UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14733
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LITHIA MOTORS, INC. |
(Exact name of registrant as specified in its charter) |
| | |
Oregon | | 93-0572810 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
150 N. Bartlett Street, Medford, Oregon | | 97501 |
(Address of principal executive offices) | | (Zip Code) |
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Registrant's telephone number, including area code: 541-776-6401 |
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 12 months (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 [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting 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 Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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| | |
Class A common stock without par value | | 23,958,16823,206,001 |
Class B common stock without par value | | 1,000,000 |
(Class) | | Outstanding at November 7, 2017July 27, 2018 |
LITHIA MOTORS, INC.
FORM 10-Q
INDEX
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PART I - FINANCIAL INFORMATION | Page |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II - OTHER INFORMATION | |
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Item 1. | Legal Proceedings | |
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Item 1A. | | |
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Item 2. | | |
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Item 5. | Other Information | |
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Item 6. | | |
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LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Assets | | | | | | | | |
Current Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 38,577 |
| | $ | 50,282 |
| | $ | 29,991 |
| | $ | 57,253 |
|
Accounts receivable, net of allowance for doubtful accounts of $6,145 and $5,281 | | 446,613 |
| | 417,714 |
| |
Accounts receivable, net of allowance for doubtful accounts of $7,733 and $7,386 | | | 483,995 |
| | 521,938 |
|
Inventories, net | | 1,966,456 |
| | 1,772,587 |
| | 2,333,112 |
| | 2,132,744 |
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Other current assets | | 59,622 |
| | 46,611 |
| | 46,231 |
| | 70,847 |
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Total Current Assets | | 2,511,268 |
| | 2,287,194 |
| | 2,893,329 |
| | 2,782,782 |
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| | | | | | | | |
Property and equipment, net of accumulated depreciation of $190,962 and $167,300 | | 1,087,920 |
| | 1,006,130 |
| |
Property and equipment, net of accumulated depreciation of $219,271 and $197,802 | | | 1,232,054 |
| | 1,185,169 |
|
Goodwill | | 257,185 |
| | 259,399 |
| | 280,954 |
| | 256,320 |
|
Franchise value | | 186,977 |
| | 184,268 |
| | 197,111 |
| | 186,977 |
|
Other non-current assets | | 328,243 |
| | 107,159 |
| | 560,714 |
| | 271,818 |
|
Total Assets | | $ | 4,371,593 |
| | $ | 3,844,150 |
| | $ | 5,164,162 |
| | $ | 4,683,066 |
|
| | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current Liabilities: | | | | | | | | |
Floor plan notes payable | | $ | 114,833 |
| | $ | 94,602 |
| | $ | 142,606 |
| | $ | 116,774 |
|
Floor plan notes payable: non-trade | | 1,598,111 |
| | 1,506,895 |
| | 1,875,462 |
| | 1,802,252 |
|
Current maturities of long-term debt | | 17,619 |
| | 20,965 |
| | 24,098 |
| | 18,876 |
|
Trade payables | | 103,105 |
| | 88,423 |
| | 115,061 |
| | 111,362 |
|
Accrued liabilities | | 241,094 |
| | 211,109 |
| | 254,984 |
| | 251,717 |
|
Total Current Liabilities | | 2,074,762 |
| | 1,921,994 |
| | 2,412,211 |
| | 2,300,981 |
|
| | | | | | | | |
Long-term debt, less current maturities | | 991,333 |
| | 769,916 |
| | 1,295,077 |
| | 1,028,476 |
|
Deferred revenue | | 98,265 |
| | 81,929 |
| | 112,601 |
| | 103,111 |
|
Deferred income taxes | | 66,474 |
| | 59,075 |
| | 58,583 |
| | 56,277 |
|
Other long-term liabilities | | 109,383 |
| | 100,460 |
| | 124,822 |
| | 111,003 |
|
Total Liabilities | | 3,340,217 |
| | 2,933,374 |
| | 4,003,294 |
| | 3,599,848 |
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| | | | | | | | |
Stockholders' Equity: | | | | | | | | |
Preferred stock - no par value; authorized 15,000 shares; none outstanding | | — |
| | — |
| | — |
| | — |
|
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,966 and 23,382 | | 148,880 |
| | 165,512 |
| |
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762 | | 124 |
| | 219 |
| |
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,433 and 23,968 | | | 94,386 |
| | 149,123 |
|
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,000 | | | 124 |
| | 124 |
|
Additional paid-in capital | | 42,373 |
| | 41,225 |
| | 43,470 |
| | 11,309 |
|
Retained earnings | | 839,999 |
| | 703,820 |
| | 1,022,888 |
| | 922,662 |
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Total Stockholders' Equity | | 1,031,376 |
| | 910,776 |
| | 1,160,868 |
| | 1,083,218 |
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Total Liabilities and Stockholders' Equity | | $ | 4,371,593 |
| | $ | 3,844,150 |
| | $ | 5,164,162 |
| | $ | 4,683,066 |
|
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | | | | | | | | | | |
New vehicle | | $ | 1,553,511 |
| | $ | 1,297,511 |
| | $ | 4,147,870 |
| | $ | 3,602,603 |
| | $ | 1,726,803 |
| | $ | 1,384,055 |
| | $ | 3,181,528 |
| | $ | 2,594,359 |
|
Used vehicle retail | | 679,180 |
| | 580,885 |
| | 1,915,038 |
| | 1,667,258 |
| | 804,098 |
| | 633,635 |
| | 1,519,672 |
| | 1,235,858 |
|
Used vehicle wholesale | | 65,739 |
| | 75,271 |
| | 206,754 |
| | 207,131 |
| | 85,335 |
| | 69,512 |
| | 161,290 |
| | 141,015 |
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Finance and insurance | | 101,044 |
| | 87,709 |
| | 282,672 |
| | 246,390 |
| | 114,492 |
| | 94,851 |
| | 220,997 |
| | 181,628 |
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Service, body and parts | | 265,683 |
| | 217,148 |
| | 744,262 |
| | 616,088 |
| | 311,407 |
| | 246,005 |
| | 597,104 |
| | 478,579 |
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Fleet and other | | 15,185 |
| | 11,443 |
| | 86,883 |
| | 46,697 |
| | 54,402 |
| | 38,978 |
| | 75,625 |
| | 71,698 |
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Total revenues | | 2,680,342 |
| | 2,269,967 |
| | 7,383,479 |
| | 6,386,167 |
| | 3,096,537 |
| | 2,467,036 |
| | 5,756,216 |
| | 4,703,137 |
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Cost of sales: | | | | | | | | | | | | | | | | |
New vehicle | | 1,465,466 |
| | 1,221,668 |
| | 3,909,168 |
| | 3,387,132 |
| | 1,625,309 |
| | 1,303,516 |
| | 2,993,087 |
| | 2,443,702 |
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Used vehicle retail | | 600,522 |
| | 512,076 |
| | 1,693,091 |
| | 1,466,947 |
| | 716,997 |
| | 559,129 |
| | 1,358,960 |
| | 1,092,569 |
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Used vehicle wholesale | | 64,565 |
| | 74,353 |
| | 202,351 |
| | 202,897 |
| | 83,409 |
| | 67,800 |
| | 158,438 |
| | 137,786 |
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Service, body and parts | | 133,191 |
| | 112,806 |
| | 376,096 |
| | 317,028 |
| | 157,700 |
| | 123,525 |
| | 304,989 |
| | 242,905 |
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Fleet and other | | 13,577 |
| | 11,803 |
| | 82,829 |
| | 45,684 |
| | 52,395 |
| | 37,795 |
| | 71,904 |
| | 69,252 |
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Total cost of sales | | 2,277,321 |
| | 1,932,706 |
| | 6,263,535 |
| | 5,419,688 |
| | 2,635,810 |
| | 2,091,765 |
| | 4,887,378 |
| | 3,986,214 |
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Gross profit | | 403,021 |
| | 337,261 |
| | 1,119,944 |
| | 966,479 |
| | 460,727 |
| | 375,271 |
| | 868,838 |
| | 716,923 |
|
Asset impairments | | — |
| | 3,498 |
| | — |
| | 10,494 |
| |
Selling, general and administrative | | 282,241 |
| | 228,134 |
| | 782,303 |
| | 662,766 |
| | 333,350 |
| | 257,290 |
| | 630,844 |
| | 500,062 |
|
Depreciation and amortization | | 14,828 |
| | 12,206 |
| | 41,598 |
| | 36,372 |
| | 18,821 |
| | 14,031 |
| | 35,675 |
| | 26,770 |
|
Operating income | | 105,952 |
| | 93,423 |
| | 296,043 |
| | 256,847 |
| | 108,556 |
| | 103,950 |
| | 202,319 |
| | 190,091 |
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Floor plan interest expense | | (10,629 | ) | | (6,186 | ) | | (28,013 | ) | | (18,304 | ) | | (15,634 | ) | | (9,332 | ) | | (29,168 | ) | | (17,384 | ) |
Other interest expense, net | | (9,905 | ) | | (5,647 | ) | | (23,745 | ) | | (16,608 | ) | | (13,829 | ) | | (7,169 | ) | | (25,635 | ) | | (13,840 | ) |
Other income (expense), net | | 1,125 |
| | (1,513 | ) | | 11,357 |
| | (4,534 | ) | |
Other income, net | | | 1,659 |
| | 387 |
| | 3,033 |
| | 10,232 |
|
Income before income taxes | | 86,543 |
| | 80,077 |
| | 255,642 |
| | 217,401 |
| | 80,752 |
| | 87,836 |
| | 150,549 |
| | 169,099 |
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Income tax provision | | (34,657 | ) | | (26,036 | ) | | (99,829 | ) | | (71,662 | ) | | (20,092 | ) | | (34,636 | ) | | (37,828 | ) | | (65,172 | ) |
Net income | | $ | 51,886 |
| | $ | 54,041 |
| | $ | 155,813 |
| | $ | 145,739 |
| | $ | 60,660 |
| | $ | 53,200 |
| | $ | 112,721 |
| | $ | 103,927 |
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| | | | | | | | | | | | | | | | |
Basic net income per share | | $ | 2.07 |
| | $ | 2.15 |
| | $ | 6.21 |
| | $ | 5.72 |
| | $ | 2.45 |
| | $ | 2.12 |
| | $ | 4.52 |
| | $ | 4.14 |
|
Shares used in basic per share calculations | | 25,008 |
| | 25,194 |
| | 25,090 |
| | 25,490 |
| | 24,793 |
| | 25,053 |
| | 24,930 |
| | 25,116 |
|
| | | | | | | | | | | | | | | | |
Diluted net income per share | | $ | 2.07 |
| | $ | 2.14 |
| | $ | 6.19 |
| | $ | 5.69 |
| | $ | 2.44 |
| | $ | 2.12 |
| | $ | 4.50 |
| | $ | 4.13 |
|
Shares used in diluted per share calculations | | 25,076 |
| | 25,290 |
| | 25,158 |
| | 25,598 |
| | 24,882 |
| | 25,106 |
| | 25,028 |
| | 25,177 |
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| | | | | | | | | | | | | | | | |
Cash dividends declared per Class A and Class B share | | $ | 0.27 |
| | $ | 0.25 |
| | $ | 0.79 |
| | $ | 0.70 |
| |
Cash dividends paid per Class A and Class B share | | | $ | 0.29 |
| | $ | 0.27 |
| | $ | 0.56 |
| | $ | 0.52 |
|
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 51,886 |
| | $ | 54,041 |
| | $ | 155,813 |
| | $ | 145,739 |
|
Other comprehensive income, net of tax: | | | | | |
| |
|
Gain on cash flow hedges, net of tax expense of $0, $0, $0, and $175, respectively | | — |
| | — |
| | — |
| | 277 |
|
Comprehensive income | | $ | 51,886 |
| | $ | 54,041 |
| | $ | 155,813 |
| | $ | 146,016 |
|
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 155,813 |
| | $ | 145,739 |
| | $ | 112,721 |
| | $ | 103,927 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Asset impairments | | — |
| | 10,494 |
| |
Depreciation and amortization | | 41,598 |
| | 36,372 |
| | 35,675 |
| | 26,770 |
|
Stock-based compensation | | 8,396 |
| | 8,665 |
| | 6,837 |
| | 5,432 |
|
Gain on disposal of other assets | | (382 | ) | | (4,299 | ) | |
Gain on disposal of franchise | | — |
| | (1,102 | ) | |
(Gain) loss on disposal of other assets | | | (78 | ) | | 256 |
|
Loss on disposal of franchise | | | 380 |
| | — |
|
Deferred income taxes | | 7,398 |
| | 9,782 |
| | 345 |
| | (1,156 | ) |
(Increase) decrease (net of acquisitions and dispositions): | | | | | | | | |
Trade receivables, net | | (13,345 | ) | | (5,911 | ) | |
Accounts receivable, net | | | 47,915 |
| | 70,908 |
|
Inventories | | (16,098 | ) | | (85,564 | ) | | (35,530 | ) | | (36,078 | ) |
Other assets | | 15,207 |
| | 4,688 |
| | 20,588 |
| | 479 |
|
Increase (net of acquisitions and dispositions): | | | | | |
Increase (decrease) (net of acquisitions and dispositions): | | | | | |
Floor plan notes payable | | 12,126 |
| | 18,122 |
| | 15,056 |
| | 1,330 |
|
Trade payables | | 12,397 |
| | 6,153 |
| | 2,929 |
| | 414 |
|
Accrued liabilities | | 25,907 |
| | 32,874 |
| | 5,463 |
| | (3,684 | ) |
Other long-term liabilities and deferred revenue | | 11,519 |
| | 18,227 |
| | 24,030 |
| | 9,957 |
|
Net cash provided by operating activities | | 260,536 |
| | 194,240 |
| | 236,331 |
| | 178,555 |
|
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Capital expenditures | | (72,174 | ) | | (81,363 | ) | | (72,373 | ) | | (32,266 | ) |
Proceeds from sales of assets | | 12,327 |
| | 1,756 |
| | 1,803 |
| | 2,870 |
|
Cash paid for other investments | | (7,929 | ) | | (22,279 | ) | | (7,066 | ) | | (7,748 | ) |
Cash paid for acquisitions, net of cash acquired | | (400,558 | ) | | (199,435 | ) | | (374,664 | ) | | (88,075 | ) |
Proceeds from sales of stores | | 3,417 |
| | 11,837 |
| | 839 |
| | — |
|
Net cash used in investing activities | | (464,917 | ) | | (289,484 | ) | | (451,461 | ) | | (125,219 | ) |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Borrowings on floor plan notes payable, net: non-trade | | 34,056 |
| | 93,817 |
| |
Borrowings (repayments) on floor plan notes payable, net: non-trade | | | 85,763 |
| | (32,124 | ) |
Borrowings on lines of credit | | 1,306,000 |
| | 841,623 |
| | 1,353,290 |
| | 773,500 |
|
Repayments on lines of credit | | (1,432,853 | ) | | (744,494 | ) | | (1,254,127 | ) | | (808,846 | ) |
Principal payments on long-term debt and capital leases, scheduled | | (13,697 | ) | | (12,278 | ) | | (9,565 | ) | | (8,825 | ) |
Principal payments on long-term debt and capital leases, other | | (46,471 | ) | | (5,903 | ) | | (5,305 | ) | | (35,765 | ) |
Proceeds from issuance of long-term debt | | 395,905 |
| | 22,816 |
| | 62,140 |
| | 74,065 |
|
Payments of debt issuance costs | | (4,517 | ) | | — |
| | (205 | ) | | — |
|
Proceeds from issuance of common stock | | 5,577 |
| | 5,191 |
| | 4,514 |
| | 3,519 |
|
Repurchase of common stock | | (31,521 | ) | | (108,597 | ) | | (33,927 | ) | | (24,913 | ) |
Dividends paid | | (19,803 | ) | | (17,823 | ) | | (13,938 | ) | | (13,052 | ) |
Net cash provided by financing activities | | 192,676 |
| | 74,352 |
| |
Payments of contingent consideration related to acquisitions | | | (772 | ) | | — |
|
Net cash provided by (used in) financing activities | | | 187,868 |
| | (72,441 | ) |
Decrease in cash and cash equivalents | | (11,705 | ) | | (20,892 | ) | | (27,262 | ) | | (19,105 | ) |
Cash and cash equivalents at beginning of period | | 50,282 |
| | 45,008 |
| | 57,253 |
| | 50,282 |
|
Cash and cash equivalents at end of period | | $ | 38,577 |
| | $ | 24,116 |
| | $ | 29,991 |
| | $ | 31,177 |
|
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for interest | | $ | 51,160 |
| | $ | 36,641 |
| | $ | 54,675 |
| | $ | 33,476 |
|
Cash paid during the period for income taxes, net | | 89,206 |
| | 29,478 |
| | 2,296 |
| | 62,274 |
|
Floor plan debt paid in connection with store disposals | | — |
| | 5,284 |
| | 5,158 |
| | — |
|
| | | | | | | | |
Supplemental schedule of non-cash activities: | | | | | | | | |
Debt issued in connection with acquisitions | | $ | 1,748 |
| | $ | — |
| | $ | 125,055 |
| | $ | 1,748 |
|
Non-cash assets transferred in connection with acquisitions | | — |
| | 2,637 |
| |
Debt assumed in connection with acquisitions | | 86,902 |
| | 19,657 |
| | 10,766 |
| | 11,837 |
|
Issuance of Class A common stock in connection with acquisitions | | 2,137 |
| | — |
| | — |
| | 2,137 |
|
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Statements
Basis of Presentation
These condensed Consolidated Financial Statements contain unaudited information as of SeptemberJune 30, 20172018 and for the three and nine-monthssix-months ended SeptemberJune 30, 20172018 and 2016.2017. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 20162017 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 20162017 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017.23, 2018. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 20162017 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. We adopted this standard utilizing a cumulative effect transition method effective January 2018. Except for the changes below, we have consistently applied the accounting policies to all periods presented in these consolidated financial statements. See Notes 2 and 13.
Reclassifications
Certain immaterial reclassifications of amounts previously reported have been made to the accompanying condensed Consolidated Financial Statements to maintain consistency and comparability between periods presented. These reclassifications were related to our adoption of ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." Specifically, we reclassified the presentation of excess tax benefits on our Consolidated Statements of Cash Flows between financing and operating cash flows and recorded reclassifications between additional paid-in capital and retained earnings. See also Note 13.
Note 2. Revenue Recognition
The following describes our major product lines, which represent the disaggregation of our revenues to transactions that are similar in nature, amount, timing, uncertainties and economic factors.
New Retail Vehicle and Used Retail Vehicle Sales
Revenue from the retail sale of a vehicle is recognized at a point in time, as all performance obligations are satisfied when a contract is signed by the customer, financing has been arranged or collectibility is probable and the control of the vehicle is transferred to the customer. The transaction price for a retail vehicle sale is specified in the contract with the customer and includes all cash and non-cash consideration. In a retail vehicle sale, customers often trade in their current vehicle. The trade-in is measured at its stand-alone selling price in the contract, utilizing various third-party pricing sources. There are no other non-cash forms of consideration related to retail sales. All vehicle rebates are applied to the vehicle purchase price at the time of the sale, and are therefore incorporated into the price of the contract at the time of the exchange. We do not allow the return of new or used vehicles, except where mandated by state law.
Service, Body and Parts Sales
Revenue from service, body and parts sales is recognized upon the transfer of control of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale and are not significant.
We are the obligor on our lifetime oil contracts. Revenue is allocated to these performance obligations and is recognized over time as services are provided to the customer. The amount of revenue recognized is calculated, net of cancellations, using an input method, which most closely depicts performance of the contracts. Our contract liability balances were $138.5 million and $126.1 million as of June 30, 2018 and December 31, 2017, respectively; and we recognized $6.0 million and $11.7 million of revenue in the three and six months ended June 30, 2018, related to our opening contract liability balance.
Finance and Insurance Sales
Revenue from finance and insurance sales is recognized, net of estimated charge-backs, at the time of the sale of the related vehicle. As a part of the vehicle sale, we seek to arrange financing for customers and sell a variety of add-ons, such as extended warranty service contracts. These products are inherently attached to the governing vehicle and performance of the obligation cannot be performed without the underlying sale of the vehicle. We act as an agent in the sale of these contracts as the pricing is set by the
third-party provider and our commission is preset. A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the sale of the contract under the new standard. We recognized a $9.2 million asset associated with future estimated variable consideration on January 1, 2018 related to contracts sold on or before December 31, 2017. Our contract asset balance was $9.2 million as of June 30, 2018 and is included in trade receivables and other non-current assets.
Note 3. Accounts Receivable and Contract Assets
Accounts receivable consisted of the following (in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Contracts in transit | | $ | 225,564 |
| | $ | 233,506 |
| | $ | 239,698 |
| | $ | 286,578 |
|
Trade receivables | | 45,243 |
| | 45,193 |
| | 51,403 |
| | 45,895 |
|
Vehicle receivables | | 53,166 |
| | 43,937 |
| | 57,795 |
| | 60,022 |
|
Manufacturer receivables | | 85,307 |
| | 76,948 |
| | 97,173 |
| | 96,141 |
|
Auto loan receivables | | 75,651 |
| | 69,859 |
| | 67,402 |
| | 75,052 |
|
Other receivables | | 16,892 |
| | 3,857 |
| | 4,920 |
| | 14,634 |
|
| | 501,823 |
|
| 473,300 |
| | 518,391 |
|
| 578,322 |
|
Less: Allowance | | (6,145 | ) | | (5,281 | ) | |
Less: Allowance for doubtful accounts | | | (7,733 | ) | | (7,386 | ) |
Less: Long-term portion of accounts receivable, net | | (49,065 | ) | | (50,305 | ) | | (26,663 | ) | | (48,998 | ) |
Total accounts receivable, net | | $ | 446,613 |
|
| $ | 417,714 |
| | $ | 483,995 |
|
| $ | 521,938 |
|
Accounts receivable classifications include the following:
Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received approximately ten days after selling a vehicle.
Trade receivables are comprised of amounts due from customers for open charge accounts, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.
Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.
Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.
Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest
income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.
Note 3.4. Inventories
The components of inventories, net, consisted of the following (in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
New vehicles | | $ | 1,412,668 |
| | $ | 1,338,110 |
| | $ | 1,694,026 |
| | $ | 1,553,751 |
|
Used vehicles | | 474,948 |
| | 368,067 |
| | 553,248 |
| | 500,011 |
|
Parts and accessories | | 78,840 |
| | 66,410 |
| | 85,838 |
| | 78,982 |
|
Total inventories | | $ | 1,966,456 |
| | $ | 1,772,587 |
| | $ | 2,333,112 |
| | $ | 2,132,744 |
|
Note 4.5. Goodwill and Franchise Value
The changes in the carrying amounts of goodwill are as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Domestic | | Import | | Luxury | | Consolidated |
Balance as of December 31, 2015 ¹ | | $ | 97,903 |
| | $ | 84,384 |
| | $ | 30,933 |
| | $ | 213,220 |
|
Additions through acquisitions2 | | 18,154 |
| | 21,795 |
| | 7,448 |
| | 47,397 |
|
Reductions through divestitures | | (1,218 | ) | | — |
| | — |
| | (1,218 | ) |
Balance as of December 31, 2016 1 | | 114,839 |
| | 106,179 |
| | 38,381 |
| | 259,399 |
|
Adjustments to purchase price allocations2,3 | | (817 | ) | | (1,006 | ) | | (391 | ) | | (2,214 | ) |
Balance as of September 30, 2017 ¹ | | $ | 114,022 |
| | $ | 105,173 |
| | $ | 37,990 |
| | $ | 257,185 |
|
|
| | | | | | | | | | | | | | | | |
| | Domestic | | Import | | Luxury | | Consolidated |
Balance as of December 31, 2016 ¹ | | $ | 114,839 |
| | $ | 106,179 |
| | $ | 38,381 |
| | $ | 259,399 |
|
Adjustments to purchase price allocations 2 | | (817 | ) | | (1,006 | ) | | (391 | ) | | (2,214 | ) |
Reductions through divestitures | | — |
| | (865 | ) | | — |
| | (865 | ) |
Balance as of December 31, 2017 ¹ | | 114,022 |
| | 104,308 |
| | 37,990 |
| | 256,320 |
|
Adjustments to purchase price allocations 3 | | 7,726 |
| | 15,674 |
| | 1,271 |
| | 24,671 |
|
Reductions through divestitures | | — |
| | (37 | ) | | — |
| | (37 | ) |
Balance as of June 30, 2018 1, 4 | | $ | 121,748 |
| | $ | 119,945 |
| | $ | 39,261 |
| | $ | 280,954 |
|
1 Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
2 Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017. As a result, we reclassified $2.2 million of value from goodwill to franchise value.
3 Our purchase price allocation for the acquisition of the Baierl Auto Group was finalized in the second quarter of 2018. As a result, we added $24.7 million of goodwill.
4 Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group and the Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, Broadway Ford, and Buhler Ford and the associated goodwill has not been allocated to each of our segments. See also Note 12.11.
The changes in the carrying amounts of franchise value are as follows (in thousands):
|
| | | |
| Franchise Value |
Balance as of December 31, 2015 | $ | 157,699 |
|
Additions through acquisitions | 27,087 |
|
Reductions through divestitures | (518 | ) |
Balance as of December 31, 2016 | 184,268 |
|
Additions through acquisitions 1 | 495 |
|
Adjustments to purchase price allocations 2 | 2,214 |
|
Balance as of September 30, 2017 | $ | 186,977 |
|
|
| | | |
| Franchise Value |
Balance as of December 31, 2016 | $ | 184,268 |
|
Additions through acquisitions | 495 |
|
Adjustments to purchase price allocations 1 | 2,214 |
|
Balance as of December 31, 2017 | 186,977 |
|
Adjustments to purchase price allocations 2 | 10,134 |
|
Balance as of June 30, 2018 3 | $ | 197,111 |
|
1 Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group and the Downtown LA Auto Group and have not been included in the above franchise value additions. See also Note 12.
2Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification in the current year of $2.2 million from goodwill to franchise value.
2 Our purchase price allocation for the acquisition of the Baierl Auto Group was finalized in the second quarter of 2018. As a result, we added $10.1 million of franchise value.
3Our purchase price allocation is preliminary for the acquisitions of the Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, Broadway Ford, and Buhler Ford and have not been included in the above franchise value additions. See also Note 11.
Note 5.6. Credit Facilities and Long-term Debt
Long-termBelow is a summary of our outstanding balances on credit facilities and long-term debt consisted of the following:(in thousands):
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Floor plan notes payable: non-trade | | | $ | 1,875,462 |
| | $ | 1,802,252 |
|
Floor plan notes payable | | | 142,606 |
| | 116,774 |
|
Total floor plan debt | | | $ | 2,018,068 |
| | $ | 1,919,026 |
|
| | | | | |
Used vehicle inventory financing facility | | | $ | 50,000 |
| | $ | 177,222 |
|
Revolving lines of credit | | | 320,953 |
| | 94,568 |
|
Real estate mortgages | | $ | 476,559 |
| | $ | 428,367 |
| | 642,602 |
| | 469,969 |
|
5.25% Senior Notes due 2025 | | 300,000 |
| | — |
| | 300,000 |
| | 300,000 |
|
Used vehicle inventory financing facility and revolving lines of credit | | 226,654 |
| | 353,507 |
| |
Capital leases and other debt | | 12,699 |
| | 11,191 |
| |
Other debt | | | 12,195 |
| | 12,512 |
|
Total long-term debt outstanding | | 1,015,912 |
| | 793,065 |
| | 1,325,750 |
| | 1,054,271 |
|
Less: unamortized debt issuance costs | | (6,960 | ) | | (2,184 | ) | | (6,575 | ) | | (6,919 | ) |
Less: current maturities (net of current debt issuance costs) | | (17,619 | ) | | (20,965 | ) | | (24,098 | ) | | (18,876 | ) |
Long-term debt | | $ | 991,333 |
| | $ | 769,916 |
| | $ | 1,295,077 |
| | $ | 1,028,476 |
|
Credit Facility
Effective June 25, 2018, we amended our syndicated credit facility, which is comprised of 20 financial institutions, including seven manufacturer-affiliated finance companies. Prior to this amendment, the credit facility, with an aggregate total financing commitment of $2.4 billion, would have matured in August 2022. With this amendment, the aggregate total financing commitment has been increased to $2.6 billion and the term of the credit facility has been extended to July 2023.
The total commitment is allocated as $135 million to used vehicle inventory floor plan financing, $450 million to revolving loans for acquisitions and other general corporate purposes, and the remaining $2.0 billion for new vehicle inventory floor plan financing. We have the option to reallocate the commitments, provided that the used vehicle inventory floor plan financing commitment does not exceed 16.5% of aggregate commitments, the revolving loan commitment does not exceed 18.75% of aggregate commitments, and the sum of these commitments plus the new vehicle inventory floor plan financing commitment does not exceed the aggregate total financing commitment of $2.6 billion. Additionally, we may request an increase in the aggregate new vehicle floor plan commitment of up to $400 million provided that the aggregate commitment does not exceed $3.0 billion. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
Our obligations under our revolving syndicated credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our revolving syndicated credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
We have the ability to deposit up to $50 million in cash in Principal Reduction (PR) accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of June 30, 2018, we had no balances in our PR accounts.
If the outstanding principal balance on our new vehicle inventory floor plan commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving line of credit commitment less the outstanding balance on the line less outstanding letters of credit. The reserve amount will decrease the revolving line of credit availability and may be used to repay the new vehicle floor plan commitment balance.
The interest rate on the credit facility, as amended, varies based on the type of debt, with the rate of one-month LIBOR plus 1.25% for new vehicle floor plan financing, one-month LIBOR plus 1.50% for used vehicle floor plan financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.25% to 2.25% depending on our leverage ratio. The annual interest rate associated with our new vehicle floor plan commitment was 3.34% at June 30, 2018. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 3.59% at June 30, 2018.
5.25% Senior Notes Due 2025
On July 24, 2017, we issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 ("the Notes") to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notes from July 24, 2017 and is payable semiannually on February 1 and August 1. The first interest payment is duewas paid on February 1, 2018. We may redeem the Notes in whole or in part at any time prior to August 1, 2020 at a price equal to 100% of the principal amount plus a make-whole premium set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest to the date of purchase.
We paid approximately $5.0 million in underwriting and other fees in connection with this issuance, which will be amortized as interest expense over the term of the Notes. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future restricted subsidiaries that is a borrower under, or that guarantees obligations under, our credit facility or other indebtedness. The terms of the Notes, in certain circumstances, may restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock, or merge, consolidate or sell all or substantially all our assets.
Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion. This syndicated credit facility is comprised of 18 financial institutions, including seven manufacturer-affiliated finance companies. Our credit facility provides for up to $1.9 billion in new vehicle inventory floor plan financing, up to $250 million in used vehicle inventory floor plan financing and a maximum of $250 million in revolving financing for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $2.75 billion total availability, subject to lender approval.
Note 6.7. Stockholders’ Equity
Repurchases of Class A Common Stock
Repurchases of our Class A Common Stock occurred under a repurchase authorization granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units ("RSUs"). In February 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. Share repurchases under this authorization were as follows:
|
| | | | | | | | | | | | | | |
| | Repurchases Occurring in the Nine Months Ended September 30, 2017 | | Cumulative Repurchases as of September 30, 2017 |
| | Shares | | Average Price | | Shares | | Average Price |
2016 Share Repurchase Authorization | | 310,000 |
| | $ | 91.33 |
| | 1,023,725 |
| | $ | 83.25 |
|
|
| | | | | | | | | | | | | | |
| | Repurchases Occurring in the Six Months Ended June 30, 2018 | | Cumulative Repurchases as of June 30, 2018 |
| | Shares | | Average Price | | Shares | | Average Price |
2016 Share Repurchase Authorization | | 640,586 |
| | $ | 99.89 |
| | 1,683,311 |
| | $ | 89.96 |
|
As of SeptemberJune 30, 2017,2018, we had $164.8$98.6 million available for repurchases pursuant to our 2016 share repurchase authorization.
In addition, during the first ninesix months of 2017,2018, we repurchased 32,30029,710 shares at an average price of $99.33$112.36 per share, for a total of $3.2$3.3 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.
Note 7.8. Fair Value Measurements
Fair Value Disclosures for Financial Assets and Liabilities
We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.
We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt. As of SeptemberJune 30, 2017,2018, our real estate mortgages and other debt, which includes capital leases, had maturity dates between January 12,September 27, 2019 and December 31, 2050.
There were no changes to our valuation techniques during the nine-monthsix-month period ended SeptemberJune 30, 2017.2018.
A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term fixed interest rate debt is as follows (in thousands):
| | | | September 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
Carrying value | | | | | | | | |
5.25% Senior Notes due 2025 | | $ | 300,000 |
| | $ | — |
| | $ | 300,000 |
| | $ | 300,000 |
|
Real Estate Mortgages and Other Debt | | 382,562 |
| | 286,660 |
| | 451,950 |
| | 376,880 |
|
| | $ | 682,562 |
|
| $ | 286,660 |
| | $ | 751,950 |
|
| $ | 676,880 |
|
Fair value | | | | | | | | |
5.25% Senior Notes due 2025 | | $ | 309,750 |
| | $ | — |
| | $ | 291,750 |
| | $ | 312,750 |
|
Real Estate Mortgages and Other Debt | | 403,009 |
| | 293,522 |
| | 450,686 |
| | 385,337 |
|
| | $ | 712,759 |
| | $ | 293,522 |
| | $ | 742,436 |
| | $ | 698,087 |
|
Note 8.9. Net Income Per Share of Class A and Class B Common Stock
We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding common shares underlying equity awards that are unvested or subject to forfeiture. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the common shares issuable upon the net exercise of stock options and unvested RSUs and is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Under our Articles of Incorporation, the Class A and Class B common stock share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.
Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):
| | Three Months Ended September 30, | | 2017 | | 2016 | |
Three Months Ended June 30, | | | 2018 | | 2017 |
(in thousands, except per share data) | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Net income applicable to common stockholders - basic | | $ | 49,687 |
| | $ | 2,199 |
| | $ | 50,262 |
| | $ | 3,779 |
| | $ | 58,213 |
| | $ | 2,447 |
| | $ | 50,520 |
| | $ | 2,680 |
|
Reallocation of net income as a result of conversion of dilutive stock options | | 1 |
| | (1 | ) | | 1 |
| | (1 | ) | | 1 |
| | (1 | ) | | 1 |
| | (1 | ) |
Reallocation of net income due to conversion of Class B to Class A common shares outstanding | | 285 |
| | — |
| | 439 |
| | — |
| | 289 |
| | — |
| | 340 |
| | — |
|
Conversion of Class B common shares into Class A common shares | | 1,908 |
| | — |
| | 3,326 |
| | — |
| | 2,149 |
| | — |
| | 2,334 |
| | — |
|
Effect of dilutive stock options on net income | | 5 |
| | (5 | ) | | 13 |
| | (13 | ) | | 8 |
| | (8 | ) | | 5 |
| | (5 | ) |
Net income applicable to common stockholders - diluted | | $ | 51,886 |
| | $ | 2,193 |
| | $ | 54,041 |
| | $ | 3,765 |
| | $ | 60,660 |
| | $ | 2,438 |
| | $ | 53,200 |
| | $ | 2,674 |
|
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | 23,948 |
| | 1,060 |
| | 23,432 |
| | 1,762 |
| | 23,793 |
| | 1,000 |
| | 23,791 |
| | 1,262 |
|
Conversion of Class B common shares into Class A common shares | | 1,060 |
| | — |
| | 1,762 |
| | — |
| | 1,000 |
| | — |
| | 1,262 |
| | — |
|
Effect of dilutive stock options on weighted average common shares | | 68 |
| | — |
| | 96 |
| | — |
| | 89 |
| | — |
| | 53 |
| | — |
|
Weighted average common shares outstanding – diluted | | 25,076 |
| | 1,060 |
| | 25,290 |
| | 1,762 |
| | 24,882 |
| | 1,000 |
| | 25,106 |
| | 1,262 |
|
| | | | | | | | | | | | | | | | |
Net income per common share - basic | | $ | 2.07 |
| | $ | 2.07 |
| | $ | 2.15 |
| | $ | 2.15 |
| | $ | 2.45 |
| | $ | 2.45 |
| | $ | 2.12 |
| | $ | 2.12 |
|
Net income per common share - diluted | | $ | 2.07 |
| | $ | 2.07 |
| | $ | 2.14 |
| | $ | 2.14 |
| | $ | 2.44 |
| | $ | 2.44 |
| | $ | 2.12 |
| | $ | 2.12 |
|
| | Three Months Ended September 30, | | 2017 | | 2016 | |
Three Months Ended June 30, | | | 2018 | | 2017 |
Diluted EPS | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Antidilutive Securities | | | | | | | | | | | | | | | | |
Shares issuable pursuant to stock options not included since they were antidilutive | | 9 |
| | — |
| | — |
| | — |
| | 30 |
| | — |
| | 22 |
| | — |
|
| | Nine Months Ended September 30, | | 2017 | | 2016 | |
Six Months Ended June 30, | | | 2018 | | 2017 |
(in thousands, except per share data) | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
Net income applicable to common stockholders - basic | | $ | 147,876 |
| | $ | 7,937 |
| | $ | 134,533 |
| | $ | 11,206 |
| | $ | 108,199 |
| | $ | 4,522 |
| | $ | 98,337 |
| | $ | 5,590 |
|
Reallocation of distributed net income as a result of conversion of dilutive stock options | | 3 |
| | (3 | ) | | 5 |
| | (5 | ) | | 2 |
| | (2 | ) | | 2 |
| | (2 | ) |
Reallocation of distributed net income due to conversion of Class B to Class A common shares outstanding | | 1,006 |
| | — |
| | 1,365 |
| | — |
| | 557 |
| | — |
| | 700 |
| | — |
|
Conversion of Class B common shares into Class A common shares | | 6,909 |
| | — |
| | 9,794 |
| | — |
| | 3,947 |
| | — |
| | 4,876 |
| | — |
|
Effect of dilutive stock options on net income | | 19 |
| | (19 | ) | | 42 |
| | (42 | ) | | 16 |
| | (16 | ) | | 12 |
| | (12 | ) |
Net income applicable to common stockholders - diluted | | $ | 155,813 |
| | $ | 7,915 |
| | $ | 145,739 |
| | $ | 11,159 |
| | $ | 112,721 |
| | $ | 4,504 |
| | $ | 103,927 |
| | $ | 5,576 |
|
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding – basic | | 23,812 |
| | 1,278 |
| | 23,530 |
| | 1,960 |
| | 23,930 |
| | 1,000 |
| | 23,765 |
| | 1,351 |
|
Conversion of Class B common shares into Class A common shares | | 1,278 |
| | — |
| | 1,960 |
| | — |
| | 1,000 |
| | — |
| | 1,351 |
| | — |
|
Effect of dilutive stock options on weighted average common shares | | 68 |
| | — |
| | 108 |
| | — |
| |
Effect of employee stock purchases and restricted stock units on weighted average common shares | | | 98 |
| | — |
| | 61 |
| | — |
|
Weighted average common shares outstanding – diluted | | 25,158 |
| | 1,278 |
| | 25,598 |
| | 1,960 |
| | 25,028 |
| | 1,000 |
| | 25,177 |
| | 1,351 |
|
| | | | | | | | | | | | | | | | |
Net income per common share - basic | | $ | 6.21 |
| | $ | 6.21 |
| | $ | 5.72 |
| | $ | 5.72 |
| | $ | 4.52 |
| | $ | 4.52 |
| | $ | 4.14 |
| | $ | 4.14 |
|
Net income per common share - diluted | | $ | 6.19 |
| | $ | 6.19 |
| | $ | 5.69 |
| | $ | 5.69 |
| | $ | 4.50 |
| | $ | 4.50 |
| | $ | 4.13 |
| | $ | 4.13 |
|
|
| | | | | | | | | | | | |
Nine Months Ended September 30, | | 2017 | | 2016 |
Diluted EPS | | Class A | | Class B | | Class A | | Class B |
Antidilutive Securities | | | | | | | | |
Shares issuable pursuant to stock options not included since they were antidilutive | | 10 |
| | — |
| | — |
| | — |
|
Note 9. Equity-Method Investment
In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with a total equity contribution of $49.8 million. This investment generated new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.
While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method. We exited this equity-method investment in December 2016.
We estimated the value of our equity-method investment, which was recorded at fair value on a non-recurring basis, based on a market valuation approach. We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets. Because these valuations contained unobservable inputs, we classified the measurement of fair value of our equity-method investment as Level 3.
The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Asset impairments to write investment down to fair value | | $ | — |
| | $ | 3,498 |
| | $ | — |
| | $ | 10,494 |
|
Our portion of the partnership’s operating losses | | — |
| | 2,066 |
| | — |
| | 6,197 |
|
Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions | | — |
| | 31 |
| | — |
| | 185 |
|
Tax benefits and credits generated | | — |
| | 7,592 |
| | — |
| | 20,374 |
|
|
| | | | | | | | | | | | |
Six Months Ended June 30, | | 2018 | | 2017 |
Diluted EPS | | Class A | | Class B | | Class A | | Class B |
Antidilutive Securities | | | | | | | | |
Shares issuable pursuant to stock options not included since they were antidilutive | | 56 |
| | — |
| | 11 |
| | — |
|
Note 10. Segments
While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three reportable segments based on their economic similarities: Domestic, Import and Luxury.
Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-BenzMercedes and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, as well as automotive finance and insurance products.
Corporate and other revenue and income includes the results of operations of our stand-alone body shopshops offset by unallocated corporate overhead expenses, such as corporate personnel costs, and certain unallocated reserve and elimination adjustments. Additionally, certain internal corporate expense allocations increase segment income for Corporate and other while decreasing segment income for the other reportable segments. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters thatwho perform certain dealership functions.
We define our chief operating decision maker (“CODM”) to be certain members of our executive management group. Historical and forecasted operational performance isare evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, except for the internal allocation within Corporate and other discussed above. Our CODM measures the performance of each operating segment based on several metrics, including earnings from operations, and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the operating segments.
Certain financial information on a segment basis is as follows (in thousands):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues: | | | | | | | | | | |
| | |
| | |
| | |
|
Domestic | | $ | 1,008,310 |
| | $ | 893,156 |
| | $ | 2,863,018 |
| | $ | 2,495,468 |
| | | | | | | | |
New vehicle | | | $ | 597,596 |
| | $ | 528,649 |
| | $ | 1,111,125 |
| | $ | 1,013,906 |
|
Used vehicle retail | | | 283,408 |
| | 251,214 |
| | 548,235 |
| | 496,212 |
|
Used vehicle wholesale | | | 33,913 |
| | 30,700 |
| | 67,519 |
| | 62,986 |
|
Finance and insurance | | | 43,083 |
| | 37,354 |
| | 83,083 |
| | 73,562 |
|
Service, body and parts | | | 113,472 |
| | 96,515 |
| | 220,614 |
| | 189,917 |
|
Fleet and other | | | 23,596 |
| | 10,517 |
| | 35,109 |
| | 18,124 |
|
| | | 1,095,068 |
| | 954,949 |
| | 2,065,685 |
| | 1,854,707 |
|
Import | | 1,209,955 |
| | 983,947 |
| | 3,276,667 |
| | 2,777,007 |
| | | | | | | | |
New vehicle | | | 771,987 |
| | 643,404 |
| | 1,439,590 |
| | 1,195,286 |
|
Used vehicle retail | | | 335,629 |
| | 269,512 |
| | 643,317 |
| | 516,788 |
|
Used vehicle wholesale | | | 30,983 |
| | 27,283 |
| | 59,178 |
| | 54,120 |
|
Finance and insurance | | | 54,866 |
| | 45,282 |
| | 106,562 |
| | 85,855 |
|
Service, body and parts | | | 116,386 |
| | 96,964 |
| | 226,041 |
| | 185,626 |
|
Fleet and other | | | 12,879 |
| | 12,794 |
| | 18,475 |
| | 29,036 |
|
| | | 1,322,730 |
| | 1,095,239 |
| | 2,493,163 |
| | 2,066,711 |
|
Luxury | | 463,518 |
| | 392,537 |
| | 1,246,484 |
| | 1,111,215 |
| | | | | | | | |
New vehicle | | | 361,913 |
| | 220,388 |
| | 640,434 |
| | 396,705 |
|
Used vehicle retail | | | 184,941 |
| | 112,032 |
| | 327,845 |
| | 222,637 |
|
Used vehicle wholesale | | | 20,263 |
| | 11,473 |
| | 34,463 |
| | 23,696 |
|
Finance and insurance | | | 15,934 |
| | 9,525 |
| | 28,185 |
| | 17,519 |
|
Service, body and parts | | | 76,883 |
| | 50,326 |
| | 141,676 |
| | 98,358 |
|
Fleet and other | | | 17,596 |
| | 15,419 |
| | 21,422 |
| | 24,052 |
|
| | | 677,530 |
| | 419,163 |
| | 1,194,025 |
| | 782,967 |
|
| | 2,681,783 |
|
| 2,269,640 |
|
| 7,386,169 |
| | 6,383,690 |
| | 3,095,328 |
|
| 2,469,351 |
|
| 5,752,873 |
| | 4,704,385 |
|
Corporate and other | | (1,441 | ) | | 327 |
| | (2,690 | ) | | 2,477 |
| | 1,209 |
| | (2,315 | ) | | 3,343 |
| | (1,248 | ) |
| | $ | 2,680,342 |
|
| $ | 2,269,967 |
|
| $ | 7,383,479 |
| | $ | 6,386,167 |
| | $ | 3,096,537 |
|
| $ | 2,467,036 |
|
| $ | 5,756,216 |
| | $ | 4,703,137 |
|
Segment income1: | | | | | | | | | | |
| | |
| | |
| | |
|
Domestic | | $ | 31,141 |
| | $ | 32,292 |
| | $ | 84,440 |
| | $ | 84,420 |
| | $ | 28,545 |
| | $ | 27,857 |
| | $ | 54,163 |
| | $ | 53,299 |
|
Import | | 36,954 |
| | 32,934 |
| | 91,365 |
| | 86,878 |
| | 30,244 |
| | 32,238 |
| | 53,265 |
| | 54,411 |
|
Luxury | | 7,515 |
| | 7,423 |
| | 22,542 |
| | 21,736 |
| | 11,939 |
| | 10,315 |
| | 18,826 |
| | 15,027 |
|
| | 75,610 |
|
| 72,649 |
|
| 198,347 |
| | 193,034 |
| | 70,728 |
|
| 70,410 |
|
| 126,254 |
| | 122,737 |
|
Corporate and other | | 34,541 |
| | 26,794 |
| | 111,281 |
| | 81,881 |
| | 41,015 |
| | 38,239 |
| | 82,572 |
| | 76,740 |
|
Depreciation and amortization | | (14,828 | ) | | (12,206 | ) | | (41,598 | ) | | (36,372 | ) | | (18,821 | ) | | (14,031 | ) | | (35,675 | ) | | (26,770 | ) |
Other interest expense | | (9,905 | ) | | (5,647 | ) | | (23,745 | ) | | (16,608 | ) | | (13,829 | ) | | (7,169 | ) | | (25,635 | ) | | (13,840 | ) |
Other income (expense), net | | 1,125 |
| | (1,513 | ) | | 11,357 |
| | (4,534 | ) | |
Other income, net | | | 1,659 |
| | 387 |
| | 3,033 |
| | 10,232 |
|
Income before income taxes | | $ | 86,543 |
|
| $ | 80,077 |
|
| $ | 255,642 |
| | $ | 217,401 |
| | $ | 80,752 |
|
| $ | 87,836 |
|
| $ | 150,549 |
| | $ | 169,099 |
|
1Segment income for each of the segments is defined as income before income taxes, depreciation and amortization, other interest expense and other income, (expense), net.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Floor plan interest expense: | | | | | | | | |
Domestic | | $ | 9,900 |
| | $ | 6,303 |
| | $ | 26,570 |
| | $ | 19,031 |
|
Import | | 8,007 |
| | 4,613 |
| | 20,608 |
| | 13,241 |
|
Luxury | | 4,494 |
| | 2,720 |
| | 11,018 |
| | 8,027 |
|
| | 22,401 |
| | 13,636 |
| | 58,196 |
| | 40,299 |
|
Corporate and other | | (11,772 | ) | | (7,450 | ) | | (30,183 | ) | | (21,995 | ) |
| | $ | 10,629 |
| | $ | 6,186 |
| | $ | 28,013 |
| | $ | 18,304 |
|
|
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
Total assets: | | | | |
Domestic | | $ | 1,256,960 |
| | $ | 1,225,387 |
|
Import | | 1,067,466 |
| | 959,355 |
|
Luxury | | 590,515 |
| | 511,779 |
|
Corporate and other | | 1,456,652 |
| | 1,147,629 |
|
| | $ | 4,371,593 |
| | $ | 3,844,150 |
|
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
California Wage and Hour Litigations
In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. The plaintiffs also seek attorney fees and costs. DCH has sought to compel arbitration based on plaintiffs’ arbitration agreements. The plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.
During the pendency of Holzer, related cases were filed that made substantially similar non-technician claims. DCH and all non-technician claimants settled their individual claims in mediation in 2017. In January 2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, although this settlement has not yet been approved by the California courts as expressly contemplated by the parties and required by applicable law as a condition of the agreed release of claims. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. We believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements. |
| | | | | | | | |
| | June 30, 2018 | | December 31, 2017 |
Total assets: | | | | |
Domestic | | $ | 1,380,823 |
| | $ | 1,224,276 |
|
Import | | 1,244,218 |
| | 1,032,665 |
|
Luxury | | 690,774 |
| | 604,023 |
|
Corporate and other | | 1,848,347 |
| | 1,822,102 |
|
| | $ | 5,164,162 |
| | $ | 4,683,066 |
|
Note 12.11. Acquisitions
In the first ninesix months of 2017,2018, we completed the following acquisitions:
On May 1, 2017, BaierlJanuary 15, 2018, Ray Laks Honda in Orchard Park, New York and Ray Laks Acura in Buffalo, New York.
On February 26, 2018, Day Auto Group, an eighta seven store platform based in Pennsylvania.
On August 7, 2017, Downtown LA ("DTLA")March 1, 2018, Prestige Auto Group, a sevensix store platform based in California.New Jersey and New York.
On April 2, 2018, Broadway Ford in Idaho Falls, Idaho.
On April 23, 2018, Buhler Ford in Eatontown, New Jersey.
Revenue and net incomeloss contributed by the 20172018 acquisitions subsequent to the date of acquisition were as follows (in thousands):
| | Revenue | $ | 281,416 |
| $ | 360,442 |
|
Net income | $ | 4,378 |
| |
Net loss | | $ | (946 | ) |
In 2016,2017, we completed the following acquisitions:
On January 26, 2016, Singh Subaru in Riverside, California.
On FebruaryMay 1, 2016, Ira Toyota in Milford, Massachusetts.
On June 23, 2016, Helena Auto Center, LLC in Helena, Montana.
On August 1, 2016, Kemp Ford in Thousand Oaks, California.
On September 12, 2016, Carbone2017, we acquired Baierl Auto Group, a ninean eight store platform based in New York and Vermont.Pennsylvania.
On September 28, 2016, Greiner Ford LincolnAugust 7, 2017, we acquired Downtown LA ("DTLA") Auto Group, a seven store platform based in Casper, Wyoming.
On October 5, 2016, Woodland Hills Audi in Woodland Hills, California.
On November 16, 2016, Honolulu11, 2017, we acquired Albany CJD Fiat in Albany, New York.
On November 15, 2017, we acquired Crater Lake Ford Lincoln and Crater Lake Mazda in Honolulu, Hawaii.Medford, Oregon.
All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.
The following tables summarize the consideration paid for the 20172018 acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):
|
| | | | |
| | Consideration |
Cash paid, net of cash acquired | | $ | 400,558 |
|
Equity securities issued 1 | | 2,137 |
|
Debt issued | | 1,748 |
|
| | $ | 404,443 |
|
1 In partial consideration for the purchase of Baierl Auto Group, we issued 4,489 shares of our Class A common stock on May 1, 2017 and will issue an additional 17,957 shares over the next four years for a total of 22,446 shares. As of May 1, 2017, these shares were deemed outstanding for purposes of calculating basic and diluted EPS and had a market value of $2.1 million, based on the closing price of our Class A common stock on May 1, 2017 of $95.22 per share. See also Note 8. |
| | | | |
| | Consideration |
Cash paid, net of cash acquired | | $ | 374,664 |
|
Debt issued | | 125,055 |
|
| | $ | 499,719 |
|
The purchase price allocations for the BaierlDowntown LA Auto Group, and DTLAAlbany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, Broadway Ford, and Buhler Ford acquisitions are preliminary and we have not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. We recorded the purchase price allocations based upon information that is currently available. Unallocated items are recorded as a component of other non-current assets in the Consolidated Balance Sheets.
|
| | | | |
| | Assets Acquired and Liabilities Assumed |
Trade receivables, net | | $ | 15,554 |
|
Inventories | | 190,079 |
|
Franchise value | | — |
|
Property and equipment | | 57,217 |
|
Other assets | | 249,725 |
|
Floor plan notes payable | | (75,065 | ) |
Debt and capital lease obligations | | (11,837 | ) |
Other liabilities | | (21,230 | ) |
| | $ | 404,443 |
|
|
| | | | |
| | Assets Acquired and Liabilities Assumed |
Accounts receivable | | $ | 732 |
|
Inventories, net | | 180,035 |
|
Property and equipment, net | | 9,850 |
|
Other non-current assets | | 322,006 |
|
Floor plan notes payable | | (10,776 | ) |
Other long-term liabilities | | (2,128 | ) |
| | $ | 499,719 |
|
In the three and nine-monthsix-month periods ended SeptemberJune 30, 2017,2018, we recorded $3.5$3.3 million and $5.7$4.2 million respectively, in acquisition related expenses as a component of selling, general and administrative expense. TheseComparatively, we recorded $2.1 million and $2.2 million, respectively, of acquisition related expenses include costs related to current year acquisitions, as well as reserve adjustments associated with contingent consideration recorded in association with previous acquisitions. We did not have any material acquisition expenses for the same periods in 2016.2017.
The following unaudited proforma summary presents consolidated information as if all acquisitions in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 had occurred on January 1, 20162017 (in thousands, except per share amounts):
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenue | | $ | 2,773,082 |
| | $ | 2,792,994 |
| | $ | 8,032,963 |
| | $ | 7,941,561 |
| | $ | 3,101,600 |
| | $ | 3,054,987 |
| | $ | 5,956,427 |
| | $ | 5,906,047 |
|
Net income | | 53,488 |
| | 59,925 |
| | 164,938 |
| | 163,473 |
| | 60,678 |
| | 56,126 |
| | 111,419 |
| | 109,162 |
|
Basic net income per share | | 2.14 |
| | 2.38 |
| | 6.57 |
| | 6.41 |
| | 2.45 |
| | 2.24 |
| | 4.47 |
| | 4.35 |
|
Diluted net income per share | | 2.13 |
| | 2.37 |
| | 6.56 |
| | 6.39 |
| | 2.44 |
| | 2.24 |
| | 4.45 |
| | 4.34 |
|
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring proforma adjustments directly attributable to the acquisitions are included in the reported proforma revenues and earnings.
Note 13.12. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We have evaluated the effect this amendment will have on our most significant types of transactions and expect the timing of most of our revenue recognition to generally remain the same. A portion of the transaction price related to sales of finance and insurance contracts will likely be considered variable consideration and subject to accelerated recognition under the new standard. The new standard requires an entity to estimate variable consideration and apply the constraint in determining the transaction price. We are still evaluating how much variable consideration should be constrained and at what
point the constraint is resolved, which will also determine the amount of any potential cumulative effect adjustment. As a result, we have not yet quantified the impact to our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are evaluatingwill adopt this accounting standard update effective January 1, 2019. A modified retrospective transition approach is required for leases existing at, or entered into after, the effect this pronouncement will have on our consolidatedbeginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We have both real estate leases and related disclosures.
In March 2016,equipment leases that will be impacted by the FASB issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. In January 2017, we adopted this new guidance. As a result, we recorded the following:
Reclassified $0.2 million as a decreaseWe continue to additional paid-in capital and an increase to retained earnings related to our policy election to record forfeitures as they occur.
All prior periods presented in our Consolidated Statements of Cash Flows have been adjusted for the presentation of excess tax benefits on the cash flow statement. This resulted in a $4.4 million reclassification between financing and operating cash flows.
We had $0.3 million of tax-affected state net operating loss carryforwards related to excess tax benefits for which a deferred tax asset had not been recognized. At adoption, this amount was recorded with the offset to retained earnings. Additionally, we do not believe that it is more-likely-than-not that the asset will be utilized and, as a result, a valuation allowance in the same amount was recorded that offset the impact to retained earnings.
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance for eight cash flow classification issues to reduce diversity in practice. The clarification includes guidance on items such as debt prepayment or debt extinguishment cost, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluatingevaluate the effect this pronouncement will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the updated standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.
Note 13. Changes in Accounting Policies
In May 2017,2014, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment replaced most of Modification Accounting." ASU 2017-09 reduces both diversitythe existing revenue recognition guidance. The new standard, as amended in practice and cost and complexity when changing the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09July 2015, is effective for fiscal years, including interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in any2017, and interim period for which financial statements have not yet been issued.periods therein. The amendments instandard permits the use of either the retrospective or cumulative effect transition method. We adopted this update should be applied prospectively to an award modified on or afterstandard utilizing a cumulative effect transition method effective January 2018. While the adoption date.of the new standard did not have a significant effect on earnings or on the timing of our most significant types of transactions, we made the following changes to our revenue policies:
A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and subject to accelerated recognition under the new standard. Accordingly, we recognized a $9.2 million asset associated with future estimated variable consideration and a net of tax increase to retained earnings of $6.5 million. We do not expect thebelieve there will be a significant impact to future revenue recognized.
The adoption of ASU 2017-09the new standard clarifies the determination and capitalization of direct costs incurred. As a result, we reassessed the method used to havecapitalize and amortize direct costs associated with the sale of lifetime lube, oil and filter contracts, which resulted in a material$7.2 million reduction in prepaid commissions and a net of tax $5.1 million reduction to retained earnings.
These changes had an immaterial effect on our financial position, resultsConsolidated Statements of operations or cash flows.Operations and the following impact on our Consolidated Balance Sheets (in thousands):
|
| | | | | | | | | | | | |
| | As Reported | | | | Balances without the adoption of Topic 606 |
Impact on Consolidated Balance Sheets | | June 30, 2018 | | Adjustments | |
Accounts receivable, net | | $ | 483,995 |
| | $ | (3,631 | ) | | $ | 480,364 |
|
Other current assets | | 46,231 |
| | (1,237 | ) | | 44,994 |
|
Other non-current assets | | 560,714 |
| | 3,653 |
| | 564,367 |
|
Total Assets | | 5,164,162 |
| | (1,215 | ) | | 5,162,947 |
|
Accrued Liabilities | | 254,984 |
| | 208 |
| | 255,192 |
|
Deferred income taxes | | 58,583 |
| | (599 | ) | | 57,984 |
|
Total Liabilities | | 4,003,294 |
| | (391 | ) | | 4,002,903 |
|
Retained earnings | | 1,022,888 |
| | (824 | ) | | 1,022,064 |
|
Total Liabilities and Stockholders' Equity | | 5,164,162 |
| | (1,215 | ) | | 5,162,947 |
|
Note 14. Subsequent Events
Disposal of Stores
On October 16, 2017, we disposed of Spokane Mercedes in Spokane, Washington. The disposal generated cash of approximately $13.2 million.
Common Stock Dividend
On OctoberJuly 23, 2017,2018, our Board of Directors approved a dividend of $0.27$0.29 per share on our Class A and Class B common stock related to our thirdsecond quarter 20172018 financial results. The dividend will total approximately $6.7$7.0 million and will be paid on November 24, 2017August 29, 2018 to shareholders of record on November 10, 2017.August 15, 2018.
Repurchase of Class A Common Stock
Since June 30, 2018, we repurchased 226,910 shares at a weighted average price of $86.65 per share and as of July 27, 2018, under our existing share repurchase authorization, $78.9 million million remained available for share repurchases.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors
Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”, “outlook,” “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terms. Examples of forward-looking statements in this Form 10-Q include, among others, statements we make regarding:
Future market conditions, including anticipated national new car sales levels;
Expected operating results, such as improved store performance; continued improvement of SG&A as a percentage of gross profit and all projections;
Anticipated continued success of acquisitions;
Anticipated ability to capture additional market share;
Anticipated ability to find accretive acquisitions;
Anticipated additions of dealership locations to our portfolio in the future;
Anticipated availability of liquidity from our unfinanced operating real estate; and
Anticipated levels of capital expenditures in the future.
The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results to materially differ from the results expressed or implied by these statements. Certain important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A in this Form 10-Q and in the Risk Factors section of our 20162017 Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission. Such factors include, but are not limited to:
Changing economic conditions, including changes in consumer demand, the availability of credit, fuel prices and interest rates;
Natural disasters, adverse weather conditions, acts of God or other incidents;
Increasing competition in our industry;
Adverse conditions affecting one or more key manufacturers whose brands we sell;
Availability of manufacturer incentives, warranty and other promotional programs;
Manufacturers relationships and our ability to renew or enter into new franchise agreements on acceptable terms;
Changes in laws and regulations;
Breaches in our data security systems or in systems used by our vendor partners; and
Our ability to acquire and successfully integrate additional stores
By their nature, forward-looking statements involve risks and uncertainties because they relate to events that depend on circumstances that may or may not occur in the future. You should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statement.
Overview
We areLithia Motors, Inc. is one of the largest automotive retailers in the highly fragmented American auto retail industry. Asproviders of November 7, 2017, we offered 30 brands of new vehicles and all major brands of used vehicles in 166 storespersonal transportation solutions in the United States and online at over 200 websites. We sell new and used vehicles and replacement parts, provide vehicle maintenance, warranty, paint and repair services, arrange related financing, and sell service contracts, vehicle protection products and credit insurance.
In 2016, we wereis among the fifth largest public automotive retailerfastest growing companies in the U.S.,Fortune 500 (#294-2018). Consumers can buy, sell and service vehicles digitally or through our 188 coast to coast locations. Our mission statement, Growth Powered by People, drives us to continuously improve and to give back to our communities.
We believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth through consolidation. In 2017, the top ten automotive retailers, as measuredreported by revenue.Automotive News, represented approximately 7% of the stores in the United States. Our storesdealerships are located in 18 states with concentrations west ofacross the Mississippi and in the Northeast and offer 30 brands of new vehicles and all major brands of used vehicles. Our operations consist ofUnited States. We seek domestic, import and luxury storesfranchises in marketscities ranging from mid-sized regional citiesmarkets to metropolitan urban areas.markets. We evaluate all brands for expansion opportunities provided the market is large enough to support adequate new vehicle sales to justify the required capital investment. Our acquisition strategy has been to acquire dealerships at prices that meet our internal investment targets and, through the application of our centralized operating structure, leverage costs and improve store profitability. We believe our disciplined approach and the current economic environment provides us with attractive acquisition opportunities.
We also believe that we can continue to improve operations at our existing stores. By promoting entrepreneurial leadership within our general and department managers, we strive for continuous improvement to drive sales and capture market share in our local
markets. Our goal is to retail an average of 85 used vehicles per store per month and we believe we can make additional improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle franchise at each location. Our service, body and parts operations provide important repeat business for our stores. We continue to grow this business through increased marketing efforts, competitive pricing on routine maintenance items and diverse commodity product offerings.
During the second quarter of 2018, we continued to integrate recently acquired stores. The second quarter experienced strong performance in revenue and gross profit growth contributed by our recent acquisitions. Newly acquired stores generally have a lower operating efficiency than our other stores and can negatively impact our operating margin. We continue to focus on accelerating the integration of acquired stores to leverage our cost structure and increase incremental profitability.
Results of Operations
For the three months ended September 30, 2017 and 2016, we reported net income of $51.9 million, or $2.07 per diluted share, and $54.0 million, or $2.14 per diluted share, respectively. For the nine months ended September 30, 2017 and 2016, we reported net income of $155.8 million, or $6.19 per diluted share, and $145.7 million, or $5.69 per diluted share, respectively.
Key Revenue and Gross Profit Metrics
Key performance metrics for revenue and gross profit were as follows (dollars in thousands):
| | Three Months Ended September 30, 2017 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit | |
Three Months Ended June 30, 2018 | | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
New vehicle | | $ | 1,553,511 |
| | 58.0 | % | | $ | 88,045 |
| | 5.7 | % | | 21.8 | % | | $ | 1,726,803 |
| | 55.8 | % | | $ | 101,494 |
| | 5.9 | % | | 22.0 | % |
Used vehicle retail | | 679,180 |
| | 25.3 |
| | 78,658 |
| | 11.6 |
| | 19.5 |
| | 804,098 |
| | 26.0 |
| | 87,101 |
| | 10.8 |
| | 18.9 |
|
Used vehicle wholesale | | 65,739 |
| | 2.5 |
| | 1,174 |
| | 1.8 |
| | 0.3 |
| | 85,335 |
| | 2.8 |
| | 1,926 |
| | 2.3 |
| | 0.4 |
|
Finance and insurance 1 | | 101,044 |
| | 3.8 |
| | 101,044 |
| | 100.0 |
| | 25.1 |
| | 114,492 |
| | 3.7 |
| | 114,492 |
| | 100.0 |
| | 24.9 |
|
Service, body and parts | | 265,683 |
| | 9.9 |
| | 132,492 |
| | 49.9 |
| | 32.9 |
| | 311,407 |
| | 10.1 |
| | 153,707 |
| | 49.4 |
| | 33.4 |
|
Fleet and other | | 15,185 |
| | 0.5 |
| | 1,608 |
| | 10.6 |
| | 0.4 |
| | 54,402 |
| | 1.6 |
| | 2,007 |
| | 3.7 |
| | 0.4 |
|
| | $ | 2,680,342 |
| | 100.0 | % | | $ | 403,021 |
| | 15.0 | % | | 100.0 | % | | $ | 3,096,537 |
| | 100.0 | % | | $ | 460,727 |
| | 14.9 | % | | 100.0 | % |
| | Three Months Ended September 30, 2016 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit | |
Three Months Ended June 30, 2017 | | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
New vehicle | | $ | 1,297,511 |
| | 57.2 | % | | $ | 75,843 |
| | 5.8 | % | | 22.5 | % | | $ | 1,384,055 |
| | 56.1 | % | | $ | 80,539 |
| | 5.8 | % | | 21.5 | % |
Used vehicle retail | | 580,885 |
| | 25.6 |
| | 68,809 |
| | 11.8 |
| | 20.4 |
| | 633,635 |
| | 25.7 |
| | 74,506 |
| | 11.8 |
| | 19.9 |
|
Used vehicle wholesale | | 75,271 |
| | 3.3 |
| | 918 |
| | 1.2 |
| | 0.3 |
| | 69,512 |
| | 2.8 |
| | 1,712 |
| | 2.5 |
| | 0.5 |
|
Finance and insurance 1 | | 87,709 |
| | 3.9 |
| | 87,709 |
| | 100.0 |
| | 26.0 |
| | 94,851 |
| | 3.8 |
| | 94,851 |
| | 100.0 |
| | 25.3 |
|
Service, body and parts | | 217,148 |
| | 9.6 |
| | 104,342 |
| | 48.1 |
| | 30.9 |
| | 246,005 |
| | 10.0 |
| | 122,480 |
| | 49.8 |
| | 32.6 |
|
Fleet and other | | 11,443 |
| | 0.4 |
| | (360 | ) | | (3.1 | ) | | (0.1 | ) | | 38,978 |
| | 1.6 |
| | 1,183 |
| | 3.0 |
| | 0.2 |
|
| | $ | 2,269,967 |
| | 100.0 | % | | $ | 337,261 |
| | 14.9 | % | | 100.0 | % | | $ | 2,467,036 |
| | 100.0 | % | | $ | 375,271 |
| | 15.2 | % | | 100.0 | % |
1 Commissions reported net of anticipated cancellations.
| | Nine Months Ended September 30, 2017 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit | |
Six Months Ended June 30, 2018 | | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
New vehicle | | $ | 4,147,870 |
| | 56.2 | % | | $ | 238,702 |
| | 5.8 | % | | 21.3 | % | | $ | 3,181,528 |
| | 55.3 | % | | $ | 188,441 |
| | 5.9 | % | | 21.7 | % |
Used vehicle retail | | 1,915,038 |
| | 25.9 |
| | 221,947 |
| | 11.6 |
| | 19.8 |
| | 1,519,672 |
| | 26.4 |
| | 160,712 |
| | 10.6 |
| | 18.5 |
|
Used vehicle wholesale | | 206,754 |
| | 2.8 |
| | 4,403 |
| | 2.1 |
| | 0.4 |
| | 161,290 |
| | 2.8 |
| | 2,852 |
| | 1.8 |
| | 0.3 |
|
Finance and insurance 1 | | 282,672 |
| | 3.8 |
| | 282,672 |
| | 100.0 |
| | 25.2 |
| | 220,997 |
| | 3.8 |
| | 220,997 |
| | 100.0 |
| | 25.4 |
|
Service, body and parts | | 744,262 |
| | 10.1 |
| | 368,166 |
| | 49.5 |
| | 32.9 |
| | 597,104 |
| | 10.4 |
| | 292,115 |
| | 48.9 |
| | 33.6 |
|
Fleet and other | | 86,883 |
| | 1.2 |
| | 4,054 |
| | 4.7 |
| | 0.4 |
| | 75,625 |
| | 1.3 |
| | 3,721 |
| | 4.9 |
| | 0.5 |
|
| | $ | 7,383,479 |
| | 100.0 | % | | $ | 1,119,944 |
| | 15.2 | % | | 100.0 | % | | $ | 5,756,216 |
| | 100.0 | % | | $ | 868,838 |
| | 15.1 | % | | 100.0 | % |
| | Nine Months Ended September 30, 2016 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit | |
Six Months Ended June 30, 2017 | | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
New vehicle | | $ | 3,602,603 |
| | 56.4 | % | | $ | 215,471 |
| | 6.0 | % | | 22.3 | % | | $ | 2,594,359 |
| | 55.2 | % | | $ | 150,657 |
| | 5.8 | % | | 21.0 | % |
Used vehicle retail | | 1,667,258 |
| | 26.1 |
| | 200,311 |
| | 12.0 |
| | 20.7 |
| | 1,235,858 |
| | 26.3 |
| | 143,289 |
| | 11.6 |
| | 20.0 |
|
Used vehicle wholesale | | 207,131 |
| | 3.2 |
| | 4,234 |
| | 2.0 |
| | 0.4 |
| | 141,015 |
| | 3.0 |
| | 3,229 |
| | 2.3 |
| | 0.5 |
|
Finance and insurance 1 | | 246,390 |
| | 3.9 |
| | 246,390 |
| | 100.0 |
| | 25.5 |
| | 181,628 |
| | 3.9 |
| | 181,628 |
| | 100.0 |
| | 25.3 |
|
Service, body and parts | | 616,088 |
| | 9.6 |
| | 299,060 |
| | 48.5 |
| | 30.9 |
| | 478,579 |
| | 10.2 |
| | 235,674 |
| | 49.2 |
| | 32.9 |
|
Fleet and other | | 46,697 |
| | 0.8 |
| | 1,013 |
| | 2.2 |
| | 0.2 |
| | 71,698 |
| | 1.4 |
| | 2,446 |
| | 3.4 |
| | 0.3 |
|
| | $ | 6,386,167 |
| | 100.0 | % | | $ | 966,479 |
| | 15.1 | % | | 100.0 | % | | $ | 4,703,137 |
| | 100.0 | % | | $ | 716,923 |
| | 15.2 | % | | 100.0 | % |
1 Commissions reported net of anticipated cancellations.
Same Store Operating Data
We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow revenues in our existing locations. As a result, same store measures have been integrated into the discussion below.
Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in August 2016May 2017 would be included in same store operating data beginning in September 2017,June 2018, after its first full complete comparable month of operation. The thirdsecond quarter operating results for the same store comparisons would include results for that store in only the period of SeptemberJune for both comparable periods.
New Vehicle Revenue and Gross Profit
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Revenue | | $ | 1,553,511 |
| | $ | 1,297,511 |
| | $ | 256,000 |
| | 19.7 | % | | $ | 1,726,803 |
| | $ | 1,384,055 |
| | $ | 342,748 |
| | 24.8 | % |
Gross profit | | $ | 88,045 |
| | $ | 75,843 |
| | $ | 12,202 |
| | 16.1 |
| | $ | 101,494 |
| | $ | 80,539 |
| | $ | 20,955 |
| | 26.0 |
|
Gross margin | | 5.7 | % | | 5.8 | % | | (10 | )bp | 1 | | | 5.9 | % | | 5.8 | % | | 10 | bp | 1 | |
| | | | | | | | | | | | | | | | |
Retail units sold | | 45,452 |
| | 38,417 |
| | 7,035 |
| | 18.3 |
| | 49,027 |
| | 40,876 |
| | 8,151 |
| | 19.9 |
|
Average selling price per retail unit | | $ | 34,179 |
| | $ | 33,774 |
| | $ | 405 |
| | 1.2 |
| | $ | 35,221 |
| | $ | 33,860 |
| | $ | 1,361 |
| | 4.0 |
|
Average gross profit per retail unit | | $ | 1,937 |
| | $ | 1,974 |
| | $ | (37 | ) | | (1.9 | ) | | $ | 2,070 |
| | $ | 1,970 |
| | $ | 100 |
| | 5.1 |
|
| | | | | | | |
|
| | | | | | | |
|
|
Same store | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Revenue | | $ | 1,288,680 |
| | $ | 1,280,030 |
| | $ | 8,650 |
| | 0.7 |
| | $ | 1,380,947 |
| | $ | 1,375,444 |
| | $ | 5,503 |
| | 0.4 |
|
Gross profit | | $ | 72,246 |
| | $ | 74,903 |
| | $ | (2,657 | ) | | (3.5 | ) | | $ | 79,141 |
| | $ | 79,830 |
| | $ | (689 | ) | | (0.9 | ) |
Gross margin | | 5.6 | % | | 5.9 | % | | (30 | )bp | |
|
| | 5.7 | % | | 5.8 | % | | (10 | )bp | |
|
|
| | | | | | | |
|
| | | | | | | |
|
|
Retail units sold | | 37,762 |
| | 37,870 |
| | (108 | ) | | (0.3 | ) | | 39,619 |
| | 40,655 |
| | (1,036 | ) | | (2.5 | ) |
Average selling price per retail unit | | $ | 34,126 |
| | $ | 33,801 |
| | $ | 325 |
| | 1.0 |
| | $ | 34,856 |
| | $ | 33,832 |
| | $ | 1,024 |
| | 3.0 |
|
Average gross profit per retail unit | | $ | 1,913 |
| | $ | 1,978 |
| | $ | (65 | ) | | (3.3 | ) | | $ | 1,998 |
| | $ | 1,964 |
| | $ | 34 |
| | 1.7 |
|
1 A basis point is equal to 1/100th of one percent
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Revenue | | $ | 4,147,870 |
| | $ | 3,602,603 |
| | $ | 545,267 |
| | 15.1 | % | | $ | 3,181,528 |
| | $ | 2,594,359 |
| | $ | 587,169 |
| | 22.6 | % |
Gross profit | | $ | 238,702 |
| | $ | 215,471 |
| | $ | 23,231 |
| | 10.8 |
| | $ | 188,441 |
| | $ | 150,657 |
| | $ | 37,784 |
| | 25.1 |
|
Gross margin | | 5.8 | % | | 6.0 | % | | (20 | )bp | 1 | |
| | 5.9 | % | | 5.8 | % | | 10 | bp | 1 | |
|
| | | | | | | | | | | | | | | | |
Retail units sold | | 121,944 |
| | 107,225 |
| | 14,719 |
| | 13.7 |
| | 90,524 |
| | 76,492 |
| | 14,032 |
| | 18.3 |
|
Average selling price per retail unit | | $ | 34,015 |
| | $ | 33,599 |
| | $ | 416 |
| | 1.2 |
| | $ | 35,146 |
| | $ | 33,917 |
| | $ | 1,229 |
| | 3.6 |
|
Average gross profit per retail unit | | $ | 1,957 |
| | $ | 2,010 |
| | $ | (53 | ) | | (2.6 | ) | | $ | 2,082 |
| | $ | 1,970 |
| | $ | 112 |
| | 5.7 |
|
| | | | | | | |
|
| | | | | | | |
|
|
Same store | | | | | | |
| | |
| | | | | | |
| | |
|
Revenue | | $ | 3,602,946 |
| | $ | 3,582,725 |
| | $ | 20,221 |
| | 0.6 |
| | $ | 2,563,814 |
| | $ | 2,576,578 |
| | $ | (12,764 | ) | | (0.5 | ) |
Gross profit | | $ | 207,549 |
| | $ | 214,415 |
| | $ | (6,866 | ) | | (3.2 | ) | | $ | 147,226 |
| | $ | 148,887 |
| | $ | (1,661 | ) | | (1.1 | ) |
Gross margin | | 5.8 | % | | 6.0 | % | | (20 | )bp | |
|
| | 5.7 | % | | 5.8 | % | | (10 | )bp | |
|
|
| | | | | | | |
|
| | | | | | | |
|
|
Retail units sold | | 105,870 |
| | 106,599 |
| | (729 | ) | | (0.7 | ) | | 73,489 |
| | 76,031 |
| | (2,542 | ) | | (3.3 | ) |
Average selling price per retail unit | | $ | 34,032 |
| | $ | 33,609 |
| | $ | 423 |
| | 1.3 |
| | $ | 34,887 |
| | $ | 33,889 |
| | $ | 998 |
| | 2.9 |
|
Average gross profit per retail unit | | $ | 1,960 |
| | $ | 2,011 |
| | $ | (51 | ) | | (2.5 | ) | | $ | 2,003 |
| | $ | 1,958 |
| | $ | 45 |
| | 2.3 |
|
1 A basis point is equal to 1/100th of one percent
New vehicle sales increased 19.7%24.8% and 15.1%22.6% in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016,2017, primarily driven by an increaseincreases in volume related to acquisitions.
SameOn a same store basis, new vehicle unit sales decreased 0.3% and 0.7%, respectively,were flat in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. These volume decreases were2017. This was primarily due to a 2.5% decrease in unit sales, offset by a 1.0%3.0% increase in average selling price and 1.3%a 3.3% decrease in unit sales, partially offset by a 2.9% increase respectively, in average selling price per unit for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018, respectively, compared to the same periods of 2016. On a same store basis, our stores performed better than2017. The national new vehicle sales levels, which decreased 1.2%market experienced 1.8% and 1.9% ,2.0% growth, respectively, induring the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017.
Same store unit sales increased (decreased)decreased as follows:
| |
| | Three months ended September 30, 2017 compared to the same period of 2016 | | National growth in the three months ended September 30, 2017 compared to the same period of 2016 ¹ | | Nine months ended September 30, 2017 compared to the same period of 2016 | | National growth in the nine months ended September 30, 2017 compared to the same period of 2016 ¹ | | Three months ended June 30, 2018 compared to the same period of 2017 | | National increase (decrease) in the three months ended June 30, 2018 compared to the same period of 2017 ¹ | | Six months ended June 30, 2018 compared to the same period of 2017 | | National increase in the six months ended June 30, 2018 compared to the same period of 2017 ¹ |
Domestic brand same store unit sales change | | (5.8 | )% | | (2.9 | )% | | (3.1 | )% | | (3.6 | )% | | (0.8 | )% | | 3.7 | % | | (3.3 | )% | | 2.3 | % |
Import brand same store unit sales change | | 4.5 |
| | 0.6 |
| | 2.7 |
| | (0.6 | ) | | (3.6 | ) | | (0.6 | ) | | (4.0 | ) | | 1.0 |
|
Luxury brand same store unit sales change | | (7.8 | ) | | (2.7 | ) | | (9.7 | ) | | 0.3 |
| | (2.2 | ) | | 6.5 |
| | (0.3 | ) | | 7.2 |
|
Overall | | (0.3 | ) | | (1.2 | ) | | (0.7 | ) | | (1.9 | ) | | (2.5 | ) | | 1.8 |
| | (3.3 | ) | | 2.0 |
|
1 National auto unit sales and seasonally adjusted annual rate ("SAAR") data obtained from Stephens Auto Unit Sales and SAAR report as of September 2017.June 2018.
National new vehicle sales market growth continues to moderate for all brands. Our domestic brandThe unit volume change outperformeddecreases for our domestic brands exceeded the national average for the nine-month periodthree and six-month periods ended SeptemberJune 30, 20172018 compared to the same periodperiods of 2016 despite a decline in the third quarter of 2017 that exceeded the national domestic brand decline for the same period.2017. Our performance, compared to the national trend for domestic brands, was mainly driven by Chrysler, whichGeneral Motors and Chrysler. Our General Motors stores had same store unit sales decreases of 9.0%1.7% and 3.4%, respectively, offset by Ford, which had a same store unit sales increases of 6.5% and 1.5%4.3%, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. This performance compares to
national market increases of 4.7% and 4.2% for the same periods. Our Chrysler stores had same store unit sales decreases of 10.3%0.4% and 8.0%3.0%, respectively, for Chrysler and 0.9% and 2.9%, respectively, for Ford for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. This performance compares to national market increases of 8.1% and 4.7% for the same periods.
Our import brand
The unit volume outperformeddecreases for our import brands exceeded the national average for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. Our Toyota2017. These decreases were primarily driven by our Honda stores, which comprised 21.2%20.7% and 19.9%, respectively, of our total same store new vehicle unit sales in the third quarterthree and six-month periods of 2017, grew 11.3%2018. Our Honda stores had same store unit decreases of 2.2% and 4.0%6.5%, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 2018 compared to the same periods of 2017, while the national average unit volume decreases were 0.3% and 0.5%, respectively, for Honda for the same periods. Our Toyota stores, which comprised 17.9% and 18.4%, respectively, of our same store new vehicle unit sales in the three and six-month periods of 2018, had a same store unit decrease of 4.6% and was flat, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods in 2016. This compares to2017, while the national market increases of 8.3%for Toyota decreased by 0.8% and 0.5%increased 3.0%, respectively, for the same periods.
Our luxury brand unit volume decreased 2.2% and was flat in the three and nine-monthssix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. Our Honda2017, which underperformed the national trend for luxury brands, and was primarily associated with our BMW stores, which comprised 20.4%3.6% of our totalsame store new vehicle unit sales in the third quartereach of 2017, had same store unit increases of 2.1% and 1.1%, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 2017 compared to the same periods of 2016. The national average unit volume increases were 0.8% and 0.3%, respectively, for Honda in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016.
The period-over-period volume decreases for our luxury brand unit volume exceeded the national average in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. The decreases were primarily associated with our BMW and Mercedes stores, which comprised 3.3% and 1.2%, respectively, of our total new vehicle unit sales in the third quarter of 2017.2018. Our BMW stores had same store unit sales decreases of 24.6%2.3% and 18.6%4.5%, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. This compares to2017, while the national average decreaseswas an increase for BMW of 7.5%2.6% and 5.2%2.8%, respectively, for the same periods. Our Mercedes stores, accounting for 0.9% of our same store new vehicle unit sales in each of the three and six-month periods ended June 30, 2018, had a same store unit decrease of 8.8% and an increase of 6.4% for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018, respectively, compared to the same periods of 2016. Our2017, while the national average was a decrease for Mercedes stores had same store unit sales decreases of 7.1%2.9% and 12.1%1.9%, respectively, for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. This compares to national average decreases for Mercedes of 7.1% and 3.0% for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. Ourperiods. The growth in our luxury brands were down morewas less than the national average due to decreases in our local markets. We are concentrated in areas such as Seattle and New Jersey, where new vehicle registrations were down. Additionally, our BMW stores lost market share.
We seek to grow our new vehicle sales organically by gaining share in the markets we serve. To increase awareness and customer traffic, we use a combination of traditional, digital and social media advertisements to reach customers. We have established a company-wide target of achieving 25% higher sales than the national OEM average. As of SeptemberFor the six-month period ended June 30, 2017,2018, our sales were 9%7% higher than the national OEM average.average, down from achieving 9% higher sales for the same period of 2017.
New vehicle gross profit increased 16.1%26.0% and 10.8%25.1%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. On a same store basis, new vehicle gross profit decreased 3.5%0.9% and 3.2%1.1%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. These decreases were driven by decreases in new vehicle unit sales of 2.5% an 3.3%, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017, offset by increases in gross profit per unit of 1.7% and 2.3%, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017. The same store average gross profit per unit for new vehicles decreased $65increased $34 and $51$45, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017.
Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, arranging of third party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work.
Used Vehicle Retail Revenue and Gross Profit
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Retail revenue | | $ | 679,180 |
| | $ | 580,885 |
| | $ | 98,295 |
| | 16.9 | % | | $ | 804,098 |
| | $ | 633,635 |
| | $ | 170,463 |
| | 26.9 | % |
Retail gross profit | | $ | 78,658 |
| | $ | 68,809 |
| | $ | 9,849 |
| | 14.3 |
| | $ | 87,101 |
| | $ | 74,506 |
| | $ | 12,595 |
| | 16.9 |
|
Retail gross margin | | 11.6 | % | | 11.8 | % | | (20 | )bp | | |
| | 10.8 | % | | 11.8 | % | | (100 | )bp | | |
|
| | | | | | | | | | | | | | | | |
Retail units sold | | 34,717 |
| | 29,636 |
| | 5,081 |
| | 17.1 |
| | 39,096 |
| | 32,171 |
| | 6,925 |
| | 21.5 |
|
Average selling price per retail unit | | $ | 19,563 |
| | $ | 19,601 |
| | $ | (38 | ) | | (0.2 | ) | | $ | 20,567 |
| | $ | 19,696 |
| | $ | 871 |
| | 4.4 |
|
Average gross profit per retail unit | | $ | 2,266 |
| | $ | 2,322 |
| | $ | (56 | ) | | (2.4 | ) | | $ | 2,228 |
| | $ | 2,316 |
| | $ | (88 | ) | | (3.8 | ) |
| | | | | | | | | | | | | | | | |
Same store | | | | | | |
| | |
| | | | | | |
| | |
|
Retail revenue | | $ | 593,285 |
| | $ | 572,862 |
| | $ | 20,423 |
| | 3.6 |
| | $ | 673,955 |
| | $ | 629,198 |
| | $ | 44,757 |
| | 7.1 |
|
Retail gross profit | | $ | 71,248 |
| | $ | 68,215 |
| | $ | 3,033 |
| | 4.4 |
| | $ | 76,447 |
| | $ | 74,102 |
| | $ | 2,345 |
| | 3.2 |
|
Retail gross margin | | 12.0 | % | | 11.9 | % | | 10 | bp | | |
| | 11.3 | % | | 11.8 | % | | (50 | )bp | | |
|
| | | | | | | | | | | | | | | | |
Retail units sold | | 30,115 |
| | 29,171 |
| | 944 |
| | 3.2 |
| | 33,328 |
| | 31,933 |
| | 1,395 |
| | 4.4 |
|
Average selling price per retail unit | | $ | 19,701 |
| | $ | 19,638 |
| | $ | 63 |
| | 0.3 |
| | $ | 20,222 |
| | $ | 19,704 |
| | $ | 518 |
| | 2.6 |
|
Average gross profit per retail unit | | $ | 2,366 |
| | $ | 2,338 |
| | $ | 28 |
| | 1.2 |
| | $ | 2,294 |
| | $ | 2,321 |
| | $ | (27 | ) | | (1.2 | ) |
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Retail revenue | | $ | 1,915,038 |
| | $ | 1,667,258 |
| | $ | 247,780 |
| | 14.9 | % | | $ | 1,519,672 |
| | $ | 1,235,858 |
| | $ | 283,814 |
| | 23.0 | % |
Retail gross profit | | $ | 221,947 |
| | $ | 200,311 |
| | $ | 21,636 |
| | 10.8 |
| | $ | 160,712 |
| | $ | 143,289 |
| | $ | 17,423 |
| | 12.2 |
|
Retail gross margin | | 11.6 | % | | 12.0 | % | | (40 | )bp | | |
| | 10.6 | % | | 11.6 | % | | (100 | )bp | | |
|
| | | | | | | | | | | | | | | | |
Retail units sold | | 97,671 |
| | 84,783 |
| | 12,888 |
| | 15.2 |
| | 75,210 |
| | 62,954 |
| | 12,256 |
| | 19.5 |
|
Average selling price per retail unit | | $ | 19,607 |
| | $ | 19,665 |
| | $ | (58 | ) | | (0.3 | ) | | $ | 20,206 |
| | $ | 19,631 |
| | $ | 575 |
| | 2.9 |
|
Average gross profit per retail unit | | $ | 2,272 |
| | $ | 2,363 |
| | $ | (91 | ) | | (3.9 | ) | | $ | 2,137 |
| | $ | 2,276 |
| | $ | (139 | ) | | (6.1 | ) |
| | | | | | | | | | | | | | | | |
Same store | | | | | | |
| | |
| | | | | | |
| | |
|
Retail revenue | | $ | 1,730,495 |
| | $ | 1,656,119 |
| | $ | 74,376 |
| | 4.5 |
| | $ | 1,296,344 |
| | $ | 1,224,239 |
| | $ | 72,105 |
| | 5.9 |
|
Retail gross profit | | $ | 205,438 |
| | $ | 199,432 |
| | $ | 6,006 |
| | 3.0 |
| | $ | 142,323 |
| | $ | 142,359 |
| | $ | (36 | ) | | — |
|
Retail gross margin | | 11.9 | % | | 12.0 | % | | (10 | )bp | | |
| | 11.0 | % | | 11.6 | % | | (60 | )bp | | |
|
| | | | | | | | | | | | | | | | |
Retail units sold | | 87,553 |
| | 84,148 |
| | 3,405 |
| | 4.0 |
| | 65,005 |
| | 62,337 |
| | 2,668 |
| | 4.3 |
|
Average selling price per retail unit | | $ | 19,765 |
| | $ | 19,681 |
| | $ | 84 |
| | 0.4 |
| | $ | 19,942 |
| | $ | 19,639 |
| | $ | 303 |
| | 1.5 |
|
Average gross profit per retail unit | | $ | 2,346 |
| | $ | 2,370 |
| | $ | (24 | ) | | (1.0 | ) | | $ | 2,189 |
| | $ | 2,284 |
| | $ | (95 | ) | | (4.2 | ) |
Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned ("CPO") vehicles; core vehicles, or late-model vehicles with lower mileage; and value autos, or vehicles with over 80,000 miles. We have established a company-wide target of achieving a per store average of 85 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of used units, from late model CPO models to vehicles over ten years old.
Same store sales of used vehicles increased (decreased) as follows:
| | | | Three months ended September 30, 2017 compared to the same period of 2016 | | Nine months ended September 30, 2017 compared to the same period of 2016 | | Three months ended June 30, 2018 compared to the same period of 2017 | | Six months ended June 30, 2018 compared to the same period of 2017 |
Certified pre-owned vehicles | | (5.3 | )% | | (1.2 | )% | |
Manufacturer CPO vehicles | | | (1.1 | )% | | (3.6 | )% |
Core vehicles | | 7.6 |
| | 6.4 |
| | 12.2 |
| | 12.4 |
|
Value autos | | 9.3 |
| | 10.8 |
| | 7.2 |
| | 2.9 |
|
Overall | | 3.6 |
| | 4.5 |
| | 7.1 |
| | 5.9 |
|
The increases in same store used vehicle sales were primarily driven by increased unit sales in our core and value auto vehicles categories. For value autos,core vehicles, same store unit sales increased 7.1% and 9.1%, respectively, and average selling pricesprice increased 4.8%4.7% and 5.7%3.2%, respectively, for the three and nine-monthssix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. For core autos,2017. Our value auto vehicle category increased same store unit sales 4.3% and 0.7%, respectively, and average selling prices increased 1.1%2.8% and 0.2%2.1%, respectively, for the three and nine-monthssix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. These increases2017. The growth in our core and value auto vehicles categories was offset theby decreases in growth of our CPO vehicles, which had difficult comparisons as this category had double digit growthvehicles. The decreases in 2016. CPO vehicle sales were driven by 0.7% and 1.5% decreases, respectively, in same store unit sales and 0.3% and 2.0% decreases, respectively, in average selling price for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017.
On an annualized average, as of SeptemberJune 30, 2017 and 2016,2018 , each of our stores sold 67 and 65 retail used vehicle units respectively, per month.month, consistent with the same period a year ago.
Used retail vehicle gross profit increased 14.3%16.9% and 10.8%12.2%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. On a same store basis, gross profit increased 4.4%3.2% and 3.0%,was flat, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016,2017, primarily driven by volume growth,increases in units sold and average selling price, partially offset in the nine-month period by a decreasedecreases in the average gross profit per unit sold.unit. The same store gross profit per unit increased $28decreased $27 and decreased $24,$95, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017.
Our used vehicle operations provide an opportunity to generate sales to customers unable or unwilling to purchase a new vehicle, sell brands other than the store’s new vehicle franchise(s) and increase sales from finance and insurance and parts and service.
Used Vehicle Wholesale Revenue and Gross Profit
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | |
Reported | | | | | | | | |
Wholesale revenue | | $ | 65,739 |
| | $ | 75,271 |
| | $ | (9,532 | ) | | (12.7 | )% |
Wholesale gross profit | | $ | 1,174 |
| | $ | 918 |
| | $ | 256 |
| | 27.9 |
|
Wholesale gross margin | | 1.8 | % | | 1.2 | % | | 60 | bp | | |
|
| | | | | | | | |
Wholesale units sold | | 11,122 |
| | 10,853 |
| | 269 |
| | 2.5 |
|
Average selling price per wholesale unit | | $ | 5,911 |
| | $ | 6,936 |
| | $ | (1,025 | ) | | (14.8 | ) |
Average gross profit per retail unit | | $ | 106 |
| | $ | 85 |
| | $ | 21 |
| | 24.7 |
|
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Wholesale revenue | | $ | 206,754 |
| | $ | 207,131 |
| | $ | (377 | ) | | (0.2 | )% | | $ | 85,335 |
| | $ | 69,512 |
| | $ | 15,823 |
| | 22.8 | % |
Wholesale gross profit | | $ | 4,403 |
| | $ | 4,234 |
| | $ | 169 |
| | 4.0 |
| | $ | 1,926 |
| | $ | 1,712 |
| | $ | 214 |
| | 12.5 |
|
Wholesale gross margin | | 2.1 | % | | 2.0 | % | | 10 | bp | | |
| | 2.3 | % | | 2.5 | % | | (20 | )bp | | |
|
| | | | | | | | | | | | | | | | |
Wholesale units sold | | 32,868 |
| | 30,140 |
| | 2,728 |
| | 9.1 |
| | 12,908 |
| | 10,906 |
| | 2,002 |
| | 18.4 |
|
Average selling price per wholesale unit | | $ | 6,290 |
| | $ | 6,872 |
| | $ | (582 | ) | | (8.5 | ) | | $ | 6,611 |
| | $ | 6,374 |
| | $ | 237 |
| | 3.7 |
|
Average gross profit per retail unit | | $ | 134 |
| | $ | 140 |
| | $ | (6 | ) | | (4.3 | ) | | $ | 149 |
| | $ | 157 |
| | $ | (8 | ) | | (5.1 | ) |
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands, except per unit amounts) | | 2018 | | 2017 | | |
Reported | | | | | | | | |
Wholesale revenue | | $ | 161,290 |
| | $ | 141,015 |
| | $ | 20,275 |
| | 14.4 | % |
Wholesale gross profit | | $ | 2,852 |
| | $ | 3,229 |
| | $ | (377 | ) | | (11.7 | ) |
Wholesale gross margin | | 1.8 | % | | 2.3 | % | | (50 | )bp | | |
|
| | | | | | | | |
Wholesale units sold | | 24,595 |
| | 21,746 |
| | 2,849 |
| | 13.1 |
|
Average selling price per wholesale unit | | $ | 6,558 |
|
| $ | 6,485 |
| | $ | 73 |
| | 1.1 |
|
Average gross profit per retail unit | | $ | 116 |
| | $ | 148 |
| | $ | (32 | ) | | (21.6 | ) |
Wholesale transactions are vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to age or other factors. Wholesale vehicles are typically sold at or near cost and do not comprise a meaningful component of our gross profit.
Finance and Insurance
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Revenue | | $ | 101,044 |
| | $ | 87,709 |
| | $ | 13,335 |
| | 15.2 | % | | $ | 114,492 |
| | $ | 94,851 |
| | $ | 19,641 |
| | 20.7 | % |
Average finance and insurance per retail unit | | $ | 1,260 |
| | $ | 1,289 |
| | $ | (29 | ) | | (2.2 | )% | | $ | 1,299 |
| | $ | 1,298 |
| | $ | 1 |
| | 0.1 | % |
| | | | | | | | | | | | | | | | |
Same store | | | | | | | | | | | | | | | | |
Revenue | | $ | 87,371 |
| | $ | 86,951 |
| | $ | 420 |
| | 0.5 | % | | $ | 95,177 |
| | $ | 94,244 |
| | $ | 933 |
| | 1.0 | % |
Average finance and insurance per retail unit | | $ | 1,287 |
| | $ | 1,297 |
| | $ | (10 | ) | | (0.8 | )% | | $ | 1,305 |
| | $ | 1,298 |
| | $ | 7 |
| | 0.5 | % |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Revenue | | $ | 282,672 |
| | $ | 246,390 |
| | $ | 36,282 |
| | 14.7 | % | | $ | 220,997 |
| | $ | 181,628 |
| | $ | 39,369 |
| | 21.7 | % |
Average finance and insurance per retail unit | | $ | 1,287 |
| | $ | 1,283 |
| | $ | 4 |
| | 0.3 | % | | 1,333 |
| | 1,302 |
| | 31 |
| | 2.4 |
|
| | | | | | | | | | | | | | | | |
Same store | | | | | | | | | | | | | | | | |
Revenue | | $ | 257,155 |
| | $ | 245,397 |
| | $ | 11,758 |
| | 4.8 | % | | $ | 185,668 |
| | $ | 180,322 |
| | $ | 5,346 |
| | 3.0 | % |
Average finance and insurance per retail unit | | $ | 1,329 |
| | $ | 1,287 |
| | $ | 42 |
| | 3.3 | % | | 1,341 |
| | 1,303 |
| | 38 |
| | 2.9 |
|
We believe that arranging timely vehicle financing is an important part of our ability to sell vehicles and we attempt to arrange financing for every vehicle we sell. We also offer related products such as extended warranties, insurance contracts and vehicle and theft protection.
The increases in finance and insurance revenue in the three and six-month periods ended June 30, 2018 compared to the same periods of 2017 were primarily due to increased volume related to acquisitions, combined with expanded product offerings. Third-party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. Same store finance and insurance revenues were flatincreased 1.0% and 3.0%, respectively, for the three-month periodthree and six-month periods ended SeptemberJune 30, 2017 and increased 4.8% for the nine-month period ended September 30, 20172018 as compared to the same periods of 2016. The slowing2017. These increases were driven by increases in the third quarter of 2017 was primarily due to a decline in penetration rates and a decrease in the average finance and insurance amountrevenues per retail unit.unit, combined with increases in used vehicle unit volume, offset by decreases in new vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit decreased $10increased $7 and increased $42,$38, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016, mainly2017, primarily due to increases in unit volume offset by flat or slightly decliningincreased penetration rates.rates related to finance and insurance contracts.
Trends in penetration rates for total new and used retail vehicles sold are detailed below:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Finance and insurance | | 75 | % | | 76 | % | | 76 | % | | 77 | % | | 73 | % | | 71 | % | | 72 | % | | 71 | % |
Service contracts | | 45 |
| | 44 |
| | 45 |
| | 44 |
| | 45 |
| | 44 |
| | 46 |
| | 45 |
|
Lifetime lube, oil and filter contracts | | 26 |
| | 27 |
| | 26 |
| | 27 |
| | 24 |
| | 25 |
| | 25 |
| | 25 |
|
We seek to increase our penetration of vehicle financing on the number of vehicles that we sell and to offer a comprehensive suite of products. We target an average F&I per retail unit of $1,450. We believe improved performance from sales training and revised compensation plans will be critical factors in achieving this target.
Service, Body and Parts Revenue and Gross Profit
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Customer pay | | $ | 143,842 |
| | $ | 118,915 |
| | $ | 24,927 |
| | 21.0 | % | | $ | 172,333 |
| | $ | 135,851 |
| | $ | 36,482 |
| | 26.9 | % |
Warranty | | 63,350 |
| | 53,203 |
| | 10,147 |
| | 19.1 |
| | 72,561 |
| | 56,703 |
| | 15,858 |
| | 28.0 |
|
Wholesale parts | | 39,463 |
| | 30,543 |
| | 8,920 |
| | 29.2 |
| | 45,310 |
| | 35,631 |
| | 9,679 |
| | 27.2 |
|
Body shop | | 19,028 |
| | 14,487 |
| | 4,541 |
| | 31.3 |
| | 21,203 |
| | 17,820 |
| | 3,383 |
| | 19.0 |
|
Total service, body and parts | | $ | 265,683 |
| | $ | 217,148 |
| | $ | 48,535 |
| | 22.4 | % | | $ | 311,407 |
| | $ | 246,005 |
| | $ | 65,402 |
| | 26.6 | % |
| | | | | | | | | | | | | | | | |
Service, body and parts gross profit | | $ | 132,492 |
| | $ | 104,342 |
| | $ | 28,150 |
| | 27.0 | % | | $ | 153,707 |
| | $ | 122,480 |
| | $ | 31,227 |
| | 25.5 | % |
Service, body and parts gross margin | | 49.9 | % | | 48.1 | % | | 180 bp |
| | | | 49.4 | % | | 49.8 | % | | (40) bp |
| | |
| | | | | | | | | | | | | | | | |
Same store | | | | | | | | | | | | | | | | |
Customer pay | | $ | 123,001 |
| | $ | 117,904 |
| | $ | 5,097 |
| | 4.3 | % | | $ | 141,173 |
| | $ | 134,406 |
| | $ | 6,767 |
| | 5.0 | % |
Warranty | | 52,836 |
| | 52,801 |
| | 35 |
| | 0.1 |
| | 56,897 |
| | 56,296 |
| | 601 |
| | 1.1 |
|
Wholesale parts | | 30,836 |
| | 29,844 |
| | 992 |
| | 3.3 |
| | 36,082 |
| | 35,255 |
| | 827 |
| | 2.3 |
|
Body shop | | 14,683 |
| | 13,842 |
| | 841 |
| | 6.1 |
| | 17,297 |
| | 17,646 |
| | (349 | ) | | (2.0 | ) |
Total service, body and parts | | $ | 221,356 |
| | $ | 214,391 |
| | $ | 6,965 |
| | 3.2 | % | | $ | 251,449 |
| | $ | 243,603 |
| | $ | 7,846 |
| | 3.2 | % |
| | | | | | | | | | | | | | | | |
Service, body and parts gross profit | | $ | 109,591 |
| | $ | 103,025 |
| | $ | 6,566 |
| | 6.4 | % | | $ | 124,751 |
| | $ | 121,368 |
| | $ | 3,383 |
| | 2.8 | % |
Service, body and parts gross margin | | 49.5 | % | | 48.1 | % | | 140 bp |
| | |
| | 49.6 | % | | 49.8 | % | | (20) bp |
| | |
|
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Reported | | | | | | | | | | | | | | | | |
Customer pay | | $ | 402,313 |
| | $ | 339,640 |
| | $ | 62,673 |
| | 18.5 | % | | $ | 322,181 |
| | $ | 258,471 |
| | $ | 63,710 |
| | 24.6 | % |
Warranty | | 174,552 |
| | 145,747 |
| | 28,805 |
| | 19.8 |
| | 140,869 |
| | 111,202 |
| | 29,667 |
| | 26.7 |
|
Wholesale parts | | 111,796 |
| | 88,710 |
| | 23,086 |
| | 26.0 |
| | 90,919 |
| | 72,333 |
| | 18,586 |
| | 25.7 |
|
Body shop | | 55,601 |
| | 41,991 |
| | 13,610 |
| | 32.4 |
| | 43,135 |
| | 36,573 |
| | 6,562 |
| | 17.9 |
|
Total service, body and parts | | $ | 744,262 |
| | $ | 616,088 |
| | $ | 128,174 |
| | 20.8 | % | | $ | 597,104 |
| | $ | 478,579 |
| | $ | 118,525 |
| | 24.8 | % |
| | | | | | | | | | | | | | | | |
Service, body and parts gross profit | | $ | 368,166 |
| | $ | 299,060 |
| | $ | 69,106 |
| | 23.1 | % | | $ | 292,115 |
| | $ | 235,674 |
| | $ | 56,441 |
| | 23.9 | % |
Service, body and parts gross margin | | 49.5 | % | | 48.5 | % | | 100 | bp | | |
| | 48.9 | % | | 49.2 | % | | (30 | ) bp | | |
|
| | | | | | | | | | | | | | | | |
Same store | | | | | | | | | | | | | | | | |
Customer pay | | $ | 358,724 |
| | $ | 338,078 |
| | $ | 20,646 |
| | 6.1 | % | | $ | 266,433 |
| | $ | 255,452 |
| | $ | 10,981 |
| | 4.3 | % |
Warranty | | 152,738 |
| | 145,140 |
| | 7,598 |
| | 5.2 |
| | 112,518 |
| | 110,233 |
| | 2,285 |
| | 2.1 |
|
Wholesale parts | | 92,124 |
| | 87,958 |
| | 4,166 |
| | 4.7 |
| | 72,680 |
| | 71,430 |
| | 1,250 |
| | 1.7 |
|
Body shop | | 44,723 |
| | 40,966 |
| | 3,757 |
| | 9.2 |
| | 35,629 |
| | 35,872 |
| | (243 | ) | | (0.7 | ) |
Total service, body and parts | | $ | 648,309 |
| | $ | 612,142 |
| | $ | 36,167 |
| | 5.9 | % | | $ | 487,260 |
| | $ | 472,987 |
| | $ | 14,273 |
| | 3.0 | % |
| | | | | | | | | | | | | | | | |
Service, body and parts gross profit | | $ | 320,345 |
| | $ | 297,185 |
| | $ | 23,160 |
| | 7.8 | % | | $ | 240,773 |
| | $ | 233,025 |
| | $ | 7,748 |
| | 3.3 | % |
Service, body and parts gross margin | | 49.4 | % | | 48.5 | % | | 90 | bp | | |
| | 49.4 | % | | 49.3 | % | | 10 | bp | | |
|
We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.
Our service, body, and parts salesrevenue grew in all areas in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. There are2017. The growth experienced in the three and six-month periods ended June 30, 2018 was primarily due to acquisitions, combined with more late-model units in operation asfrom 2010 to 2016 and a plateauing new vehicle sales volumes have been increasing since 2010.market. We believe this increase inthe increased number of units in operation will continue to benefit our service, body and parts salesrevenue in the coming years as more late-model vehicles age, and requirenecessitating repairs and maintenance.
We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts. We increased our same store customer pay businessrevenue 5.0% and 4.3% and 6.1%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017.
Same store warranty salesrevenue increased 0.1%1.1% and 5.2%2.1%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. Warranty sales growth slowedwas primarily driven by increases in the third quarter of 2017, as compared to the growth experience in the nine-month period ended September 30, 2017. This is due to slowing warranty work related todomestic segment recalls, particularly Honda and Toyota,Chrysler, which had increases of 17.9% and 16.1%, respectively, and Ford, which had increases of 4.3% and 8.7%, respectively. These increases were offset by decreases in warranty salesHonda of 39.2%26.5% and 14.9%25.1%, respectively, and decreases of 11.6% and 19.4%, respectively, in Nissan warranty work in the three month periodand six-month periods ended SeptemberJune 30, 2017 and decreases of 14.9% and 11.3%, respectively, in the nine-month period ended September 30, 20172018 as compared to the same periods of 2016. Our domestic and luxury stores offset this trend, resulting in the slight increase for the quarter.2017.
The increasesincrease (decrease) in same-store warranty work by segment werewas as follows:
| | | | Three months ended September 30, 2017 compared to the same period of 2016 | | Nine months ended September 30, 2017 compared to the same period of 2016 | | Three months ended June 30, 2018 compared to the same period of 2017 | | Six months ended June 30, 2018 compared to the same period of 2017 |
Domestic | | 10.0 | % | | 6.5 | % | | 11.2 | % | | 11.5 | % |
Import | | (11.5 | ) | | (0.3 | ) | | (5.5 | ) | | (4.6 | ) |
Luxury | | 9.8 |
| | 13.8 |
| | (1.8 | ) | | 0.5 |
|
Same store wholesale parts revenue increased 3.3%2.3% and 4.7%1.7%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. We target independent repair shops, competing new vehicle dealers and wholesale accounts to expand parts sales to other repair shops.
Same store body shop increased 6.1%revenue decreased 2.0% and 9.2%0.7%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. Our stores have increased production through calculated adjustments2017. These decreases were primarily due to optimize personnel and equipment.milder winter weather in areas in which our body shops are located.
Same store service, body and parts gross profit increased 6.4%2.8% and 7.8%3.3%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016, which is in line with our revenue growth.2017. Our gross margins have increased as our mix shifted towardshifts towards customer pay, which has a higher marginmargins than other service.service work.
Segments
Certain financial information by segment is as follows:
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenues: | | | | | | | | | | | | | | | | |
Domestic | | $ | 1,008,310 |
| | $ | 893,156 |
| | $ | 115,154 |
| | 12.9 | % | | $ | 1,095,068 |
| | $ | 954,949 |
| | $ | 140,119 |
| | 14.7 | % |
Import | | 1,209,955 |
| | 983,947 |
| | 226,008 |
| | 23.0 |
| | 1,322,730 |
| | 1,095,239 |
| | 227,491 |
| | 20.8 |
|
Luxury | | 463,518 |
| | 392,537 |
| | 70,981 |
| | 18.1 |
| | 677,530 |
| | 419,163 |
| | 258,367 |
| | 61.6 |
|
| | 2,681,783 |
| | 2,269,640 |
| | 412,143 |
| | 18.2 |
| | 3,095,328 |
| | 2,469,351 |
| | 625,977 |
| | 25.3 |
|
Corporate and other | | (1,441 | ) | | 327 |
| | (1,768 | ) | | NM |
| | 1,209 |
| | (2,315 | ) | | 3,524 |
| | NM |
|
| | $ | 2,680,342 |
| | $ | 2,269,967 |
| | $ | 410,375 |
| | 18.1 | % | | $ | 3,096,537 |
| | $ | 2,467,036 |
| | $ | 629,501 |
| | 25.5 | % |
NM - not meaningful
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2018 | | 2017 | | |
Revenues: | | | | | | | | |
Domestic | | $ | 2,065,685 |
| | $ | 1,854,707 |
| | $ | 210,978 |
| | 11.4 | % |
Import | | 2,493,163 |
| | 2,066,711 |
| | 426,452 |
| | 20.6 |
|
Luxury | | 1,194,025 |
| | 782,967 |
| | 411,058 |
| | 52.5 |
|
| | 5,752,873 |
| | 4,704,385 |
| | 1,048,488 |
| | 22.3 |
|
Corporate and other | | 3,343 |
| | (1,248 | ) | | 4,591 |
| | NM |
|
| | $ | 5,756,216 |
| | $ | 4,703,137 |
| | $ | 1,053,079 |
| | 22.4 | % |
NM - not meaningful
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2018 | | 2017 | | |
Segment income1: | | | | | | | | |
Domestic | | $ | 28,545 |
| | $ | 27,857 |
| | $ | 688 |
| | 2.5 | % |
Import | | 30,244 |
| | 32,238 |
| | (1,994 | ) | | (6.2 | ) |
Luxury | | 11,939 |
| | 10,315 |
| | 1,624 |
| | 15.7 |
|
| | 70,728 |
| | 70,410 |
| | 318 |
| | 0.5 |
|
Corporate and other | | 41,015 |
| | 38,239 |
| | 2,776 |
| | 7.3 |
|
Depreciation and amortization | | (18,821 | ) | | (14,031 | ) | | 4,790 |
| | 34.1 |
|
Other interest expense | | (13,829 | ) | | (7,169 | ) | | 6,660 |
| | 92.9 |
|
Other income, net | | 1,659 |
| | 387 |
| | 1,272 |
| | NM |
|
Income before income taxes | | $ | 80,752 |
| | $ | 87,836 |
| | $ | (7,084 | ) | | (8.1 | )% |
NM – not meaningful
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | |
Revenues: | | | | | | | | |
Domestic | | $ | 2,863,018 |
| | $ | 2,495,468 |
| | $ | 367,550 |
| | 14.7 | % |
Import | | 3,276,667 |
| | 2,777,007 |
| | 499,660 |
| | 18.0 |
|
Luxury | | 1,246,484 |
| | 1,111,215 |
| | 135,269 |
| | 12.2 |
|
| | 7,386,169 |
| | 6,383,690 |
| | 1,002,479 |
| | 15.7 |
|
Corporate and other | | (2,690 | ) | | 2,477 |
| | (5,167 | ) | | NM |
|
| | $ | 7,383,479 |
| | $ | 6,386,167 |
| | $ | 997,312 |
| | 15.6 | % |
NM - not meaningful
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | |
Segment income1: | | | | | | | | |
Domestic | | $ | 31,141 |
| | $ | 32,292 |
| | $ | (1,151 | ) | | (3.6 | )% |
Import | | 36,954 |
| | 32,934 |
| | 4,020 |
| | 12.2 |
|
Luxury | | 7,515 |
| | 7,423 |
| | 92 |
| | 1.2 |
|
| | 75,610 |
| | 72,649 |
| | 2,961 |
| | 4.1 |
|
Corporate and other | | 34,541 |
| | 26,794 |
| | 7,747 |
| | 28.9 |
|
Depreciation and amortization | | (14,828 | ) | | (12,206 | ) | | 2,622 |
| | 21.5 |
|
Other interest expense | | (9,905 | ) | | (5,647 | ) | | 4,258 |
| | 75.4 |
|
Other income (expense), net | | 1,125 |
| | (1,513 | ) | | 2,638 |
| | NM |
|
Income before income taxes | | $ | 86,543 |
| | $ | 80,077 |
| | $ | 6,466 |
| | 8.1 | % |
NM – not meaningful
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | |
Segment income1: | | | | | | | | |
Domestic | | $ | 84,440 |
| | $ | 84,420 |
| | $ | 20 |
| | — | % |
Import | | 91,365 |
| | 86,878 |
| | 4,487 |
| | 5.2 |
|
Luxury | | 22,542 |
| | 21,736 |
| | 806 |
| | 3.7 |
|
| | 198,347 |
| | 193,034 |
| | 5,313 |
| | 2.8 |
|
Corporate and other | | 111,281 |
| | 81,881 |
| | 29,400 |
| | 35.9 |
|
Depreciation and amortization | | (41,598 | ) | | (36,372 | ) | | 5,226 |
| | 14.4 |
|
Other interest expense | | (23,745 | ) | | (16,608 | ) | | 7,137 |
| | 43.0 |
|
Other income (expense), net | | 11,357 |
| | (4,534 | ) | | 15,891 |
| | NM |
|
Income before income taxes | | $ | 255,642 |
| | $ | 217,401 |
| | $ | 38,241 |
| | 17.6 | % |
NM – Not meaningful
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2018 | | 2017 | | |
Segment income1: | | | | | | | | |
Domestic | | $ | 54,163 |
| | $ | 53,299 |
| | $ | 864 |
| | 1.6 | % |
Import | | 53,265 |
| | 54,411 |
| | (1,146 | ) | | (2.1 | ) |
Luxury | | 18,826 |
| | 15,027 |
| | 3,799 |
| | 25.3 |
|
| | 126,254 |
| | 122,737 |
| | 3,517 |
| | 2.9 |
|
Corporate and other | | 82,572 |
| | 76,740 |
| | 5,832 |
| | 7.6 |
|
Depreciation and amortization | | (35,675 | ) | | (26,770 | ) | | 8,905 |
| | 33.3 |
|
Other interest expense | | (25,635 | ) | | (13,840 | ) | | 11,795 |
| | 85.2 |
|
Other income, net | | 3,033 |
| | 10,232 |
| | (7,199 | ) | | NM |
|
Income before income taxes | | $ | 150,549 |
| | $ | 169,099 |
| | $ | (18,550 | ) | | (11.0 | )% |
1Segment income for each reportable segment is defined as income before income taxes, depreciation and amortization, other interest expense and other expense, net.
NM – Not meaningful
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
| | 2017 | | 2016 | | | 2018 | | 2017 | |
Retail new vehicle unit sales: | | | | | | | | | | | | | | | | |
Domestic | | 13,911 |
| | 12,735 |
| | 1,176 |
| | 9.2 | % | | 14,697 |
| | 13,256 |
| | 1,441 |
| | 10.9 | % |
Import | | 26,621 |
| | 21,467 |
| | 5,154 |
| | 24.0 |
| | 27,376 |
| | 23,187 |
| | 4,189 |
| | 18.1 |
|
Luxury | | 5,029 |
| | 4,287 |
| | 742 |
| | 17.3 |
| | 7,050 |
| | 4,523 |
| | 2,527 |
| | 55.9 |
|
| | 45,561 |
| | 38,489 |
| | 7,072 |
| | 18.4 |
| | 49,123 |
| | 40,966 |
| | 8,157 |
| | 19.9 |
|
Allocated to management | | (109 | ) | | (72 | ) | | 37 |
| | NM |
| | (96 | ) | | (90 | ) | | 6 |
| | NM |
|
| | 45,452 |
| | 38,417 |
| | 7,035 |
| | 18.3 | % | | 49,027 |
| | 40,876 |
| | 8,151 |
| | 19.9 | % |
NM – Not meaningful
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase | | % Increase |
| | 2018 | | 2017 | | |
Retail new vehicle unit sales: | | | | | | | | |
Domestic | | 27,353 |
| | 25,496 |
| | 1,857 |
| | 7.3 | % |
Import | | 51,016 |
| | 43,022 |
| | 7,994 |
| | 18.6 |
|
Luxury | | 12,388 |
| | 8,139 |
| | 4,249 |
| | 52.2 |
|
| | 90,757 |
| | 76,657 |
| | 14,100 |
| | 18.4 |
|
Allocated to management | | (233 | ) | | (165 | ) | | 68 |
| | NM |
|
| | 90,524 |
| | 76,492 |
| | 14,032 |
| | 18.3 | % |
NM – Not meaningful
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase | | % Increase |
| | 2017 | | 2016 | | |
Retail new vehicle unit sales: | | | | | | | | |
Domestic | | 39,407 |
| | 35,176 |
| | 4,231 |
| | 12.0 | % |
Import | | 69,643 |
| | 59,581 |
| | 10,062 |
| | 16.9 |
|
Luxury | | 13,168 |
| | 12,667 |
| | 501 |
| | 4.0 |
|
| | 122,218 |
| | 107,424 |
| | 14,794 |
| | 13.8 |
|
Allocated to management | | (274 | ) | | (199 | ) | | 75 |
| | NM |
|
| | 121,944 |
| | 107,225 |
| | 14,719 |
| | 13.7 | % |
Domestic
A summary of financial information for our Domestic segment follows:
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
New vehicle | | | $ | 597,596 |
| | $ | 528,649 |
| | $ | 68,947 |
| | 13.0 | % |
Used vehicle retail | | | 283,408 |
| | 251,214 |
| | 32,194 |
| | 12.8 |
|
Used vehicle wholesale | | | 33,913 |
| | 30,700 |
| | 3,213 |
| | 10.5 |
|
Finance and insurance | | | 43,083 |
| | 37,354 |
| | 5,729 |
| | 15.3 |
|
Service, body and parts | | | 113,472 |
| | 96,515 |
| | 16,957 |
| | 17.6 |
|
Fleet and other | | | 23,596 |
| | 10,517 |
| | 13,079 |
| | 124.4 |
|
Revenue | | $ | 1,008,310 |
| | $ | 893,156 |
| | $ | 115,154 |
| | 12.9 | % | | $ | 1,095,068 |
| | $ | 954,949 |
| | $ | 140,119 |
| | 14.7 |
|
Segment income | | $ | 31,141 |
| | $ | 32,292 |
| | $ | (1,151 | ) | | (3.6 | ) | | $ | 28,545 |
| | $ | 27,857 |
| | $ | 688 |
| | 2.5 |
|
Retail new vehicle unit sales | | 13,911 |
| | 12,735 |
| | 1,176 |
| | 9.2 |
| | 14,697 |
| | 13,256 |
| | 1,441 |
| | 10.9 |
|
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenue | | $ | 2,863,018 |
| | $ | 2,495,468 |
| | $ | 367,550 |
| | 14.7 | % | |
Revenue: | | | | | | | | | |
New vehicle | | | $ | 1,111,125 |
| | $ | 1,013,906 |
| | $ | 97,219 |
| | 9.6 | % |
Used vehicle retail | | | 548,235 |
| | 496,212 |
| | 52,023 |
| | 10.5 |
|
Used vehicle wholesale | | | 67,519 |
| | 62,986 |
| | 4,533 |
| | 7.2 |
|
Finance and insurance | | | 83,083 |
| | 73,562 |
| | 9,521 |
| | 12.9 |
|
Service, body and parts | | | 220,614 |
| | 189,917 |
| | 30,697 |
| | 16.2 |
|
Fleet and other | | | 35,109 |
| | 18,124 |
| | 16,985 |
| | 93.7 |
|
| | | $ | 2,065,685 |
| | $ | 1,854,707 |
| | $ | 210,978 |
| | 11.4 | % |
Segment income | | $ | 84,440 |
| | $ | 84,420 |
| | $ | 20 |
| | — |
| | $ | 54,163 |
| | $ | 53,299 |
| | $ | 864 |
| | 1.6 | % |
Retail new vehicle unit sales | | 39,407 |
| | 35,176 |
| | 4,231 |
| | 12.0 |
| | 27,353 |
| | 25,496 |
| | 1,857 |
| | 7.3 | % |
Our Domestic segment revenue increased 12.9%14.7% and 14.7%11.4%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. Since September 2016,June 2017, we acquired fiveseven additional domestic brand stores, which contributed to increases in new vehicle, used vehicle retail, finance and insurance and service body and parts sales.all major business lines.
Our Domestic segment income decreased 3.6%increased 2.5% and was unchanged,1.6%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. In the three-months ended September 30, 2017, the decrease in segment income wasprimarily due to gross profits growth of 14.4%14.1% and 11.2%, respectively, which was in line with revenues,revenue growth, offset by growth in SG&A of 17.7% due to expense growth exceeding the rate of gross profit growth14.4% and 10.8%, respectively, and increases in all categories. Our Domestic segment experienced higher SG&A expenses in all areas. Additionally, floor plan interest expense increased 57.1%, comprised of approximately 26% related to increased volume due to acquisitions, 9% related to increased volume at existing stores and 22% related to rising interest rates. For the nine months ended September 30, 2017, segment income was flat despite growth in both revenue and gross profit. Growth in SG&A expenses of 18.6% and floor plan interest expense of 39.6% were47.6% and 46.8%, respectively, due to acquisitions and rising interest rates compared to the main drivers, offsetting allsame periods of 2017. These factors resulted in slower domestic segment income growth than revenue growth resulting in flat segment income overfor the three and six-month periods ended June 30, 2018 compared to the same periodperiods of 2016.2017.
Import
A summary of financial information for our Import segment follows:
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
New vehicle | | | $ | 771,987 |
| | $ | 643,404 |
| | $ | 128,583 |
| | 20.0 | % |
Used vehicle retail | | | 335,629 |
| | 269,512 |
| | 66,117 |
| | 24.5 |
|
Used vehicle wholesale | | | 30,983 |
| | 27,283 |
| | 3,700 |
| | 13.6 |
|
Finance and insurance | | | 54,866 |
| | 45,282 |
| | 9,584 |
| | 21.2 |
|
Service, body and parts | | | 116,386 |
| | 96,964 |
| | 19,422 |
| | 20.0 |
|
Fleet and other | | | 12,879 |
| | 12,794 |
| | 85 |
| | 0.7 |
|
Revenue | | $ | 1,209,955 |
| | $ | 983,947 |
| | $ | 226,008 |
| | 23.0 | % | | $ | 1,322,730 |
| | $ | 1,095,239 |
| | $ | 227,491 |
| | 20.8 |
|
Segment income | | $ | 36,954 |
| | $ | 32,934 |
| | $ | 4,020 |
| | 12.2 |
| | $ | 30,244 |
| | $ | 32,238 |
| | $ | (1,994 | ) | | (6.2 | ) |
Retail new vehicle unit sales | | 26,621 |
| | 21,467 |
| | 5,154 |
| | 24.0 |
| | 27,376 |
| | 23,187 |
| | 4,189 |
| | 18.1 |
|
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenue | | $ | 3,276,667 |
| | $ | 2,777,007 |
| | $ | 499,660 |
| | 18.0 | % | |
Revenue: | | | | | | | | | |
New vehicle | | | $ | 1,439,590 |
| | $ | 1,195,286 |
| | $ | 244,304 |
| | 20.4 | % |
Used vehicle retail | | | 643,317 |
| | 516,788 |
| | 126,529 |
| | 24.5 |
|
Used vehicle wholesale | | | 59,178 |
| | 54,120 |
| | 5,058 |
| | 9.3 |
|
Finance and insurance | | | 106,562 |
| | 85,855 |
| | 20,707 |
| | 24.1 |
|
Service, body and parts | | | 226,041 |
| | 185,626 |
| | 40,415 |
| | 21.8 |
|
Fleet and other | | | 18,475 |
| | 29,036 |
| | (10,561 | ) | | (36.4 | ) |
| | | $ | 2,493,163 |
| | $ | 2,066,711 |
| | $ | 426,452 |
| | 20.6 | % |
Segment income | | $ | 91,365 |
| | $ | 86,878 |
| | $ | 4,487 |
| | 5.2 |
| | $ | 53,265 |
| | $ | 54,411 |
| | $ | (1,146 | ) | | (2.1 | )% |
Retail new vehicle unit sales | | 69,643 |
| | 59,581 |
| | 10,062 |
| | 16.9 |
| | 51,016 |
| | 43,022 |
| | 7,994 |
| | 18.6 | % |
Our Import segment revenue increased 23.0%20.8% and 18.0%20.6%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 due to increases in all major business lines. Since September 2016, we added eightlines, primarily as a result of the acquisition of eleven import brand stores.stores since June 2017, as well as same store increases in used vehicle unit volume and a small increase in finance and insurance per unit.
Segment income for our Import segment increased 12.2%income decreased 6.2% and 5.2%2.1%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. In the three months ended September 30, 2017, the 12.2% growth in segment income was2017. The decreases were primarily due to gross profits growth of 22.3%, in line with revenues, offset by SG&A expense growth of 23.2% mainly related22.8% and 23.0%, respectively, partially offset by gross profit growth of 18.9% and 20.3%, respectively. Total import SG&A as a percent of gross profit increased from 76.5% to rising facility cost.79.0% and from 78.7% to 80.4%, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017. Recently acquired stores were the main contributor to the increases as newly acquired stores generally have a lower operating efficiency than our other stores. Floor plan interest expense for import stores increased 73.6%65.7% and 63.3%, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017 and was a significant contributor to the slower growth in segment income. Acquisitions, resulting in increased volumes, comprised 27.5% of this increase, increased inventory levels at existing stores increased floor plan interest expense 14.2% and rising interest rates increased the expense 31.9%. For the nine months ended September 30, 2017, segment income grew 5.2% and lagged our revenue growth. Gross profit growth was 16.3% and lagged behind revenue growth for the period. Additionally, growth in SG&A expenses was 17.7%, slightly higher than the growth in gross profit, and floor plan interest expense increased 55.6% due to increased inventory levels and rising interest rates. The net effect of these factors was slower segment income growth compared to revenue growth.
Luxury
A summary of financial information for our Luxury segment follows:
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
New vehicle | | | $ | 361,913 |
| | $ | 220,388 |
| | $ | 141,525 |
| | 64.2 | % |
Used vehicle retail | | | 184,941 |
| | 112,032 |
| | 72,909 |
| | 65.1 |
|
Used vehicle wholesale | | | 20,263 |
| | 11,473 |
| | 8,790 |
| | 76.6 |
|
Finance and insurance | | | 15,934 |
| | 9,525 |
| | 6,409 |
| | 67.3 |
|
Service, body and parts | | | 76,883 |
| | 50,326 |
| | 26,557 |
| | 52.8 |
|
Fleet and other | | | 17,596 |
| | 15,419 |
| | 2,177 |
| | 14.1 |
|
Revenue | | $ | 463,518 |
| | $ | 392,537 |
| | $ | 70,981 |
| | 18.1 | % | | $ | 677,530 |
| | $ | 419,163 |
| | $ | 258,367 |
| | 61.6 |
|
Segment income | | $ | 7,515 |
| | $ | 7,423 |
| | $ | 92 |
| | 1.2 |
| | $ | 11,939 |
| | $ | 10,315 |
| | $ | 1,624 |
| | 15.7 |
|
Retail new vehicle unit sales | | 5,029 |
| | 4,287 |
| | 742 |
| | 17.3 |
| | 7,050 |
| | 4,523 |
| | 2,527 |
| | 55.9 |
|
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenue | | $ | 1,246,484 |
| | $ | 1,111,215 |
| | $ | 135,269 |
| | 12.2 | % | |
Revenue: | | | | | | | | | |
New vehicle | | | $ | 640,434 |
| | $ | 396,705 |
| | $ | 243,729 |
| | 61.4 | % |
Used vehicle retail | | | 327,845 |
| | 222,637 |
| | 105,208 |
| | 47.3 |
|
Used vehicle wholesale | | | 34,463 |
| | 23,696 |
| | 10,767 |
| | 45.4 |
|
Finance and insurance | | | 28,185 |
| | 17,519 |
| | 10,666 |
| | 60.9 |
|
Service, body and parts | | | 141,676 |
| | 98,358 |
| | 43,318 |
| | 44.0 |
|
Fleet and other | | | 21,422 |
| | 24,052 |
| | (2,630 | ) | | (10.9 | ) |
| | | $ | 1,194,025 |
| | $ | 782,967 |
| | $ | 411,058 |
| | 52.5 | % |
Segment income | | $ | 22,542 |
| | $ | 21,736 |
| | $ | 806 |
| | 3.7 |
| | $ | 18,826 |
| | $ | 15,027 |
| | $ | 3,799 |
| | 25.3 | % |
Retail new vehicle unit sales | | 13,168 |
| | 12,667 |
| | 501 |
| | 4.0 |
| | 12,388 |
| | 8,139 |
| | 4,249 |
| | 52.2 | % |
Our Luxury segment revenue increased 18.1%61.6% and 12.2%52.5%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 due to increases in used vehicle retail, finance and insurance and service body and parts sales. In the past twelve months,all major business lines. Since June 2017, we added fivenine luxury brand stores.
Our Luxury segment income increased 1.2%15.7% and 3.7%25.3%, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. In the three months ended September 30, 2017, the 1.2% growth in segment income wasprimarily due to gross profit growth of 21.9%57.2% and 48.4%, respectively, offset by an SG&A expense increaseincreases of 22.7%64.0% and 50.1%, mainlyrespectively. Total Luxury segment SG&A as a percent of gross profit increased from 77.6% to 81.0% and from 81.5% to 82.4%, respectively, for the three and six-month periods ended June 30, 2018 compared to the same periods of 2017, primarily related to advertising expense.increases in personnel and rent related to recently acquired stores. Growth in our Luxury segment revenues and gross profit for the three and six-month periods ended June 30, 2018 was driven by volume related to acquisitions and an increase in finance and insurance per unit. Floor plan interest expense increase of 65.2%increased 86.6% and 77.3%, which was comprised of 33.1%respectively, related to a combination of increased volume from acquisitions 7.8% related to increased volume at existing stores and 24.3% related to rising interest rates. These factors resulted in slower Luxury segment income growth compared to revenue growth. For the nine months ended September 30, 2017, segment income grew 3.7% and lagged our revenue growth for that period. Gross profit growth was 13.5%, slightly better than revenue growth for the period. This was offset by growth in SG&A expense of 13.7% and floor plan interest expense growth of 37.3% due to rising interest rates and increasing inventories. These factors resulted in slower segment income growth than revenue growth.
Corporate and Other
Revenues attributable to Corporate and other include the results of operations of our stand-alone body shop, offset by certain unallocated reserve and elimination adjustments related to vehicle sales.
| | | | Three Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenue, net | | $ | (1,441 | ) | | $ | 327 |
| | $ | (1,768 | ) | | (540.7 | )% | | $ | 1,209 |
| | $ | (2,315 | ) | | $ | 3,524 |
| | NM |
Segment income | | $ | 34,541 |
| | $ | 26,794 |
| | $ | 7,747 |
| | 28.9 |
| | $ | 41,015 |
| | $ | 38,239 |
| | $ | 2,776 |
| | 7.3 |
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | % Increase (Decrease) | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Revenue, net | | $ | (2,690 | ) | | $ | 2,477 |
| | $ | (5,167 | ) | | (208.6 | )% | | $ | 3,343 |
| | $ | (1,248 | ) | | $ | 4,591 |
| | NM |
Segment income | | $ | 111,281 |
| | $ | 81,881 |
| | $ | 29,400 |
| | 35.9 |
| | $ | 82,572 |
| | $ | 76,740 |
| | $ | 5,832 |
| | 7.6 |
NM - not meaningful
The decreasesincreases in Corporate and other revenue in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 were primarily related to the addition of two stand-alone body shops, changes to certain reserves that are not specifically identified with our domestic, import or luxury segment revenue, such as our reserve for revenue reversals associated with unwound vehicle sales, and elimination of revenues associated with internal corporate vehicle purchases and leases with our stores. Corporate and other revenues were impacted in 2017 from an increase in internal corporate vehicle purchases and leases with our stores resulting in negative revenues for the three and nine month-periods ended September 30, 2017.
Segment income attributable to Corporate and other includes amounts associated with the operating income from our stand-alone body shop,shops, and certain internal corporate expense allocations that reduce reportable segment income but increase Corporate and other income. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.
Corporate and other segment income increased $7.7$2.8 million and $29.4$5.8 million, respectively, for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016. These increases were2017, primarily due to the addition of 1827 stores in the past twelve months, reduced by certain unusual expenses. The three and nine-month periods ended Septembertwo stand-alone body shops since June 30, 2017 included acquisition expenses of $3.5 million and $5.7 million, respectively, and an insurance reserve charge of $1.7 million and $5.6 million, respectively, related storm damages. The 2016 results included impairment charges of $3.5 million and $10.5 million, respectively, for the three and nine-month periods ended September 30, 2016 related to an equity investment.2017.
Asset Impairments
Asset impairments consist of the following:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Equity-method investment | | $ | — |
| | $ | 3,498 |
| | $ | — |
| | $ | 10,494 |
|
The asset impairments recorded in 2016 were associated with our equity-method investment in a limited liability company. We evaluated this equity-method investment at the end of each reporting period and identified indications of loss resulting from other than temporary declines in value. We exited this equity-method investment in December 2016. See Note 9 of the Condensed Notes to the Consolidated Financial Statements for additional information.
Selling, General and Administrative Expense (“SG&A”)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses. |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | |
Personnel | | $ | 182,443 |
| | $ | 151,801 |
| | $ | 30,642 |
| | 20.2 | % |
Advertising | | 24,572 |
| | 20,110 |
| | 4,462 |
| | 22.2 |
|
Rent | | 8,768 |
| | 6,694 |
| | 2,074 |
| | 31.0 |
|
Facility costs | | 14,992 |
| | 12,488 |
| | 2,504 |
| | 20.1 |
|
Other | | 51,466 |
| | 37,041 |
| | 14,425 |
| | 38.9 |
|
Total SG&A | | $ | 282,241 |
| | $ | 228,134 |
| | $ | 54,107 |
| | 23.7 | % |
|
| | | | | | | | | |
| | Three Months Ended September 30, | | Increase |
As a % of gross profit | | 2017 | | 2016 | |
Personnel | | 45.3 | % | | 45.0 | % | | 30 | bp |
Advertising | | 6.1 |
| | 6.0 |
| | 10 |
|
Rent | | 2.2 |
| | 2.0 |
| | 20 |
|
Facility costs | | 3.7 |
| | 3.7 |
| | — |
|
Other | | 12.7 |
| | 10.9 |
| | 180 |
|
Total SG&A | | 70.0 | % | | 67.6 | % | | 240 | bp |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2018 | | 2017 | | |
Personnel | | $ | 213,667 |
| | $ | 167,324 |
| | $ | 46,343 |
| | 27.7 | % |
Advertising | | 27,609 |
| | 22,988 |
| | 4,621 |
| | 20.1 |
|
Rent | | 11,946 |
| | 7,227 |
| | 4,719 |
| | 65.3 |
|
Facility costs | | 18,552 |
| | 14,252 |
| | 4,300 |
| | 30.2 |
|
Other | | 61,576 |
| | 45,499 |
| | 16,077 |
| | 35.3 |
|
Total SG&A | | $ | 333,350 |
| | $ | 257,290 |
| | $ | 76,060 |
| | 29.6 | % |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | |
As a % of gross profit | | | 2018 | | 2017 | | Increase (Decrease) |
Personnel | | $ | 513,439 |
| | $ | 445,053 |
| | $ | 68,386 |
| | 15.4 | % | | 46.4 | % | | 44.6 | % | |
Advertising | | 67,516 |
| | 59,229 |
| | 8,287 |
| | 14.0 |
| | 6.0 |
| | 6.1 |
| | (10 | ) |
Rent | | 23,216 |
| | 20,040 |
| | 3,176 |
| | 15.8 |
| | 2.6 |
| | 1.9 |
| | 70 |
|
Facility costs | | 44,371 |
| | 30,920 |
| | 13,451 |
| | 43.5 |
| | 4.0 |
| | 3.8 |
| | 20 |
|
Other | | 133,761 |
| | 107,524 |
| | 26,237 |
| | 24.4 |
| | 13.4 |
| | 12.2 |
| | 120 |
|
Total SG&A | | $ | 782,303 |
| | $ | 662,766 |
| | $ | 119,537 |
| | 18.0 | % | | 72.4 | % | | 68.6 | % | | 380 | bp |
|
| | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) |
As a % of gross profit | | 2017 | | 2016 | |
Personnel | | 45.8 | % | | 46.0 | % | | (20 | )bp |
Advertising | | 6.0 | % | | 6.1 | % | | (10 | ) |
Rent | | 2.1 | % | | 2.1 | % | | — |
|
Facility costs | | 4.0 | % | | 3.2 | % | | 80 |
|
Other | | 12.0 | % | | 11.2 | % | | 80 |
|
Total SG&A | | 69.9 | % | | 68.6 | % | | 130 | bp |
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2018 | | 2017 | | |
Personnel | | $ | 405,760 |
| | $ | 330,996 |
| | $ | 74,764 |
| | 22.6 | % |
Advertising | | 53,090 |
| | 42,944 |
| | 10,146 |
| | 23.6 |
|
Rent | | 23,063 |
| | 14,448 |
| | 8,615 |
| | 59.6 |
|
Facility costs | | 36,220 |
| | 29,379 |
| | 6,841 |
| | 23.3 |
|
Other | | 112,711 |
| | 82,295 |
| | 30,416 |
| | 37.0 |
|
Total SG&A | | $ | 630,844 |
| | $ | 500,062 |
| | $ | 130,782 |
| | 26.2 | % |
|
| | | | | | | | | |
| | Six Months Ended June 30, | | Increase |
As a % of gross profit | | 2018 | | 2017 | |
Personnel | | 46.7 | % | | 46.2 | % | | 50 | bp |
Advertising | | 6.1 | % | | 6.0 | % | | 10 |
|
Rent | | 2.7 | % | | 2.0 | % | | 70 |
|
Facility costs | | 4.2 | % | | 4.1 | % | | 10 |
|
Other | | 12.9 | % | | 11.5 | % | | 140 |
|
Total SG&A | | 72.6 | % | | 69.8 | % | | 280 | bp |
SG&A expense increased 23.7%29.6% and 18.0%26.2%, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. Overall, increases in SG&A expense were due primarily to growth through acquisitions. In the three-month period ended September 30, 2017 compared to the same period in 2016, increasesacquisitions, acquisition expenses, losses related to rent expensesstorm insurance reserve charges and other expenses outpaced the overall increase. Increased rent expense in the three-month period ended September 30, 2017 was a result of our
recent acquisitions in the current quarterincreased allowance losses associated with leased properties.auto loan receivables. Other expenses in the three-month periodthree and six-month periods ended SeptemberJune 30, 20172018 include acquisition expenses of $3.5$3.3 million and $4.2 million, respectively, and storm insurance reserve charges of $1.7$1.5 million and other reserve adjustments related$3.2 million, respectively. Auto loan receivable allowance losses increased $3.8 million and $5.8 million, respectively, for the three and six-month periods ended June 30, 2018 compared to ourthe same periods of 2017.
On a same store basis and excluding non-core charges, SG&A as a percentage of gross profit was 70.8% and 71.5%, respectively, for the three and six-month periods ended June 30, 2018 compared to 66.8% and 68.8%, respectively, for the same periods of 2017. These increases were primarily due to increased personnel cost and auto loan receivables and medical insurance. For the nine-month period ended September 30, 2017, facility cost and other expenses increased more significantly than other components of SG&A. The increase in facility costs was mainly due to lower costs as a result of a $3.4 million gain for property-related insurance proceeds and a $1.1 million gain on the sale of storesreceivable allowance losses recorded in the first quarter 2016. For the nine-month periodthree and six-month periods ended SeptemberJune 30, 2017, other expenses included $5.7 million of acquisition expenses, a $5.6 million increase in storm insurance reserve related charges and increases to other reserves related to our auto loan receivables.2018.
SG&A expense adjusted for non-core charges was as follows (in thousands):
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Personnel | | $ | 182,443 |
| | $ | 151,803 |
| | $ | 30,640 |
| | 20.2 | % | | $ | 213,667 |
| | $ | 167,324 |
| | $ | 46,343 |
| | 27.7 | % |
Advertising | | 24,572 |
| | 20,110 |
| | 4,462 |
| | 22.2 |
| | 27,609 |
| | 22,988 |
| | 4,621 |
| | 20.1 |
|
Rent | | 8,768 |
| | 6,694 |
| | 2,074 |
| | 31.0 |
| | 11,946 |
| | 7,227 |
| | 4,719 |
| | 65.3 |
|
Adjusted facility costs | | 14,992 |
| | 12,489 |
| | 2,503 |
| | 20.0 |
| |
Facility costs | | | 18,552 |
| | 14,252 |
| | 4,300 |
| | 30.2 |
|
Adjusted other | | 46,246 |
| | 37,038 |
| | 9,208 |
| | 24.9 |
| | 56,835 |
| | 39,484 |
| | 17,351 |
| | 43.9 |
|
Adjusted total SG&A | | $ | 277,021 |
| | $ | 228,134 |
| | $ | 48,887 |
| | 21.4 | % | | $ | 328,609 |
| | $ | 251,275 |
| | $ | 77,334 |
| | 30.8 | % |
| | | | Three Months Ended September 30, | | Increase | | Three Months Ended June 30, | | Increase (Decrease) |
As a % of gross profit | | 2017 | | 2016 | | | 2018 | | 2017 | |
Personnel | | 45.3 | % | | 45.0 | % | | 30 | bp | | 46.4 | % | | 44.6 | % | | 180 | bp |
Advertising | | 6.1 | % | | 6.0 | % | | 10 |
| | 6.0 | % | | 6.1 | % | | (10 | ) |
Rent | | 2.2 | % | | 2.0 | % | | 20 |
| | 2.6 | % | | 1.9 | % | | 70 |
|
Adjusted facility costs | | 3.7 | % | | 3.7 | % | | — |
| |
Facility costs | | | 4.0 | % | | 3.8 | % | | 20 |
|
Adjusted other | | 11.4 | % | | 10.9 | % | | 50 |
| | 12.3 | % | | 10.6 | % | | 170 |
|
Adjusted total SG&A | | 68.7 | % | | 67.6 | % | | 110 | bp | | 71.3 | % | | 67.0 | % | | 430 | bp |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Personnel | | $ | 513,439 |
| | $ | 445,055 |
| | $ | 68,384 |
| | 15.4 | % | | $ | 405,760 |
| | $ | 330,996 |
| | $ | 74,764 |
| | 22.6 | % |
Advertising | | 67,516 |
| | 59,229 |
| | 8,287 |
| | 14.0 | % | | 53,090 |
| | 42,944 |
| | 10,146 |
| | 23.6 | % |
Rent | | 23,216 |
| | 20,040 |
| | 3,176 |
| | 15.8 | % | | 23,063 |
| | 14,448 |
| | 8,615 |
| | 59.6 | % |
Adjusted facility costs | | 44,371 |
| | 32,007 |
| | 12,364 |
| | 38.6 | % | |
Facility costs | | | 36,220 |
| | 29,379 |
| | 6,841 |
| | 23.3 | % |
Adjusted other | | 122,526 |
| | 105,616 |
| | 16,910 |
| | 16.0 | % | | 107,970 |
| | 76,280 |
| | 31,690 |
| | 41.5 | % |
Adjusted total SG&A | | $ | 771,068 |
| | $ | 661,947 |
| | $ | 109,121 |
| | 16.5 | % | | $ | 626,103 |
| | $ | 494,047 |
| | $ | 132,056 |
| | 26.7 | % |
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase |
As a % of gross profit | | 2017 | | 2016 | | | 2018 | | 2017 | |
Personnel | | 45.8 | % | | 46.0 | % | | (20 | )bp | | 46.7 | % | | 46.2 | % | | 50 | bp |
Advertising | | 6.0 | % | | 6.1 | % | | (10 | ) | | 6.1 | % | | 6.0 | % | | 10 |
|
Rent | | 2.1 | % | | 2.1 | % | | — |
| | 2.7 | % | | 2.0 | % | | 70 |
|
Adjusted facility costs | | 4.0 | % | | 3.3 | % | | 70 |
| |
Facility costs | | | 4.2 | % | | 4.1 | % | | 10 |
|
Adjusted other | | 10.9 | % | | 11.0 | % | | (10 | ) | | 12.4 | % | | 10.6 | % | | 180 |
|
Adjusted total SG&A | | 68.8 | % | | 68.5 | % | | 30 | bp | | 72.1 | % | | 68.9 | % | | 320 | bp |
Adjusted SG&A for the three monthsand six-month periods ended SeptemberJune 30, 20172018 excludes acquisition related expenses of $3.5$3.3 million and a storm insurance reserve related chargecharges of $1.7$1.5 million. ForAdjusted SG&A excludes acquisition related expenses of $2.1 million in the three monthsand six-month periods ended September 30, 2016 there were no adjustments to SG&A. Adjusted SG&A for the nine month period ended SeptemberJune 30, 2017 excludes $5.7 million of acquisition expense and $5.6 million of storm insurance reserve related charges. In the nine month period ended September 30, 2016 adjusted SG&A excludes a $1.1 million gain for the disposalcharges of stores, offset by a $1.9 million legal reserve adjustment.$3.9 million. See “Non-GAAP Reconciliations” for more details.
Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization of certain intangible assets, including customer lists and non-compete agreements.
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Depreciation and amortization | | $ | 14,828 |
| | $ | 12,206 |
| | $ | 2,622 |
| | 21.5 | % | | $ | 18,821 |
| | $ | 14,031 |
| | $ | 4,790 |
| | 34.1 | % |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Depreciation and amortization | | $ | 41,598 |
| | $ | 36,372 |
| | $ | 5,226 |
| | 14.4 | % | | $ | 35,675 |
| | $ | 26,770 |
| | $ | 8,905 |
| | 33.3 | % |
The increases in depreciation and amortization in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 were primarily due to capital expenditures and acquisitions that occurred since SeptemberJune 30, 2016. Our largest capital investments were related to expanding2017. Since June 30, 2017, we purchased approximately $258 million in depreciable buildings and improving facilities subsequent toimprovements as a part of our acquisitions of
Downtown LA Auto Group, Day Automotive Group, and Prestige Auto Group. Capital expenditures for the acquisitionfirst six months of stores, as well as investments in improvements at our existing facilities. These investments increase2018 totaled $72.4 million, which also increases the amount of depreciable assetsassets. See the discussion under Liquidity and amortizable expenses. In the full year of 2016 and the first nine months of 2017, we had capital expenditures of $100.8 million and $72.2 million, respectively.Capital Resources for additional information.
Operating Margin
Operating income as a percentage of revenue, or operating margin, was as follows:
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Operating margin | | 4.0 | % | | 4.1 | % | | 4.0 | % | | 4.0 | % | | 3.5 | % | | 4.2 | % | | 3.5 | % | | 4.0 | % |
Operating margin adjusted for non-core charges 1 | | 4.1 | % | | 4.3 | % | | 4.2 | % | | 4.2 | % | | 3.7 | % | | 4.5 | % | | 3.6 | % | | 4.2 | % |
1 See “Non-GAAP Reconciliations” for more details.
Operating margin declined slightly70 and 50 basis points, respectively, in the three monthsand six-month periods ended SeptemberJune 30, 20172018 compared to the same periodperiods in 2016 and was consistent with prior year for2017. Acquisition activity over the ninepast twelve months ended September 30, 2017. Adjusting for non-core charges, as detailed below in Non-GAAP Reconciliations, adjusted operating margin declined slightly in the three months ended September 30, 2017 compared to the same period in 2016 and was consistent with the prior year for the nine months ended September 30, 2017. Our recent acquisitions of the Baierl Auto Group and DTLA Auto Groupnegatively impacted our operating margin. Acquired stores generally have a lower operating efficiency than our other stores and negatively impact our operating margin asuntil we continue tofully integrate these storesthem into our cost structure. We continue to focus on cost control, which allows us to leverage our cost structure in an environment of improving sales.
Floor Plan Interest Expense and Floor Plan Assistance
| | | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(Dollars in thousands) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change | | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
Floor plan interest expense (new vehicles) | | 10,629 |
| | 6,186 |
| | 71.8 | % | | 28,013 |
| | 18,304 |
| | 53.0 | % | | $ | 15,634 |
| | $ | 9,332 |
| | 67.5 | % | | $ | 29,168 |
| | $ | 17,384 |
| | 67.8 | % |
Floor plan interest expense increased $4.4$6.3 million and $9.7$11.8 million, respectively, in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 2016.2017. The 72%67.5% increase in floor plan interest expense for the three-month period ended SeptemberJune 30, 20172018 compared to the same period in 2016 was due2017 includes a 2.9% increase related to a 31%the increase in inventory levels related to acquisitions, a 22% increase in existingsame store inventory levels, a 31.1% increase due to acquisition volume, and a 19%33.5% increase related to increasing LIBOR rates as compared to the same period of 2016.2017. The 53%67.8% increase in floor plan interest expense for the nine-monthsix-month period ended SeptemberJune 30, 20172018 compared to the same period in 2016 was due to2017 includes a 21%2.9% increase related to acquisitions, an 17% due to increasingthe increase in same store inventory levels, at existing stores and a 15%28.4% increase due to acquisition volume, and a 36.5% increase related to increasing LIBOR rates.rates compared to the same period of 2017.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.
The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | % |
(Dollars in thousands) | | 2017 | | 2016 | | Change | | Change |
Floor plan interest expense (new vehicles) | | $ | 10,629 |
| | $ | 6,186 |
| | $ | 4,443 |
| | 71.8 | % |
Floor plan assistance (included as an offset to cost of sales) | | (15,130 | ) | | (12,044 | ) | | (3,086 | ) | | 25.6 |
|
Net new vehicle carrying costs | | $ | (4,501 | ) | | $ | (5,858 | ) | | $ | 1,357 |
| | (23.2 | )% |
| | | | Nine Months Ended September 30, | | | | % | | Three Months Ended June 30, | | | | % |
(Dollars in thousands) | | 2017 | | 2016 | | Change | | Change | | 2018 | | 2017 | | Change | | Change |
Floor plan interest expense (new vehicles) | | $ | 28,013 |
| | $ | 18,304 |
| | $ | 9,709 |
| | 53.0 | % | | $ | 15,634 |
| | $ | 9,332 |
| | $ | 6,302 |
| | 67.5 | % |
Floor plan assistance (included as an offset to cost of sales) | | (40,186 | ) | | (33,614 | ) | | (6,572 | ) | | 19.6 |
| | (17,482 | ) | | (13,268 | ) | | (4,214 | ) | | 31.8 |
|
Net new vehicle carrying costs | | $ | (12,173 | ) | | $ | (15,310 | ) | | $ | 3,137 |
| | (20.5 | )% | | $ | (1,848 | ) | | $ | (3,936 | ) | | $ | 2,088 |
| | (53.0 | )% |
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | % |
(Dollars in thousands) | | 2018 | | 2017 | | Change | | Change |
Floor plan interest expense (new vehicles) | | $ | 29,168 |
| | $ | 17,384 |
| | $ | 11,784 |
| | 67.8 | % |
Floor plan assistance (included as an offset to cost of sales) | | (31,650 | ) | | (25,056 | ) | | (6,594 | ) | | 26.3 |
|
Net new vehicle carrying costs | | $ | (2,482 | ) | | $ | (7,672 | ) | | $ | 5,190 |
| | (67.6 | )% |
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used vehicle inventory financing facility and our revolving line of credit.
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Mortgage interest | | $ | 4,964 |
| | $ | 3,787 |
| | $ | 1,177 |
| | 31.1 |
| | $ | 5,754 |
| | $ | 4,694 |
| | $ | 1,060 |
| | 22.6 |
|
Other interest | | 5,092 |
| | 1,939 |
| | 3,153 |
| | 162.6 |
| | 8,357 |
| | 2,585 |
| | 5,772 |
| | 223.3 |
|
Capitalized interest | | (151 | ) | | (79 | ) | | 72 |
| | 91.1 |
| | (282 | ) | | (110 | ) | | 172 |
| | 156.4 |
|
Total other interest expense | | $ | 9,905 |
| | $ | 5,647 |
| | 4,258 |
| | 75.4 | % | | $ | 13,829 |
| | $ | 7,169 |
| | 6,660 |
| | 92.9 | % |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Mortgage interest | | $ | 14,049 |
| | $ | 11,034 |
| | $ | 3,015 |
| | 27.3 | % | | $ | 10,661 |
| | $ | 9,085 |
| | $ | 1,576 |
| | 17.3 | % |
Other interest | | 10,040 |
| | 5,889 |
| | 4,151 |
| | 70.5 |
| | 15,459 |
| | 4,948 |
| | 10,511 |
| | 212.4 |
|
Capitalized interest | | (344 | ) | | (315 | ) | | 29 |
| | 9.2 |
| | (485 | ) | | (193 | ) | | 292 |
| | 151.3 |
|
Total other interest expense | | $ | 23,745 |
| | $ | 16,608 |
| | 7,137 |
| | 43.0 | % | | $ | 25,635 |
| | $ | 13,840 |
| | 11,795 |
| | 85.2 | % |
The increases of $4.3$6.7 million and $7.1$11.8 million, respectively, in other interest expense in the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 were primarily due to $300 million in 5.25% Senior Notes issued in July 2017, which contributed $4.1 million and $8.1 million, respectively, of additional interest expense compared to the same periods of 2017. Additionally, higher volumes of borrowing on our credit
facility and higher mortgage interest due to additional mortgage financings and increased interest rates. In July 2017, we issued $300 millionrates contributed to the overall increases in 5.25% Senior Notes, which contributed $3.0 million of additionalother interest expense in the third quarterthree and six-month periods ended June 30, 2018 compared to the same periods of 2017.
Other Income, (Expense), Net
| | | | Three Months Ended September 30, | | Increase | | % Increase | | Three Months Ended June 30, | | Increase | | % Increase |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Other Income (Expense), net | | $ | 1,125 |
| | $ | (1,513 | ) | | $ | 2,638 |
| | NM | |
Other Income, net | | | $ | 1,659 |
| | $ | 387 |
| | $ | 1,272 |
| | NM |
| | | | Nine Months Ended September 30, | | Increase | | % Increase | | Six Months Ended June 30, | | Decrease | | % Decrease |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Other Income (Expense), net | | $ | 11,357 |
| | $ | (4,534 | ) | | $ | 15,891 |
| | NM | |
Other Income, net | | | $ | 3,033 |
| | $ | 10,232 |
| | $ | (7,199 | ) | | NM |
Other income, (expense), net in the nine-monthsix-month period ended SeptemberJune 30, 2017 included a $9.1 million gainwas primarily related to a 9.1 million legal settlementssettlement with two OEMs recorded in the first quarter of 2017. Other income (expense), net in 2016 included the gains and losses related to equity-method investments, which we exited in December 2016.associated with diesel emissions litigation.
Income Tax Provision
Our effective income tax rate was as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Effective income tax rate | | 40.0 | % | | 32.5 | % | | 39.1 | % | | 33.0 | % |
Effective income tax rate excluding tax credits generated through our equity-method investment and other non-core items 1 | | 40.3 | % | | 39.3 | % | | 39.1 | % | | 39.3 | % |
1 See “Non-GAAP Reconciliations” for more details. |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Effective income tax rate | | 24.9 | % | | 39.4 | % | | 25.1 | % | | 38.5 | % |
Our 2016effective income tax rate for the three and six-month periods ended June 30, 2018 was positively affected by new marketsthe enactment of tax credits that were generated through our equity-method investment with U.S. Bancorp Community Development Corporation.legislation commonly known as the Tax Cuts and Jobs Act (the "Act"), signed into law on December 22, 2017, which reduced the Federal corporate income tax rate to 21.0%. Our effective income tax ratesrate in the second quarter of 2018 benefited from the revaluation of certain acquired deferred tax liabilities. Additionally, our effective income tax rate in the six-month period ended June 30, 2018 was favorably affected by excess tax benefits related to stock-based compensation, resulting in a lower effective rate than expected for the three and nine-month periods ended September 30, 2017 were negatively impacted byfull year. Partially offsetting these benefits was the negative impact from an increasing presence in states with higher income tax rates. OurWe estimate our annual effective tax rate, excluding non-core charges, to be 26%.
We are still analyzing certain aspects of the Act. In particular, we have not been able to make a reasonable estimate of the potential impact of the effect of the new limitations on executive compensation under Internal Revenue Code Section 162(m). We continue to account for the nine-month period ended September 30,deferred tax asset associated with this item under the provisions of the tax laws that were in effect immediately prior to enactment. As noted at December 31, 2017, was favorably impacted by excess tax benefitswe were able to reasonably estimate effects and, therefore, recorded provisional adjustments associated with certain items. We have not made any additional measurement-period adjustments related to these items. However, we continue to make and refine our stock-based compensationcalculations as a result ofadditional analysis is completed, further guidance is issued, or new information is made available and adjustments may be made in future periods. We will complete our accounting for the adoption of new guidance that was applied prospectively beginningTax Act in 2017. See Note 13 of the Condensed Notes to the Consolidated Financial Statements for additional information.
Excluding the tax credits generated by our equity-method investment and adjusting for other non-core items, our effective tax rate was slightly impacted by the recognition of excess tax benefits related to our stock-based compensation offset by our increasing presence in states with higher state income tax rates.2018.
Non-GAAP Reconciliations
We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations because they exclude adjustments for items not related to our ongoing core business operations and other non-cash adjustments, and improves the period-to-period comparability of our results from the core business operations. We use these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facility and in communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.
The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 |
(Dollars in Thousands, Except per Share Amounts) | | As reported | | Insurance reserves | | Acquisition expenses | | Adjusted |
Selling, general and administrative | | $ | 282,241 |
| | $ | (1,704 | ) | | $ | (3,516 | ) | | $ | 277,021 |
|
Operating income | | 105,952 |
| | 1,704 |
| | 3,516 |
| | 111,172 |
|
| | | | | | | | |
Income before income taxes | | $ | 86,543 |
| | $ | 1,704 |
| | $ | 3,516 |
| | $ | 91,763 |
|
Income tax provision | | (34,657 | ) | | (943 | ) | | (1,380 | ) | | (36,980 | ) |
Net income | | $ | 51,886 |
| | $ | 761 |
| | $ | 2,136 |
| | $ | 54,783 |
|
| | | | | | | | |
Diluted net income per share | | $ | 2.07 |
| | $ | 0.03 |
| | $ | 0.08 |
| | $ | 2.18 |
|
Diluted share count | | 25,076 |
| | | | | | |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, 2016 |
(Dollars in thousands, except per share amounts) | | As reported | | Equity-method investment | | Adjusted |
Asset impairment | | $ | 3,498 |
| | $ | (3,498 | ) | | $ | — |
|
Operating income | | 93,423 |
| | 3,498 |
| | 96,921 |
|
Other income (expense) | | (1,513 | ) | | 2,066 |
| | 553 |
|
| | | | | | |
Income before income taxes | | $ | 80,077 |
| | $ | 5,564 |
| | $ | 85,641 |
|
Income tax provision | | (26,036 | ) | | (7,592 | ) | | (33,628 | ) |
Net income (loss) | | $ | 54,041 |
| | $ | (2,028 | ) | | $ | 52,013 |
|
| | | | | | |
Diluted net income (loss) per share | | $ | 2.14 |
| | $ | (0.08 | ) | | $ | 2.06 |
|
Diluted share count | | 25,290 |
| | | | |
Operations.
| | | | Nine Months Ended September 30, 2017 | | Three Months Ended June 30, 2018 |
(Dollars in thousands, except per share amounts) | | As reported | | Insurance reserves | | Acquisition expenses | | OEM settlement | | Adjusted | | As reported | | Insurance reserves | | Acquisition expenses | | Tax attribute | | Adjusted |
Selling, general and administrative | | $ | 782,303 |
| | $ | (5,582 | ) | | $ | (5,653 | ) | | $ | — |
| | $ | 771,068 |
| | $ | 333,350 |
| | $ | (1,490 | ) | | $ | (3,251 | ) | | $ | — |
| | $ | 328,609 |
|
Operating income | | 296,043 |
| | 5,582 |
| | 5,653 |
| | — |
| | 307,278 |
| | 108,556 |
| | 1,490 |
| | 3,251 |
| | — |
| | 113,297 |
|
Other (expense) income, net | | 11,357 |
| | — |
| | — |
| | (9,111 | ) | | 2,246 |
| |
| | | | | | | | | |
|
| | | | | | | | | | |
Income (loss) before income taxes | | $ | 255,642 |
| | $ | 5,582 |
| | $ | 5,653 |
| | $ | (9,111 | ) | | $ | 257,766 |
| |
Income tax (provision) benefit | | (99,829 | ) | | (2,174 | ) | | (2,201 | ) | | 3,423 |
| | (100,781 | ) | |
Income before income taxes | | | $ | 80,752 |
| | $ | 1,490 |
| | $ | 3,251 |
| | $ | — |
| | $ | 85,493 |
|
Income tax provision | | | (20,092 | ) | | (389 | ) | | (853 | ) | | (1,409 | ) | | (22,743 | ) |
Net income (loss) | | $ | 155,813 |
| | $ | 3,408 |
| | $ | 3,452 |
| | $ | (5,688 | ) | | $ | 156,985 |
| | $ | 60,660 |
| | $ | 1,101 |
| | $ | 2,398 |
| | $ | (1,409 | ) | | $ | 62,750 |
|
| | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | $ | 6.19 |
| | $ | 0.14 |
| | $ | 0.14 |
| | $ | (0.23 | ) | | $ | 6.24 |
| | $ | 2.44 |
| | $ | 0.04 |
| | $ | 0.10 |
| | $ | (0.06 | ) | | $ | 2.52 |
|
Diluted share count | | 25,158 |
| | | | | | | | | | 24,882 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2016 |
(Dollars in thousands, except per share amounts) | | As reported | | Disposal gain on sale of stores | | Equity-method investment | | Legal reserve adjustment | | Adjusted |
Asset impairment | | $ | 10,494 |
| | $ | — |
| | $ | (10,494 | ) | | $ | — |
| | $ | — |
|
Selling, general and administrative | | 662,766 |
| | 1,087 |
| | — |
| | (1,906 | ) | | 661,947 |
|
Operating Income (expense) | | 256,847 |
| | (1,087 | ) | | 10,494 |
| | 1,906 |
| | 268,160 |
|
Other (expense) income, net | | (4,534 | ) | | — |
| | 6,197 |
| | — |
| | 1,663 |
|
| | | | | | | | | |
|
|
Income (loss) before income taxes | | $ | 217,401 |
| | $ | (1,087 | ) | | $ | 16,691 |
| | $ | 1,906 |
| | $ | 234,911 |
|
Income tax (provision) benefit | | (71,662 | ) | | 426 |
| | (20,374 | ) | | (747 | ) | | (92,357 | ) |
Net income (loss) | | $ | 145,739 |
| | $ | (661 | ) | | $ | (3,683 | ) | | $ | 1,159 |
| | $ | 142,554 |
|
| | | | | | | | | | |
Diluted net income (loss) per share | | $ | 5.69 |
| | $ | (0.03 | ) | | $ | (0.14 | ) | | $ | 0.05 |
| | $ | 5.57 |
|
Diluted share count | | 25,598 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
(Dollars in thousands, except per share amounts) | | As reported | | Insurance reserves | | Acquisition expense | | Adjusted |
Selling, general and administrative | | $ | 257,290 |
| | $ | (3,878 | ) | | $ | (2,137 | ) | | $ | 251,275 |
|
Operating income | | 103,950 |
| | 3,878 |
| | 2,137 |
| | 109,965 |
|
| | | | | | | | |
Income before income taxes | | $ | 87,836 |
| | $ | 3,878 |
| | $ | 2,137 |
| | $ | 93,851 |
|
Income tax provision | | (34,636 | ) | | (1,231 | ) | | (821 | ) | | (36,688 | ) |
Net income | | $ | 53,200 |
| | $ | 2,647 |
| | $ | 1,316 |
| | $ | 57,163 |
|
| | | | | | | | |
Diluted net income per share | | $ | 2.12 |
| | $ | 0.11 |
| | 0.05 |
| | $ | 2.28 |
|
Diluted share count | | 25,106 |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
(Dollars in thousands, except per share amounts) | | As reported | | Insurance reserves | | Acquisition expenses | | Tax attribute | | Adjusted |
Selling, general and administrative | | $ | 630,844 |
| | $ | (1,490 | ) | | $ | (3,251 | ) | | $ | — |
| | $ | 626,103 |
|
Operating income | | 202,319 |
| | 1,490 |
| | 3,251 |
| | — |
| | 207,060 |
|
| | | | | | | | | |
|
|
Income before income taxes | | $ | 150,549 |
| | $ | 1,490 |
| | $ | 3,251 |
| | $ | — |
| | $ | 155,290 |
|
Income tax provision | | (37,828 | ) | | (389 | ) | | (853 | ) | | (1,409 | ) | | (40,479 | ) |
Net income (loss) | | $ | 112,721 |
| | $ | 1,101 |
| | $ | 2,398 |
| | $ | (1,409 | ) | | $ | 114,811 |
|
| | | | | | | | | | |
Diluted net income (loss) per share | | $ | 4.50 |
| | $ | 0.04 |
| | $ | 0.11 |
| | $ | (0.06 | ) | | $ | 4.59 |
|
Diluted share count | | 25,028 |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
(Dollars in thousands, except per share amounts) | | As reported | | Insurance reserves | | Acquisition expense | | OEM settlement | | Adjusted |
Selling, general and administrative | | $ | 500,062 |
| | $ | (3,878 | ) | | $ | (2,137 | ) | | $ | — |
| | $ | 494,047 |
|
Operating income | | 190,091 |
| | 3,878 |
| | 2,137 |
| | — |
| | 196,106 |
|
Other (expense) income, net | | 10,232 |
| | — |
| | — |
| | (9,111 | ) | | 1,121 |
|
| | | | | | | | | | |
Income (loss) before income taxes | | $ | 169,099 |
| | $ | 3,878 |
| | $ | 2,137 |
| | $ | (9,111 | ) | | $ | 166,003 |
|
Income tax (provision) benefit | | (65,172 | ) | | (1,231 | ) | | (821 | ) | | 3,423 |
| | (63,801 | ) |
Net income (loss) | | $ | 103,927 |
| | $ | 2,647 |
| | $ | 1,316 |
| | $ | (5,688 | ) | | $ | 102,202 |
|
| | | | | | | | | | |
Diluted net income (loss) per share | | $ | 4.13 |
| | $ | 0.11 |
| | $ | 0.05 |
| | $ | (0.23 | ) | | $ | 4.06 |
|
Diluted share count | | 25,177 |
| | | | | | | | |
Liquidity and Capital Resources
We manage our liquidity and capital resources to fund our operating, investing and financing activities. We rely primarily on cash flows from operations and borrowings under our credit facilities or in capital markets as the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and fulfill contractual obligations. Remaining funds are used for acquisitions, debt retirement, cash dividends, share repurchases and general business purposes.
Available Sources
Below is a summary of our immediately available funds:
| | | | As of September 30, | | Increase | | % Increase | | As of June 30, | | Increase (Decrease) | | % Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | | 2018 | | 2017 | |
Cash and cash equivalents | | $ | 38,577 |
| | $ | 24,116 |
| | $ | 14,461 |
| | 60.0 | % | | $ | 29,991 |
| | $ | 31,177 |
| | $ | (1,186 | ) | | (3.8 | )% |
Available credit on the credit facilities | | 268,831 |
| | 122,138 |
| | 146,693 |
| | 120.1 |
| | 204,260 |
| | 185,173 |
| | 19,087 |
| | 10.3 |
|
Total current available funds | | 307,408 |
| | 146,254 |
|
| 161,154 |
| | 110.2 |
| | 234,251 |
| | 216,350 |
|
| 17,901 |
| | 8.3 |
|
Estimated funds from unfinanced real estate | | 211,379 |
| | 193,247 |
| | 18,132 |
| | 9.4 |
| | 222,439 |
| | 192,067 |
| | 30,372 |
| | 15.8 |
|
Total estimated available funds | | $ | 518,787 |
| | $ | 339,501 |
|
| $ | 179,286 |
| | 52.8 | % | | $ | 456,690 |
| | $ | 408,417 |
|
| $ | 48,273 |
| | 11.8 | % |
Cash flows generated by operating activities and borrowings under our credit facility and other types of debt are our most significant sources of liquidity. We also have the ability to raise funds through mortgaging real estate. As of SeptemberJune 30, 2017,2018, our unencumbered owned operating real estate had a book value of $282$297 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained additional funds of approximately $211$222 million at SeptemberJune 30, 2017;2018; however, no assurances can be provided that the appraised value of these properties will match or exceed their book values or that this capital source will be available on terms acceptable to us.
In July 2017, we issued $300 million in aggregate principal amount of 5.25% senior notes due 2025 in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. We used the net proceeds for general corporate purposes, including funding acquisitions, capital expenditures and debt repayment.
In addition to the above sources of liquidity, potential sources include the placement of subordinated debt or loans, the sale of equity securities and the sale of stores or other assets. We evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.
Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table summarizes our cash flows:
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | in Cash Flow | | 2018 | | 2017 | | in Cash Flow |
Net cash provided by operating activities | | $ | 260,536 |
| | $ | 194,240 |
| | $ | 66,296 |
| | $ | 236,331 |
| | $ | 178,555 |
| | $ | 57,776 |
|
Net cash used in investing activities | | (464,917 | ) | | (289,484 | ) | | (175,433 | ) | | (451,461 | ) | | (125,219 | ) | | (326,242 | ) |
Net cash provided by financing activities | | 192,676 |
| | 74,352 |
| | 118,324 |
| |
Net cash provided by (used in) financing activities | | | 187,868 |
| | (72,441 | ) | | 260,309 |
|
Operating Activities
Cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172018 increased $66.3$57.8 million compared to the same period of 2016,2017, primarily related to changesincreases in inventory.other assets and accrued liabilities that were positively impacted by the recently enacted tax legislation and increases in floor plan notes payable and other long term liabilities, offset by a decrease in the change of accounts receivable compared to the same period of 2017.
Borrowings from and repayments to our syndicated lending group related to our new vehicle inventory floor plan financing are presented as financing activities. To better understand the impact of changes in inventory and the associated financing, we also consider our adjusted net cash provided by operating activities to include borrowings or repayments associated with our new vehicle floor plan credit facility.
Adjusted net cash provided by operating activities is presented below (in thousands):
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | in Cash Flow | | 2018 | | 2017 | | in Cash Flow |
Net cash provided by operating activities – as reported | | $ | 260,536 |
| | $ | 194,240 |
| | $ | 66,296 |
| | $ | 236,331 |
| | $ | 178,555 |
| | $ | 57,776 |
|
Add: Net borrowings on floor plan notes payable, non-trade | | 34,056 |
| | 93,817 |
| | (59,761 | ) | |
Add: Net borrowings (repayments) on floor plan notes payable, non-trade | | | 85,763 |
| | (32,124 | ) | | 117,887 |
|
Less: Borrowings on floor plan notes payable, non-trade associated with acquired new vehicle inventory | | (85,527 | ) | | (88,147 | ) | | 2,620 |
| | (120,899 | ) | | — |
| | (120,899 | ) |
Net cash provided by operating activities – adjusted | | $ | 209,065 |
|
| $ | 199,910 |
|
| $ | 9,155 |
| | $ | 201,195 |
|
| $ | 146,431 |
|
| $ | 54,764 |
|
Inventories are the most significant component of our cash flow from operations. As of SeptemberJune 30, 2017,2018, our new vehicle days supply was 69,77, or one day higher than our days supply as of December 31, 2016. Our days supply of used vehicles was 63 days as of September 30, 2017, or seveneight days higher than our days supply as of December 31, 2016.2017. Our days supply of used vehicles was 62 days as of June 30, 2018, or five days lower than our days supply as of December 31, 2017. We calculate days supply of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
Investing Activities
Net cash used in investing activities totaled $464.9$451.5 million and $289.5$125.2 million, respectively, for the nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 2016.2017. Cash flows from investing activities relate primarily to capital expenditures and acquisition and divestiture activity and sales of property and equipment.activity.
Below are highlights of significant activity related to our cash flows from investing activities:
| | | | Nine Months Ended September 30, | | Increase (Decrease) | | Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | in Cash Flow | | 2018 | | 2017 | | in Cash Flow |
Capital expenditures | | $ | (72,174 | ) | | $ | (81,363 | ) | | $ | 9,189 |
| | $ | (72,373 | ) | | $ | (32,266 | ) | | $ | (40,107 | ) |
Cash paid for acquisitions, net of cash acquired | | (400,558 | ) | | (199,435 | ) | | (201,123 | ) | | (374,664 | ) | | (88,075 | ) | | (286,589 | ) |
Cash paid for other investments | | (7,929 | ) | | (22,279 | ) | | 14,350 |
| | (7,066 | ) | | (7,748 | ) | | 682 |
|
Proceeds from sales of stores | | 3,417 |
| | 11,837 |
| | (8,420 | ) | | 839 |
| | — |
| | 839 |
|
Capital Expenditures
Below is a summary of our capital expenditure activities:
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2018 | | 2017 |
Post-acquisition capital improvements | | $ | 19,893 |
| | $ | 37,714 |
| | $ | 31,095 |
| | $ | 7,304 |
|
Facilities for open points | | 714 |
| | 32 |
| | 6,202 |
| | — |
|
Purchases of previously leased facilities | | — |
| | 27,381 |
| |
Existing facility improvements | | 26,400 |
| | 11,810 |
| | 16,904 |
| | 7,734 |
|
Maintenance | | 25,167 |
| | 4,426 |
| | 18,172 |
| | 17,228 |
|
Total capital expenditures | | $ | 72,174 |
| | $ | 81,363 |
| | $ | 72,373 |
| | $ | 32,266 |
|
Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet specified standards and requirements. We expect that certain facility upgrades and remodels will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.timeliness.
We expect to use a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer standards and requirements. The increases in capital expenditures for the six-month period ended June 30, 2018, compared to the same period of 2017, relate primarily to upgrades of recently acquired facilities.
If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completion of the projects, we believe we would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.
We expect to make expenditures of approximately $93$131 million in 20172018 for capital improvements at recently acquired stores, purchases of land for expansion of existing stores, facility image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
Acquisitions
We focus on acquiring stores at attractive purchase prices that meet our return thresholds and strategic objectives. We look for acquisitions that diversify our brand and geographic mix as we continue to evaluate our portfolio to minimize exposure to any one manufacturer and achieve financial returns.
We are able to subsequently floor new vehicle inventory acquired as part of an acquisition; however, the cash generated by this transaction is recorded as borrowings on floor plan notes payable, non-trade.
Adjusted net cash paid for acquisitions, as well as certain other acquisition-related information is presented below:
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2018 | | 2017 |
Number of stores acquired | | 15 |
| | 13 |
| | 17 |
| | 8 |
|
Number of stores opened | | 1 |
| | 1 |
| | — |
| | 1 |
|
Number of franchises added | | — |
| | 1 |
| |
| | | | | | | | |
(Dollars in thousands) | | | | | | | | |
Cash paid for acquisitions, net of cash acquired | | $ | 400,558 |
| | $ | 199,435 |
| | $ | 374,664 |
| | $ | 88,075 |
|
Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | (85,527 | ) | | (88,147 | ) | | (120,899 | ) | | — |
|
Cash paid for acquisitions, net of cash acquired – adjusted | | $ | 315,031 |
| | $ | 111,288 |
| | $ | 253,765 |
| | $ | 88,075 |
|
We evaluate potential capital investments primarily based on targeted rates of return on assets and return on our net equity investment.
Financing Activities
Net cash provided by or (used) in(used in) financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:
| | | | Nine Months Ended September 30, | | Increase | | Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | in Cash Flow | | 2018 | | 2017 | | in Cash Flow |
Cash provided in financing activities, as reported | | $ | 192,676 |
| | $ | 74,352 |
| | $ | 118,324 |
| |
Cash provided by (used in) financing activities, as reported | | | $ | 187,868 |
| | $ | (72,441 | ) | | $ | 260,309 |
|
Adjust: Repayments (borrowings) on floor plan notes payable: non-trade | | (34,056 | ) | | (93,817 | ) | | 59,761 |
| | (85,763 | ) | | 32,124 |
| | (117,887 | ) |
Cash provided (used) in financing activities – adjusted | | $ | 158,620 |
| | $ | (19,465 | ) | | $ | 178,085 |
| |
Cash provided by (used in) financing activities – adjusted | | | $ | 102,105 |
| | $ | (40,317 | ) | | $ | 142,422 |
|
Below are highlights of significant activity related to our cash flows from financing activities, excluding net borrowings on floor plan notes payable: non-trade, which are discussed above:
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2017 | | 2016 | | in Cash Flow |
Net (repayments) borrowings on lines of credit | | $ | (126,853 | ) | | $ | 97,129 |
| | $ | (223,982 | ) |
Principal payments on long-term debt and capital leases, unscheduled | | (46,471 | ) | | (5,903 | ) | | (40,568 | ) |
Proceeds from issuance of long-term debt | | 395,905 |
| | 22,816 |
| | 373,089 |
|
Repurchases of common stock | | (31,521 | ) | | (108,597 | ) | | 77,076 |
|
Dividends paid | | (19,803 | ) | | (17,823 | ) | | (1,980 | ) |
Borrowing and Repayment Activity
During the first nine months of 2017, we raised net proceeds of $349.4 million from our Senior Notes offering and real estate mortgage debt. We used the funds to pay down our outstanding balances on our long-term debt and our lines of credit, acquire stores and fund repurchases of common stock. Our debt to total capital ratio, excluding floor plan notes payable, was 49.5% at September 30, 2017 compared to 46.5% at September 30, 2016. |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Increase (Decrease) |
(Dollars in thousands) | | 2018 | | 2017 | | in Cash Flow |
Net borrowings (repayments) on lines of credit | | $ | 99,163 |
| | $ | (35,346 | ) | | $ | 134,509 |
|
Principal payments on long-term debt and capital leases, unscheduled | | (5,305 | ) | | (35,765 | ) | | 30,460 |
|
Proceeds from issuance of long-term debt | | 62,140 |
| | 74,065 |
| | (11,925 | ) |
Repurchases of common stock | | (33,927 | ) | | (24,913 | ) | | (9,014 | ) |
Dividends paid | | (13,938 | ) | | (13,052 | ) | | (886 | ) |
Equity Transactions
On February 25, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. We repurchased a total of 342,300670,296 shares of our Class A common stock at an average price of $92.08$100.44 per share in the first ninesix months of 2017.2018. This included 310,000640,586 shares as part of the repurchase plan at an average price per share of $91.33$99.89 and 32,30029,710 shares related to tax withholding on vesting RSUs at an average price of $99.33.$112.36 per share. As of SeptemberJune 30, 2017,2018, we had $164.8$98.6 million remaining available for repurchases and the authorization does not have an expiration date.
In July 2018, we repurchased 226,910 shares at a weighted average price of $86.65 per share and, as of July 27, 2018, under our existing share repurchase authorization, $78.9 million remained available for share repurchases.
In December 2017, we entered into a structured repurchase agreement involving the use of capped call options for the purchase of our Class A common stock. As of June 30, 2018, the capped call options had expired and all outstanding options were settled.
In the first ninesix months of 2017,2018, we declared and paid dividends on our Class A and Class B common stock as follows:
|
| | | | | | | | |
Dividend paid: | | Dividend amount per share | | Total amount of dividend (in thousands) |
March 2017 | | $ | 0.25 |
| | $ | 6,292 |
|
May 2017 | | $ | 0.27 |
| | $ | 6,760 |
|
August 2017 | | $ | 0.27 |
| | $ | 6,751 |
|
|
| | | | | | | | |
Dividend paid: | | Dividend amount per share | | Total amount of dividend (in thousands) |
March 2018 | | $ | 0.27 |
| | $ | 6,759 |
|
May 2018 | | $ | 0.29 |
| | $ | 7,179 |
|
We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.
Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt:
| | | | As of September 30, 2017 | | | As of June 30, 2018 | |
(Dollars in thousands) | | Outstanding | | Remaining Available | | | | Outstanding | | Remaining Available | | |
Floor plan note payable: non-trade | | $ | 1,598,111 |
| | $ | — |
| | 1 | | $ | 1,875,462 |
| | $ | — |
| | 1 |
Floor plan notes payable | | 114,833 |
| | — |
| | | | 142,606 |
| | — |
| | |
Used vehicle inventory financing facility | | 5,000 |
| | 45,000 |
| | 2 | | 50,000 |
| | 85,000 |
| | 2 |
Revolving lines of credit | | 221,654 |
| | 223,831 |
| | 2, 3 | | 320,953 |
| | 119,260 |
| | 2, 3 |
Real estate mortgages | | 476,559 |
| | — |
| | | | 642,602 |
| | — |
| | |
5.25% Senior Subordinated Notes due 2025 | | 300,000 |
| | — |
| | | 300,000 |
| | — |
| |
Other debt | | 12,699 |
| | — |
| | | | 12,195 |
| | — |
| | |
Total debt outstanding | | 2,728,856 |
| | 268,831 |
| | | | 3,343,818 |
| | 204,260 |
| | |
Less: unamortized debt issuance costs | | (6,960 | ) | | — |
| | | (6,575 | ) | | — |
| |
Total debt | | $ | 2,721,896 |
| | $ | 268,831 |
| | | $ | 3,337,243 |
| | $ | 204,260 |
| |
1 As of SeptemberJune 30, 2017,2018, we had a $1.9$2.0 billion new vehicle floor plan commitment as part of our credit facility.
2 The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly.
3 Available credit is based on the borrowing base amount effective as of AugustMay 31, 2017.2018. This amount is reduced by $8.3$9.7 million for outstanding letters of credit.
Credit Facility
On August 1, 2017,Effective June 25, 2018, we amended our existing credit facility to increase the total financing commitment by $350 million to $2.4 billion and extend the maturity to August 2022. This syndicated credit facility, isnow comprised of 1820 financial institutions, including seven manufacturer-affiliated finance companies. Under ourPrior to this amendment, the credit facility, we are permitted to allocate thewith an aggregate total financing commitment of $2.4 billion, would have matured in August 2022. With this amendment, the aggregate total financing commitment has been increased to $2.6 billion and the term of the credit facility has been extended to July 2023, among other changes.
The total commitment is allocated $135 million to used vehicle inventory floor plan financing, $450 million to revolving loans for acquisitions and other general corporate purposes, and the remaining $2.0 billion for new vehicle inventory floor plan financing. We have the option to reallocate the commitments, provided that the used vehicle inventory floor plan financing for used vehicles (up to a maximum ofcommitment does not exceed 16.5% of aggregate commitments, the total aggregate commitment) and revolving financing for general corporate purposes, including acquisitions and working capital (up to a maximum ofloan commitment does not exceed 18.75% of aggregate commitments, and the sum of these commitments plus the new vehicle inventory floor plan financing commitment does not exceed the aggregate total commitment). Our credit facilityfinancing commitment of $2.6 billion. Additionally,we may be expandedrequest an increase in the aggregate new vehicle floor plan commitment of up to $2.75 billion total availability, subject to lender approval.$400 million provided that the aggregate commitment does not exceed $3.0 billion. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
Our obligations under our revolving syndicated credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our revolving syndicated credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
We have the ability to deposit up to $50 million in cash in Principal Reduction (PR) accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of SeptemberJune 30, 2017,2018, we had no balances in our PR accounts.
If the outstanding principal balance on our new vehicle inventory floor plan commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving line of credit commitment less the outstanding balance on the line less outstanding letters of credit. The reserve amount will decrease the revolving line of credit availability and may be used to repay the new vehicle floor plan commitment balance.
The interest rate on the credit facility, as amended, varies based on the type of debt, with the rate of one-month LIBOR plus 1.25% for new vehicle floor plan financing, one-month LIBOR plus 1.50% for used vehicle floor plan financing;financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.25% to 2.50%,2.25% depending on our leverage ratio. The annual interest rate associated with our new vehicle floor plan commitment was 2.48%3.34% at SeptemberJune 30, 2017.2018. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 2.73% and 2.48%, respectively,3.59% at SeptemberJune 30, 2017.2018.
Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Under our credit facility, we are required to maintain the ratios detailed in the following table:
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Debt Covenant Ratio | | Requirement | | As of SeptemberJune 30, 20172018 |
Current ratio | | Not less than 1.10 to 1 | | 1.32 | 1.25 to 1 |
Fixed charge coverage ratio | | Not less than 1.20 to 1 | | 2.82 | 2.59 to 1 |
Leverage ratio | | Not more than 5.00 to 1 | | 2.93 | 3.52 to 1 |
As of SeptemberJune 30, 2017,2018, we were in compliance with all covenants. We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.
If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which are the termination of the agreement, acceleration of the amounts owed and the seizure and sale of our assets comprising the collateral for the loans. A breach would also trigger cross-defaults under other debt agreements.
Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for new vehicles at certain stores and vehicles designated for use as service loaners. The variable interest rates on these floor plan notes payable commitments vary by manufacturer. At SeptemberJune 30, 2017, $114.82018, $142.6 million was outstanding on these arrangements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.
5.25% Senior Notes Due 2025
On July 24, 2017, we issued $300 million in aggregate principle amount of 5.25% Senior Notes due 2025 ("the Notes") to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notes from July 24, 2017 and is payable semiannually on February 1 and August 1. The first interest payment is duewas paid on February 1, 2018. We may redeem the Notes, in whole or in part, at any time prior to August 1, 2020 at a price equal to 100% of the principal amount plus a make-whole premium set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest to the date of purchase.
We paid $5.0 million of underwriting and other fees in connection with this issuance, which is being amortized as interest expense over the term of the Notes. The Notes will beare fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future restricted subsidiaries that is a borrower under, or that guarantees obligations under, our credit facility or other indebtedness. The terms of the Notes, in certain circumstances, may restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock, or merge, consolidate or sell all or substantially all our assets.
We used the net proceeds for general corporate purposes, which included funding acquisitions, capital expenditures, and debt repayment.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 3.0% to 5.0%5.3% at SeptemberJune 30, 2017.2018. The mortgages are payable in various installments through October 20348/1/2038. As of SeptemberJune 30, 2017,2018, we had fixed interest rates on 78%70% of our outstanding mortgage debt.
Our other debt includes capital leases and sellers’ notes. The interest rates associated with our other debt ranged from 3.1% to 8.0% at SeptemberJune 30, 2017.2018. This debt, which totaled $12.7$12.2 million at SeptemberJune 30, 2017,2018, is due in various installments through December 2050.2050.
Recent Accounting Pronouncements
See Note 1312 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Use of Estimates
There have been no material changes in the critical accounting policies and use of estimates described in our 20162017 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017. 23, 2018.
See also Notes 2 and 13 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information including the impact of our January 1, 2018 adoption of accounting standards update ("ASU") 2014-09 "Revenue from Contracts with Customers."
Seasonality and Quarterly Fluctuations
Historically, our sales have been lower in the first quarter of each year due to consumer purchasing patterns and inclement weather in certain of our markets. As a result, financial performance is expected to be lower during the first quarter than during the second, third and fourth quarters of each fiscal year. We believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our reported market risks or risk management policies since the filing of our 20162017 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 28, 2017.23, 2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the Condensed Notes toresolution of legal proceedings arising in the Consolidated Financial Statements for additional information.normal course of business will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
Item 1A. Risk Factors
TheThere have been no material changes from the risk factors below are modified from those that are includedpreviously disclosed in our 20162017 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on February 28, 2017 to account for our recent note placement and the expansion of our credit facility.10-K. The information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in that report.
Our indebtedness and lease obligations could materially adversely affect our financial health, limit our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much of our debt is secured by a substantial portion of our assets. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.
Our indebtedness and lease obligations could have important consequences to us, including the following:
limitations on our ability to complete acquisitions;
impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes;
reduced funds available for our operations and other purposes, as a larger portion of our cash flow from operations would be dedicated to the payment of principal and interest on our indebtedness; and
exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest.
In addition, our loan agreements and the indenture governing our 5.25% notes due in 2025 contain covenants that limit our discretionreport, which was filed with respect to business matters, including incurring additional debt, granting additional security interests in our assets, acquisition activity, disposing of assets and other business matters. Other covenants are financial in nature, including current ratio, fixed charge coverage and leverage ratio calculations. A breach of any of these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements. For example, a default under our $2.4 billion syndicated credit facility could trigger a default and acceleration of our repayment obligations under the indenture governing our $300 million aggregate principal amount 5.25% Notes due in 2025, and vice versa.
We have granted in favor of certain of our lenders and other secured parties, including those under our $2.4 billion revolving syndicated credit facility, a security interest in a substantial portion of our assets. If we default on our obligations under those agreements, the secured parties may be able to foreclose upon their security interests and otherwise be entitled to obtain or control those assets.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of default has occurred, the outstanding indebtedness could become immediately due and owing.
If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with these agreements.
In addition, the lenders’ obligations to make certain loans or other credit accommodations under our credit facility is subject to the satisfaction of certain conditions precedent including, for example, that our representations and warranties in the agreement and related loan documents are true and correct in all material respects as of the date of the proposed credit extension. If any of our representations and warranties in those agreements are not true and correct in all material respects as of the date of a proposed credit extension, or if other conditions precedent are not satisfied, we may not be able to request new loans or other credit accommodations under those credit facilities, which could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Additionally, our real estate debt generally has a five to ten-year term, after which the debt needs to be renewed or replaced. A decline in the appraised value of real estate or a reduction in the loan-to-value lending ratios for new or renewed real estate loans could result in our inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable to us, requiring us to find replacement lenders or to refinance at lower loan amounts.
As of September 30, 2017, approximately 86% of our total debt was variable rate. The majority of our variable rate debt is indexed to the one-month LIBOR rate. The current interest rate environment is at historically low levels, and interest rates will likely increase in the future. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition and cash flows.
We may not be able to satisfy our debt obligations upon the occurrence of a change in control or another event of default under our credit agreement or indenture.
Upon the occurrence of a change in control or another event of default as defined in our credit agreement, the agent under the credit agreement will have the right to declare all outstanding obligations immediately due and payable and to terminate the availability of future advances to us. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under the credit agreement in the event of a change in control or fundamental change. A "change in control" as defined in our credit agreement includes, among other events, the acquisition by any person, or two or more persons acting in concert, in either case other than Lithia Holdings Company, L.L.C., Sid DeBoer or Bryan DeBoer, of beneficial ownership (within
the meaning of Rule 13d-3 of the SEC under the Securities and Exchange Act of 1934) of 20% or more of the outstanding shares of our voting stockCommission on a fully diluted basis.
Upon a change of control as defined in the indenture governing our 5.25% Senior Notes due in 2025, the holders of the notes may require us to repurchase all or a portion of the notes at a purchase price of 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase. Generally, if an event of default occurs under the indenture, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all of the notes to be due and payable.
In the event we were unable to satisfy the above obligations, it could have a material adverse impact on our business and our common stock holders.February 23, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We repurchased the following shares of our Class A common stock during the thirdsecond quarter of 2017:2018:
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| | | | | | | | | | | | | | |
| | Total number of shares purchased 2 | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans 1 | | Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands) 1 |
July | | 20,000 |
| | $ | 97.69 |
| | 20,000 |
| | $ | 169,411 |
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August | | 23,157 |
| | 103.23 |
| | 23,000 |
| | 167,037 |
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September | | 20,000 |
| | 113.16 |
| | 20,000 |
| | 164,774 |
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| | 63,157 |
| | $ | 104.62 |
| | 63,000 |
| | $ | 164,774 |
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| | | | | | | | | | | | | | |
| | Total number of shares purchased 2 | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans 1 | | Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands) 1 |
April | | 229,826 |
| | $ | 96.77 |
| | 229,826 |
| | $ | 135,366 |
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May | | 35,925 |
| | 95.00 |
| | 35,760 |
| | 131,969 |
|
June | | 325,000 |
| | 102.76 |
| | 325,000 |
| | 98,573 |
|
| | 590,751 |
| | $ | 99.96 |
| | 590,586 |
| | $ | 98,573 |
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1 Effective February 29, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. This authorization does not have an expiration date and it replaced the previous authorizations, which limited the number of shares we were authorized to repurchase.
2 Of the shares repurchased in the thirdsecond quarter of 2017, 1572018, 165 shares were related to the tax withholdings on vesting RSUs.
Item 5.Other Information
Subsequent to the earnings release filed on a Current Report on Form 8-K on October 25, 2017, and prior to the filing of this Quarterly Report on Form 10-Q, we recorded an elimination of internal used vehicle wholesale transactions and new and used vehicle retail sales. The transactions had no impact on gross profits and were primarily associated with recently acquired stores. This elimination resulted in a reduction of both revenues and cost of sales for the three and nine months ended September 30, 2017 of $10.0 million for used vehicle wholesales, or 15.2% and 4.8%, respectively, of used vehicle wholesale revenues; $3.6 million for new vehicles or 0.2% and 0.1%, respectively, of new vehicle revenues and $0.4 million for used vehicle retail or 0.1% and less than 0.1%, respectively, of used vehicle retail revenues. Adjusted for this elimination, total revenues were $2.7 billion and $7.4 billion, respectively, and total cost of sales were $2.3 billion and $6.3 billion, respectively, for the the three and nine months ended September 30, 2017. This elimination had no other impact to our Consolidated Statements of Operations.
Item 6. Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
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3.1 | Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to exhibit 3.1 to our Form 10-K for the year ended December 31, 1999). |
| 2017 Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.1 to Form 8-K dated April 28, 2017 and filed with Securities and Exchange Commission on May 3, 2017). |
| Indenture, dated as of July 24, 2017, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017 and filed with the Securities and Exchange Commission on July 24, 2017). |
| Form of 5.250% Senior Notes due 2025 (included as part of Exhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017 and filed with the Securities and Exchange Commission on July 24, 2017). |
| Sixth Amendment toSecond Amended and Restated Loan Agreement dated July 12, 2017. |
| Seventh Amendment to Amended and Restated Loan Agreement dated August 1, 2017 (incorporated by reference to exhibit 10.1 to Form 8-K dated August 1, 2017June 25, 2018 and filed with the Securities and Exchange Commission on August 3, 2017)June 29, 2018). |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: November 7, 2017July 27, 2018 | LITHIA MOTORS, INC. |
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| By: /s/ John F. North III |
| John F. North III |
| Senior Vice President and Chief Financial Officer |
| (Duly Authorized Officer and Principal Financial and |
| Accounting Officer) |