UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2013~~2014

[ ] 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

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)

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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] ~~Accelerated filer [X]~~

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]

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.

Class A common stock without par value		~~23,327,279~~23,545,648
Class B common stock without par value		2,562,231
(Class)		(Outstanding at ~~October 25, 2013)~~August 8, 2014)

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
Consolidated Balance Sheets (Unaudited) – ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013
2
Consolidated Statements of Operations (Unaudited) – Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013
3
Consolidated Statements of Comprehensive Income (Unaudited) – Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013
4
Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013
5
Condensed Notes to Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
3740
Item 4.
Controls and Procedures
3740
PART II - OTHER INFORMATION

Item 1.
Legal Proceedings
3840

Item 1A.
Risk Factors
3841
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
41

Item 6.
Exhibits
41

Signatures
42

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

							June 30,			December 31,
	September 30, 2013			December 31, 2012			2014			2013
Assets
Current Assets:
Cash and cash equivalents	$	16,093		$	42,839		$	28,203		$	23,686
Accounts receivable, net of allowance for doubtfulaccounts of $153 and $336		140,086			133,149
Accounts receivable, net								191,228			170,519
Inventories, net		755,698			723,326			981,223			859,019
Deferred income taxes		1,999			3,832			222			1,548
Other current assets		9,477			17,484			12,028			15,251
Assets held for sale		11,845			12,579			-			11,526
Total Current Assets		935,198			933,209			1,212,904			1,081,549

Property and equipment, net of accumulateddepreciation of $104,105 and $97,883		452,367			425,086
Property and equipment, net of accumulateddepreciation of $113,594 and $106,871								528,254			481,212
Goodwill		40,313			32,047			65,004			49,511
Franchise value		66,465			62,429			77,728			71,199
Deferred income taxes		15,826			17,123			14,624			10,256
Other non-current assets		29,009			22,808			41,613			31,394
Total Assets	$	1,539,178		$	1,492,702		$	1,940,127		$	1,725,121


Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable	$	19,221		$	13,454		$	20,598		$	18,789
Floor plan notes payable: non-trade		569,027			568,130			806,684			695,066
Current maturities of long-term debt		7,066			8,182			7,578			7,083
Trade payables		48,645			41,589			56,384			51,159
Accrued liabilities		94,678			81,602			112,742			94,143
Liabilities related to assets held for sale		7,403			8,347			-			6,271
Total Current Liabilities		746,040			721,304			1,003,986			872,511

Long-term debt, less current maturities		218,172			286,876			260,835			245,471
Deferred revenue		40,774			33,589			48,918			44,005
Other long-term liabilities		27,063			22,832			34,537			28,412
Total Liabilities		1,032,049			1,064,601			1,348,276			1,190,399

Stockholders' Equity:
Preferred stock - no par value; authorized15,000 shares; none outstanding		-			-
Class A common stock - no par value;authorized 100,000 shares; issued andoutstanding 23,310 and 22,916		267,004			268,801
Class B common stock - no par value; authorized 25,000 shares; issued andoutstanding 2,562 and 2,762		319			343
Preferred stock - no par value; authorized15,000 shares; none outstanding								-			-
Class A common stock - no par value;authorized 100,000 shares; issued andoutstanding 23,544 and 23,329								266,172			268,255
Class B common stock - no par value;authorized 25,000 shares; issued andoutstanding 2,562 and 2,562								319			319
Additional paid-in capital		20,401			12,399			26,045			22,598
Accumulated other comprehensive loss		(1,677	)		(2,615	)		(1,259	)		(1,538	)
Retained earnings		221,082			149,173			300,574			245,088
Total Stockholders' Equity		507,129			428,101			591,851			534,722
Total Liabilities and Stockholders' Equity	$	1,539,178		$	1,492,702		$	1,940,127		$	1,725,121

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,
	2013			2012			2013			2012			2014			2013			2014			2013
Revenues:
New vehicle	$	604,135		$	491,846		$	1,667,063		$	1,340,731		$	694,484		$	569,487		$	1,274,006		$	1,062,928
Used vehicle retail		280,734			227,157			778,427			625,117			310,475			258,465			612,368			497,693
Used vehicle wholesale		43,396			35,006			120,593			103,469			44,286			37,691			86,979			77,197
Finance and insurance		37,132			30,929			103,013			82,989			43,838			34,218			83,469			65,881
Service, body and parts		97,784			89,038			282,686			258,038			114,337			94,462			218,954			184,902
Fleet and other		6,109			4,550			29,093			28,770			14,382			14,182			24,132			22,984
Total revenues		1,069,290			878,526			2,980,875			2,439,114			1,221,802			1,008,505			2,299,908			1,911,585
Cost of sales:
New vehicle		565,549			456,753			1,555,042			1,241,820			648,490			530,699			1,188,988			989,493
Used vehicle retail		239,093			193,885			662,920			532,577			266,408			219,572			527,505			423,827
Used vehicle wholesale		42,686			35,042			118,214			102,812			42,782			36,996			84,144			75,528
Service, body and parts		50,793			46,033			145,223			133,224			58,155			47,769			111,940			94,430
Fleet and other		5,780			4,303			27,816			27,741			13,667			13,636			22,970			22,036
Total cost of sales		903,901			736,016			2,509,215			2,038,174			1,029,502			848,672			1,935,547			1,605,314
Gross profit		165,389			142,510			471,660			400,940			192,300			159,833			364,361			306,271
Asset impairments		-			-			-			115
Selling, general and administrative		108,570			95,132			318,984			276,561			125,463			109,283			247,292			210,414
Depreciation and amortization		5,099			4,351			14,719			12,687			5,825			4,899			11,332			9,620
Operating income		51,720			43,027			137,957			111,577			61,012			45,651			105,737			86,237
Floor plan interest expense		(2,909	)		(3,370	)		(9,394	)		(9,326	)		(3,215	)		(3,036	)		(6,199	)		(6,485	)
Other interest expense		(1,933	)		(2,125	)		(6,235	)		(7,382	)		(1,869	)		(1,941	)		(3,843	)		(4,302	)
Other income, net		835			453			2,220			1,770			1,146			584			2,083			1,385
Income from continuing operations before income taxes		47,713			37,985			124,548			96,639			57,074			41,258			97,778			76,835
Income tax provision		(16,822	)		(14,893	)		(46,494	)		(36,908	)		(21,904	)		(15,977	)		(37,914	)		(29,672	)
Income from continuing operations, net of income tax		30,891			23,092			78,054			59,731			35,170			25,281			59,864			47,163
Income from discontinued operations, net of income tax		127			151			574			799			3,139			274			3,179			447
Net income	$	31,018		$	23,243		$	78,628		$	60,530		$	38,309		$	25,555		$	63,043		$	47,610

Basic income per share from continuing operations	$	1.19		$	0.91		$	3.03		$	2.32		$	1.35		$	0.98		$	2.30		$	1.83
Basic income per share from discontinued operations		0.01			0.00			0.02			0.03			0.12			0.01			0.12			0.02
Basic net income per share	$	1.20		$	0.91		$	3.05		$	2.35		$	1.47		$	0.99		$	2.42		$	1.85

Shares used in basic per share calculations		25,866			25,469			25,776			25,730			26,119			25,782			26,047			25,730

Diluted income per share from continuing operations	$	1.18		$	0.89		$	2.98		$	2.28		$	1.34		$	0.97		$	2.27		$	1.81
Diluted income per share from discontinued operations		-			0.01			0.03			0.03			0.11			0.01			0.12			0.01
Diluted net income per share	$	1.18		$	0.90		$	3.01		$	2.31		$	1.45		$	0.98		$	2.39		$	1.82

Shares used in diluted per share calculations		26,237			25,947			26,159			26,203			26,331			26,134			26,326			26,120

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012		2014		2013		2014		2013
Net income	$	31,018	$	23,243	$	78,628	$	60,530	$	38,309	$	25,555	$	63,043	$	47,610
Other comprehensive income, net of tax:
Gain on cash flow hedges, net of tax expenseof $58, $301, $582, and $791, respectively		94		484		938		1,274
Gain on cash flow hedges, net of tax expenseof $81, $209, $174, and $524 respectively										130		338		279		844
Comprehensive income	$	31,112	$	23,727	$	79,566	$	61,804	$	38,439	$	25,893	$	63,322	$	48,454

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended September 30,						Six Months Ended June 30,
	2013			2012			2014			2013
Cash flows from operating activities:
Net income	$	78,628		$	60,530		$	63,043		$	47,610
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Asset impairments		-			115
Depreciation and amortization		14,719			12,687			11,332			9,620
Depreciation and amortization within discontinued operations		-			186
Stock-based compensation		4,161			2,329			3,259			2,603
Loss (gain) on disposal of other assets		107			(378	)
Loss on disposal of other assets								62			33
Gain on sale of franchise								(5,744	)		-
Deferred income taxes		8,504			6,851			2,840			825
Excess tax benefit from share-based payment arrangements		(5,956	)		(1,629	)		(6,058	)		(5,408	)
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net		(6,937	)		(29,160	)		(20,709	)		(10,684	)
Inventories		(18,187	)		(158,186	)		(77,300	)		(48,899	)
Other current assets		5,464			3,169			1,360			5,980
Other non-current assets		(3,804	)		(4,346	)		(7,311	)		(3,394	)
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable, net		5,721			(93,975	)		368			3,384
Trade payables		4,848			5,381			1,411			2,078
Accrued liabilities		13,099			10,164			17,594			8,812
Other long-term liabilities and deferred revenue		12,307			9,927			11,659			11,889
Net cash provided by (used in) operating activities		112,674			(176,335	)		(4,194	)		24,449

Cash flows from investing activities:
Principal payments received on notes receivable		88			79			-			61
Capital expenditures		(33,803	)		(34,966	)		(35,230	)		(22,107	)
Proceeds from sales of assets		474			6,025			103			420
Payments for life insurance policies		(2,508	)		(1,908	)		(3,454	)		(2,566	)
Cash paid for acquisitions		(31,786	)		(31,376	)		(79,482	)		(31,786	)
Proceeds from sales of stores		-			2,901
Cash from dispositions								10,617			-
Net cash used in investing activities		(67,535	)		(59,245	)		(107,446	)		(55,978	)

Cash flows from financing activities:
Borrowings on floor plan notes payable: non-trade, net		2,685			272,760			112,910			5,989
Borrowings on lines of credit		499,000			365,623			578,000			358,000
Repayments on lines of credit		(542,446	)		(356,791	)		(567,000	)		(327,318	)
Principal payments on long-term debt, scheduled		(5,375	)		(5,889	)		(3,693	)		(3,667	)
Principal payments on long-term debt and capital leases, other		(25,770	)		(37,366	)		-			(25,770	)
Proceeds from issuance of long-term debt		4,720			14,169			5,392			4,721
Proceeds from issuance of common stock		3,967			4,600			2,253			2,843
Repurchase of common stock		(7,903	)		(20,606	)		(10,206	)		(7,903	)
Excess tax benefit from share-based payment arrangements		5,956			1,629			6,058			5,408
Dividends paid		(6,719	)		(6,943	)		(7,557	)		(3,356	)
Change in restricted cash		-			3,300
Net cash (used in) provided by financing activities		(71,885	)		234,486
Net cash provided by financing activities								116,157			8,947

Decrease in cash and cash equivalents		(26,746	)		(1,094	)		4,517			(22,582	)

Cash and cash equivalents at beginning of period		42,839			20,851			23,686			42,839
Cash and cash equivalents at end of period	$	16,093		$	19,757		$	28,203		$	20,257


Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	15,988		$	17,316		$	10,218		$	10,989
Cash paid during the period for income taxes, net		25,880			25,814			23,444			16,111

Supplemental schedule of non-cash activities:
Floor plan debt paid in connection with store disposals		-			6,712
Acquisition of assets with capital leases		-			2,609
Debt issued in connection with acquisitions								3,161			-
Floorplan debt paid in connection with dealership disposals								3,311			-

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 ~~September~~June 30, ~~2013~~2014 and for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012.~~2013. 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 ~~2012~~2013 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, ~~2012~~2013 is derived from our ~~2012~~2013 Annual Report on Form 10-K. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our ~~2012~~2013 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.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.

These reclassifications had no impact on previously reported net income.

Note 2. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

	September 30, 2013			December 31, 2012			June 30, 2014			December 31, 2013
Contracts in transit	$	66,516		$	65,597		$	99,390		$	85,272
Trade receivables		33,252			25,885			24,960			23,154
Vehicle receivables		22,308			21,298			25,728			23,606
Manufacturer receivables		25,098			25,658			33,852			31,662
Auto loan receivables								17,828		$	11,438
Other receivables								5,573			5,622
		147,174			138,438			207,331			180,754
Less: Allowance		(153	)		(336	)		(805	)		(546	)
Less: Long-term portion of accounts receivable, net		(6,935	)		(4,953	)		(15,298	)		(9,689	)
Total accounts receivable, net	$	140,086		$	133,149		$	191,228		$	170,519

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 within five to ten days of selling a vehicle.

●

Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and third parties 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 interest income is 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. Inventories

The components of inventory consisted of the following (in thousands):

September 30,
2013

December 31,
2012

New vehicles
$ 565,017 $ 563,275
Used vehicles
158,156 130,529
Parts and accessories
32,525 29,522
Total inventories
$ 755,698 $ 723,326

June 30,
2014

December 31,
2013

New vehicles
$ 741,220 $ 657,043
Used vehicles
203,645 167,814
Parts and accessories
36,358 34,162
Total inventories
$ 981,223 $ 859,019

Note 4. Goodwill
The changes in the carrying amounts of goodwill are as follows (in thousands):

Goodwill

Goodwill

Balance as of December, 31, 2011, gross
$ 318,224
Balance as of December, 31, 2012, gross
$ 331,313
Accumulated impairment loss
(299,266 ) (299,266 )
Balance as of December 31, 2011, net
18,958
Additions through acquisitions
13,710
Goodwill allocated to dispositions
(621 )
Balance as of December 31, 2012, net
32,047 32,047
Additions through acquisitions
8,266 17,464
Balance as of September 30, 2013, net
$ 40,313
Balance as of December 31, 2013, net
49,511
Additions through acquisition
15,493
Balance as of June 30, 2014, net
$ 65,004

Note~~Note 5.~~5. Commitments and Contingencies

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.

Alaska Consumer Protection Act Claims
In December 2006, a class action suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, ~~Inc,~~Inc., et al, Case No. 3AN-06-13341 CI), and in April 2007, a second ~~case~~class action suit (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) was filed against us, in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. These suits were subsequently consolidated. In the ~~suits,~~consolidated suit, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan. The suit sought statutory damages of $500 for each violation or three times plaintiff’s actual damages, whichever was greater, and attorney fees and costs.

In ~~June 2013~~June2013, the parties agreed to mediate the claims. The mediation resulted in a settlement agreement ~~with~~that received the ~~plaintiffs under which~~final approval of the Court on December 11, 2013. Under the settlement agreement, we ~~estimate we will~~agreed to reimburse plaintiffs’ legal fees and to pay ~~$3.8~~(i) $450 in the form of cash and vouchers to valid claimants and (ii) $3,000 for each claim representative. The majority of cash and vouchers have been mailed.
We have recorded expenses of $6.7 million to settle all claims against us and to pay plaintiffs’ legal ~~fees. The estimated payment assumes a participation rate by eligible class members based on historically experienced claim rates. An increased claim rate would result~~fees.Of this amount, $0.7 million in ~~additional payments. The estimated settlement amount~~expense was recorded in the six months ended June 30, 2014, as a component of selling, general and administrative expense in our Consolidated Statements of ~~Operations~~Operations. As of June 30, 2014, the liability for unused vouchers, assuming an expected redemption rate, was $1.3 million and ~~as of September 30, 2013, was included~~is recorded as a component of accrued liabilities ~~in our~~on the Consolidated Balance ~~Sheets. The settlement is subject to court approval and we cannot assure~~Sheet. We believe that ~~the court will approve the settlement.~~these estimates are reasonable; however, actual cost could differ materially.

Note 6. Stockholders’ Equity

Reclassification From Accumulated Other Comprehensive Loss
The reclassification from accumulated other comprehensive loss was as follows (in thousands):

Three Months
Ended
September
30, 2013

Nine Months
Ended
September
30, 2013

Affected Line Item in the
Consolidated Statements
of Operations

Three Months
Ended
June 30, 2014

Six Months
Ended
June 30, 2014

AffectedLine Item in the
Consolidated Statements
of Operations
Loss on cash flow hedges
$ (134 ) $ (606 )
Floor plan interest expense
$ (118 ) $ (252 )
Floor plan interest expense
Income Taxes
51 232
Income tax provision
Taxes
45 96
Income tax provision
Loss on cash flow hedges, net
$ (83 ) $ (374 ) $ (73 ) $ (156 )
See Note 9 for more details regarding our derivative contracts.
Share Repurchases
In ~~August~~ 2011 and 2012, our Board of Directors authorized the repurchase of up to ~~2,000,000~~a total of 3,000,000 shares of our Class A common ~~stock.On July 20, 2012, our Board of Directors authorized~~stock.In the ~~repurchase of 1,000,000 additional shares of our Class A common stock. We did not repurchase any shares of our Class A common stock during the third quarter of 2013. In the nine~~six months ended ~~September~~June 30, ~~2013,~~2014, we repurchased ~~127,900~~45,000 shares at an average price of ~~$40.76~~$71.73 per share, for a total of ~~$5.2~~$3.2 million. Through ~~September~~June 30, ~~2013,~~2014, we have repurchased ~~1,273,047~~1,318,047 shares and ~~1,726,953~~1,681,953 shares remained available for repurchase. This authority to repurchase shares does not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.

In addition, we repurchased ~~59,721~~106,772 shares during the first ~~quarter~~six months of ~~2013~~2014 at an average price of ~~$45.04,~~$65.36, for a total of ~~$2.7~~$7.0 million, related to tax withholdings associated with the vesting of restricted stock units.

Dividends
Dividends paid on our Class A and Class B common stock in the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 were as follows:

Quarter paid:

Dividend
amount per
share

Total amount of
dividend (in
thousands)

First quarter
$ * $ *
Second quarter
0.13 3,356
Third quarter
0.13 3,363
* A dividend of $0.10 per share was paid in December 2012 related to our fourth quarter 2012 financial results in lieu of the dividend typically declared and paid in March of the following year. Accordingly, we did not pay dividends on our Class A and Class B common stock during the first quarter of 2013.
Quarter paid:

Dividend
amount per
share

Total amount of
dividend (in
thousands)

First quarter
$ 0.13 $ 3,378
Second quarter
0.16 4,179

See Note 1314 for a discussion of a dividend related to our ~~third~~second quarter ~~2013~~2014 financial results.
Note 7. Deferred Compensation and Long-Term Incentive Plan
We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to accumulate assets for retirement on a ~~tax-deferred~~tax deferred basis. We may make discretionary contributions to the LTIP. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement.

In ~~the first nine months of 2013,~~2014, we made discretionary contributions of $2.1 million to the LTIP. Participants will receive a guaranteed return of 5.25% in ~~2013.~~2014. We recognized compensation expense related to the LTIP as follows (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2013

2012

2013

2012

Compensation expense
$ 357 $ 299 $ 1,042 $ 876

Three Months Ended
June 30,

Six Months Ended
June 30,

2014

2013

2014

2013

Compensation expense
$ 377 $ 352 $ 1,077 $ 686

As of ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012,~~2013, the balance due to participants was ~~$6.3~~$9.4 million and ~~$3.6~~$7.1 million, respectively, and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.

Note 8. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

●
Level 1 – quoted prices in active markets for identical securities;

●
Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads and credit risk; and

●
Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.
We use the income approach to determine the fair value of our interest rate swap using observable Level 2 market expectations at each measurement date and an income approach to convert estimated future cash flows to a single present value amount (discounted) assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the swap valuation are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short-term borrowings, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future reset rates to discount those future cash flows to present value at the measurement date.

Inputs are collected from Bloomberg on the last market day of the ~~period. The same method is~~period and used to determine the rate used to discount the future cash flows. The valuation of the interest rate swap also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.

There were no changes to our valuation techniques during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2013.~~2014.

Assets and Liabilities Measured at Fair Value
Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):

Fair Value at September 30, 2013

Level 1

Level 2

Level 3

Measured on a recurring basis:

Derivative contracts, net
$ - $ (3,166 ) $ -
Fair Value at June 30, 2014

Level 1

Level 2

Level 3

Measured on a recurring basis:

Derivative contract, net
$ - $ (2,375 ) $ -

Fair Value at December 31, 2012

Level 1

Level 2

Level 3

Measured on a recurring basis:

Derivative contracts, net
$ - $ (4,679 ) $ -
Fair Value at December 31, 2013

Level 1

Level 2

Level 3

Measured on a recurring basis:

Derivative contract, net
$ - $ (2,900 ) $ -

See Note 9 for more details regarding our derivative contracts.
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 ~~short-term~~ 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 and calculate the estimated fair value of our fixed-rate debt using a discounted cash flow ~~method.~~methodology. Using 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 ~~September~~June 30, ~~2013,~~2014, this debt had maturity dates between November 2016 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed-interest rate debt is as follows (in thousands):

September 30,
2013

December 31,
2012

June 30,
2014

December 31,
2013

Carrying value
$ 133,994 $ 130,469 $ 138,283 $ 132,616
Fair value
135,010 134,688 135,762 126,786

Note 9. Derivative Financial ~~Instruments~~Instrument
WeFrom time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.

As of ~~September~~June 30, ~~2013,~~2014, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At ~~September~~June 30, ~~2013,~~2014, the one-month LIBOR rate was ~~0.18%~~0.15% per annum, as reported in the Wall Street Journal.

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income immediately. The estimated amount that we expect to reclassify from accumulated other comprehensive loss to net income within the next twelve months is $1.2 million at ~~September~~June 30, ~~2013.~~2014.

At ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012,~~2013, the fair value of our derivative ~~instruments~~instrument was included in our Consolidated Balance Sheets as follows (in thousands):

Balance Sheet Information

Fair Value of Liability Derivatives
Fair Value of Liability Derivatives
Derivatives Designated as Hedging
Instruments

Location in Balance
Sheet

September 30,
2013

Location in Balance
Sheet

June 30,
2014

Interest Rate Swap Contracts

Accrued liabilities
$ 1,217
Interest Rate Swap Contract

Accrued liabilities
$ 1,228

Other long-term liabilities
1,949
Other long-term liabilities
1,147
$ 3,166 $ 2,375
Balance Sheet Information

Fair Value of Liability Derivatives
Fair Value of Liability Derivatives
Derivatives Designated as Hedging
Instruments

Location in Balance
Sheet

December 31,
2012

Location in Balance
Sheet

December 31,
2013

Interest Rate Swap Contracts

Accrued liabilities
$ 1,839
Interest Rate Swap Contract

Accrued liabilities
$ 1,215

Other long-term liabilities
2,840
Other long-term liabilities
1,685
$ 4,679 $ 2,900

The effect of derivative instruments on our Consolidated Statements of Operations for the ~~three-and nine-month~~three- and six-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013 was as follows (in thousands):

Derivatives in Cash
Flow Hedging
Relationships

Amount of
Gain
Recognized
in
Accumulated
OCI (Effective
Portion)

Location of
Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Amount of Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Location of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Gain
Recognized
in
Accumulated
OCI (Effective
Portion)

Location of
Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Amount of Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Location of
Loss
Recognizedin
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Three Months Ended
September 30, 2013

Three Months Ended
June 30, 2014

Interest Rate Swap Contract $ 93 Floor plan
interest
expense $ (118 )
Floor plan
interest
expense
$ (188 )

Three Months Ended
June 30, 2013

Interest Rate Swap Contracts
$ 18
Floor plan
interest expense
$ (134 )
Floor plan
interestexpense
$ (173 ) $ 381
Floor plan
interest
expense
$ (166 ) Floor plan
interest
expense $ (296 )

Three Months Ended
September 30, 2012

Interest Rate Swap Contracts
$ 476
Floor plan
interest expense
$ (309 )
Floor plan
interestexpense
$ (788 )


Derivatives in Cash
Flow Hedging
Relationships

Amount of
Gain
Recognized
in
Accumulated
OCI (Effective
Portion)

Locationof
Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Amount of Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Location of
Loss
Recognizedin
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Gain
Recognized
in
Accumulated
OCI (Effective
Portion)

Location of
Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)

Amount of Loss
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)

Location of
Loss
Recognizedin
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Nine Months Ended
September 30, 2013

Six Months Ended
June 30, 2014

Interest Rate Swap Contract $ 201 Floor plan
interest
expense $ (252 ) Floor plan
interest
expense $ (359 )

Six Months Ended
June 30, 2013

Interest Rate Swap Contracts
$ 914
Floor plan
interest expense
$ (606 )
Floor plan
interest expense
$ (1,064 ) $ 896 Floor plan
interest
expense $ (472 ) Floor plan
interest
expense $ (890 )

Nine Months Ended
September 30, 2012

Interest Rate Swap Contracts
$ 998
Floor plan
interest expense
$ (1,067 )
Floor plan
interest expense
$ (2,172 )

See also Note 8.

Note 10. Acquisitions
OnIn the first six months of 2014, we completed the following acquisitions, which contributed revenues of $53.3 million for the six months ended June 10, 2013, we acquired the inventory, property, equipment and intangible assets and assumed certain liabilities of OB Salem Auto Group, Inc. in Salem, Oregon from Michael O’Brien including BMW, Honda and Volkswagen franchises.30, 2014:
●
On January 31, 2014, we acquired Island Honda in Kahului, Hawaii.
●
On February 3, 2014, we acquired Stockton Volkswagen in Stockton, California.
●
On March 5, 2014, we acquired Honolulu Buick GMC Cadillac and Honolulu Volkswagen in Honolulu, Hawaii.
●
On April 1, 2014, we acquired Corpus Christi Ford in Corpus Christi, Texas.
●
On June 11, 2014, we acquired Portland GMC Buick and Portland Cadillac in Portland, Oregon.

~~The acquisition was~~All acquisitions were accounted for ~~using~~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.
No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the ~~acquisition~~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
$ 79,482
Debt issued
3,161
$ 82,643

Consideration

Cash paid, net of cash acquired
$ 31,786

Assets Acquired and Liabilities Assumed

Inventories
$ 42,997
Franchise value
6,529
Property, plant and equipment
17,302
Other assets
430
Other liabilities
(108 )
67,150
Goodwill
15,493
$ 82,643

Assets
Acquired and
Liabilities
Assumed

Inventories
$ 15,198
Franchise value
4,036
Property, plant and equipment
4,697
Other assets
122
Other liabilities
(533 )
23,520
Goodwill
8,266
$ 31,786

In the first quarter of 2014, we assumed a contract associated with an acquisition and determined the remaining term would not provide economic benefit. As a result, we recorded costs of $1.4 million associated with the contract. For the three and six month periods ended June 30, 2014, we recorded acquisition expense of $0.2 million. This amount is included as a component of selling, general and administrative expense in our Consolidated Statements of Operations. We did not have any material acquisition-related expenses in 2013.

We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes.

~~This acquired company contributed revenues and earnings of $26.8 million and $286,000, respectively, for the period from acquisition to September 30, 2013.~~

The following unaudited pro forma summary presents consolidated information as if all acquisitions in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2012~~2013 and ~~2013~~2014 had occurred on January 1, ~~2012~~2013 (in thousands, except for per share amounts):

Three Months Ended September 30,

2013

2012

Three Months Ended June 30,

2014

2013

Revenue
$ 1,069,290 $ 909,029 $ 1,232,950 $ 1,113,612
Income from continuing operations, net of tax
30,891 23,409 35,504 26,447
Basic income per share from continuing operations, net of tax
1.19 0.92 1.36 1.03
Diluted income per share from continuing operations, net of tax
1.18 0.90 1.35 1.01

Nine Months Ended September 30,

2013

2012

Six Months Ended June 30,

2014

2013

Revenue
$ 3,019,726 $ 2,548,136 $ 2,353,299 $ 2,115,438
Income from continuing operations, net of tax
78,500 60,777 60,732 49,405
Basic income per share from continuing operations, net of tax
3.05 2.36 2.33 1.92
Diluted income per share from continuing operations, net of tax
3.00 2.32 2.31 1.89

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, plant 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 pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.

Note ~~11.~~11. Discontinued Operations
We classify a store as discontinued operations if the location has been sold, we have ceased operations at that location or the store meets the criteria required by U.S. generally accepted accounting standards:

●
our management team, possessing the necessary authority, commits to a plan to sell the store;

●
the store is available for immediate sale in its present condition;

●
an active program to locate buyers and other actions that are required to sell the store are initiated;

●
a market for the store exists and we believe its sale is likely within one year;

●
active marketing of the store commences at a price that is reasonable in relation to the estimated fair market value; and

●
our management team believes it is unlikely changes will be made to the plan or the plan to dispose of the store will be withdrawn.

We reclassify the store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the store’s operations after its disposal.

~~One~~
On May 1, 2014, we completed the sale of our ~~stores,~~one store which had been classified as held for sale ~~in the fourth quarter~~since October 2012. As of ~~2012, continues to meet the criteria for classification of its assets and related liabilities~~June 30, 2014, we have no stores or properties classified as held for ~~sale and its associated operating results are classified as discontinued operations as of September 30, 2013.~~sale.

Actual floor plan interest expense for the store classified as discontinued operations is directly related to the store’s new vehicles. Interest expense related to our used vehicle inventory financing and revolving line of credit is allocated based on the working capital level of the store. For the six months ended June 30, 2014 and 2013, interest expense included as a component of discontinued operations was immaterial.

Certain financial information related to discontinued operations was as follows (in thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,

2013

2012

2013

2012

Revenue
$ 8,712 $ 24,409 $ 27,590 $ 69,838

Pre-tax gain from discontinued operations
$ 236 $ 657 $ 929 $ 1,685
Loss on disposal activities
- (397 ) - (397 )
236 260 929 1,288
Income tax expense
(109 ) (109 ) (355 ) (489 )
Income from discontinued operations, net of income tax expense
$ 127 $ 151 $ 574 $ 799
Cash generated from disposal activities
$ - $ - $ - $ 2,901
Floor plan debt paid in connection with disposal activities
$ - $ - $ - $ 6,712
~~Assets held for sale included the following (in thousands):~~

September 30, 2013

December 31, 2012

Inventories
$ 8,597 $ 9,412
Property, plant and equipment
1,177 1,102
Intangible assets
2,071 2,065
$ 11,845 $ 12,579
~~Liabilities related to assets held for sale included the following (in thousands):~~

September 30, 2013

December 31, 2012

Floor plan notes payable
$ 7,403 $ 8,347

Three Months Ended
June 30,

Six Months Ended
June 30,

2014

2013

2014

2013

Revenue
$ 3,920 $ 10,078 $ 12,569 $ 18,878

Pre-tax income (loss) from discontinued operations
$ (532 ) $ 409 $ (467 ) $ 693
Net gain on disposal activities
5,744 - 5,744 -
5,212 409 5,277 693
Income tax expense
(2,073 ) (135 ) (2,098 ) (246 )
Income from discontinued operations, net of income tax expense
$ 3,139 $ 274 $ 3,179 $ 447
Goodwill and other intangible assets disposed of
221 - 221 -
Cash generated from disposal activities
10,617 - 10,617 -
Floor plan debt paid in connection with disposal activities
3,311 - 3,311 -

Note 12. 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 unvested common shares subject to repurchase or cancellation. 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 incremental common shares issuable upon the exercise of stock options and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants 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. Our Restated Articles of Incorporation require that 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, which would have the effect of adversely altering 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 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 the income from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS for the ~~three- and nine-month~~three-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013 (in thousands, except per share amounts):

Three Months Ended September 30,

2013

2012

Three Months Ended June 30,

2014

2013

Basic EPS from Continuing
Operations

Class A

Class B

Class A

Class B

Class A

Class B

Class A

Class B

Numerator:

Income from continuing operations applicable to common stockholders
$ 27,831 $ 3,060 $ 20,073 $ 3,019 $ 31,720 $ 3,450 $ 22,734 $ 2,547
Distributed income applicable to common stockholders
(3,030 ) (333 ) (2,212 ) (333 ) (3,769 ) (410 ) (3,018 ) (338 )
Basic undistributed income from continuing operations applicable to common stockholders
$ 24,801 $ 2,727 $ 17,861 $ 2,686 $ 27,951 $ 3,040 $ 19,716 $ 2,209

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share
23,304 2,562 22,139 3,330 23,557 2,562 23,185 2,597

Basic income per share from continuing operations applicable to common stockholders
$ 1.19 $ 1.19 $ 0.91 $ 0.91 $ 1.35 $ 1.35 $ 0.98 $ 0.98
Basic distributed income per share from continuing operations applicable to common stockholders
(0.13 ) (0.13 ) (0.10 ) (0.10 ) (0.16 ) (0.16 ) (0.13 ) (0.13 )
Basic undistributed income per share from continuing operations applicable to common stockholders
$ 1.06 $ 1.06 $ 0.81 $ 0.81 $ 1.19 $ 1.19 $ 0.85 $ 0.85

Three Months EndedJune 30,

2014

2013

Diluted EPS from Continuing Operations

Class A

Class B

Class A

Class B

Numerator:

Distributed income applicable to common stockholders
$ 3,769 $ 410 $ 3,018 $ 338
Reallocation of distributed income as a result of conversion of dilutive stock options
3 (3 ) 5 (5 )
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
407 - 333 -
Diluted distributed income applicable to common stockholders
$ 4,179 $ 407 $ 3,356 $ 333
Undistributed income from continuing operations applicable to common stockholders
$ 27,951 $ 3,040 $ 19,716 $ 2,209
Reallocation of undistributed income as a result of conversion of dilutive stock options
25 (25 ) 30 (30 )
Reallocation of undistributed income due to conversion of Class B to Class A
3,015 - 2,179 -
Diluted undistributed income from continuing operations applicable to common stockholders
$ 30,991 $ 3,015 $ 21,925 $ 2,179

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
23,557 2,562 23,185 2,597
Weighted average number of shares from stock options
212 - 352 -
Conversion of Class B to Class A common shares outstanding
2,562 - 2,597 -
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
26,331 2,562 26,134 2,597

Diluted income per share from continuing operations applicable to common stockholders
$ 1.34 $ 1.34 $ 0.97 $ 0.97
Diluted distributed income per share from continuing operations applicable to common stockholders
(0.16 ) (0.16 ) (0.13 ) (0.13 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
$ 1.18 $ 1.18 $ 0.84 $ 0.84

Three Months Ended June 30,

2014

2013

Diluted EPS

Class A

Class B

Class A

Class B

Antidilutive Securities

Shares issuable pursuant to stock options not included since they were antidilutive
12 - 18 -

Three Months Ended September 30,

2013

2012

Diluted EPS from Continuing
Operations

Class A

Class B

Class A

Class B

Numerator:

Distributed income applicable to common stockholders
$ 3,030 $ 333 $ 2,212 $ 333
Reallocation of distributed income as a result of conversion of dilutive stock options
5 (5 ) 6 (6 )
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
328 - 327 -
Diluted distributed income applicable to common stockholders
$ 3,363 $ 328 $ 2,545 $ 327
Undistributed income from continuing operations applicable to common stockholders
$ 24,801 $ 2,727 $ 17,861 $ 2,686
Reallocation of undistributed income as a result of conversion of dilutive stock options
39 (39 ) 49 (49 )
Reallocation of undistributed income due to conversion of Class B to Class A
2,688 - 2,637 -
Diluted undistributed income from continuing operations applicable to common stockholders
$ 27,528 $ 2,688 $ 20,547 $ 2,637

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
23,304 2,562 22,139 3,330
Weighted average number of shares from stock options
371 - 478 -
Conversion of Class B to Class A common shares outstanding
2,562 - 3,330 -
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
26,237 2,562 25,947 3,330

Diluted income per share from continuing operations applicable to common stockholders
$ 1.18 $ 1.18 $ 0.89 $ 0.89
Diluted distributed income per share from continuing operations applicable to common stockholders
(0.13 ) (0.13 ) (0.10 ) (0.10 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
$ 1.05 $ 1.05 $ 0.79 $ 0.79
Three Months Ended September 30,

2013

2012

Diluted EPS

Class A

Class B

Class A

Class B

Antidilutive Securities

Shares issuable pursuant to stock options not included since they were antidilutive
14 - - -
Six Months Ended June 30,

2014

2013

Basic EPS from Continuing Operations

Class A

Class B

Class A

Class B

Numerator:

Income from continuing operations applicable to common stockholders
$ 53,976 $ 5,888 $ 42,254 $ 4,909
Distributed income applicable to common stockholders
(6,814 ) (743 ) (3,007 ) (349 )
Basic undistributed income from continuing operations applicable to common stockholders
$ 47,162 $ 5,145 $ 39,247 $ 4,560

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share
23,485 2,562 23,052 2,678

Basic income per share from continuing operations applicable to common stockholders
$ 2.30 $ 2.30 $ 1.83 $ 1.83
Basic distributed income per share from continuing operations applicable to common stockholders
(0.29 ) (0.29 ) (0.13 ) (0.13 )
Basic undistributed income per share from continuing operations applicable to common stockholders
$ 2.01 $ 2.01 $ 1.70 $ 1.70


Nine Months Ended September 30,

2013

2012

Basic EPS from Continuing
Operations

Class A

Class B

Class A

Class B

Numerator:

Income from continuing operations applicable to common stockholders
$ 70,063 $ 7,991 $ 51,525 $ 8,206
Distributed income applicable to common stockholders
(6,031 ) (688 ) (5,989 ) (954 )
Basic undistributed income from continuing operations applicable to common stockholders
$ 64,032 $ 7,303 $ 45,536 $ 7,252

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share
23,137 2,639 22,195 3,535

Basic income per share from continuing operations applicable to common stockholders
$ 3.03 $ 3.03 $ 2.32 $ 2.32
Basic distributed income per share from continuing operations applicable to common stockholders
(0.26 ) (0.26 ) (0.27 ) (0.27 )
Basic undistributed income per share from continuing operations applicable to common stockholders
$ 2.77 $ 2.77 $ 2.05 $ 2.05
Six Months EndedJune 30,

2014

2013

Diluted EPS from Continuing Operations

Class A

Class B

Class A

Class B

Numerator:

Distributed income applicable to common stockholders
$ 6,814 $ 743 $ 3,007 $ 349
Reallocation of distributed income as a result of conversion of dilutive stock options
8 (8 ) 5 (5 )
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
735 - 344 -
Diluted distributed income applicable to common stockholders
$ 7,557 $ 735 $ 3,356 $ 344
Undistributed income from continuing operations applicable to common stockholders
$ 47,162 $ 5,145 $ 39,247 $ 4,560
Reallocation of undistributed income as a result of conversion of dilutive stock options
55 (55 ) 69 (69 )
Reallocation of undistributed income due to conversion of Class B to Class A
5,090 - 4,491 -
Diluted undistributed income from continuing operations applicable to common stockholders
$ 52,307 $ 5,090 $ 43,807 $ 4,491

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
23,485 2,562 23,052 2,678
Weighted average number of shares from stock options
279 - 390 -
Conversion of Class B to Class A common shares outstanding
2,562 - 2,678 -
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
26,326 2,562 26,120 2,678

Diluted income per share from continuing operations applicable to common stockholders
$ 2.27 $ 2.27 $ 1.81 $ 1.81
Diluted distributed income per share from continuing operations applicable to common stockholders
(0.29 ) (0.29 ) (0.13 ) (0.13 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
$ 1.98 $ 1.98 $ 1.68 $ 1.68
Six Months Ended June 30,

2014

2013

Diluted EPS

Class A

Class B

Class A

Class B

Antidilutive Securities

Shares issuable pursuant to stock options not included since they were antidilutive
14 - 19 -


Nine Months Ended September 30,

2013

2012

Diluted EPS from Continuing
Operations

Class A

Class B

Class A

Class B

Numerator:

Distributed income applicable to common stockholders
$ 6,031 $ 688 $ 5,989 $ 954
Reallocation of distributed income as a result of conversion of dilutive stock options
10 (10 ) 17 (17 )
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
678 - 937 -
Diluted distributed income applicable to common stockholders
$ 6,719 $ 678 $ 6,943 $ 937
Undistributed income from continuing operations applicable to common stockholders
$ 64,032 $ 7,303 $ 45,536 $ 7,252
Reallocation of undistributed income as a result of conversion of dilutive stock options
107 (107 ) 130 (130 )
Reallocation of undistributed income due to conversion of Class B to Class A
7,196 - 7,122 -
Diluted undistributed income from continuing operations applicable to common stockholders
$ 71,335 $ 7,196 $ 52,788 $ 7,122

Denominator:

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
23,137 2,639 22,195 3,535
Weighted average number of shares from stock options
383 - 473 -
Conversion of Class B to Class A common shares outstanding
2,639 - 3,535 -
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
26,159 2,639 26,203 3,535

Diluted income per share from continuing operations applicable to common stockholders
$ 2.98 $ 2.98 $ 2.28 $ 2.28
Diluted distributed income per share from continuing operations applicable to common stockholders
(0.26 ) (0.26 ) (0.26 ) (0.26 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
$ 2.72 $ 2.72 $ 2.02 $ 2.02
Note 13.Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting guidance related to discontinued operations. This amendment defines discontinued operations as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This amendment also introduces new disclosures for disposals. The amendments in this accounting standard update are effective for fiscal years beginning after December 15, 2014 and applies to new disposals and new classifications of disposal groups as held for sale after the effective date. The accounting standard update is expected to result in fewer disposals being presented as discontinued operations and, because the guidance relates to presentation and disclosure requirements, will not affect our consolidated financial position, results of operations, or cash flows.

Nine Months Ended September 30,

2013

2012

Diluted EPS

Class A

Class B

Class A

Class B

Antidilutive Securities

Shares issuable pursuant to stock options not included since they were antidilutive
17 - 90 -
On May 28, 2014, the FASB issued an accounting standard update 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 is effective for fiscal years beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect this amendment will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

Note ~~13.~~14. Subsequent Events
~~Acquisitions~~Acquisition
On ~~October 7, 2013,~~July 28, 2014, we acquired the inventory, equipment ~~real estate~~ and intangible assets of ~~and assumed certain liabilities related to, Stockton Nissan Kia~~Bellingham Buick GMC in ~~Stockton, California, from Stockton Automotive Development, LLC and Fresno Automotive Development, LP.~~Bellingham, Washington. We paid ~~$18.9~~$1.7 million in cash for this acquisition.
On October 24, 2013, we acquired the inventory, equipment, real estate and intangible assets of, and assumed certain liabilities related to, Fresno Lincoln Volvo in Fresno, California, from Robert B. Kopf, Inc. and R & V Wilson, Inc. We paid $8.5 million in cash for this acquisition.
As of October 25, 2013, the initial accounting for determining the acquisition-date fair value for each major class of assets acquired, including goodwill, and liabilities assumed was not yet complete for these acquisitions.
Common Stock Dividend
On ~~October~~July 21, ~~2013,~~2014, our Board of Directors approved a dividend of ~~$0.13~~$0.16 per share on our Class A and Class B ~~Common~~common stock related to our ~~third~~second quarter ~~2013~~2014 financial results. The dividend will total approximately ~~$3.4~~$4.2 million and will be paid on ~~November~~August 22, ~~2013~~2014 to shareholders of record on ~~November~~August 8, ~~2013.~~2014.
~~Related Party Transaction~~
On October 25, 2013, we entered into an agreement for the sale of 11.9 acres of unimproved land in Medford, Oregon for an aggregate price of $4.1 million with Dick Heimann, a director and our Vice Chairman. The land is part of a planned auto mall at which several dealerships, including Lithia-owned stores, will be relocated. Mr. Heimann plans to relocate the Medford BMW, Nissan and Volkswagen stores, which are 80% owned by him and 20% owned by Lithia, to this new location. We used an independent appraisal to determine the sale price for the unimproved land. The transaction will result in a gain to the Company of $2.5 million.
The terms of the transaction were reviewed and approved by the Audit Committee of our Board of Directors which determined that the transaction would benefit Lithia by attracting more potential purchasers to a single location and was on terms no less favorable to Lithia than the terms we could have obtained from an unaffiliated party.

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 terminology. Examples of forward-looking statements in this Form 10-Q include, among others, statements we make regarding:
●
Future market conditions.
●
Expected operating results, such as maintaining SG&A as a percentage of gross profit in the mid to upper 60% range and targeting incremental throughput of 50% on a same store basis.
●
The increase in our annual revenues and earnings per share that we estimate will result from the dealerships that we acquired and from the DCH Auto Group transaction.

●
Our belief that the DCH Auto Group transaction will close early in the fourth quarter.
●
Anticipated availability of liquidity from our unfinanced operating real estate.
●
Anticipated levels of capital expenditures in the future.
●
Our strategies for customer retention, growth, market position, financial results and risk management.
The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. ~~Important~~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 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.

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. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or ~~achievements.~~achievements, and our actual results of operations, financial condition and liquidity and development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements in this Form 10-Q. 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 are a leading operator of automotive franchises and a retailer of new and used vehicles and related services. As of ~~October 25, 2013,~~August 8, 2014, we offer 2829 brands of new vehicles and all brands of used vehicles in 93101 stores in the United States and onlineat Lithia.com.We sell new and used cars and replacement parts; provide vehicle maintenance, warranty, paint and repair services; arrange related financing; and sell service contracts, vehicle protection products and credit insurance.

Our mission statement is: “Driven by our employees and preferred by our customers, Lithia is the leading automotive retailer in each of our markets.” We offer our customers ~~personal,~~ convenient, flexible, ~~hometown~~personalized service combined with the large company advantages of selection, competitive pricing, broad access to financing, ~~consistent service, competence~~ and ~~guarantees.~~warranties. We strive for diversification in our products, services, brands and geographic locations to insulate us from market risk and to maintain profitability. We have developed a centralized support structure to reduce store level administrative functions. This allows store personnel to focus on providing a positive customer experience. With our management information systems and centrally-performed administrative functions in Medford, Oregon, we seek to gain economies of scale from our dealership network.

Results of Continuing Operations
For the three months ended ~~September~~June 30, ~~2013~~2014 and ~~2012,~~2013, we reported income from continuing operations, net of tax, of ~~$30.9~~$35.2 million, or ~~$1.18~~$1.34 per diluted share, and ~~$23.1~~$25.3 million, or ~~$0.89~~$0.97 per diluted share, respectively.

For the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012,~~2013, we reported income from continuing operations, net of tax, of ~~$78.1~~$59.9 million, or ~~$2.98~~$2.27 per diluted share, and ~~$59.7~~$47.2 million, or ~~$2.28~~$1.81 per diluted share, respectively.

Discontinued Operations
~~Results~~The results of operations for stores sold, closed or held for sale ~~qualifying for reclassification under the applicable accounting guidance,~~ are presented as discontinued operations for all periods in our Consolidated Statements of ~~Operations.~~Operations if they qualify for reclassification under the applicable accounting guidance. As a result, our results from continuing operations are presented on a comparable ~~basis.~~basis for all periods.

~~Income~~We realized income from discontinued operations, net of tax, for the three months ended ~~September~~June 30, 2014 and 2013, of $3.1 million and ~~2012 totaled $127,000 and $151,000,~~$274,000, respectively. Income from discontinued operations, net of tax, for the ~~nine~~six months ended ~~September~~June 30, 2014 and 2013 totaled $3.2 million and ~~2012 totaled $574,000 and $799,000,~~$447,000, respectively. See Note 11 of the Condensed Notes to Consolidated Financial Statements for additional information.

Key Revenue and Gross Profit Metrics
Key performance metrics for revenue and gross profit were as follows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013 (dollars in thousands):

Three months ended
September 30, 2013

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

Three months ended
June 30, 2014

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

New vehicle
$ 604,135 56.5% $ 38,586 6.4 % 23.3% $ 694,484 56.8 % $ 45,994 6.6 % 23.9 %
Used vehicle retail
280,734 26.3 41,641 14.8 25.2 310,475 25.4 44,067 14.2 22.9
Used vehicle wholesale
43,396 4.1 710 1.6 0.4 44,286 3.6 1,504 3.4 0.8
Finance and insurance⁽¹⁾
37,132 3.5 37,132 100.0 22.5 43,838 3.6 43,838 100.0 22.8
Service, body and parts
97,784 9.1 46,991 48.1 28.4 114,337 9.4 56,182 49.1 29.2
Fleet and other
6,109 0.5 329 5.4 0.2 14,382 1.2 715 5.0 0.4
$ 1,069,290 100.0% $ 165,389 15.5 % 100.0% $ 1,221,802 100.0 % $ 192,300 15.7 % 100.0 %

Three months ended
September 30, 2012

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

Three months ended
June 30, 2013

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

New vehicle
$ 491,846 56.0% $ 35,093 7.1 % 24.6% $ 569,487 56.5 % $ 38,788 6.8 % 24.3 %
Used vehicle retail
227,157 25.9 33,272 14.6 23.3 258,465 25.6 38,893 15.0 24.3
Used vehicle wholesale
35,006 4.0 (36 ) (0.1 ) 0.0 37,691 3.7 695 1.8 0.4
Finance and insurance⁽¹⁾
30,929 3.5 30,929 100.0 21.7 34,218 3.4 34,218 100.0 21.4
Service, body and parts
89,038 10.1 43,005 48.3 30.2 94,462 9.4 46,693 49.4 29.2
Fleet and other
4,550 0.5 247 5.4 0.2 14,182 1.4 546 3.8 0.4
$ 878,526 100.0% $ 142,510 16.2 % 100.0% $ 1,008,505 100.0 % $ 159,833 15.8 % 100.0 %

Nine months ended
September 30, 2013

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

Six months ended
June 30, 2014

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

New vehicle
$ 1,667,063 55.9% $ 112,021 6.7 % 23.8% $ 1,274,006 55.4 % $ 85,018 6.7 % 23.3 %
Used vehicle retail
778,427 26.1 115,507 14.8 24.5 612,368 26.6 84,863 13.9 23.3
Used vehicle wholesale
120,593 4.0 2,379 2.0 0.5 86,979 3.8 2,835 3.3 0.8
Finance and insurance⁽¹⁾
103,013 3.5 103,013 �� 100.0 21.8 83,469 3.6 83,469 100.0 22.9
Service, body and parts
282,686 9.5 137,463 48.6 29.1 218,954 9.5 107,014 48.9 29.4
Fleet and other
29,093 1.0 1,277 4.4 0.3 24,132 1.1 1,162 4.8 0.3
$ 2,980,875 100.0% $ 471,660 15.8 % 100.0% $ 2,299,908 100.0 % $ 364,361 15.8 % 100.0 %

Nine months ended
September 30, 2012

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

Six months ended
June 30, 2013

Revenues

Percent of
Total
Revenues

Gross
Profit

Gross
Profit
Margin

Percent of
Total
Gross Profit

New vehicle
$ 1,340,731 55.0% $ 98,911 7.4 % 24.7% $ 1,062,928 55.6 % $ 73,435 6.9 % 24.0 %
Used vehicle retail
625,117 25.6 92,540 14.8 23.1 497,693 26.0 73,866 14.8 24.1
Used vehicle wholesale
103,469 4.2 657 0.6 0.2 77,197 4.0 1,669 2.2 0.6
Finance and insurance⁽¹⁾
82,989 3.4 82,989 100.0 20.7 65,881 3.5 65,881 100.0 21.5
Service, body and parts
258,038 10.6 124,814 48.4 31.1 184,902 9.7 90,472 48.9 29.5
Fleet and other
28,770 1.2 1,029 3.6 0.2 22,984 1.2 948 4.1 0.3
$ 2,439,114 100.0% $ 400,940 16.4 % 100.0% $ 1,911,585 100.0 % $ 306,271 16.0 % 100.0 %
^{(1)Commissions reported net of anticipated cancellations.}

Same Store Operating Data
We believe that same store comparisons are ~~a key~~an important indicator of our financial performance. Same store ~~metrics~~measures demonstrate our ability to ~~profitably~~ grow our ~~revenue in our~~business at existing locations. As a result, same store ~~comparisons~~measures have been integrated into the discussion below.

~~A same~~Same store ~~metric represents~~measures reflect results for stores that were operating ~~during the three- and nine-month periods ended September 30, 2013,~~in each comparison period and only ~~includes~~include the months when operations ~~occur~~occurred in both ~~comparable~~ periods. For example, a store acquired in ~~July 2012~~May 2013 would be included in same store operating data beginning in ~~August 2013,~~June 2014, after its first full complete comparable month of ~~operation, and~~operation. The second quarter operating results for the same store comparisons would include results for that store in only the period of ~~August~~June for both comparable periods.

New Vehicle Revenue and Gross Profit

Three Months Ended
September 30,

Increase

% Increase

Three Months Ended
June 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2013

2012

(Decrease)

(Decrease)

2014

2013

(Decrease)

(Decrease)

Reported

Revenue
$ 604,135 $ 491,846 $ 112,289 22.8 % $ 694,484 $ 569,487 $ 124,997 21.9 %
Gross profit
$ 38,586 $ 35,093 $ 3,493 10.0 $ 45,994 $ 38,788 $ 7,206 18.6
Gross margin
6.4 % 7.1 %
(70)
bp⁽¹⁾ 6.6 % 6.8 %
(20)bp⁽¹⁾

Retail units sold
18,109 14,841 3,268 22.0 20,446 17,024 3,422 20.1
Average selling price per retail unit
$ 33,361 $ 33,141 $ 220 0.7 $ 33,967 $ 33,452 $ 515 1.5
Average gross profit per retail unit
$ 2,131 $ 2,365 $ (234 ) (9.9 ) $ 2,250 $ 2,278 $ (28 ) (1.2 )

Same store

Revenue
$ 632,785 $ 566,862 $ 65,923 11.6 %
Gross profit
$ 41,711 $ 38,588 $ 3,123 8.1
Gross margin
6.6 % 6.8 %
(20)bp

Retail units sold
18,379 16,937 1,442 8.5
Average selling price per retail unit
$ 34,430 $ 33,469 $ 961 2.9
Average gross profit per retail unit
$ 2,269 $ 2,278 $ (9 ) (0.4 )

Same store

Revenue
$ 569,744 $ 492,063 $ 77,681 15.8 %
Gross profit
$ 35,995 $ 35,107 $ 888 2.5
Gross margin
6.3 % 7.1 %
(80)
bp

Retail units sold
17,048 14,846 2,202 14.8
Average selling price per retail unit
$ 33,420 $ 33,144 $ 276 0.8
Average gross profit per retail unit
$ 2,111 $ 2,365 $ (254 ) (10.7 )
^{(1)A basis point is equal to 1/100^th100th of one percent.}

Six Months Ended
June 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2014

2013

(Decrease)

(Decrease)

Reported

Revenue
$ 1,274,006 $ 1,062,928 $ 211,078 19.9 %
Gross profit
$ 85,018 $ 73,435 $ 11,583 15.8
Gross margin
6.7 % 6.9 %
(20)bp⁽¹⁾

Retail units sold
37,720 31,744 5,976 18.8
Average selling price per retail unit
$ 33,775 $ 33,484 $ 291 0.9
Average gross profit per retail unit
$ 2,254 $ 2,313 $ (59 ) (2.6 )

Same store

Revenue
$ 1,175,760 $ 1,060,303 $ 115,457 10.9 %
Gross profit
$ 78,404 $ 73,235 $ 5,169 7.1
Gross margin
6.7 % 6.9 %
(20)bp

Retail units sold
34,323 31,657 2,666 8.4
Average selling price per retail unit
$ 34,256 $ 33,493 $ 763 2.3
Average gross profit per retail unit
$ 2,284 $ 2,313 $ (29 ) (1.3 )

Nine Months Ended
September 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2013

2012

(Decrease)

(Decrease)

Reported

Revenue
$ 1,667,063 $ 1,340,731 $ 326,332 24.3 %
Gross profit
$ 112,021 $ 98,911 $ 13,110 13.3
Gross margin
6.7 % 7.4 %
(70
)bp

Retail units sold
49,853 40,953 8,900 21.7
Average selling price per retail unit
$ 33,440 $ 32,738 $ 702 2.1
Average gross profit per retail unit
$ 2,247 $ 2,415 $ (168 ) (7.0 )
Same store

Revenue
$ 1,585,504 $ 1,336,187 $ 249,317 18.7 %
Gross profit
$ 105,498 $ 98,458 $ 7,040 7.2
Gross margin
6.7 % 7.4 %
(70
)bp

Retail units sold
47,411 40,816 6,595 16.2
Average selling price per retail unit
$ 33,442 $ 32,737 $ 705 2.2
Average gross profit per retail unit
$ 2,225 $ 2,412 $ (187 ) (7.8 )
New vehicle sales improved primarily due to volume growth as same store unit sales increased ~~14.8%~~8.5% and ~~16.2%~~8.4%, respectively, in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods in ~~2012.~~2013. The number of new vehicles sold in the U.S. during the first ~~three and nine~~six months of ~~2013~~2014 grew approximately ~~9.1%~~4.2% compared to the same period of 2013.

During the three- and ~~8.0%, respectively,~~six-month periods ended June 30, 2014, same store unit sales increased in all three categories of new vehicles compared to the same periods of ~~2012.~~2013:
●
Our domestic brand same store unit sales grew 7.2% and 8.1%, respectively, compared to national domestic unit sales growth of 5.6% and 3.4%, respectively.
●
Our import brand same store unit sales grew 9.6% and 8.7%, respectively. National import brand unit sales grew 7.4% and 4.6%, respectively.
●
Our luxury brand same store unit sales grew 11.2% and 9.3%, respectively, compared to national luxury brand unit sales of 10.6% and 6.8%, respectively.

~~Growth~~Recovery from the recession in our ~~domestic and import brand sales has outpaced~~specific markets is different than the growth experienced nationally. Our domestic brand same store unit sales grew 12.5% and 14.5%, respectively, while same store unit sales for import brands grew 19.7% and 19.4%, respectively, for the three- and nine-month periods ended September 30, 2013 compared to the same periods in 2012. Sales of our luxury brands remained consistent with national growth in the third quarter of 2013 and outpaced national growth in the first nine months of 2013. Same store unit sales for our luxury brands grew 9.1% and 12.8%, respectively, for the three- and nine-month periods ended September 30, 2013 compared to the same periods in 2012. We continue to focus on increasing our share of overall new vehicle sales within our markets. Additionally, certainaverage. Certain of our markets ~~have seen~~saw an increase in ~~local market~~ sales volumes ~~exceeding~~that exceeded the national average, while others continued to lag behind the national average. As of the most recent data available, six of the twelve states we operate in, representing approximately 53% of our revenues for the six month period ended June 30, 2014, continue to be below the pre-recessionary vehicle registration levels experienced in 2006.

New vehicle gross profit dollars increased ~~10.0%~~18.6% and ~~13.3%~~15.8%, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012.~~2013. On a same store basis, gross profit increased ~~2.5%~~8.1% and ~~7.2%~~7.1%, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013.~~2014. These increases were due to a greater number of vehicles sold, slightly offset by lower gross profit per unit and ~~lower~~ gross ~~margin.~~margins.

We focus on gross profit dollars earned per unit, not aon gross margin percentage. On a same store basis, the average gross profit per new retail unit decreased ~~$254~~$9 and ~~$187,~~$29, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012. These decreases were~~2013. This decrease was primarily due to the strategic decision to increase market share through lower retail pricing. Additionally, certain manufacturer incentives are tied to increases in units sold per store, and, given consecutive years of significant unit sales increases, these objectives have been more difficult to achieve in 2013 than in prior years, resulting in lower total incentive dollars earned.

~~We believe increasing~~Increasing new unit sales creates additional used vehicle trade-in opportunities, finance and insurance sales and future service work. We believe the incremental business generated in future periods will more than offset the lower new vehicle gross profit per unit that has occurred with the pursuit of our volume-based strategy.
Used Vehicle Retail Revenue and Gross Profit

Three Months Ended
September 30,

(Dollars in thousands, except per unit amounts)

2013

2012

Increase

% Increase

Reported

Retail revenue
$ 280,734 $ 227,157 $ 53,577 23.6 %
Retail gross profit
$ 41,641 $ 33,272 $ 8,369 25.2
Retail gross margin
14.8 % 14.6 %
20
bp

Retail units sold
15,496 13,211 2,285 17.3
Average selling price per retail unit
$ 18,117 $ 17,195 $ 922 5.4
Average gross profit per retail unit
$ 2,687 $ 2,519 $ 168 6.7

Three Months Ended
June 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2014

2013

(Decrease)

(Decrease)

Reported

Retail revenue
$ 310,475 $ 258,465 $ 52,010 20.1 %
Retail gross profit
$ 44,067 $ 38,893 $ 5,174 13.3
Retail gross margin
14.2 % 15.0 %
(80)bp

Retail units sold
16,086 14,074 2,012 14.3
Average selling price per retail unit
$ 19,301 $ 18,365 $ 936 5.1
Average gross profit per retail unit
$ 2,739 $ 2,763 $ (24 ) (0.9 )

Same store

Retail revenue
$ 265,734 $ 227,311 $ 38,423 16.9 % $ 285,555 $ 257,754 $ 27,801 10.8 %
Retail gross profit
$ 39,766 $ 33,312 $ 6,454 19.4 $ 41,011 $ 38,799 $ 2,212 5.7
Retail gross margin
15.0 % 14.7 %
30
bp 14.4 % 15.1 %
(70)bp

Retail units sold
14,690 13,223 1,467 11.1 14,709 14,033 676 4.8
Average selling price per retail unit
$ 18,089 $ 17,191 $ 898 5.2 $ 19,414 $ 18,368 $ 1,046 5.7
Average gross profit per retail unit
$ 2,707 $ 2,519 $ 188 7.5 $ 2,788 $ 2,765 $ 23 0.8


Nine Months Ended
September 30,

(Dollars in thousands, except per unit amounts)

2013

2012

Increase

% Increase

Reported

Retail revenue
$ 778,427 $ 625,117 $ 153,310 24.5 %
Retail gross profit
$ 115,507 $ 92,540 $ 22,967 24.8
Retail gross margin
14.8 % 14.8 %
0
bp

Retail units sold
43,231 36,022 7,209 20.0
Average selling price per retail unit
$ 18,006 $ 17,354 $ 652 3.8
Average gross profit per retail unit
$ 2,672 $ 2,569 $ 103 4.0

Six Months Ended
June 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2014

2013

(Decrease)

(Decrease)

Reported

Retail revenue
$ 612,368 $ 497,693 $ 114,675 23.0 %
Retail gross profit
$ 84,863 $ 73,866 $ 10,997 14.9
Retail gross margin
13.9 % 14.8 %
(90)bp

Retail units sold
32,402 27,735 4,667 16.8
Average selling price per retail unit
$ 18,899 $ 17,945 $ 954 5.3
Average gross profit per retail unit
$ 2,619 $ 2,663 $ (44 ) (1.7 )

Same store

Retail revenue
$ 739,487 $ 622,080 $ 117,407 18.9 % $ 570,759 $ 496,982 $ 73,777 14.8 %
Retail gross profit
$ 110,616 $ 92,251 $ 18,365 19.9 $ 79,820 $ 73,765 $ 6,055 8.2
Retail gross margin
15.0 % 14.8 %
20
bp 14.0 % 14.8 %
(80)bp

Retail units sold
41,197 35,841 5,356 14.9 29,964 27,694 2,270 8.2
Average selling price per retail unit
$ 17,950 $ 17,357 $ 593 3.4 $ 19,048 $ 17,945 $ 1,103 6.1
Average gross profit per retail unit
$ 2,685 $ 2,574 $ 111 4.3 $ 2,664 $ 2,664 $ - -

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned vehicles; core vehicles, or ~~late model~~three-to-seven-year-old vehicles ~~with lower-mileage;~~below certain mileage limitations; and value autos, or older vehicles with ~~over 80,000 miles.~~higher mileage. Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade to retail used vehicle sales.

During the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013,~~2014, sales increased in all three categories of used vehicles compared to the same periods of ~~2012:~~2013:

●
Same store unit sales for manufacturer certified pre-owned vehicles increased ~~24.3%~~11.3% and ~~31.0%~~19.0%, respectively.

●
Same store unit sales for the ~~core~~late model, lower-mileage vehicle category increased ~~8.3%~~2.7% and ~~7.5%~~5.2%, respectively.

●
Same store unit sales for the value auto category increased ~~8.7%~~4.1% and ~~20.1%~~6.7%, respectively.

~~Our~~Same store used vehicle retail ~~used-to-new vehicle sales ratio was 0.9:1~~revenue grew 10.8% and 14.8%, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013 and 2012.~~ 2014 compared to the same periods of 2013. An increasing supply of late model vehicles caused our certified pre-owned segment to grow more quickly than the other categories, resulting in revenue outpacing unit growth.
On average, each of our stores currently sells approximately 5755 retail used vehicle units per month, ~~and we~~compared to 51 in the same period of 2013. We target increasing average sales to 75 units per month.

Used retail vehicle gross profit dollars increased ~~25.2%~~13.3% and ~~24.8%~~14.9%, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012.~~2013. On a same store basis, gross profit increased ~~19.4%~~5.7% and ~~19.9%~~8.2%, respectively, for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012.~~2013. These increases were related to ~~both~~ volume growth ~~and increases~~offset by a decrease in ~~the average~~ gross ~~profit per unit sold.~~margins as growth in certified pre-owned vehicles, which have a lower gross margin percentage, outpaced growth in our other used vehicle categories. Similar to new vehicle sales, we focus on gross profit dollars earned per unit, not on gross margin percentage, in evaluating our sales performance.

Used Vehicle Wholesale Revenue and Gross Profit

Three Months Ended
September 30,

(Dollars in thousands, except per unit amounts)

2013

2012

Increase

% Increase

Reported

Wholesale revenue
$ 43,396 $ 35,006 $ 8,390 24.0 %
Wholesale gross profit
$ 710 $ (36 ) $ 746
NM

Wholesale gross margin
1.6 % (0.1 )%
170
bp

Wholesale units sold
6,059 5,142 917 17.8
Average selling price per wholesale unit
$ 7,162 $ 6,808 $ 354 5.2
Average gross profit per retail unit
$ 117 $ (7 ) $ 124
NM

Three Months Ended
June 30,

(Dollars in thousands, except per unit amounts)

2014

2013

Increase

% Increase

Reported

Wholesale revenue
$ 44,286 $ 37,691 $ 6,595 17.5 %
Wholesale gross profit
$ 1,504 $ 695 $ 809 116.4
Wholesale gross margin
3.4 % 1.8 %
160bp

Wholesale units sold
6,047 5,241 806 15.4
Average selling price per wholesale unit
$ 7,324 $ 7,192 $ 132 1.8
Average gross profit per retail unit
$ 249 $ 133 $ 116 87.2

Same store

Wholesale revenue
$ 41,937 $ 37,692 $ 4,245 11.3 %
Wholesale gross profit
$ 1,444 $ 748 $ 696 93.0
Wholesale gross margin
3.4 % 2.0 %
140bp

Wholesale units sold
5,649 5,241 408 7.8
Average selling price per wholesale unit
$ 7,424 $ 7,192 $ 232 3.2
Average gross profit per retail unit
$ 256 $ 143 $ 113 79.0

Same store

Wholesale revenue
$ 41,371 $ 35,084 $ 6,287 17.9 %
Wholesale gross profit
$ 642 $ (32 ) $ 674 NM
Wholesale gross margin
1.6 % (0.1 )%
170
bp

Wholesale units sold
5,783 5,148 635 12.3
Average selling price per wholesale unit
$ 7,154 $ 6,815 $ 339 5.0
Average gross profit per retail unit
$ 111 $ (6 ) $ 117 NM
~~NM – not meaningful~~

Nine Months Ended
September 30,

Increase

% Increase

(Dollars in thousands, except per unit amounts)

2013

2012

(Decrease)

(Decrease)

Reported

Wholesale revenue
$ 120,593 $ 103,469 $ 17,124 16.5 %
Wholesale gross profit
$ 2,379 $ 657 $ 1,722 262.1
Wholesale gross margin
2.0 % 0.6 % 140 bp

Wholesale units sold
16,624 14,135 2,489 17.6
Average selling price per wholesale unit
$ 7,254 $ 7,320 $ (66 ) (0.9 )
Average gross profit per retail unit
$ 143 $ 46 $ 97 210.9

Six Months Ended
June 30,

(Dollars in thousands, except per unit amounts)

2014

2013

Increase

% Increase

Reported

Wholesale revenue
$ 86,979 $ 77,197 $ 9,782 12.7 %
Wholesale gross profit
$ 2,835 $ 1,669 $ 1,166 69.9
Wholesale gross margin
3.3 % 2.2 %
110bp

Wholesale units sold
11,900 10,565 1,335 12.6
Average selling price per wholesale unit
$ 7,309 $ 7,307 $ 2 -
Average gross profit per retail unit
$ 238 $ 158 $ 80 50.6

Same store

Wholesale revenue
$ 113,417 $ 102,892 $ 10,525 10.2 % $ 83,060 $ 77,172 $ 5,888 7.6 %
Wholesale gross profit
$ 2,402 $ 712 $ 1,690 237.4 $ 2,758 $ 1,781 $ 977 54.9
Wholesale gross margin
2.1 % 0.7 % 140 bp 3.3 % 2.3 %
100bp

Wholesale units sold
15,752 14,046 1,706 12.1 11,200 10,564 636 6.0
Average selling price per wholesale unit
$ 7,200 $ 7,325 $ (125 ) (1.7 ) $ 7,416 $ 7,305 $ 111 1.5
Average gross profit per retail unit
$ 152 $ 51 $ 101 198.0 $ 246 $ 169 $ 77 45.6

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 inventory age or other factors. Wholesale vehicles are typically sold at or near inventory cost and do not comprise a meaningful component of our gross profit.
Finance and Insurance

Three Months Ended
June 30,

%

(Dollars in thousands, except per unit amounts)

2014

2013

Increase

Increase

Reported

Revenue
$ 43,838 $ 34,218 $ 9,620 28.1 %
Average finance and insurance per retail unit
$ 1,200 $ 1,100 $ 100 9.1 %

Same store

Revenue
$ 39,892 $ 34,139 $ 5,753 16.9 %
Average finance and insurance per retail unit
$ 1,206 $ 1,102 $ 104 9.4 %


~~Finance and Insurance~~

Three Months Ended
September 30,

%

(Dollars in thousands, except per unit amounts)

2013

2012

Increase

Increase

Reported

Revenue
$ 37,132 $ 30,929 $ 6,203 20.1 %
Average finance and insurance per retail unit
$ 1,105 $ 1,103 $ 2 0.2 %

Same store

Revenue
$ 35,110 $ 30,003 $ 5,107 17.0 %
Average finance and insurance per retail unit
$ 1,106 $ 1,069 $ 37 3.5 %

Nine Months Ended
September 30,

%

Six Months Ended
June 30,

%

(Dollars in thousands, except per unit amounts)

2013

2012

Increase

Increase

2014

2013

Increase

Increase

Reported

Revenue
$ 103,013 $ 82,989 $ 20,024 24.1 % $ 83,469 $ 65,881 $ 17,588 26.7 %
Average finance and insurance per retail unit
$ 1,107 $ 1,078 $ 29 2.7 % $ 1,190 $ 1,108 $ 82 7.4 %

Same store

Revenue
$ 97,671 $ 80,983 $ 16,688 20.6 % $ 77,322 $ 65,810 $ 11,512 17.5 %
Average finance and insurance per retail unit
$ 1,102 $ 1,056 $ 46 4.4 % $ 1,203 $ 1,109 $ 94 8.5 %

The increases in finance and insurance sales were driven by increased vehicle sales volume and higher retail prices in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of 2012. The availability of consumer credit continued to expand through the first nine months of 2013 with lenders increasing the average loan-to-value amount available to most customers. Additionally, we increased our penetration rate2013. Penetration rates on arranging financing for our customers and the sale of extended service ~~contracts.~~contracts also increased. As a result, our average finance and insurance revenue per retail unit increased. We continue to see the availability of consumer credit expand in 2014 with lenders increasing the average loan-to-value amount available to most customers.

Penetration rates for specific categories of products were as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2013

2012

2013

2012

Arranged financing
79% 77% 78% 76%
Service contracts
42 41 42 41
Lifetime oil change and filter
36 35 36 36

Three Months Ended
June 30,

Six Months Ended
June 30,

2014

2013

2014

2013

Finance and insurance
80 % 78 % 79 % 77 %
Service contracts
43 42 43 42
Lifetime lube, oil and filter contracts
36 37 37 36

Service, Body and Parts Revenue and Gross Profit

Three Months Ended
September 30,

Increase

Three Months Ended
June 30,

Increase

(Dollars in thousands)

2013

2012

(Decrease)

% Increase

2014

2013

(Decrease)

% Increase

Reported

Customer pay
$ 55,194 $ 50,736 $ 4,458 8.8% $ 64,331 $ 53,243 $ 11,088 20.8 %
Warranty
15,716 13,491 2,225 16.5 19,908 15,707 4,201 26.7
Wholesale parts
17,949 16,101 1,848 11.5 19,950 16,916 3,034 17.9
Body shop
8,925 8,710 215 2.5 10,148 8,596 1,552 18.1
Total service, body and parts
$ 97,784 $ 89,038 $ 8,746 9.8% $ 114,337 $ 94,462 $ 19,875 21.0 %

Service, body and parts gross profit
$ 46,991 $ 43,005 $ 3,986 9.3% $ 56,182 $ 46,693 $ 9,489 20.3 %
Service, body and parts gross margin
48.1 % 48.3 % (20 )bp 49.1 % 49.4 %
(30)bp

Same store

Customer pay
$ 58,109 $ 52,932 $ 5,177 9.8 %
Warranty
17,980 15,627 2,353 15.1
Wholesale parts
18,257 16,879 1,378 8.2
Body shop
9,424 8,596 828 9.6
Total service, body and parts
$ 103,770 $ 94,034 $ 9,736 10.4 %

Service, body and parts gross profit
$ 50,988 $ 46,452 $ 4,536 9.8 %
Service, body and parts gross margin
49.1 % 49.4 %
(30)bp

Same store

Customer pay
$ 52,655 $ 50,713 $ 1,942 3.8%
Warranty
14,920 13,488 1,432 10.6
Wholesale parts
17,438 16,078 1,360 8.5
Body shop
8,925 8,710 215 2.5
Total service, body and parts
$ 93,938 $ 88,989 $ 4,949 5.6%

Service, body and parts gross profit
$ 44,281 $ 42,034 $ 2,247 5.3%
Service, body and parts gross margin
47.1 % 47.2 % (10 )bp

Nine Months Ended
September 30,

(Dollars in thousands)

2013

2012

Increase

% Increase

Reported

Customer pay
$ 157,753 $ 145,570 $ 12,183 8.4%
Warranty
45,764 39,052 6,712 17.2
Wholesale parts
52,215 47,921 4,294 9.0
Body shop
26,954 25,495 1,459 5.7
Total service, body and parts
$ 282,686 $ 258,038 $ 24,648 9.6%

Service, body and parts gross profit
$ 137,463 $ 124,814 $ 12,649 10.1%
Service, body and parts gross margin
48.6 % 48.4 % 20 bp

Six Months Ended
June 30,

Increase

(Dollars in thousands)

2014

2013

(Decrease)

% Increase

Reported

Customer pay
$ 121,160 $ 102,561 $ 18,599 18.1 %
Warranty
37,826 30,047 7,779 25.9
Wholesale parts
39,744 34,266 5,478 16.0
Body shop
20,224 18,028 2,196 12.2
Total service, body and parts
$ 218,954 $ 184,902 $ 34,052 18.4 %

Service, body and parts gross profit
$ 107,014 $ 90,472 $ 16,542 18.3 %
Service, body and parts gross margin
48.9 % 48.9 % -

Same store

Customer pay
$ 151,530 $ 144,774 $ 6,756 4.7% $ 111,382 $ 102,252 $ 9,130 8.9 %
Warranty
43,846 38,778 5,068 13.1 34,793 29,967 4,826 16.1
Wholesale parts
50,800 47,740 3,060 6.4 37,023 34,230 2,793 8.2
Body shop
26,954 25,490 1,464 5.7 19,501 18,028 1,473 8.2
Total service, body and parts
$ 273,130 $ 256,782 $ 16,348 6.4% $ 202,699 $ 184,477 $ 18,222 9.9 %

Service, body and parts gross profit
$ 130,208 $ 121,537 $ 8,671 7.1% $ 98,906 $ 90,277 $ 8,629 9.6 %
Service, body and parts gross margin
47.7 % 47.3 % 40 bp 48.8 % 48.9 %
(10)bp

Our service, body and parts sales grew in all areas in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the ~~prior year periods.~~ same periods of 2013. There are more late model vehicles in operation as new vehicle sales volumes have been increasing since 2010. We believe our sales in this area may increase in the coming years as more late model vehicles require repairs and maintenance.
We focus on retaining customers by offering competitively priced routine maintenance and increasing our marketing efforts. We increased our same store customer pay business ~~3.8%~~9.8% and ~~4.7%~~8.9%, respectively, in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods in ~~2012.~~2013.

In the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012,~~2013, same store warranty sales increased ~~10.6%~~15.1% and ~~13.1%~~16.1%, respectively. ~~Domestic brand~~In 2014, several franchises, including General Motors, Chrysler and Toyota, have announced significant vehicle recalls. These recalls have increased warranty ~~work increased 3.3% and 1.8%, import warranty work increased 24.6% and 24.6%, and luxury warranty work increased 10.9% and 20.7%, respectively. Import and luxury warranty work increased primarily~~sales. Additionally, we continue to see increases due to ~~recent recalls on certain models~~the growing numbers of vehicles in ~~2013. Additionally, certain import and luxury franchises include routine~~operation. Routine maintenance, such as oil changes, offered by certain franchises including BMW, Toyota and General Motors for two to four years after a ~~new~~ vehicle is sold, ~~which is included as~~provides for future work. Domestic brand warranty ~~work. As a result, increasing new vehicle unit sales~~work increased 37.6% and 33.1%, respectively, and import warranty work increased 6.7% and 7.0%, respectively, in ~~these franchises also contributed~~the three- and six-month periods ended June 30, 2014 compared to the ~~period-over-period increases in~~same periods of 2013. Luxury warranty ~~revenue.~~work decreased 4.2% for the three-month period ended June 30, 2014 compared to the same period of 2013, and increased 2.4% for the six-month period ended June 30, 2014 compared to the same period of 2013.

Wholesale parts represented ~~18.6%~~17.6% and 18.3% of our same store service, body and parts revenue mix in the first three and ~~nine~~six months of ~~2013,~~2014 and ~~18.1%~~17.9% and 18.6% in the first three and ~~nine~~six months of ~~2012, respectively.~~2013. Wholesale parts grew ~~8.5% and 6.4%, respectively,~~8.2% in the first three and ~~nine~~six months of ~~2013~~2014 compared to the same periods of ~~2012.~~2013. We believe this increase is a function of targeting fleet and mechanical wholesale accounts.

Body shop represented ~~9.5%~~9.1% and ~~9.9%~~9.6% of our same store service, body and parts revenue mix in the first three and ~~nine~~six months of ~~2013,~~2014, and ~~9.8%~~9.1% and ~~9.9%~~9.8% in the first three and ~~nine~~six months of ~~2012, respectively.~~2013. Body shop grew ~~2.5%~~9.6% and ~~5.7%, respectively,~~8.2% in the first three and ~~nine~~six months of ~~2013~~2014 compared to the same periods of ~~2012.~~2013. This increase is a result of obtaining additional direct repair relationships with insurance companies and certain personnel changes we made in 2014 that increased productivity and volume.

Service, body and parts gross profit increased ~~9.3%~~20.3% and ~~10.1%, respectively,~~18.3% for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods of ~~2012. On a~~2013, which is in line with our revenue growth. Our gross margins were consistent in the first three and six months of 2014 compared to the same ~~store basis, gross profit increased 5.3% and 7.1%, respectively, for the three- and nine-month~~ periods ~~ended September 30,~~of 2013. ~~These increases were mainly due to sales growth in all service, body and parts areas.~~

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

Three Months Ended
June 30,

Increase

% Increase

(Dollars in thousands)

2013

2012

(Decrease)

(Decrease)

2014

2013

(Decrease)

(Decrease)

Personnel
$ 70,676 $ 62,258 $ 8,418 13.5% $ 85,332 $ 70,692 $ 14,640 20.7 %
Advertising
10,762 8,868 1,894 21.4 10,374 9,700 674 6.9
Rent
3,421 3,646 (225 ) (6.2) 3,757 3,324 433 13.0
Facility costs
6,222 6,021 201 3.3 7,301 6,658 643 9.7
Other
17,489 14,339 3,150 22.0 18,699 18,909 (210 ) (1.1 )
Total SG&A
$ 108,570 $ 95,132 $ 13,438 14.1% $ 125,463 $ 109,283 $ 16,180 14.8 %

Three Months Ended
September 30,

Increase

Three Months Ended
June 30,

Increase

As a % of gross profit

2013

2012

(Decrease)

2014

2013

(Decrease)

Personnel
42.7 % 43.7 % (100 )bp 44.4 % 44.2 %
20 bp

Advertising
6.5 6.2 30 5.4 6.1 (70 )
Rent
2.1 2.6 (50 ) 2.0 2.1 (10 )
Facility costs
3.8 4.2 (40 ) 3.8 4.2 (40 )
Other
10.5 10.1 40 9.6 11.8 (220 )
Total SG&A
65.6 % 66.8 % (120 )bp 65.2 % 68.4 %
(320) bp

Nine Months Ended
September 30,

Increase

% Increase

Six Months Ended
June 30,

(Dollars in thousands)

2013

2012

(Decrease)

(Decrease)

2014

2013

Increase

% Increase

Personnel
$ 208,500 $ 181,749 $ 26,751 14.7% $ 166,008 $ 137,824 $ 28,184 20.4 %
Advertising
29,364 22,956 6,408 27.9 20,059 18,602 1,457 7.8
Rent
10,473 11,381 (908 ) (8.0) 7,318 7,053 265 3.8
Facility costs
19,548 17,903 1,645 9.2 14,885 13,327 1,558 11.7
Other
51,099 42,572 8,527 20.0 39,022 33,608 5,414 16.1
Total SG&A
$ 318,984 $ 276,561 $ 42,423 15.3% $ 247,292 $ 210,414 $ 36,878 17.5 %

Nine Months Ended
September 30,

Increase

Six Months Ended
June 30,

Increase

As a % of gross profit

2013

2012

(Decrease)

2014

2013

(Decrease)

Personnel
44.2 % 45.3 % (110)bp 45.6 % 45.0 %
60 bp

Advertising
6.2 5.7 50 5.5 6.1 (60 )
Rent
2.2 2.8 (60) 2.0 2.3 (30 )
Facility costs
4.1 4.5 (40) 4.1 4.3 (20 )
Other
10.9 10.7 20 10.7 11.0 (30 )
Total SG&A
67.6 % 69.0 % (140)bp 67.9 % 68.7 %
(80) bp

SG&A expense increased ~~$13.4~~$16.2 and $36.9 million ~~and $42.4 million, respectively,~~ in the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to the same periods in ~~2012. These increases were~~2013. SG&A as a percentage of gross profit was 65.2% and 68.4%, respectively, for the three months ended June 30, 2014 and 2013, and 67.9% and 68.7%, respectively, for the six months ended June 30, 2014 and 2013.
The increase in SG&A expense was primarily driven by increased variable costs associated with improved sales and ~~increases~~an increase in ~~advertising as~~store count. Additionally, during the first quarter of 2014, we ~~focused on gaining market share. Additionally, during~~recorded non-core charges of $3.9 million related to a reserve associated with a lawsuit filed in 2006 and settled in 2013, a charge for a hailstorm and a reserve for a contract assumed in an acquisition. In the second quarter of ~~2013,~~2014, we recorded ~~a $3.8~~non-core charges of $0.2 million ~~expense associated with a non-core legal reserve~~ related to acquisition expenses for the ~~settlement of a claim filed in 2006.~~pending combination with DCH Auto Group.

SG&A expense adjusted for non-core charges was as follows (in thousands):

Three Months Ended
June 30,

(Dollars in thousands)

2014

2013

Increase

% Increase

Personnel
$ 85,332 $ 70,692 $ 14,640 20.7 %
Advertising
10,374 9,700 674 6.9
Rent
3,757 3,324 433 13.0
Facility costs
7,301 6,658 643 9.7
Adjusted other
18,536 15,096 3,440 22.8
Adjusted total SG&A
$ 125,300 $ 105,470 $ 19,830 18.8 %

Three Months Ended
June 30,

Increase

As a % of gross profit

2014

2013

(Decrease)

Personnel
44.4 % 44.2 %
20 bp

Advertising
5.4 6.1 (70 )
Rent
2.0 2.1 (10 )
Facility costs
3.8 4.2 (40 )
Adjusted other
9.6 9.4 20
Adjusted total SG&A
65.2 % 66.0 %
(80) bp

Six Months Ended
June 30,

(Dollars in thousands)

2014

2013

Increase

% Increase

Personnel
$ 166,008 $ 137,824 $ 28,184 20.4 %
Advertising
20,059 18,602 1,457 7.8
Rent
7,318 7,053 265 3.8
Facility costs
14,885 13,326 1,559 11.7
Adjusted other
34,928 29,796 5,132 17.2
Adjusted total SG&A
$ 243,198 $ 206,601 $ 36,597 17.7 %

Six Months Ended
June 30,

Increase

As a % of gross profit

2014

2013

(Decrease)

Personnel
45.6 % 45.0 %
60 bp

Advertising
5.5 6.1 (60 )
Rent
2.0 2.3 (30 )
Facility costs
4.1 4.4 (30 )
Adjusted other
9.5 9.7 (20 )
Adjusted total SG&A
66.7 % 67.5 %
(80) bp

Excluding the non-core charges of $0.2 million and $4.1 million, adjusted SG&A as a percentage of gross profit was ~~65.6%~~65.2% and ~~66.8%~~66.7%, respectively, for the three and six months ended ~~September~~June 30, 2013 and 2012, and 67.6% and 69.0%, respectively, for the nine months ended September 30, 2013 and 2012. Excluding the non-core legal reserve, SG&A as a percentage of gross profit was 66.8% for the nine months ended September 30, 2013.2014. See “Non-GAAP Reconciliations” for more details. As sales volume increases and we ~~gain~~further leverage in our cost structure, we anticipate maintaining SG&A as a percentage of gross profit in the mid to upper 60% range.

We also measure the leverage of our cost structure by evaluating throughput, which is the incremental percentage of gross profit retained after deducting SG&A expense.

Three Months Ended
September 30,

% of
Change in

Three Months Ended
June 30,

% of
Change in

(Dollars in thousands)

2013

2012

Change

Gross Profit

2014

2013

Change

Gross Profit

Gross profit
$ 165,389 $ 142,510 $ 22,879 100.0 % $ 192,300 $ 159,833 $ 32,467 100.0 %
SG&A expense
(108,570 ) (95,132 ) (13,438 ) (58.7 ) (125,463 ) (109,283 ) (16,180 ) (49.8 )
Throughput contribution
$ 9,441 41.3 % $ 16,287 50.2 %

Three Months Ended
September 30,

% of
Change in

(Dollars in thousands)

2012

2011

Change

Gross Profit

Gross profit
$ 142,510 $ 118,798 $ 23,712 100.0 %
SG&A expense
(95,132 ) (83,135 ) (11,997 ) (50.6 )
Throughput contribution
$ 11,715 49.4 %

Nine Months Ended
September 30,

% of
Change in

(Dollars in thousands)

2013

2012

Change

Gross Profit

Gross profit
$ 471,660 $ 400,940 $ 70,720 100.0 %
SG&A expense
(318,984 ) (276,561 ) (42,423 ) (60.0 )
Throughput contribution
$ 28,297 40.0 %

Nine Months Ended
September 30,

% of
Change in

(Dollars in thousands)

2012

2011

Change

Gross Profit

Gross profit
$ 400,940 $ 332,431 $ 68,509 100.0 %
SG&A expense
(276,561 ) (238,332 ) (38,229 ) (55.8 )
Throughput contribution
$ 30,280 44.2 %

Six Months Ended
June 30,

% of
Change in

(Dollars in thousands)

2014

2013

Change

Gross Profit

Gross profit
$ 364,361 $ 306,271 $ 58,090 100.0 %
SG&A expense
(247,292 ) (210,414 ) (36,878 ) (63.5 )
Throughput contribution
$ 21,212 36.5 %

Throughput, ~~adjusted~~excluding non-core charges, was 38.9% and 37.0% for the three- and six-month periods ended June 30, 2014. These non-core ~~items including~~charges were $0.2 million and $4.1 million, respectively, for the three- and six-month periods ended June 30, 2014 and $3.8 million ~~legal reserve recorded in the second quarter of 2013, was 46.4%~~ for the ~~nine-month period~~three- and six-month periods ended ~~September~~June 30, 2013. See “Non-GAAP Reconciliations” for more details.

Nine Months Ended
September 30,

% of
Change in

(Dollars in thousands)

2013

2012

Change

Gross Profit

Gross profit
$ 471,660 $ 400,940 $ 70,720 100.0 %
Adjusted SG&A expense
(315,172 ) (277,300 ) (37,872 ) (53.6 )
Adjusted throughput contribution
$ 32,848 46.4 %
Throughput contributions for newly opened or acquired stores ~~are on a “first dollar” basis for~~reduce overall throughput as in the first ~~twelve months~~year of ~~operations.~~ operation, a store’s throughput is equal to the inverse of its SG&A as a percentage of gross profit. For example, a store which achieves SG&A as a percentage of gross profit of 70% will have throughput of 30% in the first year of operation.
We acquired ~~four~~thirteen stores and opened ~~one~~two new ~~store~~stores since the ~~third~~first quarter of ~~2012.~~2013. Adjusting for these locations and the ~~non-core legal reserve,~~adjustments discussed above, our throughput contribution on a same store basis was ~~estimated at 41.4%~~50.5% and ~~49.6%, respectively,~~45.7% for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013. Lower gross margins, increased advertising spend and periodic adjustments to certain reserve accounts contributed to the shortfall in our throughput objective.~~2014. We continue to target a same store throughput contribution of approximately 50%.
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,

%

Three Months Ended
June 30,

%

(Dollars in thousands)

2013

2012

Increase

Increase

2014

2013

Increase

Increase

Depreciation and amortization
$ 5,099 $ 4,351 $ 748 17.2 % $ 5,825 $ 4,899 $ 926 18.9 %

Nine Months Ended
September 30,

%

Six Months Ended
June 30,

%

(Dollars in thousands)

2013

2012

Increase

Increase

2014

2013

Increase

Increase

Depreciation and amortization
$ 14,719 $ 12,687 $ 2,032 16.0 % $ 11,332 $ 9,620 $ 1,712 17.8 %

Depreciation and amortization for the three and ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014, increased compared to the same periods of ~~2012~~2013 as we purchased previously leased facilities, built new facilities subsequent to the acquisition of stores and invested in improvements at our facilities and replacement of equipment. These investments increase the amount of depreciable assets and amortizable expenses. In the full year of 2013 and the first ~~nine~~six months of ~~2013,~~2014, we had capital expenditures of ~~$33.8~~$50.0 million and ~~in the full year of 2012, we had capital expenditures of $64.6 million.~~$35.2 million, respectively.

Operating Income
Operating income was ~~4.8%~~5.0% and ~~4.9%~~4.5% of revenue for the three-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012,~~2013, respectively. Operating income as a percentage of revenue was 4.6% and 4.5% for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012.~~2013. Operating margin adjusted for non-core charges was 5.0% and 4.8% for the three- and six-month periods ended June 30, 2014. See “Non-GAAP Reconciliations” for more details. 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
Floor plan interest expense ~~decreased $0.5~~increased $0.2 million in the three months ended ~~September~~June 30, ~~2013~~2014 compared to the same period of ~~2012.~~2013. Changes in the average outstanding balances on our floor plan facilities increased the expense ~~$0.2~~$0.9 million, changes in the interest rates on our floor plan facilities ~~increased the expense $0.1 million and the maturity of three interest rate swaps~~ decreased the expense ~~$0.8~~$0.6 million and interest rate swap activity decreased the expense $0.1 million during the three months ended ~~September~~June 30, ~~2013~~2014 compared to the same period of ~~2012.~~2013.

Floor plan interest expense ~~increased $0.1~~decreased $0.3 million in the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 compared to the same period of ~~2012.~~2013. Changes in the average outstanding balances on our floor plan facilities increased the expense ~~$2.2~~$1.5 million, changes in the interest rates on our floor plan facilities decreased the expense ~~$0.5~~$1.1 million and the maturity of three interest rate swaps ~~further~~ decreased the expense ~~$1.6~~$0.7 million during the ~~nine~~six months ended ~~September~~June 30, ~~2013~~2014 compared to the same period of ~~2012.~~2013.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. ~~Floor~~Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when athe 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,

%

Three Months Ended
June 30,

%

(Dollars in thousands)

2013

2012

Change

Change

2014

2013

Change

Change

Floor plan interest expense (new vehicles)
$ 2,909 $ 3,370 $ (461 ) (13.7 )% $ 3,215 $ 3,036 $ 179 5.9 %
Floor plan assistance (included as an offset to cost of sales)
(5,666 ) (4,401 ) 1,265 28.7 (6,806 ) (5,354 ) 1,452 27.1
Net new vehicle carrying costs
$ (2,757 ) $ (1,031 ) $ 1,726 167.4 % $ (3,591 ) $ (2,318 ) $ 1,273 (54.9 )%

Nine Months Ended
September 30,

%

Six Months Ended
June 30,

%

(Dollars in thousands)

2013

2012

Change

Change

2014

2013

Change

Change

Floor plan interest expense (new vehicles)
$ 9,394 $ 9,326 $ 68 0.7 % $ 6,199 $ 6,485 $ (286 ) (4.4 )%
Floor plan assistance (included as an offset to cost of sales)
(15,431 ) (12,231 ) 3,200 26.2 (12,424 ) (9,765 ) 2,659 27.2
Net new vehicle carrying costs
$ (6,037 ) $ (2,905 ) $ 3,132 107.8 % $ (6,225 ) $ (3,280 ) $ 2,945 (89.8 )%

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)

2013

2012

(Decrease)

(Decrease)

2014

2013

(Decrease)

(Decrease)

Mortgage interest
$ 1,523 $ 1,868 $ (345 ) (18.5 )% $ 1,446 $ 1,505 $ (59 ) (3.9 )%
Other interest
431 320 111 34.7 523 451 72 16.0
Capitalized interest
(21 ) (63 ) (42 ) (66.7 ) (100 ) (15 ) 85 566.7
Total other interest expense
$ 1,933 $ 2,125 $ (192 ) (9.0 )% $ 1,869 $ 1,941 $ (72 ) (3.7 )%

Nine Months Ended
September 30,

%

Six Months Ended
June 30,

Increase

% Increase

(Dollars in thousands)

2013

2012

Decrease

Decrease

2014

2013

(Decrease)

(Decrease)

Mortgage interest
$ 5,014 $ 6,330 $ (1,316 ) (20.8 )% $ 3,004 $ 3,491 $ (487 ) (14.0 )%
Other interest
1,277 1,307 (30 ) (2.3 ) 969 846 123 14.5
Capitalized interest
(56 ) (255 ) (199 ) (78.0 ) (130 ) (35 ) 95 271.4
Total other interest expense
$ 6,235 $ 7,382 $ (1,147 ) (15.5 )% $ 3,843 $ 4,302 $ (459 ) (10.7 )%

~~Total other~~Other interest expense decreased ~~$0.2 million~~$0.1 and ~~$1.1~~$0.5 million, respectively, in the first three and ~~nine~~six months of ~~2013~~2014 compared to the same periods of ~~2012.~~2013. In ~~the full year of 2012 and first nine months of~~ 2013, we ~~had net mortgage reductions of $1.5~~used excess cash to pay off $25.8 million ~~and $26.4 million, respectively,~~in mortgages, which contributed to the decrease. ~~In addition, we refinanced mortgages at lower interest rates, which lowered interest expense. Total other~~Other interest expense ~~also decreased~~increased due to ~~lower~~higher volumes of borrowing on our credit ~~facility.~~facility, offset by an increase in capitalized interest.

Other Income, Net
Other income, net primarily includes interest income and the gains related to an equity investment. Other income, net was ~~$0.8~~$1.1 million and ~~$0.5~~$0.6 million for the three-month periods ended ~~September~~June 30, 2014 and 2013, and ~~2012, and $2.2~~$2.1 million and ~~$1.8~~$1.4 million for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 and ~~2012,~~2013, respectively.

Income Tax Expense
Our effective income tax rate was ~~35.3%~~38.4% and ~~37.3%, respectively,~~38.8% for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2013~~2014 compared to ~~39.2%~~38.7% and ~~38.2%~~38.6%, respectively, in the comparable periods of 2012. Our effective income tax rate in the three- and nine-month periods ended September 30, 2013 benefitted from the recognition of non-core tax attributes as well as tax benefits associated with the American Taxpayer Relief Act of 2012 enacted at the beginning of 2013. Excluding the non-core tax attributes and adjusting for other non-core items, our effective income tax rate was 37.9% and 38.6%, respectively, for the three and nine months ended September 30, 2013. See “Non-GAAP Reconciliations” for more details. For the full year of ~~2013,~~2014, we ~~anticipate~~forecast our income tax rate ~~will~~to be approximately ~~37.8%~~39.0%.

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 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. Our management uses 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 ~~measures~~measure from our Consolidated Statements of Operations (dollars in thousands, except per share amounts): for the three and six months ended June 30, 2014 and June 30, 2013:

Three Months Ended September 30, 2013

Three Months Ended June 30, 2014

As reported

Acquisition
expenses

Tax
attributes

Adjusted

Selling, general and administrative
$ 125,463 $ (163 ) $ - $ 125,300

Income from operations
61,012 163 - 61,175

As reported

Tax
attribute

Adjusted

Income from continuing operations before income taxes
$ 47,713 $ - $ 47,713 $ 57,074 $ 163 $ - $ 57,237
Income tax expense
(16,822 ) (1,284 ) (18,106 ) (21,904 ) (63 ) (73 ) (22,040 )
Net income from continuing operations
$ 30,891 $ (1,284 ) $ 29,607 $ 35,170 $ 100 $ (73 ) $ 35,197

Diluted earnings (loss) per share from continuing operations
$ 1.18 $ (0.05 ) $ 1.13
Diluted earnings per share from continuing operations
$ 1.34 $ - $ - $ 1.34
Diluted share count
26,237 26,331

Three Months Ended June 30, 2013

As reported

Legal
accrual
adjustment

Tax
attribute

Adjusted

Selling, general and administrative
$ 109,283 $ (3,813 ) $ - $ 105,470

Income from operations
$ 45,651 $ 3,813 $ - $ 49,464

Income from continuing operations before income taxes
$ 41,258 $ 3,813 $ - $ 45,071
Income tax expense
(15,977 ) (1,484 ) (228 ) (17,689 )
Net income from continuing operations
$ 25,281 $ 2,329 $ (228 ) $ 27,382

Diluted earnings per share from continuing operations
$ 0.97 $ 0.09 $ (0.01 ) $ 1.05
Diluted share count
26,134


Six Months Ended June 30, 2014

As reported

Reserve
adjustments

Acquisition
expenses

Tax attribute

Adjusted

Selling, general and administrative
$ 247,292 $ (3,931 ) $ (163 ) $ - $ 243,198

Income from operations
105,737 3,931 163 - 109,831

Income from continuing operations before income taxes
$ 97,778 $ 3,931 $ 163 $ - $ 101,872
Income tax expense
(37,914 ) (1,545 ) (63 ) (73 ) (39,595 )
Net income from continuing operations
$ 59,864 $ 2,386 $ 100 $ (73 ) $ 62,277

Diluted earnings per share from continuing operations
$ 2.27 $ 0.09 $ - $ - $ 2.36
Diluted share count
26,326

Nine Months Ended September 30, 2013

As reported

Legal accrual
adjustments

Tax
attribute

Adjusted

Selling, general and administrative
$ 318,984 $ (3,813 ) $ - $ 315,171

Operating income
$ 137,957 $ 3,813 $ - $ 141,770

Income from continuing operations before income taxes
$ 124,548 $ 3,813 $ - $ 128,361
Income tax provision
(46,494 ) (1,484 ) (1,512 ) (49,490 )
Income from continuing operations, net of income tax
$ 78,054 $ 2,329 $ (1,512 ) $ 78,871

Diluted income per share from continuing operations
$ 2.98 $ 0.09 $ (0.05 ) $ 3.02
Diluted share count
26,159

Six months ended June 30, 2013

As reported

Legal accrual adjustment

Tax attribute

Adjusted

Selling, general and administrative
$ 210,414 $ (3,813 ) $ - $ 206,601

Income from operations
$ 86,237 $ 3,813 $ - $ 90,050

Income from continuing operations before income taxes
$ 76,835 $ 3,813 $ - $ 80,648
Income tax expense
(29,672 ) (1,484 ) (228 ) (31,384 )
Net income from continuing operations
$ 47,163 $ 2,329 $ (228 ) $ 49,264

Diluted earnings per share from continuing operations
$ 1.81 $ 0.09 $ (0.01 ) $ 1.89
Diluted share count
26,120

Nine Months Ended September 30, 2012

As reported

Asset
impairment
and disposal
gain

Equity
investment

Tax
attribute

Adjusted

Asset impairments
$ 115 $ (115 ) $ - $ - $ -
Selling, general and administrative
$ 276,561 $ 739 $ - $ - $ 277,300

Operating income
$ 111,577 $ (624 ) $ - $ - $ 110,953

Other income, net
$ 1,770 $ - $ (244 ) $ - $ 1,526

Income from continuing operations before
income taxes
$ 96,639 $ (624 ) $ (244 ) $ - $ 95,771
Income tax provision
(36,908 ) 244 95 (1,066 ) (37,635 )
Income from continuing operations, net of income tax
$ 59,731 $ (380 ) $ (149 ) $ (1,066 ) $ 58,136

Diluted income per share from continuing operations
$ 2.28 $ (0.01 ) $ (0.01 ) $ (0.04 ) $ 2.22
Diluted share count
26,203
Liquidity and Capital Resources
We manage our liquidity and capital resources to fund ~~capital expenditures, working capital requirements~~our operating, investing and ~~contractual obligations. Additionally, we use capital resources to fund cash dividend payments, share repurchases and acquisitions.~~
~~Available Sources~~
financing activities. We ~~have relied~~rely primarily on cash flows from operations and borrowings under our credit agreements ~~financing of real estate~~as the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and ~~the proceeds from equity~~fulfill contractual obligations. Funds remaining after these uses are used for acquisitions, debt retirement, cash dividends and ~~debt offerings to finance operations and expansion. Historically, we have also been able to raise capital through the sale of assets and sale of stores.~~share repurchases.
~~Based on these factors and our normal operational cash flow, we believe we have sufficient availability to accommodate both our short- and long-term capital needs.~~

Available Sources
Below is a summary of our available funds (in thousands):

As of
September 30,
2013

As of
December 31,
2012

Increase
(Decrease)

% Increase
(Decrease)

Cash and cash equivalents
$ 16,093 $ 42,839 $ (26,746 ) (62.4 )%
Available credit on the credit facility
165,101 120,536 44,565 37.0
Total available funds
$ 181,194 $ 163,375 $ 17,819 10.9 %

As of June 30,

Increase

%
Increase

2014

2013

(Decrease)

(Decrease)

Cash and cash equivalents
$ 28,203 $ 20,257 $ 7,946 39.2 %
Available credit on the Credit Facility
83,980 90,983 (7,003 ) (7.7 )
Total current available funds
$ 112,183 $ 111,240 $ 943 0.8 %
Estimated funds from unfinanced real estate
161,842 122,808 39,034 31.8
Total estimated available funds
$ 274,025 $ 234,048 $ 39,977 17.1 %

Our cash flows generated by operating activities and our credit facility are our most significant sources of liquidity. We have a $1.0 billion revolving syndicated credit facility that matures in December 2018. This facility provides new vehicle inventory floor plan financing, used vehicle inventory financing and a revolving line of credit for general corporate purposes.

We also have the ability to raise funds through ~~the financing of owned operating~~mortgaging real estate. As of ~~September~~June 30, ~~2013,~~2014, our ~~unfinanced~~unencumbered owned operating real estate had a book value of ~~$160.1~~$215.8 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained additional funds of approximately ~~$120.1~~$161.8 million at ~~September~~June 30, ~~2013;~~2014; however, no assurances can be ~~provided that~~providedthat the appraised value of this property will match or exceed its book value or that this capital source will be available on terms acceptable to us.

In addition to the above sources of liquidity, potential sources include the placement of subordinated debentures or loans, the sale of equity securities ~~additional store sales~~and the sale of stores or ~~additional~~ other ~~asset sales.~~assets. We ~~will~~ 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 onwith terms acceptable to us.
Information about our cash flows, by category, is presented in our Consolidated Statement of Cash Flows. The following table summarizes our cash flows for the six months ended June 30, 2014 and 2013:

Six Months Ended
June 30,

Increase

2014

2013

(Decrease)

Net cash provided by (used in) operating activities
$ (4,194 ) $ 24,449 $ (28,643 )
Net cash used in investing activities
(107,446 ) (55,978 ) (51,468 )
Net cash provided by financing activities
116,157 8,947 107,210
Operating Activities
Compared to the same period of 2013, cash provided by operating activities for the six months ended June 30, 2014 decreased $28.6 million.
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 net cash provided by operating activities adjusted to include cash activity associated with our new vehicle credit facility.

Six Months Ended
June 30,

Increase

(Dollars in thousands)

2014

2013

(Decrease)

Net cash provided by (used in) operating activities – as reported
$ (4,194 ) $ 24,449 $ (28,643 )
Add: Net borrowings on floor plan notes payable, non-trade
112,910 5,989 106,921
Net cash provided by operating activities – adjusted
$ 108,716 $ 30,438 $ 78,278
Adjusted net cash provided by operating activities increased $78.3 million in the first six months of 2014 compared to the same periods of 2013, primarily driven by increased net borrowings on floor plan notes payable.
Investing Activities
Net cash used in investing activities totaled $107.4 million and $56.0 million for the six-month periods ended June 30, 2014 and 2013. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.

Below are highlights of significant activity related to our cash flows from investing activities:

Six Months Ended
June 30,

(Dollars in thousands)

2014

2013

Increase

Capital expenditures
$ (35,230 ) $ (22,107 ) $ 13,123
Cash paid for acquisitions, net of cash acquired
(79,482 ) (31,786 ) 47,696

Capital expenditures
Below is a summary of our capital expenditure activities:

Six Months Ended
June 30,

(Dollars in thousands)

2014

2013

Post-acquisition capital improvements
$ 4,201 $ 2,695
Facilities for open points
3,031 2,949
Purchases of previously leased facilities
17,124 6,774
Existing facility improvements
6,134 4,322
Maintenance
4,740 5,367
Total capital expenditures
$ 35,230 $ 22,107
We expect to make capital expenditures in 2014 of approximately $110 million for a combined Lithia/DCH organization related to 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.
Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. Certain facility upgrades and remodels will generate additional manufacturer incentive payments.
We expect to make 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 image standards and requirements.
Acquisitions
We focus on acquiring stores at opportunistic purchase prices that meet our return thresholds and strategic objectives. Additionally, we have a pending combination with a partner to expand our footprint and future growth opportunities.
We acquired seven stores in the first six months of 2014. These acquisitions 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 acquired three stores in the first six months of 2013.
In June 2014, we also entered into a definitive agreement with DCH Auto Group Limited to acquire 100 percent of the outstanding shares of DCH Auto Group Inc., one of the 10 largest dealer groups in the country. The purchase price is equal to a fixed payment for goodwill and the tangible net work of DCH as of the closing date, which we estimate will be approximately $362.5 million, to be paid with approximately $340 million in cash and $22.5 million payable in shares of our Class A Common Stock. In 2013, DCH sold approximately 50,000 new vehicle units and 23,400 used vehicle retail units. We estimate the DCH stores will generate approximately $2.3 billion in annualized revenue with a projected full year earnings impact of $0.65 to $0.75 per share.

The transaction is expected to be funded through the expansion of Lithia's existing credit facility by $600 million, mortgage financing of $200 million, and available cash flows from operations. After financing the DCH combination, we expect our year-end leverage ratio to be approximately 1.8 times net debt to EBITDA, excluding floorplan debt. The acquisition of DCH is targeted to close in the fourth quarter of 2014, and is subject to customary closing conditions, including our receipt of adequate financing to complete the purchase, regulatory approvals and required auto manufacturer approvals. See our Form 8-K dated June 15, 2014 and filed with the Securities and Exchange Commission on June 16, 2014 for more information.
We follow disciplined capital investment metrics in evaluating all potential transactions.
Financing Activities
Net cash provided by financing activities totaled $116.2 million and $8.9 million for six-month periods ended June 30, 2014 and 2013, respectively. Cash flows from financing activities relate to debt issuances, repayments and recurring monthly payments as well as equity transactions.
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:

Six Months Ended
June 30,

Increase

(Dollars in thousands)

2014

2013

(Decrease)

Net borrowings (repayments) on lines of credit
$ 11,000 $ 30,682 $ (19,682 )
Principal payments on long-term debt, unscheduled
- (25,770 ) (25,770 )
Repurchases of common stock
(10,206 ) (7,903 ) 2,303
Dividends paid
(7,557 ) (3,356 ) 4,201
Borrowing and Repayment Activity
During the six-months ended June 30, 2014, we had net borrowings of $11.0 million associated with our used vehicle financing facility and our revolving line of credit. These borrowings primarily related to the funding of our acquisition activity. In the first six months of 2013, we strategically paid off $25.8 million in outstanding mortgages.
We continue to deleverage our balance sheet, which provides us with liquidity that can be deployed in future periods if accretive opportunities arise. As of June 30, 2014 our debt to total capital ratio, excluding floor plan notes payable, was 31.2% compared to 38.7% as of June 30, 2013.
Equity Transactions
Under the share repurchase program authorized by our Board of Directors and repurchases associated with stock compensation activity, we repurchased 151,772 shares of our Class A common stock at an average price of $67.24 per share in the first six months of 2014.
In the first six months of 2014, 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 2014
$ 0.13 $ 3,378
May 2014
0.16 4,179
Management evaluates performance and makes a recommendation to the Board of Directors on dividend payments on a quarterly basis.

Inventories
As of June 30, 2014, our new vehicle days supply was 71, or five days lower than our days supply as of June 30, 2013. Our days supply of used vehicles was 60 days as of June 30, 2014, or nine days higher than our days supply as of June 30, 2013. 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.
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 (in thousands):

Outstanding as of
September 30,
2013

Remaining
Availableas of
September 30,
2013

Outstanding as ofJune 30, 2014

Remaining
Available as of
June 30, 2014

New vehicle floor plan commitment
$ 569,027 $ - ^(1),(4) $ 806,684 $ 8,316 ⁽¹⁾
Floor plan notes payable
19,221 - ⁽⁴⁾ 20,598 -
Used vehicle inventory financing facility
55,909 24,091 ⁽³⁾ 96,000 4,000 ⁽³⁾
Revolving line of credit
- 141,010 ^(2),(3) - 79,980 ^(2),(3)
Real estate mortgages
166,544 - 166,718 -
Other debt
2,785 - 5,695 -
Liabilities associated with assets held for sale
7,403 - ⁽⁴⁾
Total debt
$ 820,889 $ 165,101 $ 1,095,695 $ 92,890

(1)
~~We have~~As of June 30, 2014, we had a ~~$575~~$815 million new vehicle floor plan commitment as part of our credit facility.
(2)
Available credit is based on the borrowing base amount effective as of ~~September~~June 30, ~~2013.~~2014. This amount is reduced by ~~$4.0~~$5.0 million for outstanding letters of credit.
(3)
The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly.
~~(4)~~
As of September 30, 2013, an additional $6.0 million of floor plan notes payable outstanding on our new vehicle floor plan commitment and $1.4 million of floor plan notes payable on vehicles designated as service loaners were recorded as liabilities related to assets held for sale.
Credit Facility
We have ~~an $800 million~~a $1.0 billion revolving credit facility, maturing December 2018, with a syndicate of 1013 financial institutions, including ~~four~~seven manufacturer-affiliated finance companies. ~~This financing commitment is comprised of $575 million in~~Our credit facility provides a new vehicle inventory floor plan ~~financing, $80 million in~~commitment, a used vehicle inventory financing facility and ~~$145 million on~~ a revolving line of credit for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $1.25 billion total availability, subject to lender approval.
We may request a reallocation of up to $250 million of any unused portion of our credit facility as long as no event of default has occurred. A reallocation may be requested monthly and cannot result in a change in either our used vehicle inventory financing facility or the revolving line of credit exceeding the lesser of 20% of the aggregate commitment or $200 million. All borrowings from, and repayments to, our ~~syndicated~~ lending group are presented in the Consolidated Statements of Cash Flows as financing activities.

The new vehicle floor plan ~~financing~~ commitment is collateralized by our new vehicle inventory. Our used vehicle inventory financing facility is collateralized by our used vehicle inventory that ishas been in stock for less than 180 ~~days old.~~days. Our revolving line of credit is secured by our outstanding receivables related to vehicle sales, unencumbered vehicle inventory, other eligible receivables, parts and accessories and equipment.
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, 2014, we had no amounts deposited in our PR accounts.

If the outstanding principal balance on our new vehicle inventory floor plan ~~facility,~~commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving ~~loan commitment~~line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving ~~loan~~line of credit commitment less the outstanding balance on the ~~loan~~line less outstanding letters of credit. The reserve amount will decrease the revolving ~~loan~~line of credit availability and may be used to repay the new vehicle floor plan commitment balance.

The interest rate on the credit facility varies based on the type of debt and the calculated leverage ratio, with the rate ranging from the one-month LIBOR plus ~~1.5%~~1.25% to the one-month LIBOR plus 2.5%. The annual interest rate associated with our new vehicle floor plan commitment, excluding the effects of our interest rate swaps, was ~~1.7%~~1.4% at ~~September~~June 30, ~~2013.~~2014. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was ~~1.9%~~1.7% and 1.4%, respectively, at ~~September~~June 30, ~~2013.~~2014.

Our financial covenants related to this credit facility include maintaining a current ratio of not less than 1.20x, a fixed charge coverage ratio of not less than 1.20x, a leverage ratio of not more than 5.0x and funded debt of not more than $375 million.
~~Floor Plan Notes Payable~~
We have floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. Borrowings from, and repayments to, the manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of Cash Flows.
~~Real Estate Mortgages and Other Debt~~
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.7% to 4.4% at September 30, 2013. The mortgages are payable in various installments through May 2031. As of September 30, 2013, we had fixed interest rates on 79% of our outstanding mortgage debt.
Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and had interest rates that ranged from 2.0% to 9.0% at September 30, 2013. This debt, which totaled $2.8 million at September 30, 2013, is due in various installments through May 2019.
~~Debt Covenants~~
Under the terms of our credit facility ~~and other debt agreements,~~ 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:

Debt Covenant Ratio

Requirement

As of September 30, 2013

Current ratio

Not less than 1.20 to 1
1.44 to 1
Fixed charge coverage ratio

Not less than 1.20 to 1
3.54 to 1
Leverage ratio

Not more than 5.00 to 1
1.48 to 1
Funded debt restriction (million)

Not to exceed $375 million

$169.3

Debt Covenant Ratio
Requirement
As of June 30, 2014
Current ratio
Not less than 1.20 to 1
1.29 to 1
Fixed charge coverage ratio
Not less than 1.20 to 1
4.22 to 1
Leverage ratio
Not more than 5.00 to 1
1.29 to 1
Funded debt restriction (in millions)
Not to exceed $375
$172.4

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 is the termination of the agreement and acceleration of the amounts owed. WeA breach would also ~~would~~ trigger cross-defaults under other debt agreements.

~~Inventories~~Floor Plan Notes Payable
We ~~calculate days supply~~have floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. The variable interest rates on these floor plan notes payable commitments vary by manufacturer. At June 30, 2014, $20.6 million was outstanding on these arrangements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. As of September 30, 2013, our new vehicle days supply was 76, or one day higher than our days supply as of September 30, 2012. Our days supply of used vehicles was 52 as of September 30, 2013, or two days higher than our days supply level as of September 30, 2012. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
~~Capital Expenditures~~
~~Capital expenditures were $33.8million and $35.0million for the nine months ended September 30, 2013 and 2012, respectively.~~We anticipate approximately $55 million in capital expenditures for 2013. This amount is associated with image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. We believe it is an attractive time to invest in facility upgrades and remodels that 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.
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.Cash Flows.

~~Dividends~~Real Estate Mortgages and Other Debt
~~Management evaluates performance and makes a recommendation~~We have mortgages associated with our owned real estate. Interest rates related to ~~the Board~~this debt ranged from 1.7% to 4.4% at June 30, 2014. The mortgages are payable in various installments through May 2031. As of ~~Directors~~June 30, 2014, we had fixed interest rates on ~~dividend payments on a quarterly basis. A dividend payment was paid in December 2012 in lieu~~80% of ~~the dividend typically declared and paid in March of the following year. Accordingly, we did not pay dividends on~~ our ~~Class A and Class B common stock during the first quarter of 2013. For the nine months ended September 30, 2013, we paid dividends on our Class A and Class B common stock of $6.7 million.~~outstanding mortgage debt.

Our ~~Board~~other debt includes capital leases and had interest rates that ranged from 2.0% to 9.4% at June 30, 2014. This debt, which totaled $5.7 million at June 30, 2014, is due in various installments through January 2024.
Recent Accounting Pronouncements
See Note 13 of ~~Directors approved a dividend of $0.13 per share~~the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on our Class A and Class B common stock related to our third quarter 2013 financial results. The dividend will total approximately $3.4 million and will be paid on November 22, 2013 to shareholders of record on November 8, 2013.
~~Common Stock Repurchases~~
In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. We did not repurchase any shares of our Class A common stock during the third quarter of 2013. In the nine months ended September 30, 2013, we repurchased 127,900 shares at an average price of $40.76 per share, for a total of $5.2 million. Through September 30, 2013, we have repurchased 1,273,047 shares and 1,726,953 shares remained available for repurchase. This authority to repurchase shares does not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.Form 10-Q.

In addition, we repurchased 59,721 shares during the first quarter of 2013 at an average price of $45.04, for a total of $2.7 million, related to tax withholdings associated with the vesting of restricted stock units.
Critical Accounting Policies and Use of Estimates
There have been no material changes in ~~our~~ the critical accounting policies and use of estimates as described in our ~~2012~~2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February ~~22, 2013.~~ 21, 2014.
Seasonality and Quarterly Fluctuations
Historically, our sales have been lower in the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced number of business days during the holiday season. As a result, financial performance is expected to be lower during the first and fourth quarters than during the second and third quarters of each fiscal year. However, more recently, our franchise diversification and cost control efforts have moderated the significance of our seasonality. 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~~end of our ~~2012~~preceding fiscal year, as discussed in our 2013 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February ~~22, 2013.~~21, 2014.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures
Our management 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

Except as disclosed in Note 5 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, there have been no new proceedings or material changes to proceedings previously disclosed in our 2013 Annual Report on Form ~~10-K for the year ended December 31, 2012.~~10-K. The information in this Form 10-Q should be read in conjunction with the legal proceedings disclosed in that report, which was filed with the Securities and Exchange Commission on February ~~22, 2013.~~21, 2014.

Item 1A.Risk Factors

~~Except for the risk factor set forth below, there~~There have been no material changes from the risk factors previously disclosed in our 2013 Annual Report on Form ~~10-K for the year ended December 31, 2012.~~10-K. The information ~~below~~in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in ~~our Annual Report on Form 10-K for the year ended December 31, 2012,~~that report, which was filed with the Securities and Exchange Commission on February ~~22, 2013.~~21, 2014.
Item 2.
~~Government regulations~~Unregistered Sales of Equity Securities and ~~compliance costs may adversely affect our business, and the failure to comply could have a material adverse effect on our results~~Use of ~~operations.~~Proceeds

We ~~are, and expect to continue to be, subject to a wide range of federal, state and local laws and regulations, including local licensing requirements. These laws regulate~~repurchased the ~~conduct~~following shares of our ~~business, including:~~Class A common stock during the second quarter of 2014:

Total number
of shares
purchased

Average
price paid
per share

Total number of shares purchased as part of publicly announced plan⁽¹⁾

Maximum number of shares that may yet be purchased under the plans

April 1 to April 30
11,000 $ 68.55 11,000 1,700,953
May 1 to May 31
10,500 75.12 10,500 1,690,453
June 1 to June 30
8,553 84.45 8,500 1,681,953
Total
30,053 75.37 30,000 1,681,953

●(1)
~~motor vehicle~~In 2011 and ~~retail installment sales practices;~~
●
~~leasing;~~
●
~~sales~~2012, our Board of ~~finance, insurance and vehicle protection products;~~
●
~~consumer credit;~~
●
~~deceptive trade practices;~~
●
~~consumer protection;~~
●
~~consumer privacy;~~
●
~~money laundering;~~
●
~~advertising;~~
●
~~land use and zoning;~~
●
~~health and safety; and~~
●
~~employment practices.~~Directors authorized the repurchase of up to a total of 3,000,000 shares of our Class A common stock. Through June 30, 2014, we have repurchased 1,318,047 shares at an average price of $25.81 per share. This authority to repurchase shares does not have an expiration date nor a maximum aggregate dollar amount for repurchases.
In every state in which we operate, we must obtain certain licenses issued by state authorities to operate our businesses, including dealer, sales, finance and insurance-related licenses. State laws also regulate our advertising, operating, financing, employment and sales practices. Other laws and regulations include state franchise laws and regulations and other extensive laws and regulations applicable to new and used automobile dealers. In some states, some of our practices must be approved by regulatory agencies which have broad discretion. The enactment of new laws and regulations that materially impair or restrict our sales, finance and insurance or other operations could have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines. In recent years, private plaintiffs and state attorneys general in the United States have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.
The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (CFPB), which has broad regulatory powers. Although the CFPB may not exercise its authority over an automotive dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, the Dodd-Frank Act and future regulatory actions by this bureau could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions, and it could affect our arrangements with lending sources.
In March 2013, the CFPB issued a bulletin suggesting that auto dealers who arrange credit through outside parties may be participating in a credit decision such that they are subject to the Equal Credit Opportunity Act, including its anti-discrimination provisions. In particular, the CFPB highlighted that the payment to a dealer of the excess of the interest rate the dealer negotiates with the customer over the rate at which the lender is willing to provide financing may encourage pricing disparities on the basis of race, national origin, or potentially other prohibited bases. This bulletin may affect the willingness of outsider lenders to continue these lending practices, and heightened focus on these arrangements may affect our relationships and agreements, including our indemnification obligations, with lenders, which could adversely affect our business.
Our operations are also subject to the National Traffic and Motor Vehicle Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to U.S. customs duties and, in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages or other charges.
If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.
Likewise, employees and former employees are protected by a variety of employment-related laws and regulations relating to, among other things, wages and discrimination. Allegations of a violation could subject us to individual claims or consumer class actions, administrative investigations or adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and civil fines and penalties, and damage our reputation and sales.

Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities under federal and state statutes. These federal and state statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and state statutes. In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.
A significant judgment against us, the loss of a significant license or permit or the imposition of a significant fine could have a material adverse effect on our business, financial condition and future prospects. We further expect that, from time to time, new laws and regulations, particularly in the labor, employment, environmental and consumer protection areas will be enacted, and compliance with such laws, or penalties for failure to comply, could significantly increase our costs.

Item 6.Exhibits

~~The following exhibits are filed herewith and this list is intended to constitute the exhibit index:~~
2.1*
Stock Purchase Agreement, dated June 14, 2014, between Lithia Motors, Inc. and DCH Auto Group (USA) Limited.
2.2
First Amendment to Stock Purchase Agreement, effective July 15, 2014, between Lithia Motors, Inc. and DCH Auto Group (USA) Limited.
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).
3.2

2013 Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.1 to Form 8-K dated August 20, 2013 and filed with the Securities and Exchange Commission on August 26, 2013).
~~10.1~~
~~Real Estate Purchase and Sale Agreement between Lithia Real Estate, Inc. and Dick Heimann dated October 25, 2013,~~
31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1

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.
32.2

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.
* Portion of this exhibit were omitted pursuant to a request for confidential treatment that has been filed separately with the Securities and Exchange Commission.

SIGNATURES

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.

Date: ~~October 25, 2013~~August 8, 2014
LITHIA MOTORS, INC.
By:/s/ Christopher S. Holzshu
Christopher S. Holzshu
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial Officer)
By: /s/ John F. North III
John F. North III
Vice President and
Corporate Controller
(Principal Accounting Officer)

42

PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements

	Consolidated Balance Sheets (Unaudited) – ~~September~~June 30, ~~2013~~2014 and December 31, ~~2012~~2013	2

	Consolidated Statements of Operations (Unaudited) – Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013	3

	Consolidated Statements of Comprehensive Income (Unaudited) – Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013	4

	Consolidated Statements of Cash Flows (Unaudited) – ~~Nine~~Six Months Ended ~~September~~June 30, ~~2013~~2014 and ~~2012~~2013	5

	Condensed Notes to Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3740

Item 4.	Controls and Procedures	3740

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	3840

Item 1A.	Risk Factors	3841

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 6.	Exhibits	41

Signatures			42

	September 30, 2013		December 31, 2012
New vehicles	$	565,017	$	563,275
Used vehicles		158,156		130,529
Parts and accessories		32,525		29,522
Total inventories	$	755,698	$	723,326

	June 30, 2014		December 31, 2013
New vehicles	$	741,220	$	657,043
Used vehicles		203,645		167,814
Parts and accessories		36,358		34,162
Total inventories	$	981,223	$	859,019

	Goodwill			Goodwill
Balance as of December, 31, 2011, gross	$	318,224
Balance as of December, 31, 2012, gross				$	331,313
Accumulated impairment loss		(299,266	)		(299,266	)
Balance as of December 31, 2011, net		18,958
Additions through acquisitions		13,710
Goodwill allocated to dispositions		(621	)
Balance as of December 31, 2012, net		32,047			32,047
Additions through acquisitions		8,266			17,464
Balance as of September 30, 2013, net	$	40,313
Balance as of December 31, 2013, net					49,511
Additions through acquisition					15,493
Balance as of June 30, 2014, net				$	65,004

	Three Months Ended September 30, 2013			Nine Months Ended September 30, 2013			Affected Line Item in the Consolidated Statements of Operations	Three Months Ended June 30, 2014			Six Months Ended June 30, 2014			AffectedLine Item in the Consolidated Statements of Operations
Loss on cash flow hedges	$	(134	)	$	(606	)	Floor plan interest expense	$	(118	)	$	(252	)	Floor plan interest expense
Income Taxes		51			232		Income tax provision
Taxes									45			96		Income tax provision
Loss on cash flow hedges, net	$	(83	)	$	(374	)		$	(73	)	$	(156	)

Quarter paid:	Dividend amount per share		Total amount of dividend (in thousands)
First quarter	$	*	$	*
Second quarter		0.13		3,356
Third quarter		0.13		3,363

Fair Value at September 30, 2013	Level 1		Level 2			Level 3
Measured on a recurring basis:
Derivative contracts, net	$	-	$	(3,166	)	$	-

Fair Value at December 31, 2012	Level 1		Level 2			Level 3
Measured on a recurring basis:
Derivative contracts, net	$	-	$	(4,679	)	$	-

Balance Sheet Information	Fair Value of Liability Derivatives			Fair Value of Liability Derivatives
Derivatives Designated as Hedging Instruments	Location in Balance Sheet	September 30, 2013		Location in Balance Sheet	June 30, 2014

Interest Rate Swap Contracts	Accrued liabilities	$	1,217
Interest Rate Swap Contract				Accrued liabilities	$	1,228
	Other long-term liabilities		1,949	Other long-term liabilities		1,147
		$	3,166		$	2,375

Derivatives in Cash Flow Hedging Relationships	Amount of Gain Recognized in Accumulated OCI (Effective Portion)		Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)			Amount of Gain Recognized in Accumulated OCI (Effective Portion)		Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Loss Recognizedin Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Three Months Ended September 30, 2013
Three Months Ended June 30, 2014
Interest Rate Swap Contract											$	93	Floor plan interest expense	$	(118	)	Floor plan interest expense	$	(188	)

Three Months Ended June 30, 2013
Interest Rate Swap Contracts	$	18	Floor plan interest expense	$	(134	)	Floor plan interestexpense	$	(173	)	$	381	Floor plan interest expense	$	(166	)	Floor plan interest expense	$	(296	)

Three Months Ended September 30, 2012
Interest Rate Swap Contracts	$	476	Floor plan interest expense	$	(309	)	Floor plan interestexpense	$	(788	)

Derivatives in Cash Flow Hedging Relationships	Amount of Gain Recognized in Accumulated OCI (Effective Portion)		Locationof Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Loss Recognizedin Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)			Amount of Gain Recognized in Accumulated OCI (Effective Portion)		Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Loss Recognizedin Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

Nine Months Ended September 30, 2013
Six Months Ended June 30, 2014
Interest Rate Swap Contract											$	201	Floor plan interest expense	$	(252	)	Floor plan interest expense	$	(359	)

Six Months Ended June 30, 2013
Interest Rate Swap Contracts	$	914	Floor plan interest expense	$	(606	)	Floor plan interest expense	$	(1,064	)	$	896	Floor plan interest expense	$	(472	)	Floor plan interest expense	$	(890	)

Nine Months Ended September 30, 2012
Interest Rate Swap Contracts	$	998	Floor plan interest expense	$	(1,067	)	Floor plan interest expense	$	(2,172	)

	Consideration
Cash paid, net of cash acquired	$	79,482
Debt issued		3,161
	$	82,643

	Assets Acquired and Liabilities Assumed
Inventories	$	42,997
Franchise value		6,529
Property, plant and equipment		17,302
Other assets		430
Other liabilities		(108	)
		67,150
Goodwill		15,493
	$	82,643

	Assets Acquired and Liabilities Assumed
Inventories	$	15,198
Franchise value		4,036
Property, plant and equipment		4,697
Other assets		122
Other liabilities		(533	)
		23,520
Goodwill		8,266
	$	31,786

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Revenue	$	8,712		$	24,409		$	27,590		$	69,838

Pre-tax gain from discontinued operations	$	236		$	657		$	929		$	1,685
Loss on disposal activities		-			(397	)		-			(397	)
		236			260			929			1,288
Income tax expense		(109	)		(109	)		(355	)		(489	)
Income from discontinued operations, net of income tax expense	$	127		$	151		$	574		$	799
Cash generated from disposal activities	$	-		$	-		$	-		$	2,901
Floor plan debt paid in connection with disposal activities	$	-		$	-		$	-		$	6,712

	September 30, 2013		December 31, 2012
Inventories	$	8,597	$	9,412
Property, plant and equipment		1,177		1,102
Intangible assets		2,071		2,065
	$	11,845	$	12,579

	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenue	$	3,920		$	10,078		$	12,569		$	18,878

Pre-tax income (loss) from discontinued operations	$	(532	)	$	409		$	(467	)	$	693
Net gain on disposal activities		5,744			-			5,744			-
		5,212			409			5,277			693
Income tax expense		(2,073	)		(135	)		(2,098	)		(246	)
Income from discontinued operations, net of income tax expense	$	3,139		$	274		$	3,179		$	447
Goodwill and other intangible assets disposed of		221			-			221			-
Cash generated from disposal activities		10,617			-			10,617			-
Floor plan debt paid in connection with disposal activities		3,311			-			3,311			-

Three Months EndedJune 30,	2014						2013
Diluted EPS from Continuing Operations	Class A			Class B			Class A			Class B
Numerator:
Distributed income applicable to common stockholders	$	3,769		$	410		$	3,018		$	338
Reallocation of distributed income as a result of conversion of dilutive stock options		3			(3	)		5			(5	)
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding		407			-			333			-
Diluted distributed income applicable to common stockholders	$	4,179		$	407		$	3,356		$	333
Undistributed income from continuing operations applicable to common stockholders	$	27,951		$	3,040		$	19,716		$	2,209
Reallocation of undistributed income as a result of conversion of dilutive stock options		25			(25	)		30			(30	)
Reallocation of undistributed income due to conversion of Class B to Class A		3,015			-			2,179			-
Diluted undistributed income from continuing operations applicable to common stockholders	$	30,991		$	3,015		$	21,925		$	2,179

Denominator:
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations		23,557			2,562			23,185			2,597
Weighted average number of shares from stock options		212			-			352			-
Conversion of Class B to Class A common shares outstanding		2,562			-			2,597			-
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations		26,331			2,562			26,134			2,597

Diluted income per share from continuing operations applicable to common stockholders	$	1.34		$	1.34		$	0.97		$	0.97
Diluted distributed income per share from continuing operations applicable to common stockholders		(0.16	)		(0.16	)		(0.13	)		(0.13	)
Diluted undistributed income per share from continuing operations applicable to common stockholders	$	1.18		$	1.18		$	0.84		$	0.84

Three Months Ended June 30,	2014				2013
Diluted EPS	Class A		Class B		Class A		Class B
Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive		12		-		18		-

Six Months Ended June 30,	2014						2013
Basic EPS from Continuing Operations	Class A			Class B			Class A			Class B
Numerator:
Income from continuing operations applicable to common stockholders	$	53,976		$	5,888		$	42,254		$	4,909
Distributed income applicable to common stockholders		(6,814	)		(743	)		(3,007	)		(349	)
Basic undistributed income from continuing operations applicable to common stockholders	$	47,162		$	5,145		$	39,247		$	4,560

Denominator:
Weighted average number of shares outstanding used to calculate basic income per share		23,485			2,562			23,052			2,678

Basic income per share from continuing operations applicable to common stockholders	$	2.30		$	2.30		$	1.83		$	1.83
Basic distributed income per share from continuing operations applicable to common stockholders		(0.29	)		(0.29	)		(0.13	)		(0.13	)
Basic undistributed income per share from continuing operations applicable to common stockholders	$	2.01		$	2.01		$	1.70		$	1.70

Six Months EndedJune 30,	2014						2013
Diluted EPS from Continuing Operations	Class A			Class B			Class A			Class B
Numerator:
Distributed income applicable to common stockholders	$	6,814		$	743		$	3,007		$	349
Reallocation of distributed income as a result of conversion of dilutive stock options		8			(8	)		5			(5	)
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding		735			-			344			-
Diluted distributed income applicable to common stockholders	$	7,557		$	735		$	3,356		$	344
Undistributed income from continuing operations applicable to common stockholders	$	47,162		$	5,145		$	39,247		$	4,560
Reallocation of undistributed income as a result of conversion of dilutive stock options		55			(55	)		69			(69	)
Reallocation of undistributed income due to conversion of Class B to Class A		5,090			-			4,491			-
Diluted undistributed income from continuing operations applicable to common stockholders	$	52,307		$	5,090		$	43,807		$	4,491

Denominator:
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations		23,485			2,562			23,052			2,678
Weighted average number of shares from stock options		279			-			390			-
Conversion of Class B to Class A common shares outstanding		2,562			-			2,678			-
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations		26,326			2,562			26,120			2,678

Diluted income per share from continuing operations applicable to common stockholders	$	2.27		$	2.27		$	1.81		$	1.81
Diluted distributed income per share from continuing operations applicable to common stockholders		(0.29	)		(0.29	)		(0.13	)		(0.13	)
Diluted undistributed income per share from continuing operations applicable to common stockholders	$	1.98		$	1.98		$	1.68		$	1.68

Three months ended September 30, 2013	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
Three months ended June 30, 2014												Revenues		Percent of Total Revenues			Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
New vehicle	$	604,135		56.5%	$	38,586		6.4	%		23.3%	$	694,484		56.8	%	$	45,994		6.6	%		23.9	%
Used vehicle retail		280,734		26.3		41,641		14.8			25.2		310,475		25.4			44,067		14.2			22.9
Used vehicle wholesale		43,396		4.1		710		1.6			0.4		44,286		3.6			1,504		3.4			0.8
Finance and insurance⁽¹⁾		37,132		3.5		37,132		100.0			22.5		43,838		3.6			43,838		100.0			22.8
Service, body and parts		97,784		9.1		46,991		48.1			28.4		114,337		9.4			56,182		49.1			29.2
Fleet and other		6,109		0.5		329		5.4			0.2		14,382		1.2			715		5.0			0.4
	$	1,069,290		100.0%	$	165,389		15.5	%		100.0%	$	1,221,802		100.0	%	$	192,300		15.7	%		100.0	%

Three months ended September 30, 2012	Revenues		Percent of Total Revenues		Gross Profit			Gross Profit Margin			Percent of Total Gross Profit
Three months ended June 30, 2013													Revenues		Percent of Total Revenues			Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
New vehicle	$	491,846		56.0%	$	35,093			7.1	%		24.6%	$	569,487		56.5	%	$	38,788		6.8	%		24.3	%
Used vehicle retail		227,157		25.9		33,272			14.6			23.3		258,465		25.6			38,893		15.0			24.3
Used vehicle wholesale		35,006		4.0		(36	)		(0.1	)		0.0		37,691		3.7			695		1.8			0.4
Finance and insurance⁽¹⁾		30,929		3.5		30,929			100.0			21.7		34,218		3.4			34,218		100.0			21.4
Service, body and parts		89,038		10.1		43,005			48.3			30.2		94,462		9.4			46,693		49.4			29.2
Fleet and other		4,550		0.5		247			5.4			0.2		14,182		1.4			546		3.8			0.4
	$	878,526		100.0%	$	142,510			16.2	%		100.0%	$	1,008,505		100.0	%	$	159,833		15.8	%		100.0	%

Nine months ended September 30, 2013	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
Six months ended June 30, 2014												Revenues		Percent of Total Revenues			Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
New vehicle	$	1,667,063		55.9%	$	112,021		6.7	%		23.8%	$	1,274,006		55.4	%	$	85,018		6.7	%		23.3	%
Used vehicle retail		778,427		26.1		115,507		14.8			24.5		612,368		26.6			84,863		13.9			23.3
Used vehicle wholesale		120,593		4.0		2,379		2.0			0.5		86,979		3.8			2,835		3.3			0.8
Finance and insurance⁽¹⁾		103,013		3.5		103,013	��	100.0			21.8		83,469		3.6			83,469		100.0			22.9
Service, body and parts		282,686		9.5		137,463		48.6			29.1		218,954		9.5			107,014		48.9			29.4
Fleet and other		29,093		1.0		1,277		4.4			0.3		24,132		1.1			1,162		4.8			0.3
	$	2,980,875		100.0%	$	471,660		15.8	%		100.0%	$	2,299,908		100.0	%	$	364,361		15.8	%		100.0	%

Nine months ended September 30, 2012	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
Six months ended June 30, 2013												Revenues		Percent of Total Revenues			Gross Profit		Gross Profit Margin			Percent of Total Gross Profit
New vehicle	$	1,340,731		55.0%	$	98,911		7.4	%		24.7%	$	1,062,928		55.6	%	$	73,435		6.9	%		24.0	%
Used vehicle retail		625,117		25.6		92,540		14.8			23.1		497,693		26.0			73,866		14.8			24.1
Used vehicle wholesale		103,469		4.2		657		0.6			0.2		77,197		4.0			1,669		2.2			0.6
Finance and insurance⁽¹⁾		82,989		3.4		82,989		100.0			20.7		65,881		3.5			65,881		100.0			21.5
Service, body and parts		258,038		10.6		124,814		48.4			31.1		184,902		9.7			90,472		48.9			29.5
Fleet and other		28,770		1.2		1,029		3.6			0.2		22,984		1.2			948		4.1			0.3
	$	2,439,114		100.0%	$	400,940		16.4	%		100.0%	$	1,911,585		100.0	%	$	306,271		16.0	%		100.0	%

	Three Months Ended September 30,						Increase			% Increase			Three Months Ended June 30,						Increase			% Increase
(Dollars in thousands, except per unit amounts)	2013			2012			(Decrease)			(Decrease)			2014			2013			(Decrease)			(Decrease)
Reported
Revenue	$	604,135		$	491,846		$	112,289			22.8	%	$	694,484		$	569,487		$	124,997			21.9	%
Gross profit	$	38,586		$	35,093		$	3,493			10.0		$	45,994		$	38,788		$	7,206			18.6
Gross margin		6.4	%		7.1	%		(70)	bp⁽¹⁾					6.6	%		6.8	%	(20)bp⁽¹⁾

Retail units sold		18,109			14,841			3,268			22.0			20,446			17,024			3,422			20.1
Average selling price per retail unit	$	33,361		$	33,141		$	220			0.7		$	33,967		$	33,452		$	515			1.5
Average gross profit per retail unit	$	2,131		$	2,365		$	(234	)		(9.9	)	$	2,250		$	2,278		$	(28	)		(1.2	)

Same store
Revenue													$	632,785		$	566,862		$	65,923			11.6	%
Gross profit													$	41,711		$	38,588		$	3,123			8.1
Gross margin														6.6	%		6.8	%	(20)bp

Retail units sold														18,379			16,937			1,442			8.5
Average selling price per retail unit													$	34,430		$	33,469		$	961			2.9
Average gross profit per retail unit													$	2,269		$	2,278		$	(9	)		(0.4	)

Same store
Revenue	$	569,744		$	492,063		$	77,681		15.8	%
Gross profit	$	35,995		$	35,107		$	888		2.5
Gross margin		6.3	%		7.1	%		(80)	bp

Retail units sold		17,048			14,846			2,202		14.8
Average selling price per retail unit	$	33,420		$	33,144		$	276		0.8
Average gross profit per retail unit	$	2,111		$	2,365		$	(254	)	(10.7	)

Same store
Revenue	$	1,585,504		$	1,336,187		$	249,317		18.7	%
Gross profit	$	105,498		$	98,458		$	7,040		7.2
Gross margin		6.7	%		7.4	%		(70	)bp

Retail units sold		47,411			40,816			6,595		16.2
Average selling price per retail unit	$	33,442		$	32,737		$	705		2.2
Average gross profit per retail unit	$	2,225		$	2,412		$	(187	)	(7.8	)

	Three Months Ended June 30,
(Dollars in thousands, except per unit amounts)	2014			2013			Increase		% Increase
Reported
Wholesale revenue	$	44,286		$	37,691		$	6,595		17.5	%
Wholesale gross profit	$	1,504		$	695		$	809		116.4
Wholesale gross margin		3.4	%		1.8	%	160bp

Wholesale units sold		6,047			5,241			806		15.4
Average selling price per wholesale unit	$	7,324		$	7,192		$	132		1.8
Average gross profit per retail unit	$	249		$	133		$	116		87.2

Same store
Wholesale revenue	$	41,937		$	37,692		$	4,245		11.3	%
Wholesale gross profit	$	1,444		$	748		$	696		93.0
Wholesale gross margin		3.4	%		2.0	%	140bp

Wholesale units sold		5,649			5,241			408		7.8
Average selling price per wholesale unit	$	7,424		$	7,192		$	232		3.2
Average gross profit per retail unit	$	256		$	143		$	113		79.0

Same store
Wholesale revenue	$	41,371		$	35,084		$	6,287		17.9	%
Wholesale gross profit	$	642		$	(32	)	$	674		NM
Wholesale gross margin		1.6	%		(0.1	)%		170	bp

Wholesale units sold		5,783			5,148			635		12.3
Average selling price per wholesale unit	$	7,154		$	6,815		$	339		5.0
Average gross profit per retail unit	$	111		$	(6	)	$	117		NM