Attached files

file filename
EX-31.2 - EXHIBIT 31.2 - LITHIA MOTORS INCex31-2.htm
EX-32.1 - EXHIBIT 32.1 - LITHIA MOTORS INCex32-1.htm
EX-31.1 - EXHIBIT 31.1 - LITHIA MOTORS INCex31-1.htm
EX-10.1 - EXHIBIT 10.1 - LITHIA MOTORS INCex10-1.htm
EX-32.2 - EXHIBIT 32.2 - LITHIA MOTORS INCex32-2.htm

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 March 31, 2016

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

 

23,826,428

Class B common stock without par value

 

1,762,231

(Class)

 

(Outstanding at April 29, 2016)

 

 
 

 

 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

 

 

PART I - FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

2
     
 

Consolidated Balance Sheets (Unaudited) – March 31, 2016 and December 31, 2015

2
     
 

Consolidated Statements of Operations (Unaudited) – Three Months Ended March 31, 2016 and 2015

3
     
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three Months Ended March 31, 2016 and 2015

4
     
 

Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2016 and 2015

5
     
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

6
     

Item 2.

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

16
     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35
     

Item 4.

Controls and Procedures

36
     

PART II - OTHER INFORMATION

 
     

Item 1A.

Risk Factors

36
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36
     

Item 6.

Exhibits

37
     

Signatures

  38

 

 
1

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

   

March 31,

2016

   

December 31,

2015

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 21,559     $ 45,008  

Accounts receivable, net of allowance for doubtful accounts of $3,729 and $2,243

    286,292       308,462  

Inventories, net

    1,541,085       1,470,987  

Other current assets

    50,473       54,408  

Total Current Assets

    1,899,409       1,878,865  
                 

Property and equipment, net of accumulated depreciation of $145,033 and $137,853

    882,405       876,660  

Goodwill

    213,934       213,220  

Franchise value

    161,668       157,699  

Other non-current assets

    110,202       100,855  

Total Assets

  $ 3,267,618     $ 3,227,299  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Floor plan notes payable

  $ 55,836     $ 48,083  

Floor plan notes payable: non-trade

    1,296,751       1,265,872  

Current maturities of long-term debt

    33,721       38,891  

Trade payables

    78,250       70,871  

Accrued liabilities

    179,145       167,108  

Total Current Liabilities

    1,643,703       1,590,825  
                 

Long-term debt, less current maturities

    595,663       606,463  

Deferred revenue

    70,066       66,734  

Deferred income taxes

    59,134       53,129  

Other long-term liabilities

    84,375       81,984  

Total Liabilities

    2,452,941       2,399,135  
                 

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 23,993 and 23,676

    213,699       258,410  

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,762 and 2,542

    219       316  

Additional paid-in capital

    34,866       38,822  

Accumulated other comprehensive loss

    (114

)

    (277

)

Retained earnings

    566,007       530,893  

Total Stockholders' Equity

    814,677       828,164  

Total Liabilities and Stockholders' Equity

  $ 3,267,618     $ 3,227,299  

 

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 March 31,

 
   

2016

   

2015

 

Revenues:

               

New vehicle

  $ 1,096,055     $ 1,007,816  

Used vehicle retail

    532,726       462,931  

Used vehicle wholesale

    65,146       62,208  

Finance and insurance

    77,638       64,604  

Service, body and parts

    196,675       173,475  

Fleet and other

    14,621       18,144  

Total revenues

    1,982,861       1,789,178  

Cost of sales:

               

New vehicle

    1,029,289       946,042  

Used vehicle retail

    468,449       403,489  

Used vehicle wholesale

    63,316       60,047  

Service, body and parts

    100,556       89,036  

Fleet and other

    14,069       17,189  

Total cost of sales

    1,675,679       1,515,803  

Gross profit

    307,182       273,375  

Asset impairments

    3,498       4,130  

Selling, general and administrative

    219,106       191,618  

Depreciation and amortization

    11,663       9,726  

Operating income

    72,915       67,901  

Floor plan interest expense

    (5,909

)

    (4,649

)

Other interest expense

    (5,459

)

    (4,828

)

Other expense, net

    (1,526

)

    (368

)

Income before income taxes

    60,021       58,056  

Income tax provision

    (19,751

)

    (17,403

)

Net income

  $ 40,270     $ 40,653  
                 

Basic net income per share

  $ 1.56     $ 1.55  

Shares used in basic per share calculations

    25,816       26,283  
                 

Diluted net income per share

  $ 1.55     $ 1.53  

Shares used in diluted per share calculations

    25,973       26,519  

 

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

March 31,

 
   

2016

   

2015

 

Net income

  $ 40,270     $ 40,653  

Other comprehensive income, net of tax:

               

Gain on cash flow hedges, net of tax expense of $103 and $86

    163       139  

Comprehensive income

  $ 40,433     $ 40,792  

 

See accompanying condensed notes to consolidated financial statements.

 

 
4

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 40,270     $ 40,653  

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

               

Asset impairments

    3,498       4,130  

Depreciation and amortization

    11,663       9,726  

Stock-based compensation

    3,149       2,727  

(Gain) loss on disposal of other assets

    (3,391

)

    8  

Gain on disposal of franchise

    (1,087

)

    (3,349

)

Deferred income taxes

    10,261       3,863  

Excess tax benefit from share-based payment arrangements

    (4,379

)

    (4,733

)

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

               

Trade receivables, net

    25,564       7,569  

Inventories

    (73,744

)

    (39,460

)

Other assets

    (4,705

)

    (2,078

)

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

               

Floor plan notes payable

    7,753       1,092  

Trade payables

    920       6,799  

Accrued liabilities

    13,425       4,444  

Other long-term liabilities and deferred revenue

    5,396       6,838  

Net cash provided by operating activities

    34,593       38,229  
                 

Cash flows from investing activities:

               

Capital expenditures

    (15,900

)

    (24,917

)

Proceeds from sales of assets

    92       103  

Cash paid for other investments

    (11,449

)

    (9,804

)

Cash paid for acquisitions, net of cash acquired

    (13,799

)

     

Proceeds from sales of stores

    11,822       3,680  

Net cash used in investing activities

    (29,234

)

    (30,938

)

                 

Cash flows from financing activities:

               

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

    38,626       (21,984

)

Borrowings on lines of credit

    213,123       271,023  

Repayments on lines of credit

    (229,311

)

    (293,960

)

Principal payments on long-term debt, scheduled

    (3,979

)

    (3,619

)

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

    (2,303

)

    (9,189

)

Proceeds from issuance of long-term debt

    12,080       50,350  

Proceeds from issuance of common stock

    1,464       1,039  

Repurchase of common stock

    (57,736

)

    (10,343

)

Excess tax benefit from share-based payment arrangements

    4,379       4,733  

Dividends paid

    (5,151

)

    (4,216

)

Net cash used in financing activities

    (28,808

)

    (16,166

)

Decrease in cash and cash equivalents

    (23,449

)

    (8,875

)

Cash and cash equivalents at beginning of period

    45,008       29,898  

Cash and cash equivalents at end of period

  $ 21,559     $ 21,023  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for interest

  $ 12,990     $ 12,494  

Cash paid during the period for income taxes, net

    497       6,542  
                 

Supplemental schedule of non-cash activities:

               

Floor plan debt paid in connection with store disposals

  $ 5,284     $ 2,208  

 

 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 March 31, 2016 and for the three months ended March 31, 2016 and 2015. 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 2015 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2015 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2015 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):

 

   

March 31, 2016

   

December 31, 2015

 

Contracts in transit

  $ 153,126     $ 168,460  

Trade receivables

    37,543       33,749  

Vehicle receivables

    31,833       36,470  

Manufacturer receivables

    53,059       59,215  

Auto loan receivables

    50,811       42,490  

Other receivables

    3,023       3,033  
      329,395       343,417  

Less: Allowances

    (3,729

)

    (2,243

)

Less: Long-term portion of accounts receivable, net

    (39,374

)

    (32,712

)

Total accounts receivable, net

  $ 286,292     $ 308,462  

 

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 others for commissions earned on service contracts and insurance products.

 

Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.

 

Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.

 

Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.

 

Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.

 

The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial.

 

 
6

 

 

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 inventories, net, consisted of the following (in thousands):

 

   

March 31, 2016

   

December 31, 2015

 

New vehicles

  $ 1,154,910     $ 1,113,613  

Used vehicles

    332,341       302,911  

Parts and accessories

    53,834       54,463  

Total inventories

  $ 1,541,085     $ 1,470,987  

 

Note 4. Goodwill and Franchise Value

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

 

   

Domestic

   

Import

   

Luxury

   

Consolidated

 

Balance as of December 31, 2014(1)

  $ 91,011     $ 79,601     $ 28,763     $ 199,375  

Additions through acquisitions

    6,892       5,029       2,170       14,091  

Reduction related to divestiture

          (246

)

          (246

)

Balance as of December 31, 2015(1)

    97,903       84,384       30,933       213,220  

Additions through acquisitions

    456       1,283       193       1,932  

Reduction related to divestiture

    (1,218

)

                (1,218

)

Balance as of March 31, 2016(1)

  $ 97,141     $ 85,667     $ 31,126     $ 213,934  

 

(1)

Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.

 

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

 

   

Franchise Value

 

Balance as of December 31, 2014

  $ 150,892  

Additions through acquisitions

    6,843  

Transfers to assets held for sale

    (36

)

Balance as of December 31, 2015

    157,699  

Additions through acquisitions

    4,487  

Reduction related to divestiture

    (518

)

Balance as of March 31, 2016

  $ 161,668  

 

Note 5. Stockholders’ Equity

 

Repurchases of Class A Common Stock

In August 2011, our Board of Directors authorized the repurchase of up to 2 million shares of our Class A common stock and, on July 20, 2012, our Board of Directors authorized the repurchase of 1 million additional shares of our Class A common stock. Through March 31, 2016, we have repurchased 2,327,636 shares under this authorization at an average price of $51.09 per share. Of this amount, 599,123 shares were repurchased during the first three months of 2016 at an average price of $79.21 per share for a total of $47.5 million.

 

Effective February 29, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. This authorization replaced the existing authorization, increasing the total and establishing a maximum dollar rather than share amount. Through March 31, 2016, we have repurchased 19,000 shares under this authorization at an average price of $92.20 per share for a total of $1.8 million. As of March 31, 2016, we have $248.2 million available for repurchases pursuant to this authorization.

 

 
7

 

 

In addition, during the first three months of 2016, we repurchased 94,363 shares at an average price of $90.48 per share, for a total of $8.5 million, related to tax withholdings associated with the vesting of restricted stock units (“RSUs”). The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.

 

Class B Common Stock Conversion

On March 2, 2016, Lithia Holding Company, L.L.C. (“Holding Company”), which is managed and controlled by Sidney B. DeBoer, our Chairman of the Board, notified us that it had converted 780,000 shares of our Class B Common Stock into shares of our Class A Common Stock and distributed them to certain members of Holding Company in redemption of their membership interests in Holding Company.

 

Dividends

Dividends paid on our Class A and Class B common stock were as follows:

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 

Dividend amount per share

  $ 0.20     $ 0.16  

Total amount of dividend (in thousands)

    5,151       4,216  

 

See Note 13 for a discussion of a dividend related to our first quarter 2016 financial results.

 

Note 6. 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 over one to seven years depending 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. The following is a summary related to our LTIP (dollars in thousands):

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 

Compensation expense

  $ 280     $ 457  

Discretionary contribution

    1,382       2,096  

Guaranteed annual return

    5.25

%

    5.25

%

 

As of March 31, 2016 and December 31, 2015, the balance due, comprised of both amounts participants elected to defer and discretionary contributions, was $18.3 million and $19.7 million, respectively, and was included as a component of accrued liabilities and other long-term liabilities in the Consolidated Balance Sheets.

 

Assets to fund the obligations of the LTIP are held in a Rabbi Trust and must be used only for purposes of providing benefits under the plan, other than in an event of insolvency. The assets held by the Rabbi Trust are invested in corporate-owned life insurance. As of March 31, 2016 and December 31, 2015, the value of the assets held by the Rabbi trust were $21.3 million and $15.4 million, respectively, and are recorded as a component of Other non-current assets in the Consolidated Balance Sheets.

 

Note 7. 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, 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 estimate the value of our equity-method investment, which is recorded at fair value on a non-recurring basis, based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets. Because these valuations contain unobservable inputs, we classified the measurement of fair value of our equity-method investment as Level 3.

 

 
8

 

 

We estimate the value of other long-lived assets that are recorded at fair value on a non-recurring basis based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers’ and brokers’ valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. Because these valuations contain unobservable inputs, we classified the measurement of fair value of long-lived assets as Level 3.

 

There were no changes to our valuation techniques during the three-month period ended March 31, 2016.

 

Assets and Liabilities Measured at Fair Value

Following are the disclosures related to our assets that are measured at fair value (in thousands):

 

Fair Value at March 31, 2016

 

Level 1

   

Level 2

   

Level 3

 

Measured on a non-recurring basis:

                       

Equity-method investment

  $     $     $ 16,721  

 

 

Fair Value at December 31, 2015

 

Level 1

   

Level 2

   

Level 3

 

Measured on a non-recurring basis:

                       

Equity-method investment

  $     $     $ 22,284  

Long-lived assets held and used:

                       

Certain buildings and improvements

  $     $     $ 6,559  

 

Based on operating losses recognized by the equity-method investment, we determined that an impairment of our investment had occurred. Accordingly, we performed a fair value calculation for this investment and determined that a $3.5 million and a $4.1 million impairment, respectively, was required to be recorded as asset impairments in our Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015, respectively. See Note 9.

 

Fair Value Disclosures for Financial Assets and Liabilities

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

 

We have fixed rate debt 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 March 31, 2016, this debt had maturity dates between May 1, 2018 and October 1, 2034. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

 

   

March 31, 2016

   

December 31, 2015

 

Carrying value

  $ 290,008     $ 297,463  

Fair value

    284,075       296,961  

 

 
9

 

 

Note 8. Net Income Per Share of Class A and Class B Common Stock

We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding common shares underlying equity awards that are unvested or subject to forfeiture. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the common shares issuable upon the net exercise of stock options and unvested RSUs and is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.

 

Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Under our Articles of Incorporation, the Class A and Class B common stock share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.

 

Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):

 

Three Months Ended March 31,

 

2016

   

2015

 

Basic EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Net income applicable to common stockholders

  $ 36,692     $ 3,578     $ 36,690     $ 3,963  

Distributed net income applicable to common stockholders

    (4,693

)

    (458

)

    (3,805

)

    (411

)

Basic undistributed net income applicable to common stockholders

  $ 31,999     $ 3,120     $ 32,885     $ 3,552  
                                 

Denominator:

                               

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

    23,522       2,294       23,721       2,562  
                                 

Earnings per Share:

                               

Basic net income per share applicable to common stockholders

  $ 1.56     $ 1.56     $ 1.55     $ 1.55  

Basic distributed net income per share applicable to common stockholders

    (0.20

)

    (0.20

)

    (0.16

)

    (0.16

)

Basic undistributed net income per share applicable to common stockholders

  $ 1.36     $ 1.36     $ 1.39     $ 1.39  

 

 
10

 

 

Three Months Ended March 31,

 

2016

   

2015

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed net income applicable to common stockholders

  $ 4,693     $ 458     $ 3,805     $ 411  

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

    3       (3

)

    4       (4

)

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

    455             407        

Diluted distributed net income applicable to common stockholders

  $ 5,151     $ 455     $ 4,216     $ 407  
                                 

Undistributed net income applicable to common stockholders

  $ 31,999     $ 3,120     $ 32,885     $ 3,552  

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

    18       (18

)

    32       (32

)

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

    3,102             3,520        

Diluted undistributed net income applicable to common stockholders

  $ 35,119     $ 3,102     $ 36,437     $ 3,520  
                                 

Denominator:

                               

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

    23,522       2,294       23,721       2,562  

Weighted average number of shares from stock options

    157             236        

Conversion of Class B to Class A common shares outstanding

    2,294             2,562        

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

    25,973       2,294       26,519       2,562  
                                 

Earnings per Share:

                               

Diluted net income per share applicable to common stockholders

  $ 1.55     $ 1.55     $ 1.53     $ 1.53  

Diluted distributed net income per share applicable to common stockholders

    (0.20

)

    (0.20

)

    (0.16

)

    (0.16

)

Diluted undistributed net income per share applicable to common stockholders

  $ 1.35     $ 1.35     $ 1.37     $ 1.37  

 

Three Months Ended March 31,

 

2016

   

2015

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Antidilutive Securities

                               

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

    20             15      
   

 

Note 9. Equity-Method Investment

In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with an initial equity contribution of $4.1 million. We made additional equity contributions to the entity of $5.7 million in the first three months of 2016 and $22.8 million in the full year of 2015. We are obligated to make $49.8 million of total contributions in quarterly installments to the entity over a two-year period ending October 2016, of which $32.6 million in contributions have been made as of March 31, 2016.

 

This investment generates new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.

 

 
11

 

 

While U.S. Bancorp Community Development Corporation exercises management control over the limited liability company, due to the economic interest we hold in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method.

 

The following amounts related to this equity-method investment were recorded in our Consolidated Balance Sheets (in thousands):

 

   

March 31,

2016

   

December 31,

2015

 

Carrying value, recorded as a component of other non-current assets

  $ 16,721     $ 22,284  

Present value of obligation associated with future equity contributions, recorded as a component of accrued liabilities and other long-term liabilities

    16,930       22,511  

 

The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):

 

   

Three Months Ended

March 31,

 
   

2016

   

2015

 

Asset impairments to write investment down to fair value

  $ 3,498     $ 4,130  

Our portion of the partnership’s operating losses

    2,066       1,732  

Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions

    92       211  

Tax benefits and credits generated

    5,945       7,250  

 

Note 10. Segments

While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three reportable segments based on their economic similarities: Domestic, Import and Luxury.

 

Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-Benz and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products.

 

Corporate and other revenue and income includes the results of operations of our stand-alone body shop offset by unallocated corporate overhead expenses, such as corporate personnel costs, and certain unallocated reserve and elimination adjustments. Additionally, certain internal corporate expense allocations increase segment income for Corporate and other while decreasing segment income for the other reportable segments. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters that perform certain dealership functions.

 

We define our chief operating decision maker (“CODM”) to be certain members of our executive management group. Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, except for the internal allocation within Corporate and other discussed above. Our CODM measures the performance of each operating segment based on several metrics, including earnings from operations, and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the operating segments.

 

 
12

 

 

Certain financial information on a segment basis is as follows (in thousands):

 

   

Three Months Ended March 31,

 
   

2016

   

2015

 

Revenues:

               

Domestic

  $ 768,902     $ 690,682  

Import

    865,743       760,080  

Luxury

    346,813       336,993  
      1,981,458       1,787,755  

Corporate and other

    1,403       1,423  
    $ 1,982,861     $ 1,789,178  

Segment income*:

               

Domestic

  $ 21,730     $ 27,294  

Import

    22,633       17,063  

Luxury

    4,235       6,645  
      48,598       51,002  

Corporate and other

    30,071       21,976  

Depreciation and amortization

    (11,663

)

    (9,726

)

Other interest expense

    (5,459

)

    (4,828

)

Other expense, net

    (1,526

)

    (368

)

Income before income taxes

  $ 60,021     $ 58,056  

 *Segment income for each of the segments is defined as Income before income taxes, depreciation and amortization, other interest expense and other expense, net.

 

Floor plan interest expense:

               

Domestic

  $ 6,431     $ 4,722  

Import

    4,299       3,713  

Luxury

    2,657       2,062  
      13,387       10,497  

Corporate and other

    (7,478

)

    (5,848

)

    $ 5,909     $ 4,649  

 

   

March 31, 2016

   

December 31, 2015

 

Total assets:

               

Domestic

  $ 1,013,079     $ 985,374  

Import

    786,619       725,011  

Luxury

    449,916       475,305  

Corporate and other

    1,018,004       1,041,609  
    $ 3,267,618     $ 3,227,299  

 

Note 11. 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.

 

 
13

 

 

Stein and Jessos Litigations

On December 14, 2015, Shiva Y. Stein, a Lithia shareholder, filed derivative claims on behalf of Lithia against its Board of Directors, listing Lithia as a nominal defendant. The case, Stein v. DeBoer, et al., Case No. 15CV33696, is pending in the Circuit Court of the State of Oregon for Marion County. Ms. Stein’s claims relate to the adoption of a transition agreement between Lithia and Sidney B. DeBoer, as disclosed in a Current Report on Form 8-K filed September 16, 2015. Ms. Stein alleges that Lithia's directors breached their fiduciary duties of loyalty and due care, and wasted corporate assets, when they approved the agreement with Mr. DeBoer. Ms. Stein also alleges a claim against Sidney B. DeBoer, asserting that he has been unjustly enriched by the agreement. Ms. Stein is seeking relief in the amount of damages allegedly sustained by Lithia as a result of the alleged breaches of fiduciary duty and alleged corporate waste, disgorgement and imposition of a constructive trust on all property and profits Sidney B. DeBoer received as a result of the alleged wrongful conduct, and an award of the costs and disbursements of the lawsuit, including reasonable attorneys fees, costs, and expenses. The Board and Mr. DeBoer filed Motions to Dismiss the Stein suit on February 26, 2016.

 

On February 12, 2016, Marty A. Jessos, a Lithia shareholder, also filed derivative claims on behalf of Lithia against its Board of Directors, listing Lithia as a nominal defendant. The case, Jessos v. DeBoer, et al., Case No. 16CV04181, was filed in the Circuit Court of the State of Oregon for Multnomah County. The Jessos suit involves the same subject matter and alleges substantially the same facts, claims, and causes of action as the Stein suit. On March 22, 2016, the Jessos suit was transferred to Marion County Circuit Court. On April 4, 2016, the parties filed a Stipulation and [Proposed] Order of Consolidation in the Stein suit to consolidate both Stein and Jessos under the Stein suit, Case No. 15CV33696. On April 4, 2016, the Court signed the consolidation order. The case will be known as In re Lithia Motors Derivative Litigation, Case No. 15CV33696. Plaintiffs filed their consolidated complaint on April 15, 2016. The Board and Mr. DeBoer have not yet filed an answer or otherwise responded to the consolidated complaint.

 

The Board and Mr. DeBoer are defending themselves against Ms. Stein’s and Mr. Jessos’ allegations.

 

California Wage and Hour Litigations

In June 2012 Mr. Robles and Mr. Laredo brought claims against DCH Tustin Acura (Robles vs. Tustin Motors, Inc., Case No. 30-2012-00579414, filed in the Superior Court of California, Orange County) alleging that the employer underpaid technicians in light of the Wage Order provisions that require an employer to pay at least two times the minimum wage for each hour worked if the employee is required to bring his or her own tools. The complaint was amended in late 2013 to include allegations that the employer failed to pay technicians for non-productive time and/or time spent performing tasks not compensated by the flat-rate compensation system; off-the-clock time worked; and wages due at termination.  The amended complaint also alleged that the employer failed to provide technicians accurate and complete wage statements; and statutory meal and rest periods. Plaintiffs are now seeking relief on behalf of all employees at all DCH Auto Group dealerships in California.  Plaintiffs also seek attorney fees and costs.  These Plaintiffs (and several other former technicians in separate-but-partially-overlapping actions) also seek relief under California’s Private Attorney General Action (PAGA) provisions, which allow private plaintiffs to recover civil penalties on behalf of the State of California.  DCH successfully compelled arbitration based on arbitration agreements between these claimants and the employer, although certain representative claims were excluded and stayed pending arbitration.

 

The Company and these claimants settled their individual claims in arbitration in 2015.  In April 2016, DCH and plaintiffs agreed in principle to settle the representative claims, although this settlement has not yet been approved by either an independent arbitrator or the California courts as expressly contemplated by the parties and required by applicable law as a condition of the agreed release of claims.  DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. As a result, we believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.

 

In August 2014 Ms. Holzer filed a complaint in the Central District of California (Holzer vs. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods.  The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination.  Plaintiffs also seek attorney fees and costs. DCH has sought to compel arbitration based on Plaintiffs’ arbitration agreements.  Plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.  DCH is defending itself against these claims, and DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. As a result, we believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.

 

Note 12. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this amendment will have on our consolidated financial statements and related disclosures and believe the financial impact is not material. We have not yet selected a transition method.

 

 
14

 

 

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out method by prescribing inventory be valued at the lower of cost and net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are evaluating the effect this amendment will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies the accounting for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. 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.

 

Note 13. Subsequent Events

 

Common Stock Dividend

On April 19, 2016, our Board of Directors approved a dividend of $0.25 per share on our Class A and Class B common stock related to our first quarter 2016 financial results. The dividend will total approximately $6.4 million and will be paid on May 27, 2016 to shareholders of record on May 13, 2016.

 

Repurchases of Class A Common Stock

Since March 31, 2016, we have repurchased approximately 162,000 shares at a weighted average price of $81.10 per share. As of April 29, 2016, under our existing share repurchase authorization, approximately $235.1 million remains available for share repurchases.

 

 
15

 

 

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

 

Forward-Looking Statements and Risk Factors

Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”, “outlook,” “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terms. Examples of forward-looking statements in this Form 10-Q include, among others, statements we make regarding:

 

Future market conditions;

 

Expected operating results, such as improved store performance; maintaining incremental throughput between 45% and 50%; continued improvement of SG&A as a percentage of gross profit and all projections;

 

Anticipated continued success and growth of DCH Auto Group;

 

Anticipated ability to capture additional market share;

 

Anticipated ability to find accretive acquisitions;

 

Anticipated additions of dealership locations to our portfolio in the future;

 

Anticipated availability of liquidity from our unfinanced operating real estate; and

 

Anticipated levels of capital expenditures in the future.

 

The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results to materially differ from the results expressed or implied by these statements. Certain important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A in this Form 10-Q and in the Risk Factors section of our 2015 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. 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 April 29, 2016, we offered 31 brands of new vehicles and all brands of used vehicles in 138 stores in the United States and online at Lithia.com and DCHauto.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 dealerships are located across the United States. We seek domestic, import and luxury franchises in cities ranging from mid-sized regional markets to metropolitan markets. We evaluate all brands for expansion opportunities provided the market is large enough to support adequate new vehicle sales to justify the required capital investment.

 

Our 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 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 manage 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, and regional accounting processing centers, we seek to gain economies of scale from our dealership network.

 

Results of Operations

For the three months ended March 31, 2016 and 2015, we reported income, net of tax, of $40.3 million, or $1.55 per diluted share, and $40.7 million, or $1.53 per diluted share, respectively.

 

 
16

 

 

Key Revenue and Gross Profit Metrics

Key performance metrics for revenue and gross profit were as follows (dollars in thousands):

 

Three Months Ended
March 31, 2016

 

Revenues

   

Percent of

Total Revenues

   

Gross Profit

   

Gross Profit

Margin

   

Percent of Total

Gross Profit

 

New vehicle

  $ 1,096,055       55.3

%

  $ 66,766       6.1

%

    21.7

%

Used vehicle retail

    532,726       26.9       64,277       12.1       20.9  

Used vehicle wholesale

    65,146       3.3       1,830       2.8       0.6  

Finance and insurance(1)

    77,638       3.9       77,638       100.0       25.3  

Service, body and parts

    196,675       9.9       96,119       48.9       31.3  

Fleet and other

    14,621       0.7       552       3.8       0.2  
    $ 1,982,861       100.0

%

  $ 307,182       15.5

%

    100.0

%

 

Three Months Ended
March 31, 2015

 

Revenues

   

Percent of

Total Revenues

   

Gross Profit

   

Gross Profit

Margin

   

Percent of Total

Gross Profit

 

New vehicle

  $ 1,007,816       56.3

%

  $ 61,774       6.1

%

    22.6

%

Used vehicle retail

    462,931       25.9       59,442       12.8       21.7  

Used vehicle wholesale

    62,208       3.5       2,161       3.5       0.8  

Finance and insurance(1)

    64,604       3.6       64,604       100.0       23.6  

Service, body and parts

    173,475       9.7       84,439       48.7       30.9  

Fleet and other

    18,144       1.0       955       5.3       0.4  
    $ 1,789,178       100.0

%

  $ 273,375       15.3

%

    100.0

%

 

(1)

Commissions reported net of anticipated cancellations.

 

Same Store Operating Data

In the first quarter of 2016, we acquired two stores and, in 2015, we acquired six stores and opened one store. We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow revenues in our existing locations. As a result, same store measures have been integrated into the discussion below.

 

Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in February 2015 would be included in same store operating data beginning in March 2016, after its first full complete comparable month of operation. The first quarter operating results for the same store comparisons would include results for that store in only the period of March for both comparable periods.

 

 
17

 

 

New Vehicle Revenue and Gross Profit

 

   

Three Months Ended
March 31,

           

%

 

(Dollars in thousands, except per unit amounts)

 

2016

   

2015

   

Increase

   

Increase

 

Reported

                               

Revenue

  $ 1,096,055     $ 1,007,816     $ 88,239       8.8

%

Gross profit

  $ 66,766     $ 61,774     $ 4,992       8.1  

Gross margin

    6.1

%

    6.1

%

    bp        
                                 

Retail units sold

    32,749       30,623       2,126       6.9  

Average selling price per retail unit

  $ 33,468     $ 32,910     $ 558       1.7  

Average gross profit per retail unit

  $ 2,039     $ 2,017     $ 22       1.1  
                                 

Same store

                               

Revenue

  $ 1,062,335     $ 1,000,768     $ 61,567       6.2  

Gross profit

  $ 64,818     $ 61,278     $ 3,540       5.8  

Gross margin

    6.1

%

    6.1

%

    bp        
                                 

Retail units sold

    31,779       30,391       1,388       4.6  

Average selling price per retail unit

  $ 33,429     $ 32,930     $ 499       1.5  

Average gross profit per retail unit

  $ 2,040     $ 2,016     $ 24       1.2  

 

 

(1)

A basis point is equal to 1/100th of one percent.

 

New vehicle sales increased 8.8% in the three-month period ended March 31, 2016 compared to the same period of 2015, primarily driven by an increase in volume. On a same store basis, new vehicle sales increased 6.2% in the three-month period ended March 31, 2016 compared to the same period of 2015. Same store new vehicle unit sales increased 4.6% compared to national new vehicle sales levels, which increased approximately 3.1% in the three-month period ended March 31, 2016 compared to the same period of 2015.

 

Same store unit sales increased in all categories as follows:

 

   

Three months

ended

March 31, 2016

compared to the

same period of

2015

   

National growth

in the three months

ended

March 31, 2016

compared to the

same period of

2015(1)

 

Domestic brand same store unit sales growth

    2.4

%

    5.1

%

Import brand same store unit sales growth

    6.6       1.8  

Luxury brand same store unit sales growth

    1.5       (0.5

)

Overall

    4.6       3.1  

 

(1) National auto unit sales and SAAR data obtained from Stephens Auto Unit Sales and SAAR report as of March 2016

Our unit volume growth rate for the 2016 period was higher than the national average for our import and luxury brands. Our domestic brands unit volume growth lagged the national average for the 2016 period primarily due to our Chrysler stores, which had flat same store unit sales compared to a national average increase of 9% . Certain of our domestic stores had difficult stair step incentive objectives, and elected not to pursue them, resulting in reduced performance compared to the prior year. We continue to focus on increasing our share of overall new vehicle sales within each of our markets.

 

In addition to the increase in unit volume, an increase in average selling prices of 1.5% in the three-month period ended March 31, 2016 compared to the same period of 2015, contributed to the overall increase in same store new vehicle revenue.

 

 
18

 

 

New vehicle gross profit increased 8.1% in the three-month period ended March 31, 2016 compared to the same period of 2015. This increase is in line with the increase in revenues. On a same store basis, new vehicle gross profit increased by 5.8% in the three-month period ended March 31, 2016 compared to the same period of 2015, primarily driven by unit growth, as well as a $24 increase in the average gross profit per unit.

 

Used Vehicle Retail Revenue and Gross Profit

 

   

Three Months Ended
March 31,

   

Increase

   

% Increase

 

(Dollars in thousands, except per unit amounts)

 

2016

   

2015

   

(Decrease)

   

(Decrease)

 

Reported

                               

Retail revenue

  $ 532,726     $ 462,931     $ 69,795       15.1

%

Retail gross profit

  $ 64,277     $ 59,442     $ 4,835       8.1  

Retail gross margin

    12.1

%

    12.8

%

    (70

) bp

       
                                 

Retail units sold

    27,431       24,204       3,227       13.3  

Average selling price per retail unit

  $ 19,421     $ 19,126     $ 295       1.5  

Average gross profit per retail unit

  $ 2,343     $ 2,456     $ (113

)

    (4.6

)

                                 

Same store

                               

Retail revenue

  $ 516,277     $ 459,192     $ 57,085       12.4  

Retail gross profit

  $ 62,543     $ 59,026     $ 3,517       6.0  

Retail gross margin

    12.1

%

    12.9

%

    (80

) bp

       
                                 

Retail units sold

    26,531       23,972       2,559       10.7  

Average selling price per retail unit

  $ 19,459     $ 19,155     $ 304       1.6  

Average gross profit per retail unit

  $ 2,357     $ 2,462     $ (105

)

    (4.3

)

 

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer Certified Pre-Owned ("CPO") vehicles; Core Vehicles, or late-model vehicles with lower mileage; and Value Autos, or vehicles with over 80,000 miles. Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade to retail used vehicle sales.

 

Same store sales increased in all three categories of used vehicles as follows:

 

   

Three months

ended

March 31, 2016

compared to the

same

period of 2015

 

Certified pre-owned vehicles

    14.9

%

Core vehicles

    12.4  

Value autos

    7.1  

Overall

    12.4  

 

The increases in same store sales were mainly a result of increased unit sales and a slight increase in average selling prices. We continue to see a mix shift towards certified pre-owned vehicle sales as the supply of late-model, off-lease vehicles increases. This increase is driven by increased new vehicle leasing and an overall increase in vehicle sales levels over the past 6 years. Because the average new lease is approximately 30 months, the supply of late model used vehicles has increased.

 

On an annualized average, as of March 31, 2016 and 2015, each of our stores sold 64 and 57 retail used vehicle units, respectively, per month. We continue to target increasing sales to 75 units per store per month.

 

 
19

 

 

Used retail vehicle gross profit increased 8.1% in the three-month period ended March 31, 2016 compared to the same period of 2015. On a same store basis, gross profit increased 6.0% in the three-month period ended March 31, 2016 compared to the same period of 2015, primarily driven by volume growth, offset by decreases in the average gross profit per unit sold.

 

Similar to new vehicle sales, we focus on gross profit dollars earned per unit, not on gross margin, in evaluating our sales performance. Gross profit per unit decreased in all three categories of used vehicles in the three-month period ended March 31, 2016 compared to the same period of 2015 as our stores focused on gaining incremental sales volume. This volume-based strategy creates the ability to generate incremental future business through used vehicle trade-in opportunities, finance and insurance sales and service work.

 

Used Vehicle Wholesale Revenue and Gross Profit

 

   

Three Months Ended
March 31,

   

Increase

   

% Increase

 

(Dollars in thousands, except per unit amounts)

 

2016

   

2015

   

(Decrease)

   

(Decrease)

 

Reported

                               

Wholesale revenue

  $ 65,146     $ 62,208     $ 2,938       4.7

%

Wholesale gross profit

  $ 1,830     $ 2,161     $ (331

)

    (15.3

)

Wholesale gross margin

    2.8

%

    3.5

%

    (70 ) bp        
                                 

Wholesale units sold

    9,513       9,144       369       4.0  

Average selling price per wholesale unit

  $ 6,848     $ 6,803     $ 45       0.7  

Average gross profit per retail unit

  $ 192     $ 236     $ (44

)

    (18.6

)

                                 

Same store

                               

Wholesale revenue

  $ 63,805     $ 61,949     $ 1,856       3.0  

Wholesale gross profit

  $ 1,755     $ 2,222     $ (467

)

    (21.0

)

Wholesale gross margin

    2.8

%

    3.6

%

    (80 ) bp        
                                 

Wholesale units sold

    9,255       9,063       192       2.1  

Average selling price per wholesale unit

  $ 6,894     $ 6,835     $ 59       0.9  

Average gross profit per retail unit

  $ 190     $ 245     $ (55

)

    (22.4

)

 

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.

 

 
20

 

 

Finance and Insurance

 

   

Three Months Ended
March 31,

           

%

 

(Dollars in thousands, except per unit amounts)

 

2016

   

2015

   

Increase

   

Increase

 

Reported

                               

Revenue

  $ 77,638     $ 64,604     $ 13,034       20.2

%

Average finance and insurance per retail unit

  $ 1,290     $ 1,178     $ 112       9.5

%

                                 

Same store

                               

Revenue

  $ 75,365     $ 64,206     $ 11,159       17.4

%

Average finance and insurance per retail unit

  $ 1,292     $ 1,181     $ 111       9.4

%

 

The increase in finance and insurance revenue, both as reported and on a same store basis, was primarily due to higher unit volumes and an increase in the average finance and insurance amount per retail unit . On a same store basis, our finance and insurance revenues per retail unit increased $111 in the three-month period ended March 31, 2016 compared to the same period of 2015, as both pricing and penetration rates improved.

 

Trends in penetration rates for total new and used retail vehicles sold are detailed below:

 

   

Three Months Ended March 31,