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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 30, 2014

OR

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to      

 

Commission file number: 001-14733

 


 

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 [  ] 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

23,688,734

Class B common stock without par value

2,562,231

(Class)

(Outstanding at October 31, 2014)

 



 

 
 

 

 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX 

 

PART I - FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets (Unaudited) – September 30, 2014 and December 31, 2013

 2

     
 

Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2014 and 2013

 3

     
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2014 and 2013

 4

     
 

Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2014 and 2013

 5

     
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

6

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 20

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

     

Item 4.

Controls and Procedures

41

     

PART II - OTHER INFORMATION

 
     

Item 1.

Legal Proceedings

42

     

Item 1A.

Risk Factors

42

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

     

Item 6.

Exhibits

43

     

Signatures

44

 

 
1

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 21,666     $ 23,686  

Accounts receivable, net

    181,855       170,519  

Inventories, net

    941,756       859,019  

Deferred income taxes

    500       1,548  

Other current assets

    11,088       15,251  

Assets held for sale

    8,920       11,526  

Total Current Assets

    1,165,785       1,081,549  
                 

Property and equipment, net of accumulated depreciation of $114,102 and $106,871

    536,519       481,212  

Goodwill

    65,745       49,511  

Franchise value

    77,482       71,199  

Deferred income taxes

    12,450       10,256  

Other non-current assets

    46,922       31,394  

Total Assets

  $ 1,904,903     $ 1,725,121  
                 
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Floor plan notes payable

  $ 21,362     $ 18,789  

Floor plan notes payable: non-trade

    718,227       695,066  

Current maturities of long-term debt

    9,305       7,083  

Trade payables

    59,481       51,159  

Accrued liabilities

    116,619       94,143  

Liabilities related to assets held for sale

    4,776       6,271  

Total Current Liabilities

    929,770       872,511  
                 

Long-term debt, less current maturities

    263,117       245,471  

Deferred revenue

    51,913       44,005  

Other long-term liabilities

    36,190       28,412  

Total Liabilities

    1,280,990       1,190,399  
                 

Stockholders' Equity:

               

Preferred stock - no par value; authorized 15,000 shares; none outstanding

    -       -  

Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,546 and 23,329

    266,075       268,255  

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 2,562 and 2,562

    319       319  

Additional paid-in capital

    27,657       22,598  

Accumulated other comprehensive loss

    (1,075 )     (1,538 )

Retained earnings

    330,937       245,088  

Total Stockholders' Equity

    623,913       534,722  

Total Liabilities and Stockholders' Equity

  $ 1,904,903     $ 1,725,121  

 

See accompanying condensed notes to consolidated financial statements.

 

 
2

 

 

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,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues:

                               

New vehicle

  $ 732,121     $ 604,135     $ 2,006,127     $ 1,667,063  

Used vehicle retail

    340,522       280,734       952,890       778,427  

Used vehicle wholesale

    48,853       43,396       135,832       120,593  

Finance and insurance

    46,855       37,132       130,324       103,013  

Service, body and parts

    120,772       97,784       339,726       282,686  

Fleet and other

    7,988       6,109       32,120       29,093  

Total revenues

    1,297,111       1,069,290       3,597,019       2,980,875  

Cost of sales:

                               

New vehicle

    684,473       565,549       1,873,461       1,555,042  

Used vehicle retail

    296,624       239,093       824,129       662,920  

Used vehicle wholesale

    48,349       42,686       132,493       118,214  

Service, body and parts

    62,351       50,793       174,291       145,223  

Fleet and other

    7,474       5,780       30,444       27,816  

Total cost of sales

    1,099,271       903,901       3,034,818       2,509,215  

Gross profit

    197,840       165,389       562,201       471,660  

Selling, general and administrative

    131,627       108,570       378,919       318,984  

Depreciation and amortization

    6,067       5,099       17,399       14,719  

Operating income

    60,146       51,720       165,883       137,957  

Floor plan interest expense

    (3,127 )     (2,909 )     (9,326 )     (9,394 )

Other interest expense

    (2,051 )     (1,933 )     (5,894 )     (6,235 )

Other income, net

    1,027       835       3,110       2,220  

Income from continuing operations before income taxes

    55,995       47,713       153,773       124,548  

Income tax provision

    (21,458 )     (16,822 )     (59,372 )     (46,494 )

Income from continuing operations, net of income tax

    34,537       30,891       94,401       78,054  

Income from discontinued operations, net of income tax

    -       127       3,179       574  

Net income

  $ 34,537     $ 31,018     $ 97,580     $ 78,628  
                                 

Basic income per share from continuing operations

  $ 1.32     $ 1.19     $ 3.62     $ 3.03  

Basic income per share from discontinued operations

    -       0.01       0.12       0.02  

Basic net income per share

  $ 1.32     $ 1.20     $ 3.74     $ 3.05  
                                 

Shares used in basic per share calculations

    26,118       25,866       26,071       25,776  
                                 

Diluted income per share from continuing operations

  $ 1.31     $ 1.18     $ 3.58     $ 2.98  

Diluted income per share from discontinued operations

    -       -       0.13       0.03  

Diluted net income per share

  $ 1.31     $ 1.18     $ 3.71     $ 3.01  
                                 

Shares used in diluted per share calculations

    26,359       26,237       26,337       26,159  

 

See accompanying condensed notes to consolidated financial statements.

 

 
3

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

   

Three Months Ended September 30,

   

Nine Months Ended September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Net income

  $ 34,537     $ 31,018     $ 97,580     $ 78,628  

Other comprehensive income, net of tax:

                               

Gain on cash flow hedges, net of tax expense of $114, $58, $288, and $582, respectively

    184       94       463       938  

Comprehensive income

  $ 34,721     $ 31,112     $ 98,043     $ 79,566  

 

See accompanying condensed notes to consolidated financial statements.

 

 
4

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Nine Months Ended September 30,

 
   

2014

   

2013

 

Cash flows from operating activities:

               

Net income

  $ 97,580     $ 78,628  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    17,399       14,719  

Stock-based compensation

    5,054       4,161  

Loss on disposal of other assets

    307       107  

Gain from disposal activities within discontinued operations

    (5,744 )     -  

Deferred income taxes

    4,725       8,504  

Excess tax benefit from share-based payment arrangements

    (6,160 )     (5,956 )

(Increase) decrease (net of acquisitions and dispositions):

               

Trade receivables, net

    (11,336 )     (6,937 )

Inventories, net

    (44,349 )     (18,187 )

Other assets

    (13,700 )     1,660  

Increase (decrease) (net of acquisitions and dispositions):

               

Floor plan notes payable, net

    1,132       5,721  

Trade payables

    4,246       4,848  

Accrued liabilities

    21,913       13,099  

Other long-term liabilities and deferred revenue

    16,635       12,307  

Net cash provided by operating activities

    87,702       112,674  
                 

Cash flows from investing activities:

               

Principal payments received on notes receivable

    2,882       88  

Capital expenditures

    (54,149 )     (33,803 )

Proceeds from sales of assets

    3,243       474  

Payments for life insurance policies

    (3,385 )     (2,508 )

Cash paid for acquisitions

    (81,558 )     (31,786 )

Proceeds from sales of stores

    10,617       -  

Net cash used in investing activities

    (122,350 )     (67,535 )
                 

Cash flows from financing activities:

               

Borrowings on floor plan notes payable: non-trade, net

    30,375       2,685  

Borrowings on lines of credit

    836,156       499,000  

Repayments on lines of credit

    (891,000 )     (542,446 )

Principal payments on long-term debt, scheduled

    (5,528 )     (5,375 )

Principal payments on long-term debt and capital leases, other

    -       (25,770 )

Proceeds from issuance of long-term debt

    76,530       4,720  

Proceeds from issuance of common stock

    3,411       3,967  

Repurchase of common stock

    (11,745 )     (7,903 )

Excess tax benefit from share-based payment arrangements

    6,160       5,956  

Dividends paid

    (11,731 )     (6,719 )

Net cash provided by (used in) financing activities

    32,628       (71,885 )
                 

Decrease in cash and cash equivalents

    (2,020 )     (26,746 )
                 

Cash and cash equivalents at beginning of period

    23,686       42,839  

Cash and cash equivalents at end of period

  $ 21,666     $ 16,093  
                 
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for interest

  $ 15,556     $ 15,988  

Cash paid during the period for income taxes, net

    44,918       25,880  
                 

Supplemental schedule of non-cash activities:

               

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.

 

 
5

 

 

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 30, 2014 and for the three- and nine-month periods ended September 30, 2014 and 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 2013 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2013 is derived from our 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 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,
2014

   

December 31,

2013

 

Contracts in transit

  $ 91,920     $ 85,272  

Trade receivables

    24,873       23,154  

Vehicle receivables

    25,093       23,606  

Manufacturer receivables

    34,282       31,662  

Auto loan receivables

    21,807     $ 11,438  

Other receivables

    2,697       5,622  
      200,672       180,754  

Less: Allowance

    (966 )     (546 )

Less: Long-term portion of accounts receivable, net

    (17,851 )     (9,689 )

Total accounts receivable, net

  $ 181,855     $ 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.

 

 
6

 

 

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,
2014

   

December 31,

2013

 

New vehicles

  $ 711,090     $ 657,043  

Used vehicles

    192,801       167,814  

Parts and accessories

    37,865       34,162  

Total inventories

  $ 941,756     $ 859,019  

 

Note 4. Goodwill

The changes in the carrying amounts of goodwill are as follows (in thousands):

 

   

Goodwill

 

Balance as of December, 31, 2012, gross

  $ 331,313  

Accumulated impairment loss

    (299,266 )

Balance as of December 31, 2012, net

    32,047  

Additions through acquisitions

    17,464  

Balance as of December 31, 2013, net

    49,511  

Additions through acquisition

    16,234  

Balance as of September 30, 2014, net

  $ 65,745  

 

Note 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., et al, Case No. 3AN-06-13341 CI), and in April 2007, a second 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 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.

 

 
7

 

 

In June 2013, the parties agreed to mediate the claims. The mediation resulted in a settlement agreement that received the final approval of the Court on December 11, 2013.  Under the settlement agreement, we agreed to reimburse plaintiffs’ legal fees and to pay (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. Of this amount, $0.7 million was recorded in the nine months ended September 30, 2014, as a component of selling, general and administrative expense in our Consolidated Statements of Operations. As of September 30, 2014, the liability for unused vouchers, assuming an expected redemption rate, was $1.1 million and is recorded as a component of accrued liabilities in the Consolidated Balance Sheet. We believe that these estimates are reasonable; however, actual costs 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, 2014

   

Nine Months Ended
September 30, 2014

 

Affected Line Item in the Consolidated Statements of Operations

Loss on cash flow hedges

  $ (119 )   $ (370 )

Floor plan interest expense

Taxes

    46       141  

Income tax provision

Loss on cash flow hedges, net

  $ (73 )   $ (229 )  

 

   

Three Months Ended
September 30, 2013

   

Nine Months Ended
September 30, 2013

 

Affected Line Item in the Consolidated Statements of Operations

Loss on cash flow hedges

  $ (134 )   $ (606 )

Floor plan interest expense

Taxes

    51       232  

Income tax provision

Loss on cash flow hedges, net

  $ (83 )   $ (374 )  

 

See Note 9 for more details regarding our derivative contracts.

 

Share Repurchases

In 2011 and 2012, our Board of Directors authorized the repurchase of up to a total of 3,000,000 shares of our Class A common stock. In the nine months ended September 30, 2014, we repurchased 62,500 shares at an average price of $76.28 per share, for a total of $4.8 million. Through September 30, 2014, we have repurchased 1,335,547 shares and 1,664,453 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.

 

 
8

 

 

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

 

Dividends

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

 

Quarter paid:

 

Dividend amount

per share

   

Total amount of dividend

(in thousands)

 

First quarter

  $ 0.13     $ 3,378  
Second quarter     0.16       4,179  
Third quarter     0.16       4,174  

 

See Note 14 for a discussion of a dividend related to our third quarter 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 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 2014, we made discretionary contributions of $2.4 million to the LTIP. Participants will receive a guaranteed return of 5.25% in 2014. We recognized compensation expense related to the LTIP as follows (in thousands):

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Compensation expense

  $ 381     $ 357     $ 1,458     $ 1,042  

 

As of September 30, 2014 and December 31, 2013, the balance due to participants was $10.8 million and $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.

 

 
9

 

 

Inputs are collected from Bloomberg on the last market day of the 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 period ended September 30, 2014.

 

Liabilities Measured at Fair Value on a Recurring Basis

Following are the disclosures related to our liabilities that are measured at fair value on a recurring basis (in thousands):

 

Fair Value at September 30, 2014

 

Level 1

   

Level 2

   

Level 3

 

Measured on a recurring basis:

                       

Derivative contract, net

  $ -     $ (2,032 )   $ -  

 

Fair Value at December 31, 2013

 

Level 1

   

Level 2

   

Level 3

 

Measured on a recurring basis:

                       

Derivative contract, net

  $ -     $ (2,900 )   $ -  

 

We did not have any assets measured at fair value on a recurring basis at September 30, 2014 or December 31, 2013.

 

See Note 9 for more details regarding our derivative contracts.

 

Fair Value Disclosures for Financial Assets and Liabilities

We determined that the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.

 

We have fixed-rate debt and calculate the estimated fair value of our fixed-rate debt using a discounted cash flow 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 30, 2014, this debt had maturity dates between November 2016 and October 2034. 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,
2014

   

December 31,

2013

 

Carrying value

  $ 208,541     $ 132,616  

Fair value

    208,574       126,786  

 

Note 9. Derivative Financial Instrument

From time to time, we may 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 30, 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 30, 2014, the one-month LIBOR rate was 0.15% per annum, as reported in the Wall Street Journal.

 

 
10

 

 

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 $1.1 million at September 30, 2014.

 

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

 

Balance Sheet Information

 

Fair Value of Liability Derivatives

 

Derivatives Designated as Hedging

Instruments

 

Location in Balance

Sheet

 

September 30,

2014

 
             

Interest Rate Swap Contract

 

Accrued liabilities

  $ 1,213  
   

Other long-term liabilities

    819  
          2,032  

 

Balance Sheet Information

 

Fair Value of Liability Derivatives

 

Derivatives Designated as Hedging

Instruments

 

Location in Balance

Sheet

 

December 31,

2013

 
             

Interest Rate Swap Contract

 

Accrued liabilities

  $ 1,215  
   

Other long-term liabilities

    1,685  
        $ 2,900  

 

The effect of derivative instruments on our Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2014 and 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)

 
                             

Three Months Ended

September 30, 2014

                           

Interest Rate Swap Contract

  $ 179  

Floor plan interest expense

  $ (119 )

Floor plan interest expense

  $ (184 )
                             

Three Months Ended

September 30, 2013

                           

Interest Rate Swap Contracts

  $ 18  

Floor plan interest expense

  $ (134 )

Floor plan interest expense

  $ (173 )

 

 
11

 

 

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)

 
                             

Nine Months Ended

September 30, 2014

                           

Interest Rate Swap Contract

  $ 381  

Floor plan interest expense

  $ (370 )

Floor plan interest expense

  $ (543 )
                             

Nine Months Ended

September 30, 2013

                           

Interest Rate Swap Contracts

  $ 914  

Floor plan interest expense

  $ (606 )

Floor plan interest expense

  $ (1,064 )

 

 

See also Note 8.

 

Note 10. Acquisitions

In the first nine months of 2014, we completed the following acquisitions, which contributed revenues of $114.6 million for the nine months ended September 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 Beaverton GMC Buick and Portland Cadillac in Portland, Oregon.

 

On July 28, 2014, we acquired Bellingham GMC Buick in Bellingham, Washington.

 

All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our consolidated financial statements from the date of acquisition.

 

 
12

 

 

No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the 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

  $ 81,558  

Debt issued

    3,161  
      84,719  

 

   

Assets Acquired and Liabilities Assumed

 

Inventories

  $ 44,026  

Franchise value

    6,823  

Property and equipment

    17,313  

Other assets

    430  

Other liabilities

    (107 )
      68,485  

Goodwill

    16,234  
    $ 84,719  

 

 

For the three- and nine-month periods ended September 30, 2014, we recorded acquisition expense of $0.9 million and $1.1 million, respectively, primarily related to the DCH acquisition which was completed on October 1, 2014. See also Note 14. Additionally, 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. These amounts are 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.

 

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

 

Three Months Ended September 30,

 

2014

   

2013

 

Revenue

  $ 1,297,479     $ 1,162,850  

Income from continuing operations, net of tax

    34,542       31,959  

Basic income per share from continuing operations, net of tax

    1.32       1.24  

Diluted income per share from continuing operations, net of tax

    1.31       1.22  

 

Nine Months Ended September 30,

 

2014

   

2013

 

Revenue

  $ 3,652,673     $ 3,280,183  

Income from continuing operations, net of tax

    95,141       81,387  

Basic income per share from continuing operations, net of tax

    3.65       3.16  

Diluted income per share from continuing operations, net of tax

    3.61       3.11  

 

These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.

 

 
13

 

 

Note 11. Discontinued Operations

We classify an asset group as held for sale 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 as follows:

 

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.

 

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. We early adopted this guidance in the third quarter of 2014 and, as a result, determined that individual stores which met the criteria for held for sale after our adoption date would no longer qualify for classification as discontinued operations. We had previously reclassified a store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we did not expect to have any significant continuing involvement in the store’s operations after its disposal.

On May 1, 2014, we completed the sale of one store which had been classified as held for sale since October 2012. This store’s operations have been reclassified to discontinued operations in our Consolidated Statement of Operations, on a comparable basis for all periods presented.

 

In September 2014, we determined two operating stores met the criteria to be classified as held for sale. One of the stores was under contract to sell and the other was being actively marketed for sale by us and third party brokers. For the nine months ended September 30, 2014 and 2013, income from continuing operations before income taxes of the two operating stores was immaterial.

 

Assets held for sale included the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 

Inventories

  $ 6,551     $ 8,260  

Property, plant and equipment

    1,829       1,194  

Intangible assets

    540       2,072  
    $ 8,920     $ 11,526  

 

Liabilities related to assets held for sale included the following (in thousands):

 

   

September 30,

   

December 31,

 
   

2014

   

2013

 

Floor plan notes payable

  $ 4,776     $ 6,271  

 

 
14

 

 

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenue

  $ -     $ 8,712     $ 12,569     $ 27,590  
                                 

Pre-tax income (loss) from discontinued operations

  $ -     $ 237     $ (467 )   $ 929  

Net gain on disposal activities

    -       -       5,744       -  
      -       237       5,277       929  

Income tax expense

    -       (110 )     (2,098 )     (355 )

Income from discontinued operations, net of income tax expense

  $ -     $ 127     $ 3,179     $ 574  

Goodwill and other intangible assets disposed of

    -       -       221       -  

Cash generated from disposal activities

    -       -       10,617       -  

Floor plan debt paid in connection with disposal activities

    -       -       3,311       -  

 

Actual floor plan interest expense for a 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 nine months ended September 30, 2014 and 2013, interest expense included as a component of discontinued operations was immaterial.

 

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.

 

 
15

 

 

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 periods ended September 30, 2014 and 2013 (in thousands, except per share amounts):

 

Three Months Ended September 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

  $ 31,149     $ 3,388     $ 27,831     $ 3,060  

Distributed income applicable to common stockholders

    (3,765 )     (409 )     (3,030 )     (333 )

Basic undistributed income from continuing operations applicable to common stockholders

  $ 27,384     $ 2,979     $ 24,801     $ 2,727  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share

    23,556       2,562       23,304       2,562  
                                 

Basic income per share from continuing operations applicable to common stockholders

  $ 1.32     $ 1.32     $ 1.19     $ 1.19  

Basic distributed income per share from continuing operations applicable to common stockholders

    (0.16 )     (0.16 )     (0.13 )     (0.13 )

Basic undistributed income per share from continuing operations applicable to common stockholders

  $ 1.16     $ 1.16     $ 1.06       1.06  

 

 
16

 

 

Three Months Ended September 30,

 

2014

   

2013

 

Diluted EPS from Continuing Operations

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed income applicable to common stockholders

  $ 3,765     $ 409     $ 3,030     $ 333  

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

    406       -       328       -  

Diluted distributed income applicable to common stockholders

  $ 4,174     $ 406     $ 3,363     $ 328  

Undistributed income from continuing operations applicable to common stockholders

  $ 27,384     $ 2,979     $ 24,801     $ 2,727  

Reallocation of undistributed income as a result of conversion of dilutive stock options

    28       (28 )     39       (39 )

Reallocation of undistributed income due to conversion of Class B to Class A

    2,951       -       2,688       -  

Diluted undistributed income from continuing operations applicable to common stockholders

  $ 30,363     $ 2,951     $ 27,528     $ 2,688  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations

    23,556       2,562       23,304       2,562  

Weighted average number of shares from stock options

    241       -       371       -  

Conversion of Class B to Class A common shares outstanding

    2,562       -       2,562       -  

Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations

    26,359       2,562       26,237       2,562  
                                 

Diluted income per share from continuing operations applicable to common stockholders

  $ 1.31     $ 1.31     $ 1.18     $ 1.18  

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

  $ 1.15       1.15       1.05       1.05  

 

Three Months Ended September 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

    13       -       14       -  

 

 
17

 

 

Nine Months Ended September 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

  $ 85,124     $ 9,277     $ 70,063     $ 7,991  

Distributed income applicable to common stockholders

    (10,578 )     (1,153 )     (6,031 )     (688 )

Basic undistributed income from continuing operations applicable to common stockholders

  $ 74,546     $ 8,124     $ 64,032     $ 7,303  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share

    23,509       2,562       23,137       2,639  
                                 

Basic income per share from continuing operations applicable to common stockholders

  $ 3.62     $ 3.62     $ 3.03     $ 3.03  

Basic distributed income per share from continuing operations applicable to common stockholders

    (0.45 )     (0.45 )     (0.26 )     (0.26 )

Basic undistributed income per share from continuing operations applicable to common stockholders

  $ 3.17     $ 3.17     $ 2.77     $ 2.77  

 

 
18

 

 

Nine Months Ended September 30,

 

2014

   

2013

 

Diluted EPS from Continuing Operations

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed income applicable to common stockholders

  $ 10,578     $ 1,153     $ 6,031     $ 688  

Reallocation of distributed income as a result of conversion of dilutive stock options

    12       (12 )     10       (10 )

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

    1,141       -       678       -  

Diluted distributed income applicable to common stockholders

  $ 11,731     $ 1,141     $ 6,719     $ 678  

Undistributed income from continuing operations applicable to common stockholders

  $ 74,546     $ 8,124     $ 64,032     $ 7,303  

Reallocation of undistributed income as a result of conversion of dilutive stock options

    82       (82 )     107       (107 )

Reallocation of undistributed income due to conversion of Class B to Class A

    8,042       -       7,196       -  

Diluted undistributed income from continuing operations applicable to common stockholders

  $ 82,670     $ 8,042     $ 71,335     $ 7,196  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations

    23,509       2,562       23,137       2,639  

Weighted average number of shares from stock options

    266       -       383       -  

Conversion of Class B to Class A common shares outstanding

    2,562       -       2,639       -  

Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations

    26,337       2,562       26,159       2,639  
                                 

Diluted income per share from continuing operations applicable to common stockholders

  $ 3.58     $ 3.58     $ 2.98     $ 2.98  

Diluted distributed income per share from continuing operations applicable to common stockholders

    (0.45 )     (0.45 )     (0.26 )     (0.26 )

Diluted undistributed income per share from continuing operations applicable to common stockholders

  $ 3.13     $ 3.13     $ 2.72       2.72  

 

Nine Months Ended September 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

    13       -       17       -  

 

 
19

 

 

Note 13. Recent Accounting Pronouncements

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. We are evaluating the effect this amendment will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

 

Note 14. Subsequent Events

 

Acquisitions

On October 1, 2014, we completed the purchase of all of the issued and outstanding shares of the capital stock of DCH Auto Group (USA) Inc., which includes 27 stores located in New York, New Jersey and California. The purchase price was $669.5 million, comprised of $364 million in cash, the issuance of 268,770 shares of Lithia Class A common stock with a value of $22.5 million, incurring $230 million of vehicle floor plan debt financing, and the assumption of non-floor plan debt of $53 million. In conjunction with the transaction, we increased our syndicated credit facility by $700 million and we expect to increase outstanding mortgage debt by $100 million.

 

On October 6, 2014, we acquired the inventory, equipment and intangible assets of Harris Nissan in Clovis, California for $7.8 million in cash.

 

Credit Facility

On October 1, 2014, we amended our existing credit facility to increase the total financing commitment to $1.7 billion. This syndicated credit facility is comprised of 16 financial institutions, including seven manufacturer-affiliated finance companies. Our credit facility provides for up to $1.25 billion in new vehicle inventory floor plan financing, up to $150 million in used vehicle inventory floor plan financing and a maximum of $300 million in revolving financing for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $1.85 billion total availability, subject to lender approval.

 

New Market Tax Credit

In October 2014, we acquired a 99.9% membership interest in USB NMTC Fund 2014-1, LLC (“the LLC”). The LLC was formed by U.S. Bancorp Community Development Corporation, which invests in a variety of entities providing capital for businesses in distressed or low income areas. We expect these investments will generate new market tax credits that may be used to reduce our federal income tax liability. The transaction obligates us to contribute $37.1 million to the entity over the next 24 months.

 

Common Stock Dividend

On October 27, 2014, our Board of Directors approved a dividend of $0.16 per share on our Class A and Class B common stock related to our third quarter 2014 financial results. The dividend will total approximately $4.2 million and will be paid on December 5, 2014 to shareholders of record on November 21, 2014.

 

 
20

 

 

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 constitutes 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.

 

Our belief that the compressed used vehicle retail gross profit margins are limited to the third and fourth quarters of 2014.

 

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. 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 in 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. 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, 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 31, 2014, we offer 30 brands of new vehicles and all brands of used vehicles in 129 stores in the United States and online at 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 convenient, flexible, personalized service combined with the large company advantages of selection, competitive pricing, broad access to financing, and 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, centrally-performed administrative functions in Medford, Oregon, and regional accounting processing centers, we seek to gain economies of scale from our dealership network.

 

 
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Results of Continuing Operations

For the three months ended September 30, 2014 and 2013, we reported income from continuing operations, net of tax, of $34.5 million, or $1.31 per diluted share, and $30.9 million, or $1.18 per diluted share, respectively.

 

For the nine months ended September 30, 2014 and 2013, we reported income from continuing operations, net of tax, of $94.4 million, or $3.58 per diluted share, and $78.1 million, or $2.98 per diluted share, respectively.

 

Discontinued Operations

We early adopted the amendment to the accounting guidance related to discontinued operations in the third quarter of 2014. 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. As a result, we determined that individual stores which met the criteria for held for sale after our adoption date would no longer qualify for classification as discontinued operations. We had previously reclassified a store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we did not expect to have any significant continuing involvement in the store’s operations after its disposal.

We realized income from discontinued operations, net of tax, for the three months ended September 30, 2013, of $127,000. Due to our early adoption of the amended accounting guidance, no income from discontinued operations was recorded for the three months ended September 30, 2014. Income from discontinued operations, net of tax, for the nine months ended September 30, 2014 and 2013 totaled $3.2 million and $574,000, 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 months ended September 30, 2014 and 2013 (dollars in thousands):

 

Three months ended
September 30, 2014

 

Revenues

   

Percent of

Total Revenues

   

Gross Profit

   

Gross Profit

Margin

   

Percent of Total

Gross Profit

 

New vehicle

  $ 732,121       56.4 %   $ 47,648       6.5 %     24.1 %

Used vehicle retail

    340,522       26.3       43,898       12.9       22.2  

Used vehicle wholesale

    48,853       3.8       504       1.0       0.3  

Finance and insurance(1)

    46,855       3.6       46,855       100.0       23.7  

Service, body and parts

    120,772       9.3       58,421       48.4