are typically funded within 10 days of theinitial approval of the finance transaction given by the third-party finance source. The finance source is not contractually obligated to make the loan or leaseto the customer until it gives its final approval and funds the transaction, and until such final approval is given, the contracts in transit represent amounts duefrom the customer to Sonic. Contracts in transit are included in receivables, net on the accompanying consolidated balance sheets and totaled $267.6 millionand $236.4 million at December 31, 2017 and 2016, respectively.Accounts Receivable - In addition to contracts in transit, Sonic’s accounts receivable primarily consists of amounts due from the manufacturers forrepair services performed on vehicles with a remaining factory warranty and amounts due from third parties from the sale of parts. Sonic evaluates receivablesfor collectability based on the age of the receivable, the credit history of the customer and past collection experience. The allowance for doubtful accountsreceivable was not significant at December 31, 2017 and 2016.Inventories - Inventories of new vehicles, recorded net of manufacturer credits, and used vehicles, including demonstrators, are stated at the lower ofspecific cost or market. Inventories of parts and accessories are accounted for using the “first-in, first-out” (“FIFO”) method of inventory accounting and arestated at the lower of FIFO cost or market. Other inventories are primarily service loaner vehicles and, to a lesser extent, vehicle chassis, other supplies andcapitalized customer work-in-progress (open customer vehicle repair orders). Other inventories are stated at the lower of specific cost (depreciated cost forservice loaner vehicles) or market.Sonic assesses the valuation of all its vehicle and parts inventories and maintains a reserve where the cost basis exceeds the fair market value. Inmaking this assessment for new vehicles, used vehicles, service loaners and parts inventory, Sonic considers recent internal and external market data and theage of the vehicles to estimate the inventory’s fair market value. The risk with vehicle inventory is minimized by the fact that vehicles can be transferredwithin Sonic’s network of dealerships. The risk with parts inventories is minimized by the fact that excess or obsolete parts can also be transferred withinSonic’s network of dealerships or can usually be returned to the manufacturer. Recorded inventory reserves were not significant at December 31, 2017 and2016.F-10SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Property and Equipment - Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method overthe estimated useful lives of the assets. Sonic amortizes leasehold improvements over the shorter of the estimated useful life or the remaining lease life. Thislease life includes renewal options if a renewal has been determined to be reasonably assured. The range of estimated useful lives is as follows: Leasehold and land improvements 10-30 yearsBuildings 10-30 yearsParts and service equipment 7-10 yearsOffice equipment and fixtures 3-10 yearsCompany vehicles 3-5 yearsSonic reviews the carrying value of property and equipment and other long-term assets (other than goodwill and franchise assets) for impairmentwhenever events or changes in circumstances indicate that the carrying value may not be recoverable. If such an indication is present, Sonic compares thecarrying amount of the asset to the estimated undiscounted cash flows related to that asset. Sonic concludes that an asset is impaired if the sum of suchexpected future cash flows is less than the carrying amount of the related asset. If Sonic determines an asset is impaired, the impairment loss would be theamount by which the carrying amount of the related asset exceeds its fair value. The fair value of the asset would be determined based on the quoted marketprices, if available. If quoted market prices are not available, Sonic determines fair value by using a discounted cash flow model. See Note 4, “Property andEquipment,” for a discussion of impairment charges.Derivative Instruments and Hedging Activities - Sonic utilizes derivative financial instruments for the purpose of hedging the risks of certainidentifiable and anticipated transactions. Commonly, the types of risks being hedged are those relating to the variability of cash flows caused by fluctuationsin interest rates. Sonic documents its risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. As ofDecember 31, 2017, Sonic utilized interest rate cash flow swap agreements to effectively convert a portion of its LIBOR-based variable rate debt to a fixedrate. In addition, Sonic has interest rate cap agreements to limit its exposure to increases in LIBOR rates above certain levels. See Note 6, “Long-Term Debt,”for further discussion of derivative instruments and hedging activities.Goodwill - Goodwill is recognized to the extent that the purchase price of the acquisition exceeds the estimated fair value of the net assets acquired,including other identifiable intangible assets. In accordance with “Intangibles - Goodwill and Other” in the ASC, goodwill is tested for impairment at leastannually, or more frequently when events or circumstances indicate that impairment might have occurred. The ASC also states that if an entity determines,based on an assessment of certain qualitative factors, that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount,then a quantitative goodwill impairment test is unnecessary. For purposes of goodwill impairment testing, Sonic has two reporting units, which consist of: (1)its traditional franchised dealerships and (2) its pre-owned stores. The carrying value of Sonic’s goodwill totaled approximately $525.8 million atDecember 31, 2017, $465.8 million of which is related to its franchised dealerships reporting unit and $60.0 million of which is related to its pre-ownedstores reporting unit. As the $60.0 million of goodwill carrying value related to the pre-owned stores reporting unit was acquired immediately preceding thetesting date, Sonic evaluated impairment on a qualitative basis and determined there was no indication of impairment. For the franchised dealershipsreporting unit, Sonic utilized the Market Price (“MP”) method to estimate its enterprise value as of October 1, 2017. The significant inputs in the MP methodinclude debt value, stock price and control premium.In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would represent the amount ofrequired goodwill impairment. To the extent the reporting unit’s earnings decline significantly or there are changes in one or more of these inputs that wouldresult in lower valuation results, it could cause the carrying value of the reporting unit to exceed its fair value and thus require Sonic to record goodwillimpairment.Based on the results of Sonic’s quantitative test as of October 1, 2017, its franchised dealerships reporting unit’s fair value exceeded its carrying value.As a result, Sonic was not required to record goodwill impairment for either of its reporting units. See Note 5, “Intangible Assets and Goodwill,” for furtherdiscussion of goodwill.Other Intangible Assets - The principal identifiable intangible assets other than goodwill acquired in an acquisition are rights under franchise ordealer agreements with manufacturers. Sonic classifies franchise and dealer agreements as indefinite lived intangible assets as it has been Sonic’s experiencethat renewals have occurred without substantial cost or material modifications to the underlying agreements. As such, Sonic believes that its franchise anddealer agreements will contribute to cash flows for an indefinite period, therefore the carrying amount of franchise rights is not amortized. Franchise anddealer agreements acquired on or after July 1, 2001 have been included in other intangible assets, net on the accompanying consolidated balance sheets.Prior to July 1, 2001, franchise and dealer agreements were recorded and amortized as part of goodwill and remain as part of goodwill on theF-11SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) accompanying consolidated balance sheets. Other intangible assets acquired in acquisitions include favorable lease agreements with definite lives which areamortized on a straight-line basis over the remaining lease term. In accordance with “Intangibles - Goodwill and Other” in the ASC, Sonic evaluates otherintangible assets for impairment annually (as of October 1) or more frequently if indicators of impairment exist.Sonic utilized a discounted cash flow (“DCF”) model to estimate the fair value of the franchise assets for each of its franchises with recorded franchiseassets. The significant assumptions in Sonic’s DCF model include projected revenue, weighted average cost of capital (and estimates in the weighted averagecost of capital inputs) and residual growth rates. In projecting the franchises’ revenue and growth rates, Sonic develops many assumptions which mayinclude, but are not limited to, revenue growth, internal revenue enhancement initiatives, cost control initiatives, internal investment programs (such astraining, technology and infrastructure) and inventory floor plan borrowing rates. Sonic’s expectation of revenue growth is in part driven by its estimates ofnew vehicle industry sales volume in future periods. Sonic believes the historic and projected industry sales volume is a good indicator of growth orcontraction in the retail automotive industry. Based on the October 1, 2017 impairment test, Sonic determined that the fair value of the franchise assets exceeded the carrying value of the franchiseassets for all but four of its franchises, resulting in a franchise asset impairment charge of $3.6 million during 2017, recorded in impairment charges in theaccompanying consolidated statements of income. See Note 5, “Intangible Assets and Goodwill,” for further discussion of franchise and dealer agreements.In evaluating its definite life favorable lease assets for impairment, Sonic considered whether the leased asset was being utilized by the dealership andif the dealership operating activities could recover the value of the recorded favorable lease asset. Sonic evaluated its favorable lease assets for impairment asof October 1, 2017 and determined that no impairment was required.Insurance Reserves - Sonic has various self-insured and high deductible casualty and other insurance programs which require the Company to makeestimates in determining the ultimate liability it may incur for claims arising under these programs. These insurance reserves are estimated by managementusing actuarial evaluations based on historical claims experience, claims processing procedures, medical cost trends and, in certain cases, a discount factor.As of December 31, 2017 and 2016, Sonic had $22.0 million and $22.7 million, respectively, reserved for such programs.Lease Exit Accruals - The majority of Sonic’s dealership properties are leased under long-term operating lease arrangements. When situations arisewhere the leased properties are no longer utilized in operations, Sonic records accruals for the present value of the lease payments, net of estimated subleaserentals, for the remaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. These situations couldinclude the relocation of an existing facility or the sale of a dealership when the buyer will not be subleasing the property for either the remaining term of thelease or for an amount of rent equal to Sonic’s obligation under the lease, or situations in which a store is closed as a result of the associated franchise beingterminated by the manufacturer or Sonic and no other operations continue on the leased property. See Note 12, “Commitments and Contingencies,” forfurther discussion.Income Taxes - Income taxes are provided for the tax effects of transactions reported in the accompanying consolidated financial statements andconsist of taxes currently due plus deferred taxes. Deferred taxes are provided at enacted tax rates for the tax effects of carryforward items and temporarydifferences between the tax basis of assets and liabilities and their reported amounts. As a matter of course, the Company is regularly audited by varioustaxing authorities and, from time to time, these audits result in proposed assessments where the ultimate resolution may result in the Company owingadditional taxes. Sonic’s management believes that the Company’s tax positions comply, in all material respects, with applicable tax law and that theCompany has adequately provided for any reasonably foreseeable outcome related to these matters.From time to time, Sonic engages in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required inassessing and estimating the tax consequences of these transactions. Sonic determines whether it is more likely than not that a tax position will be sustainedupon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether atax position has met the more-likely-than-not recognition threshold, Sonic presumes that the position will be examined by the appropriate taxing authoritythat has full knowledge of all relevant information. A tax position that does not meet the more-likely-than-not recognition threshold is measured to determinethe amount of benefit to be recognized in the financial statements. The tax position is measured at the largest amount of benefit that is likely to be realizedupon ultimate settlement. Sonic adjusts its estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, aswell as changes in tax laws, regulations and precedent. See Note 7, “Income Taxes,” for further discussion of Sonic’s uncertain tax positions.F-12SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Concentrations of Credit and Business Risk - Financial instruments that potentially subject Sonic to concentrations of credit risk consist principallyof cash on deposit with financial institutions. At times, amounts invested with financial institutions exceed Federal Deposit Insurance Corporation insurancelimits. Concentrations of credit risk with respect to receivables are limited primarily to receivables from automobile manufacturers, totaling approximately$102.5 million and $92.8 million at December 31, 2017 and 2016, respectively, and receivables from financial institutions (which include manufacturer-affiliated finance companies and commercial banks), totaling approximately $299.6 million and $265.3 million at December 31, 2017 and 2016,respectively. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the tradereceivables balances.Sonic participates in a program with two of its manufacturer-affiliated finance companies and one commercial bank wherein Sonic maintains a depositbalance with the lender that earns floor plan interest rebates based on the agreed upon rate. This deposit balance is not designated as a pre-payment of notespayable - floor plan, nor is it Sonic’s intent to use this amount to offset principal amounts owed under notes payable - floor plan in the future, although Sonichas the right and ability to do so. The deposit balance of $3.0 million and $10.0 million as of December 31, 2017 and 2016, respectively, is classified in othercurrent assets in the accompanying consolidated balance sheets, because there are restrictions on Sonic’s availability to withdraw these funds under certaincircumstances. Changes in this deposit balance are classified as changes in other assets in the cash flows from operating activities section of theaccompanying consolidated statements of cash flows. The interest rebate as a result of this deposit balance is classified as a reduction in interest expense,floor plan in the accompanying consolidated statements of income. In 2017, 2016 and 2015, the reduction in interest expense, floor plan was approximately$0.5 million, $0.6 million and $1.5 million, respectively.Sonic is subject to a concentration of risk in the event of financial distress or other adverse events related to any of the automobile manufacturerswhose franchised dealerships are included in Sonic’s brand portfolio. Sonic purchases its new vehicle inventory from various automobile manufacturers at theprevailing prices available to all franchised dealerships. In addition, Sonic finances a substantial portion of its new vehicle inventory with manufacturer-affiliated finance companies. Sonic’s results of operations could be adversely affected by the manufacturers’ inability to supply Sonic’s dealerships with anadequate supply of new vehicle inventory and related floor plan financing. Sonic also has concentrations of risk related to geographic markets in which itsdealerships operate. Changes in overall economic, retail automotive or regulatory environments in one or more of these markets could adversely impactSonic’s results of operations.Financial Instruments and Market Risks - As of December 31, 2017 and 2016, the fair values of Sonic’s financial instruments including receivables,notes receivable from finance contracts, notes payable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certainmortgage notes approximated their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing marketrates. See Note 11, “Fair Value Measurements,” for further discussion of the fair value and carrying value of Sonic’s fixed rate long-term debt and otherfinancial instruments.Sonic has variable rate notes payable - floor plan, revolving credit facilities and other variable rate notes that expose Sonic to risks caused byfluctuations in the underlying interest rates. The counterparties to Sonic’s interest rate swap and interest rate cap agreements are large financial institutions.Sonic could be exposed to loss in the event of non-performance by any of these counterparties. See further discussion in Note 6, “Long-Term Debt.” Advertising - Sonic expenses advertising costs in the period incurred, net of earned cooperative manufacturer credits that represent reimbursements forspecific, identifiable and incremental advertising costs. Advertising expense amounted to approximately $61.6 million, $61.7 million and $61.6 million for2017, 2016 and 2015, respectively, and is classified as selling, general and administrative expenses in the accompanying consolidated statements of income.Sonic has cooperative advertising reimbursement agreements with certain automobile manufacturers it represents. These agreements require Sonic toprovide the manufacturer with support for qualified, actual advertising expenditures in order to receive reimbursement under the agreements. It is uncertainwhether or not Sonic would maintain the same level of advertising expenditures if these manufacturers discontinued their cooperative programs. Cooperativemanufacturer credits classified as an offset to advertising expenses were approximately $26.0 million, $26.2 million and $24.2 million for 2017, 2016 and2015, respectively.Segment Information - Sonic has determined it has two reporting segments: (1) the Franchised Dealerships Segment and (2) the Pre-Owned StoresSegment, for purposes of reporting financial condition and results of operations. The Franchised Dealerships Segment is comprised of retail automotivefranchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repair and maintenance services, and arrange financeand insurance products. The Pre-Owned Stores Segment is comprised of stand-alone pre-owned vehicle specialty retail locations that provide customers anopportunity to search, buy, service, finance and sell pre-owned vehicles. F-13SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 2. Business Acquisitions and DispositionsAcquisitions Sonic acquired one stand-alone pre-owned vehicle store for approximately $76.6 million during 2017. Goodwill in the amount of $60.0 millionrelated to this acquisition was assigned to the Pre-Owned Stores segment. We anticipate that substantially all of the goodwill recorded in 2017 will bedeductible for federal income tax purposes. The purchase agreement requires a deferred payment of $10.0 million after two years from the date of theacquisition to the seller who became an employee of Sonic. The purchase agreement also provides for potential additional variable payments to the employeeover a ten-year period based on the financial performance up to a maximum of $80.0 million. Sonic is not obligated to make the variable payments up to amaximum of $80.0 million upon the termination of employment of the employee under certain circumstances. As a result, the deferred and variable amounts,if earned, are treated as compensation arrangements for post-combination services separate from the business combination, pursuant to ASC 805, “BusinessCombinations,” specifically ASC 805-10-55-25, therefore Sonic will recognize the accrual of the deferred and variable payments as compensation expense asearned. As of December 31, 2017, we had approximately $1.3 million accrued for deferred and variable payments, included in other long-term liabilities. In addition to the stand-alone pre-owned vehicle dealership business discussed above, Sonic opened two new EchoPark stores during the year endedDecember 31, 2017. Sonic acquired three stand-alone pre-owned vehicle stores and related real estate for approximately $15.9 million during 2016. These cash outflowswere funded by cash from operations and borrowings under Sonic’s revolving credit and floor plan facilities. Sonic did not acquire any businesses during2015. Acquisitions are included in the consolidated financial statements from the date of acquisition. DispositionsSonic disposed of three dealership franchises during 2017 and four dealership franchises during 2015. Sonic did not dispose of any dealershipfranchises during 2016. The dispositions during 2017 and 2015 generated cash of approximately $38.2 million and $8.0 million, respectively. Inconjunction with dealership dispositions, Sonic has agreed to indemnify the buyers from certain liabilities and costs arising from operations or events thatoccurred prior to sale but which may or may not have been known at the time of sale, including environmental liabilities and liabilities associated from thebreach of representations or warranties made under the agreements. See Note 12, “Commitments and Contingencies,” for further discussion.Prior to Sonic’s adoption of ASU 2014-08 beginning with its Quarterly Report on Form 10-Q for the period ended June 30, 2014, individualdealership franchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of these dealershipfranchises sold or terminated prior to March 31, 2014 are reported as discontinued operations for all periods presented. Dealership franchises sold on or afterMarch 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-08.Revenues and other activities associated with disposed dealerships classified as discontinued operations were as follows: Year Ended December 31, 2017 2016 2015 (In thousands) Income (loss) from operations $(741) $(1,100) $(1,421)Gain (loss) on disposal 6 (1) - Lease exit accrual adjustments and charges (1,207) (1,020) (1,462)Pre-tax income (loss) $(1,942) $(2,121) $(2,883)Total revenues $- $- $-Revenues and other activities associated with disposed dealerships that remain in continuing operations were as follows: F-14SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Year Ended December 31, 2017 2016 2015 (In thousands) Income (loss) from operations $(2,329) $(2,154) $(6,214)Gain (loss) on disposal 11,188 (47) 2,748 Property and equipment impairment charges - (81) (6,584)Pre-tax income (loss) $8,859 $(2,282) $(10,050)Total revenues $86,111 $127,337 $215,629In the ordinary course of business, Sonic evaluates its dealership franchises for possible disposition based on various strategic and performancecriteria. As of December 31, 2017, Sonic did not have any franchises classified as held for sale; however, in the future, Sonic may sell franchises that are notcurrently held for sale. 3. Inventories and Related Notes Payable - Floor PlanInventories consist of the following: December 31, 2017 December 31, 2016 (In thousands) New vehicles $1,017,523 $1,088,814 Used vehicles 294,496 282,288 Service loaners 130,406 128,821 Parts, accessories and other 70,320 70,778 Net inventories $1,512,745 $1,570,701 Sonic finances all of its new and certain of its used vehicle inventory through standardized floor plan facilities with a syndicate of financialinstitutions and manufacturer-affiliated finance companies. The new and used vehicle floor plan facilities bear interest at variable rates based on prime orLIBOR rates. The weighted average interest rate for Sonic’s new vehicle floor plan facilities was 2.37%, 1.85% and 1.61% for 2017, 2016 and 2015,respectively. Sonic’s floor plan interest expense related to the new vehicle floor plan arrangements is partially offset by amounts received from manufacturersin the form of floor plan assistance. Floor plan assistance received is capitalized in inventory and charged against cost of sales when the associated inventoryis sold. For 2017, 2016 and 2015, Sonic recognized a reduction in cost of sales of approximately $45.3 million, $45.0 million and $42.1 million,respectively, related to manufacturer floor plan assistance.The weighted average interest rate for Sonic’s used vehicle floor plan facilities was 2.61%, 1.78% and 1.72% for 2017, 2016 and 2015, respectively.The new and used vehicle floor plan facilities are collateralized by vehicle inventories and other assets, excluding franchise and dealer agreements, ofthe relevant dealership subsidiary. The new and used vehicle floor plan facilities contain a number of covenants, including, among others, covenantsrestricting Sonic with respect to the creation of liens and changes in ownership, officers and key management personnel. Sonic was in compliance with all ofthese restrictive covenants as of December 31, 2017.F-15SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 4. Property and EquipmentProperty and equipment, net consists of the following: December 31, 2017 December 31, 2016 (In thousands) Land $370,828 $306,457 Building and improvements 893,768 777,766 Software and computer equipment 147,812 128,366 Parts and service equipment 105,123 93,901 Office equipment and fixtures 96,066 86,216 Company vehicles 9,723 9,107 Construction in progress 54,429 62,982 Total, at cost 1,677,749 1,464,795 Less accumulated depreciation (527,379) (450,184)Subtotal 1,150,370 1,014,611 Less assets held for sale (1) (3,489) (4,231)Property and equipment, net $1,146,881 $1,010,380 (1)Classified in other current assets in the accompanying consolidated balance sheets.Interest capitalized in conjunction with construction projects and software development was approximately $2.2 million, $2.8 million and $1.9million for 2017, 2016 and 2015, respectively. As of December 31, 2017, commitments for facility construction projects totaled approximately $31.9million. During 2017, 2016 and 2015, property and equipment impairment charges were recorded as noted in the following table: Year Ended December 31, (In thousands) 2017 $4,894 2016 $8,063 2015 $12,210Impairment charges were due to the abandonment of construction and software development projects, the abandonment and disposal of dealershipequipment or Sonic’s estimate that based on historical and projected operating losses for certain dealerships, these dealerships would not be able to recoverrecorded property and equipment asset balances. F-16SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 5. Intangible Assets and GoodwillThe changes in the carrying amount of franchise assets and goodwill for 2017 and 2016 were as follows: FranchiseAssets NetGoodwill (In thousands) Balance at December 31, 2015 $74,900 $471,493 (1)Prior year acquisition allocations - 944 Balance at December 31, 2016 $74,900 $472,437 (1)Additions through current year acquisitions - 60,024 Reductions from dispositions (1,400) (5,737) Reductions from impairment (3,600) (900) Prior year acquisition allocations - (44) Balance at December 31, 2017 $69,900 $525,780 (2)(1)Net of accumulated impairment losses of $796,725.(2)Net of accumulated impairment losses of $797,625.GoodwillSonic impaired approximately $0.9 million of goodwill in 2017 related to the write-off of goodwill due to the closure of two stand-alone pre-ownedvehicle stores that were acquired in 2016. There was no impairment of goodwill in 2016. Other Intangible AssetsOther intangible assets consists of franchise assets and definite life intangible assets, and is presented net of accumulated amortization on theaccompanying consolidated balance sheets. Pursuant to applicable accounting pronouncements, Sonic evaluates its franchise assets and definite lifeintangible assets for impairment annually (as of October 1) or more frequently if an event occurs or circumstances change that would more likely than notreduce the fair value of the asset below its carrying amount. Franchise asset impairment charges of $3.6 million and $3.3 million for 2017 and 2015,respectively, were recorded in continuing operations based on the impairment evaluations performed. There were no franchise asset impairment charges in2016, and no definite life intangible asset impairment charges in 2017, 2016 and 2015.Definite life intangible assets consist of the following: December 31, 2017 December 31, 2016 (In thousands) Favorable lease agreements $17,317 $17,318 Less accumulated amortization (12,628) (11,985)Definite life intangibles, net $4,689 $5,333Amortization expense for definite life intangible assets was approximately $0.6 million in each of 2017, 2016 and 2015. The initial weighted averageamortization period for lease agreements and definite life intangible assets outstanding at December 31, 2017 was 17 years. Expiration dates for these leaseagreements range between 2020 and 2027.Future amortization expense is as follows: Year Ending December 31, (In thousands) 2018 $644 2019 644 2020 614 2021 475 2022 408 Thereafter 1,904 Total $4,689F-17SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 6. Long-Term DebtLong-term debt consists of the following: December 31, 2017 December 31, 2016 (In thousands) 2016 Revolving Credit Facility (1) $75,000 $- 7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”) (2) - 200,000 5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”) 289,273 289,273 6.125% Senior Subordinated Notes due 2027 (the “6.125% Notes”) 250,000 - Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03% 199,972 176,369 Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR 219,719 227,342 Net debt discount and premium (3) - (1,258)Debt issuance costs (13,208) (13,328)Other 3,947 4,280 Total debt $1,024,703 $882,678 Less current maturities (61,314) (43,003)Long-term debt $963,389 $839,675(1)The interest rate on the 2016 Revolving Credit Facility was 225 basis points above LIBOR at December 31, 2017 and 2016.(2)Sonic repurchased all of the 7.0% Notes outstanding on March 27, 2017. See the heading “7.0% Notes” below for further information.(3)Long-term debt at December 31, 2016 includes a $1.1 million discount associated with the 7.0% Notes and a $0.2 million discount associated withmortgage notes payable.Future maturities of long-term debt are as follows: Principal/Net ofDiscount/Premium (1) Year Ending December 31, (In thousands) 2018 $61,314 2019 25,179 2020 57,919 2021 126,532 2022 40,617 Thereafter 726,350 Total $1,037,911 (1)There were no premium/discount amounts recorded at December 31, 2017.2016 Credit FacilitiesOn November 30, 2016, Sonic entered into an amended and restated syndicated revolving credit facility (the “2016 Revolving Credit Facility”) andamended and restated syndicated new and used vehicle floor plan credit facilities (the “2016 Floor Plan Facilities” and, together with the 2016 RevolvingCredit Facility, the “2016 Credit Facilities”), which are scheduled to mature on November 30, 2021. The 2016 Credit Facilities extended the scheduledmaturity date, increased availability under the 2016 Revolving Credit Facility by $25.0 million and increased availability under the 2016 Floor PlanFacilities by $215.0 million, among other things.F-18SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Availability under the 2016 Revolving Credit Facility is calculated as the lesser of $250.0 million or a borrowing base calculated based on certaineligible assets, less the aggregate face amount of any outstanding letters of credit under the 2016 Revolving Credit Facility (the “2016 Revolving BorrowingBase”). The 2016 Revolving Credit Facility may be increased at Sonic’s option up to $300.0 million upon satisfaction of certain conditions. Based onbalances as of December 31, 2017, the 2016 Revolving Borrowing Base was approximately $247.6 million. As of December 31, 2017, Sonic hadapproximately $75.0 million outstanding borrowings and approximately $17.3 million in outstanding letters of credit under the 2016 Revolving CreditFacility, resulting in total borrowing availability of approximately $155.3 million under the 2016 Revolving Credit Facility.The 2016 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2016 New Vehicle Floor Plan Facility”) and a usedvehicle revolving floor plan facility (the “2016 Used Vehicle Floor Plan Facility”), subject to a borrowing base, in a combined amount up to $1.015 billion.Sonic may, under certain conditions, request an increase in the 2016 Floor Plan Facilities to a maximum borrowing limit of up to $1.265 billion, which shallbe allocated between the 2016 New Vehicle Floor Plan Facility and the 2016 Used Vehicle Floor Plan Facility as Sonic requests, with no more than 30% ofthe aggregate commitments allocated to the commitments under the 2016 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2016 FloorPlan Facilities are guaranteed by Sonic and certain of its subsidiaries and are secured by a pledge of substantially all of the assets of Sonic and itssubsidiaries. The amounts outstanding under the 2016 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.Sonic agreed under the 2016 Credit Facilities not to pledge any assets to any third party (other than those explicitly allowed under the amended termsof the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends,capital expenditures and material dispositions and acquisitions of assets as well as other customary covenants and default provisions. Specifically, the 2016Credit Facilities permit cash dividends on Sonic’s Class A and Class B common stock so long as no event of default (as defined in the 2016 Credit Facilities)has occurred and is continuing and provided that Sonic remains in compliance with all financial covenants under the 2016 Credit Facilities.7.0% NotesOn July 2, 2012, Sonic issued $200.0 million in aggregate principal amount of unsecured senior subordinated 7.0% Notes which were scheduled tomature on July 15, 2022. On March 27, 2017, Sonic repurchased all of the outstanding 7.0% Notes using net proceeds from the issuance of the 6.125%Notes. Sonic paid approximately $213.7 million in cash, including an early redemption premium and accrued and unpaid interest, to extinguish the 7.0%Notes and recognized a loss of approximately $14.6 million on the repurchase of the 7.0% Notes, recorded in other income (expense), net in theaccompanying consolidated statements of income. For the period during which both the 7.0% Notes and the 6.125% Notes were outstanding, Sonic incurreddouble-carry interest expense of approximately $0.7 million.6.125% NotesOn March 10, 2017, Sonic issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes which mature onMarch 15, 2027. The 6.125% Notes were issued at a price of 100.0% of the principal amount thereof. Sonic used the net proceeds from the issuance of the6.125% Notes to repurchase all of the outstanding 7.0% Notes on March 27, 2017. Remaining proceeds from the issuance of the 6.125% Notes will be usedfor general corporate purposes. The 6.125% Notes are guaranteed by Sonic’s domestic operating subsidiaries. Interest on the 6.125% Notes is payable semi-annually in arrears on March 15 and September 15 of each year. Sonic may redeem the 6.125% Notes, in whole or in part, at any time on or after March 15,2022 at the following redemption prices, which are expressed as percentages of the principal amount: RedemptionPrice Beginning on March 15, 2022 103.063%Beginning on March 15, 2023 102.042%Beginning on March 15, 2024 101.021%Beginning on March 15, 2025 and thereafter 100.000% Before March 15, 2022, Sonic may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the principal amount of the6.125% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 6.125% Notes) and any accrued and unpaid interest, if any,to the redemption date. In addition, on or before March 15, 2020, Sonic may redeem up to 35% of the aggregate principal amount of the 6.125% Notes at aredemption price equal to 106.125% of the par value of the 6.125% Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date withproceeds from certain equity offerings. The indenture governing the 6.125% Notes also provides that holders of the 6.125% Notes may require Sonic torepurchaseF-19SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) the 6.125% Notes at a purchase price equal to 101.0% of the par value of the 6.125% Notes, plus accrued and unpaid interest, if any, to the date of purchase ifSonic undergoes a Change of Control (as defined in the indenture governing the 6.125% Notes).The indenture governing the 6.125% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitionsconcerning the incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations,issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certainassets. Specifically, the indenture governing the 6.125% Notes limits Sonic’s ability to pay quarterly cash dividends on its Class A and Class B commonstock in excess of $0.12 per share. Sonic may only pay quarterly cash dividends on its Class A and Class B common stock if Sonic complies with the terms ofthe indenture governing the 6.125% Notes. Sonic was in compliance with all restrictive covenants in the indenture governing the 6.125% Notes as ofDecember 31, 2017.Sonic’s obligations under the 6.125% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 6.125% Notes thenoutstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, orbreach, of Sonic’s covenants under the 6.125% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstandingindebtedness in excess of $50.0 million.5.0% NotesOn May 9, 2013, Sonic issued $300.0 million in aggregate principal amount of unsecured senior subordinated 5.0% Notes which mature on May 15,2023. The 5.0% Notes were issued at a price of 100.0% of the principal amount thereof. Sonic used the net proceeds from the issuance of the 5.0% Notes torepurchase all of the outstanding 9.0% Senior Subordinated Notes due 2018. Remaining proceeds from the issuance of the 5.0% Notes were used for generalcorporate purposes. The 5.0% Notes are guaranteed by Sonic’s domestic operating subsidiaries. Interest on the 5.0% Notes is payable semi-annually in arrearson May 15 and November 15 of each year. During 2016, Sonic repurchased approximately $10.7 million of its outstanding 5.0% Notes for approximately$10.6 million in cash, plus accrued and unpaid interest related thereto.Sonic may redeem the 5.0% Notes, in whole or in part, at any time on or after May 15, 2018 at the following redemption prices, which are expressed aspercentages of the principal amount: RedemptionPrice Beginning on May 15, 2018 102.500%Beginning on May 15, 2019 101.667%Beginning on May 15, 2020 100.833%Beginning on May 15, 2021 and thereafter 100.000%Before May 15, 2018, Sonic may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of theprincipal amount of the 5.0% Notes redeemed, plus the Applicable Premium (as defined in the indenture governing the 5.0% Notes) and any accrued andunpaid interest, if any, to the redemption date. The indenture governing the 5.0% Notes also provides that holders of the 5.0% Notes may require Sonic torepurchase the 5.0% Notes at a purchase price equal to 101.0% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if any, to the date ofpurchase if Sonic undergoes a Change of Control (as defined in the indenture governing the 5.0% Notes).The indenture governing the 5.0% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third-partylender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerningthe incurrence of other indebtedness, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance ofpreferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets.Specifically, the indenture governing the 5.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and Class B common stock inexcess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and Class B common stock if Sonic complies with the terms of theindenture governing the 5.0% Notes. Sonic was in compliance with all restrictive covenants in the indenture governing the 5.0% Notes as of December 31,2017.F-20SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Sonic’s obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0% Notes thenoutstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, orbreach, of Sonic’s covenants under the 5.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstandingindebtedness in excess of $50.0 million.Mortgage NotesDuring 2017, Sonic obtained approximately $52.5 million in mortgage financing related to 10 of its operating locations. As of December 31, 2017,the weighted average interest rate was 4.22% and the total outstanding mortgage principal balance was approximately $419.7 million, related toapproximately 45% of Sonic’s operating locations. These mortgage notes require monthly payments of principal and interest through their respectivematurities, are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2018and 2033.CovenantsSonic agreed under the 2016 Credit Facilities not to pledge any assets to any third party (other than those explicitly allowed under the amended termsof the 2016 Credit Facilities), including other lenders, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2016Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit the payment of dividends, capital expenditures andmaterial dispositions of assets, as well as other customary covenants and default provisions.Sonic was in compliance with the covenants under the 2016 Credit Facilities as of December 31, 2017. Financial covenants include required specifiedratios (as each is defined in the 2016 Credit Facilities) of: Covenant MinimumConsolidatedLiquidityRatio MinimumConsolidatedFixed ChargeCoverageRatio MaximumConsolidatedTotal LeaseAdjusted LeverageRatio Required ratio 1.05 1.20 5.75 December 31, 2017 actual 1.13 1.65 4.72The 2016 Credit Facilities contain events of default, including cross defaults to other material indebtedness, change of control events and other eventsof default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, Sonic could be required to immediatelyrepay all outstanding amounts under the 2016 Credit Facilities.After giving effect to the applicable restrictions on the payment of dividends under its debt agreements, as of December 31, 2017, Sonic had at least$148.7 million of net income and retained earnings free of such restrictions. Sonic was in compliance with all restrictive covenants as of December 31, 2017.In addition, many of Sonic’s facility leases are governed by a guarantee agreement between the landlord and Sonic that contains financial andoperating covenants. The financial covenants under the guarantee agreement are identical to those under the 2016 Credit Facilities with the exception of onefinancial covenant related to the ratio of EBTDAR to rent (as defined in the guarantee agreement) with a required ratio of no less than 1.50 to 1.00. As ofDecember 31, 2017, the ratio was 3.85 to 1.00.F-21SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Derivative Instruments and Hedging ActivitiesSonic has interest rate cash flow swap agreements to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. In addition,Sonic has interest rate cap agreements to limit its exposure to increases in LIBOR rates above certain levels. Under the terms of these cash flow swaps andinterest rate caps, interest rates reset monthly. The fair value of these interest rate swap and rate cap positions at December 31, 2017 was a net asset ofapproximately $4.7 million, with approximately $5.1 million included in other assets and approximately $0.9 million included in other current assets in theaccompanying consolidated balance sheets, offset partially by approximately $1.0 million included in other accrued liabilities and approximately$0.3 million included in other long-term liabilities in the accompanying consolidated balance sheets. The fair value of these interest rate swap positions atDecember 31, 2016 was a net liability of approximately $3.7 million, with approximately $4.1 million included in other accrued liabilities andapproximately $2.4 million included in other long-term liabilities in the accompanying consolidated balance sheets, offset partially by approximately $2.8million included in other assets in the accompanying consolidated balance sheets. Under the terms of these agreements, Sonic will receive and pay interestbased on the following: NotionalAmount PayRate Receive Rate (1) Maturing Date(In millions) $250.0 1.887% one-month LIBOR June 30, 2018$125.0 1.900% one-month LIBOR July 1, 2018$50.0 (2)2.320% one-month LIBOR July 1, 2019$200.0 (2)2.313% one-month LIBOR July 1, 2019$100.0 (3)1.384% one-month LIBOR July 1, 2020$125.0 (2)1.158% one-month LIBOR July 1, 2019$150.0 (3)1.310% one-month LIBOR July 1, 2020$125.0 1.020% one-month LIBOR July 1, 2018$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021$62.5 (4)2.000% (5)one-month LIBOR July 1, 2021 (1)The one-month LIBOR rate was approximately1.564% at December 31, 2017.(2)The effective date of these forward-starting swaps is July 2, 2018.(3)The effective date of these forward-starting swaps is July 1, 2019.(4)The notional amount of these interest rate caps adjusts over the term of the agreement as follows: $62.5 million from September 1, 2017 to June 30,2018, $93.75 million from July 1, 2018 to June 30, 2019, $78.125 million from July 1, 2019 to June 30, 2020 and $37.5 million from July 1, 2020 toJuly 1, 2021.(5)Under these interest rate caps, no payment will occur unless the stated receive rate exceeds the stated pay rate. If this occurs, a net payment to Sonicfrom the counterparty based on the spread between the receive rate and the pay rate will be recognized as a reduction of interest expense, other, net inthe accompanying consolidated statements of income.For the interest rate swaps and rate caps that qualify as cash flow hedges, the changes in the fair value of these instruments are recorded in othercomprehensive income (loss) in the accompanying consolidated statements of comprehensive income and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying consolidated statements of cash flows. The incremental interest expense (the difference between interest paidand interest received) related to these instruments was approximately $3.1 million, $5.5 million and $7.8 million for 2017, 2016 and 2015, respectively, andis included in interest expense, other, net in the accompanying consolidated statements of income and the interest paid amount is disclosed in thesupplemental disclosures of cash flow information in the accompanying consolidated statements of cash flows. The estimated net expense expected to bereclassified out of accumulated other comprehensive income (loss) into results of operations during the next 12 months is approximately $0.1 million. F-22SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 7. Income TaxesThe provision for income taxes for continuing operations - benefit (expense) consists of the following: Year Ended December 31, 2017 2016 2015 (In thousands) Current: Federal $(34,877) $(43,655) $(36,241)State (7,292) (3,766) (6,414)Total current (42,169) (47,421) (42,655)Deferred 28,198 (13,275) (14,410)Total provision for income taxes for continuing operations - benefit (expense) $(13,971) $(60,696) $(57,065) The provision for income taxes for continuing operations – (benefit) expense includes a $28.4 million benefit related to the remeasurement of the netdeferred tax liability as of December 31, 2017 due to a reduction in the U.S. statutory federal income tax rate from 35.0% to 21.0% (beginning in 2018) thatwas signed into law in December 2017. The effect of this benefit is shown separately in the following rate reconciliation table. The reconciliation of the U.S.statutory federal income tax rate with Sonic’s federal and state overall effective income tax rate from continuing operations is as follows: Year Ended December 31, 2017 2016 2015 U.S. statutory federal income tax rate 35.00% 35.00% 35.00%Effective state income tax rate 4.58% 2.04% 3.26%Valuation allowance adjustments (0.59%) 0.85% (0.45%)Uncertain tax positions 0.71% 0.17% (0.14%)Effect of change in future U.S. statutory federal income tax rate (26.27%) 0.00% 0.00%Other (0.51%) 1.05% 1.64%Effective income tax rate 12.92% 39.11% 39.31% Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for tax purposes. Significant components of Sonic’s deferred tax assets and liabilities are as follows: December 31, 2017 December 31, 2016 (In thousands) Deferred tax assets: Accruals and reserves $24,320 $34,884 State net operating loss carryforwards 12,689 10,777 Fair value of interest rate swaps - 1,406 Interest and state taxes associated with the liability for uncertain income tax positions 1,126 1,746 Other 712 774 Total deferred tax assets 38,847 49,587 Deferred tax liabilities: Fair value of interest rate swaps (696) - Basis difference in inventories (965) (1,506)Basis difference in property and equipment (2,467) (9,335)Basis difference in goodwill (73,803) (101,999)Other (1,636) (3,540)Total deferred tax liabilities (79,567) (116,380)Valuation allowance (7,985) (7,211)Net deferred tax asset (liability) $(48,705) $(74,004) Net long-term deferred tax asset balances were approximately $2.9 million and $2.4 million at December 31, 2017 and 2016, respectively, and arerecorded in other assets on the accompanying consolidated balance sheets. Net long-term deferred tax liabilityF-23SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) balances were approximately $51.6 million and $76.4 million at December 31, 2017 and 2016, respectively, and are recorded in deferred income taxes on theaccompanying consolidated balance sheets.Sonic has approximately $282.0 million in gross state net operating loss carryforwards that will expire between 2018 and 2037. Management reviewsthese carryforward positions, the time remaining until expiration and other opportunities to realize these carryforwards in making an assessment as to whetherit is more likely than not that these carryforwards will be realized. The results of future operations, regulatory framework of the taxing authorities and otherrelated matters cannot be predicted with certainty and, therefore, differences from the assumptions used in the development of management’s judgment couldoccur. As of December 31, 2017, Sonic had recorded a valuation allowance amount of approximately $8.0 million related to certain state net operating losscarryforward deferred tax assets as Sonic determined that it would not be able to generate sufficient state taxable income in the related entities to realize theaccumulated net operating loss carryforward balances.At January 1, 2017, Sonic had liabilities of approximately $5.2 million recorded related to unrecognized tax benefits. Included in the liabilitiesrelated to unrecognized tax benefits at January 1, 2017, was approximately $0.8 million related to interest and penalties which Sonic has estimated may bepaid as a result of its tax positions. It is Sonic’s policy to classify the expense related to interest and penalties to be paid on underpayments of income taxeswithin income tax expense. A summary of the changes in the liability related to Sonic’s unrecognized tax benefits is presented below. 2017 2016 2015 (In thousands) Unrecognized tax benefit liability, January 1 (1) $4,357 $4,755 $5,740 New positions 653 - - Prior period positions: Increases 491 939 175 Decreases (539) (415) - Increases from current period positions 692 615 184 Settlements - - - Lapse of statute of limitations (781) (1,290) (1,114)Other (228) (247) (230)Unrecognized tax benefit liability, December 31 (2) $4,645 $4,357 $4,755(1)Excludes accrued interest and penalties of $0.8 million, $1.1 million and $1.2 million at January 1, 2017, 2016 and 2015, respectively.(2)Excludes accrued interest and penalties of $0.6 million, $0.8 million and $1.1 million at December 31, 2017, 2016 and 2015, respectively. Amountpresented is net of state net operating losses of $0.1 million, $0.3 million and $0.6 million at December 31, 2017, 2016 and 2015, respectively.Approximately $4.7 million and $3.3 million of the unrecognized tax benefits as of December 31, 2017 and 2016, respectively, would ultimatelyaffect the income tax rate if recognized. Included in the December 31, 2017 recorded liability is approximately $0.6 million related to interest and penaltieswhich Sonic has estimated may be paid as a result of its tax positions. Sonic does not anticipate any significant changes in its unrecognized tax benefitliability within the next 12 months.Sonic and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. Sonic’s 2014 through 2017 U.S.federal income tax returns remain open to examination by the U.S. Internal Revenue Service. Sonic and its subsidiaries’ state income tax returns remain opento examination by state taxing authorities for years ranging from 2013 to 2017. The primary effect of the change in the U.S. federal income tax rate from 35% to 21% as required by the 2017 Tax Cuts and Jobs Act (the “Act”)related to the adjustment of deferred income tax balances. In periods prior to 2018, the income tax benefit or expense related to the reversal of deferredincome tax assets and liabilities was expected to be realized at a federal rate of 35%. Because of the Act, at December 31, 2017, the reversal of deferredincome tax asset and liabilities in subsequent periods is recorded assuming a federal income tax rate of 21%. There were no significant provisional amountsconsidered in Sonic’s recorded income tax balances at December 31, 2017. However, as the Act was signed into law on December 22, 2017, clarifications ofthe Act’s provisions may be issued in 2018 that alter Sonic’s understanding of the Act’s provisions and thus may affect recorded income taxbalances. Interpretations related to the Act’s provisions concerning depreciation, interest and compensation deductibility could impact recorded income taxbalances. F-24SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 8. Related PartiesCertain of Sonic’s dealerships purchase the zMAX micro-lubricant from Oil-Chem Research Corporation (“Oil-Chem”), a subsidiary of SpeedwayMotorsports, Inc. (“SMI”), for resale to Fixed Operations customers of Sonic’s dealerships in the ordinary course of business. Sonic’s Executive Chairman, Mr.O. Bruton Smith, is also the Executive Chairman of SMI, and Mr. Smith’s son, Mr. Marcus G. Smith, a greater than 10% beneficial owner of Sonic, is the ChiefExecutive Officer and President of SMI. Total purchases from Oil-Chem by Sonic dealerships were approximately $1.9 million, $2.1 million and $2.1 millionin 2017, 2016 and 2015, respectively. Sonic also engaged in other transactions with various SMI subsidiaries, consisting primarily of (1) merchandise andapparel purchases from SMISC Holdings, Inc. (d/b/a SMI Properties) for approximately $0.9 million in each of 2017, 2016 and 2015 and (2) vehicle sales tovarious SMI subsidiaries for approximately $0.2 million in both 2017 and 2016 and $0.1 million in 2015.Sonic participates in various aircraft-related transactions with Sonic Financial Corporation (“SFC”). Such transactions include, but are not limited to,the use of aircraft owned by SFC for business-related travel by Sonic executives, a management agreement with SFC for storage and maintenance of aircraftleased by Sonic from unrelated third parties and the use of Sonic’s aircraft for business-related travel by certain affiliates of SFC. Sonic incurred net expensesof approximately $0.4 million, $0.5 million and $0.6 million in 2017, 2016 and 2015, respectively, in aircraft-related transactions with these related parties.9. Capital Structure and Per Share DataPreferred Stock - Sonic has 3,000,000 shares of “blank check” preferred stock authorized with such designations, rights and preferences as may bedetermined from time to time by the Board of Directors. The Board of Directors has designated 300,000 shares of preferred stock as Class A convertiblepreferred stock, par value $0.10 per share (the “Preferred Stock”), which is divided into 100,000 shares of Series I Preferred Stock, 100,000 shares of Series IIPreferred Stock and 100,000 shares of Series III Preferred Stock. There were no shares of Preferred Stock issued or outstanding at December 31, 2017, 2016and 2015.Common Stock - Sonic has two classes of common stock. Sonic has authorized 100,000,000 shares of Class A common stock at a par value of $0.01 pershare. Class A common stock entitles its holder to one vote per share. Sonic has also authorized 30,000,000 shares of Class B common stock at a par value of$0.01 per share. Class B common stock entitles its holder to 10 votes per share, except in certain circumstances. Each share of Class B common stock isconvertible into one share of Class A common stock either upon voluntary conversion at the option of the holder, or automatically upon the occurrence ofcertain events, as provided in Sonic’s charter. The two classes of common stock share equally in dividends and in the event of liquidation.Share Repurchases - Prior to December 31, 2017, Sonic’s Board of Directors had authorized Sonic to expend up to $695.0 million to repurchase sharesof its Class A common stock. As of December 31, 2017, Sonic had repurchased a total of approximately 32.3 million shares of Class A common stock at anaverage price per share of approximately $17.76 and had redeemed 13,801.5 shares of the Preferred Stock at an average price of $1,000 per share. As ofDecember 31, 2017, Sonic had approximately $107.7 million remaining under the Board’s authorization.Per Share Data - The calculation of diluted earnings per share considers the potential dilutive effect of stock options and shares under Sonic’s stockcompensation plans and Class A common stock purchase warrants. Certain of Sonic’s non-vested restricted stock and restricted stock units contain rights toreceive non-forfeitable dividends and, thus, are considered participating securities and are included in the two-class method of computing earnings per share.The following table illustrates the dilutive effect of such items on earnings per share for 2017, 2016 and 2015: Year Ended December 31, 2017 Income (Loss) Income (Loss) From Continuing From Discontinued Net Operations Operations Income (Loss) Weighted Per Per Per Average Share Share Share Shares Amount Amount Amount Amount Amount Amount (In thousands, except per share amounts) Earnings (loss) and shares 43,997 $94,153 $(1,170) $92,983 Effect of participating securities: Non-vested restricted stock (85) - (85) Basic earnings (loss) and shares 43,997 $94,068 $2.14 $(1,170) $(0.03) $92,898 $2.11 Effect of dilutive securities: Stock compensation plans 361 Diluted earnings (loss) and shares 44,358 $94,068 $2.12 $(1,170) $(0.03) $92,898 $2.09F-25SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Year Ended December 31, 2016 Income (Loss) Income (Loss) From Continuing From Discontinued Net Operations Operations Income (Loss) Weighted Per Per Per Average Share Share Share Shares Amount Amount Amount Amount Amount Amount (In thousands, except per share amounts) Earnings (loss) and shares 45,637 $94,516 $(1,323) $93,193 Effect of participating securities: Non-vested restricted stock (52) - (52) Basic earnings (loss) and shares 45,637 $94,464 $2.07 $(1,323) $(0.03) $93,141 $2.04 Effect of dilutive securities: Stock compensation plans 311 Diluted earnings (loss) and shares 45,948 $94,464 $2.06 $(1,323) $(0.03) $93,141 $2.03 Year Ended December 31, 2015 Income (Loss) Income (Loss) From Continuing From Discontinued Net Operations Operations Income (Loss) Weighted Per Per Per Average Share Share Share Shares Amount Amount Amount Amount Amount Amount (In thousands, except per share amounts) Earnings (loss) and shares 50,489 $88,091 $(1,780) $86,311 Effect of participating securities: Non-vested restricted stock and restricted stock units (36) - (36) Basic earnings (loss) and shares 50,489 $88,055 $1.74 $(1,780) $(0.03) $86,275 $1.71 Effect of dilutive securities: Stock compensation plans 394 Diluted earnings (loss) and shares 50,883 $88,055 $1.73 $(1,780) $(0.03) $86,275 $1.70 In addition to the stock options included in the tables above, options to purchase approximately 0.2 million and 0.4 million shares of Class Acommon stock were outstanding as of December 31, 2016 and 2015, respectively, but were not included in the computation of diluted net income per sharebecause the options were not dilutive. 10. Employee Benefit PlansSubstantially all of the employees of Sonic are eligible to participate in a 401(k) plan. Contributions by Sonic to the 401(k) plan were approximately$8.0 million, $8.0 million and $7.7 million in 2017, 2016 and 2015, respectively.Stock Compensation PlansSonic currently has three active stock compensation plans: the Sonic Automotive, Inc. 2004 Stock Incentive Plan (the “2004 Plan”), the SonicAutomotive, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) and the Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors (the “2012 Formula Plan”). Collectively, these plans are referred to as the “Stock Plans.” Effective February 19, 2014, new grants ofequity awards under the 2004 Plan were no longer permitted. Stock options outstanding, non-vested restricted stock awards and restricted stock unitspreviously granted under the 2004 Plan were unaffected by this change in plan status. During the second quarter of 2012, Sonic’s stockholders voted toapprove the 2012 Plan and the 2012 Formula Plan, with authorization for issuance of 2,000,000 shares of Class A common stock and 300,000 shares of ClassA common stock, respectively. During the second quarter of 2015, Sonic’s stockholders voted to increase the number of shares of Class A common stockauthorized for issuance under the 2012 Plan from 2,000,000 shares to 4,000,000 shares. During the second quarter of 2017, Sonic’s stockholders voted toincrease the number of shares of Class A common stock authorized for issuance under the 2012 Formula Plan from 300,000 shares to 500,000 shares.The Stock Plans were adopted by the Board of Directors in order to attract and retain key personnel. Under the 2012 Plan and the 2004 Plan, options topurchase shares of Class A common stock may be granted to key employees of Sonic and its subsidiaries and to officers, directors, consultants and otherindividuals providing services to Sonic. The options are granted at the fair market value of Sonic’s Class A common stock at the date of grant, typically vestover a period ranging from six months to three years, are exercisable upon vesting and typically expire 10 years from the date of grant. The 2012 Plan and the2004 Plan also authorized the issuance of restricted stock awards and restricted stock units. Restricted stock award and restricted stock unit grants under the2012 Plan and theF-26SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 2004 Plan typically vest over a period ranging from one to three years, but may be longer in certain cases. The 2012 Formula Plan provides for grants ofrestricted stock awards or deferred restricted stock units to non-employee directors and restrictions on those shares expire on the earlier of the first anniversaryof the grant date or the day before the next annual meeting of Sonic’s stockholders. Individuals holding non-vested restricted stock awards under the 2012Plan, the 2012 Formula Plan and the 2004 Plan have voting rights and certain grants may receive dividends on non-vested shares. Individuals holdingrestricted stock units as of December 31, 2017 granted under the 2012 Plan and the 2004 Plan do not have voting or dividend rights. Sonic issues new sharesof Class A common stock to employees and directors to satisfy its option exercise and stock grant obligations. To offset the effects of these transactions,Sonic has historically repurchased shares of its Class A common stock after considering cash flow, market conditions and other factors.A summary of the status of the stock options related to the Stock Plans is presented below: OptionsOutstanding Exercise PricePer Share(Low - High) WeightedAverageExercisePricePer Share WeightedAverageRemainingContractualTerm AggregateIntrinsicValue (In thousands, except per share data, term in years) Balance at December 31, 2016 439 $1.81 -30.07 $13.42 1.4 $5,327 Exercised (25) $1.81 -1.81 $1.81 Forfeited (186) $28.04 -30.07 $29.14 Balance at December 31, 2017 228 $1.81 -1.81 $1.81 1.3 $3,787 Exercisable 228 $1.81 -1.81 $1.81 1.3 $3,787 Year Ended December 31, 2017 2016 2015 (In thousands) Intrinsic value of stock options exercised $425 $250 $2,511 Sonic recognizes compensation expense within selling, general and administrative expenses related to the stock options granted under the StockPlans. No stock option compensation expense was recognized during 2017, 2016 or 2015 as all previous stock option grants were completely vested prior toDecember 31, 2012.A summary of the status of non-vested restricted stock award and restricted stock unit grants related to the Stock Plans is presented below: Non-VestedRestrictedStock Awardsand RestrictedStock Units WeightedAverageGrant DateFair Valueper Share (In thousands, except per share data) Balance at December 31, 2016 2,180 $20.86 Granted 600 $22.88 Forfeited (131) $16.59 Vested (450) $20.42 Balance at December 31, 2017 2,199 $21.76 During 2017, approximately 560,000 restricted stock units were awarded to Sonic’s executive officers and other key associates under the 2012 Plan.These awards were made in connection with establishing the objective performance criteria for 2017 incentive compensation and vest over three years. Themajority of the restricted stock units awarded to executive officers and other key associates are subject to forfeiture, in whole or in part, based upon specifiedmeasures of Sonic’s earnings per share performance for 2017, continuation of employment and compliance with any restrictive covenants contained in anagreement between Sonic and the respective executive officer or other key associate. Also in 2017, approximately 40,000 non-vested restricted stock awardswere granted to Sonic’s Board of Directors pursuant to the 2012 Formula Plan and vest on the earlier of the first anniversary of the grant date or the day beforethe next annual meeting of Sonic’s stockholders. Sonic recognized compensation expense within selling, general and administrative expenses related torestricted stock units and restricted stock awards of approximately $11.1 million, $11.2 million and $9.8 million in 2017, 2016 and 2015, respectively.F-27SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Tax benefits recognized related to restricted stock units and restricted stock awards compensation expense were approximately $4.2 million, $4.2million and $3.7 million for 2017, 2016 and 2015, respectively. Total compensation cost related to non-vested restricted stock units and restricted stockawards not yet recognized at December 31, 2017 was approximately $34.2 million and is expected to be recognized over a weighted average period ofapproximately 7.5 years.Supplemental Executive Retirement PlanOn December 7, 2009, the Compensation Committee of Sonic’s Board of Directors approved and adopted the Sonic Automotive, Inc. SupplementalExecutive Retirement Plan (the “SERP”) to be effective as of January 1, 2010. The SERP is a nonqualified deferred compensation plan that is unfunded forfederal tax purposes. The SERP included 12 active or former members of senior management at December 31, 2017. The purpose of the SERP is to attract andretain key members of management by providing a retirement benefit in addition to the benefits provided by Sonic’s tax-qualified and other nonqualifieddeferred compensation plans.The following table sets forth the status of the SERP: Year Ended December 31, 2017 2016 (In thousands) Change in projected benefit obligation: Obligation at January 1, $11,233 $9,234 Service cost 1,711 1,590 Interest cost 448 383 Actuarial loss (gain) 429 295 Amendments/settlements/curtailments loss (gain) - - Benefits paid (265) (269)Obligation at December 31, (1) $13,556 $11,233 Accumulated benefit obligation $10,204 $8,557 (1)Approximately $13.3 million is included in other long-term liabilities and approximately $0.3 million is included in other accrued liabilities in theaccompanying consolidated balance sheets. Year Ended December 31, 2017 2016 (In thousands) Change in fair value of plan assets: Plan assets at January 1, $- $- Actual return on plan assets - - Employer contributions 265 269 Benefits paid (265) (269)Plan assets at December 31, - - Funded status recognized $(13,556) $(11,233) The following table provides the cost components of the SERP: Year Ended December 31, 2017 2016 (In thousands) Service cost $1,711 $1,590 Interest cost 448 383 Net pension expense (benefit) $2,159 $1,973 F-28SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) The weighted average assumptions used to determine the benefit obligation and net periodic benefit costs consist of: As of December 31, 2017 2016 Discount rate 3.50% 4.04%Rate of compensation increase 3.00% 3.00% The estimated future benefit payments expected to be paid for each of the next five years and the sum of the payments expected for the next five yearsthereafter are: Estimated FutureBenefit Payments Year Ending December 31, (In thousands) 2018 $265 2019 $265 2020 $363 2021 $363 2022 $363 2023 - 2027 $1,968 Multiemployer Benefit PlanSix of Sonic’s dealership subsidiaries currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”)pursuant to collective bargaining agreements between Sonic’s subsidiaries and the International Association of Machinists (the “IAM”) and the InternationalBrotherhood of Teamsters (the “IBT”). The AI Pension Plan is a “multiemployer plan” as defined under the Employee Retirement Income Security Act of1974, as amended, and Sonic’s six dealership subsidiaries are among approximately 201 employers that are obligated to make contributions to the AIPension Plan pursuant to collective bargaining agreements with the IAM, the IBT and other unions. The risks of participating in this multiemployer pensionplan are different from single-employer plans in the following aspects: •assets contributed to the multiemployer pension plan by one employer may be used to provide benefits to employees of other participatingemployers; •if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participatingemployers; and •if Sonic chooses to stop participating in the multiemployer pension plan, Sonic may be required to pay the plan an amount based on theunderfunded status of the plan, referred to as a withdrawal liability.Sonic’s participation in the AI Pension Plan for 2017, 2016 and 2015 is outlined in the table below. The “EIN/Pension Plan Number” column providesthe Employee Identification Number (the “EIN”). Unless otherwise noted, the most recent Pension Protection Act of 2006 (the “PPA”) zone status available inthe years ended December 31, 2017 and 2016 is for the plan’s year-end at December 31, 2016 and 2015, respectively. The zone status is based on informationthat Sonic received from the AI Pension Plan. Among other factors, plans in the red zone are generally less than 65% funded (“Critical Status”), plans in theyellow zone are less than 80% funded and plans in the green zone are at least 80% funded. The “FIP/RP Status Pending/Implemented” column indicatesplans for which a Financial Improvement Plan (“FIP”) or a Rehabilitation Plan (“RP”) is either pending or has been implemented. The last column lists theexpiration dates of the collective bargaining agreements to which the plan is subject. The number of employees covered by the AI Pension Plan increased2.6% from December 31, 2015 to December 31, 2016 and increased 0.5% from December 31, 2016 to December 31, 2017, affecting the period-to-periodcomparability of the contributions for 2017, 2016 and 2015. F-29SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) PensionProtectionAct ZoneStatus FIP/RP Status Sonic Contributions CollectiveBargainingPension EIN/Pension Pending / Year Ended December 31, Surcharge AgreementFund Plan Number 2017 2016 Implemented 2017 2016 2015 Imposed Expiration Date (1) (In thousands) AIPensionPlan 94-1133245 Red Red RP Implemented $171 $150 $140 Yes BetweenMay 21, 2018and November 15,2018 (1)Collective bargaining agreement expiration dates vary by union and dealership. Dates shown represent the range of the earliest and latest statedexpirations for Sonic’s union employees, noting certain of Sonic’s collective bargaining agreements are expired as of December 31, 2017 and arecurrently under negotiation.Sonic’s participating dealership subsidiaries were not listed in the AI Pension Plan’s Form 5500 as providing more than 5% of the total contributionsfor the plan years ended December 31, 2016 and December 31, 2015. In June 2006, Sonic received information that the AI Pension Plan was substantiallyunderfunded as of December 31, 2005. In July 2007, Sonic received updated information that the AI Pension Plan continued to be substantially underfundedas of December 31, 2006, with the amount of such underfunding increasing versus year end 2005. In March 2008, the Board of Trustees of the AI PensionPlan notified participants, participating employers and local unions that the AI Pension Plan’s actuary, in accordance with the requirements of the PPA, hadissued a certification that the AI Pension Plan was in Critical Status effective with the plan year commencing January 1, 2008. In conjunction with the AIPension Plan’s Critical Status, the Board of Trustees of the AI Pension Plan adopted a rehabilitation plan that implemented reductions or eliminations ofcertain adjustable benefits that were previously available under the AI Pension Plan (including some forms of early retirement benefits, and disability anddeath benefits, among other items), and also implemented a requirement on all participating employers to increase employer contributions to the AI PensionPlan for a seven-year period which commenced in 2013. As of April 2015, the AI Pension Plan’s actuary certified that the AI Pension Plan remained inCritical Status for the plan year commencing January 1, 2015. According to publicly available information, in September 2016, the AI Pension Plan made aformal application for approval of suspension of benefits with the U.S. Treasury Department, which, if approved by the U.S. Treasury Department, would haveimplemented a benefit reduction effective July 1, 2017 for participants in the AI Pension Plan. The filing included an Actuarial Certification of Plan Status asof January 1, 2016 that the AI Pension Plan previously filed with the U.S. Internal Revenue Service on March 30, 2016, which reported that the AI PensionPlan was in critical and declining status as of January 1, 2016 and further notified that the AI Pension Plan is making the scheduled progress in meeting therequirements of the plan’s previously-adopted rehabilitation plan. The September 2016 filing with the U.S. Treasury Department also included an ActuarialCertification of Plan Solvency as of July 1, 2016 with the actuarial firm’s projection that the proposed suspensions of benefits are reasonably estimated toenable the AI Pension Plan to avoid insolvency assuming the proposed suspensions of benefits continue indefinitely. In May 2017, the U.S. TreasuryDepartment denied the application to suspend benefits but noted that it remains willing to discuss the issues presented in the September 2016 formalapplication for suspension of benefits. Under applicable federal law, any employer contributing to a multiemployer pension plan that completely ceasesparticipating in the plan while the plan is underfunded is subject to payment of such employer’s assessed share of the aggregate unfunded vested benefits ofthe plan. In certain circumstances, an employer can be assessed withdrawal liability for a partial withdrawal from a multiemployer pension plan. In addition, ifthe financial condition of the AI Pension Plan were to continue to deteriorate to the point that the AI Pension Plan is forced to terminate and be administeredby the Pension Benefit Guaranty Corporation (the “PBGC”), the participating employers could be subject to assessments by the PBGC to cover theparticipating employers’ assessed share of the unfunded vested benefits. If any of these adverse events were to occur in the future, it could result in asubstantial withdrawal liability assessment to Sonic. 11. Fair Value MeasurementsIn determining fair value, Sonic uses various valuation approaches including market, income and/or cost approaches. “Fair Value Measurements andDisclosures” in the ASC establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use ofunobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use inpricing the asset or liability developed based on market data obtained from sources independent of Sonic. Unobservable inputs are inputs that reflect Sonic’sassumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in thecircumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that Sonic has the ability to access. Assets utilizingLevel 1 inputs include marketable securities that are actively traded, including Sonic’s stock or public bonds.F-30SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly orindirectly. Assets and liabilities utilizing Level 2 inputs include cash flow swap instruments and deferred compensation plan balances.Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurementsutilizing Level 3 inputs include those used in estimating fair value of non-financial assets and non-financial liabilities in purchase acquisitions, thoseused in assessing impairment of property, plant and equipment and other intangibles and those used in the reporting unit valuation in the annualgoodwill impairment evaluation.The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputsthat are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment requiredby Sonic in determining fair value is greatest for assets and liabilities categorized in Level 3. In certain cases, the inputs used to measure fair value may fallinto different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair valuemeasurement is disclosed is determined based on the lowest level input (Level 3 being the lowest level) that is significant to the fair value measurement.Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than anentity-specific measure. Therefore, even when market assumptions are not readily available, Sonic’s own assumptions are set to reflect those that marketparticipants would use in pricing the asset or liability at the measurement date. Sonic uses inputs that are current as of the measurement date, includingduring periods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factorsthat may or may not be within Sonic’s control.Assets and liabilities recorded at fair value in the accompanying consolidated balance sheets as of December 31, 2017 and 2016 are as follows: Fair Value Based onSignificant Other ObservableInputs (Level 2) December 31, 2017 December 31, 2016 (In thousands) Assets: Cash surrender value of life insurance policies (1) $33,747 $31,475 Cash flow swaps and interest rate caps designated as hedges (2) 5,968 2,772 Total assets $39,715 $34,247 Liabilities: Cash flow swaps designated as hedges (3) $1,286 $6,135 Cash flow swaps not designated as hedges (4) - 346 Deferred compensation plan (5) 18,417 14,824 Total liabilities $19,703 $21,305 (1)Included in other assets in the accompanying consolidated balance sheets.(2)As of December 31, 2017, approximately $0.9 million and $5.1 million were included in other current assets and other assets, respectively, in theaccompanying consolidated balance sheets. As of December 31, 2016, approximately $2.8 million was included in other assets in the accompanyingconsolidated balance sheets.F-31SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (3)As of December 31, 2017, approximately $1.0 million and $0.3 million were included in other accrued liabilities and other long-term liabilities,respectively, in the accompanying consolidated balance sheets. As of December 31, 2016, approximately $3.7 million and $2.4 million were includedin other accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheets.(4)Included in other accrued liabilities in the accompanying consolidated balance sheets.(5)Included in other long-term liabilities in the accompanying consolidated balance sheets. The carrying value of assets and liabilities measured at fair value on a non-recurring basis but not completely adjusted to fair value in theaccompanying consolidated balance sheets as of December 31, 2017, are included in the table below. Certain components of long-lived assets held and usedhave been adjusted to fair value through impairment charges as discussed in Note 4, “Property and Equipment” and Note 5, “Intangible Assets andGoodwill.” Significant Unobservable Total Gains / Inputs (Losses) for the Balance as of (Level 3) as of Year Ended December 31, 2017 December 31, 2017 December 31, 2017 (In thousands) Long-lived assets held and used (1) $1,146,881 $1,146,881 $(4,894)Goodwill (2) $525,780 $525,780 $(899)Franchise assets (2) $69,900 $69,900 $(3,600) (1)See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 4, “Property and Equipment,” for discussion.(2)See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 5, “Intangible Assets and Goodwill,” for discussion.As of December 31, 2017 and 2016, the fair values of Sonic’s financial instruments, including receivables, notes receivable from finance contracts,notes payable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes, approximate their carryingvalues due either to length of maturity or existence of variable interest rates that approximate prevailing market rates.The fair value and carrying value of Sonic’s fixed rate long-term debt were as follows: December 31, 2017 December 31, 2016 Fair Value Carrying Value Fair Value Carrying Value (In thousands) 7.0% Notes (1) (2) $- $- $211,000 $198,871 5.0% Notes (1) $279,148 $289,273 $284,934 $289,273 6.125% Notes (1) $248,750 $250,000 $- $- Mortgage Notes (3) $203,031 $199,972 $185,979 $176,369 Other (3) $3,760 $3,947 $4,057 $4,280 (1)As determined by market quotations as of December 31, 2017 and 2016, respectively (Level 1).(2)Sonic repurchased all of the 7.0% Notes outstanding on March 27, 2017.(3)As determined by discounted cash flows (Level 3). F-32SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) 12. Commitments and ContingenciesFacility and Equipment LeasesFor 2017, Sonic recognized approximately $2.2 million of lease exit expense, which consists of $0.6 million of interest expense and $1.6 millionrelated to adjustments to lease exit accruals recorded in previous years for the present value of the lease payments, net of estimated sublease rentals, for theremaining life of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. A summary of the activity of theseoperating lease accruals consists of the following: (In thousands) Balance at December 31, 2016 $9,790 Lease exit expense (1) 2,157 Payments (2) (3,592)Lease buyout/other (3) (1,877)Balance at December 31, 2017 $6,478 (1)Expense of approximately $0.1 million is recorded in interest expense, other, net and expense of approximately $0.9 million is recorded in selling,general and administrative expenses in the accompanying consolidated statements of income. In addition, expense of approximately $1.2 million isrecorded in income (loss) from discontinued operations in the accompanying consolidated statements of income.(2)Amount is recorded as an offset to rent expense in selling, general and administrative expenses, with approximately $1.1 million in continuingoperations and $2.5 million in income (loss) from discontinued operations in the accompanying consolidated statements of income.(3)Amount represents cash paid to settle deferred maintenance costs related to terminating and exiting leased properties.Sonic leases facilities for the majority of its dealership operations under operating lease arrangements. These facility lease arrangements normally have15- to 20-year terms with one or two five- to 10-year renewal options and do not contain provisions for contingent rent related to the dealership’s operations.Many of the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. Sonic was incompliance with these covenants at December 31, 2017. Approximately 10% of these facility leases have payments that may vary based on interest rates.Future minimum lease payments for facility leases and future receipts from subleases as required under non-cancelable operating leases for bothcontinuing and discontinued operations based on current interest rates in effect are as follows: FutureMinimumLeasePayments,Net FutureReceiptsfromSubleases Year Ending December 31, (In thousands) 2018 $86,941 $(10,535)2019 $73,080 $(8,828)2020 $47,761 $(7,191)2021 $35,636 $(5,827)2022 $26,760 $(4,377)Thereafter $95,949 $(10,982) Total lease expense for continuing operations for 2017, 2016 and 2015 was approximately $100.6 million, $94.6 million and $98.2 million,respectively. Total lease expense, net of lease exit accrual adjustments for discontinued operations for 2017, 2016 and 2015 was approximately $1.3 million,$0.9 million and $1.4 million, respectively. The total net contingent rent benefit related to a decrease in interest rates since the underlying leases commencedwas approximately $1.7 million, $1.8 million and $2.0 million for continuing operations for 2017, 2016 and 2015, respectively, and was approximately $0.1million for discontinued operations for each of 2017, 2016 and 2015.F-33SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Many of Sonic’s facility operating leases are subject to affirmative and financial covenant provisions related to a subordination and guarantyagreement executed with the landlord of many of its facility properties. The required financial covenants related to certain lease agreements are as follows: Covenant MinimumConsolidatedLiquidityRatio MinimumConsolidatedFixed ChargeCoverageRatio MaximumConsolidatedTotal LeaseAdjustedLeverageRatio MinimumEBTDAR toRent Ratio Required ratio 1.05 1.20 5.75 1.50 December 31, 2017 actual 1.13 1.65 4.72 3.85Guarantees and IndemnificationsIn accordance with the terms of Sonic’s operating lease agreements, Sonic’s dealership subsidiaries, acting as lessees, generally agree to indemnify thelessor from certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upontermination of the lease. In addition, Sonic has generally agreed to indemnify the lessor in the event of a breach of the lease by the lessee.In connection with dealership dispositions and facility relocations, certain of Sonic’s subsidiaries have assigned or sublet to the buyer its interests inreal property leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under suchleases, including rent payments and repairs to leased property upon termination of the lease, to the extent that the assignee or sublessee does not perform.These obligations are included within the future minimum lease payments, net in the table above. In the event the assignees or sublessees do not performtheir obligations, Sonic remains liable for the lease payments. As of December 31, 2017, the total amount relating to this risk was approximately $47.7million, which is the total of the future receipts from subleases in the table above under the heading “Facility and Equipment Leases.” However, there aresituations in which Sonic has assigned a lease to the buyer and Sonic was not able to obtain a release from the landlord. In these situations, although Sonic isno longer the primary obligor, Sonic is contingently liable if the buyer does not perform under the lease terms. However, in accordance with the terms of theassignment and sublease agreements, the assignees and sublessees have generally agreed to indemnify Sonic and its subsidiaries in the event of non-performance. Additionally, in connection with certain dispositions, Sonic has obtained indemnifications from the parent company or owners of theseassignees and sublessees in the event of non-performance.In accordance with the terms of agreements entered into for the sale of Sonic’s dealerships, Sonic generally agrees to indemnify the buyer from certainliabilities and costs arising subsequent to the date of sale, including environmental exposure and exposure resulting from the breach of representations orwarranties made in accordance with the agreement. While Sonic’s exposure with respect to environmental remediation and repairs is difficult to quantify,Sonic’s maximum exposure associated with these general indemnifications was approximately $5.0 million at December 31, 2017. These indemnificationsexpire within a period of one year following the date of sale. The estimated fair value of these indemnifications was not material and the amount recorded forthis contingency was not significant at December 31, 2017.Sonic also guarantees the floor plan commitments of its 50%-owned joint venture, the amount of which was approximately $2.8 million atDecember 31, 2017.Legal MattersSonic is involved, and expects to continue to be involved, in numerous legal and administrative proceedings arising out of the conduct of its business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has beencertified. Although Sonic vigorously defends itself in all legal and administrative proceedings, the outcomes of pending and future proceedings arising out ofthe conduct of Sonic’s business, including litigation with customers, employment-related lawsuits, contractual disputes, class actions, purported class actionsand actions brought by governmental authorities, cannot be predicted with certainty. An unfavorable resolution of one or more of these matters could have amaterial adverse effect on Sonic’s business, financial condition, results of operations, cash flows or prospects.Included in other accrued liabilities and other long-term liabilities at December 31, 2017 was approximately $3.0 million and $0.2 million,respectively, in reserves that Sonic was holding for pending proceedings. Included in other accrued liabilities and other long-term liabilities at December 31,2016 was approximately $0.3 million and $0.2 million, respectively, for such reserves. ExceptF-34SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) as reflected in such reserves, Sonic is currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of theamount accrued, for pending proceedings. 13. Accumulated Other Comprehensive Income (Loss)The changes in accumulated other comprehensive income (loss) by component for 2017 are as follows: Gains andLosses onCash FlowHedges DefinedBenefitPensionPlan TotalAccumulatedOtherComprehensiveIncome (Loss) (In thousands) Balance at December 31, 2016 $(2,085) $(177) $(2,262) Other comprehensive income (loss) before reclassifications (1) 1,718 (266) 1,452 Amounts reclassified out of accumulated other comprehensive income (loss) (2) 2,117 - 2,117 Net current-period other comprehensive income (loss) 3,835 (266) 3,569 Balance at December 31, 2017 $1,750 $(443) $1,307 (1)Net of tax expense of $1,053 related to gains on cash flow hedges and tax benefit of $163 related to the defined benefit pension plan.(2)Net of tax expense of $1,298 related to gains on cash flow hedges.See the heading “Derivative Instruments and Hedging Activities” in Note 6, “Long-Term Debt,” for further discussion of Sonic’s cash flow hedges. Forfurther discussion of Sonic’s defined benefit pension plan, see Note 10, “Employee Benefit Plans.” 14. Segment InformationAs of December 31, 2017, Sonic had two operating segments: (1) retail automotive franchises that sell new vehicles and buy and sell used vehicles,sell replacement parts, perform vehicle repair and maintenance services, and arrange finance and insurance products (the “Franchised Dealerships Segment”)and (2) stand-alone pre-owned vehicle specialty retail locations that provide customers an opportunity to search, buy, service, finance and sell pre-ownedvehicles (the “Pre-Owned Stores Segment”). The operating segments identified above are the business activities of Sonic for which discrete financial information is available and for whichoperating results are regularly reviewed by Sonic’s chief operating decision maker to assess operating performance and allocate resources. Sonic’s chiefoperating decision maker is a group of three individuals consisting of: (1) the Company’s Chief Executive Officer and President; (2) the Company’sExecutive Vice President and Chief Financial Officer; and (3) the Company’s Executive Vice President of Operations. Sonic has determined that its operatingsegments also represent its reportable segments.F-35SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Reportable segment revenues, segment income (loss), floor plan interest expense, depreciation and amortization, capital expenditures and assets are asfollows: Year Ended December 31, 2017 2016 2015 (In thousands) Revenues: Franchised Dealerships Segment $9,612,899 $9,590,752 $9,547,236 Pre-Owned Stores Segment 254,309 141,027 77,063 Total consolidated revenues $9,867,208 $9,731,779 $9,624,299 Year Ended December 31, 2017 2016 2015 (In thousands) Segment income (loss) (1): Franchised Dealerships Segment $196,897 $218,769 $213,224 Pre-Owned Stores Segment (21,727) (13,576) (17,257)Total segment income (loss) 175,170 205,193 195,967 Interest expense, other, net (52,524) (50,106) (50,910)Other income (expense), net (14,522) 125 99 Income (loss) from continuing operations before taxes $108,124 $155,212 $145,156 (1) Segment income (loss) for each segment is defined as operating income less floor plan interest expense. Year Ended December 31, 2017 2016 2015 (In thousands) Floor plan interest expense: Franchised Dealerships Segment $35,030 $26,631 $20,727 Pre-Owned Stores Segment 1,365 1,085 599 Total floor plan interest expense $36,395 $27,716 $21,326 Year Ended December 31, 2017 2016 2015 (In thousands) Depreciation and amortization: Franchised Dealerships Segment $83,741 $73,591 $65,766 Pre-Owned Stores Segment 5,203 3,855 3,033 Total depreciation and amortization $88,944 $77,446 $68,799 Year Ended December 31, 2017 2016 2015 (In thousands) Capital expenditures: Franchised Dealerships Segment $195,220 $166,405 $148,593 Pre-Owned Stores Segment 39,025 39,827 24,656 Total capital expenditures $234,245 $206,232 $173,249 F-36SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) December 31, 2017 2016 (In thousands) Assets: Franchised Dealerships Segment $1,930,336 $2,079,297 Pre-Owned Stores Segment 200,500 144,605 Corporate and other: Cash and Cash Equivalents 6,352 3,108 Goodwill, Net 525,780 472,437 Other Intangible Assets, Net 74,589 80,233 Other Corporate and Other Assets 1,080,961 859,656 Total assets $3,818,518 $3,639,336 15. Summary of Quarterly Financial Data (Unaudited)The following table summarizes Sonic’s results of operations as presented in the accompanying consolidated statements of income by quarter for 2017and 2016: FirstQuarter SecondQuarter ThirdQuarter FourthQuarter (In thousands, except per share data) Year Ended December 31, 2017 Total revenues (1) $2,287,822 $2,405,746 $2,505,701 $2,667,939 Gross profit (1) $350,346 $360,618 $362,622 $384,090 Net income (loss) (2) $(541) $12,132 $19,440 $61,952 Earnings (loss) per common share - Basic (2) (3) $(0.01) $0.27 $0.45 $1.43 Earnings (loss) per common share - Diluted (2) (3) $(0.01) $0.27 $0.44 $1.42 Year Ended December 31, 2016 Total revenues (1) $2,234,626 $2,382,312 $2,557,928 $2,556,913 Gross profit (1) $345,150 $353,305 $359,085 $371,734 Net income (loss) (2) $14,624 $22,822 $18,111 $37,636 Earnings (loss) per common share - Basic (2) (3) $0.31 $0.50 $0.40 $0.84 Earnings (loss) per common share - Diluted (2) (3) $0.31 $0.50 $0.40 $0.83 (1)Results are for continuing operations.(2)Results include both continuing operations and discontinued operations.(3)The sum of net income per common share for the quarters may not equal the full year amount due to weighted average common shares beingcalculated on a quarterly versus annual basis.Operations are subject to seasonal variations. The first quarter normally contributes less operating profit than the second and third quarters, while thefourth quarter normally contributes the highest operating profit of any quarter. Parts and service demand remains more stable throughout the year.Net income for the fourth quarter ended December 31, 2017 includes a tax benefit of approximately $28.4 million related to the deferred income taximpact of the change in U.S. statutory federal income tax rate from 35.0% in 2017 to 21.0% in periods thereafter, a pre-tax benefit of approximately $1.4million related to storm damage and a pre-tax gain of approximately $1.5 million from the sale of dealership franchises, offset partially by approximately$6.1 million of pre-tax impairment charges related to franchise assets, dealership facility construction projects and other property and equipment write-offsand approximately $1.5 million of pre-tax legal and other charges.Net income for the third quarter ended September 30, 2017 includes approximately $8.5 million of pre-tax gain from the sale of dealership franchises,offset partially by pre-tax charges of approximately $3.0 million related to storm damage, pre-tax charges of approximately $1.0 million related to legal andother accrual adjustments and approximately $0.2 million of pre-tax impairment charges related to dealership facility construction projects.F-37SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued) Net income for the second quarter ended June 30, 2017 includes pre-tax charges of approximately $4.6 million related to storm damage,approximately $2.6 million of pre-tax impairment charges related to goodwill and certain construction project costs, approximately $1.0 million of pre-taxlegal accruals and settlements and approximately $1.0 million of pre-tax lease exit charges.Net income for the first quarter ended March 31, 2017 includes a pre-tax charge of $15.3 million related to the extinguishment of the 7.0% Notes(including double-carry interest), pre-tax charges of approximately $2.4 million related to storm damage and approximately $0.5 million of pre-taximpairment charges related to the write-off of certain construction project costs, offset partially by a $1.1 million net benefit from legal settlements.Net income for the fourth quarter ended December 31, 2016 includes a pre-tax benefit of approximately $14.8 million related to a manufacturer legalsettlement and a pre-tax benefit of approximately $0.4 million related to storm damage and other accrual adjustments, offset partially by pre-tax impairmentcharges of approximately $1.8 million primarily related to the write-off of certain construction project costs and pre-tax charges of approximately $0.5million related to lease exit accrual adjustments in discontinued operations.Net income for the third quarter ended September 30, 2016 includes approximately $6.1 million of pre-tax impairment charges related to dealershipfacility construction projects and pre-tax charges of $1.0 million related to lease exit accrual adjustments in discontinued operations, offset partially by a pre-tax benefit of approximately $2.3 million related to storm damage.Net income for the first quarter ended March 31, 2016 includes pre-tax charges of approximately $6.0 million related to storm damage, offset partiallyby a pre-tax benefit of approximately $0.5 million related to lease exit accrual adjustments in discontinued operations. F-38Exhibit 10.39 Sonic Automotive, Inc. Director Compensation Policy (Effective as of April 18, 2017)* Each non-employee director of Sonic Automotive, Inc. (the “Company”) will receive the following compensation for suchdirector’s service on the Board of Directors: •an annual cash retainer of $70,000, payable in quarterly installments; •$20,000 annual cash retainer for the Audit Committee Chairman, payable in quarterly installments, and $12,500annual cash retainer for the Compensation Committee Chairman, the Nominating and Corporate GovernanceCommittee Chairman and the Lead Independent Director, payable in quarterly installments; •$6,250 annual cash retainer for the Vice Chairman of any Board committee, payable in quarterly installments; •a demonstrator vehicle for personal use; and •an annual equity grant of $130,000 in the form of restricted stock or, subject to the non-employee director’s timelyelection, deferred restricted stock units on the first business day following each annual meeting of the Company’sstockholders pursuant to the Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors. The number of restricted shares of Class A common stock or deferred restricted stock units,as applicable, granted to an eligible non-employee director each year will equal $130,000 divided by the averageclosing sale price of the Class A common stock on the New York Stock Exchange for the twenty (20) trading daysimmediately preceding the grant date (rounded up to the nearest whole share or unit). Generally, subject to thedirector’s continued service on the Board, the restricted stock or deferred restricted stock units, as applicable, willvest in full on the earlier of (i) the first anniversary of the grant date or (ii) the day before the next annual meetingof the Company’s stockholders following the grant date. Non-employee directors are eligible to participate in the Sonic Automotive, Inc. Deferred Compensation Plan (the “Plan”) and may electto defer up to 100% of their annual cash retainer fees under the Plan. Any non-employee director who is initially elected to the Board of Directors during a calendar year but after the annualmeeting of the Company’s stockholders has been held for such year will receive an equity grant of $130,000 in the form of restrictedstock upon his or her election to the Board with the number of shares determined as described above. Generally, subject to thedirector’s continued service on the Company’s Board, the restricted stock will vest in full on the first anniversary of the grant date. Directors who are also employees of the Company do not receive compensation (other than their compensation as employeesof the Company) for their service on the Board of Directors. * Amended and adopted by the Board of Directors on October 17, 2016.Exhibit 12.1SONIC AUTOMOTIVE, INC. AND SUBSIDIARIESRATIO OF EARNINGS TO FIXED CHARGES Year Ended December 31, 2017 2016 2015 2014 2013 (In thousands) Fixed charges: Interest expense, including floor plan interest (1) $89,466 $78,694 $73,539 $73,805 $79,842 Capitalized interest 2,172 2,750 1,912 1,921 2,484 Rent expense (interest factor) 24,341 24,634 24,514 24,569 24,659 Total fixed charges 115,979 106,078 99,965 100,295 106,985 Income from continuing operations before income taxes andcumulative effect of change in accounting principle 108,124 155,212 145,156 161,727 129,021 Add: Fixed charges 115,979 106,078 99,965 100,295 106,985 Less: Capitalized interest (2,172) (2,750) (1,912) (1,921) (2,484)Income from continuing operations before income taxes andcumulative effect of change in accounting principle & fixedcharges $221,931 $258,540 $243,209 $260,101 $233,522 Ratio of earnings to fixed charges 1.9 x 2.4 x 2.4 x 2.6 x 2.2 x (1) Includes interest expense associated with discontinued operations. Exhibit 21.1ENTITYDomesticForeignASSUMED NAMEAnTrev, LLC NC Arngar, Inc. NC Cadillac of South Charlotte Autobahn, Inc.CA Autobahn Motors Avalon Ford, Inc. DE CA CAR CA$H: Car Cash of North Carolina, Inc. NCNC Cornerstone Acceptance Corporation FL NC OHTN TX driversselect: SAI DS, LLCTX VA, FLdriversselectdriversselect: SAI DS Realty TX, LLCTX ECHOPARK: AM GA, LLC GA ECHOPARK: AM Realty GA, LLC GA ECHOPARK: Echopark Automotive, Inc. DE CO FLNCEchoPark ECHOPARK: EchoPark Driver Education, LLC CO ECHOPARK: EchoPark FL, LLC FL AutoMatch Fort MyersAutoMatch JacksonvilleAutoMatch Ocala ECHOPARK: EchoPark NC, LLC NC ECHOPARK: EchoPark Realty TX, LLC TX ECHOPARK: EchoPark SC, LLC SC ECHOPARK: EchoPark TX, LLC TX EchoParkECHOPARK: EP Realty NC, LLC NC ECHOPARK: EP Realty SC, LLC SC ECHOPARK: TT Denver, LLC CO EchoParkECHOPARK: TTRE CO 1, LLC CO FAA Beverly Hills, Inc. CA Beverly Hills BMWFAA Capitol N, Inc. CA FAA Concord H, Inc.CA Concord Honda Exhibit 21.1ENTITYDomesticForeignASSUMED NAMEFAA Concord T, Inc.CA Concord ScionConcord Toyota FAA Dublin N, Inc. CA FAA Dublin VWD, Inc. CA FAA Holding Corp. CA FAA Las Vegas H, Inc. NV Honda WestFAA Poway H, Inc.CA Poway Honda FAA Poway T, Inc. CA FAA San Bruno, Inc.CA Melody ToyotaMelody Scion FAA Santa Monica V, Inc. CA FAA Serramonte H, Inc.CA Honda of Serramonte FAA Serramonte L, Inc.CA Lexus of MarinLexus of Serramonte FAA Serramonte, Inc. CA FAA Stevens Creek, Inc. CA FAA Torrance CPJ, Inc. CA FirstAmerica Automotive, Inc. DE CA Fort Mill Ford, Inc. SC Franciscan Motors, Inc.CA Acura of Serramonte Frontier Oldsmobile-Cadillac, Inc. NC Kramer Motors IncorporatedCA Honda of Santa Monica L Dealership Group, Inc. TXCA Marcus David Corporation NC Town and Country ToyotaTown and Country Toyota Certified Used CarsMassey Cadillac, Inc. (TN-MI) TN Mountain States Motors Co., Inc. CO Ontario L, LLC CA Crown Lexus Exhibit 21.1ENTITYDomesticForeignASSUMED NAMEPhilpott Motors, Ltd. TX Philpott Motors HyundaiPhilpott Ford Santa Clara Imported Cars, Inc. CA Honda of Stevens Creek SRM Assurance, Ltd.CaymanIs. Stevens Creek Cadillac, Inc. CA St. Claire Cadillac Town and Country Ford, IncorporatedNC Windward, Inc. HI CAHonda of HaywardSAI AL HC1, Inc. AL SAI AL HC2, Inc. AL Tom Williams Collision Center SAI Ann Arbor Imports, LLC MI SAI Atlanta B, LLC GA Global Imports (BMW)Global Imports MINISAI Broken Arrow C, LLC OK SAI Calabasas A, LLC CA SAI Chamblee V, LLC GA Dyer and Dyer Volvo Cars SAI Charlotte M, LLC NC SAI Chattanooga N, LLC TN Nissan of Chattanooga EastSAI Clearwater T, LLC FL Clearwater ToyotaClearwater Scion SAI Cleveland N, LLC TN Nissan of ClevelandSAI Columbus Motors, LLC OH Hatfield HyundaiHatfield SubaruHatfield Isuzu SAI Columbus T, LLC OH Toyota WestScion WestHatfield Automall SAI Columbus VWK, LLC OH Hatfield KiaHatfield Volkswagen SAI Conroe N, LLCTX SAI Denver B, Inc. CO BMW of Denver DowntownBodyworksMurray Motorworks Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESAI Denver C, Inc. CO SAI Denver M, Inc. CO Mercedes-Benz of Denver SAI Fairfax B, LLC VA BMW of FairfaxSAI FL HC1, Inc. FL SAI FL HC2, Inc. FL SAI FL HC3, Inc. FL SAI FL HC4, Inc. FL SAI FL HC7, Inc. FL SAI Fort Myers B, LLC FL BMW of Fort MyersMINI of Fort MyersSAI Fort Myers H, LLC FL Honda of Fort MyersSAI Fort Myers M, LLC FL Mercedes-Benz of Fort MyersSAI Fort Myers VW, LLC FL Volkswagen of Fort MyersSAI GA HC1, LLC GA SAI Irondale Imports, LLC AL Audi BirminghamBMW of BirminghamJaguar BirminghamLand Rover BirminghamMINI of BirminghamPorsche Birmingham SAI Irondale L, LLC AL Lexus of Birmingham SAI Long Beach B, Inc. CA Long Beach BMWLong Beach MINISAI McKinney M, LLC TX Mercedes-Benz of McKinneySAI MD HC1, Inc. MD SAI Monrovia B, Inc. CA BMW of MonroviaMINI of Monrovia SAI Montgomery B, LLC AL BMW of MontgomeryClassic DodgeSAI Montgomery BCH, LLC AL Classic CadillacClassic Buick GMC SAI Montgomery CH, LLC AL Capitol ChevroletCapitol Hyundai Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESAI Nashville CSH, LLC TN Crest Cadillac SAI Nashville H, LLC TN Crest Honda SAI Nashville M, LLC TN Mercedes-Benz of Nashville SAI Nashville Motors, LLC TN Audi NashvillePorsche of Nashville SAI OK HC1, Inc. OK SAI Oklahoma City C, LLC OK SAI Oklahoma City H, LLC OK SAI Oklahoma City T, LLC OK SAI Orlando CS, LLC FL Massey Cadillac SAI Peachtree, LLC GA SAI Pensacola A, LLC FL Audi PensacolaSAI Philpott T, LLCTX Philpott ToyotaPhilpott Scion SAI Riverside C, LLC OK SAI Roaring Fork LR, Inc. CO Land Rover Roaring ForkSAI Rockville Imports, LLC MD Porsche BethesdaRockville Audi SAI Rockville L, LLC MD Lexus of RockvilleSAI S. Atlanta JLR, LLCGA Jaguar South AtlantaLand Rover South AtlantaSAI Santa Clara K, Inc. CA SAI Stone Mountain T, LLC GA SAI TN HC1, LLC TN SAI TN HC2, LLC TN SAI TN HC3, LLC TN SAI Tulsa N, LLC OK SAI Tulsa T, LLC OK Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESAI Tysons Corner H, LLC VA Honda of Tysons Corner SAI Tysons Corner I, LLC VA Infiniti of Tysons CornerSAI VA HC1, Inc. VA SAI West Houston B, LLC TX BMW of West Houston Sonic 2185 Chapman Rd., Chattanooga, LLC TN Economy Honda Superstore Sonic Advantage PA, LP TX Porsche of West HoustonMomentum Luxury CarsAudi West Houston Sonic – Buena Park H, Inc. CA Buena Park HondaSonic – Cadillac D, LP TX Massey CadillacSonic – Calabasas A, Inc. CA Sonic Calabasas M, Inc. CA Mercedes-Benz of CalabasasSonic – Calabasas V, Inc. CA Sonic – Camp Ford, LP TX Sonic – Capitol Cadillac, Inc. MI Sonic – Capitol Imports, Inc. SC Sonic – Carrollton V, LP TX Sonic – Carson F, Inc. CA Sonic – Carson LM, Inc. CA Sonic – Clear Lake N, LP TX Sonic – Clear Lake Volkswagen, LP TX Momentum Volkswagen of Clear Lake Sonic – Denver T, Inc. CO Mountain States ToyotaMountain States Toyota and ScionSonic Development, LLC NC AL CACO FLGA MDMI NVOH OKSC TNTX VA Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESonic Divisional Operations, LLC NV AL AZCA COFL GAMD MINC OHOK SCTN TXVA WI Sonic – Downey Cadillac, Inc. CA Sonic eStore, Inc.NC Sonic FFC 1, Inc. DETX Sonic FFC 2, Inc. DETX Sonic FFC 3, Inc. DETX Sonic – Fort Mill Chrysler Jeep, Inc. SC Sonic – Fort Mill Dodge, Inc. SC Sonic – Fort Worth T, LP TX Toyota of Fort WorthScion of Fort Worth Sonic – Frank Parra Autoplex, LP TX Sonic Fremont, Inc. CA Sonic – Harbor City H, Inc. CA Carson Honda Sonic Houston JLR, LP TX Jaguar Houston NorthLand Rover Houston North Sonic Houston LR, LP TX Land Rover Houston CentralJaguar Houston Central Sonic – Houston V, LP TX Sonic – Integrity Dodge LV, LLC NV Sonic – Jersey Village Volkswagen, LP TX Momentum Volkswagen of Jersey Village Sonic – Lake Norman Chrysler Jeep, LLC NC Sonic – Las Vegas C West, LLC NV Cadillac of Las Vegas Sonic – Lloyd Nissan, Inc. FL Sonic – Lloyd Pontiac – Cadillac, Inc. FL Sonic – Lone Tree Cadillac, Inc. CO Don Massey Collision Center Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESonic – LS Chevrolet, LP TX Lone Star ChevroletSonic – LS, LLC DETX Sonic – Lute Riley, LP TX Lute Riley Honda Sonic – Massey Cadillac, LP TX Sonic – Massey Chevrolet, Inc. CA Sonic – Mesquite Hyundai, LP TX Sonic Momentum B, LP TX Momentum Collision CenterMomentum BMWMomentum MINI Sonic Momentum JVP, LP TX Momentum PorscheMomentum Volvo CarsLand Rover Southwest HoustonJaguar Southwest Houston Sonic Momentum VWA, LP TX Audi Central HoustonMomentum Volkswagen Sonic – Newsome Chevrolet World, Inc. SC Sonic – Newsome of Florence, Inc. SC Sonic – North Charleston Dodge, Inc. SC Sonic – North Charleston, Inc. SC Sonic of Texas, Inc. TX Sonic – Plymouth Cadillac, Inc. MI Sonic Resources, Inc.NV Sonic – Richardson F, LP TX North Central FordSonic – Sanford Cadillac, Inc. FL Sonic Santa Monica M, Inc. CA W.I. SimonsonSonic Santa Monica S, Inc. CA Sonic – Shottenkirk, Inc. FL Pensacola HondaSonic – Stevens Creek B, Inc. CA Stevens Creek BMWSonic – Volvo LV, LLC NV Volvo Cars of Las Vegas Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESonic Walnut Creek M, Inc. CA Mercedes-Benz of Walnut Creek Sonic – West Covina T, Inc. CA Sonic – Williams Cadillac, Inc. AL Sonic Wilshire Cadillac, Inc. CA Sonic Automotive – 1495 Automall Drive, Columbus, Inc. OH Sonic Automotive – 1720 Mason Ave., DB, Inc. FL Sonic Automotive - 1720 Mason Ave., DB, LLC FL Sonic Automotive – 2490 South Lee Highway, LLC TN Sonic Automotive – 3401 N. Main, TX, LP TX Baytown Auto Collision CenterRon Craft CadillacRon Craft Chevrolet Sonic Automotive – 4701 I-10 East, TX, LP TX Baytown Ford Sonic Automotive – 6008 N. Dale Mabry, FL, Inc. FL Sonic Automotive – 9103 E. Independence, NC, LLC NC Infiniti of CharlotteSonic Automotive 2424 Laurens Rd., Greenville, Inc. SC Sonic Automotive 2752 Laurens Rd., Greenville, Inc.SC Century BMWCentury MINISonic Automotive Aviation, LLC NC Sonic Automotive F&I, LLC NV Sonic Automotive of Chattanooga, LLC TN BMW of Chattanooga Sonic Automotive of Nashville, LLC TN MINI of NashvilleBMW of NashvilleBMW Certified Pre-Owned Nashville Sonic Automotive of Nevada, Inc. NV Sonic Automotive of Texas, LPTX Lone Star Ford Sonic Automotive Support, LLC NV Sonic Automotive West, LLC NV SRE Alabama – 2, LLC AL Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESRE Alabama – 5, LLC AL SRE California – 1, LLC CA SRE California – 2, LLC CA SRE California – 3, LLC CA SRE California – 4, LLC CA SRE California – 5, LLC CA SRE California – 6, LLC CA SRE California – 7 SCB, LLC CA SRE California – 8 SCH, LLC CA SRE California – 9 BHB, LLC CA SRE California 10 LBB, LLC CA SRE California 11 PH, LLC CA SRE Colorado – 1, LLC CO SRE Colorado – 2, LLC CO SRE Colorado – 3, LLC CO SRE Colorado – 4 RF, LLC CO SRE Colorado – 5 CC, LLC CO SRE Florida – 1, LLC FL SRE Florida – 2, LLC FL SRE Georgia 4, LLCGA SRE Georgia 5, LLCGA SRE Georgia 6, LLCGA SRE Holding, LLC NC AL AZCO TX SRE Maryland – 1, LLC MD SRE Nevada – 2, LLC NV Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESRE North Carolina – 2, LLC NC SRE North Carolina – 3, LLC NC SRE Ohio 1, LLC OH SRE Ohio 2, LLC OH SRE Oklahoma – 1, LLC OK SRE Oklahoma – 2, LLC OK SRE Oklahoma – 5, LLC OK SRE South Carolina – 2, LLC SC SRE South Carolina – 3, LLC SC SRE South Carolina – 4, LLC SC SRE Tennessee – 1, LLC TN SRE Tennessee – 2, LLC TN SRE Tennessee – 3, LLC TN SRE Tennessee – 4, LLC TN SRE Tennessee – 5, LLC TN SRE Tennessee 6, LLC TN SRE Texas – 1, LP TX SRE Texas – 2, LP TX SRE Texas – 3, LP TX SRE Texas – 4, LP TX SRE Texas – 5, LP TX SRE Texas – 6, LP TX SRE Texas – 7, LP TX SRE Texas – 8, LP TX SRE Texas 9, LLCTX Exhibit 21.1ENTITYDomesticForeignASSUMED NAMESRE Texas 10, LLC TX SRE Texas 11, LLC TX SRE Texas 12, LLC TX SRE Texas 13, LLC TX SRE Texas 14, LLCTX SRE Texas 15, LLCTX SRE Texas 16, LLCTX SRE Virginia - 1, LLC VAMD SRE Virginia – 2, LLC VA Exhibit 23.1 Consent of Independent Registered Public Accounting FirmThe Board of DirectorsSonic Automotive, Inc.:We consent to the incorporation by reference in the Registration Statements (Nos. 333-82615, 333-71803, 333-68183, 333-96023, 333-50430, 333-50430-01 through 333-50430-G7, 333-160452, 333-160452-01 through 333-160452-277, 333-161519, 333-161519-01 through 333-161519-277) on Form S-3,(No. 333-77407) on Form S-3MEF, (Nos. 333-51978, 333-165718, 333-165718-01 through 333-165718-277, 333-182307, 333-183709, 333-183709-001through 333-183709-284, 333-188804, 333-188804-01 through 333-188804-195 and 333-218382-01 through 333-218382-233) on Form S-4 and (Nos. 333-81059, 333-81053, 333-69907, 333-69899, 333-65447, 333-49113, 333-69901, 333-95791, 333-46272, 333-46274, 333-102052, 333-102053, 333-109411, 333-117065, 333-124370, 333-142435, 333-142436, 333-159674, 333-159675, 333-180814, 333-180815, 333-204027 and 333-217504) on FormS-8 of Sonic Automotive, Inc. of our reports dated February 28, 2018, with respect to the consolidated balance sheets of Sonic Automotive, Inc. andsubsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cashflows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”),and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports appear in the December 31, 2017 Annual Report onForm 10‑K of Sonic Automotive, Inc./s/ KPMG LLPCharlotte, North CarolinaFebruary 28, 2018  Exhibit 31.1CERTIFICATIONI, Heath R. Byrd, certify that: 1.I have reviewed this annual report on Form 10-K of Sonic Automotive, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date:February 28, 2018 By:/s/ HEATH R. BYRD Heath R. Byrd Executive Vice President and Chief Financial Officer  Exhibit 31.2CERTIFICATIONI, B. Scott Smith, certify that: 1.I have reviewed this annual report on Form 10-K of Sonic Automotive, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period coveredby this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; (b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;and (d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’smost recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or isreasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date:February 28, 2018 By:/s/ B. SCOTT SMITH B. Scott Smith President and Chief Executive Officer  Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Sonic Automotive, Inc. (the “Company”) for the year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, Heath R. Byrd, Executive Vice President and Chief Financial Officer of theCompany, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ HEATH R. BYRDHeath R. ByrdExecutive Vice President and Chief Financial Officer February 28, 2018  Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Sonic Automotive, Inc. (the “Company”) for the year ended December 31, 2017, as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), I, B. Scott Smith, President and Chief Executive Officer of the Company, certify,pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany. /s/ B. SCOTT SMITHB. Scott SmithPresident and Chief Executive Officer February 28, 2018 

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