Sonic Automotive
Annual Report 2018

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018 or☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 1-13395SONIC AUTOMOTIVE, INC.(Exact name of registrant as specified in its charter)Delaware56-2010790(State or other jurisdiction of(I.R.S. Employerincorporation or organization)Identification No.) 4401 Colwick RoadCharlotte, North Carolina28211 (Address of principal executive offices)(Zip Code)Registrant’s telephone number, including area code: (704) 566-2400Securities registered pursuant to Section 12(b) of the Act: Title of each className of each exchange on which registeredClass A common stock, $0.01 par valueNew 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 ☐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 $599.3 million based upon the closing sales price of theregistrant’s Class A Common Stock on June 30, 2018 of $20.60 per share.As of February 20, 2019, there were 30,916,226 shares of Class A Common Stock, par value $0.01 per share, and 12,029,375 shares of Class B Common Stock, par value $0.01per share, outstanding.Documents incorporated by reference. Portions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders to be held April 24, 2019 areincorporated by reference into Part III of this Form 10-K.UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATIONThis 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 herein, 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 to obtain additional financing to fund our EchoPark expansion, capital expenditures, our sharerepurchase program, dividends on our common stock, acquisitions and general operating activities;•our business and growth strategies, including, but not limited to, our EchoPark store operations;•the reputation and financial condition of vehicle manufacturers whose brands we represent, the financial incentives vehicle manufacturers offer andtheir 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 to complete additionalacquisitions;•the adverse resolution of one or more significant legal proceedings against us or our franchised dealerships or EchoPark stores;•changes in laws and regulations governing the operation of automobile franchises, accounting standards, taxation requirements and environmentallaws;•changes in vehicle and parts import quotas, duties, tariffs or other restrictions;•general economic conditions in the markets in which we operate, including fluctuations in interest rates, employment levels, the level of consumerspending and consumer credit availability;•high competition in the retail automotive industry, which not only creates pricing pressures on the products and services we offer, but also onbusinesses 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 Annual Report on Form 10-K or when made, and we undertake no obligation torevise or update these statements to reflect subsequent events or circumstances, except as required under the federal securities laws and the rules andregulations of the Securities and Exchange Commission.SONIC AUTOMOTIVE, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2018 TABLE OF CONTENTSPAGEPART IItem 1.Business1Item 1A.Risk Factors9Item 1B.Unresolved Staff Comments23Item 2.Properties23Item 3.Legal Proceedings23Item 4.Mine Safety Disclosures23PART IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24Item 6.Selected Financial Data25Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations26Item 7A.Quantitative and Qualitative Disclosures About Market Risk84Item 8.Financial Statements and Supplementary Data86Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure86Item 9A.Controls and Procedures86Item 9B.Other Information86PART IIIItem 10.Directors, Executive Officers and Corporate Governance87Item 11.Executive Compensation87Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters87Item 13.Certain Relationships and Related Transactions, and Director Independence87Item 14.Principal Accountant Fees and Services87PART IVItem 15.Exhibits and Financial Statement Schedules88Item 16.Form 10-K Summary92SIGNATURES93CONSOLIDATED FINANCIAL STATEMENTSF-3SONIC AUTOMOTIVE, INC.PART IItem 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 a result of the way we manage our business, we had two operating segments as of December 31, 2018: (1) the Franchised Dealerships Segmentand (2) the EchoPark Segment. For management and operational reporting purposes, we group certain businesses together that share management andinventory (principally used vehicles) into “stores.” As of December 31, 2018, we operated 96 stores in the Franchised Dealerships Segment and eight stores inthe EchoPark Segment. The Franchised Dealerships Segment consists of 108 new vehicle franchises (representing 23 different brands of cars and lighttrucks) and 15 collision repair centers in 13 states. 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, “finance andinsurance” or “F&I”) for our customers. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our customers in pre-ownedvehicle specialty retail locations. Our EchoPark business operates independently from our franchised dealerships business. Sales operations in our firstEchoPark market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2018, we had three EchoPark stores in operation in Colorado,four in Texas and one in North Carolina. By the end of 2019, we expect to open one additional EchoPark store in Texas. We believe that the expansion of ourEchoPark business will provide long-term benefits to the Company, our stockholders and our guests. However, in the short term, this strategic initiative maynegatively impact our overall 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. and itssubsidiaries.The following charts depict the multiple sources of continuing operations revenue and gross profit for the year ended December 31, 2018 (“2018”):1SONIC AUTOMOTIVE, INC.As of December 31, 2018, we operated in the following states:MarketNumber of FranchisedStoresNumber of EchoParkStores Percent of2018 TotalRevenueCalifornia23 — 28.2 %Texas20 4 26.8 %Colorado2 3 7.8 %Tennessee11 — 6.8 %Florida9 — 5.6 %Alabama10 — 5.2 %North Carolina4 1 3.4 %Ohio5 — 3.1 %Maryland2 — 3.0 %Georgia4 — 2.8 %Virginia2 — 2.8 %Nevada2 — 1.7 %South Carolina2 — 1.5 %Disposed stores and holding companies— — 1.3 %Total96 8 100.0 %In the future, we may acquire 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, 2018, we had two operating segments: (1) the Franchised Dealerships Segment and (2) the EchoPark Segment. The FranchisedDealerships Segment is comprised of retail automotive franchises that sell new vehicles and buy and sell used vehicles, sell replacement parts, performvehicle maintenance, warranty and repair services, and arrange finance and insurance products. The EchoPark Segment is comprised of pre-owned vehiclespecialty retail locations that buy and sell used vehicles and arrange finance and insurance products.For 2018, EchoPark Segment revenue represented approximately 7.0% of total revenue. See Note 14, “Segment Information,” to the accompanyingconsolidated 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 EchoPark Store Initiative. We have augmented our manufacturer-franchised dealership operations with our EchoPark pre-owned vehiclespecialty retail locations. Our EchoPark business operates independently from our franchised dealerships business. Sales operations for EchoPark began inDenver, Colorado in the fourth quarter of 2014. As of December 31, 2018, we had three EchoPark stores in operation in Colorado, four in Texas and one inNorth Carolina. We expect to open one additional EchoPark store in Texas during 2019.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, all2SONIC AUTOMOTIVE, INC.manufacturers consider CSI scores in approving acquisitions or awarding new dealership open points. To keep dealership and executive management focusedon customer satisfaction, we include CSI results as a component of our incentive-based compensation programs for certain groups of associates and executivemanagement.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 where feasible and financially and strategicallyadvantageous will, over the long term, strengthen our balance sheet and reduce our overall cost of operating and financing our facilities.Improve Capital Structure. As we generate cash through operations, we may opportunistically repurchase our Class A Common Stock or ouroutstanding subordinated notes in open-market or structured transactions and may sell our Class A Common Stock to reduce debt.Maximize Asset Returns Through Process Execution. We have developed standardized operating processes that are documented in operatingplaybooks for our stores. Through the continued implementation of our operating playbooks, we believe organic growth opportunities exist by offering amore 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 2018, approximately 89.4% 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 RevenuesYear Ended December 31,Brand201820172016Luxury:BMW19.8 %19.6 %20.2 %Mercedes10.7 %10.7 %10.6 %Audi6.5 %6.0 %5.3 %Lexus6.1 %5.8 %5.9 %Land Rover4.4 %3.2 %3.3 %Porsche2.7 %2.4 %2.3 %Cadillac2.3 %2.7 %3.3 %MINI1.3 %1.3 %1.6 %Other luxury (1)2.8 %2.9 %3.0 %Total Luxury56.6 %54.6 %55.5 %Mid-line Import:Honda17.2 %17.3 %16.8 %Toyota10.2 %11.9 %11.4 %Volkswagen2.0 %1.8 %1.5 %Hyundai1.6 %1.5 %1.2 %Other imports (2)1.8 %1.7 %1.7 %Total Mid-line Import32.8 %34.2 %32.6 %Domestic:Ford5.7 %6.8 %6.8 %General Motors (3)4.9 %4.4 %5.1 %Total Domestic10.6 %11.2 %11.9 %Total100.0 %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 store personnel. The internet presents a marketing, advertising and automotive sales channel that we will continueto utilize to drive value for our stores and enhance the customer experience. Our technology platforms give us the ability to leverage technology toefficiently integrate systems, customize our dealership websites and use our data to improve the effectiveness of our advertising and interaction with ourcustomers. These platforms also allow us to market all of our products and services to a national audience and, at the same time, support the local marketpenetration of our individual stores.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 stores 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 and other aftermarket product commissions. We also offer our customers theopportunity to purchase extended warranties, service contracts and other aftermarket products from third-party providers whereby we earn a commission forarranging the contract sale. We currently offer a wide range of non-recourse financing, leasing, other aftermarket products, extended warranties, servicecontracts and4SONIC AUTOMOTIVE, INC.insurance products to our customers. We emphasize menu-selling techniques and other best practices to increase our sales of F&I products at our franchiseddealerships and EchoPark stores.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 and maintenance associated with new and used vehicle retail sales will drive further service and parts business in our franchised dealerships as weincrease the potential to retain current 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 the 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 themanufacturer 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 provides5SONIC AUTOMOTIVE, INC.some method for dealers to challenge manufacturer attempts to establish dealerships of the same brand in their relevant market area.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 EchoPark 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 EchoPark properties.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.6SONIC AUTOMOTIVE, INC.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 condition and cash flows. However, soil andgroundwater contamination is known to exist at certain properties owned and used by us. Further, environmental laws and regulations are complex andsubject to frequent change. In addition, in connection with our past or future acquisitions, it is possible that we will assume or become subject to new orunforeseen 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:NameAgePosition(s) with SonicO. Bruton Smith91 Executive Chairman and DirectorDavid Bruton Smith44 Chief Executive Officer and DirectorJeff Dyke51 PresidentHeath R. Byrd52 Executive Vice President and Chief Financial OfficerO. Bruton Smith is the Founder of Sonic and has served as its Executive Chairman since July 2015. Prior to his election as Executive Chairman, Mr.Smith had served as Chairman and Chief Executive Officer of the Company since its organization in January 1997. Mr. Smith has also served as a director ofSonic since its organization in January 1997. Mr. Smith is also a director of many of Sonic’s subsidiaries. Mr. Smith has worked in the retail automobileindustry since 1966. Mr. Smith is also the Executive Chairman and a director of Speedway Motorsports, Inc. (“SMI”), which is controlled by Mr. Smith andhis family. SMI is a public company whose shares are traded on the New York Stock Exchange (the “NYSE”). Among other things, SMI owns and operates thefollowing speedways: Atlanta Motor Speedway, Bristol Motor Speedway, Charlotte Motor Speedway, Kentucky Speedway, Las Vegas Motor Speedway, NewHampshire Motor Speedway, Sonoma Raceway and Texas Motor Speedway. He is also a director of most of SMI’s operating subsidiaries. He is the father ofMr. David Bruton Smith.David Bruton Smith was elected as Chief Executive Officer of Sonic in September 2018. Prior to his election as Chief Executive Officer, Mr. Smithserved as Sonic’s Executive Vice Chairman and Chief Strategic Officer from March 2018 to September 2018, Sonic’s Vice Chairman from March 2013 toMarch 2018 and as an Executive Vice President of Sonic from October 2008 to March 2013. He has served as a director of Sonic since October 2008 and hasserved in Sonic’s organization since 1998. Prior to being named an Executive Vice President and a director in October 2008, Mr. Smith had served as Sonic’sSenior Vice President of Corporate Development since March 2007. Mr. Smith served as Sonic’s Vice President of Corporate Strategy from October 2005 toMarch 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.Jeff Dyke was elected as President of Sonic in September 2018 and is responsible for direct oversight for all of Sonic’s retail automotive operations.Prior to his election as President, Mr. Dyke served as Sonic’s Executive Vice President of Operations from October 2008 to September 2018. From March2007 to October 2008, Mr. Dyke served as our Division Chief Operating Officer – Southeast Division, where he oversaw retail automotive operations for thestates of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee and Texas. Mr. Dyke first joined Sonic in October 2005 as our Vice Presidentof Retail Strategy, a position that he held until April 2006, when he was promoted to Division Vice President – Eastern Division, a position he held fromApril 2006 to March 2007. Prior to joining Sonic, Mr. Dyke worked in the automotive retail industry at AutoNation, Inc., an American automotive retailer,which provides new and pre-owned vehicles and associated services in the United States, from 1996 to 2005, where he held several positions in divisional,regional and dealership management with that company.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.EmployeesAs of December 31, 2018, we employed approximately 9,700 associates. We believe that our relationships with our associates are good.Approximately 260 of our associates, primarily service technicians in northern California, are represented7SONIC AUTOMOTIVE, INC.by a labor union. Although only a small percentage of our associates is represented by a labor union, we may be affected by labor strikes, work slowdownsand walkouts at automobile manufacturers’ manufacturing facilities.Company InformationOur website can be accessed at www.sonicautomotive.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports onForm 8-K and 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“Exchange Act”), as well as proxy statements and other information we file with, or furnish to, the Securities and Exchange Commission (the “SEC”) areavailable free of charge on our website. We make these documents available as soon as reasonably practicable after we electronically transmit them to theSEC. Except as otherwise stated in these documents, the information contained on our website or available by hyperlink from our website is not incorporatedinto this Annual 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 investorsshould consider 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, 2018, 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, 2018, we had approximately $223.9 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”) and 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 subject to long-term operating lease arrangements that commonly have initial terms of 15 to20 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.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 all9SONIC AUTOMOTIVE, INC.RISK FACTORS 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 substantialdegree on the results of operations of our subsidiaries and upon the ability of our subsidiaries to provide us with cash. We may receive cash from oursubsidiaries in the form of dividends, loans or distributions. We may use this cash to service our debt obligations or for working capital. Our subsidiaries areseparate and distinct legal entities and have no obligation, contingent or otherwise, to distribute 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 and improvement of certain dealership properties with mortgage notes that require balloon payments at the end of thenotes’ 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 2019 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, 2018, we had interest rate cap agreements related to a portion of our LIBOR-based variable rate debt to limit our exposure to rising interestrates. See the heading “Derivative Instruments and Hedging Activities” under Note 6, “Long-Term Debt,” to the accompanying consolidated financialstatements. We intend to hedge as much of our interest rate risk as management determines is in our best interests given 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;•the duration or the amount of the hedge may not match the duration or the amount of the related liability;•the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value,downward adjustments or “mark-to-market losses,” which would affect our recorded stockholders’ equity amounts; and10SONIC AUTOMOTIVE, INC.RISK FACTORS •all of our hedging instruments contain terms and conditions with which we are required to meet. In the event those terms and conditions are not met,we may be required to settle the instruments prior to the instruments’ maturity with cash payments, which could significantly affect our liquidity.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. The agreements orinstruments governing any future debt that we may incur may contain similar provisions regarding repurchases in the event of a change of control triggeringevent. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under these debt instruments in the eventof 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.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.11SONIC AUTOMOTIVE, INC.RISK FACTORS 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 to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Manufacturers’lobbying efforts may lead to the repeal or revision of state dealer laws. 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.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 2018, approximately 19.5% 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.12SONIC AUTOMOTIVE, INC.RISK FACTORS 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 adequate compensation forour 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 and 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.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.13SONIC AUTOMOTIVE, INC.RISK FACTORS 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 or legalproceedings related to these events may have a negative impact on the products we sell. If such events are significant, the profitability of our dealershipsrelated to those manufacturers could be adversely affected and we could experience a material adverse effect on our overall results of operations, financialposition 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 EchoPark stores. Suchendeavors may involve significant risks and uncertainties, including allocating management resources away from current operations, insufficient revenues tooffset expenses associated with these new investments, inadequate return of capital on our investments and unidentified issues not discovered in our duediligence of such strategies and offerings. Because these ventures are inherently risky, no assurance can be given that such strategies and offerings will besuccessful and will not have a material adverse effect on our reputation, financial condition and operating results.Our ability to make acquisitions, execute our growth strategy for our EchoPark business and grow organically may be restricted by the terms and limits ofthe 2016 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 EchoPark business may be limited in the event other sources of capital are unavailable. These restrictions may limit our growthstrategy.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 issueadditional indebtedness, or the need for manufacturer consent to the issuance of equity securities. Using cash to complete acquisitions could substantiallylimit our operating 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 of the assets of our dealerships are pledged to secure the indebtedness under the 2016 Credit Facilities and the Silo Floor PlanFacilities. These pledges may impede our ability to borrow from other sources. Moreover, because certain lending institutions are either owned by oraffiliated with an automobile manufacturer, any deterioration of our relationship with the particular manufacturer-affiliated finance subsidiary couldadversely affect our relationship with the affiliated manufacturer, and vice versa.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,14SONIC AUTOMOTIVE, INC.RISK FACTORS under an applicable franchise or dealer agreement or under state law, a manufacturer may have a right of first refusal to acquire a dealership that we seek toacquire.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;•failing to obtain a manufacturer’s consent to the acquisition of one or more of its franchises or to renew the franchise or dealer agreement on termsacceptable 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.15SONIC AUTOMOTIVE, INC.RISK FACTORS 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 ("U.S. GAAP"). We may not have an accurate understanding of the historical financial condition and performance of our acquiredentities. Until we actually assume control of business assets and their operations, we may not be able to ascertain the actual value or understand the potentialliabilities of the acquired 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 ourdealerships and stores, we are subject to various laws and regulations, the violation of which could subject us to consumer class action or other lawsuits orgovernmental investigations and adverse publicity, in addition to administrative, civil or criminal sanctions. With respect to employment practices, we aresubject to various laws and regulations, including complex federal, state, and local wage and hour and anti-discrimination laws. We are also subject tolawsuits and governmental investigations alleging violations of these laws and regulations, including purported class action lawsuits, which could result insignificant liability, fines and penalties. The violation of other laws and regulations to which we are subject also can result in administrative, civil or criminalsanctions against us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate thesubject business, as well as significant liability, fines and penalties. We currently devote significant resources to comply with applicable federal, state andlocal regulation 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 to satisfy them. Failure to comply with applicable laws and regulations may have anadverse effect on our business, operating results, financial condition, 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 agency16SONIC AUTOMOTIVE, INC.RISK FACTORS funded by the U.S. Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress. Although automotive dealers are generallyexcluded, the Dodd-Frank Act has led to additional, indirect regulation of automotive dealers, in particular, their sale and marketing of finance and insuranceproducts, through its regulation of automotive finance companies and other financial institutions. In March 2013, the CFPB issued supervisory guidancehighlighting its concern that the practice of automotive dealers being compensated for arranging customer financing through discretionary markup ofwholesale rates offered by financial institutions (“dealer markup”) results in a significant risk of pricing disparity in violation of the Equal CreditOpportunity Act (the “ECOA”). The CFPB recommended that financial 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 tomarkup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to certain groups of consumers.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 the 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 sales 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.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-focused companies have continued to enter into the automotive space in recent years. Companies including,but not limited to, Amazon, Apple, Google, Lyft, Tesla and Uber may challenge the existing17SONIC AUTOMOTIVE, INC.RISK FACTORS automotive manufacturing, retail sales, maintenance and repair, and transportation models. For example, Tesla has been challenging state dealer franchiselaws in many states with mixed results, but its business model has been accepted by many consumers. Although Tesla’s participation in the competitivelandscape has had minimal impact on the overall retail automotive space thus far, these other large technology-based companies may continue to changeconsumers’ view on how automobiles should be manufactured, equipped, retailed, maintained and utilized in the future. Because these companies have theability to connect with each individual consumer easily through their existing or future technology platforms, we may ultimately be at a competitivedisadvantage in marketing, selling, financing and servicing vehicles. In addition, certain manufacturers have expressed interest in selling directly tocustomers. The franchised dealer’s participation in that potential future transaction type is unclear and may negatively impact our operations and financialresults.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-sourced orproduced 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 socioeconomic 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 and cash flows. In addition to business interruption, theautomotive retailing business is subject to substantial risk of property loss due to the significant concentration of property values at store locations. Althoughwe have18SONIC AUTOMOTIVE, INC.RISK FACTORS substantial insurance, subject to certain deductibles, limitations and exclusions, we may be exposed to uninsured or under insured losses that could have amaterial adverse effect on our business, financial condition, results of operations or cash 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 strategically sensitivedata;•disruption of communications (both internally and externally) that may affect the quality of information used to make informed business decisions;and•damage to our reputation as a result of a breach in security that could affect the financial security of our customers.Moreover, significant technology-related business functions of ours are outsourced, including:•payroll and human resources management systems, including expense reimbursement management;•customer relationship management, e-commerce 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 transaction proposed or approved by our Board of Directors or a Class B commonstockholder or otherwise benefiting the Class B common stockholders constituting a:19SONIC AUTOMOTIVE, INC.RISK FACTORS •“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 a director, and an entity Mr. Smith andhis family members control) currently hold less than a majority of our outstanding common stock, but a majority of our voting power. As a result, the holdersof Class B Common Stock may be able to control fundamental corporate matters and transactions, subject to the above limitations. The concentration ofvoting power may also discourage, delay or prevent a change of control of us from a third party even if the action was favored by holders of Class A CommonStock. In addition, 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 downwardpressure on the market price of our Class A Common Stock. The perception among the public that these sales or transfers will occur could also contribute to adecline in the 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 the 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 business, financialcondition, results of operations, cash flows or prospects.We are involved, and expect to continue to be involved, in various legal and administrative proceedings arising out of the conduct of our business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has 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 and civil fines and penalties, including suspension orrevocation of our licenses and franchise or dealer agreements to conduct dealership operations.20SONIC AUTOMOTIVE, INC.RISK FACTORS 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, if permitted at all.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 generalmanagers and other key dealership personnel. Consequently, the loss of the services of one or more of these key employees could have a material adverseeffect on our results 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 which weoperate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods oflow unemployment. The loss of the services of key employees or the inability to attract additional qualified managers could have a material adverse effect onour results of operations. In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability toconsummate 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 our dealershipsmake contributions pursuant to collective bargaining agreements.Five 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 five dealership subsidiaries are among approximately 199 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 the21SONIC AUTOMOTIVE, INC.RISK FACTORS proposed suspensions of benefits are reasonably estimated to enable the AI Pension Plan to avoid insolvency assuming the proposed suspensions of benefitscontinue indefinitely. In May 2017, the U.S. Treasury Department denied the application to suspend benefits but noted that it remains willing to discuss theissues presented in the September 2016 formal application for suspension of benefits. Under applicable federal law, any employer contributing to amultiemployer pension plan that completely ceases participating in the plan while the plan is underfunded is subject to payment of such employer’s assessedshare of the aggregate unfunded vested benefits of the plan. In certain circumstances, an employer can be assessed withdrawal liability for a partialwithdrawal from a multiemployer pension plan. If any of these adverse events were to occur in the future, it could result in a substantial withdrawal liabilityassessment that could have a material adverse effect on our business, financial condition, results of operations 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 with 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 experiences 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 we couldfail to meet our reporting obligations under SEC regulations and the terms of our debt agreements on a timely basis and there could be a material adverseeffect on the 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, 2018, our balancesheet reflected a carrying amount of approximately $509.6 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 a significant number of the properties utilized by our dealership operations from affiliates of Capital Automotive Real Estate Services, Inc.and other individuals and entities. Under the terms of our franchise and dealer agreements, each of our dealerships must maintain an appropriate appearanceand design of its dealership facility and is restricted in its ability to relocate. The properties utilized by our dealership operations that are owned by us or oneof our subsidiaries are pledged as security for the 2016 Credit Facilities or mortgage financing arrangements. We believe that our facilities are adequate forour current needs.Item 3. Legal Proceedings.We are involved, and expect to continue to be involved, in various legal and administrative proceedings arising out of the conduct of our business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has 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. 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.Included in other accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheet at December 31, 2018 wereapproximately $2.4 million in reserves that we were holding for pending proceedings. Except as reflected in such reserves, we are currently unable to estimatea range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pending proceedings.Item 4. Mine Safety Disclosures.Not applicable.23SONIC AUTOMOTIVE, INC.PART IIItem 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 20, 2019, there were 30,916,226 shares of our Class A Common Stock and 12,029,375 shares of our Class B Common Stockoutstanding. As of February 20, 2019, there were 1,126 record holders of the Class A Common Stock and four record holders of the Class B Common Stock.The closing stock price for the Class A Common Stock on February 20, 2019 was $15.94.Our Board of Directors approved four quarterly cash dividends on all outstanding shares of common stock totaling $0.24 per share, $0.20 per share and$0.20 per share during 2018, 2017 and 2016, respectively. Subsequent to December 31, 2018, our Board of Directors approved a cash dividend on alloutstanding shares of common stock of $0.10 per share for stockholders of record on March 15, 2019 to be paid on April 15, 2019. 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.24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, 2018. As a result of the effects of anyacquisitions 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 31,20182017201620152014(In millions, except per share data)Income Statement Data (1):Total revenues$9,951.6 $9,867.2 $9,731.8 $9,624.3 $9,197.1 Impairment charges$29.5 $9.4 $8.1 $18.0 $6.6 Income (loss) from continuing operationsbefore taxes$75.3 $108.1 $155.2 $145.2 $161.7 Income (loss) from continuing operations$52.4 $94.2 $94.5 $88.1 $98.6 Basic earnings (loss) per share from continuingoperations$1.23 $2.14 $2.07 $1.74 $1.89 Diluted earnings (loss) per share fromcontinuing operations$1.22 $2.12 $2.06 $1.73 $1.87 Balance Sheet Data (1):Total assets$3,796.8 $3,818.5 $3,639.3 $3,562.4 $3,168.3 Current maturities of long-term debt$26.3 $61.3 $43.0 $33.4 $30.8 Total long-term debt (including currentmaturities of long-term debt)$945.1 $1,024.7 $882.7 $814.6 $758.5 Total long-term liabilities (including currentmaturities of long-term debt)$1,054.1 $1,138.2 $1,020.3 $952.1 $885.3 Cash dividends declared per common share$0.24 $0.20 $0.20 $0.11 $0.10 (1) As discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” andNote 2, “Business Acquisitions and Dispositions,” Note 5, “Intangible Assets and Goodwill,” and Note 6, “Long-Term Debt,” to the accompanyingconsolidated financial statements, impairment charges, business combinations and dispositions, and debt refinancing have had a material impact on ourreported historical consolidated financial information.25SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanyingconsolidated financial statements and related notes thereto and “Item 1A. Risk Factors” included in this Annual Report on Form 10-K. The financial andstatistical data contained in the following discussion for all periods presented reflects our December 31, 2018 classification of dealerships betweencontinuing and discontinued operations in accordance with “Presentation of Financial Statements” in the Accounting Standards Codification (the “ASC”).Unless otherwise noted, we present the discussion in this Management’s Discussion and Analysis of Financial Condition and Results of Operations ona consolidated 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 currently operating stores are included within the same store group as of the first full month following the first anniversary of the store’sopening or acquisition. During the year ended December 31, 2018 (“2018”), we opened one new manufacturer-awarded open point franchised dealership andthree new EchoPark stores, which are included in reported amounts for 2018, but are excluded from same store reporting for all periods. During the year endedDecember 31, 2017 (“2017”), we opened one new manufacturer-awarded open point franchised dealership, acquired one pre-owned vehicle store and openedtwo new EchoPark stores, which are included in reported amounts for all periods and same store reporting for 2018 compared to 2017, but are excluded fromsame store reporting for 2017 compared to 2016. During the year ended December 31, 2016 (“2016”), we opened one new manufacturer-awarded open pointfranchised dealership, which is included in reported and same store amounts for all periods.We disposed of seven franchised dealerships, terminated one luxury franchised dealership and closed three EchoPark stores and one previouslyacquired pre-owned vehicle store during 2018, and had no franchises held for sale as of December 31, 2018. We disposed of three franchised dealerships andclosed two previously acquired pre-owned vehicle stores during 2017. We did not dispose of any dealership franchises during 2016. The results of operationsof these disposed dealership franchises and closed stores are included in reported amounts below and in continuing operations on the accompanyingconsolidated statements of income for all periods presented. Dispositions that occurred subsequent to March 31, 2014 have not been reclassified todiscontinued operations since they did not meet the criteria for reclassification under U.S. generally accepted accounting principles (“U.S. GAAP”). See Note2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for tabular disclosure of the effects of disposeddealership franchises that remain in continuing operations.OverviewWe are one of the largest automotive retailers in the United States (as measured by total revenue). As a result of the way we manage our business, wehad two operating segments as of December 31, 2018: (1) the Franchised Dealerships Segment and (2) the EchoPark Segment. For management andoperational reporting purposes, we group certain businesses together that share management and inventory (principally used vehicles) into “stores.” As ofDecember 31, 2018, we operated 96 stores in the Franchised Dealerships Segment and eight stores in the EchoPark Segment. The Franchised DealershipsSegment consists of 108 new vehicle franchises (representing 23 different brands of cars and light trucks) and 15 collision repair centers in 13 states.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, “finance andinsurance” or “F&I”) for our customers. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our customers in pre-ownedvehicle specialty retail locations. Our EchoPark business operates independently from our franchised dealerships business. Sales operations in our firstEchoPark market in Denver, Colorado began in the fourth quarter of 2014. As of December 31, 2018, we had three EchoPark stores in operation inColorado, four in Texas and one in North Carolina. By the end of 2019, we expect to open one additional EchoPark store in Texas. We believe that theexpansion of our EchoPark business will provide long-term benefits to the Company, our stockholders and our guests. However, in the short term, thisstrategic initiative may negatively impact our overall operating results as we allocate management and capital resources to this business.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 to26SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSparticipate in those offerings. This may include partnerships or relationships with ride hailing, 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 was 17.2 million vehicles, in 2018 and 2017, according to data fromBloomberg Financial Markets, provided by Stephens Inc. For 2019, analysts’ average industry expectation for the new vehicle seasonally adjusted annualrate of sales (“SAAR”) range from 16.8 million to 17.0 million vehicles, a decrease of 1.2% to 2.3% compared to the industry volume level in 2018. Weestimate the 2019 new vehicle SAAR will be between 16.5 million and 17.0 million vehicles. Changes in consumer confidence, availability of consumerfinancing or changes in the financial stability of automotive manufacturers could cause actual 2019 new vehicle SAAR to vary from expectations. Manyfactors such as brand and geographic concentrations have caused our past results to differ from the industry’s overall trend, as well as the industry sales mixbetween 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 2.2%,to 13.6 million vehicles, in 2018, from 13.9 million vehicles in 2017.As a result of the disposition, termination or closure of several franchised dealership stores since December 31, 2017, the change in consolidatedreported amounts from period to period may not be indicative of the future operational or financial performance of our current group of operating stores.Unless otherwise noted, all discussion of increases or decreases are for the year ended December 31, 2018 and are compared to the prior year period, asapplicable. The following discussion of new vehicles, used vehicles, wholesale vehicles, parts, service and collision repair, and finance, insurance and other,net are on a same store basis, except where otherwise noted. All currently operating stores (both our franchised dealerships and EchoPark stores) are includedwithin the same store group in the first full month following the first anniversary of the store’s opening or acquisition.New vehicle revenue decreased 1.9% in 2018, driven by a 4.5% decrease in new vehicle unit sales volume. New vehicle gross profit decreased 6.7% in2018 due to lower new vehicle unit sales volume and lower new vehicle gross profit per unit, which decreased $46 per unit, or 2.3%, to $1,982 per unit.While the availability of vehicle pricing information to consumers, increased competition for sales between similar branded dealerships and higher overallinventory levels have resulted in downward pressure on new vehicle pricing, we believe that new vehicle gross profit per unit has stabilized and do notanticipate significant declines in future periods.Retail used vehicle revenue increased 6.9% in 2018, driven by a 6.9% increase in retail used vehicle unit sales volume. Retail used vehicle gross profitdecreased 1.8% in 2018, driven by a decrease in retail used vehicle gross profit per unit of $100 per unit, or 8.1%, to $1,132 per unit. Our retail used vehiclegross profit per unit decreased due to a shift in inventory and pricing strategy at our EchoPark stores in 2018, where we price our inventory at a lower level(resulting in lower retail used vehicle gross profit per unit) in order to driver higher levels of retail used vehicle unit sales volume and total gross profit (fromboth the retail used vehicle sale and higher levels of F&I gross profit per retail unit). Our wholesale vehicle gross loss increased approximately $3.8 million,or 50.4%, during 2018, primarily driven by higher levels of wholesale unit sales volume in the first quarter of 2018. We focus on maintaining used vehicleinventory days’ supply in the 30- to 40- day range in order to limit our exposure to market pricing volatility. Our consolidated used vehicle inventory days’supply was approximately 31 and 34 days as of December 31, 2018 and 2017, respectively.In 2018, our Fixed Operations revenue increased 0.7% and our Fixed Operations gross profit increased 1.2%. Fixed Operations gross marginincreased 30 basis points, to 48.4%, in 2018, driven primarily by higher levels of customer pay revenue and an increase in customer pay gross margin.Although vehicle sales and sales of associated finance, insurance and other aftermarket products are cyclical and are affected by many factors, includingoverall economic conditions, consumer confidence, levels of discretionary personal income, interest rates and available credit, our parts, service and collisionrepair services are not closely tied to vehicle sales and are not as dependent upon near-term sales volume. However, significant changes to the level ofmanufacturer recall and warranty activity could negatively impact our Fixed Operations results in the future.Our F&I revenue increased 7.6% in 2018, driven by a 6.8% increase in F&I gross profit per retail unit, in addition to a 0.8% increase in combined retailnew and used vehicle unit sales volume. F&I gross profit per retail unit increased $95 per unit, or 6.8%, to $1,493 per unit, in 2018. We believe that ourproprietary software applications, playbook processes and customer-centric selling approach enable us to maximize gross profit per F&I contract andpenetration rates (the number of F&I products27SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSsold per vehicle) across our F&I product lines. We believe that we will continue to increase revenue in this area as we refine our processes, train our associatesand 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 RevenuesYear Ended December 31,201820172016Revenues:New vehicles50.0 %53.7 %53.8 %Used vehicles29.9 %26.6 %26.0 %Wholesale vehicles2.2 %1.7 %2.2 %Parts, service and collision repair13.9 %14.4 %14.5 %Finance, insurance and other, net4.1 %3.6 %3.5 %Total revenues100.0 %100.0 %100.0 %Cost of sales85.5 %85.2 %85.3 %Gross profit14.5 %14.8 %14.7 %Selling, general and administrative expenses11.5 %11.6 %11.4 %Impairment charges0.3 %0.1 %0.1 %Depreciation and amortization0.9 %1.0 %0.8 %Operating income (loss)1.8 %2.1 %2.4 %Interest expense, floor plan0.5 %0.4 %0.3 %Interest expense, other, net0.5 %0.5 %0.5 %Other (income) expense, net0.0%0.1 %0.0%Income (loss) from continuing operations before taxes0.8 %1.1 %1.6 %Provision for income taxes for continuing operations - (benefit) expense0.2 %0.1 %0.6 %Income (loss) from continuing operations0.5 %1.0 %1.0 %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 vehicle manufacturer incentives to consumers (which vary from cash-back incentives to low interest rate financing, among other things),the availability of consumer credit and the level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventoryallocations to our dealerships to meet customer demands. The automobile manufacturing industry is cyclical and historically has experienced periodicdownturns characterized by oversupply and weak demand. As an automotive retailer, we seek to mitigate the effects of this sales cycle by maintaining adiverse brand mix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower-priced/economyvehicles 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)20182017% Change20162015% ChangeU.S. industry volume - Retail (1)13.6 13.9 (2.2)% 14.1 14.2 (0.7)% U.S. industry volume - Fleet3.6 3.3 9.1% 3.4 3.2 6.3% U.S. industry volume - Total (2)17.2 17.2 —% 17.5 17.4 0.6% 28SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(1) Source: PIN from J.D. Power(2) Source: Bloomberg Financial Markets, provided by Stephens Inc.According to industry analysts, industry volume expectations for 2019 range from 16.8 million to 17.0 million vehicles, which would represent adecrease of 1.2% to 2.3% compared to the industry volume for 2018.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)20182017Change% Change(In thousands, except unit data)Total new vehicle revenue:Same store$4,897,389 $4,992,552 $(95,163)(1.9)%Acquisitions, open points and dispositions76,708 302,499 (225,791)NM Total as reported$4,974,097 $5,295,051 $(320,954)(6.1)%Total new vehicle gross profit:Same store$238,648 $255,795 $(17,147)(6.7)%Acquisitions, open points and dispositions2,854 9,131 (6,277)NM Total as reported$241,502 $264,926 $(23,424)(8.8)%Total new vehicle unit sales:Same store120,400 126,101 (5,701)(4.5)%Acquisitions, open points and dispositions2,317 9,562 (7,245)NMTotal as reported122,717 135,663 (12,946)(9.5)%NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total new vehicle revenue:Same store$4,960,012 $4,914,970 $45,042 0.9 %Acquisitions, open points and dispositions335,039 319,535 15,504 4.9 %Total as reported$5,295,051 $5,234,505 $60,546 1.2 %Total new vehicle gross profit:Same store$253,412 $252,477 $935 0.4 %Acquisitions, open points and dispositions11,514 8,117 3,397 41.9 %Total as reported$264,926 $260,594 $4,332 1.7 %Total new vehicle unit sales:Same store125,525 125,600 (75)(0.1)%Acquisitions, open points and dispositions10,138 10,403 (265)(2.5)%Total as reported135,663 136,003 (340)(0.2)%29SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur consolidated reported new vehicle results (combined retail and fleet data) are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported new vehicle:Revenue$4,974,097 $5,295,051 $(320,954)(6.1)%Gross profit$241,502 $264,926 $(23,424)(8.8)%Unit sales122,717 135,663 (12,946)(9.5)%Revenue per unit$40,533 $39,031 $1,502 3.8 %Gross profit per unit$1,968 $1,953 $15 0.8 %Gross profit as a % of revenue4.9 %5.0 %(10)bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales135,663 136,003 (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 revenue5.0 %5.0 %— bpsOur consolidated same store new vehicle results (combined retail and fleet data) are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store new vehicle:Revenue$4,897,389 $4,992,552 $(95,163)(1.9)%Gross profit$238,648 $255,795 $(17,147)(6.7)%Unit sales120,400 126,101 (5,701)(4.5)%Revenue per unit$40,676 $39,592 $1,084 2.7 %Gross profit per unit$1,982 $2,028 $(46)(2.3)%Gross profit as a % of revenue4.9 %5.1 %(20)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store new vehicle:Revenue$4,960,012 $4,914,970 $45,042 0.9 %Gross profit$253,412 $252,477 $935 0.4 %Unit sales125,525 125,600 (75)(0.1)%Revenue per unit$39,514 $39,132 $382 1.0 %Gross profit per unit$2,019 $2,010 $9 0.4 %Gross profit as a % of revenue5.1 %5.1 %— bps30SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFor 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 consist of sales to retail customers and are directly affected by a number of factors, including the level of manufacturerincentives on new vehicles, the number and quality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and theavailability 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)20182017Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$2,593,725 $2,427,306 $166,419 6.9 %Acquisitions, open points and dispositions379,773 194,747 185,026 NM Total as reported$2,973,498 $2,622,053 $351,445 13.4 %Total used vehicle gross profit:Same store$136,200 $138,677 $(2,477)(1.8)%Acquisitions, open points and dispositions6,788 16,226 (9,438)NM Total as reported$142,988 $154,903 $(11,915)(7.7)%Total used vehicle unit sales:Same store120,339 112,605 7,734 6.9 %Acquisitions, open points and dispositions19,266 10,884 8,382 NM Total as reported139,605 123,489 16,116 13.1 %NM = Not Meaningful Year Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$2,349,053 $2,354,926 $(5,873)(0.2)%Acquisitions, open points and dispositions273,000 178,196 94,804 NM Total as reported$2,622,053 $2,533,122 $88,931 3.5 %Total used vehicle gross profit:Same store$136,889 $140,775 $(3,886)(2.8)%Acquisitions, open points and dispositions18,014 17,810 204 NM Total as reported$154,903 $158,585 $(3,682)(2.3)%Total used vehicle unit sales:Same store108,798 109,091 (293)(0.3)%Acquisitions, open points and dispositions14,691 10,083 4,608 NM Total as reported123,489 119,174 4,315 3.6 %NM = Not Meaningful31SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur consolidated reported retail used vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported used vehicle:Revenue$2,973,498 $2,622,053 $351,445 13.4 %Gross profit$142,988 $154,903 $(11,915)(7.7)%Unit sales139,605 123,489 16,116 13.1 %Revenue per unit$21,299 $21,233 $66 0.3 %Gross profit per unit$1,024 $1,254 $(230)(18.3)%Gross profit as a % of revenue4.8 %5.9 %(110)bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales123,489 119,174 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 revenue5.9 %6.3 %(40)bpsOur consolidated same store retail used vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store used vehicle:Revenue$2,593,725 $2,427,306 $166,419 6.9 %Gross profit$136,200 $138,677 $(2,477)(1.8)%Unit sales120,339 112,605 7,734 6.9 %Revenue per unit$21,553 $21,556 $(3)0.0%Gross profit per unit$1,132 $1,232 $(100)(8.1)%Gross profit as a % of revenue5.3 %5.7 %(40)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store used vehicle:Revenue$2,349,053 $2,354,926 $(5,873)(0.2)%Gross profit$136,889 $140,775 $(3,886)(2.8)%Unit sales108,798 109,091 (293)(0.3)%Revenue per unit$21,591 $21,587 $4 0.0 %Gross profit per unit$1,258 $1,290 $(32)(2.5)%Gross profit as a % of revenue5.8 %6.0 %(20)bps32SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFor further analysis of retail used vehicle results, see the tables and discussion under the headings “Used Vehicles – Franchised Dealerships Segment”and “Used Vehicles and F&I - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.Wholesale Vehicles - ConsolidatedWholesale vehicle revenues consist of sales at third-party auction sites and are highly correlated with new and used vehicle retail sales and theassociated trade-in volume. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, whichare designed to optimize our total used vehicle inventory and reduce our risk of inventory price depreciation prior to sale.The following tables provide a reconciliation of consolidated same store basis and reported basis for wholesale vehicles:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$200,574 $158,787 $41,787 26.3 %Acquisitions, open points and dispositions17,051 12,277 4,774 NMTotal as reported$217,625 $171,064 $46,561 27.2 %Total wholesale vehicle gross profit (loss):Same store$(11,215)$(7,455)$(3,760)(50.4)%Acquisitions, open points and dispositions(34)(1,259)1,225 NMTotal as reported$(11,249)$(8,714)$(2,535)(29.1)%Total wholesale vehicle unit sales:Same store31,080 28,547 2,533 8.9 %Acquisitions, open points and dispositions3,087 2,838 249 NMTotal as reported34,167 31,385 2,782 8.9 %NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$156,808 $195,944 $(39,136)(20.0)%Acquisitions, open points and dispositions14,256 15,104 (848)NMTotal as reported$171,064 $211,048 $(39,984)(18.9)%Total wholesale vehicle gross profit (loss):Same store$(7,566)$(5,731)$(1,835)(32.0)%Acquisitions, open points and dispositions(1,148)(1,585)437 NMTotal as reported$(8,714)$(7,316)$(1,398)(19.1)%Total wholesale vehicle unit sales:Same store28,152 31,959 (3,807)(11.9)%Acquisitions, open points and dispositions3,233 3,139 94 NMTotal as reported31,385 35,098 (3,713)(10.6)%NM = Not Meaningful33SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur consolidated reported wholesale vehicle results are as follows: Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported wholesale vehicle:Revenue$217,625 $171,064 $46,561 27.2 %Gross profit (loss)$(11,249)$(8,714)$(2,535)(29.1)%Unit sales34,167 31,385 2,782 8.9 %Revenue per unit$6,369 $5,451 $918 16.8 %Gross profit (loss) per unit$(329)$(278)$(51)(18.3)%Gross profit (loss) as a % of revenue(5.2)%(5.1)%(10)bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales31,385 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)bpsOur consolidated same store wholesale vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$200,574 $158,787 $41,787 26.3 %Gross profit (loss)$(11,215)$(7,455)$(3,760)(50.4)%Unit sales31,080 28,547 2,533 8.9 %Revenue per unit$6,453 $5,562 $891 16.0 %Gross profit (loss) per unit$(361)$(261)$(100)(38.3)%Gross profit (loss) as a % of revenue(5.6)%(4.7)%(90)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$156,808 $195,944 $(39,136)(20.0)%Gross profit (loss)$(7,566)$(5,731)$(1,835)(32.0)%Unit sales28,152 31,959 (3,807)(11.9)%Revenue per unit$5,570 $6,131 $(561)(9.2)%Gross profit (loss) per unit$(269)$(179)$(90)(50.3)%Gross profit (loss) as a % of revenue(4.8)%(2.9)%(190)bps34SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFor further analysis of wholesale vehicle results, see the tables and discussion under the headings “Wholesale Vehicles – Franchised DealershipsSegment” and “Wholesale Vehicles - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.Fixed Operations - ConsolidatedParts, service and collision repair revenues consist of customer requested repair orders (“customer pay”), warranty repairs, wholesale parts, and internal,sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality,manufacturer recalls, customer loyalty and prepaid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning workperformed on vehicles in inventory to be subsequently sold to retail customers. When that work is performed by one of our dealerships or stores, the work isclassified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet. In 2017, we changed the character of certainmanufacturer-offered complimentary maintenance repair orders from customer pay to warranty. Accordingly, the customer pay and warranty amounts in thetables below reflect this change for 2018 and 2017, but not for 2016, as it was administratively impractical to recalculate the 2016 amounts.We believe that over time vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualifiedtechnicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that over the long term we have theability to continue to add service capacity at our dealerships and stores to further increase Fixed Operations revenues. Manufacturers continue to extend newvehicle warranty periods and have also begun to include regular maintenance items in the warranty or complimentary maintenance program coverage. Thesefactors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitate long-term growth in ourservice and parts business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, aswell as the improved quality of vehicles that may affect the level and frequency of future customer pay or warranty-related revenues.The following tables provide a reconciliation of consolidated same store basis and reported basis for Fixed Operations:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Total Fixed Operations revenue:Same store$1,350,669 $1,340,980 $9,689 0.7 %Acquisitions, open points and dispositions30,218 75,030 (44,812)NM Total as reported$1,380,887 $1,416,010 $(35,123)(2.5)%Total Fixed Operations gross profit:Same store$653,523 $645,539 $7,984 1.2 %Acquisitions, open points and dispositions13,838 37,992 (24,154)NM Total as reported$667,361 $683,531 $(16,170)(2.4)%NM = Not Meaningful35SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Total Fixed Operations revenue:Same store$1,332,356 $1,327,618 $4,738 0.4 %Acquisitions, open points and dispositions83,654 82,201 1,453 NMTotal as reported$1,416,010 $1,409,819 $6,191 0.4 %Total Fixed Operations gross profit:Same store$642,179 $632,705 $9,474 1.5 %Acquisitions, open points and dispositions41,352 41,421 (69)NMTotal as reported$683,531 $674,126 $9,405 1.4 %NM = Not MeaningfulOur consolidated reported Fixed Operations results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$560,037 $555,463 $4,574 0.8 %Warranty266,644 282,926 (16,282)(5.8)%Wholesale parts161,066 168,459 (7,393)(4.4)%Internal, sublet and other393,140 409,162 (16,022)(3.9)%Total revenue$1,380,887 $1,416,010 $(35,123)(2.5)%Gross profitCustomer pay$299,616 $296,834 $2,782 0.9 %Warranty150,746 156,082 (5,336)(3.4)%Wholesale parts27,746 28,989 (1,243)(4.3)%Internal, sublet and other189,253 201,626 (12,373)(6.1)%Total gross profit$667,361 $683,531 $(16,170)(2.4)%Gross profit as a % of revenueCustomer pay53.5 %53.4 %10 bpsWarranty56.5 %55.2 %130 bpsWholesale parts17.2 %17.2 %— bpsInternal, sublet and other48.1 %49.3 %(120)bpsTotal gross profit as a % of revenue48.3 %48.3 %— bps36SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$555,463 $582,557 $(27,094)(4.7)%Warranty282,926 240,415 42,511 17.7 %Wholesale parts168,459 176,870 (8,411)(4.8)%Internal, sublet and other409,162 409,977 (815)(0.2)%Total revenue$1,416,010 $1,409,819 $6,191 0.4 %Gross profitCustomer pay$296,834 $314,791 $(17,957)(5.7)%Warranty156,082 129,924 26,158 20.1 %Wholesale parts28,989 30,754 (1,765)(5.7)%Internal, sublet and other201,626 198,657 2,969 1.5 %Total gross profit$683,531 $674,126 $9,405 1.4 %Gross profit as a % of revenueCustomer pay53.4 %54.0 %(60)bpsWarranty55.2 %54.0 %120 bpsWholesale parts17.2 %17.4 %(20)bpsInternal, sublet and other49.3 %48.5 %80 bpsTotal gross profit as a % of revenue48.3 %47.8 %50 bps37SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur consolidated same store Fixed Operations results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$550,371 $528,163 $22,208 4.2 %Warranty263,814 268,800 (4,986)(1.9)%Wholesale parts159,004 160,691 (1,687)(1.0)%Internal, sublet and other377,480 383,326 (5,846)(1.5)%Total revenue$1,350,669 $1,340,980 9,689 0.7 %Gross profitCustomer pay$294,660 $281,891 $12,769 4.5 %Warranty147,507 148,237 (730)(0.5)%Wholesale parts27,429 27,702 (273)(1.0)%Internal, sublet and other183,927 187,709 (3,782)(2.0)%Total gross profit$653,523 $645,539 $7,984 1.2 %Gross profit as a % of revenueCustomer pay53.5 %53.4 %10 bpsWarranty55.9 %55.1 %80 bpsWholesale parts17.3 %17.2 %10 bpsInternal, sublet and other48.7 %49.0 %(30)bpsTotal gross profit as a % of revenue48.4 %48.1 %30 bps38SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$526,504 $550,414 $(23,910)(4.3)%Warranty267,865 226,886 40,979 18.1 %Wholesale parts160,330 168,240 (7,910)(4.7)%Internal, sublet and other377,657 382,078 (4,421)(1.2)%Total revenue$1,332,356 $1,327,618 $4,738 0.4 %Gross profitCustomer pay$281,001 $296,803 $(15,802)(5.3)%Warranty147,726 122,635 25,091 20.5 %Wholesale parts27,602 29,239 (1,637)(5.6)%Internal, sublet and other185,850 184,028 1,822 1.0 %Total gross profit$642,179 $632,705 $9,474 1.5 %Gross profit as a % of revenueCustomer pay53.4 %53.9 %(50)bpsWarranty55.1 %54.1 %100 bpsWholesale parts17.2 %17.4 %(20)bpsInternal, sublet and other49.2 %48.2 %100 bpsTotal gross profit as a % of revenue48.2 %47.7 %50 bpsFor further analysis of Fixed Operations results, see the tables and discussion under the headings “Fixed Operations – Franchised DealershipsSegment” and “Fixed Operations - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.F&I - ConsolidatedFinance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warrantiesand service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties, service contracts, otheraftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net ofestimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&Irevenues are affected by the level of new and used vehicle unit sales, the age and average selling price of vehicles sold, the level of manufacturer financingspecials or leasing incentives, and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties andservice contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.39SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following tables provide a reconciliation of consolidated same store basis and reported basis for F&I:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Total F&I revenue:Same store$356,589 $331,288 $25,301 7.6 %Acquisitions, open points and dispositions48,934 31,742 17,192 NMTotal as reported$405,523 $363,030 $42,493 11.7 %Total F&I gross profit per retail unit (excludes fleet):Same store$1,493 $1,398 $95 6.8 %Reported$1,557 $1,411 $146 10.3 %Total combined new and used retail unit sales:Same store238,886 236,961 1,925 0.8 %Acquisitions, open points and dispositions21,538 20,256 1,282 NMTotal as reported260,424 257,217 3,207 1.2 %NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Total F&I revenue:Same store$323,450 $312,447 $11,003 3.5 %Acquisitions, open points and dispositions39,580 30,838 8,742 NMReported$363,030 $343,285 $19,745 5.8 %Total F&I gross profit per retail unit (excludes fleet):Same store$1,391 $1,340 $51 3.8 %Reported$1,411 $1,354 $57 4.2 %Total combined new and used retail unit sales:Same store232,579 233,189 (610)(0.3)%Acquisitions, open points and dispositions24,638 20,273 4,365 NMTotal as reported257,217 253,462 3,755 1.5 %NM = Not MeaningfulOur consolidated reported F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported F&I:Revenue$405,523 $363,030 $42,493 11.7 %Unit sales260,424 257,217 3,207 1.2 %Gross profit per retail unit (excludes fleet)$1,557 $1,411 $146 10.3 %40SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Reported F&I:Revenue$363,030 $343,285 $19,745 5.8 %Unit sales257,217 253,462 3,755 1.5 %Gross profit per retail unit (excludes fleet)$1,411 $1,354 $57 4.2 %Our consolidated same store F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store F&I:Revenue$356,589 $331,288 $25,301 7.6 %Unit sales238,886 236,961 1,925 0.8 %Gross profit per retail unit (excludes fleet)$1,493 $1,398 $95 6.8 %Year Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store F&I:Revenue$323,450 $312,447 $11,003 3.5 %Unit sales232,579 233,189 (610)(0.3)%Gross profit per retail unit (excludes fleet)$1,391 $1,340 $51 3.8 %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 - EchoPark Segment” in the Franchised Dealerships Segment and EchoPark Segment sections, respectively, below.New 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 vehicle manufacturer incentives to consumers (which vary from cash-back incentives to low interest rate financing, among other things),the availability of consumer credit and the level and type of manufacturer-to-dealer incentives, as well as manufacturers providing adequate inventoryallocations to our dealerships to meet customer demands. The automobile manufacturing industry is cyclical and historically has experienced periodicdownturns characterized by oversupply and weak demand. As an automotive retailer, we seek to mitigate the effects of this sales cycle by maintaining adiverse brand mix of dealerships. Our brand diversity allows us to offer a broad range of products at a wide range of prices from lower–priced/economyvehicles to luxury vehicles.41SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe 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)20182017Change% Change(In thousands, except unit data)Total new vehicle revenue:Same store$4,897,389 $4,992,552 $(95,163)(1.9)%Acquisitions, open points and dispositions76,708 302,499 (379,207)NMTotal as reported$4,974,097 $5,295,051 $(320,954)(6.1)%Total new vehicle gross profit:Same store$238,648 $255,795 $(17,147)(6.7)%Acquisitions, open points and dispositions2,854 9,131 (6,277)NMTotal as reported$241,502 $264,926 $(23,424)(8.8)%Total new vehicle unit sales:Same store120,400 126,101 (5,701)(4.5)%Acquisitions, open points and dispositions2,317 9,562 (7,245)NMTotal as reported122,717 135,663 (12,946)(9.5)%NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total new vehicle revenue:Same store$4,960,012 $4,914,970 $45,042 0.9 %Acquisitions, open points and dispositions335,039 319,535 15,504 4.9 %Total as reported$5,295,051 $5,234,505 $60,546 1.2 %Total new vehicle gross profit:Same store$253,412 $252,477 $935 0.4 %Acquisitions, open points and dispositions11,514 8,117 3,397 41.9 %Total as reported$264,926 $260,594 $4,332 1.7 %Total new vehicle unit sales:Same store125,525 125,600 (75)(0.1)%Acquisitions, open points and dispositions10,138 10,403 (265)(2.5)%Total as reported135,663 136,003 (340)(0.2)%NM = Not Meaningful42SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Franchised Dealerships Segment reported new vehicle results (combined retail and fleet data) are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported new vehicle:Revenue$4,974,097 $5,295,051 $(320,954)(6.1)%Gross profit$241,502 $264,926 $(23,424)(8.8)%Unit sales122,717 135,663 (12,946)(9.5)%Revenue per unit$40,533 $39,031 $1,502 3.8 %Gross profit per unit$1,968 $1,953 $15 0.8 %Gross profit as a % of revenue4.9 %5.0 %(10)bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales135,663 136,003 (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 revenue5.0 %5.0 %— bpsOur Franchised Dealerships Segment same store new vehicle results (combined retail and fleet data) are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store new vehicle:Revenue$4,897,389 $4,992,552 $(95,163)(1.9)%Gross profit$238,648 $255,795 $(17,147)(6.7)%Unit sales120,400 126,101 (5,701)(4.5)%Revenue per unit$40,676 $39,592 $1,084 2.7 %Gross profit per unit$1,982 $2,028 $(46)(2.3)%Gross profit as a % of revenue4.9 %5.1 %(20)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store new vehicle:Revenue$4,960,012 $4,914,970 $45,042 0.9 %Gross profit$253,412 $252,477 $935 0.4 %Unit sales125,525 125,600 (75)(0.1)%Revenue per unit$39,514 $39,132 $382 1.0 %Gross profit per unit$2,019 $2,010 $9 0.4 %Gross profit as a % of revenue5.1 %5.1 %— bps43SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFranchised Dealerships Segment New Vehicles - 2018 Compared to 2017Our new vehicle revenue decreased 1.9% and our new vehicle unit sales volume decreased 4.5%, driven primarily by decreases in new vehicle unitsales volume at our Honda, Toyota and BMW dealerships. Our new vehicle gross profit decreased approximately $17.1 million, or 6.7%, primarily driven bydecreases in new vehicle gross profit at our BMW, Honda and Toyota dealerships. Our new vehicle gross profit per unit decreased $46 per unit, or 2.3%, to$1,982 per unit, primarily driven by decreases in new vehicle gross profit per unit at our BMW, Honda and Toyota dealerships, offset partially by increases innew vehicle gross profit per unit at our Land Rover, Hyundai and Lexus dealerships.Beginning in the second quarter of 2018, new vehicle gross profit per unit at our BMW and Honda dealerships was significantly lower than expecteddue primarily to lower manufacturer-to-dealer incentives on certain models. We experienced some improvement in both brands during the third quarter of2018, but BMW manufacturer-to-dealer incentives were below anticipated levels in the fourth quarter of 2018.Our reported franchised dealerships new vehicle inventory days’ supply was approximately 59 and 52 days as of December 31, 2018 and 2017,respectively, driven primarily by our luxury-branded dealerships.Franchised Dealerships Segment New Vehicles - 2017 Compared to 2016Our new vehicle revenue increased 0.9% and our new vehicle unit sales volume decreased 0.1%, 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 increased approximately $0.9 million, or 0.4%, primarily driven by increases innew vehicle gross profit at our BMW, Ford and Honda dealerships, offset partially by decreases in new vehicle gross profit at our General Motors (excludingCadillac), Cadillac and Lexus dealerships. Our new vehicle gross profit per unit increased $9 per unit, or 0.4%, to $2,019 per unit, primarily driven byincreases in new vehicle gross profit per unit at our BMW, Ford and Honda dealerships, offset partially by decreases in new vehicle gross profit per unit at ourGeneral Motors (excluding Cadillac), 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 unit during the third quarter of 2017. Higher new vehicle unit sales volume and gross profit in the third and fourth quarters of2017 partially offset lower new vehicle unit sales volume and gross profit during the first half of 2017 as a result of continued headwinds in the energymarkets, resulting in relatively flat new vehicle unit sales volume and gross profit for 2017.Used Vehicles – Franchised Dealerships SegmentUsed vehicle revenues consist of sales to retail customers and are directly affected by a number of factors, including the level of manufacturerincentives on new vehicles, the number and quality of trade-ins and lease turn-ins, the availability and pricing of used vehicles acquired at auction and theavailability of consumer credit.44SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe 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)20182017Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$2,335,804 $2,279,693 $56,111 2.5 %Acquisitions, open points and dispositions34,995 126,714 (91,719)NMTotal as reported$2,370,799 $2,406,407 $(35,608)(1.5)%Total used vehicle gross profit:Same store$137,858 $134,056 $3,802 2.8 %Acquisitions, open points and dispositions10,492 13,993 (3,501)NMTotal as reported$148,350 $148,049 $301 0.2 %Total used vehicle unit sales:Same store108,085 105,228 2,857 2.7 %Acquisitions, open points and dispositions2,083 7,643 (5,560)NMTotal as reported110,168 112,871 (2,703)(2.4)%NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$2,261,329 $2,276,385 $(15,056)(0.7)%Acquisitions, open points and dispositions145,078 142,770 2,308 NMTotal as reported$2,406,407 $2,419,155 $(12,748)(0.5)%Total used vehicle gross profit:Same store$132,877 $136,457 $(3,580)(2.6)%Acquisitions, open points and dispositions15,172 15,803 (631)NMTotal as reported$148,049 $152,260 $(4,211)(2.8)%Total used vehicle unit sales:Same store104,382 105,312 (930)(0.9)%Acquisitions, open points and dispositions8,489 8,515 (26)NMTotal as reported112,871 113,827 (956)(0.8)%NM = Not Meaningful45SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Franchised Dealerships Segment reported retail used vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported used vehicle:Revenue$2,370,799 $2,406,407 $(35,608)(1.5)%Gross profit$148,350 $148,049 $301 0.2 %Unit sales110,168 112,871 (2,703)(2.4)%Revenue per unit$21,520 $21,320 $200 0.9 %Gross profit per unit$1,347 $1,312 $35 2.7 %Gross profit as a % of revenue6.3 %6.2 %10 bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales112,871 113,827 (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 revenue6.2 %6.3 %(10)bpsOur Franchised Dealerships Segment same store retail used vehicle results are as follows: Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store used vehicle:Revenue$2,335,804 $2,279,693 $56,111 2.5 %Gross profit$137,858 $134,056 $3,802 2.8 %Unit sales108,085 105,228 2,857 2.7 %Revenue per unit$21,611 $21,664 $(53)(0.2)%Gross profit per unit$1,275 $1,274 $1 0.1 %Gross profit as a % of revenue5.9 %5.9 %— bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store used vehicle:Revenue$2,261,329 $2,276,385 $(15,056)(0.7)%Gross profit$132,877 $136,457 $(3,580)(2.6)%Unit sales104,382 105,312 (930)(0.9)%Revenue per unit$21,664 $21,616 $48 0.2 %Gross profit per unit$1,273 $1,296 $(23)(1.8)%Gross profit as a % of revenue5.9 %6.0 %(10)bps46SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSFranchised Dealerships Segment Used Vehicles - 2018 Compared to 2017Retail used vehicle revenue increased 2.5%, driven primarily by a 2.7% increase in retail used vehicle unit sales volume. This increase in retail usedvehicle unit sales volume was primarily driven by increases in retail used vehicle unit sales volume at our Mercedes, Honda and Toyota dealerships, offsetpartially by decreases in retail used vehicle unit sales volume at our Lexus dealerships. Retail used vehicle gross profit increased approximately $3.8 million,or 2.8%, driven primarily by increases in retail used vehicle gross profit at our Mercedes, BMW and MINI dealerships, offset partially by a decrease in retailused vehicle gross profit at our Lexus dealerships. Retail used vehicle gross profit per unit was flat at $1,275 per unit. Our reported franchised dealershipsused vehicle inventory days’ supply was approximately 30 and 32 days as of December 31, 2018 and 2017, respectively. We focus on maintaining usedvehicle inventory days' supply in the 30- to 40- day range in order to limit our exposure to market pricing volatility.Franchised Dealerships Segment Used Vehicles - 2017 Compared to 2016Retail used vehicle revenue decreased 0.7%, driven primarily by a 0.9% 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 and General Motors (excludingCadillac) dealerships, offset partially by increases in retail used vehicle unit sales volume at our BMW and Audi dealerships. Retail used vehicle gross profitdecreased approximately $3.6 million, or 2.6%, driven primarily by lower retail used vehicle gross profit per unit at our dealerships in the Houston market asa result of ongoing economic challenges in that market. Retail used vehicle gross profit per unit decreased $23 per unit, or 1.8%, to $1,273 per unit, drivenprimarily by lower retail used vehicle gross profit per unit at our BMW and General Motors (excluding Cadillac) dealerships.Wholesale Vehicles - Franchised Dealerships SegmentWholesale vehicle revenues consist of sales at third-party auction sites and are highly correlated with new and used vehicle retail sales and theassociated trade-in volume. Wholesale vehicle revenues are also significantly affected by our corporate inventory management strategy and policies, whichare designed to optimize our total used vehicle inventory and reduce our risk of inventory price depreciation prior to sale.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)20182017Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$192,199 $151,018 $41,181 27.3 %Acquisitions, open points and dispositions4,984 10,563 (5,579)NMTotal as reported$197,183 $161,581 $35,602 22.0 %Total wholesale vehicle gross profit (loss):Same store$(11,047)$(7,286)$(3,761)(51.6)%Acquisitions, open points and dispositions(732)(1,192)460 NMTotal as reported$(11,779)$(8,478)$(3,301)(38.9)%Total wholesale vehicle unit sales:Same store29,865 26,425 3,440 13.0 %Acquisitions, open points and dispositions750 2,458 (1,708)NMTotal as reported30,615 28,883 1,732 6.0 %NM = Not Meaningful47SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$149,276 $186,155 $(36,879)(19.8)%Acquisitions, open points and dispositions12,305 14,202 (1,897)NMTotal as reported$161,581 $200,357 $(38,776)(19.4)%Total wholesale vehicle gross profit (loss):Same store$(7,267)$(5,701)$(1,566)(27.5)%Acquisitions, open points and dispositions(1,211)(1,411)200 NMTotal as reported$(8,478)$(7,112)$(1,366)(19.2)%Total wholesale vehicle unit sales:Same store26,209 30,186 (3,977)(13.2)%Acquisitions, open points and dispositions2,674 2,956 (282)NMTotal as reported28,883 33,142 (4,259)(12.9)%NM = Not MeaningfulOur Franchised Dealerships Segment reported wholesale vehicle results are as follows: Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported wholesale vehicle:Revenue$197,183 $161,581 $35,602 22.0 %Gross profit (loss)$(11,779)$(8,478)$(3,301)(38.9)%Unit sales30,615 28,883 1,732 6.0 %Revenue per unit$6,441 $5,594 $847 15.1 %Gross profit (loss) per unit$(385)$(294)$(91)(31.0)%Gross profit (loss) as a % of revenue(6.0)%(5.2)%(80)bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales28,883 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)bps48SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Franchised Dealerships Segment same store wholesale vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$192,199 $151,018 $41,181 27.3 %Gross profit (loss)$(11,047)$(7,286)$(3,761)(51.6)%Unit sales29,865 26,425 3,440 13.0 %Revenue per unit$6,436 $5,715 $721 12.6 %Gross profit (loss) per unit$(370)$(276)$(94)(34.1)%Gross profit (loss) as a % of revenue(5.7)%(4.8)%(90)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$149,276 $186,155 $(36,879)(19.8)%Gross profit (loss)$(7,267)$(5,701)$(1,566)(27.5)%Unit sales26,209 30,186 (3,977)(13.2)%Revenue per unit$5,696 $6,167 $(471)(7.6)%Gross profit (loss) per unit$(277)$(189)$(88)(46.6)%Gross profit (loss) as a % of revenue(4.9)%(3.1)%(180)bpsFranchised Dealerships Segment Wholesale Vehicles - 2018 Compared to 2017 Wholesale vehicle revenue, wholesale vehicle gross loss and wholesale vehicle unit sales volume increased, primarily driven by inventory supply andallocation challenges related to the Houston market in the first quarter of 2018, in addition to our actions to reduce the number of days' sales we had on handin used vehicle inventory. Early in 2018, we aggressively disposed of units at retail and wholesale in higher volumes and at lower gross margins to achievethe desired inventory levels in a short period of time. We focus on maintaining used vehicle inventory days’ supply in the 30- to 40- day range in order tolimit our exposure to market pricing volatility. As of December 31, 2018, our days’ sales outstanding for used vehicle inventory was 30 days compared to 32days at December 31, 2017.Franchised Dealerships Segment Wholesale Vehicles - 2017 Compared to 2016Wholesale vehicle revenue and wholesale vehicle unit sales volume decreased, while wholesale vehicle gross loss increased due to higher gross lossper unit. The increase in wholesale vehicle gross loss per unit was primarily driven by declining used vehicle valuations due in part to increasing off-leaseunit sales volume and the seasonal fluctuations in the pre-owned vehicle market.Fixed Operations - Franchised Dealerships SegmentParts, service and collision repair revenues consist of customer requested repair orders (“customer pay”), warranty repairs, wholesale parts, and internal,sublet and other. Parts and service revenue is driven by the mix of warranty repairs versus customer pay repairs, available service capacity, vehicle quality,manufacturer recalls, customer loyalty and prepaid maintenance programs. Internal, sublet and other primarily relates to preparation and reconditioning workperformed on vehicles in inventory to be subsequently sold to retail customers. When that work is performed by one of our dealerships or stores, the work isclassified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet. In 2017, we changed the character of certainmanufacturer-offered complimentary maintenance repair orders from49SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONScustomer pay to warranty. Accordingly, the customer pay and warranty amounts in the tables below reflect this change for 2018 and 2017, but not for 2016,as it was administratively impractical to recalculate the 2016 amounts.We believe that over time vehicle quality will continue to improve, but vehicle complexity and the associated demand for repairs by qualifiedtechnicians at franchised dealerships will offset any revenue lost from improvement in vehicle quality. We also believe that over the long term we have theability to continue to add service capacity at our dealerships and stores to further increase Fixed Operations revenues. Manufacturers continue to extend newvehicle warranty periods and have also begun to include regular maintenance items in the warranty or complementary maintenance program coverage. Thesefactors, over the long term, combined with the extended manufacturer warranties on certified pre-owned vehicles, should facilitate long-term growth in ourservice and parts business. Barriers to long-term growth may include reductions in the rate paid by manufacturers to dealers for warranty work performed, aswell as the improved quality of vehicles that may affect the level and frequency of future customer pay or warranty related revenues.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)20182017Change% Change(In thousands)Total Fixed Operations revenue:Same store$1,344,661 $1,330,731 $13,930 1.0 %Acquisitions, open points and dispositions19,898 71,071 (51,173)NMTotal as reported$1,364,559 $1,401,802 $(37,243)(2.7)%Total Fixed Operations gross profit:Same store$653,319 $641,330 $11,989 1.9 %Acquisitions, open points and dispositions11,898 36,099 (24,201)NMTotal as reported$665,217 $677,429 $(12,212)(1.8)%NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Total Fixed Operations revenue:Same store$1,324,126 $1,320,260 $3,866 0.3 %Acquisitions, open points and dispositions77,676 80,028 (2,352)NMTotal as reported$1,401,802 $1,400,288 $1,514 0.1 %Total Fixed Operations gross profit:Same store$638,721 $629,832 $8,889 1.4 %Acquisitions, open points and dispositions38,708 40,089 (1,381)NMTotal as reported$677,429 $669,921 $7,508 1.1 %NM = Not Meaningful50SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur Franchised Dealerships Segment reported Fixed Operations results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$559,027 $554,080 $4,947 0.9 %Warranty266,644 282,926 (16,282)(5.8)%Wholesale parts161,066 168,459 (7,393)(4.4)%Internal, sublet and other377,822 396,337 (18,515)(4.7)%Total revenue$1,364,559 $1,401,802 $(37,243)(2.7)%Gross profitCustomer pay$299,360 $296,348 $3,012 1.0 %Warranty150,746 156,082 (5,336)(3.4)%Wholesale parts27,746 28,989 (1,243)(4.3)%Internal, sublet and other187,365 196,010 (8,645)(4.4)%Total gross profit$665,217 $677,429 $(12,212)(1.8)%Gross profit as a % of revenueCustomer pay53.6 %53.5 %10 bpsWarranty56.5 %55.2 %130 bpsWholesale parts17.2 %17.2 %— bpsInternal, sublet and other49.6 %49.5 %10 bpsTotal gross profit as a % of revenue48.7 %48.3 %40 bps51SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$554,080 $581,612 $(27,532)(4.7)%Warranty282,926 240,415 42,511 17.7 %Wholesale parts168,459 176,870 (8,411)(4.8)%Internal, sublet and other396,337 401,391 (5,054)(1.3)%Total revenue$1,401,802 $1,400,288 $1,514 0.1 %Gross profitCustomer pay$296,348 $314,439 $(18,091)(5.8)%Warranty156,082 129,924 26,158 20.1 %Wholesale parts28,989 30,754 (1,765)(5.7)%Internal, sublet and other196,010 194,804 1,206 0.6 %Total gross profit$677,429 $669,921 $7,508 1.1 %Gross profit as a % of revenueCustomer pay53.5 %54.1 %(60)bpsWarranty55.2 %54.0 %120 bpsWholesale parts17.2 %17.4 %(20)bpsInternal, sublet and other49.5 %48.5 %100 bpsTotal gross profit as a % of revenue48.3 %47.8 %50 bpsOur Franchised Dealerships Segment same store Fixed Operations results are as follows: Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$549,971 $527,418 $22,553 4.3 %Warranty263,814 268,800 (4,986)(1.9)%Wholesale parts159,004 160,691 (1,687)(1.0)%Internal, sublet and other371,872 373,822 (1,950)(0.5)%Total revenue$1,344,661 $1,330,731 $13,930 1.0 %Gross profitCustomer pay$294,577 $281,627 $12,950 4.6 %Warranty147,507 148,237 (730)(0.5)%Wholesale parts27,429 27,702 (273)(1.0)%Internal, sublet and other183,806 183,764 42 — %Total gross profit$653,319 $641,330 $11,989 1.9 %Gross profit as a % of revenueCustomer pay53.6 %53.4 %20 bpsWarranty55.9 %55.1 %80 bpsWholesale parts17.3 %17.2 %10 bpsInternal, sublet and other49.4 %49.2 %20 bpsTotal gross profit as a % of revenue48.6 %48.2 %40 bps52SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$525,809 $549,815 $(24,006)(4.4)%Warranty267,865 226,886 40,979 18.1 %Wholesale parts160,330 168,240 (7,910)(4.7)%Internal, sublet and other370,122 375,319 (5,197)(1.4)%Total revenue$1,324,126 $1,320,260 $3,866 0.3 %Gross profitCustomer pay$280,754 $296,581 $(15,827)(5.3)%Warranty147,726 122,635 25,091 20.5 %Wholesale parts27,602 29,239 (1,637)(5.6)%Internal, sublet and other182,639 181,377 1,262 0.7 %Total gross profit$638,721 $629,832 $8,889 1.4 %Gross profit as a % of revenueCustomer pay53.4 %53.9 %(50)bpsWarranty55.1 %54.1 %100 bpsWholesale parts17.2 %17.4 %(20)bpsInternal, sublet and other49.3 %48.3 %100 bpsTotal gross profit as a % of revenue48.2 %47.7 %50 bpsFranchised Dealerships Segment Fixed Operations - 2018 Compared to 2017Our Fixed Operations revenue increased approximately $13.9 million, or 1.0%, driven primarily by increases in Fixed Operations revenue at ourMercedes, Land Rover and Audi dealerships, and our Fixed Operations gross profit increased approximately $12.0 million, or 1.9%, driven primarily byincreases in Fixed Operations gross profit at our Mercedes and Land Rover dealerships. Customer pay gross profit increased approximately $13.0 million, or4.6%, warranty gross profit decreased approximately $0.7 million, or 0.5%, wholesale parts gross profit decreased approximately $0.3 million, or 1.0%, andinternal, sublet and other gross profit was flat.Franchised Dealerships Segment Fixed Operations - 2017 Compared to 2016Our Fixed Operations revenue increased approximately $3.9 million, or 0.3%, driven primarily by increases in Fixed Operations revenue at ourLexus, Audi and BMW dealerships, and our Fixed Operations gross profit increased approximately $8.9 million, or 1.4%, driven primarily by increases inFixed Operations gross profit at our Lexus, Audi and Mercedes dealerships. Combined customer pay and warranty gross profit increased approximately $9.3million, or 2.2%.F&I - Franchised Dealerships SegmentFinance, insurance and other, net revenues include commissions for arranging vehicle financing and insurance, sales of third-party extended warrantiesand service contracts for vehicles, and sales of other aftermarket products. In connection with vehicle financing, extended warranties, service contracts, otheraftermarket products and insurance contracts, we receive commissions from the providers for originating contracts. F&I revenues are recognized net ofestimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&I gross profit are the same amount). F&Irevenues are affected by the level of new and used vehicle unit sales, the age and average selling price of vehicles sold, the level of manufacturer financingspecials or leasing incentives and our F&I penetration rate. The F&I penetration rate represents the number of finance contracts, extended warranties andservice contracts, other aftermarket products or insurance contracts that we are able to originate per vehicle sold, expressed as a percentage.53SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYield spread premium 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 (e.g., a commercial bank, credit union or manufacturer captive finance company). We have established caps on the potential yield spreadpremium our dealerships can earn with all finance sources. We believe the yield spread premium we earn for arranging vehicle financing represents value tothe 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 their vehicleloan or lease obligation) frequently are unable to pay off the loan on their current vehicle and finance the purchase or lease of a replacement new orused 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)20182017Change% Change(In thousands, except unit and per unit data)Total F&I revenue:Same store$330,455 $320,898 $9,557 3.0 %Acquisitions, open points and dispositions14,359 27,160 (12,801)NMTotal as reported$344,814 $348,058 $(3,244)(0.9)%Total F&I gross profit per retail unit (excludes fleet):Same store$1,458 $1,398 $60 4.3 %Total as reported$1,493 $1,411 $82 5.8 %Total combined new and used retail unit sales:Same store226,632 229,584 (2,952)(1.3)%Acquisitions, open points and dispositions4,355 17,015 (12,660)NMTotal as reported230,987 246,599 (15,612)(6.3)%NM = Not Meaningful54SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Total F&I revenue:Same store$318,798 $308,206 $10,592 3.4 %Acquisitions, open points and dispositions29,260 28,141 1,119 NMTotal as reported$348,058 $336,347 $11,711 3.5 %Total F&I gross profit per retail unit (excludes fleet):Same store$1,397 $1,343 $54 4.0 %Total as reported$1,411 $1,356 $55 4.1 %Total combined new and used retail unit sales:Same store228,163 229,410 (1,247)(0.5)%Acquisitions, open points and dispositions18,436 18,705 (269)NMTotal as reported246,599 248,115 (1,516)(0.6)%NM = Not MeaningfulOur Franchised Dealerships Segment reported F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported F&I:Revenue$344,814 $348,058 $(3,244)(0.9)%Unit sales230,987 246,599 (15,612)(6.3)%Gross profit per retail unit (excludes fleet)$1,493 $1,411 $82 5.8 %Year Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Reported F&I:Revenue$348,058 $336,347 $11,711 3.5 %Unit sales246,599 248,115 (1,516)(0.6)%Gross profit per retail unit (excludes fleet)$1,411 $1,356 $55 4.1 %Our Franchised Dealerships Segment same store F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same Store F&I:Revenue$330,455 $320,898 $9,557 3.0 %Unit sales226,632 229,584 (2,952)(1.3)%Gross profit per retail unit (excludes fleet)$1,458 $1,398 $60 4.3 %55SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same Store F&I:Revenue$318,798 $308,206 $10,592 3.4 %Unit sales228,163 229,410 (1,247)(0.5)%Gross profit per retail unit (excludes fleet)$1,397 $1,343 $54 4.0 %Franchised Dealerships Segment F&I – 2018 Compared to 2017Our F&I revenues increased approximately $9.6 million, or 3.0%, and our F&I gross profit per retail unit increased $60 per unit, or 4.3%, to $1,458 perunit. The growth in F&I revenues and F&I gross profit per retail unit was due 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 1.3% decrease in combined retail new and used vehicle unit salesvolume and lower penetration rates. Finance contract gross profit increased 1.4%, primarily due to a 2.8% increase in gross profit per finance contract, offsetpartially by a 10-basis point decrease in the combined new and used vehicle finance contract penetration rate. Service contract gross profit increased 4.4%due primarily to a 6.2% increase in gross profit per service contract, offset partially by a 10-basis point decrease in the service contract penetration rate. Otheraftermarket contract gross profit increased 11.9%, driven primarily by a 9.9% increase in gross profit per other aftermarket contract and a 410-basis pointincrease in the other aftermarket contract penetration rate.Franchised Dealerships Segment F&I – 2017 Compared to 2016Our F&I revenues increased approximately $10.6 million, or 3.4%, and our F&I gross profit per retail unit increased $54 per unit, or 4.0%, to $1,397per unit. Finance contract gross profit decreased 2.9% due to an 80-basis point decrease in the combined new and used vehicle finance contract penetrationrate, and a 1.4% decrease in gross profit per finance contract. Service contract gross profit increased 5.5% due to a 10.5% increase in gross profit per servicecontract, offset partially by a 140-basis point decrease in the service contract penetration rate and a 4.6% decrease in service contract sales volume. Otheraftermarket contract gross profit increased 8.8% due to a 10.7% increase in gross profit per other aftermarket contract, offset by a 140-basis point decrease inthe other aftermarket contract penetration rate.Results of Operations - EchoPark SegmentEchoPark Segment same store results consist of results of operations from three EchoPark stores in Colorado and one EchoPark store in Texas for 2018compared to 2017, and two EchoPark stores in Colorado for 2017 compared to 2016. Due to the ongoing expansion of our EchoPark Segment, same storeresults may vary significantly from reported results due to stores that began operations in the last 12 months.Used Vehicles and F&I - EchoPark SegmentBased on the way we manage the EchoPark Segment, our operating strategy focuses on maximizing total used-related gross profit (based on acombination of unit sales volume, front-end retail used vehicle gross profit per unit and F&I gross profit per unit) rather than emphasizing certain levels offront-end retail used vehicle gross profit per unit. As such, we believe the best per unit measure of gross profit performance at our EchoPark stores is acombined total gross profit per unit, which includes both front-end retail used vehicle gross profit and F&I gross profit per unit sale transaction.See the discussion in Franchised Dealerships Segment Results of Operations for a description of the macro drivers of used vehicle revenues and F&Irevenues. F&I revenues are recognized net of estimated chargebacks and other costs associated with originating contracts (as a result, F&I revenues and F&Igross profit are the same amount).56SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following tables provide a reconciliation of EchoPark Segment same store basis and reported basis for retail used vehicles:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$257,921 $147,614 $110,307 74.7 %Acquisitions, store openings and closures344,778 68,032 276,746 NMTotal as reported$602,699 $215,646 $387,053 179.5 %Total used vehicle gross profit (loss):Same store$(1,658)$4,620 $(6,278)(135.9)%Acquisitions, store openings and closures(3,704)2,234 (5,938)NMTotal as reported$(5,362)$6,854 $(12,216)(178.2)%Total used vehicle unit sales:Same store12,254 7,377 4,877 66.1 %Acquisitions, store openings and closures17,183 3,241 13,942 NMTotal as reported29,437 10,618 18,819 177.2 %NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total used vehicle revenue:Same store$87,724 $78,541 $9,183 11.7 %Acquisitions, store openings and closures127,922 35,426 92,496 NMTotal as reported$215,646 $113,967 $101,679 89.2 %Total used vehicle gross profit (loss):Same store$4,012 $4,318 $(306)(7.1)%Acquisitions, store openings and closures2,842 2,007 835 NMTotal as reported$6,854 $6,325 $529 8.4 %Total used vehicle unit sales:Same store4,416 3,779 637 16.9 %Acquisitions, store openings and closures6,202 1,568 4,634 NMTotal as reported10,618 5,347 5,271 98.6 %NM = Not MeaningfulThe following tables provide a reconciliation of EchoPark Segment same store basis and reported basis for F&I:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Total F&I revenue:Same store$26,133 $10,389 $15,744 151.5 %Acquisitions, store openings and closures34,576 4,583 29,993 NMTotal as reported$60,709 $14,972 $45,737 305.5 %NM = Not Meaningful57SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Total F&I revenue:Same store$4,652 $4,240 $412 9.7 %Acquisitions, store openings and closures10,320 2,698 7,622 NMTotal as reported$14,972 $6,938 $8,034 115.8 %NM = Not MeaningfulOur EchoPark Segment reported retail used vehicle and F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported used vehicle and F&I:Used vehicle revenue$602,699 $215,646 $387,053 179.5 %Used vehicle gross profit (loss)$(5,362)$6,854 $(12,216)(178.2)%Used vehicle unit sales29,437 10,618 18,819 177.2 %Used vehicle revenue per unit$20,474 $20,309 $165 0.8 %F&I revenue$60,709 $14,972 $45,737 305.5 %Combined used vehicle gross profit and F&I revenue$55,347 $21,826 $33,521 153.6 %Total used vehicle and F&I gross profit per unit$1,880 $2,056 $(176)(8.6)%Year Ended December 31,Better / (Worse)20172016Change% 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 (loss)$6,854 $6,325 $529 8.4 %Used vehicle unit sales10,618 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)%Our EchoPark Segment same store retail used vehicle and F&I results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store used vehicle and F&I:Used vehicle revenue$257,921 $147,614 $110,307 74.7 %Used vehicle gross profit (loss)$(1,658)$4,620 $(6,278)(135.9)%Used vehicle unit sales12,254 7,377 4,877 66.1 %Used vehicle revenue per unit$21,048 $20,010 $1,038 5.2 %F&I revenue$26,133 $10,389 $15,744 151.5 %Combined used vehicle gross profit and F&I revenue$24,475 $15,009 $9,466 63.1 %Total used vehicle and F&I gross profit per unit$1,997 $2,035 $(38)(1.9)%58SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store used vehicle and F&I:Used vehicle revenue$87,724 $78,541 $9,183 11.7 %Used vehicle gross profit (loss)$4,012 $4,318 $(306)(7.1)%Used vehicle unit sales4,416 3,779 637 16.9 %Used vehicle revenue per unit$19,865 $20,784 $(919)(4.4)%F&I revenue$4,652 $4,240 $412 9.7 %Combined used vehicle gross profit and F&I revenue$8,664 $8,558 $106 1.2 %Total used vehicle and F&I gross profit per unit$1,962 $2,265 $(303)(13.4)%EchoPark Segment Used Vehicles and F&I - 2018 Compared to 2017Combined used vehicle revenue and F&I revenue increased approximately $126.1 million, or 79.8%, and combined used vehicle gross profit and F&Irevenue increased approximately $9.5 million, or 63.1%, due primarily to a 66.1% increase in retail used vehicle unit sales volume. Combined retail usedvehicle and F&I gross profit per unit decreased approximately $38 per unit, or 1.9%, to $1,997 per unit, driven primarily by lower retail used vehicle grossprofit, partially offset by an increase in F&I gross profit. Our retail used vehicle gross profit per unit decreased due to a shift in inventory and pricing strategyat our EchoPark stores in 2018, where we price our inventory at a lower level (resulting in lower retail used vehicle gross profit per unit) in order to driverhigher levels of retail used vehicle unit sales volume, increasing F&I opportunity, to result in higher combined gross profit (from both the retail used vehiclesale and higher levels of F&I gross profit per retail unit).F&I revenues increased approximately $15.7 million, or 151.5%, driven by an increase in gross profit per service contract due to additional productofferings and increased visibility into performance drivers provided by our proprietary internal software applications and higher retail unit sales volume.Finance contract gross profit increased 107.5%, primarily due to a 71.5% increase in finance contract sales volume, in addition to a 21.0% increase in grossprofit per finance contract and a 250-basis point increase in the used vehicle finance contract penetration rate. Service contract gross profit increased 122.9%due primarily to an 91.9% increase in service contract sales volume, in addition to a 16.1% increase in gross profit per service contract and a 720-basis pointincrease in the service contract penetration rate. Other aftermarket contract gross profit increased 87.6%, driven primarily by a 67.2% increase in otheraftermarket contract sales volume in addition to a 12.2% increase in gross profit per other aftermarket contract and a 50-basis point increase in the otheraftermarket contract penetration rate. F&I penetration rates are generally higher in our EchoPark Segment than in our Franchised Dealerships Segment.EchoPark Segment Used Vehicles and F&I - 2017 Compared to 2016Combined used vehicle revenue and F&I revenue increased approximately $9.6 million, or 11.6%, and combined used vehicle gross profit and F&Irevenue increased approximately $0.1 million, or 1.2%, due primarily to a 16.9% increase in retail used vehicle unit sales volume. Combined retail usedvehicle and F&I gross profit per unit decreased approximately $303 per unit, or 13.4%, to $1,962 per unit, driven primarily by lower retail used vehicle grossprofit, partially offset by an increase in F&I gross profit.F&I revenues increased approximately $0.4 million, or 9.7%, driven by higher used vehicle unit sales volume. Finance contract gross profit increased5.1% due primarily to a 13.5% increase in finance contract sales volume, partially offset by a 7.4% decrease in gross profit per finance contract and a 240-basis point decrease in the used vehicle finance contract penetration rate. Service contract gross profit increased 19.8% due primarily to a 15.2% increase inservice contract sales volume and a 3.9% increase in gross profit per service contract, partially offset by a 70-basis point decrease in the service contractpenetration rate. Other aftermarket contract gross profit was flat due primarily to a 15.0% increase in aftermarket contract sales volume, offset by a 12.5%decrease in gross profit per other aftermarket contract and a 120-basis point decrease in the other aftermarket contract penetration rate.Wholesale Vehicles - EchoPark SegmentSee the discussion in Franchised Dealerships Segment Results of Operations for a discussion of the macro drivers of wholesale vehicle revenues.59SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following tables provide a reconciliation of EchoPark Segment same store basis and reported basis for wholesale vehicles:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$8,375 $7,770 $605 7.8 %Acquisitions, open points and dispositions12,067 1,713 10,354 NMTotal as reported$20,442 $9,483 $10,959 115.6 %Total wholesale vehicle gross profit (loss):Same store$(169)$(169)$— — %Acquisitions, open points and dispositions699 (67)766 NMTotal as reported$530 $(236)$766 324.6 %Total wholesale vehicle unit sales:Same store1,215 2,122 (907)(42.7)%Acquisitions, open points and dispositions2,337 380 1,957 NMTotal as reported3,552 2,502 1,050 42.0 %NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Total wholesale vehicle revenue:Same store$7,533 $9,789 $(2,256)(23.0)%Acquisitions, open points and dispositions1,950 902 1,048 NMTotal as reported$9,483 $10,691 $(1,208)(11.3)%Total wholesale vehicle gross profit (loss):Same store$(299)$(30)$(269)(896.7)%Acquisitions, open points and dispositions63 (174)237 NMTotal as reported$(236)$(204)$(32)(15.7)%Total wholesale vehicle unit sales:Same store1,943 1,773 170 9.6 %Acquisitions, open points and dispositions559 183 376 NMTotal as reported2,502 1,956 546 27.9 %NM = Not Meaningful60SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOur EchoPark Segment reported wholesale vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Reported wholesale vehicle:Revenue$20,442 $9,483 $10,959 115.6 %Gross profit (loss)$530 $(236)$766 324.6 %Unit sales3,552 2,502 1,050 42.0 %Revenue per unit$5,755 $3,790 $1,965 51.8 %Gross profit (loss) per unit$149 $(94)$243 258.5 %Gross profit (loss) as a % of revenue2.6 %(2.5)%510 bpsYear Ended December 31,Better / (Worse)20172016Change% 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 sales2,502 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)bpsOur EchoPark Segment same store wholesale vehicle results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$8,375 $7,770 $605 7.8 %Gross profit (loss)$(169)$(169)$— — %Unit sales1,215 2,122 (907)(42.7)%Revenue per unit$6,893 $3,662 $3,231 88.2 %Gross profit (loss) per unit$(139)$(80)$(59)(73.8)%Gross profit (loss) as a % of revenue(2.0)%(2.2)%20 bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit and per unit data)Same store wholesale vehicle:Revenue$7,533 $9,789 $(2,256)(23.0)%Gross profit (loss)$(299)$(30)$(269)(896.7)%Unit sales1,943 1,773 170 9.6 %Revenue per unit$3,877 $5,521 $(1,644)(29.8)%Gross profit (loss) per unit$(154)$(17)$(137)(805.9)%Gross profit (loss) as a % of revenue(4.0)%(0.3)%(370)bps61SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSEchoPark Segment Wholesale Vehicles - 2018 Compared to 2017Wholesale vehicle revenue increased, while wholesale vehicle unit sales volume decreased and wholesale vehicle gross loss was flat as a result of ashift in our inventory and pricing strategy at our EchoPark stores in 2018. Our new EchoPark strategy reduces the risk of aged inventory that must be sold atauction (typically at a higher gross loss per unit), but increases the volume of trade-ins that we obtain from customers and send directly to wholesaleauction (typically at a lower gross loss per unit). As a result, we experienced higher average revenue per wholesale vehicle but maintained the same level ofwholesale gross loss.EchoPark Segment Wholesale Vehicles - 2017 Compared to 2016Wholesale vehicle revenue decreased, while wholesale vehicle unit sales volume and wholesale vehicle gross loss increased due to higher gross lossper unit. The increases in wholesale vehicle unit sales volume and wholesale vehicle gross loss per unit were primarily driven by reductions of agedinventory units in order to rebalance inventory levels at the end of 2017.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)20182017Change% Change(In thousands, except unit data)Revenues:Franchised Dealerships Segment$9,251,453 $9,612,899 $(361,446)(3.8)%EchoPark Segment700,177 254,309 445,868 175.3 %Total revenues$9,951,630 $9,867,208 $84,422 0.9 %Segment income (loss) (1):Franchised Dealerships Segment (2)$181,730 $197,121 $(15,391)(7.8)%EchoPark Segment (3)(52,465)(21,951)(30,514)(139.0)%Total segment income (loss)129,265 175,170 (45,905)(26.2)%Interest expense, other, net(54,059)(52,524)(1,535)(2.9)%Other income (expense), net106 (14,522)14,628 100.7 %Income (loss) from continuing operations before taxes$75,312 $108,124 $(32,812)(30.3)%Retail new and used vehicle unit sales volume:Franchised Dealerships Segment232,885 248,534 (15,649)(6.3)%EchoPark Segment29,437 10,618 18,819 177.2 %Total retail new and used vehicle unit sales volume262,322 259,152 3,170 1.2 % (1) Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan.(2) For the year ended December 31, 2018, the above amount includes approximately $38.9 million of net gain on the disposal of franchised dealerships,offset partially by approximately $27.9 million of impairment expense, approximately $4.0 million of storm-related physical damage costs, approximately$1.7 million of legal costs, approximately $1.6 million of executive transition costs and approximately $1.4 million of lease exit charges. For the year endedDecember 31, 2017, the above amount includes approximately $14.6 million of net loss on the extinguishment of debt, approximately $8.9 million of storm-related physical damage and legal costs, approximately $7.5 million of impairment expense, approximately $0.7 million of double-carry interest andapproximately $0.3 million of lease exit charges, offset partially by approximately $10.0 million of net gain on the disposal of franchised dealerships.(3) For the year ended December 31, 2018, the above amount includes approximately $32.5 million of long-term compensation-related charges andapproximately $1.6 million of impairment expense. For the year ended December 31, 2017, the above amount includes approximately $1.9 million ofimpairment expense, approximately $1.3 million of long-term compensation62SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-related charges, approximately $0.6 million of lease exit charges, and approximately $0.2 million of storm-related physical damage and legal costs.Year Ended December 31,Better / (Worse)20172016Change% Change(In thousands, except unit data)Revenues:Franchised Dealerships Segment$9,612,899 $9,590,752 $22,147 0.2 %EchoPark Segment254,309 141,027 113,282 80.3 %Total consolidated revenues$9,867,208 $9,731,779 $135,429 1.4 %Segment income (loss) (1):Franchised Dealerships Segment (2)$197,121 $218,769 $(21,648)(9.9)%EchoPark Segment (3)(21,951)(13,576)(8,375)(61.7)%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 (14647)NM 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 Segment248,534 249,830 (1,296)(0.5)%EchoPark Segment10,618 5,347 5,271 98.6 %Total retail new and used vehicle unit sales volume259,152 255,177 3,975 1.6 %NM = Not Meaningful(1) Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan.(2) For the year ended December 31, 2017, the above amount includes approximately $14.6 million of net loss on the extinguishment of debt, approximately$8.9 million of storm-related physical damage and legal costs, approximately $7.5 million of impairment expense, approximately $0.7 million of double-carry interest and approximately $0.3 million of lease exit charges, offset partially by approximately $10.0 million of net gain on the disposal of franchiseddealerships. For the year ended December 31, 2016, the above amount includes approximately $11.7 million of storm-related physical damage and legalcosts, approximately $7.9 million of impairment expense and approximately $0.2 million of lease exit charges.(3) For the year ended December 31, 2017, the above amount includes approximately $1.9 million of impairment expense, approximately $1.3 million oflong-term compensation-related charges, approximately $0.6 million of lease exit charges and approximately $0.2 million of storm-related physical damageand legal costs.Fixed Operations - EchoPark SegmentParts, service and collision repair revenues consist of customer pay and internal, sublet and other transactions. Parts and service revenue is driven bythe mix of customer pay repairs, available service capacity, vehicle quality, customer loyalty and prepaid maintenance programs. Internal, sublet and otherprimarily relates to preparation and reconditioning work performed on vehicles in inventory to be subsequently sold to retail customers. When that work isperformed by one of our stores, the work is classified as internal. In the event the work is performed by a third party on our behalf, it is classified as sublet.63SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following tables provide a reconciliation of EchoPark Segment same store basis and reported basis for Fixed Operations:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Total Fixed Operations revenue:Same store$6,008 $10,250 $(4,242)(41.4)%Acquisitions, open points and dispositions10,320 3,958 6,362 NMTotal as reported$16,328 $14,208 $2,120 14.9 %Total Fixed Operations gross profit:Same store$203 $4,209 $(4,006)(95.2)%Acquisitions, open points and dispositions1,941 1,893 48 NMTotal as reported$2,144 $6,102 $(3,958)(64.9)%NM = Not MeaningfulYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Total Fixed Operations revenue:Same store$8,230 $7,358 $872 11.9 %Acquisitions, open points and dispositions5,978 2,173 3,805 NMTotal as reported$14,208 $9,531 $4,677 49.1 %Total Fixed Operations gross profit:Same store$3,458 $2,873 $585 20.4 %Acquisitions, open points and dispositions2,644 1,332 1,312 NMTotal as reported$6,102 $4,205 $1,897 45.1 %NM = Not MeaningfulOur EchoPark Segment reported Fixed Operations results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$1,010 $1,383 $(373)(27.0)%Internal, sublet and other15,318 12,825 2,493 19.4 %Total revenue$16,328 $14,208 $2,120 14.9 %Gross profitCustomer pay$257 $486 $(229)(47.1)%Internal, sublet and other1,887 5,616 (3,729)(66.4)%Total gross profit$2,144 $6,102 $(3,958)(64.9)%Gross profit as a % of revenueCustomer pay25.4 %35.1 %(970)bpsInternal, sublet and other12.3 %43.8 %(3,150)bpsTotal gross profit as a % of revenue13.1 %42.9 %(2,980)bps64SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Reported Fixed Operations:RevenueCustomer pay$1,383 $945 $438 46.3 %Internal, sublet and other12,825 8,586 4,239 49.4 %Total revenue$14,208 $9,531 $4,677 49.1 %Gross profitCustomer pay$486 $352 $134 38.1 %Internal, sublet and other5,616 3,853 1,763 45.8 %Total gross profit$6,102 $4,205 $1,897 45.1 %Gross profit as a % of revenueCustomer pay35.1 %37.2 %(210)bpsInternal, sublet and other43.8 %44.9 %(110)bpsTotal gross profit as a % of revenue42.9 %44.1 %(120)bpsOur EchoPark Segment same store Fixed Operations results are as follows:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$400 $745 $(345)(46.3)%Internal, sublet and other5,608 9,505 (3,897)(41.0)%Total revenue$6,008 $10,250 $(4,242)(41.4)%Gross profitCustomer pay$83 $264 $(181)(68.6)%Internal, sublet and other120 3,945 (3,825)(97.0)%Total gross profit$203 $4,209 (4,006)(95.2)%Gross profit as a % of revenueCustomer pay20.8 %35.4 %(1,460)bpsInternal, sublet and other2.1 %41.5 %(3,940)bpsTotal gross profit as a % of revenue3.4 %41.1 %(3,770)bps65SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Same store Fixed Operations:RevenueCustomer pay$695 $599 $96 16.0 %Internal, sublet and other7,535 6,759 776 11.5 %Total revenue$8,230 $7,358 $872 11.9 %Gross profitCustomer pay$247 $222 $25 11.3 %Internal, sublet and other3,211 2,651 560 21.1 %Total gross profit$3,458 $2,873 $585 20.4 %Gross profit as a % of revenueCustomer pay35.5 %37.1 %(160)bpsInternal, sublet and other42.6 %39.2 %340 bpsTotal gross profit as a % of revenue42.0 %39.0 %300 bpsEchoPark Segment Fixed Operations - 2018 Compared to 2017As a result of a shift in our strategy at our EchoPark stores in 2018, total Fixed Operations activity decreased compared to 2017. Our Fixed Operationsrevenue decreased approximately $4.2 million, or 41.4%, and our Fixed Operations gross profit decreased approximately $4.0 million, or 95.2%. Customerpay gross profit decreased approximately $0.2 million, or 68.6%, due to a shift in strategy away from customer pay Fixed Operations work. Internal, subletand other gross profit decreased approximately $3.8 million, or 97.0%, primarily due to lower levels of inventory reconditioning work based on a shift in ourinventory acquisition and pricing strategy toward newer, low-mileage vehicles that require less reconditioning prior to being listed for retail sale.EchoPark Segment Fixed Operations - 2017 Compared to 2016Our Fixed Operations revenue increased approximately $0.9 million, or 11.9%, and our Fixed Operations gross profit increased approximately $0.6million, or 20.4%. Customer pay gross profit increased approximately $0.1 million, or 11.3% and internal, sublet and other gross profit increasedapproximately $0.5 million, or 21.1%, on higher levels of used vehicle reconditioning, which supported higher retail unit sales.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 the number of dealerships in operation. Rent expensetypically varies with the number of store locations that are subject to third-party lease agreements, investments made for facility improvements, interest ratesand changes in consumer price indices. Other expense includes various fixed and variable expenses, including certain customer-related costs, insurance,training, legal and IT expenses, which may not change in proportion to gross profit levels.66SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following tables set forth information related to our consolidated reported SG&A expenses:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)SG&A expenses:Compensation$725,022 $692,935 $(32,087)(4.6)%Advertising63,134 61,563 (1,571)(2.6)%Rent64,204 73,022 8,818 12.1 %Other292,965 320,253 27,288 8.5 %Total SG&A expenses$1,145,325 $1,147,773 $2,448 0.2 %SG&A expenses as a % of gross profit:Compensation50.1 %47.5 %(260)bpsAdvertising4.4 %4.2 %(20)bpsRent4.4 %5.0 %60 bpsOther20.3 %22.0 %170 bpsTotal SG&A expenses as a % of gross profit79.2 %78.7 %(50)bpsYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)SG&A expenses:Compensation$692,935 $674,617 $(18,318)(2.7)%Advertising61,563 61,674 111 0.2 %Rent73,022 73,903 881 1.2 %Other320,253 300,662 (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:Compensation47.5 %47.2 %(30)bpsAdvertising4.2 %4.3 %10 bpsRent5.0 %5.2 %20 bpsOther22.0 %21.0 %(100)bpsTotal SG&A expenses as a % of gross profit78.7 %77.7 %(100)bps67SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS2018 Compared to 2017Overall SG&A expenses decreased in dollar amount and increased as a percentage of gross profit, primarily due to a net gain on the disposal offranchised dealerships and lower rent expenses, IT expense and storm-related physical damage costs, offset partially by higher compensation and employeebenefit-related expenses. Compensation costs increased both in dollar amount and as a percentage of gross profit, primarily due to long-term compensationexpenses for a 2017 acquisition and a high level of employee benefit-related expense. Advertising expense increased both in dollar amount and as apercentage of gross profit due primarily to marketing efforts related to establishing new EchoPark locations. Rent expense decreased both in dollar amountand as a percentage of gross profit, primarily due to our strategy to own more of our dealership properties, offset partially by lease exit charges related to thedisposal of franchised dealerships. Other SG&A expenses decreased both in dollar amount and as a percentage of gross profit, primarily due to a net gain onthe disposal of franchised dealerships and lower storm-related physical damage costs, IT expenses and customer-related costs. On an adjusted basis, SG&Aexpenses as a percentage of gross profit were 79.0% in 2018, up 40 basis points from the prior year. For 2018, adjusted SG&A expenses excludeapproximately $32.5 million of long-term compensation expense, approximately $4.0 million of expense due to storm-related physical damage,approximately $1.7 million of legal and other charges, approximately $1.6 million of executive transition costs and approximately $1.4 million of lease exitcharges, offset partially by a net gain of approximately $38.9 million on the disposal of franchised dealerships. 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.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 employee benefit-related expenses related to new manufacturer-awarded open points and EchoPark storeopenings. Advertising expense was relatively flat both in dollar amount and as a percentage of gross profit as we focused on targeted advertising where wewould expect the best returns for our business. Rent expense decreased both in dollar amount and as a percentage of gross profit, primarily due to our strategyto own more of our dealership properties, offset by lease exit charges related to the relocation of a franchised dealership and the closure of two pre-ownedvehicle stores acquired in 2016. Other SG&A expenses increased 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 thedisposal 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 prioryear. For 2017, adjusted SG&A expenses exclude approximately $8.6 million of expense due to storm-related physical damage, approximately $2.3 millionof legal and other charges and approximately $1.0 million of lease exit charges, offset partially by a net gain of approximately $10.0 million on the disposalof franchised dealerships. For 2016, adjusted SG&A expenses exclude a manufacturer legal settlement benefit of approximately $14.8 million, offset partiallyby charges of approximately $3.0 million related to hail damage and approximately $0.3 million of lease exit and other charges.Impairment Charges – ConsolidatedImpairment charges were approximately $29.5 million, $9.4 million and $8.1 million in 2018, 2017 and 2016, respectively. Impairment charges for2018 include approximately $27.4 million of property and equipment charges due to the abandonment of certain construction projects andinternally developed software applications, as well as our estimate that certain dealerships would not be able to recover recorded balances through operatingactivities, in addition to approximately $2.1 million of franchise asset impairment charges. Impairment charges for 2017 include approximately $4.9 millionof property and equipment charges due to the abandonment of construction and software development projects, as well as our estimate that certaindealerships would not be able to recover recorded balances through operating activities, in addition to approximately $3.6 million of franchise assetimpairment charges and approximately $0.9 million of goodwill impairment charges related to the write-off of goodwill due to the closure of two pre-ownedvehicle stores that were acquired in 2016. Impairment charges for 2016 include approximately $8.1 million of property and equipment charges due to theabandonment of construction and software development projects, as well as our estimate that certain dealerships would not be able to recover recordedbalances through operating activities.68SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSDepreciation and Amortization – ConsolidatedDepreciation expense increased approximately $4.7 million, or 5.3%, in 2018 and approximately $11.5 million, or 14.8%, in 2017, compared to theprior years. The increases were primarily related to net additions to gross property and equipment (excluding land and construction in progress) ofapproximately $67.5 million and $157.1 million in 2018 and 2017, respectively.Interest Expense, Floor Plan - Consolidated2018 Compared to 2017Interest expense, floor plan for new vehicles increased approximately $10.6 million, or 32.9%. The average new vehicle floor plan notes payablebalance increased approximately $21.5 million, resulting in an increase in new vehicle floor plan interest expense of approximately $0.5 million. Theaverage new vehicle floor plan effective interest rate was 3.10%, up from 2.37% in the prior year, which resulted in an increase in interest expense ofapproximately $10.1 million.Interest expense, floor plan for used vehicles increased approximately $1.4 million, or 33.5%. The average used vehicle floor plan notes payablebalance increased approximately $27.1 million, resulting in an increase in used vehicle floor plan interest expense of approximately $0.7 million. Theaverage used vehicle floor plan effective interest rate was 2.98%, up from 2.61% in the prior year, which resulted in an increase in interest expense ofapproximately $0.7 million.2017 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 effective interest rate was 2.37%, up from 1.85% in the prior year, which resulted in an increase in interest expense of approximately$7.1 million.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 effective interest rate was 2.61%, up from 1.78% in the prior year, which resulted in an increase in interest expense ofapproximately $1.3 million.Interest Expense, Other, Net - ConsolidatedInterest expense, other, net is summarized in the tables below:Year Ended December 31,Better / (Worse)20182017Change% Change(In thousands)Stated/coupon interest$51,018 $49,092 $(1,926)(3.9)%Discount/premium amortization— 28 28 100.0 %Deferred loan cost amortization2,418 2,383 (35)(1.5)%Interest rate hedge expense (benefit)(462)2,736 3,198 116.9 %Capitalized interest(1,515)(2,172)(657)(30.2)%Other interest2,600 457 (2,143)(468.9)%Total interest expense, other, net$54,059 $52,524 $(1,535)(2.9)%69SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSYear Ended December 31,Better / (Worse)20172016Change% Change(In thousands)Stated/coupon interest$49,092 $44,689 $(4,403)(9.9)%Discount/premium amortization28 163 135 82.8 %Deferred loan cost amortization2,383 2,641 258 9.8 %Interest rate hedge expense (benefit)2,736 4,934 2,198 44.5 %Capitalized interest(2,172)(2,750)(578)(21.0)%Other interest457 429 (28)(6.5)%Total interest expense, other, net$52,524 $50,106 $(2,418)(4.8)%2018 Compared to 2017Interest expense, other, net increased approximately $1.5 million, primarily due to higher other interest related to capital lease obligations and higherstated/coupon interest related to additional mortgage notes payable outstanding, offset partially by a decrease in net interest rate hedge payments due to ashift from interest rate swap to interest rate cap instruments beginning in the second half of 2017. 2017 Compared to 2016 Interest 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 capitalized interest associated with construction andsoftware development projects, offset partially by a $2.2 million decrease in interest rate hedge expense (benefit).Provision for Income Taxes - ConsolidatedThe overall effective tax rate from continuing operations was 30.4%, 12.9% and 39.1% for 2018, 2017 and 2016, respectively. Income tax expensefor 2018 includes the effect of a $0.7 million discrete charge for non-deductible executive compensation related to executive transition costs and a $0.6million discrete charge for non-deductible book goodwill related to dealership dispositions. Our effective tax rate varies from year to year based on thedistribution of taxable income between states in which we operate and other tax adjustments. We expect the effective tax rate in future periods to fall within arange of 26.0% to 29.0% before the impact, if any, of changes in valuation allowances related to deferred income tax assets, non-deductible compensation orunusual discrete tax adjustments. The 30.4% effective tax rate in 2018 is higher than the 12.9% effective tax rate in 2017 due to the 2017 effective tax ratecontaining the effect of the remeasurement of net deferred tax assets and liabilities in 2017 as a result of the change in the U.S. statutory federal income taxrate from 35.0% to 21.0% on 2017 balances offset by the effect of the lower federal rate of 21.0% on 2018 balances. This remeasurement also affects thecomparison of the 2017 effective tax rate of 12.9% compared to the 2016 effective rate of 39.1%.Discontinued OperationsThe pre-tax income (losses) from discontinued operations and the sale of dealerships were as follows:Year Ended December 31,201820172016(In thousands)Income (loss) from operations$(610)$(735)$(1,101)Lease exit accrual adjustments and charges(407)(1,207)(1,020)Pre-tax income (loss)$(1,017)$(1,942)$(2,121)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 Accounting Standards Update (“ASU”) ASU 2014-08. The results of operations for those dealerships and franchises that were classified asdiscontinued operations as of March 31, 2014 will continue to be reported within discontinued operations in the future. See the discussion of our adoption ofASU 2014-08 in Note 1, “Description of Business and Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.70SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSUse of Estimates and Critical Accounting PoliciesThe preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenuesand 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.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, 2018 by approximately $3.3 million. Our estimate of chargebacks (approximately $25.8 million as of December 31, 2018) 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 Accounting Standards Codification (“ASC”), we test goodwill 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, we have two reporting units, which consist of (1) our traditional franchised dealerships and (2) ourEchoPark stores. The carrying value of our goodwill totaled approximately $509.6 million at December 31, 2018, of which $449.6 million was related to ourfranchised dealerships reporting unit and $60.0 million was related to our EchoPark stores reporting unit. In evaluating goodwill for impairment, if the fairvalue of a reporting unit is less than its carrying value, the difference would represent the amount of required goodwill impairment. For each reporting unit,we utilized the Discounted Cash Flows (“DCF”) method to estimate its enterprise value as of October 1, 2018. The significant assumptions in our DCF modelinclude projected earnings, weighted average cost of capital (and estimates in the weighted average cost of capital inputs) and residual growth rates. To theextent the reporting unit’s earnings decline significantly or there are changes in one or more of these assumptions that would result in lower valuation results,it could cause the carrying value of the reporting unit to exceed its fair value and thus require impairment of goodwill.Based on the results of our goodwill impairment test as of October 1, 2018, each of our reporting units' fair value exceeded its carrying value and, assuch, no impairment was required. Our DCF model is dependent on the assumptions used and is sensitive to changes in those assumptions. In order todetermine the effects of changes in our assumptions on our DCF model, and consequently our goodwill valuation, we ran multiple scenarios adjusting ourassumed earnings before interest and taxes (“EBIT”) growth factors and weighted average cost of capital assumptions. Although we assumed a 1.0% residualEBIT growth factor in our model, in the event the residual EBIT growth rate decreased by 100 basis points, assuming all other factors remain the same, thecalculated fair value estimate as of October 1, 2018 would change by approximately $130.0 million and $8.1 million for our franchised dealerships andEchoPark reporting units, respectively. In the event the weighted average cost of71SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONScapital increased by 100 basis points, assuming all other factors remain the same, the calculated fair value estimate as of October 1, 2018 would change byapproximately $184.9 million and $13.2 million for our franchised dealerships and EchoPark reporting units, respectively. In the event the residual EBITgrowth rate decreased by 100 bps and the weighted average cost of capital increased by 100 basis points, assuming all other factors remain the same, thecalculated fair value estimate as of October 1, 2018 would change by approximately $285.0 million and $20.0 million for our franchised dealerships andEchoPark reporting units, respectively. Based on our DCF model, none of the realistic scenarios described above, if realized, would have resulted in loweringthe fair value of the reporting unit below the reporting unit’s carrying value.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 DCF model. The DCF model used contains inherentuncertainties, including significant estimates and assumptions related to growth rates, projected earnings and cost of capital. We are subject to financial riskto the extent that our franchise assets become impaired due to deterioration of the underlying businesses. The risk of a franchise asset impairment loss mayincrease to the extent the underlying businesses’ earnings or projected earnings decline. As a result of our impairment testing as of October 1, 2018, werecorded approximately $2.1 million in franchise asset impairment charges in the accompanying consolidated statements of income. The carrying value ofour franchise assets totaled approximately $65.7 million at December 31, 2018, and is included in other intangible assets, net in the accompanyingconsolidated 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 31,2018, we estimated the ultimate liability under these programs to be between $21.3 million and $23.5 million, and had approximately $22.9 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 subject to 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, 2018, we had approximately $4.6 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, 2017$6,478 Lease exit expense (1)1,709 Payments (2)(2,973)Lease buyout/other (3)(580)Balance at December 31, 2018$4,634 (1) Expense of approximately $0.1 million is recorded in interest expense, other, net and expense of approximately $1.2 million is recorded in selling,general and administrative expenses in the accompanying consolidated statements of income. In addition,72SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSexpense of approximately $0.4 million is recorded 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 of income,with approximately $1.0 million in continuing operations and approximately $2.0 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 various legal and administrative proceedings arising out of the conduct of our business,including regulatory investigations and private civil actions brought by plaintiffs purporting to represent a potential class or for which a class has 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. 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.As of December 31, 2018, we had accrued approximately $2.4 million in legal reserves. Although we vigorously defend ourselves in all legalproceedings, the outcomes of pending and future proceedings arising out of the conduct of our business 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, 2018, there were approximately $5.5 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 $5.0 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, 2018 and 2017, we had recorded a valuation allowance amount of approximately $8.1 million and $8.0 million, respectively,related to certain state net operating loss carryforward deferred tax assets as we determined that we would not be able to generate sufficient state taxableincome in the related entities to realize the accumulated net operating loss carryforward balances.73SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSWe 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 ASU 2014-09 as well as several subsequent amendments to amend theaccounting guidance on revenue recognition. The amendments to the revenue recognition accounting guidance are included in ASC 606, “Revenue fromContracts with Customers,” and are intended to provide a more robust framework for addressing revenue issues, improve comparability of revenuerecognition practices and improve disclosure requirements. The amendments to this guidance must be applied using either of the following transitionmethods: (1) a full retrospective approach reflecting the application of the amendments in each prior reporting period with the option to elect certainpractical expedients; or (2) a modified retrospective approach with the cumulative effect of initially applying the amendments recognized at the date ofadoption (which requires additional footnote disclosures). These amendments were effective for reporting periods beginning after December 15, 2017. OnJanuary 1, 2018, we adopted ASC 606 (the “new revenue standard”) using the modified retrospective transition approach applied to contracts not completedas of the date of adoption. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance ofretained earnings. The comparative financial information has not been restated and continues to be reported under the accounting standards in effect for thatperiod.Under the new revenue standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflectsthe consideration that the entity expects to receive in exchange for those goods or services. The principles apply a five-step model that includes: (1)identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4)allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied.The new revenue standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers. We do not include the cost of obtaining contracts within the related revenue streams. We have elected the practical expedient to expense the coststo obtain a contract when incurred.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 revenue standard as compared with prior U.S. GAAP. Management identifiedits material revenue streams to be (1) the sale of new vehicles; (2) the sale of used vehicles to retail customers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service and other insurance contracts; and (5) the performance of vehicle maintenanceand repair services and the sale of related parts and accessories. As a result of this evaluation during the implementation process, management expects theamounts and timing of revenue recognition to generally remain the same, with the exception of the timing of revenue recognition related to: (1) service andcollision repair orders that are incomplete as of a reporting date (“work in process”) and (2) certain retrospective finance and insurance revenue earned inperiods subsequent to the completion of the initial performance obligation (“F&I retro revenues”), both of which are subject to accelerated recognition underthe new revenue standard. Work in process revenues are recognized over time based on the completed work to date and F&I retro revenues are recognizedwhen the product contract has been executed with the end customer and are estimated each reporting period based on the expected value method usinghistorical and projected data. F&I retro revenues, which represent variable consideration, subject to a constraint, are to be included in the transaction priceand recognized when or as the performance obligation is satisfied. F&I retro revenues can vary based on a variety of factors, including number of contractsand history of cancellations and claims. Accordingly, we utilize this historical and projected data to constrain the consideration to the extent that it isprobable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty associated with the variable consideration issubsequently resolved.Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance hasoccurred or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components aspayments are typically received within a short period of time following completion of the performance obligation(s).During the year ended December 31, 2018, we implemented new financial reporting controls during the process of adopting the new revenue standard.Those efforts did not result in any material changes to our internal control process.74SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSIn February 2016, the FASB established ASC 842, “Leases,” by issuing ASU 2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10and ASU 2018-11) in order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on thebalance sheet and disclosing key information about leasing arrangements. The lease standard is effective for us on January 1, 2019. Prior to adoption of thelease standard, only leases classified as capital leases under ASC 840 were recorded in the consolidated balance sheets. Under ASC 842, an entity will classifyleases as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset (“ROU asset”) and lease liability are required to berecognized in the consolidated balance sheets for both finance and operating leases with a term longer than 12 months. The lease standard requires amodified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or(2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. Weadopted the lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosuresrequired under the new lease standard will not be provided for dates and periods prior to January 1, 2019. The lease standard provides for a number ofoptional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, leaseclassification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accountingpolicy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the use of hindsight inestimating lease term or assessing impairment of ROU assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We expect toelect all of the practical expedients permitted under the transition guidance within the new standard. The new lease standard also provides practicalexpedients for ongoing accounting. We expect to elect the short-term lease recognition exemption for our real estate and equipment leases, which means thatfor those leases that qualify, we will not recognize ROU assets or lease liabilities.As part of the lease standard implementation process, we assessed our existing real estate and equipment lease agreements, identified certain leasecomponents embedded within existing service contracts, evaluated transition guidance and practical expedient elections, implemented lease accountingsoftware and designed internal controls over lease accounting under the new standard. We are still evaluating the possible effects of impairment of certainROU assets as of the effective date. We estimate that adoption of the new lease standard will result in recording additional operating lease liabilities andcorresponding ROU assets ranging from $350.0 million to $400.0 million as of January 1, 2019. We do not expect the adoption of the new lease standard tohave a material effect on future results of operations or cash flows.In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC Topic 815,Derivatives and Hedging. This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognitionand presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements tosimplify the application of current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.In February 2018, the FASB issued ASU 2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of2017, from accumulated other comprehensive income to retained earnings. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-basedpayment transactions for acquiring goods and services from non-employees. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.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 (as defined below) and other debt obligations and lease arrangements. However, our liquidity could benegatively affected if we fail to comply with the financial covenants in our existing debt or lease arrangements. After giving effect to the applicablerestrictions on the payment of dividends under our debt agreements, as of December 31, 2018, we75SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONShad at least $171.1 million of net income and retained earnings free of such restrictions. Cash flows provided by our dealerships are derived from varioussources. The primary sources include individual consumers, automobile manufacturers, automobile manufacturers’ captive finance subsidiaries and financecompanies. Disruptions in these cash flows could have a material adverse impact on our operations and overall liquidity.Because the majority of our consolidated assets are held by our dealership subsidiaries, the majority of our cash flows from operations are generated 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, 2018 and 2017:December 31, 2018December 31, 2017(In thousands)Cash and cash equivalents$5,854 $6,352 Availability under the 2016 Revolving Credit Facility223,922 155,304 Availability under our used vehicle floor plan facilities1,979 7,104 Floor plan deposit balance— 3,000 Total available liquidity resources$231,755 $171,760 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 prepaymentof 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, althoughwe have the right and ability to do so. There was no deposit balance as of December 31, 2018. The deposit balance of $3.0 million as of December 31, 2017 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 FacilitiesOn 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, 2018, the 2016 Revolving Borrowing Base was approximately $238.8 million. As of December 31, 2018, we had no outstandingborrowings and approximately $14.8 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in total borrowingavailability of approximately $223.9 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.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.76SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSWe 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.5.0% NotesOn May 9, 2013, we 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. We 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. Balances outstanding under the 5.0% Notes are guaranteed by all of our domestic operating subsidiaries. These guarantees are full andunconditional and joint and several. The parent company has no independent assets or operations. The non-domestic operating subsidiary that is not aguarantor is considered to be minor. Interest on the 5.0% Notes is payable semi-annually in arrears on May 15 and November 15 of each year. During 2016,we repurchased approximately $10.7 million of our outstanding 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interest relatedthereto.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.RedemptionPriceBeginning on May 15, 2018102.500 %Beginning on May 15, 2019101.667 %Beginning on May 15, 2020100.833 %Beginning on May 15, 2021 and thereafter100.000 %The indenture governing the 5.0% Notes provides that holders of the 5.0% Notes may require us to repurchase the 5.0% Notes at a purchase priceequal to 101.0% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if any, to the date of purchase if we undergo a Change of Control (asdefined 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. 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 5.0% Notes. We were in compliance with all restrictive covenants in the indenture governing the 5.0% Notes as of December 31, 2018.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.Balances under Sonic’s 5.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional andjoint and several. The parent company has no independent assets or operations. The non-domestic subsidiary that is not a guarantor is considered to be minor.6.125% NotesOn March 10, 2017, we issued $250.0 million in aggregate principal amount of unsecured senior subordinated 6.125% Notes which mature on March15, 2027. The 6.125% Notes were issued at a price of 100.0% of the principal amount thereof.77SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSWe used the net proceeds from the issuance of the 6.125% Notes to repurchase all of the outstanding 7.0% Senior Subordinated Notes due 2022 (the “7.0%Notes”) on March 27, 2017. Remaining proceeds from the issuance of the 6.125% Notes were used for general corporate purposes. Balances outstandingunder the 6.125% Notes are guaranteed by all of our domestic operating subsidiaries. These guarantees are full and unconditional and joint and several. Theparent company has no independent assets or operations. The non-domestic operating subsidiary that is not a guarantor is considered to be minor. Interest onthe 6.125% Notes is payable semi-annually in arrears on March 15 and September 15 of each year. We may redeem the 6.125% Notes, in whole or in part, atany time on or after March 15, 2022 at the following redemption prices, which are expressed as percentages of the principal amount:RedemptionPriceBeginning on March 15, 2022103.063 %Beginning on March 15, 2023102.042 %Beginning on March 15, 2024101.021 %Beginning on March 15, 2025 and thereafter100.000 %Before March 15, 2022, we may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the principal amount of the 6.125%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 theredemption date. In addition, on or before March 15, 2020, we may redeem up to 35% of the aggregate principal amount of the 6.125% Notes at a redemptionprice 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 with proceeds fromcertain equity offerings. The indenture governing the 6.125% Notes also provides that holders of the 6.125% Notes may require us to repurchase 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 if we undergoa 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, 2018.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.Balances under Sonic’s 6.125% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditionaland joint and several. The parent company has no independent assets or operations. The non-domestic subsidiary that is not a guarantor is considered to beminor.Mortgage NotesDuring 2018, we obtained approximately $21.1 million in mortgage financing related to three of our operating locations. As of December 31, 2018,the weighted average interest rate was 4.70% and the total outstanding mortgage principal balance was approximately $396.2 million, related toapproximately 50% of our operating locations. These mortgage notes require monthly payments of principal and interest through their respective maturities,are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2019 and 2033.78SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOperating LeasesThe majority of our dealership properties are subject to long-term operating lease arrangements. These facility lease arrangements normally have 15- to20-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. Manyof the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. Approximately 10%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. In 2019, the majority of these operating leases will be recorded on the balance sheet inaccordance with ASC 842.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 3.09%, 2.40% and 1.84% for 2018,2017 and 2016, 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 $41.7 million, $44.8 million and $45.3 million inmanufacturer assistance in 2018, 2017 and 2016, respectively, and recognized in cost of sales approximately $42.2 million, $45.3 million and $45.0 millionin manufacturer assistance in 2018, 2017 and 2016, 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, our floor plan agreements withvarious manufacturer-affiliated finance companies and other lending institutions (the “Silo Floor Plan Facilities”), operating lease agreements, mortgagenotes, the 5.0% Notes and the 6.125% Notes (collectively, our “Significant Debt Agreements”) could result in a default and an acceleration of our repaymentobligation under the 2016 Credit Facilities. A default under the 2016 Credit Facilities would constitute a default under the Silo Floor Plan Facilities andcould entitle these lenders to accelerate our repayment obligations under one or more of the floor plan facilities. Certain defaults under the 2016 CreditFacilities and one or more Silo Floor Plan Facilities or certain other debt obligations would not result in a default under the 5.0% Notes or the 6.125% Notesunless our repayment obligations under the 2016 Credit Facilities and/or one or more of the Silo Floor Plan Facilities or such other debt obligations wereaccelerated. An acceleration of our repayment obligation under any of the Significant Debt Agreements could result in an acceleration of our repaymentobligations under our other Significant Debt Agreements. The failure to repay principal amounts of the Significant Debt Agreements when due would createcross-default situations related to other indebtedness. The 2016 Credit Facilities include the following financial covenants:CovenantMinimumConsolidatedLiquidityRatioMinimumConsolidatedFixed ChargeCoverageRatioMaximumConsolidatedTotal LeaseAdjusted LeverageRatioRequired ratio1.05 1.20 5.75 December 31, 2018 actual1.10 1.43 5.25 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, 2018, the ratio was3.36 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, 2018. After giving effect to the applicable restrictions on the payment of dividends and certain other transactions under our debt agreements, asof December 31, 2018, we had at least $171.1 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.79SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSAcquisitions and DispositionsDuring 2018, we did not acquire any businesses. We disposed of seven franchised dealerships in 2018, which generated net cash from dispositions ofapproximately $128.7 million. In addition to these dispositions, we terminated one luxury franchised dealership and ceased operation at four stores in ourEchoPark Segment in 2018. See Note 2, “Business Acquisitions and Dispositions,” to the accompanying consolidated financial statements for furtherdiscussion.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, EchoPark stores and collision repaircenters, building improvements and equipment purchased for use in our franchised dealerships and EchoPark stores. We selectively construct or improve newfranchised dealership facilities to maintain compliance with manufacturers’ image requirements. We typically finance these projects through new mortgagesor, alternatively, through our credit facilities. We also fund these improvements through cash flows from operations.Capital expenditures for 2018 were approximately $163.6 million. Of this amount, approximately $104.9 million was related to facility constructionprojects, $42.7 million was related to real estate acquisitions and $16.0 million was for other fixed assets utilized in our dealership operations. Of the capitalexpenditures in 2018, approximately $21.1 million was funded through mortgage financing and approximately $142.5 million was funded through cash fromoperations and use of our credit facilities. As of December 31, 2018, commitments for facilities construction projects totaled approximately $19.2 million. Weexpect investments related to capital expenditures to be partly dependent upon the availability of mortgage financing to fund significant capital 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 2018, we repurchased approximately 1.2 million shares of our Class A Common Stock for approximately $24.1 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, 2018,our total remaining repurchase authorization was approximately $83.6 million. Under the 2016 Credit Facilities, share repurchases are permitted to the extentthat no event of default exists and we do not exceed the restrictions set forth in the agreements. After giving effect to the applicable restrictions on sharerepurchases and certain other transactions under our debt agreements, as of December 31, 2018, we had at least $171.1 million of net income and retainedearnings free of such restrictions.Our share repurchase activity is subject to the business judgment of our Board of Directors and management, taking into consideration our 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 $0.24 pershare during 2018. Subsequent to December 31, 2018, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class BCommon Stock of $0.10 per share for stockholders of record on March 15, 2019 to be paid on April 15, 2019. 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, 2018, we had at least $171.1 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 any80SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONStime in the future. See Note 6, “Long-Term Debt,” to the accompanying consolidated financial statements for a description of restrictions on the payment ofdividends.Repurchases of DebtWe may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in openmarket purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, ourliquidity requirements, contractual restrictions and other factors. The amounts involved may be materialCash FlowsCash Flows from Operating Activities - Net cash provided by operating activities was approximately $143.7 million, $162.9 million and $216.4million for 2018, 2017 and 2016, respectively. The net cash provided by operations for 2018 consisted primarily of net income (less non-cash items), anincrease in notes payable - floor plan trade and a decrease in receivables, offset partially by an increase in inventories. The net cash provided by operationsfor 2017 consisted primarily of net income (less non-cash items) and a decrease in inventories, offset partially by an increase in receivables and a decrease innotes payable - floor plan – trade. The net cash provided by operations for 2016 consisted primarily of net income (less non-cash items) and a decrease ininventories and other assets, offset partially by a decrease in notes payable - floor plan - trade.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 provided by combined trade and non-trade floor plan financing was approximately $20.7 million and $7.1 million for 2018 and 2016,respectively. Net cash used in combined trade and non-trade floor plan financing was approximately $12.6 million for 2017. Accordingly, if all changes infloor plan notes payable were classified as an operating activity, the result would have been net cash provided by operating activities of approximately$147.5 million, $196.6 million and $266.4 million for 2018, 2017 and 2016, respectively.Cash Flows from Investing Activities – Net cash used in investing activities during 2018, 2017 and 2016 was approximately $15.3 million,$272.1 million and $220.8 million, respectively. The use of cash during 2018 was comprised primarily of purchases of land, property and equipment, offsetpartially by proceeds from the sale of seven franchised dealerships. The use of cash during 2017 was comprised primarily of purchases of land, property andequipment and the acquisition of one pre-owned vehicle store, offset partially by proceeds from the sale of three franchised dealerships. The use of cashduring 2016 was primarily comprised of purchases of land, property and equipment and the acquisition of three pre-owned vehicle stores.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 EchoPark stores. During 2018, 2017 and 2016, we generated net proceeds from mortgage financing in the amount ofapproximately $21.1 million, $52.5 million and $103.4 million, respectively, to purchase certain existing dealership facilities and to fund certain capitalexpenditures.Cash Flows from Financing Activities – Net cash used in financing activities was approximately $128.8 million for 2018. Net cash provided byfinancing activities was approximately $112.5 million and $3.9 million for 2017 and 2016, respectively. For 2018, cash used in financing activities wascomprised primarily of net repayments on revolving credit facilities, schedule principal payments and repayments of long-term debt and repurchase oftreasury stock, offset partially by proceeds from mortgage notes . For 2017, cash provided by financing activities was comprised primarily of proceeds fromthe issuance of the 6.125% Notes, net borrowings on notes payable - floor plan - non-trade and proceeds from mortgage notes, offset partially by theextinguishment of the 7.0% Notes, repurchases of treasury stock and scheduled principal payments and81SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSrepayments of long-term debt. For 2016, cash provided by financing activities was comprised primarily of net borrowings on notes payable – floor plan –non-trade and proceeds from mortgage notes, offset partially by repurchases of treasury stock and scheduled principal payments and repayments of long-termdebt.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 2018, 2017 and 2016 were not material to total cash flows.Future Liquidity OutlookOur future contractual obligations are as follows:20192020202120222023ThereafterTotal(In thousands)Floor plan facilities$1,534,040 $— $— $— $— $— $1,534,040 Long-term debt (1)26,304 59,756 53,385 43,187 351,314 422,071 956,017 Letters of credit14,844 — — — — — 14,844 Estimated interest payments on floorplan facilities (2)8,738 — — — — — 8,738 Estimated interest payments on long-term debt (3)50,701 48,839 47,155 45,348 33,669 82,617 308,329 Operating leases (net of subleaserentals)89,162 73,188 58,858 44,526 41,095 175,265 482,094 Construction contracts19,191 — — — — — 19,191 Other purchase obligations (4)22,816 10,069 9,471 — — — 42,356 Liability for uncertain tax positions(5)500 — — — — 4,995 5,495 Total$1,766,296 $191,852 $168,869 $133,061 $426,078 $684,948 $3,371,104 (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. Estimated interestpayments were calculated using the December 31, 2018 floor plan facilities balance, the weighted average interest rate for the three months ended December31, 2018 of 3.42% and the assumption that floor plan balances at December 31, 2018 would be relieved within 60 days in connection with the sale of theassociated vehicle inventory.(3) Estimated interest payments include receipts related to interest rate caps.(4) Other purchase obligations include contracts for real estate purchases, office supplies, utilities, acquisition related obligations and various other items orother services.(5) Amount represents recorded liability, including interest and penalties, related to “Accounting for Uncertain Income Tax Positions” in the ASC. See Note1, “Description of Business and Summary of Significant Accounting Policies,” and Note 7, “Income Taxes,” to the accompanying consolidated financialstatements.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.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 more stable throughout the year.82SONIC AUTOMOTIVE, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOff-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 leases, we may be required to record lease exit accruals. As of December 31,2018, our future gross minimum lease payments related to properties subleased to buyers of sold dealerships totaled approximately $74.2 million. Futuresublease payments expected to be received related to these lease payments were approximately $46.8 million at December 31, 2018.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 $13.2 million at December 31, 2018. 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, 2018. We also guarantee the floor plan commitments of our 50%-owned joint venture, the amount of whichwas approximately $4.3 million at December 31, 2018. 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.83SONIC AUTOMOTIVE, INC.Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Interest Rate RiskOur variable rate floor plan facilities, the 2016 Revolving Credit Facility borrowings and our 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 outstanding cash flowhedge instruments was approximately $0.9 billion at December 31, 2018 and approximately $1.1 billion at December 31, 2017. A change of 100 basis pointsin the underlying interest rate would have caused a change in interest expense of approximately $11.5 million in 2018 and approximately $10.4 million in2017. Of the total change in interest expense, approximately $9.1 million and $8.1 million in 2018 and 2017, respectively, would have resulted from ourfloor plan facilities.In addition to our variable rate debt, as of December 31, 2018 and 2017, 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 expensein 2018 and 2017 due to the leases containing LIBOR floors which were above the LIBOR rate during 2018 and 2017.Prior to March 9, 2018, we had outstanding interest rate cash flow swap agreements to effectively convert a portion of our LIBOR-based variable ratedebt to a fixed rate (these interest rate cash flow swap agreements were terminated on March 9, 2018 with a net $4.8 million payment to us from thecounterparties). As of both December 31, 2018 and 2017, we had interest rate cap agreements to limit our exposure to increases in LIBOR rates above certainlevels. Under the terms of the cash flow swap and interest rate cap agreements, interest rates reset monthly. The fair value of the interest rate cap positions atDecember 31, 2018 was a net asset of approximately $4.8 million, with approximately $3.0 million included in other assets and approximately $1.8 millionincluded in other current assets in the accompanying consolidated balance sheets. The fair value of the interest rate swap and interest rate cap positions atDecember 31, 2017 was a net asset of approximately $4.7 million, with approximately $5.1 million included in other assets and approximately $0.9 millionincluded in other current assets in the accompanying consolidated balance sheets, offset partially by approximately $1.0 million included in other accruedliabilities and approximately $0.3 million included in other long-term liabilities in the accompanying consolidated balance sheets. Under the terms of theseagreements, we will receive and pay interest based on the following:NotionalAmount Pay Rate (1) Receive Rate (1) (2) Start Date Maturing Date (In millions) $375.0 2.000% one-month LIBORJuly 1, 2018June 30, 2019$375.0 3.000% one-month LIBORJuly 1, 2018June 30, 2019$312.5 2.000% one-month LIBORJuly 1, 2019June 30, 2020$250.0 3.000% one-month LIBORJuly 1, 2019June 30, 2020$225.0 3.000% one-month LIBORJuly 1, 2020June 30, 2021$150.0 2.000% one-month LIBORJuly 1, 2020July 1, 2021$250.0 3.000% one-month LIBORJuly 1, 2021July 1, 2022(1) 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 us from thecounterparty based on the spread between the receive rate and the pay rate will be recognized as a reduction of interest expense, other, net in theaccompanying consolidated statements of income.(2) The one-month LIBOR rate was approximately 2.503% at December 31, 2018.During 2018, we entered into four new interest rate cap agreements. These interest rate caps have been designated and qualify as cash flow hedges and,as a result, changes in the fair value of these interest rate caps are recorded in total other comprehensive income (loss) before taxes in the accompanyingconsolidated statements of comprehensive income.84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 caps are as follows:20192020202120222023ThereafterTotalAsset(Liability)Fair Value(In thousands)Long-term debt:Fixed rate maturities$13,621 $18,799 $14,713 $25,145 $311,593 $391,187 $775,058 Fixed rate outstanding (1)$775,058 $761,437 $742,638 $727,925 $702,780 $(717,604)Average rate on fixedoutstanding debt (1)6.07 %6.08 %6.10 %6.10 %6.53 %6.96 %Variable rate maturities$12,683 $40,957 $38,672 $18,042 $39,721 $30,884 $180,959 Variable rate outstanding(1)$180,959 $168,276 $127,319 $88,647 $70,605 $(182,185)Average rate on variableoutstanding debt (1)4.66 %4.66 %4.68 %4.76 %4.76 %4.96 %Cash flow hedge instruments:Interest rate cap notionalmaturities$750,000 $562,500 $375,000 $250,000 $— $— Interest rate cap notionaloutstanding (1)$750,000 $562,500 $375,000 $250,000 $— $— $4,839 Average interest incomerate on interest rate capnotional outstanding (1)0.13 %0.14 %0.10 %—% N/AN/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.85SONIC AUTOMOTIVE, INC.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, 2018. Based upon that evaluation, our CEO and CFO concluded that our disclosure controlsand procedures were effective as of December 31, 2018.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. GAAP.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, 2018 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, 2018. The attestation report of our independent registered public accounting firm on the Company’s internal control over financial reporting isset 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 control 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 our internal control over financial reporting during the fourthquarter ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Item 9B. Other Information.None.86SONIC AUTOMOTIVE, INC.PART IIIItem 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 2019 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 – Director Independence,” “Corporate Governance and Board of Directors – Policies and Procedures for Review, Approval or Ratificationof Transactions with Affiliates” and “Corporate Governance and Board of Directors – Transactions with Affiliates” 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.87SONIC AUTOMOTIVE, INC.PART IVItem 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, 2018 and 2017; consolidated statements of income for the years endedDecember 31, 2018, 2017 and 2016; consolidated statements of comprehensive income for the years ended December 31, 2018, 2017 and2016; consolidated statements of stockholders’ equity for the years ended December 31, 2018, 2017 and 2016; and consolidated statements of cashflows for the years ended December 31, 2018, 2017 and 2016.2.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 incorporatedby reference 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 theQuarterly Report 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)).4.6Indenture, 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)).4.7Form 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)).10.1Fourth 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)).10.2Form 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-Kfor the year ended December 31, 2016 (File No. 001-13395)).88SONIC AUTOMOTIVE, INC.EXHIBIT NO.DESCRIPTION10.3Fourth 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)).10.4Fourth 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)).10.5Fourth 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)).10.6Fourth 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)).10.7Third 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.,as administrative 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)).10.8Form 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)).10.9Third 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)).10.10 Third 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 10.20 to the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 001-13395)).10.11Standard 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)).10.12Standard 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)).10.13Amendment 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)).10.14Second 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 tothe Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 001-13395)).10.15Side 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)).10.16Sonic 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)10.17Sonic 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)10.18Sonic 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)89SONIC AUTOMOTIVE, INC.EXHIBIT NO.DESCRIPTION10.19 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)10.20 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)10.21Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective January 1, 2010 (incorporated by reference to Exhibit10.46 to the Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-13395)). (1)10.22First 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)10.23Second 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)10.24Third 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)10.25*Fourth Amendment to Sonic Automotive, Inc. Supplemental Executive Retirement Plan, effective April 1, 2018. (1)10.26Sonic 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)10.27Sonic 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)10.28Sonic 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)10.29 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)10.30 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)10.31Sonic 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)10.32Sonic 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)10.33Sonic 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)10.34Sonic 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)10.35Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors, amended and restated effectiveas of 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)10.36Sonic 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)10.37Sonic Automotive, Inc. 2012 Formula Restricted Stock and Deferral Plan for Non-Employee Directors Form of Deferred RestrictedStock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2017 (File No. 001-13395)). (1)10.38Director Compensation Policy. (incorporated by reference to Exhibit 10.39 to the Annual Report on Form 10-K for the year endedDecember 31, 2017 (File No. 001-13395)). (1)90SONIC AUTOMOTIVE, INC.EXHIBIT NO.DESCRIPTION10.39 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)10.40 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)10.41Agreement between Sonic Automotive, Inc. and B. Scott Smith, effective as of September 25, 2018 (incorporated by reference toExhibit 10.1 to the Current Report on Form 8-K filed September 27, 2018 (File No. 001-13395)). (1)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.91SONIC AUTOMOTIVE, INC.Item 16. Form 10-K Summary.None.92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.February 21, 2019By:/s/ HEATH R. BYRDHeath R. ByrdExecutive Vice President and Chief Financial OfficerPursuant 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.SignatureTitleDate/s/ O. BRUTON SMITHExecutive Chairman and DirectorFebruary 21, 2019O. Bruton Smith/s/ DAVID BRUTON SMITHChief Executive Officer and DirectorFebruary 21, 2019David Bruton Smith(Principal Executive Officer)/s/ HEATH R. BYRDExecutive Vice President and Chief Financial OfficerFebruary 21, 2019Heath R. Byrd(Principal Financial Officer and Principal Accounting Officer)/s/ WILLIAM I. BELKDirectorFebruary 21, 2019William I. Belk/s/ WILLIAM R. BROOKSDirectorFebruary 21, 2019William R. Brooks/s/ VICTOR H. DOOLANDirectorFebruary 21, 2019Victor H. Doolan/s/ JOHN W. HARRIS IIIDirectorFebruary 21, 2019John W. Harris III/s/ ROBERT HELLERDirectorFebruary 21, 2019Robert Heller/s/ R. EUGENE TAYLORDirectorFebruary 21, 2019R. Eugene Taylor93Report of Independent Registered Public Accounting FirmTo 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 subsidiaries (the Company) as of December 31, 2018 and2017, 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, 2018, 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, 2018 and 2017, and the results of its operationsand its cash flows for each of the years in the three-year period ended December 31, 2018, 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) (PCAOB), the Company’sinternal control over financial reporting as of December 31, 2018, 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 21, 2019 expressed an unqualified opinion on theeffectiveness of the Company’s internal control over financial reporting.Change in Accounting PrincipleAs discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue due to the adoption ofAccounting Standards Codification 606, Revenue from Contracts with Customers. 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 LLPWe have served as the Company’s auditor since 2014.Charlotte, North CarolinaFebruary 21, 2019 F-1Report of Independent Registered Public Accounting FirmTo 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, 2018, 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, 2018, 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) (PCAOB), the consolidatedbalance sheets of the Company as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financialstatements), and our report dated February 21, 2019 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 LLPCharlotte, North CarolinaFebruary 21, 2019F-2SONIC AUTOMOTIVE, INC.CONSOLIDATED BALANCE SHEETS December 31, 2018December 31, 2017 (Dollars in thousands)ASSETSCurrent Assets: Cash and cash equivalents$5,854 $6,352 Receivables, net438,186 482,126 Inventories1,528,461 1,512,745 Other current assets20,886 18,574 Total current assets1,993,387 2,019,797 Property and Equipment, net1,178,489 1,146,881 Goodwill509,592 525,780 Other Intangible Assets, net69,705 74,589 Other Assets45,634 51,471 Total Assets$3,796,807 $3,818,518 LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent Liabilities: Notes payable - floor plan - trade$821,074 $804,238 Notes payable - floor plan - non-trade712,966 709,098 Trade accounts payable114,263 129,903 Accrued interest13,417 12,316 Other accrued liabilities257,823 237,963 Current maturities of long-term debt26,304 61,314 Total current liabilities1,945,847 1,954,832 Long-Term Debt918,779 963,389 Other Long-Term Liabilities75,887 61,918 Deferred Income Taxes33,178 51,619 Commitments and ContingenciesStockholders’ Equity:Class A Convertible Preferred Stock, none issued— — Class A Common Stock, $0.01 par value; 100,000,000 shares authorized; 64,197,385 shares issued and30,721,226 shares outstanding at December 31, 2018; 63,456,698 shares issued and 31,166,205 sharesoutstanding at December 31, 2017 642 635 Class B Common Stock, $0.01 par value; 30,000,000 shares authorized; 12,029,375 shares issued andoutstanding at December 31, 2018 and 2017 121 121 Paid-in capital745,052 732,854 Retained earnings670,691 625,356 Accumulated other comprehensive income (loss)4,233 1,307 Treasury stock, at cost; 33,476,159 Class A Common Stock shares held at December 31, 2018 and32,290,493 Class A Common Stock shares held at December 31, 2017 (597,623)(573,513)Total Stockholders’ Equity823,116 786,760 Total Liabilities and Stockholders’ Equity$3,796,807 $3,818,518 See notes to consolidated financial statements.F-3SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 201820172016(Dollars and shares in thousands,except per share amounts)Revenues:New vehicles$4,974,097 $5,295,051 $5,234,505 Used vehicles2,973,498 2,622,053 2,533,122 Wholesale vehicles217,625 171,064 211,048 Total vehicles8,165,220 8,088,168 7,978,675 Parts, service and collision repair1,380,887 1,416,010 1,409,819 Finance, insurance and other, net405,523 363,030 343,285 Total revenues9,951,630 9,867,208 9,731,779 Cost of Sales:New vehicles(4,732,595)(5,030,125)(4,973,911)Used vehicles(2,830,510)(2,467,150)(2,374,537)Wholesale vehicles(228,874)(179,778)(218,364)Total vehicles(7,791,979)(7,677,053)(7,566,812)Parts, service and collision repair(713,526)(732,479)(735,693)Total cost of sales(8,505,505)(8,409,532)(8,302,505)Gross profit1,446,125 1,457,676 1,429,274 Selling, general and administrative expenses(1,145,325)(1,147,773)(1,110,856)Impairment charges(29,514)(9,394)(8,063)Depreciation and amortization(93,623)(88,944)(77,446)Operating income (loss)177,663 211,565 232,909 Other income (expense):Interest expense, floor plan(48,398)(36,395)(27,716)Interest expense, other, net(54,059)(52,524)(50,106)Other income (expense), net106 (14,522)125 Total other income (expense)(102,351)(103,441)(77,697)Income (loss) from continuing operations before taxes75,312 108,124 155,212 Provision for income taxes for continuing operations - benefit (expense)(22,922)(13,971)(60,696)Income (loss) from continuing operations52,390 94,153 94,516 Discontinued operations:Income (loss) from discontinued operations before taxes(1,017)(1,942)(2,121)Provision for income taxes for discontinued operations - benefit (expense)277 772 798 Income (loss) from discontinued operations(740)(1,170)(1,323)Net income (loss)$51,650 $92,983 $93,193 Basic earnings (loss) per common share:Earnings (loss) per share from continuing operations$1.23 $2.14 $2.07 Earnings (loss) per share from discontinued operations(0.02)(0.03)(0.03)Earnings (loss) per common share$1.21 $2.11 $2.04 Weighted average common shares outstanding42,708 43,997 45,637 Diluted earnings (loss) per common share:Earnings (loss) per share from continuing operations$1.22 $2.12 $2.06 Earnings (loss) per share from discontinued operations(0.02)(0.03)(0.03)Earnings (loss) per common share$1.20 $2.09 $2.03 Weighted average common shares outstanding42,950 44,358 45,948 See notes to consolidated financial statementsF-4SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEYear Ended December 31,201820172016(Dollars in thousands)Net income (loss)$51,650 $92,983 $93,193 Other comprehensive income (loss) before taxes: Change in fair value of interest rate swap and rate cap agreements2,173 6,186 5,731 Amortization of terminated interest rate swap agreements(429)— — Pension actuarial income (loss)2,368 (429)(295)Total other comprehensive income (loss) before taxes4,112 5,757 5,436 Provision for income tax benefit (expense) related to components of other comprehensive income (loss)(1,186)(2,188)(2,066)Other comprehensive income (loss)2,926 3,569 3,370 Comprehensive income (loss)$54,576 $96,552 $96,563 See notes to consolidated financial statements.F-5SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYClass ACommon Stock Class ATreasury Stock Class BCommon Stock Paid-InCapitalRetainedEarnings AccumulatedOtherComprehensiveIncome (Loss) TotalStockholders'Equity Shares Amount Shares Amount Shares Amount (In thousands) 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 stockcompensation plans 381 4 — — — — 23 — — 27 Purchases of treasury stock — — (5,588)(99,971)— — — — — (99,971)Income tax benefit associated with stockcompensation plans — — — — — — (2,611)— — (2,611)Change in fair value of interest rate swapagreements, net of tax expense of $2,178 — — — — — — — — 3,553 3553 Pension actuarial income, net of taxbenefit of $112 — — — — — — — — (183)(183)Restricted stock amortization — — — — — — 11,165 — — 11,165 Net income (loss) — — — — — — — 93,193 — 93,193 Dividends declared ($0.20 per share) — — — — — — — (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 stockcompensation plans 490 5 — — — — 40 — — 45 Purchases of treasury stock — — (2,027)(37,347)— — — — — (37,347)Change in fair value of interest rate swapagreements, net of tax expense of $2,351 — — — — — — — — 3,835 3,835 Pension actuarial income, net of taxbenefit of $163 — — — — — — — — (266)(266)Restricted stock amortization — — — — — — 11,119 — — 11,119 Net income (loss) — — — — — — — 92,983 — 92,983 Dividends declared ($0.20 per share) — — — — — — — (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 Shares awarded under stockcompensation plans 740 7 — — — — 345 — — 352 Purchases of treasury stock — — (1,186)(24,110)— — — — — (24,110)Change in fair value of interest rate swapagreements, net of tax expense of $460 — — — — — — — — 1,284 1,284 Pension actuarial income, net of taxexpense of $726 — — — — — — — — 1,642 1,642 Restricted stock amortization — — — — — — 11,853 — — 11,853 Net income (loss) — — — — — — — 51,650 — 51,650 Cumulative effect of change inaccounting principle — — — — — — — 3,918 3,918 Dividends declared ($0.24 per share) — — — — — — — (10,233)— (10,233)Balance at December 31, 2018 64,197 $642 (33,476)$(597,623)12,029 $121 $745,052 $670,691 $4,233 $823,116 See notes to consolidated financial statements.F-6SONIC AUTOMOTIVE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 201820172016 (Dollars in thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)$51,650 $92,983 $93,193 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization of property and equipment93,617 88,938 77,532 Provision for bad debt expense531 748 389 Other amortization617 649 649 Debt issuance cost amortization2,418 2,383 2,641 Debt discount amortization, net of premium amortization— 157 303 Stock-based compensation expense11,853 11,119 11,165 Deferred income taxes(20,606)(27,760)14,465 Net distributions from equity investee(225)(138)(300)Asset impairment charges29,514 9,394 8,063 Loss (gain) on disposal of dealerships and property and equipment(43,164)(10,194)(331)Loss (gain) on exit of leased dealerships1,709 2,157 1,386 Loss (gain) on retirement of debt— 14,607 — Changes in assets and liabilities that relate to operations:Receivables50,351 (52,989)(62,894)Inventories(78,701)57,250 35,545 Other assets11,288 3,266 62,538 Notes payable - floor plan - trade16,836 (46,299)(42,929)Trade accounts payable and other liabilities15,987 16,612 14,953 Total adjustments92,025 69,900 123,175 Net cash provided by (used in) operating activities143,675 162,883 216,368 CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of businesses, net of cash acquired— (76,610)(15,861)Purchases of land, property and equipment(163,619)(234,245)(206,232)Proceeds from sales of property and equipment19,554 596 1,319 Proceeds from sales of dealerships128,734 38,150 — Net cash provided by (used in) investing activities(15,331)(272,109)(220,774)CASH FLOWS FROM FINANCING ACTIVITIES:Net (repayments) borrowings on notes payable - floor plan - non-trade3,868 33,745 49,986 Borrowings on revolving credit facilities918,967 327,070 209,287 Repayments on revolving credit facilities(993,967)(252,070)(213,490)Proceeds from issuance of long-term debt21,072 302,483 103,395 Debt issuance costs(144)(4,855)(3,084)Principal payments and repurchase of long-term debt(45,053)(36,836)(30,949)Repurchase of debt securities— (210,914)— Purchases of treasury stock(24,110)(37,347)(99,971)Income tax benefit (expense) associated with stock compensation plans— — (2,611)Issuance of shares under stock compensation plans352 45 27 Dividends paid(9,827)(8,851)(8,701)Net cash provided by (used in) financing activities(128,842)112,470 3,889 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(498)3,244 (517)CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR6,352 3,108 3,625 CASH AND CASH EQUIVALENTS, END OF YEAR$5,854 $6,352 $3,108 SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Change in fair value of interest rate swap and rate cap agreements (net of tax expense of $460, $2,351 and$2,178 in the years ended December 31, 2018, 2017 and 2016, respectively)$1,284 $3,835 $3,553 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the period for:Interest, including amount capitalized$98,126 $89,525 $77,289 Income taxes$35,217 $42,907 $28,459 See notes to consolidated financial statements.F-7SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. Description of Business and Summary of Significant Accounting PoliciesOrganization and Business - Sonic Automotive, Inc. (“Sonic,” the “Company,” “we,” “us” or “our”) is one of the largest automotive retailers in theUnited States (as measured by total revenue). As a result of the way we manage our business, we had two operating segments as of December 31, 2018: (1) theFranchised Dealerships Segment and (2) the EchoPark Segment. For management and operational reporting purposes, we group certain businesses togetherthat share management and inventory (principally used vehicles) into “stores.” As of December 31, 2018, we operated 96 stores in the Franchised DealershipsSegment and eight stores in the EchoPark Segment. The Franchised Dealerships Segment consists of 108 new vehicle franchises (representing 23 differentbrands of cars and light trucks) and 15 collision repair centers in 13 states.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, “finance andinsurance” or “F&I”) for our customers. The EchoPark Segment sells used cars and light trucks and arranges F&I product sales for our customers in pre-ownedvehicle specialty retail locations. Our EchoPark business operates independently from our franchised dealerships business.Principles of Consolidation - All of our 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 revenuerecognition accounting guidance are included in Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers,” and areintended to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosurerequirements. The amendments to this guidance must be applied using either of the following transition methods: (1) a full retrospective approach reflectingthe application of the amendments in each prior reporting period with the option to elect certain practical expedients; or (2) a modified retrospectiveapproach with the cumulative effect of initially applying the amendments recognized at the date of adoption (which requires additional footnote disclosures).These amendments were effective for reporting periods beginning after December 15, 2017. On January 1, 2018, we adopted ASC 606 (the “new revenuestandard”) using the modified retrospective transition approach applied to contracts not completed as of the date of adoption. We recognized the cumulativeeffect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative financial information hasnot been restated and continues to be reported under the accounting standards in effect for that period. We do not expect the effect of the adoption of the newrevenue standard to have a material impact on our net income on an ongoing basis.Under the new revenue standard, revenue is recognized when a customer obtains control of promised goods or services and in an amount that reflectsthe consideration that the entity expects to receive in exchange for those goods or services. The principles apply a five-step model that includes: (1)identifying the contract(s) with the customer; (2) identifying the performance obligation(s) in the contract(s); (3) determining the transaction price; (4)allocating the transaction price to the performance obligation(s) in the contract(s); and (5) recognizing revenue as the performance obligation(s) are satisfied.The new revenue standard also requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts withcustomers. We do not include the cost of obtaining contracts within the related revenue streams. We have elected the practical expedient to expense the coststo obtain a contract when incurred.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 revenue standard as compared with prior U.S. generally accepted accountingprinciples (“U.S. GAAP”). Management identified its material revenue streams to be (1) the sale of new vehicles; (2) the sale of used vehicles to retailcustomers; (3) the sale of wholesale used vehicles at third-party auctions; (4) the arrangement of vehicle financing and the sale of service and other insurancecontracts; and (5) the performance of vehicle maintenance and repair services and the sale of related parts and accessories. As a result of this evaluationduring the implementation process, management expects the amounts and timing of revenue recognition to generally remain the same, with the exception ofthe timing of revenue recognition related to: (1) service and collision repair orders that are incomplete as of a reporting date (“work in process”) and (2)certain retrospective finance and insurance revenue earned in periods subsequent to the completion of the initial performance obligation (“F&I retrorevenues”), both of which are subject to accelerated recognition under the new revenue standard. Work in process revenues areF-8SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSrecognized over time based on the completed work to date and F&I retro revenues are recognized when the product contract has been executed with the endcustomer and are estimated each reporting period based on the expected value method using historical and projected data. F&I retro revenues, whichrepresent variable consideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation issatisfied. F&I retro revenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, weutilize this historical and projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulativerevenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.Generally, performance conditions are satisfied when the associated vehicle is either delivered or returned to a customer and customer acceptance hasoccurred or over time as the maintenance and repair services are performed. We do not have any revenue streams with significant financing components aspayments are typically received within a short period of time following completion of the performance obligation(s).During the year ended December 31, 2018, we implemented new financial reporting controls during the process of adopting the new revenue standard.Those efforts did not result in any material changes to our internal control process.The cumulative effect of the adjustments to our December 31, 2018 consolidated statements of income and January 1, 2018 consolidated balancesheet for the adoption of ASC 606 was as follows:Income Statement Pre-ASC 606 ResultsYear EndedDecember 31, 2018 Effects of Adoption of ASC606 As ReportedYear EndedDecember 31, 2018 (In thousands) Revenues: Parts, service and collision repair $1,380,506 $381 $1,380,887 Finance, insurance and other, net $396,905 $8,618 $405,523 Cost of Sales: Parts, service and collision repair $(713,259)$(267)$(713,526)Selling, general and administrative expenses: $(1,145,294)$(31)$(1,145,325)Operating income (loss): $168,962 $8,701 $177,663 Balance Sheet December 31, 2017 Effects of Adoption of ASC606 January 1, 2018(In thousands) Assets: Receivables, net $482,126 $4,590 $486,716 Contract assets (1) $— $2,082 $2,082 Liabilities: Other accrued liabilities $237,963 $1,286 $239,249 Deferred income taxes $51,619 $1,468 $53,087 Stockholders' Equity: Retained earnings $625,356 $3,918 $629,274 (1) Receivables, net in the accompanying consolidated balance sheets at December 31, 2018 includes approximately $4.7 million related to work in processand a contract asset of approximately $5.4 million related to F&I retro revenues. Changes in contract assets from January 1, 2018 to December 31, 2018were primarily due to ordinary business activity.In February 2016, the FASB established ASC 842, “Leases,” by issuing ASU 2016-02 (and subsequent amendments via ASU 2018-01, ASU 2018-10and ASU 2018-11) in order to increase transparency and comparability among organizations by recognizing operating lease assets and lease liabilities on thebalance sheet and disclosing key information about leasing arrangements. The lease standard is effective for us on January 1, 2019. Prior to adoption of thelease standard, only leases classified as capital leases under ASC 840 were recorded in the consolidated balance sheets. Under ASC 842, an entity willF-9SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSclassify leases as either finance leases (formerly capital leases) or operating leases, and a right-of-use asset (“ROU asset”) and lease liability are required to berecognized in the consolidated balance sheets for both finance and operating leases with a term longer than 12 months. The lease standard requires amodified retrospective transition approach and provides an optional transition method to either (1) record current existing leases as of the effective date; or(2) record leases existing as of the earliest comparative period presented in the financial statements by recasting comparative period financial statements. Weadopted the lease standard as of January 1, 2019 using the effective date as our date of application. As such, financial statement information and disclosuresrequired under the new lease standard will not be provided for dates and periods prior to January 1, 2019. The lease standard provides for a number ofoptional practical expedients in transition, which include: (1) not requiring an entity to reassess prior conclusions about lease identification, leaseclassification or initial direct costs; (2) allowing an entity to use a portfolio approach for similar lease assets; (3) allowing an entity to elect an accountingpolicy to choose not to separate non-lease components of an agreement from lease components (by asset class); (4) allowing the use of hindsight inestimating lease term or assessing impairment of ROU assets; and (5) not requiring an entity to reassess prior conclusions about land easements. We expect toelect all of the practical expedients permitted under the transition guidance within the new standard. The new lease standard also provides practicalexpedients for ongoing accounting. We expect to elect the short-term lease recognition exemption for our real estate and equipment leases, which means thatfor those leases that qualify, we will not recognize ROU assets or lease liabilities.As part of the lease standard implementation process, we assessed our existing real estate and equipment lease agreements, identified certain leasecomponents embedded within existing service contracts, evaluated transition guidance and practical expedient elections, implemented lease accountingsoftware and designed internal controls over lease accounting under the new standard. We are still evaluating the possible effects of impairment of certainROU assets as of the effective date. We estimate that adoption of the new lease standard will result in recording additional operating lease liabilities andcorresponding ROU assets ranging from $350.0 million to $400.0 million as of January 1, 2019. We do not expect the adoption of the new lease standard tohave a material effect on future results of operations or cash flows. In August 2017, the FASB issued ASU 2017-12 which amends the hedge accounting recognition and presentation requirements in ASC Topic 815,Derivatives and Hedging. This ASU expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognitionand presentation of the effects of the hedging instrument and the hedged item in the financial statements. It also includes certain targeted improvements tosimplify the application of current guidance related to hedge accounting. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.In February 2018, the FASB issued ASU 2018-02, which allows the reclassification of stranded tax effects, as a result of the Tax Cuts and Jobs Acts of2017, from accumulated other comprehensive income to retained earnings. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.In June 2018, the FASB issued ASU 2018-07 to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-basedpayment transactions for acquiring goods and services from non-employees. For public companies, this ASU is effective for fiscal years, and interim periodswithin those fiscal years, beginning after December 15, 2018. We do not believe the effects of this ASU will materially impact our consolidated financialstatements.Reclassifications - Prior to our adoption of ASU 2014-8 beginning with our 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 soldor terminated on or after March 31, 2014 have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-8. If, in futureperiods, we determine that a dealership franchise should be reclassified from continuing operations to discontinued operations, previously reportedconsolidated statements 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 dates of the accompanyingconsolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. 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.F-10SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCash and Cash Equivalents - We classify 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 we are 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. We were not in a book overdraft position as of December 31, 2018 and were in a book overdraft position in an amount ofapproximately $6.9 million, as of December 31, 2017. Revenue Recognition - We record 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 heading “Recent Accounting Pronouncements” above for discussion and impact on our consolidated financial statements asa result of the adoption of ASC 2014-09 effective January 1, 2018.We arrange financing for customers through various financial institutions and receives 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. We maybe assessed a chargeback fee in the event of early cancellation of a loan or insurance contract by the customer. Finance and insurance commission revenue isrecorded net of estimated chargebacks at the time of sale.In addition to up-front commissions from the sale of F&I products, in certain cases we earn additional F&I revenues in future periods subsequent to thecompletion of the initial performance condition. F&I retro revenues are recognized when the product contract has been executed with the end customer andare estimated each reporting period based on the expected value method using historical and projected data. F&I retro revenues, which represent variableconsideration, subject to constraint, are to be included in the transaction price and recognized when or as the performance obligation is satisfied. F&I retrorevenues can vary based on a variety of factors, including number of contracts and history of cancellations and claims. Accordingly, we utilize this historicaland projected data to constrain the consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue will notoccur when the uncertainty associated with the variable consideration is subsequently resolved.As of December 31, 2018 and 2017, the amounts recorded as allowances for finance, insurance and service contract commission chargeback reserveswere approximately $25.8 million and $20.9 million, respectively, and were classified as other accrued liabilities and other long-term liabilities in theaccompanying consolidated balance sheets.Floor Plan Assistance - We receive floor plan assistance payments from certain manufacturers. This assistance reduces the carrying value of our newvehicle 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 of sales wereapproximately $42.2 million, $45.3 million and $45.0 million for 2018, 2017 and 2016, respectively.Contracts in Transit - Contracts in transit represent customer finance contracts evidencing loans or lease agreements between us, as creditor, and thecustomer, as borrower, to acquire or lease a vehicle in situations where a third-party finance source has given us initial, non-binding approval to assume ourposition as creditor. Funding and final approval from the finance source is provided upon the finance source’s review of the loan or lease agreement andrelated documentation executed by the customer at the dealership. These finance contracts are typically funded within 10 days of the initial approval of thefinance transaction given by the third-party finance source. The finance source is not contractually obligated to make the loan or lease to the customer until itgives its final approval and funds the transaction, and until such final approval is given, the contracts in transit represent amounts due from the customer tous. Contracts in transit are included in receivables, net on the accompanying consolidated balance sheets and totaled approximately $227.8 million and$267.6 million at December 31, 2018 and 2017, respectively.Accounts Receivable - In addition to contracts in transit, our accounts receivable primarily consists of amounts due from the manufacturers for repairservices performed on vehicles with a remaining factory warranty and amounts due from third parties from the sale of parts. We evaluate receivables forcollectability 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, 2018 and 2017. As of December 31, 2018, there was approximately $1.0 million in accounts receivable in theaccompanying consolidated balance sheets related to expected business interruption insurance proceeds for actual expensesF-11SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSincurred as a result of Hurricane Harvey. We did not record any estimate of business interruption insurance proceeds related to lost earnings or othercontingent gain amounts related to Hurricane Harvey.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.We assess the valuation of all of our vehicle and parts inventories and maintain a reserve where the cost basis exceeds the fair market value. In makingthis assessment for new vehicles, used vehicles, service loaners and parts inventory, we consider recent internal and external market data and the age of thevehicles to estimate the inventory’s fair market value. The risk with vehicle inventory is minimized by the fact that vehicles can be transferred within ournetwork of dealerships. The risk with parts inventories is minimized by the fact that excess or obsolete parts can also be transferred within our network ofdealerships or can usually be returned to the manufacturer. Recorded inventory reserves were not significant at December 31, 2018 and 2017. 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. We amortize leasehold improvements over the shorter of the estimated useful life or the remaining lease life. This leaselife 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 improvements10-30 yearsBuildings10-30 yearsParts and service equipment7-10 yearsOffice equipment and fixtures3-10 yearsCompany vehicles3-5 yearsWe review 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, we compare thecarrying amount of the asset to the estimated undiscounted cash flows related to that asset. We conclude that an asset is impaired if the sum of such expectedfuture cash flows is less than the carrying amount of the related asset. If we determine an asset is impaired, the impairment loss would be the amount by whichthe carrying amount of the related asset exceeds its fair value. The fair value of the asset would be determined based on the quoted market prices, if available.If quoted market prices are not available, we determine fair value by using a discounted cash flow model. See Note 4, “Property and Equipment,” for adiscussion of impairment charges.Derivative Instruments and Hedging Activities - We utilize derivative financial instruments for the purpose of hedging the risks of certain identifiableand anticipated transactions. Commonly, the types of risks being hedged are those relating to the variability of cash flows caused by fluctuations in interestrates. We document our risk management strategy and hedge effectiveness at the inception of and during the term of each hedge. As of December 31, 2018,we utilized interest rate cap agreements to limit our exposure to increases in LIBOR rates above certain levels. See Note 6, “Long-Term Debt,” for furtherdiscussion 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, we have two reporting units, which consist of: (1)our traditional franchised dealerships and (2) our EchoPark stores. The carrying value of our goodwill totaled approximately $509.6 million at December 31,2018, $449.6 million of which was related to our franchised dealerships reporting unit and $60.0 million of which was related to our EchoPark reporting unit.For each reporting unit, we utilized the Discounted Cash Flows (“DCF”) method to estimate our enterprise value as of October 1, 2018. The significantassumptions in our DCF model include projected earnings, weighted average cost of capital (and estimates in the weighted average cost of capital inputs) andresidual growth rates. In evaluating goodwill for impairment, if the fair value of a reporting unit is less than its carrying value, the difference would representthe amount of required goodwill impairment. To the extent theF-12SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSreporting unit’s earnings decline significantly or there are changes in one or more of these assumptions that would result in lower valuation results, it couldcause the carrying value of the reporting unit to exceed its fair value and thus require us to record goodwill impairment.Based on the results of our quantitative test as of October 1, 2018, each reporting unit’s fair value exceeded its carrying value. As a result, we were notrequired to record goodwill impairment for either of our reporting units. See Note 5, “Intangible Assets and Goodwill,” for further discussion 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. We classify franchise and dealer agreements as indefinite lived intangible assets as it has been our experience thatrenewals have occurred without substantial cost or material modifications to the underlying agreements. As such, we believe that our franchise and dealeragreements will contribute to cash flows for an indefinite period, therefore the carrying amount of franchise rights is not amortized. Franchise and dealeragreements acquired on or after July 1, 2001 have been included in other intangible assets, net on the accompanying consolidated balance sheets. Prior toJuly 1, 2001, franchise and dealer agreements were recorded and amortized as part of goodwill and remain as part of goodwill on the accompanyingconsolidated balance sheets. Other intangible assets acquired in acquisitions include favorable lease agreements with definite lives which are amortized on astraight-line basis over the remaining lease term. In accordance with “Intangibles - Goodwill and Other” in the ASC, we evaluate other intangible assets forimpairment annually (as of October 1) or more frequently if indicators of impairment exist.We utilized a DCF model to estimate the fair value of the franchise assets for each of our franchises with recorded franchise assets. The significantassumptions in our DCF model include projected revenue, weighted average cost of capital (and estimates in the weighted average cost of capital inputs) andresidual growth rates. In projecting the franchises’ revenue and growth rates, we developed many assumptions which may include, but are not limited to,revenue growth, internal revenue enhancement initiatives, cost control initiatives, internal investment programs (such as training, technology andinfrastructure) and inventory floor plan borrowing rates. Our expectation of revenue growth is in part driven by our estimates of new vehicle industry salesvolume in future periods. We believe the historic and projected industry sales volume is a good general indicator of growth or contraction in the retailautomotive industry. Based on the October 1, 2018 impairment test, we determined that the fair value of the franchise assets exceeded the carrying value of the franchiseassets for all but one of our franchises, resulting in a franchise asset impairment charge of $2.1 million during 2018, which is recorded in impairment chargesin the accompanying consolidated statements of income. See Note 5, “Intangible Assets and Goodwill,” for further discussion of franchise and dealeragreements.In evaluating our definite life favorable lease assets for impairment, we considered whether the leased asset was being utilized by the dealership and ifthe dealership operating activities could recover the value of the recorded favorable lease asset. We evaluated our favorable lease assets for impairment as ofOctober 1, 2018 and determined that no impairment charge was required.Insurance Reserves - We have 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, 2018 and 2017, we had approximately $22.9 million and $22.0 million, respectively, reserved for such programs.Lease Exit Accruals - The majority of our dealership properties are subject to long-term operating lease arrangements. When situations arise where theleased properties are no longer utilized in operations, we record accruals 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. These situations could include therelocation 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 the lease or foran amount of rent equal to our obligation under the lease, or situations in which a store is closed as a result of the associated franchise being terminated bythe manufacturer or us and no other operations continue on the leased property. See Note 12, “Commitments and Contingencies,” for further 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.F-13SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSManagement believes that the Company’s tax positions comply, in all material respects, with applicable tax law and that the Company has adequatelyprovided for any reasonably foreseeable outcome related to these matters.From time to time, we engage in transactions in which the tax consequences may be subject to uncertainty. Significant judgment is required inassessing and estimating the tax consequences of these transactions. We determine 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, we presume that the position will be examined by the appropriate taxing authority thathas full knowledge of all relevant information. A tax position that does not meet the more-likely-than-not recognition threshold is measured to determine theamount 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 realized uponultimate settlement. We adjust our estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well aschanges in tax laws, regulations and precedent. See Note 7, “Income Taxes,” for further discussion of our uncertain tax positions. Concentrations of Credit and Business Risk - Financial instruments that potentially subject us to concentrations of credit risk consist principally ofcash 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$93.8 million and $102.5 million at December 31, 2018 and 2017, respectively, and receivables from financial institutions (which include manufacturer-affiliated finance companies and commercial banks), totaling approximately $258.7 million and $299.6 million at December 31, 2018 and 2017,respectively. Credit risk arising from trade receivables from commercial customers is reduced by the large number of customers comprising the tradereceivables balances.We participate in a program with two of our manufacturer-affiliated finance companies and one commercial bank wherein we maintain 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 prepayment of notespayable - 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 havethe right and ability to do so. We did not have a deposit balance as of December 31, 2018 and had a deposit balance of $3.0 million as of December 31, 2017.These deposits are classified in other current assets in the accompanying consolidated balance sheets due to restrictions on our availability to withdraw thesefunds under certain circumstances. Changes in this deposit balance are classified as changes in other assets in the cash flows from operating activities sectionof the accompanying consolidated statements of cash flows. The interest rebate as a result of this deposit balance is classified as a reduction in interestexpense, floor plan in the accompanying consolidated statements of income. In 2018, no interest expense reduction was recognized. In 2017 and 2016, thereduction in interest expense, floor plan was approximately $0.5 million and $0.6 million, respectively.We are subject to a concentration of risk in the event of financial distress or other adverse events related to any of the automobile manufacturers whosefranchised dealerships are included in our brand portfolio. We purchase our new vehicle inventory from various automobile manufacturers at the prevailingprices available to all franchised dealerships. In addition, we finance a substantial portion of our new vehicle inventory with manufacturer-affiliated financecompanies. Our results of operations could be adversely affected by the manufacturers’ inability to supply our dealerships with an adequate supply of newvehicle inventory and related floor plan financing. We also have concentrations of risk related to the geographic markets in which our dealerships operate.Changes in overall economic, retail automotive or regulatory environments in one or more of these markets could adversely impact the results of ouroperations.Financial Instruments and Market Risks - As of December 31, 2018 and 2017, the fair values of our financial instruments including receivables, notesreceivable from finance contracts, notes payable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgagenotes approximated their carrying values due either to length of maturity or existence of variable interest rates that approximate prevailing market rates. SeeNote 11, “Fair Value Measurements,” for further discussion of the fair value and carrying value of our fixed rate long-term debt and other financialinstruments.We have variable rate notes payable - floor plan, revolving credit facilities and other variable rate notes that expose us to risks caused by fluctuationsin the underlying interest rates. The counterparties to our interest rate cap agreements are large financial institutions. We could be exposed to loss in theevent of non-performance by any of these counterparties. See further discussion in Note 6, “Long-Term Debt.”Advertising - We expense advertising costs in the period incurred, net of earned cooperative manufacturer credits that represent reimbursements forspecific, identifiable and incremental advertising costs. Advertising expense amounted toF-14SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSapproximately $63.1 million, $61.6 million and $61.7 million for 2018, 2017 and 2016, respectively, and is classified as selling, general and administrativeexpenses in the accompanying consolidated statements of income.We have cooperative advertising reimbursement agreements with certain automobile manufacturers we represent. These agreements require us toprovide the manufacturer with support for qualified, actual advertising expenditures in order to receive reimbursement under the agreements. It is uncertainwhether or not we 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 $26.7 million, $26.0 million and $26.2 million for 2018, 2017 and2016, respectively.Segment Information - We have determined we have two reporting segments: (1) the Franchised Dealerships Segment and (2) the EchoPark Segment,for purposes of reporting financial condition and results of operations. The Franchised Dealerships Segment is comprised of retail automotive franchises thatsell new vehicles and buy and sell used vehicles, sell replacement parts, perform vehicle repair and maintenance services, and arrange finance and insuranceproducts. The EchoPark Segment is comprised of pre-owned vehicle specialty retail locations that provide customers an opportunity to search, buy, service,finance and sell pre-owned vehicles.2. Business Acquisitions and DispositionsAcquisitionsWe did not acquire any businesses during 2018. We opened one manufacturer-awarded luxury franchised dealership and three new EchoPark storesduring the year ended December 31, 2018. We acquired one pre-owned business (that was subsequently converted to an EchoPark store) for approximately$76.6 million during 2017. We acquired one pre-owned business with three operating locations and related real estate for approximately $15.9 millionduring 2016, all of which were subsequently closed. These cash outflows were funded by cash from operations and borrowings under our revolving credit andfloor plan facilities. Acquisitions are included in the consolidated financial statements from the date of acquisition.DispositionsWe disposed of seven dealership franchises during 2018 and three dealership franchises during 2017. We did not dispose of any dealership franchisesduring 2016. The dispositions during 2018 and 2017 generated cash of approximately $128.7 million and $38.2 million, respectively. In addition to thesedispositions, we terminated one luxury franchised dealership and ceased operation at four stores in our EchoPark Segment. In conjunction with dealershipdispositions, we have agreed to indemnify the buyers from certain liabilities and costs arising from operations or events that occurred prior to sale but whichmay or may not have been known at the time of sale, including environmental liabilities and liabilities associated from the breach of representations orwarranties made under the agreements. See Note 12, “Commitments and Contingencies,” for further discussion.Prior to our adoption of ASU 2014-8 beginning with our Quarterly Report on Form 10-Q for the period ended June 30, 2014, individual dealershipfranchises sold, terminated or classified as held for sale were reported as discontinued operations. The results of operations of these dealership franchises soldor terminated prior to March 31, 2014 are reported as discontinued operations for all periods presented. Dealership franchises sold on or after March 31, 2014have not been reclassified to discontinued operations since they did not meet the criteria in ASU 2014-8.Revenues and other activities associated with disposed dealerships classified as discontinued operations were as follows: Year Ended December 31,201820172016(In thousands)Income (loss) from operations$(610)$(735)$(1,101)Lease exit accrual adjustments and charges(407)(1,207)(1,020)Pre-tax income (loss)$(1,017)$(1,942)$(2,121)F-15SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSRevenues and other activities associated with disposed dealerships that remain in continuing operations were as follows:Year Ended December 31,201820172016(In thousands)Income (loss) from operations$(8,033)$(6,109)$(2,244)Gain (loss) on disposal39,307 9,974 (47)Lease exit accrual adjustments and charges959 — (1,020)Property impairment charges(694)(169)(119)Pre-tax income (loss)$31,539 $3,696 $(3,430)Total revenues$127,213 $530,294 $579,938 In the ordinary course of business, we evaluate our dealership franchises for possible disposition based on various strategic and performance criteria.As of December 31, 2018, we did not have any franchises classified as held for sale; however, in the future, we may sell franchises that are not currently heldfor sale.3. Inventories and Related Notes Payable - Floor PlanInventories consist of the following: December 31, 2018December 31, 2017 (In thousands)New vehicles$1,027,727 $1,017,523 Used vehicles293,179 294,496 Service loaners141,542 130,406 Parts, accessories and other66,013 70,320 Net inventories$1,528,461 $1,512,745 We finance all of our new and certain of our used vehicle inventory through standardized floor plan facilities with either a syndicate of financialinstitutions and manufacturer-affiliated finance companies or directly with individual manufacturer-affiliated finance companies and other lendinginstitutions. The new and used vehicle floor plan facilities bear interest at variable rates based on either LIBOR or prime rates, depending on the lenderarrangement. The weighted average interest rate for our new vehicle floor plan facilities was 3.10%, 2.37% and 1.85% for 2018, 2017 and 2016, respectively.Our floor plan interest expense related to the new vehicle floor plan arrangements is partially offset by amounts received from manufacturers in the form offloor plan assistance capitalized in inventory and charged against cost of sales when the associated inventory is sold. For 2018, 2017 and 2016, werecognized a reduction in cost of sales of approximately $42.2 million, $45.3 million and $45.0 million, respectively, related to manufacturer floor planassistance.The weighted average interest rate for our used vehicle floor plan facilities was 2.98%, 2.61% and 1.78% for 2018, 2017 and 2016, respectively.The new and used vehicle floor plan facilities are collateralized by vehicle inventory 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 us with respect to the creation of liens and changes in ownership, officers and key management personnel. We were in compliance with all of theserestrictive covenants as of December 31, 2018.F-16SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS4. Property and EquipmentProperty and equipment, net consists of the following: December 31, 2018December 31, 2017 (In thousands)Land$381,527 $370,828 Building and improvements989,872 893,768 Software and computer equipment116,348 147,812 Parts and service equipment108,040 105,123 Office equipment and fixtures96,622 96,066 Company vehicles9,139 9,723 Construction in progress59,523 54,429 Total, at cost1,761,071 1,677,749 Less accumulated depreciation(575,720)(527,379)Subtotal1,185,351 1,150,370 Less assets held for sale (1)(6,862)(3,489)Property and equipment, net$1,178,489 $1,146,881 (1) Classified in other current assets in the accompanying consolidated balance sheets.Interest capitalized in conjunction with construction projects and software development was approximately $1.5 million, $2.2 million and $2.8million for 2018, 2017 and 2016, respectively. As of December 31, 2018, commitments for facility construction projects totaled approximately $19.2 million.During 2018, 2017 and 2016, property and equipment impairment charges were recorded as noted in the following table:Year Ended December 31,(In thousands)2018$27,414 2017$4,894 2016$8,063 Impairment charges were due to the abandonment of construction projects and internally developed software, the abandonment and disposal ofdealership equipment or our estimate that based on historical and projected operating losses for certain dealerships, these dealerships would not be able torecover recorded property and equipment asset balances. 5. Intangible Assets and GoodwillThe changes in the carrying amount of franchise assets and goodwill for 2018 and 2017 were as follows: FranchiseAssetsNetGoodwill (In thousands) Balance at December 31, 2016$74,900 $472,437 (1)Prior year acquisition allocations— 59,980 Reductions from dispositions(1,400)(5,737)Reductions from impairment(3,600)(900)Balance at December 31, 2017$69,900 $525,780 (2)Additions through current year acquisitions— — Reductions from dispositions(2,100)(16,188) Reductions from impairment(2,100)— Prior year acquisition allocations— — Balance at December 31, 2018$65,700 $509,592 (2)(1) Net of accumulated impairment losses of $796.7 million.(2) Net of accumulated impairment losses of $797.6 million.F-17SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSGoodwillWe had no impairment of goodwill in 2018. We impaired approximately $0.9 million of goodwill in 2017 related to the write-off of goodwill due tothe closure of two pre-owned vehicle stores that were acquired in 2016.Other Intangible AssetsOther intangible assets consist 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, we evaluate our franchise assets and definite life intangibleassets for impairment annually (as of October 1) or more frequently if an event occurs or circumstances change that would more likely than not reduce the fairvalue of the asset below its carrying amount. Franchise asset impairment charges of $2.1 million and $3.6 million for 2018 and 2017, respectively, wererecorded in continuing operations based on the impairment evaluations performed.Definite life intangible assets consist of the following: December 31, 2018December 31, 2017 (In thousands)Favorable lease agreements$17,245 $17,317 Less accumulated amortization(13,240)(12,628)Definite life intangibles, net$4,005 $4,689 Amortization expense for definite life intangible assets was approximately $0.6 million in each of 2018, 2017 and 2016. The initial weighted averageamortization period for lease agreements and definite life intangible assets outstanding at December 31, 2018 was 18 years. Expiration dates for these leaseagreements range between 2021 and 2027.Future amortization expense is as follows:Year Ending December 31,(In thousands)2019$609 2020609 2021475 2022408 2023408 Thereafter1,496 Total$4,005 6. Long-Term DebtLong-term debt consists of the following:December 31, 2018December 31, 2017(In thousands)2016 Revolving Credit Facility (1)$— $75,000 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”)250,000 250,000 Mortgage notes to finance companies - fixed rate, bearing interest from 3.51% to 7.03% 215,196 199,972 Mortgage notes to finance companies - variable rate, bearing interest at 1.50 to 2.90 percentage points above one-month or three-month LIBOR180,959 219,719 Other 20,589 3,947 Subtotal956,017 1,037,911 Debt issuance costs (10,934)(13,208)Total debt945,083 1,024,703 Less current maturities (26,304)(61,314)Long-term debt$918,779 $963,389 F-18SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) The interest rate on the 2016 Revolving Credit Facility (as defined below) was 250 and 225 basis points above LIBOR at December 31, 2018 and 2017.Future maturities of long-term debt are as follows:PrincipalYear Ending December 31,(In thousands)2019$26,304 202059,756 202153,385 202243,187 2023351,314 Thereafter422,071 Total$956,017 2016 Credit FacilitiesOn 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.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, 2018, the 2016 Revolving Borrowing Base was approximately $238.8 million. As of December 31, 2018, we had no outstandingborrowings and approximately $14.8 million in outstanding letters of credit under the 2016 Revolving Credit Facility, resulting in total borrowingavailability of approximately $223.9 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.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 assets and our subsidiaries’ assets. Theamounts outstanding 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.5.0% NotesOn May 9, 2013, we 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. Our 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. Balances outstanding under the 5.0% Notes are guaranteed by all of our domestic operating subsidiaries. These guarantees are full andunconditional and joint and several. The parent company has no independent assets or operations. The non-domestic operating subsidiary thatF-19SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSis not a guarantor is considered to be minor. Interest on the 5.0% Notes is payable semi-annually in arrears on May 15 and November 15 of each year. During2016, we repurchased approximately $10.7 million of our outstanding 5.0% Notes for approximately $10.6 million in cash, plus accrued and unpaid interestrelated 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:Redemption Price Beginning on May 15, 2018102.500 %Beginning on May 15, 2019101.667 %Beginning on May 15, 2020100.833 %Beginning on May 15, 2021 and thereafter100.000 %The indenture governing the 5.0% Notes provides that holders of the 5.0% Notes may require us to repurchase the 5.0% Notes at a purchase price equal to101.0% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if any, to the date of purchase if we undergo a Change of Control (as defined inthe indenture governing the 5.0% Notes). The indenture governing the 5.0% Notes contains certain specified restrictive covenants. We have agreed not topledge any assets to any third-party lender of senior subordinated debt except under certain limited circumstances. We also have agreed to certain otherlimitations or prohibitions concerning 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 ordisposal 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 BCommon Stock in excess of $0.10 per share. We may only pay quarterly cash dividends on our Class A and Class B Common Stock if we comply with theterms 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 ofDecember 31, 2018.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.Balances under Sonic’s 5.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional andjoint and several. The parent company has no independent assets or operations. The non-domestic subsidiary that is not a guarantor is considered to be minor.6.125% NotesOn March 10, 2017, we 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. We used the net proceeds from the issuance of the6.125% Notes to repurchase all of the outstanding 7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”) on March 27, 2017. Remaining proceedsfrom the issuance of the 6.125% Notes were used for general corporate purposes. Balances outstanding under the 6.125% Notes are guaranteed by all of ourdomestic operating subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets oroperations. The non-domestic operating subsidiary that is not a guarantor is considered to be minor. Interest on the 6.125% Notes is payable semi-annually inarrears on March 15 and September 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 thefollowing redemption prices, which are expressed as percentages of the principal amount:Redemption Price Beginning on March 15, 2022103.063 %Beginning on March 15, 2023102.042 %Beginning on March 15, 2024101.021 %Beginning on March 15, 2025 and thereafter100.000 %Before March 15, 2022, we may redeem all or a part of the 6.125% Notes at a redemption price equal to 100.0% of the principal amount of the 6.125%Notes redeemed, plus the Applicable Premium (as defined in the indenture governing theF-20SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS6.125% Notes) and any accrued and unpaid interest, if any, to the redemption date. In addition, on or before March 15, 2020, we may redeem up to 35% ofthe aggregate principal amount of the 6.125% Notes at a redemption price equal to 106.125% of the par value of the 6.125% Notes redeemed, plus accruedand unpaid interest, if any, to the redemption date with proceeds from certain equity offerings. The indenture governing the 6.125% Notes also provides thatholders of the 6.125% Notes may require us to repurchase the 6.125% Notes at a purchase price equal to 101.0% of the par value of the 6.125% Notes, plusaccrued and unpaid interest, if any, to the 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, 2018.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.Balances under Sonic’s 6.125% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditionaland joint and several. The parent company has no independent assets or operations. The non-domestic subsidiary that is not a guarantor is considered to beminor.Mortgage NotesDuring 2018, we obtained approximately $21.1 million in mortgage financing related to three of our operating locations. As of December 31, 2018,the weighted average interest rate was 4.70% and the total outstanding mortgage principal balance was approximately $396.2 million, related toapproximately 50% of our operating locations. These mortgage notes require monthly payments of principal and interest through their respective maturities,are secured by the underlying properties and contain certain cross-default provisions. Maturity dates for these mortgage notes range between 2019 and 2033.CovenantsWe 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 indebtedness, liens, prohibit the payment of dividends,capital expenditures and material dispositions and acquisitions of assets, as well as other customary covenants and default provisions.We were in compliance with the financial covenants under the 2016 Credit Facilities as of December 31, 2018. Financial covenants include requiredspecified ratios (as each is defined in the 2016 Credit Facilities) of:CovenantMinimumConsolidatedLiquidityRatioMinimumConsolidatedFixed ChargeCoverageRatioMaximumConsolidatedTotal LeaseAdjusted LeverageRatioRequired ratio1.05 1.20 5.75 December 31, 2018 actual1.10 1.43 5.25 The 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, we could be required to immediately repayall outstanding amounts under the 2016 Credit Facilities.F-21SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAfter giving effect to the applicable restrictions on the payment of dividends under our debt agreements, as of December 31, 2018, we had at least$171.1 million of net income and retained earnings free of such restrictions. We were in compliance with all restrictive covenants as of December 31, 2018.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 under the guarantee agreement are identical to those under the 2016 Credit Facilities with the exception of one financialcovenant 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 of December 31,2018, the ratio was 3.36 to 1.00. Derivative Instruments and Hedging ActivitiesPrior to March 9, 2018, we had outstanding interest rate cash flow swap agreements to effectively convert a portion of our LIBOR-based variable ratedebt to a fixed rate (these interest rate cash flow swap agreements were terminated on March 9, 2018 with a net $4.8 million payment to us from thecounterparties that is being amortized into interest expense, other, net in the accompanying consolidated statements of income over the initial term of theinterest rate swap agreements). As of both December 31, 2018 and 2017, we had interest rate cap agreements to limit our exposure to increases in LIBOR ratesabove certain levels. Under the terms of these cash flow swaps and interest rate cap agreements, interest rates reset monthly. We paid cash premiums ofapproximately $2.8 million and $1.9 million in the years ended December 31, 2018 and 2017, respectively, upon entering into new interest rate capagreements, and the cash premiums were reflected in operating cash flows for the periods in which the premiums were paid. The unamortized premiumamounts related to the outstanding interest rate caps were approximately $4.6 million and $1.9 million as of December 31, 2018 and 2017, respectively, andwill be amortized through interest expense, other, net in the accompanying consolidated statements of income over the remaining term of the interest rate capagreements. The fair value of the interest rate cap positions at December 31, 2018 was a net asset of approximately $4.8 million, with approximately $1.8million included in other current assets and approximately $3.0 million included in other assets in the accompanying consolidated balance sheets. The fairvalue of the interest rate swap and interest rate cap positions at December 31, 2017 was an asset of approximately $4.7 million, with approximately $0.9million included in other current assets and approximately $5.1 million included in other assets in the accompanying consolidated balance sheets, offsetpartially by approximately $1.0 million included in other accrued liabilities and approximately $0.3 million included in other long-term liabilities in theaccompanying consolidated balance sheets. Under the terms of these agreements, we will receive and pay interest based on the following:NotionalAmount Pay Rate (1)Receive Rate (1) (2)Start DateMaturing Date(In millions) $375.0 2.000% one-month LIBORJuly 1, 2018June 30, 2019$375.0 3.000% one-month LIBORJuly 1, 2018June 30, 2019$312.5 2.000% one-month LIBORJuly 1, 2019June 30, 2020$250.0 3.000% one-month LIBORJuly 1, 2019June 30, 2020$225.0 3.000% one-month LIBORJuly 1, 2020June 30, 2021$150.0 2.000% one-month LIBORJuly 1, 2020July 1, 2021$250.0 3.000% one-month LIBORJuly 1, 2021July 1, 2022(1) 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 us from thecounterparty based on the spread between the receive rate and the pay rate will be recognized as a reduction of interest expense, other, net in theaccompanying consolidated statements of income.(2) The one-month LIBOR rate was approximately 2.503% at December 31, 2018.The interest rate caps are designated as cash flow hedges, and the changes in the fair value of these instruments are recorded in other comprehensiveincome (loss) in the accompanying consolidated statements of comprehensive income and are disclosed in the supplemental schedule of non-cash financingactivities in the accompanying consolidated statements of cash flows. The incremental interest income or expense (the difference between interest paid andinterest received) related to these instruments was income of approximately $0.2 million for 2018 and expense of approximately $3.1 million and $5.5million for 2017 and 2016, respectively, and is included in interest expense, other, net in the accompanying consolidated statements of income and theinterest amount is disclosed in the supplemental disclosures of cash flow information in the accompanying consolidated statements of cash flows. Theestimated net benefit expected to be reclassified out of accumulated otherF-22SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTScomprehensive income (loss) into results of operations during the next 12 months is approximately $2.9 million related to the interest rate swaps and interestrate caps.7. Income TaxesThe provision for income taxes for continuing operations - benefit (expense) consists of the following:Year Ended December 31,201820172016(In thousands)Current:Federal$(37,028)$(34,877)$(43,655)State(7,411)(7,292)(3,766)Total current(44,439)(42,169)(47,421)Deferred21,517 28,198 (13,275)Total provision for income taxes for continuing operations - benefit (expense)$(22,922)$(13,971)$(60,696)The provision for income taxes for continuing operations – benefit (expense) includes a benefit of $28.4 million related to the remeasurement of thenet deferred 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)that was signed into law in December 2017. The effect of this benefit is shown separately in the following rate reconciliation table. The reconciliation of theU.S. statutory federal income tax rate with our federal and state overall effective income tax rate from continuing operations is as follows:Year Ended December 31,201820172016U.S. statutory federal income tax rate21.00 %35.00 %35.00 %Effective state income tax rate4.60 %4.58 %2.04 %Valuation allowance adjustments0.20 %(0.59)%0.85 %Uncertain tax positions0.17 %0.71 %0.17 %Effect of change in future U.S. statutory federal income tax rate0.00 %(26.27)%0.00 %Non-deductible compensation3.06 %0.23 %0.15 %Other1.41 %(0.74)%0.90 %Effective income tax rate30.44 %12.92 %39.11 %F-23SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDeferred 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 our deferred tax assets and liabilities are as follows:December 31, 2018December 31, 2017(In thousands) Deferred tax assets:Accruals and reserves$24,948 $24,320 State net operating loss carryforwards12,687 12,689 Basis difference in property and equipment11,515 — Interest and state taxes associated with the liability for uncertain income tax positions1,175 1,126 Other1,778 712 Total deferred tax assets52,103 38,847 Deferred tax liabilities:Fair value of interest rate swaps and caps(462)(696)Basis difference in inventories(838)(965)Basis difference in property and equipment— (2,467)Basis difference in goodwill(69,646)(73,803)Other(2,544)(1,636)Total deferred tax liabilities(73,490)(79,567)Valuation allowance(8,138)(7,985)Net deferred tax asset (liability)$(29,525)$(48,705)Net long-term deferred tax asset balances were approximately $3.7 million and $2.9 million at December 31, 2018 and 2017, respectively, and arerecorded in other assets on the accompanying consolidated balance sheets. Net long-term deferred tax liability balances were approximately $33.2 millionand $51.6 million at December 31, 2018 and 2017, respectively, and are recorded in deferred income taxes on the accompanying consolidated balancesheets.We have approximately $277.3 million in gross state net operating loss carryforwards that will expire between 2019 and 2038. 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, 2018, we had recorded a valuation allowance amount of approximately $8.1 million related to certain state net operating losscarryforward deferred tax assets as we determined that we 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, 2018, we had liabilities of approximately $5.3 million recorded related to unrecognized tax benefits. Included in the liabilities related tounrecognized tax benefits at January 1, 2018, was approximately $0.6 million related to interest and penalties which we have estimated may be paid as aresult of our tax positions. It is our policy to classify the expense related to interest and penalties to be paid on underpayments of income taxes within incometax expense. A summary of the changes in the liability related to our unrecognized tax benefits is presented below.F-24SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS201820172016(In thousands) Unrecognized tax benefit liability, January 1 (1)$4,645 $4,357 $4,755 New positions— 653 — Prior period positions:Increases7 491 939 Decreases(199)(539)(415)Increases from current period positions714 692 615 SettlementsLapse of statute of limitations(69)(781)(1,290)Other(197)(228)(247)Unrecognized tax benefit liability, December 31 (2)$4,901 $4,645 $4,357 (1) Excludes accrued interest and penalties of $0.6 million, $0.8 million and $1.1 million at January 1, 2018, 2017 and 2016, respectively.(2) Excludes accrued interest and penalties of $0.6 million, $0.6 million and $0.8 million at December 31, 2018, 2017 and 2016, respectively. Amountpresented is net of state net operating losses of $0.0 million, $0.1 million and $0.3 million at December 31, 2018, 2017 and 2016, respectively.Approximately $4.9 million and $4.7 million of the unrecognized tax benefits as of December 31, 2018 and 2017, respectively, would ultimatelyaffect the income tax rate if recognized. Included in the December 31, 2018 recorded liability is approximately $0.6 million related to interest and penaltieswhich we have estimated may be paid as a result of our tax positions. We do not anticipate any significant changes in our unrecognized tax benefit liabilitywithin 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 2015 through 2018 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 2014 to 2018.The primary effect of the change in the U.S. federal income tax rate from 35.0% to 21.0% as required by the Tax Cuts and Jobs Act (the “Act”) relatedto the adjustment of deferred income tax balances. In periods prior to the year ended December 31, 2017, the income tax benefit or expense related to thereversal of deferred income tax assets and liabilities was expected to be realized at a federal rate of 35.0%. Because of the Act, the reversal of deferred incometax asset and liabilities in subsequent periods is recorded assuming a federal income tax rate of 21.0%. There were no significant provisional amountsconsidered in our recorded income tax balances at December 31, 2018. However, as the Act was signed into law on December 22, 2017, clarifications of theAct’s provisions may be issued at later dates that alter our 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.8. Related PartiesCertain of our 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 our 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 our dealerships were approximately $1.6 million, $1.9 million and $2.1 million in2018, 2017 and 2016, respectively. We also engaged in other transactions with various SMI subsidiaries, consisting primarily of (1) merchandise and apparelpurchases from SMISC Holdings, Inc. (d/b/a SMI Properties) for approximately $0.9 million in each of 2018, 2017 and 2016 and (2) vehicle sales to variousSMI subsidiaries for approximately $0.2 million in each of 2018, 2017 and 2016.We participate in various aircraft-related transactions with Sonic Financial Corporation (“SFC”), a privately held company controlled by Mr. O.Bruton Smith and his family. Such transactions include, but are not limited to, the use of aircraft owned by SFC for business-related travel by our executives,a management agreement with SFC for storage and maintenance of aircraft leased by us from unrelated third parties and the use of our aircraft for business-related travel by certain affiliates of SFC. We incurred net expenses of approximately $0.3 million, $0.4 million and $0.5 million in 2018, 2017 and 2016,respectively, in aircraft-related transactions with these related parties.F-25SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS9. Capital Structure and Per Share DataPreferred Stock - We have 3,000,000 shares of “blank check” preferred stock authorized with such designations, rights and preferences as may bedetermined from time to time by our Board of Directors. our 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, 2018 or 2017.Common Stock - We have two classes of common stock. We authorized 100,000,000 shares of Class A Common Stock at a par value of $0.01 per share.Class A Common Stock entitles its holder to one vote per share. We have also authorized 30,000,000 shares of Class B Common Stock at a par value of $0.01per 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 our charter. The two classes of common stock share equally in dividends and in the event of liquidation.Share Repurchases - Prior to December 31, 2018, our Board of Directors had authorized us to expend up to $695.0 million to repurchase shares of ourClass A Common Stock. As of December 31, 2018, we had repurchased a total of approximately 33.5 million shares of Class A Common Stock at an averageprice per share of approximately $17.85 and had redeemed 13,801.5 shares of the Preferred Stock at an average price of $1,000 per share. As of December 31,2018, we had approximately $83.6 million remaining under our Board’s authorization.Per Share Data - The calculation of diluted earnings per share considers the potential dilutive effect of stock options and shares under our stockcompensation plans and Class A Common Stock purchase warrants. Certain of our 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 2018, 2017 and 2016: Year Ended December 31, 2018 Income (Loss)Income (Loss) From ContinuingOperationsFrom DiscontinuedOperationsNetIncome (Loss)WeightedAverageSharesAmountPerShareAmountAmountPerShareAmountAmountPerShareAmount (In thousands, except per share amounts)Earnings (loss) and shares42,708 $52,390 $(740)$51,650 Effect of participating securities:Non-vested restricted stock(50)— (50)Basic earnings (loss) and shares42,708 $52,340 $1.23 $(740)$(0.02)$51,600 $1.21 Effect of dilutive securities:Stock compensation plans242 Diluted earnings (loss) and shares42,950 $52,340 $1.22 $(740)$(0.02)$51,600 $1.20 F-26SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 31, 2017 Income (Loss)Income (Loss) From ContinuingOperationsFrom DiscontinuedOperationsNetIncome (Loss)WeightedAverageSharesAmountPerShareAmountAmountPerShareAmountAmountPerShareAmount (In thousands, except per share amounts)Earnings (loss) and shares43,997 $94,153 $(1,170)$92,983 Effect of participating securities:Non-vested restricted stock(85)— (85)Basic earnings (loss) and shares43,997 $94,068 $2.14 $(1,170)$(0.03)$92,898 $2.11 Effect of dilutive securities:Stock compensation plans361 Diluted earnings (loss) and shares44,358 $94,068 $2.12 $(1,170)$(0.03)$92,898 $2.09 Year Ended December 31, 2016 Income (Loss)Income (Loss)From ContinuingOperationsFrom DiscontinuedOperationsNetIncome (Loss)WeightedAverageSharesAmountPerShareAmountAmountPerShareAmountAmountPerShareAmount (In thousands, except per share amounts)Earnings (loss) and shares45,637 $94,516 $(1,323)$93,193 Effect of participating securities:Non-vested restricted stock and restricted stock units(52)— (52)Basic earnings (loss) and shares45,637 $94,464 $2.07 $(1,323)$(0.03)$93,141 $2.04 Effect of dilutive securities:Stock compensation plans311 Diluted earnings (loss) and shares45,948 $94,464 $2.06 $(1,323)$(0.03)$93,141 $2.03 10. Employee Benefit PlansSubstantially all of our employees are eligible to participate in a 401(k) plan. Contributions by us to the 401(k) plan were approximately $9.2 million,$8.0 million and $8.0 million in 2018, 2017 and 2016, respectively.Stock Compensation PlansWe currently have 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, our stockholders voted to approvethe 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 Class ACommon Stock, respectively. During the second quarter of 2015, our 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, our 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 our Board of Directors in order to attract and retain key personnel. Under the 2012 Plan, options to purchase shares ofClass A Common Stock may be granted to key employees of Sonic and its subsidiaries and to officers, directors, consultants and other individuals providingservices to us. The options are granted at the fair market value of our Class A Common Stock at the date of grant, typically vest over a period ranging from sixmonths to three years, are exercisable upon vesting and typically expire 10 years from the date of grant. The 2012 Plan also authorizes the issuance ofF-27SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSrestricted stock awards and restricted stock units. Restricted stock award and restricted stock unit grants under the 2012 Plan typically vest over a periodranging from one to three years, but may be longer in certain cases. The 2012 Formula Plan provides for grants of restricted stock awards or deferred restrictedstock units to non-employee directors and restrictions on those shares expire on the earlier of the first anniversary of the grant date or the day before the nextannual meeting of our stockholders. Individuals holding non-vested restricted stock awards under the 2012 Plan and the 2012 Formula Plan have votingrights and certain grants may receive dividends on non-vested shares. Individuals holding restricted stock units as of December 31, 2018 granted under the2012 Plan do not have voting or dividend rights. We issue new shares of Class A Common Stock to employees and directors to satisfy our option exerciseand stock grant obligations. To offset the effects of these transactions, we have historically repurchased shares of our Class A Common Stock afterconsidering cash flow, market conditions and other factors; however, there is no guarantee that this will occur in future periods.A summary of the status of the stock options related to the Stock Plans is presented below:OptionsOutstandingExercise PricePer Share(Low - High)Weighted AverageExercise Price PerShare WeightedAverageRemainingContractualTermAggregateIntrinsicValue(In thousands, except per share data, term in years)Balance at December 31, 2017228 $1.81-1.81 $1.81 1.3$3,787 Exercised(195)$1.81-1.81 $1.81 Forfeited— $— — $— Balance at December 31, 201833 $1.81-1.81 $1.81 0.3$392 Exercisable33 $1.81-1.81 $1.81 0.3$392 Year Ended December 31,201820172016(In thousands)Intrinsic value of stock options exercised$3,564 $425 $250 We recognize compensation expense within selling, general and administrative expenses related to the stock options granted under the Stock Plans.No stock option compensation expense was recognized during 2018, 2017 or 2016 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 UnitsWeightedAverageGrant DateFair Valueper Share(In thousands, except per share data)Balance at December 31, 20172,199 $21.76 Granted704 $19.55 Forfeited(197)$22.82 Vested(545)$20.98 Balance at December 31, 20182,161 $21.20 During 2018, approximately 664,000 restricted stock units were awarded to our executive officers and other key associates under the 2012 Plan. Theseawards were made in connection with establishing the objective performance criteria for 2018 incentive compensation and vest over three years. The majorityof the restricted stock units awarded to executive officers and other key associates are subject to forfeiture, in whole or in part, based upon specified measuresof Sonic’s earnings per share performance for 2018, continuation of employment and compliance with any restrictive covenants contained in an agreementbetween us and the respective executive officer or other key associate. Also in 2018, approximately 40,000 non-vested restricted stock awards were grantedto our 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 before the next annualmeeting of our stockholders. We recognizedF-28SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTScompensation expense within selling, general and administrative expenses related to restricted stock units and restricted stock awards of approximately $11.9million, $11.1 million and $11.2 million in 2018, 2017 and 2016, respectively.Tax benefits recognized related to restricted stock unit and restricted stock award compensation expense were approximately $3.0 million, $4.2million and $4.2 million for 2018, 2017 and 2016, respectively. Total compensation cost related to non-vested restricted stock units and restricted stockawards not yet recognized at December 31, 2018 was approximately $32.7 million and is expected to be recognized over a weighted average period ofapproximately 6.9 years.Supplemental Executive Retirement PlanOn December 7, 2009, the Compensation Committee of our 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 non-qualified deferred compensation plan that is unfunded forfederal tax purposes. The SERP included 12 active or former members of senior management at December 31, 2018. 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 our tax-qualified and other non-qualifieddeferred compensation plans.The following table sets forth the status of the SERP: Year Ended December 31,20182017Change in projected benefit obligation:(In thousands)Obligation at January 1, $13,556 $11,233 Service cost1,933 1,711 Interest cost470 448 Actuarial loss (gain)(2,368)429 Amendments/settlements/curtailments loss (gain)— — Benefits paid(265)(265)Obligation at December 31, (1)$13,326 $13,556 Accumulated benefit obligation$10,191 $10,204 (1) For 2018, approximately $0.3 million is included in other accrued liabilities and approximately $13.0 million is included in other long-term liabilities inthe accompanying consolidated balance sheets. For 2017, approximately $0.3 million is included in other accrued liabilities and approximately $13.3million is included in other long-term liabilities in the accompanying consolidated balance sheets.Year Ended December 31,20182017(In thousands)Change in fair value of plan assets:Plan assets at January 1,$— $— Actual return on plan assets— — Employer contributions265 265 Benefits paid(265)(265)Plan assets at December 31,— — Funded status recognized$(13,326)$(13,556)The following table provides the cost components of the SERP:Year Ended December 31,20182017(In thousands)Service cost$1,933 $1,711 Interest cost470 448 Net pension expense (benefit)$2,403 $2,159 F-29SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe weighted average assumptions used to determine the benefit obligation and net periodic benefit costs consist of:As of December 31,20182017Discount rate4.36 %3.50 %Rate of compensation increase3.00 %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 Future BenefitPaymentsYear Ending December 31,(In thousands)2019$265 2020$362 2021$362 2022$362 2023$362 2024 - 2028$2,122 Multiemployer Benefit PlanFive of our dealership subsidiaries currently make fixed-dollar contributions to the Automotive Industries Pension Plan (the “AI Pension Plan”)pursuant to collective bargaining agreements between our subsidiaries and the International Association of Machinists (the “IAM”) and the 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 our five dealership subsidiaries are among approximately 199 employers that are obligated to make contributions to the AI PensionPlan pursuant to collective bargaining agreements with the IAM, the IBT and other unions. The risks of participating in this multiemployer pension plan aredifferent 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 we choose to stop participating in the multiemployer pension plan, we may be required to pay the plan an amount based on the underfunded statusof the plan, referred to as a withdrawal liability.Our participation in the AI Pension Plan for 2018, 2017 and 2016 is outlined in the table below. The “EIN/Pension Plan Number” column provides theEmployee Identification Number (the “EIN”). Unless otherwise noted, the most recent Pension Protection Act of 2006 (the “PPA”) zone status available in theyears ended December 31, 2018 and 2017 is for the plan’s year-end at December 31, 2017 and 2016, respectively. The zone status is based on informationthat we 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 increased0.5% from December 31, 2016 to December 31, 2017 and decreased 1.0% from December 31, 2017 to December 31, 2018, affecting the period-to-periodcomparability of the contributions for 2018, 2017 and 2016.F-30SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSPensionProtectionAct ZoneStatusFIP/RP StatusSonic ContributionsSurchargeImposedCollective BargainingAgreement ExpirationDatePension FundEIN/Pension PlanNumber20182017Pending /ImplementedYear Ended December 31,201820172016(In thousands)AI Pension Plan94-1133245RedRedRP Implemented$176 $171 $150 YesBetweenOctober 2021and February 2022Our participating dealership subsidiaries were not listed in the AI Pension Plan’s Form 5500 as providing more than 5% of the total contributions forthe plan years ended December 31, 2018 and December 31, 2017. In June 2006, we received information that the AI Pension Plan was substantiallyunderfunded as of December 31, 2005. In July 2007, we received updated information that the AI Pension Plan continued to be substantially underfunded asof December 31, 2006, with the amount of such underfunding increasing versus year end 2005. In March 2008, the Board of Trustees of the AI Pension Plannotified participants, participating employers and local unions that the AI Pension Plan’s actuary, in accordance with the requirements of the PPA, had issueda certification that the AI Pension Plan was in Critical Status effective with the plan year commencing January 1, 2008. In conjunction with the AI PensionPlan’s Critical Status, the Board of Trustees of the AI Pension Plan adopted a RP that implemented reductions or eliminations of certain adjustable benefitsthat were previously available under the AI Pension Plan (including some forms of early retirement benefits, and disability and death benefits, among otheritems), and also implemented a requirement on all participating employers to increase employer contributions to the AI Pension Plan for a seven-year periodwhich commenced in 2013. As of April 2015, the AI Pension Plan’s actuary certified that the AI Pension Plan remained in Critical Status for the plan yearcommencing January 1, 2015. According to publicly available information, in September 2016, the AI Pension Plan made a formal application for approvalof suspension of benefits with the U.S. Treasury Department, which, if approved by the U.S. Treasury Department, would have implemented a benefitreduction effective July 1, 2017 for participants in the AI Pension Plan. The filing included an Actuarial Certification of Plan Status as of January 1, 2016 thatthe AI Pension Plan previously filed with the U.S. Internal Revenue Service on March 30, 2016, which reported that the AI Pension Plan was in critical anddeclining 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’spreviously adopted RP. The September 2016 filing with the U.S. Treasury Department also included an Actuarial Certification of Plan Solvency as of July 1,2016 with the actuarial firm’s projection that the proposed suspensions of benefits are reasonably estimated to enable the AI Pension Plan to avoidinsolvency 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. In addition, if the financial condition of the AIPension Plan were to continue to deteriorate to the point that the AI Pension Plan is forced to terminate and be administered by the Pension Benefit GuarantyCorporation (the “PBGC”), the participating employers could be subject to assessments by the PBGC to cover the participating employers’ assessed share ofthe unfunded vested benefits. If any of these adverse events were to occur in the future, it could result in a substantial withdrawal liability assessment to us.11. Fair Value MeasurementsIn determining fair value, we use 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 us. Unobservable inputs are inputs that reflect ourassumptions 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 we have the ability to access. Assets utilizing Level1 inputs include marketable securities that are actively traded, including our stock or public bonds.F-31SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLevel 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, those used inassessing impairment of property, plant and equipment and other intangibles and those used in the reporting unit valuation in the annual goodwillimpairment 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 us 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 fall intodifferent levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurementis 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, our own assumptions are set to reflect those that marketparticipants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including duringperiods when the market may be abnormally high or abnormally low. Accordingly, fair value measurements can be volatile based on various factors that mayor may not be within our control.Assets and liabilities recorded at fair value in the accompanying consolidated balance sheets as of December 31, 2018 and 2017 are as follows: Fair Value Based onSignificant Other ObservableInputs (Level 2) December 31, 2018December 31, 2017 (In thousands)Assets: Cash surrender value of life insurance policies (1)$31,395 $33,747 Cash flow swaps and interest rate caps designated as hedges (2)4,839 5,968 Total assets$36,234 $39,715 Liabilities:Cash flow swaps designated as hedges (3)$— $1,286 Deferred compensation plan (4)19,848 18,417 Total liabilities$19,848 $19,703 (1) Included in other assets in the accompanying consolidated balance sheets.(2) As of December 31, 2018, approximately $1.8 million and $3.0 million were included in other current assets and other assets, respectively, in theaccompanying consolidated balance sheets. As of December 31, 2017, approximately $0.9 million and $5.1 million were included in other current assets andother assets, respectively, in the accompanying consolidated balance sheets.(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.(4) 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, 2018, 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.” F-32SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSBalance as ofBalance as ofDecember 31, 2018SignificantUnobservableInputs(Level 3) asofSignificant Unobservable Inputs (Level 3) as of December 31, 2018Total Gains /(Losses) fortheYear EndedTotal Gains/ (Losses) for the Year Ended December 31, 2018(In thousands)Long-lived assets held and used (1)$1,178,489 $1,178,489 $(26,604)Goodwill (2)$509,592 $509,592 $— Franchise assets (2)$65,700 $65,700 $(2,100)(1) See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 4, “Property and Equipment.”(2) See Note 1, “Description of Business and Summary of Significant Accounting Policies,” and Note 5, “Intangible Assets and Goodwill.”As of December 31, 2018 and 2017, the fair values of our financial instruments, including receivables, notes receivable from finance contracts, notespayable - floor plan, trade accounts payable, borrowings under the revolving credit facilities and certain mortgage notes, approximated their carrying valuesdue either to length of maturity or existence of variable interest rates that approximate prevailing market rates.The fair value and carrying value of our fixed rate long-term debt were as follows: December 31, 2018December 31, 2017 Fair ValueCarrying ValueFair ValueCarrying Value (In thousands)5.0% Notes (1)$262,515 $289,273 $279,148 $289,273 6.125% Notes (1)$216,250 $250,000 $248,750 $250,000 Mortgage Notes (2)$218,402 $215,196 $203,031 $199,972 Other (2)$20,437 $20,588 $3,760 $3,947 (1) As determined by market quotations as of December 31, 2018 and 2017, respectively (Level 1).(2) As determined by DCF (Level 3).12. Commitments and ContingenciesFacility and Equipment LeasesFor 2018, we recognized approximately $1.7 million of lease exit expense, which consists of $0.5 million of interest expense and $1.2 million relatedto adjustments to lease exit accruals recorded in previous years for the present value of the lease payments, net of estimated sublease rentals, for the remaininglife of the operating leases and other accruals necessary to satisfy the lease commitment to the landlord. A summary of the activity of these operating leaseaccruals consists of the following: (In thousands)Balance at December 31, 2017$6,478 Lease exit expense (1)1,709 Payments (2)(2,973)Lease buyout/other (3)(580)Balance at December 31, 2018$4,634 (1) Expense of approximately $0.1 million is recorded in interest expense, other, net and expense of approximately $1.2 million is recorded in selling,general and administrative expenses in the accompanying consolidated statements of income. In addition, expense of approximately $0.4 million is recordedin 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 $1.0 million recorded in continuingoperations and approximately $2.0 million recorded 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.F-33SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe majority of our dealership facilities are subject to long-term operating lease arrangements. These facility lease arrangements normally have 15- to20-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. Manyof the leases are subject to the provisions of a guaranty and subordination agreement that contains financial and affirmative covenants. We were incompliance with these covenants at December 31, 2018. 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,NetFutureReceiptsfromSubleasesYear Ending December 31,(In thousands)2019$89,162 $(13,430)2020$73,188 $(10,508)2021$58,858 $(8,534)2022$44,526 $(7,232)2023$41,095 $(7,013)Thereafter$175,265 $(13,116)Total lease expense for continuing operations for 2018, 2017 and 2016 was approximately $89.2 million, $100.6 million and $94.6 million,respectively. Total lease expense, net of lease exit accrual adjustments for discontinued operations for 2018, 2017 and 2016 was approximately $0.6 million,$1.3 million and $0.9 million, respectively. The total net contingent rent benefit related to a decrease in interest rates since the underlying leases commencedwas approximately $1.6 million, $1.7 million and $1.8 million for continuing operations for 2018, 2017 and 2016, respectively, and was approximately $0.1million for discontinued operations for each of 2018, 2017 and 2016.Many of our facility operating leases are subject to affirmative and financial covenant provisions related to a subordination and guaranty agreementexecuted with the landlord of many of our facility properties. The required financial covenants related to certain lease agreements are as follows: Covenant MinimumConsolidatedLiquidity RatioMinimumConsolidated FixedCharge CoverageRatioMaximumConsolidated TotalLease AdjustedLeverage RatioMinimum EBTDARto Rent RatioRequired ratio1.05 1.20 5.75 1.50 December 31, 2018 actual1.10 1.43 5.25 3.36 Guarantees and IndemnificationsIn accordance with the terms of our operating lease agreements, our dealership subsidiaries, acting as lessees, generally agree to indemnify the lessorfrom certain exposure arising as a result of the use of the leased premises, including environmental exposure and repairs to leased property upon terminationof the lease. In addition, we have 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 our subsidiaries have assigned or sublet to the buyer their interests in realproperty leases associated with such dealerships. In general, the subsidiaries retain responsibility for the performance of certain obligations under such leases,including rent payments and repairs to leased property upon termination of the lease, to the extent that the assignee or sublessee does not perform. Theseobligations are included within the “Future Minimum Lease Payments, Net” column in the table above. In the event the assignees or sublessees do notperform their obligations, we remain liable for the lease payments. As of December 31, 2018, the total amount relating to this risk was approximately $59.8million, which is the total of the “Future Receipts from Subleases” column in the table above. However, there are situations in which we have assigned a leaseto the buyer and we were not able to obtain a release from the landlord. In these situations, although we are no longer the primary obligor, we arecontingently liable if the buyer does not perform under the lease terms. However, in accordance with the terms of the assignment and sublease agreements, theassignees andF-34SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSsublessees have generally agreed to indemnify us and our subsidiaries in the event of non-performance. Additionally, in connection with certain dispositions,we have obtained indemnifications from the parent company or owners of these assignees and sublessees in the event of non-performance.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 $13.2 million at December 31, 2018. These indemnifications typicallyexpire within a period of one to three years following the date of sale. The estimated fair value of these indemnifications was not material and the amountrecorded for this contingency was not significant at December 31, 2018.We also guarantee the floor plan commitments of our 50%-owned joint venture, the amount of which was approximately $4.3 million at December 31,2018.Legal MattersWe 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 defends 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. 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.Included in other accrued liabilities and other long-term liabilities in the accompanying consolidated balance sheet at December 31, 2018 wereapproximately $2.4 million in reserves that we were holding for pending proceedings. Included in other accrued liabilities and other long-term liabilities inthe accompanying consolidated balance sheet at December 31, 2017 were approximately $3.2 million for such reserves. Except as reflected in such reserves,we are currently unable to estimate a range of reasonably possible loss, or a range of reasonably possible loss in excess of the amount accrued, for pendingproceedings.Earnout ConsiderationIn association with the acquisition of a business in 2017, we entered into an earnout agreement whereby the seller may be entitled to certain variableearnout payments, subject to certain restrictions, based on the acquired business achieving specified earnings targets over a 10-year period, not to exceed amaximum aggregate earnout payment of $80.0 million. We will recognize the accrual of any such variable earnout payments as compensation expense asearned. We have recorded approximately $23.3 million in earnout accruals as of December 31, 2018, with approximately $7.7 million and $15.6 millionrecorded in other accrued liabilities and other long-term liabilities, respectively, in the accompanying consolidated balance sheets.13. Accumulated Other Comprehensive Income (Loss)The changes in accumulated other comprehensive income (loss) by component for 2018 are as follows: Gains and (Losses)on Cash FlowHedgesDefined BenefitPension Plan Total AccumulatedOther ComprehensiveIncome (Loss) (In thousands)Balance at December 31, 2017$1,750 $(443)$1,307 Other comprehensive income (loss) before reclassifications (1)1,517 1,642 3,159 Amounts reclassified out of accumulated other comprehensive income (loss) (2)(233)— (233)Net current-period other comprehensive income (loss)1,284 1,642 2,926 Balance at December 31, 2018$3,034 1,199 $4,233 F-35SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1) Net of tax expense of $548 related to gains on cash flow hedges and tax expense of $726 related to the defined benefit pension plan.(2) Net of tax benefit of $88 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 our cash flow hedges. Forfurther discussion of our defined benefit pension plan, see Note 10, “Employee Benefit Plans.”14. Segment InformationAs of December 31, 2018, we had two operating segments: (1) retail automotive franchises that sell new vehicles and buy and sell used vehicles, sellreplacement parts, perform vehicle repair and maintenance services, and arrange finance and insurance products (the “Franchised Dealerships Segment”) and(2) pre-owned vehicle specialty retail locations that provide customers an opportunity to search, buy, service, finance and sell pre-owned vehicles (the“EchoPark 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 our chief operating decision maker to assess operating performance and allocate resources. Our chief operatingdecision maker is a group of three individuals consisting of: (1) the Company’s Chief Executive Officer; (2) the Company’s Chief Financial Officer; and (3)the Company’s President. We have determined that our operating segments also represent our reportable segments. Reportable segment revenues, segment income (loss), floor plan interest expense, depreciation and amortization, capital expenditures and assets are asfollows:Year Ended December 31,201820172016(In thousands)Revenues:Franchised Dealerships Segment$9,251,453 $9,612,899 $9,590,752 EchoPark Segment700,177 254,309 141,027 Total revenues$9,951,630 $9,867,208 $9,731,779 Year Ended December 31,201820172016(In thousands)Segment income (loss) (1):Franchised Dealerships Segment (2)$181,730 $197,121 $218,769 EchoPark Segment (3)(52,465)(21,951)(13,576)Total segment income (loss)129,265 175,170 205,193 Interest expense, other, net(54,059)(52,524)(50,106)Other income (expense), net106 (14,522)125 Income (loss) from continuing operations before taxes$75,312 $108,124 $155,212 (1) Segment income (loss) for each segment is defined as operating income (loss) less interest expense, floor plan.(2) For the year ended December 31, 2018, the above amount includes approximately $38.9 million of net gain on the disposal of franchised dealerships,offset partially by approximately $27.9 million of impairment expense, approximately $4.0 million of storm-related physical damage costs, approximately$1.7 million of legal costs, approximately $1.6 million of executive transition costs and approximately $1.4 million of lease exit charges. For the year endedDecember 31, 2017, the above amount includes approximately $14.6 million of net loss on the extinguishment of debt, approximately $8.9 million of storm-related physical damage and legal costs, approximately $7.5 million of impairment expense, approximately $0.7 million of double-carry interest andapproximately $0.3 million of lease exit charges, offset partially by approximately $10.0 million of net gain on the disposal of franchised dealerships. For theyear ended December 31, 2016, the above amount includes approximately $11.7 million of storm-related physical damage and legal costs, approximately$7.9 million of impairment expense and approximately $0.2 million of lease exit charges.F-36SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(3) For the year ended December 31, 2018, the above amount includes approximately $32.5 million of long-term compensation-related charges andapproximately $1.6 million of impairment expense. For the year ended December 31, 2017, the above amount includes approximately $1.9 million ofimpairment expense, approximately $1.3 million of long-term compensation-related charges, approximately $0.6 million of lease exit charges andapproximately $0.2 million of storm-related physical damage and legal costs.Year Ended December 31,201820172016(In thousands)Floor plan interest expense:Franchised Dealerships Segment$46,126 $35,030 $26,631 EchoPark Segment2,272 1,365 1,085 Total floor plan interest expense$48,398 $36,395 $27,716 Year Ended December 31,201820172016(In thousands)Depreciation and amortization:Franchised Dealerships Segment$85,849 $83,741 $73,591 EchoPark Segment7,774 5,203 3,855 Total depreciation and amortization$93,623 $88,944 $77,446 Year Ended December 31,201820172016(In thousands)Capital expenditures:Franchised Dealerships Segment$116,854 $195,220 $166,405 EchoPark Segment46,765 39,025 39,827 Total capital expenditures$163,619 $234,245 $206,232 December 31,20182017(In thousands)Assets:Franchised Dealerships Segment$1,861,144 $1,930,336 EchoPark Segment245,648 200,289 Corporate and other:Cash and Cash Equivalents5,854 6,352 Goodwill, Net509,592 525,780 Other Intangible Assets, Net69,705 74,589 Other Corporate and Other Assets1,104,864 1,081,172 Total assets$3,796,807 $3,818,518 F-37SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS15. Summary of Quarterly Financial Data (Unaudited)The following table summarizes our results of operations as presented in the accompanying consolidated statements of income by quarter for 2018 and2017: FirstQuarterSecondQuarterThirdQuarterFourthQuarter(In thousands, except per share data)Year Ended December 31, 2018Total revenues (1)$2,400,773 $2,505,749 $2,470,849 $2,574,259 Gross profit (1)$352,499 $362,375 $360,536 $370,715 Net income (loss) (2)$(2,194)$16,905 $15,118 $21,821 Earnings (loss) per common share - Basic (2) (3)$(0.05)$0.40 $0.35 $0.51 Earnings (loss) per common share - Diluted (2) (3)$(0.05)$0.39 $0.35 $0.51 Year Ended December 31, 2017Total 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 (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 being calculated ona quarterly versus annual basis.Our 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 more stable throughout the year.Net income for the fourth quarter ended December 31, 2018 includes approximately $15.6 million of pre-tax impairment charges related to propertyand equipment, capitalized software projects, dealership facility construction projects and franchise asset write-offs, offset partially by a benefit ofapproximately $0.8 million related to pre-tax lease exit accrual adjustments.Net income for the third quarter ended September 30, 2018 includes approximately $1.6 million of pre-tax executive transition costs, pre-tax chargesof approximately $1.2 million related to storm-related physical damage and approximately $0.3 million of pre-tax costs related to the sale of franchiseddealerships.Net income for the second quarter ended June 30, 2018 includes approximately $38.0 million of pre-tax gain related to the sale of franchiseddealerships and a pre-tax benefit of approximately $2.6 million related to lease exit accrual adjustments, offset partially by approximately $23.3 million ofpre-tax long-term compensation costs, approximately $10.3 million of pre-tax impairment charges related to certain construction projects and approximately$3.1 million of pre-tax charges related to storm-related physical damage and legal costs.Net income for the first quarter ended March 31, 2018 includes approximately $9.2 million of pre-tax long-term compensation costs, approximately$4.8 million of pre-tax lease exit charges, pre-tax impairment charges of approximately $3.6 million related to certain construction projects andapproximately $1.5 million of pre-tax legal costs, offset partially by a pre-tax net gain of approximately $1.2 million related to the sale of franchiseddealerships.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.F-38SONIC AUTOMOTIVE, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNet 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. 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 approximately $15.3 million related to the extinguishment of the7.0% Notes (including double-carry interest), pre-tax charges of approximately $2.4 million related to storm damage and approximately $0.5 million of pre-tax impairment charges related to the write-off of certain construction project costs, offset partially by a $1.1 million net benefit from legal settlements.16. Subsequent EventsSubsequent to December 31, 2018, we disposed of two franchised dealerships, which generated cash proceeds of approximately $108.6 million.Subsequent to December 31, 2018, our Board of Directors approved a cash dividend on all outstanding shares of Class A and Class B Common Stockof $0.10 per share for stockholders of record on March 15, 2019 to be paid on April 15, 2019.F-39Exhibit 10.25FOURTH AMENDMENTTO THESONIC AUTOMOTIVE, INC.SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN(“SERP”)THIS AMENDMENT IS ADOPTED AS OF THE 17th DAY OF December, 2018, by Sonic Automotive, Inc. (the “Company”) tobe effective as of the date hereof;W I T N E S S E T H:WHEREAS, the Company adopted the Sonic Automotive, Inc. Supplemental Executive Retirement Plan effective January 1, 2010and as subsequently amended (the “SERP”);WHEREAS, Article VII of the SERP permits the Company, by action taken by the Compensation Committee of the Board ofDirectors of the Company, to amend the SERP at any time and for any reason, provided that any such amendment shall not reduce thevested accrued benefits of any participant accrued as of the date of any such amendment without the written consent of the participant;andWHEREAS, pursuant to action taken by the Compensation Committee of the Board of Directors of the Company, the Companywishes to amend the SERP to modify Article IX of the SERP (Claims) to revise the claims procedures for disability claims under thePlan in connection with changes in applicable Department of Labor regulations and make other updates;NOW, THEREFORE, Article IX of the SERP (Claims) is hereby amended in its entirety and replaced with the following effective asApril 1, 2018:ARTICLE IXClaims9.1 Filing a Claim. Any controversy or claim arising out of or relating to the Plan shall be filed in writing with the Committeewhich shall make all determinations concerning such claim. Any claim filed with the Committee and any decision by the Committeedenying such claim shall be in writing and any such denial shall be delivered to the Participant or Beneficiary filing the claim (the“Claimant”). A Claimant may exercise his or her rights directly or through an authorized representative. If the Claimant chooses toexercise his or her rights through an authorized representative, the Claimant must submit a written statement to the Committeedesignating the authorized representative to act on the Claimant’s behalf with respect to a claim for benefits. A Claimant may have onlyone representative at a time to assist in submitting an individual claim or appealing an unfavorable claim determination. An authorizedrepresentative may be required to produce evidence of his or her authority to act on the Claimant’s behalf andthe Plan may require the Claimant to execute a form relating to such representative’s authority before that person will be given accessto the Claimant’s information or allowed to take any action for the Claimant. Such a delegation must be clearly stated in a formacceptable to the Committee. For purposes of the Plan, electronic notification from the Committee may serve as written notificationsubject to and in accordance with applicable Department of Labor regulations.(a) In General. Notice of a denial of benefits (other than Disability Benefits) will be provided within 90 days of theCommittee’s receipt of the Claimant’s claim for benefits. If the Committee determines that it needs additional time to review the claim,the Committee will provide the Claimant with a notice of the extension before the end of the initial 90-day period. The extension willnot be more than 90 days from the end of the initial 90-day period and the notice of extension will explain the special circumstancesthat require the extension and the date by which the Committee expects to make a decision.(b) Disability Benefits. Notice of denial of a Disability Benefit will be provided within 45 days of the Committee’s receiptof the Claimant’s claim for a Disability Benefit. If the Committee determines that it needs additional time to review the DisabilityBenefit claim, the Committee may extend the review period for up to 30 days and the Committee will provide the Claimant with anotice of the extension before the end of the initial 45-day period. If the Committee determines that a decision cannot be made withinthe first 30-day extension period due to matters beyond the control of the Committee, the time period for making a determination maybe further extended for an additional 30 days. If such an additional extension is necessary, the Committee shall notify the Claimantprior to the expiration of the initial 30-day extension. Any notice of extension shall indicate the circumstances necessitating theextension of time, the date by which the Committee expects to furnish a notice of decision, the specific standards on which suchentitlement to a benefit is based, the unresolved issues that prevent a decision on the claim and any additional information needed toresolve those issues. A Claimant will be provided a minimum of 45 days to submit any necessary additional information to theCommittee. In the event that a 30-day extension is necessary due to a Claimant’s failure to submit information necessary to decide aclaim, the period for furnishing a notice of decision shall be tolled from the date on which the notice of the extension is sent to theClaimant until the earlier of the date the Claimant responds to the request for additional information or the response deadline.(c) Contents of Notice. If a claim for benefits is completely or partially denied, notice of such denial shall be in writing andshall set forth the following information: (i) the specific reason or reasons for the denial; (ii) reference to the specific Plan provisions onwhich the denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claimand an explanation of why such material or information is necessary; (iv) an explanation of the claims review procedures under thePlan to appeal a denial and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring a civilaction under Section 502(a) of ERISA following an adverse benefit determination on review; and (v) the consequences of theParticipant’s failure to meet the deadline for appeal, including the possible loss of the right to bring a civil action. In the case of acomplete or partial denial of a Disability Benefit claim, the notice also shall set forth: (A) a discussion of the decision, including reasonsfor disagreeing with, or not following, (i) the views presented by the Claimant to the Plan of any health care professionals treating theClaimant and vocationalprofessionals who evaluated the Claimant, (ii) the views of medical or vocational experts whose advice was obtained on behalf of thePlan in connection with the denial, without regard to whether the advice was relied upon in making the benefit determination, and (iii)a disability determination regarding the Claimant made by the Social Security Administration presented by the Claimant to the Plan;(B) any internal rule, guideline, protocol or other similar criterion relied upon in denying the claim for Disability Benefits, or astatement that any such internal rule, guideline, protocol or other similar criterion does not exist; and (C) a statement that the Claimantis entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and otherinformation relevant to the claim for benefits. If required by ERISA, the notice will be provided in a culturally and linguisticallyappropriate manner.9.2 Appeal of Denied Claims. A Claimant whose claim has been completely or partially denied shall be entitled to appeal the claimdenial by filing a written appeal with a committee designated to hear such appeals (the “Appeals Committee”), which may be theCommittee except as otherwise provided below. A Claimant who timely requests a review of the denied claim (or his or her authorizedrepresentative) may have, upon request and free of charge, reasonable access to and copies of all documents, records and otherinformation relevant to the claim for benefits and may submit written comments, documents, records and other information relevant tothe claim to the Appeals Committee. All written comments, documents, records, and other information shall be considered “relevant” ifthe information: (i) was relied upon in making a benefits determination, (ii) was submitted, considered or generated in the course ofmaking a benefits decision regardless of whether it was relied upon to make the decision, or (iii) demonstrates compliance withadministrative processes and safeguards established for making benefit decisions. The Appeals Committee may, in its sole discretionand if it deems appropriate or necessary, decide to hold a hearing with respect to the claim appeal.(a) In General. Appeal of a denied benefits claim (other than a Disability Benefit claim) must be filed in writing with theAppeals Committee no later than 60 days after receipt of the written notification of such claim denial. The Appeals Committee shallmake its decision regarding the merits of the denied claim within 60 days following receipt of the appeal (or within 120 days after suchreceipt, in a case where there are special circumstances requiring extension of time for reviewing the appealed claim). If an extension oftime for reviewing the appeal is required because of special circumstances, written notice of the extension shall be furnished to theClaimant prior to the commencement of the extension. The notice will indicate the special circumstances requiring the extension oftime and the date by which the Appeals Committee expects to render the determination on review. The review will take into accountcomments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether suchinformation was submitted or considered in the initial benefit determination.(b) Disability Benefits. Appeal of a denied Disability Benefit claim must be filed in writing with the Appeals Committee nolater than 180 days after receipt of the written notification of such claim denial. The review shall be conducted by the AppealsCommittee (exclusive of any person who made the initial adverse decision or such person’s subordinate). If the Participant requests areview of his or her claim in a timely fashion, he or she shall have the following rights in addition to those set forth in the immediatelypreceding paragraph. The claim will be reviewed without deference to the initial adverse benefits determination. Before the Plancan issue an adverse determination on review of a claim for Disability Benefits, the Appeals Committee will provide the Claimant, freeof charge, with any new or additional evidence considered, relied upon, or generated by the Plan, or any other person making thebenefit determination (or at the direction of the Plan or such other person) in connection with the claim. Such evidence will be providedas soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required tobe provided, in order to give the Claimant a reasonable opportunity to respond prior to that date. Before the Plan can issue an adversedetermination on review of a claim for Disability Benefits based on a new or additional rationale, the Appeals Committee will providethe Claimant, free of charge, with the new rationale. The rationale will be provided as soon as possible and sufficiently in advance ofthe date on which the notice of adverse benefit determination on review is required to be provided, in order to give the Participant areasonable opportunity to respond prior to that date. If the initial adverse benefit determination was based in whole or in part on amedical judgment, the Appeals Committee will consult with a health care professional with appropriate training and experience in thefield of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the sameindividual who was consulted during the initial determination or the subordinate of such individual. If the Committee obtained theadvice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was reliedupon), the Appeals Committee will identify such experts. The Appeals Committee shall make its decision regarding the merits of thedenied claim within 45 days following receipt of the appeal (or within 90 days after such receipt, in a case where there are specialcircumstances requiring extension of time for reviewing the appealed claim). If an extension of time for reviewing the appeal isrequired because of special circumstances, written notice of the extension shall be furnished to the Claimant prior to thecommencement of the extension. The notice will indicate the special circumstances requiring the extension of time and the date bywhich the Appeals Committee expects to render the determination on review. Following its review of any additional informationsubmitted by the Claimant, the Appeals Committee shall render a decision on its review of the denied claim.(c) Contents of Notice. If a benefits claim is completely or partially denied on review, notice of such denial shall be inwriting and shall set forth the reasons for denial in plain language. The decision on review shall set forth: (i) the specific reason orreasons for the denial; (ii) reference to the specific Plan provisions on which the denial is based; (iii) a statement that the Claimant isentitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other informationrelevant to the Claimant’s claim for benefits; and (v) a statement of the Claimant’s right to bring an action under Section 502(a) ofERISA (and for any claim for Disability Benefits, a description of any contractual limitations period that applies, if any, to theClaimant’s right to bring such an action (with the calendar date on which any such contractual limitations period that may apply to theclaim will expire)). In addition, if the Claimant’s benefit claim is one for Disability Benefits, the notice also shall include: (A) adiscussion of the decision, including reasons for disagreeing with, or not following, (i) the views presented by the Claimant to the Planof any health care professionals treating the Claimant and vocational professionals who evaluated the Claimant, (ii) the views ofmedical or vocational experts whose advice was obtained on behalf of the Plan in connection with the Claimant’s denial, withoutregard to whether the advice was relied upon in making the benefit determination, and (iii) a disability determination regarding theClaimant presented by the Claimant to the Plan made by the Social Security Administration; and (B) any internal rule,guideline, protocol or other similar criterion relied upon in denying the claim for Disability Benefits, or a statement that any suchinternal rule, guideline, protocol or other similar criterion does not exist. As applicable, the notice for any denial on appeal will beprovided in a culturally and linguistically appropriate manner. If the Plan offers additional voluntary appeal procedures (which the Planis not required to do), the notice for denial also will describe those procedures.9.3 Legal Action. A Claimant may not bring any legal or equitable action, including commencement of any arbitration, relating to aclaim for benefits under the Plan unless and until the Claimant has followed the claims procedures under the Plan and exhausted his orher administrative remedies under such claims procedures. This exhaustion requirement applies to all types of claims under the Plan,including without limitation: (a) claims for and recovery of benefits under the Plan, (b) enforcement of rights under the terms of thePlan, and (c) clarification of rights to future benefits under the terms of the Plan.If a Participant or Beneficiary prevails in a legal proceeding brought under the Plan to enforce the rights of such Participantor any other similarly situated Participant or Beneficiary, in whole or in part, the Company shall reimburse such Participant orBeneficiary for all legal costs, expenses, attorneys’ fees and such other liabilities incurred as a result of such proceedings. If the legalproceeding is brought in connection with a Change in Control and the Company has established a rabbi trust as described in Section8.2, the Participant or Beneficiary may file a claim directly with the trustee for reimbursement of such costs, expenses and fees. Forpurposes of the preceding sentence, the amount of the claim shall be treated as if it were an addition to the Participant’s orBeneficiary’s Accrued Benefit and will be included in determining the Company’s or other Employer’s trust funding obligation underSection 8.2.9.4 Discretion of Appeals Committee. All interpretations, determinations and decisions of the Appeals Committee with respect toany claim shall be made in its sole discretion, and shall be final and conclusive.IN WITNESS WHEREOF, the Company, pursuant to approval by the Compensation Committee of the Board of Directors, hascaused this Amendment to be properly executed as of the day and year first above written.SONIC AUTOMOTIVE, INC.By: Stephen K. CossTitle: SecretaryExhibit 21.1ENTITY Domestic Foreign ASSUMED NAME AnTrev, 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. NC NC Cornerstone Acceptance Corporation FL NC OH TN TX driversselect: SAI DS, LLC TX VA, FL EchoPark driversselect: SAI DS Realty TX, LLC TX driversselect: SAI SIC, Inc. GA ECHOPARK: AM GA, LLC GA ECHOPARK: AM Realty GA, LLC GA ECHOPARK: Echopark Automotive, Inc. DE CO FL EchoPark NC ECHOPARK: EchoPark Driver Education,LLC CO ECHOPARK: EchoPark FL, LLC FL AutoMatch Fort Myers AutoMatch Jacksonville AutoMatch Ocala ECHOPARK: EchoPark NC, LLC NC ECHOPARK: EchoPark Realty TX, LLC TX ECHOPARK: EchoPark SC, LLC SC ECHOPARK: EchoPark TX, LLC TX EchoPark ECHOPARK: EP Realty NC, LLC NC ECHOPARK: EP Realty SC, LLC SC ECHOPARK: SAI Vehicle Subscription, Inc. DE TX ECHOPARK: SAI VS GA, LLC GA Drivers-Select ECHOPARK: SAI VS TX, LLC TX Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME ECHOPARK: TT Denver, LLC CO EchoPark ECHOPARK: TTRE CO 1, LLC CO FAA Beverly Hills, Inc. CA Beverly Hills BMW FAA Capitol N, Inc. CA FAA Concord H, Inc. CA Concord Honda FAA Concord T, Inc. CA Concord Scion FAA Dublin N, Inc. CA FAA Dublin VWD, Inc. CA FAA Holding Corp. CA FAA Las Vegas H, Inc. NV Honda West FAA Poway H, Inc. CA Poway Honda FAA Poway T, Inc. CA FAA San Bruno, Inc. CA Melody Toyota Melody Scion FAA Santa Monica V, Inc. CA FAA Serramonte H, Inc. CA Honda of Serramonte FAA Serramonte L, Inc. CA Lexus of Marin Lexus 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 Incorporated CA Honda of Santa Monica L Dealership Group, Inc. TX CA Marcus David Corporation NC Town and Country Toyota Town and Country Toyota Certified UsedCars Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME Massey Cadillac, Inc. (TN-MI) TN Mountain States Motors Co., Inc. CO Ontario L, LLC CA Crown Lexus Exhibit 21.1 ENTITY Domestic Foreign ASSUMED NAME Philpott Motors, Ltd. TX Philpott Motors Hyundai Philpott Ford Santa Clara Imported Cars, Inc. CA Honda of Stevens Creek SRM Assurance, Ltd. Cayman Is. Stevens Creek Cadillac, Inc. CA St. Claire Cadillac Town and Country Ford, Incorporated NC Windward, Inc. HI CA Honda of Hayward SAI 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 MINI SAI 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 East SAI Clearwater T, LLC FL Clearwater Toyota Clearwater Scion SAI Cleveland N, LLC TN Nissan of Cleveland SAI Columbus Motors, LLC OH Hatfield Hyundai Hatfield Subaru Hatfield Isuzu SAI Columbus T, LLC OH Toyota West Scion West Hatfield Automall SAI Columbus VWK, LLC OH Hatfield Kia Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME Hatfield Volkswagen SAI Conroe N, LLC TX SAI Denver B, Inc. CO BMW of Denver Downtown Bodyworks Murray Motorworks Exhibit 21.1 ENTITY Domestic Foreign ASSUMED NAME SAI Denver C, Inc. CO SAI Denver M, Inc. CO Mercedes-Benz of Denver SAI Fairfax B, LLC VA BMW of Fairfax SAI 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 Myers MINI of Fort Myers SAI Fort Myers H, LLC FL Honda of Fort Myers SAI Fort Myers M, LLC FL Mercedes-Benz of Fort Myers SAI Fort Myers VW, LLC FL Volkswagen of Fort Myers SAI GA HC1, LLC GA SAI Irondale Imports, LLC AL Audi Birmingham BMW of Birmingham Jaguar Birmingham Land Rover Birmingham MINI of Birmingham Porsche Birmingham SAI Irondale L, LLC AL Lexus of Birmingham SAI Long Beach B, Inc. CA Long Beach BMW Long Beach MINI SAI McKinney M, LLC TX Mercedes-Benz of McKinney SAI MD HC1, Inc. MD Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME SAI Monrovia B, Inc. CA BMW of Monrovia MINI of Monrovia SAI Montgomery B, LLC AL BMW of Montgomery Classic Dodge SAI Montgomery BCH, LLC AL Classic Cadillac Classic Buick GMC SAI Montgomery CH, LLC AL Capitol Chevrolet Capitol Hyundai SAI 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 Nashville Porsche 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 Pensacola SAI Philpott T, LLC TX Philpott Toyota Philpott Scion SAI Riverside C, LLC OK SAI Roaring Fork LR, Inc. CO Land Rover Roaring Fork SAI Rockville Imports, LLC MD Porsche Bethesda Rockville Audi SAI Rockville L, LLC MD Lexus of Rockville SAI S. Atlanta JLR, LLC GA Jaguar South Atlanta Land Rover South Atlanta Jaguar Land Rover South Atlanta SAI Santa Clara K, Inc. CA SAI Stone Mountain T, LLC GA SAI TN HC1, LLC TN Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME SAI TN HC2, LLC TN SAI TN HC3, LLC TN SAI Tulsa N, LLC OK SAI Tulsa T, LLC OK SAI Tysons Corner H, LLC VA Honda of Tysons Corner SAI Tysons Corner I, LLC VA Infiniti of Tysons Corner SAI 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 Houston Momentum Luxury Cars Audi West Houston Sonic – Buena Park H, Inc. CA Buena Park Honda Sonic – Cadillac D, LP TX Massey Cadillac Sonic – Calabasas A, Inc. CA Sonic Calabasas M, Inc. CA Mercedes-Benz of Calabasas Sonic – 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 Toyota Mountain States Toyota and Scion Sonic Development, LLC NC AL CA Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME CO FL GA MD MI NV OH OK SC TN TX VA Exhibit 21.1 ENTITY Domestic Foreign ASSUMED NAME Sonic Divisional Operations, LLC NV AL AZ CA CO FL GA MD MI NC OH OK SC TN TX VA WI Sonic – Downey Cadillac, Inc. CA Sonic eStore, Inc. NC Sonic FFC 1, Inc. DE TX Sonic FFC 2, Inc. DE TX Sonic FFC 3, Inc. DE TX Sonic – Fort Mill Chrysler Jeep, Inc. SC Sonic – Fort Mill Dodge, Inc. SC Sonic – Fort Worth T, LP TX Toyota of Fort Worth Scion 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 North Land Rover Houston North Sonic Houston LR, LP TX Land Rover Houston Central Jaguar Houston Central Sonic – Houston V, LP TX Sonic – Integrity Dodge LV, LLC NV Sonic – Jersey Village Volkswagen, LP TX Momentum Volkswagen of Jersey Village Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME 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 Sonic – LS Chevrolet, LP TX Lone Star Chevrolet Sonic – LS, LLC DE TX 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 Center Momentum BMW Momentum MINI Sonic Momentum JVP, LP TX Momentum Porsche Momentum Volvo Cars Land Rover Southwest Houston Jaguar Southwest Houston Sonic Momentum VWA, LP TX Audi Central Houston Momentum 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 Ford Sonic – Sanford Cadillac, Inc. FL Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME Sonic Santa Monica M, Inc. CA W.I. Simonson Sonic Santa Monica S, Inc. CA Sonic – Shottenkirk, Inc. FL Pensacola Honda Sonic – Stevens Creek B, Inc. CA Stevens Creek BMW Sonic – Volvo LV, LLC NV Volvo Cars of Las Vegas Sonic 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 Center Ron Craft Cadillac Ron 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 Charlotte Sonic Automotive 2424 Laurens Rd.,Greenville, Inc. SC Sonic Automotive 2752 Laurens Rd.,Greenville, Inc. SC Century BMW Century MINI Sonic Automotive Aviation, LLC NC Sonic Automotive F&I, LLC NV Sonic Automotive of Chattanooga, LLC TN BMW of Chattanooga Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME Sonic Automotive of Nashville, LLC TN MINI of Nashville BMW of Nashville BMW Certified Pre-Owned Nashville Sonic Automotive of Nevada, Inc. NV Sonic Automotive of Texas, LP TX Lone Star Ford Sonic Automotive Support, LLC NV Sonic Automotive West, LLC NV SRE Alabama – 2, LLC AL SRE 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, LLC GA Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME SRE Georgia 5, LLC GA SRE Georgia 6, LLC GA SRE Holding, LLC NC AL AZ CO TX SRE Maryland – 1, LLC MD SRE Nevada – 2, LLC NV SRE 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 Tennessee 7, 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 Exhibit 21.1ENTITY Domestic Foreign ASSUMED NAME SRE Texas – 6, LP TX SRE Texas – 7, LP TX SRE Texas – 8, LP TX SRE Texas 9, LLC TX SRE Texas 10, LLC TX SRE Texas 11, LLC TX SRE Texas 12, LLC TX SRE Texas 13, LLC TX SRE Texas 14, LLC TX SRE Texas 15, LLC TX SRE Texas 16, LLC TX SRE Virginia - 1, LLC VA MD 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, 333-50430-01through 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 21, 2019, with respect to the consolidated balance sheets of Sonic Automotive, Inc. andsubsidiaries as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flowsfor each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and theeffectiveness of internal control over financial reporting as of December 31, 2018, which reports appear in the December 31, 2018 Annual Report on Form10-K of Sonic Automotive, Inc.Our report refers to a change in Sonic Automotive, Inc.’s method of accounting for revenue in 2018 due to the adoption of Accounting StandardsCodification 606, Revenue from Contracts with Customers./s/ KPMG LLPCharlotte, North CarolinaFebruary 21, 2019 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 make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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) and 15d-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 our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 21, 2019By: /s/ HEATH R. BYRD Heath R. Byrd Executive Vice President and Chief Financial Officer Exhibit 31.2CERTIFICATIONI, David Bruton 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 make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial 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) and 15d-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 our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose 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 under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’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; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting.Date: February 21, 2019By: /s/ DAVID BRUTON SMITH David Bruton Smith 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 of Sonic Automotive, Inc. (the Company) on Form 10-K for the year ended December 31, 2018, as filed with theSecurities and Exchange Commission on the date hereof (the Report), I, Heath R. Byrd, Executive Vice President and Chief Financial 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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ HEATH R. BYRD Heath R. Byrd Executive Vice President and ChiefFinancial Officer February 21, 2019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 of Sonic Automotive, Inc. (the Company) on Form 10-K for the year ended December 31, 2018, as filed with theSecurities and Exchange Commission on the date hereof (the Report), I, David Bruton Smith, Chief Executive Officer of the Company, certify, pursuant to 18U.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; and2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company./s/ DAVID BRUTONSMITH David Bruton Smith Chief Executive Officer February 21, 2019

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