Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - LITHIA MOTORS INC | lad2017q3-10qex322cfocert.htm |
EX-32.1 - EXHIBIT 32.1 - LITHIA MOTORS INC | lad2017q3-10qex321ceocert.htm |
EX-31.2 - EXHIBIT 31.2 - LITHIA MOTORS INC | lad2017q3-10qex312cfocert.htm |
EX-31.1 - EXHIBIT 31.1 - LITHIA MOTORS INC | lad2017q3-10qex311ceocert.htm |
EX-10.1 - EXHIBIT 10.1 - LITHIA MOTORS INC | lad2017q3-10qex101sixthamend.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 September 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A common stock without par value | 23,958,168 | |
Class B common stock without par value | 1,000,000 | |
(Class) | Outstanding at November 7, 2017 |
LITHIA MOTORS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION | Page | |
Item 1. | ||
Consolidated Balance Sheets (Unaudited) - September 30, 2017 and December 31, 2016 | ||
Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2017 and 2016 | ||
Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2017 and 2016 | ||
Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2017 and 2016 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | |
Item 1A. | ||
Item 2. | ||
Item 5. | Other Information | |
Item 6. | ||
1
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
September 30, 2017 | December 31, 2016 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 38,577 | $ | 50,282 | ||||
Accounts receivable, net of allowance for doubtful accounts of $6,145 and $5,281 | 446,613 | 417,714 | ||||||
Inventories, net | 1,966,456 | 1,772,587 | ||||||
Other current assets | 59,622 | 46,611 | ||||||
Total Current Assets | 2,511,268 | 2,287,194 | ||||||
Property and equipment, net of accumulated depreciation of $190,962 and $167,300 | 1,087,920 | 1,006,130 | ||||||
Goodwill | 257,185 | 259,399 | ||||||
Franchise value | 186,977 | 184,268 | ||||||
Other non-current assets | 328,243 | 107,159 | ||||||
Total Assets | $ | 4,371,593 | $ | 3,844,150 | ||||
Liabilities and Stockholders' Equity | ||||||||
Current Liabilities: | ||||||||
Floor plan notes payable | $ | 114,833 | $ | 94,602 | ||||
Floor plan notes payable: non-trade | 1,598,111 | 1,506,895 | ||||||
Current maturities of long-term debt | 17,619 | 20,965 | ||||||
Trade payables | 103,105 | 88,423 | ||||||
Accrued liabilities | 241,094 | 211,109 | ||||||
Total Current Liabilities | 2,074,762 | 1,921,994 | ||||||
Long-term debt, less current maturities | 991,333 | 769,916 | ||||||
Deferred revenue | 98,265 | 81,929 | ||||||
Deferred income taxes | 66,474 | 59,075 | ||||||
Other long-term liabilities | 109,383 | 100,460 | ||||||
Total Liabilities | 3,340,217 | 2,933,374 | ||||||
Stockholders' Equity: | ||||||||
Preferred stock - no par value; authorized 15,000 shares; none outstanding | — | — | ||||||
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,966 and 23,382 | 148,880 | 165,512 | ||||||
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762 | 124 | 219 | ||||||
Additional paid-in capital | 42,373 | 41,225 | ||||||
Retained earnings | 839,999 | 703,820 | ||||||
Total Stockholders' Equity | 1,031,376 | 910,776 | ||||||
Total Liabilities and Stockholders' Equity | $ | 4,371,593 | $ | 3,844,150 |
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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
New vehicle | $ | 1,553,511 | $ | 1,297,511 | $ | 4,147,870 | $ | 3,602,603 | ||||||||
Used vehicle retail | 679,180 | 580,885 | 1,915,038 | 1,667,258 | ||||||||||||
Used vehicle wholesale | 65,739 | 75,271 | 206,754 | 207,131 | ||||||||||||
Finance and insurance | 101,044 | 87,709 | 282,672 | 246,390 | ||||||||||||
Service, body and parts | 265,683 | 217,148 | 744,262 | 616,088 | ||||||||||||
Fleet and other | 15,185 | 11,443 | 86,883 | 46,697 | ||||||||||||
Total revenues | 2,680,342 | 2,269,967 | 7,383,479 | 6,386,167 | ||||||||||||
Cost of sales: | ||||||||||||||||
New vehicle | 1,465,466 | 1,221,668 | 3,909,168 | 3,387,132 | ||||||||||||
Used vehicle retail | 600,522 | 512,076 | 1,693,091 | 1,466,947 | ||||||||||||
Used vehicle wholesale | 64,565 | 74,353 | 202,351 | 202,897 | ||||||||||||
Service, body and parts | 133,191 | 112,806 | 376,096 | 317,028 | ||||||||||||
Fleet and other | 13,577 | 11,803 | 82,829 | 45,684 | ||||||||||||
Total cost of sales | 2,277,321 | 1,932,706 | 6,263,535 | 5,419,688 | ||||||||||||
Gross profit | 403,021 | 337,261 | 1,119,944 | 966,479 | ||||||||||||
Asset impairments | — | 3,498 | — | 10,494 | ||||||||||||
Selling, general and administrative | 282,241 | 228,134 | 782,303 | 662,766 | ||||||||||||
Depreciation and amortization | 14,828 | 12,206 | 41,598 | 36,372 | ||||||||||||
Operating income | 105,952 | 93,423 | 296,043 | 256,847 | ||||||||||||
Floor plan interest expense | (10,629 | ) | (6,186 | ) | (28,013 | ) | (18,304 | ) | ||||||||
Other interest expense, net | (9,905 | ) | (5,647 | ) | (23,745 | ) | (16,608 | ) | ||||||||
Other income (expense), net | 1,125 | (1,513 | ) | 11,357 | (4,534 | ) | ||||||||||
Income before income taxes | 86,543 | 80,077 | 255,642 | 217,401 | ||||||||||||
Income tax provision | (34,657 | ) | (26,036 | ) | (99,829 | ) | (71,662 | ) | ||||||||
Net income | $ | 51,886 | $ | 54,041 | $ | 155,813 | $ | 145,739 | ||||||||
Basic net income per share | $ | 2.07 | $ | 2.15 | $ | 6.21 | $ | 5.72 | ||||||||
Shares used in basic per share calculations | 25,008 | 25,194 | 25,090 | 25,490 | ||||||||||||
Diluted net income per share | $ | 2.07 | $ | 2.14 | $ | 6.19 | $ | 5.69 | ||||||||
Shares used in diluted per share calculations | 25,076 | 25,290 | 25,158 | 25,598 | ||||||||||||
Cash dividends declared per Class A and Class B share | $ | 0.27 | $ | 0.25 | $ | 0.79 | $ | 0.70 |
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, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 51,886 | $ | 54,041 | $ | 155,813 | $ | 145,739 | ||||||||
Other comprehensive income, net of tax: | ||||||||||||||||
Gain on cash flow hedges, net of tax expense of $0, $0, $0, and $175, respectively | — | — | — | 277 | ||||||||||||
Comprehensive income | $ | 51,886 | $ | 54,041 | $ | 155,813 | $ | 146,016 |
See accompanying condensed notes to consolidated financial statements.
4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 155,813 | $ | 145,739 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Asset impairments | — | 10,494 | ||||||
Depreciation and amortization | 41,598 | 36,372 | ||||||
Stock-based compensation | 8,396 | 8,665 | ||||||
Gain on disposal of other assets | (382 | ) | (4,299 | ) | ||||
Gain on disposal of franchise | — | (1,102 | ) | |||||
Deferred income taxes | 7,398 | 9,782 | ||||||
(Increase) decrease (net of acquisitions and dispositions): | ||||||||
Trade receivables, net | (13,345 | ) | (5,911 | ) | ||||
Inventories | (16,098 | ) | (85,564 | ) | ||||
Other assets | 15,207 | 4,688 | ||||||
Increase (net of acquisitions and dispositions): | ||||||||
Floor plan notes payable | 12,126 | 18,122 | ||||||
Trade payables | 12,397 | 6,153 | ||||||
Accrued liabilities | 25,907 | 32,874 | ||||||
Other long-term liabilities and deferred revenue | 11,519 | 18,227 | ||||||
Net cash provided by operating activities | 260,536 | 194,240 | ||||||
Cash flows from investing activities: | ||||||||
Capital expenditures | (72,174 | ) | (81,363 | ) | ||||
Proceeds from sales of assets | 12,327 | 1,756 | ||||||
Cash paid for other investments | (7,929 | ) | (22,279 | ) | ||||
Cash paid for acquisitions, net of cash acquired | (400,558 | ) | (199,435 | ) | ||||
Proceeds from sales of stores | 3,417 | 11,837 | ||||||
Net cash used in investing activities | (464,917 | ) | (289,484 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings on floor plan notes payable, net: non-trade | 34,056 | 93,817 | ||||||
Borrowings on lines of credit | 1,306,000 | 841,623 | ||||||
Repayments on lines of credit | (1,432,853 | ) | (744,494 | ) | ||||
Principal payments on long-term debt and capital leases, scheduled | (13,697 | ) | (12,278 | ) | ||||
Principal payments on long-term debt and capital leases, other | (46,471 | ) | (5,903 | ) | ||||
Proceeds from issuance of long-term debt | 395,905 | 22,816 | ||||||
Payments of debt issuance costs | (4,517 | ) | — | |||||
Proceeds from issuance of common stock | 5,577 | 5,191 | ||||||
Repurchase of common stock | (31,521 | ) | (108,597 | ) | ||||
Dividends paid | (19,803 | ) | (17,823 | ) | ||||
Net cash provided by financing activities | 192,676 | 74,352 | ||||||
Decrease in cash and cash equivalents | (11,705 | ) | (20,892 | ) | ||||
Cash and cash equivalents at beginning of period | 50,282 | 45,008 | ||||||
Cash and cash equivalents at end of period | $ | 38,577 | $ | 24,116 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 51,160 | $ | 36,641 | ||||
Cash paid during the period for income taxes, net | 89,206 | 29,478 | ||||||
Floor plan debt paid in connection with store disposals | — | 5,284 | ||||||
Supplemental schedule of non-cash activities: | ||||||||
Debt issued in connection with acquisitions | $ | 1,748 | $ | — | ||||
Non-cash assets transferred in connection with acquisitions | — | 2,637 | ||||||
Debt assumed in connection with acquisitions | 86,902 | 19,657 | ||||||
Issuance of Class A common stock in connection with acquisitions | 2,137 | — |
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, 2017 and for the three and nine-months ended September 30, 2017 and 2016. 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 2016 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2016 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2016 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 condensed Consolidated Financial Statements to maintain consistency and comparability between periods presented. These reclassifications were related to our adoption of ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." Specifically, we reclassified the presentation of excess tax benefits on our Consolidated Statements of Cash Flows between financing and operating cash flows and recorded reclassifications between additional paid-in capital and retained earnings. See also Note 13.
Note 2. Accounts Receivable
Accounts receivable consisted of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Contracts in transit | $ | 225,564 | $ | 233,506 | ||||
Trade receivables | 45,243 | 45,193 | ||||||
Vehicle receivables | 53,166 | 43,937 | ||||||
Manufacturer receivables | 85,307 | 76,948 | ||||||
Auto loan receivables | 75,651 | 69,859 | ||||||
Other receivables | 16,892 | 3,857 | ||||||
501,823 | 473,300 | |||||||
Less: Allowance | (6,145 | ) | (5,281 | ) | ||||
Less: Long-term portion of accounts receivable, net | (49,065 | ) | (50,305 | ) | ||||
Total accounts receivable, net | $ | 446,613 | $ | 417,714 |
Accounts receivable classifications include the following:
• | Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received approximately ten days after selling a vehicle. |
• | Trade receivables are comprised of amounts due from customers for open charge accounts, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products. |
• | Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer. |
• | Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims. |
• | Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products. |
Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest
6
income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.
Note 3. Inventories
The components of inventories, net, consisted of the following (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
New vehicles | $ | 1,412,668 | $ | 1,338,110 | ||||
Used vehicles | 474,948 | 368,067 | ||||||
Parts and accessories | 78,840 | 66,410 | ||||||
Total inventories | $ | 1,966,456 | $ | 1,772,587 |
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, 2015 ¹ | $ | 97,903 | $ | 84,384 | $ | 30,933 | $ | 213,220 | ||||||||
Additions through acquisitions2 | 18,154 | 21,795 | 7,448 | 47,397 | ||||||||||||
Reductions through divestitures | (1,218 | ) | — | — | (1,218 | ) | ||||||||||
Balance as of December 31, 2016 1 | 114,839 | 106,179 | 38,381 | 259,399 | ||||||||||||
Adjustments to purchase price allocations2,3 | (817 | ) | (1,006 | ) | (391 | ) | (2,214 | ) | ||||||||
Balance as of September 30, 2017 ¹ | $ | 114,022 | $ | 105,173 | $ | 37,990 | $ | 257,185 |
1 Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
2 Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017. As a result, we reclassified $2.2 million of value from goodwill to franchise value.
3 Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group and the Downtown LA Auto Group and the associated goodwill has not been allocated to each of our segments. See also Note 12.
The changes in the carrying amounts of franchise value are as follows (in thousands):
Franchise Value | |||
Balance as of December 31, 2015 | $ | 157,699 | |
Additions through acquisitions | 27,087 | ||
Reductions through divestitures | (518 | ) | |
Balance as of December 31, 2016 | 184,268 | ||
Additions through acquisitions 1 | 495 | ||
Adjustments to purchase price allocations 2 | 2,214 | ||
Balance as of September 30, 2017 | $ | 186,977 |
1 Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group and the Downtown LA Auto Group and have not been included in the above franchise value additions. See also Note 12.
2Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification in the current year of $2.2 million from goodwill to franchise value.
7
Note 5. Long-term Debt
Long-term debt consisted of the following:
(Dollars in thousands) | September 30, 2017 | December 31, 2016 | ||||||
Real estate mortgages | $ | 476,559 | $ | 428,367 | ||||
5.25% Senior Notes due 2025 | 300,000 | — | ||||||
Used vehicle inventory financing facility and revolving lines of credit | 226,654 | 353,507 | ||||||
Capital leases and other debt | 12,699 | 11,191 | ||||||
Total long-term debt outstanding | 1,015,912 | 793,065 | ||||||
Less: unamortized debt issuance costs | (6,960 | ) | (2,184 | ) | ||||
Less: current maturities (net of current debt issuance costs) | (17,619 | ) | (20,965 | ) | ||||
Long-term debt | $ | 991,333 | $ | 769,916 |
5.25% Senior Notes Due 2025
On July 24, 2017, we issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 ("the Notes") to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notes from July 24, 2017 and is payable semiannually on February 1 and August 1. The first interest payment is due on February 1, 2018. We may redeem the Notes in whole or in part at any time prior to August 1, 2020 at a price equal to 100% of the principal amount plus a make-whole premium set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest to the date of purchase.
We paid approximately $5.0 million in underwriting and other fees in connection with this issuance, which will be amortized as interest expense over the term of the Notes. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future restricted subsidiaries that is a borrower under, or that guarantees obligations under, our credit facility or other indebtedness. The terms of the Notes, in certain circumstances, may restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock, or merge, consolidate or sell all or substantially all our assets.
Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion. This syndicated credit facility is comprised of 18 financial institutions, including seven manufacturer-affiliated finance companies. Our credit facility provides for up to $1.9 billion in new vehicle inventory floor plan financing, up to $250 million in used vehicle inventory floor plan financing and a maximum of $250 million in revolving financing for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $2.75 billion total availability, subject to lender approval.
Note 6. Stockholders’ Equity
Repurchases of Class A Common Stock
Repurchases of our Class A Common Stock occurred under a repurchase authorization granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units ("RSUs"). In February 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. Share repurchases under this authorization were as follows:
Repurchases Occurring in the Nine Months Ended September 30, 2017 | Cumulative Repurchases as of September 30, 2017 | |||||||||||||
Shares | Average Price | Shares | Average Price | |||||||||||
2016 Share Repurchase Authorization | 310,000 | $ | 91.33 | 1,023,725 | $ | 83.25 |
As of September 30, 2017, we had $164.8 million available for repurchases pursuant to our 2016 share repurchase authorization.
8
In addition, during the first nine months of 2017, we repurchased 32,300 shares at an average price of $99.33 per share, for a total of $3.2 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.
Note 7. Fair Value Measurements
Fair Value Disclosures for Financial Assets and Liabilities
We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.
We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt. As of September 30, 2017, our real estate mortgages and other debt, which includes capital leases, had maturity dates between January 12, 2019 and December 31, 2050.
There were no changes to our valuation techniques during the nine-month period ended September 30, 2017.
A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term fixed interest rate debt is as follows (in thousands):
September 30, 2017 | December 31, 2016 | |||||||
Carrying value | ||||||||
5.25% Senior Notes due 2025 | $ | 300,000 | $ | — | ||||
Real Estate Mortgages and Other Debt | 382,562 | 286,660 | ||||||
$ | 682,562 | $ | 286,660 | |||||
Fair value | ||||||||
5.25% Senior Notes due 2025 | $ | 309,750 | $ | — | ||||
Real Estate Mortgages and Other Debt | 403,009 | 293,522 | ||||||
$ | 712,759 | $ | 293,522 |
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.
9
Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):
Three Months Ended September 30, | 2017 | 2016 | ||||||||||||||
(in thousands, except per share data) | Class A | Class B | Class A | Class B | ||||||||||||
Net income applicable to common stockholders - basic | $ | 49,687 | $ | 2,199 | $ | 50,262 | $ | 3,779 | ||||||||
Reallocation of net income as a result of conversion of dilutive stock options | 1 | (1 | ) | 1 | (1 | ) | ||||||||||
Reallocation of net income due to conversion of Class B to Class A common shares outstanding | 285 | — | 439 | — | ||||||||||||
Conversion of Class B common shares into Class A common shares | 1,908 | — | 3,326 | — | ||||||||||||
Effect of dilutive stock options on net income | 5 | (5 | ) | 13 | (13 | ) | ||||||||||
Net income applicable to common stockholders - diluted | $ | 51,886 | $ | 2,193 | $ | 54,041 | $ | 3,765 | ||||||||
Weighted average common shares outstanding – basic | 23,948 | 1,060 | 23,432 | 1,762 | ||||||||||||
Conversion of Class B common shares into Class A common shares | 1,060 | — | 1,762 | — | ||||||||||||
Effect of dilutive stock options on weighted average common shares | 68 | — | 96 | — | ||||||||||||
Weighted average common shares outstanding – diluted | 25,076 | 1,060 | 25,290 | 1,762 | ||||||||||||
Net income per common share - basic | $ | 2.07 | $ | 2.07 | $ | 2.15 | $ | 2.15 | ||||||||
Net income per common share - diluted | $ | 2.07 | $ | 2.07 | $ | 2.14 | $ | 2.14 |
Three Months Ended September 30, | 2017 | 2016 | ||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||
Antidilutive Securities | ||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 9 | — | — | — |
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Nine Months Ended September 30, | 2017 | 2016 | ||||||||||||||
(in thousands, except per share data) | Class A | Class B | Class A | Class B | ||||||||||||
Net income applicable to common stockholders - basic | $ | 147,876 | $ | 7,937 | $ | 134,533 | $ | 11,206 | ||||||||
Reallocation of distributed net income as a result of conversion of dilutive stock options | 3 | (3 | ) | 5 | (5 | ) | ||||||||||
Reallocation of distributed net income due to conversion of Class B to Class A common shares outstanding | 1,006 | — | 1,365 | — | ||||||||||||
Conversion of Class B common shares into Class A common shares | 6,909 | — | 9,794 | — | ||||||||||||
Effect of dilutive stock options on net income | 19 | (19 | ) | 42 | (42 | ) | ||||||||||
Net income applicable to common stockholders - diluted | $ | 155,813 | $ | 7,915 | $ | 145,739 | $ | 11,159 | ||||||||
Weighted average common shares outstanding – basic | 23,812 | 1,278 | 23,530 | 1,960 | ||||||||||||
Conversion of Class B common shares into Class A common shares | 1,278 | — | 1,960 | — | ||||||||||||
Effect of dilutive stock options on weighted average common shares | 68 | — | 108 | — | ||||||||||||
Weighted average common shares outstanding – diluted | 25,158 | 1,278 | 25,598 | 1,960 | ||||||||||||
Net income per common share - basic | $ | 6.21 | $ | 6.21 | $ | 5.72 | $ | 5.72 | ||||||||
Net income per common share - diluted | $ | 6.19 | $ | 6.19 | $ | 5.69 | $ | 5.69 |
Nine Months Ended September 30, | 2017 | 2016 | ||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||
Antidilutive Securities | ||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 10 | — | — | — |
Note 9. Equity-Method Investment
In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with a total equity contribution of $49.8 million. This investment generated new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.
While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method. We exited this equity-method investment in December 2016.
We estimated the value of our equity-method investment, which was recorded at fair value on a non-recurring basis, based on a market valuation approach. We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets. Because these valuations contained unobservable inputs, we classified the measurement of fair value of our equity-method investment as Level 3.
The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Asset impairments to write investment down to fair value | $ | — | $ | 3,498 | $ | — | $ | 10,494 | ||||||||
Our portion of the partnership’s operating losses | — | 2,066 | — | 6,197 | ||||||||||||
Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions | — | 31 | — | 185 | ||||||||||||
Tax benefits and credits generated | — | 7,592 | — | 20,374 |
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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, as well as, 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.
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Certain financial information on a segment basis is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Domestic | $ | 1,008,310 | $ | 893,156 | $ | 2,863,018 | $ | 2,495,468 | ||||||||
Import | 1,209,955 | 983,947 | 3,276,667 | 2,777,007 | ||||||||||||
Luxury | 463,518 | 392,537 | 1,246,484 | 1,111,215 | ||||||||||||
2,681,783 | 2,269,640 | 7,386,169 | 6,383,690 | |||||||||||||
Corporate and other | (1,441 | ) | 327 | (2,690 | ) | 2,477 | ||||||||||
$ | 2,680,342 | $ | 2,269,967 | $ | 7,383,479 | $ | 6,386,167 | |||||||||
Segment income1: | ||||||||||||||||
Domestic | $ | 31,141 | $ | 32,292 | $ | 84,440 | $ | 84,420 | ||||||||
Import | 36,954 | 32,934 | 91,365 | 86,878 | ||||||||||||
Luxury | 7,515 | 7,423 | 22,542 | 21,736 | ||||||||||||
75,610 | 72,649 | 198,347 | 193,034 | |||||||||||||
Corporate and other | 34,541 | 26,794 | 111,281 | 81,881 | ||||||||||||
Depreciation and amortization | (14,828 | ) | (12,206 | ) | (41,598 | ) | (36,372 | ) | ||||||||
Other interest expense | (9,905 | ) | (5,647 | ) | (23,745 | ) | (16,608 | ) | ||||||||
Other income (expense), net | 1,125 | (1,513 | ) | 11,357 | (4,534 | ) | ||||||||||
Income before income taxes | $ | 86,543 | $ | 80,077 | $ | 255,642 | $ | 217,401 |
1Segment income for each of the segments is defined as income before income taxes, depreciation and amortization, other interest expense and other income (expense), net.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Floor plan interest expense: | ||||||||||||||||
Domestic | $ | 9,900 | $ | 6,303 | $ | 26,570 | $ | 19,031 | ||||||||
Import | 8,007 | 4,613 | 20,608 | 13,241 | ||||||||||||
Luxury | 4,494 | 2,720 | 11,018 | 8,027 | ||||||||||||
22,401 | 13,636 | 58,196 | 40,299 | |||||||||||||
Corporate and other | (11,772 | ) | (7,450 | ) | (30,183 | ) | (21,995 | ) | ||||||||
$ | 10,629 | $ | 6,186 | $ | 28,013 | $ | 18,304 |
September 30, 2017 | December 31, 2016 | |||||||
Total assets: | ||||||||
Domestic | $ | 1,256,960 | $ | 1,225,387 | ||||
Import | 1,067,466 | 959,355 | ||||||
Luxury | 590,515 | 511,779 | ||||||
Corporate and other | 1,456,652 | 1,147,629 | ||||||
$ | 4,371,593 | $ | 3,844,150 |
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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.
California Wage and Hour Litigations
In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. The plaintiffs also seek attorney fees and costs. DCH has sought to compel arbitration based on plaintiffs’ arbitration agreements. The plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.
During the pendency of Holzer, related cases were filed that made substantially similar non-technician claims. DCH and all non-technician claimants settled their individual claims in mediation in 2017. In January 2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, although this settlement has not yet been approved by the California courts as expressly contemplated by the parties and required by applicable law as a condition of the agreed release of claims. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. We believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.
Note 12. Acquisitions
In the first nine months of 2017, we completed the following acquisitions:
• | On May 1, 2017, Baierl Auto Group, an eight store platform based in Pennsylvania. |
• | On August 7, 2017, Downtown LA ("DTLA") Auto Group, a seven store platform based in California. |
Revenue and net income contributed by the 2017 acquisitions subsequent to the date of acquisition were as follows (in thousands):
Revenue | $ | 281,416 | |
Net income | $ | 4,378 |
In 2016, we completed the following acquisitions:
• | On January 26, 2016, Singh Subaru in Riverside, California. |
• | On February 1, 2016, Ira Toyota in Milford, Massachusetts. |
• | On June 23, 2016, Helena Auto Center, LLC in Helena, Montana. |
• | On August 1, 2016, Kemp Ford in Thousand Oaks, California. |
• | On September 12, 2016, Carbone Auto Group, a nine store platform based in New York and Vermont. |
• | On September 28, 2016, Greiner Ford Lincoln in Casper, Wyoming. |
• | On October 5, 2016, Woodland Hills Audi in Woodland Hills, California. |
• | On November 16, 2016, Honolulu Ford in Honolulu, Hawaii. |
All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.
The following tables summarize the consideration paid for the 2017 acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):
Consideration | ||||
Cash paid, net of cash acquired | $ | 400,558 | ||
Equity securities issued 1 | 2,137 | |||
Debt issued | 1,748 | |||
$ | 404,443 |
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1 In partial consideration for the purchase of Baierl Auto Group, we issued 4,489 shares of our Class A common stock on May 1, 2017 and will issue an additional 17,957 shares over the next four years for a total of 22,446 shares. As of May 1, 2017, these shares were deemed outstanding for purposes of calculating basic and diluted EPS and had a market value of $2.1 million, based on the closing price of our Class A common stock on May 1, 2017 of $95.22 per share. See also Note 8.
The purchase price allocations for the Baierl Auto Group and DTLA Auto Group acquisitions are preliminary and we have not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. We recorded the purchase price allocations based upon information that is currently available. Unallocated items are recorded as a component of other non-current assets in the Consolidated Balance Sheets.
Assets Acquired and Liabilities Assumed | ||||
Trade receivables, net | $ | 15,554 | ||
Inventories | 190,079 | |||
Franchise value | — | |||
Property and equipment | 57,217 | |||
Other assets | 249,725 | |||
Floor plan notes payable | (75,065 | ) | ||
Debt and capital lease obligations | (11,837 | ) | ||
Other liabilities | (21,230 | ) | ||
$ | 404,443 |
In the three and nine-month periods ended September 30, 2017, we recorded $3.5 million and $5.7 million, respectively, in acquisition related expenses as a component of selling, general and administrative expense. These expenses include costs related to current year acquisitions, as well as reserve adjustments associated with contingent consideration recorded in association with previous acquisitions. We did not have any material acquisition expenses for the same periods in 2016.
The following unaudited proforma summary presents consolidated information as if all acquisitions in the three and nine-month periods ended September 30, 2017 and 2016 had occurred on January 1, 2016 (in thousands, except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue | $ | 2,773,082 | $ | 2,792,994 | $ | 8,032,963 | $ | 7,941,561 | ||||||||
Net income | 53,488 | 59,925 | 164,938 | 163,473 | ||||||||||||
Basic net income per share | 2.14 | 2.38 | 6.57 | 6.41 | ||||||||||||
Diluted net income per share | 2.13 | 2.37 | 6.56 | 6.39 |
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring proforma adjustments directly attributable to the acquisitions are included in the reported proforma revenues and earnings.
Note 13. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We have evaluated the effect this amendment will have on our most significant types of transactions and expect the timing of most of our revenue recognition to generally remain the same. A portion of the transaction price related to sales of finance and insurance contracts will likely be considered variable consideration and subject to accelerated recognition under the new standard. The new standard requires an entity to estimate variable consideration and apply the constraint in determining the transaction price. We are still evaluating how much variable consideration should be constrained and at what
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point the constraint is resolved, which will also determine the amount of any potential cumulative effect adjustment. As a result, we have not yet quantified the impact to our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are evaluating the effect this pronouncement 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 share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. In January 2017, we adopted this new guidance. As a result, we recorded the following:
• | Reclassified $0.2 million as a decrease to additional paid-in capital and an increase to retained earnings related to our policy election to record forfeitures as they occur. |
• | All prior periods presented in our Consolidated Statements of Cash Flows have been adjusted for the presentation of excess tax benefits on the cash flow statement. This resulted in a $4.4 million reclassification between financing and operating cash flows. |
• | We had $0.3 million of tax-affected state net operating loss carryforwards related to excess tax benefits for which a deferred tax asset had not been recognized. At adoption, this amount was recorded with the offset to retained earnings. Additionally, we do not believe that it is more-likely-than-not that the asset will be utilized and, as a result, a valuation allowance in the same amount was recorded that offset the impact to retained earnings. |
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance for eight cash flow classification issues to reduce diversity in practice. The clarification includes guidance on items such as debt prepayment or debt extinguishment cost, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect this pronouncement will have on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the updated standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting." ASU 2017-09 reduces both diversity in practice and cost and complexity when changing the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU 2017-09 to have a material effect on our financial position, results of operations or cash flows.
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Note 14. Subsequent Events
Disposal of Stores
On October 16, 2017, we disposed of Spokane Mercedes in Spokane, Washington. The disposal generated cash of approximately $13.2 million.
Common Stock Dividend
On October 23, 2017, our Board of Directors approved a dividend of $0.27 per share on our Class A and Class B common stock related to our third quarter 2017 financial results. The dividend will total approximately $6.7 million and will be paid on November 24, 2017 to shareholders of record on November 10, 2017.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors
Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”, “outlook,” “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terms. Examples of forward-looking statements in this Form 10-Q include, among others, statements we make regarding:
• | Future market conditions, including anticipated national new car sales levels; |
• | Expected operating results, such as improved store performance; continued improvement of SG&A as a percentage of gross profit and all projections; |
• | Anticipated continued success of acquisitions; |
• | Anticipated ability to capture additional market share; |
• | Anticipated ability to find accretive acquisitions; |
• | Anticipated additions of dealership locations to our portfolio in the future; |
• | Anticipated availability of liquidity from our unfinanced operating real estate; and |
• | Anticipated levels of capital expenditures in the future. |
The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results to materially differ from the results expressed or implied by these statements. Certain important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A in this Form 10-Q and in the Risk Factors section of our 2016 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 one of the largest automotive retailers in the highly fragmented American auto retail industry. As of November 7, 2017, we offered 30 brands of new vehicles and all major brands of used vehicles in 166 stores in the United States and online at over 200 websites. We sell new and used vehicles and replacement parts, provide vehicle maintenance, warranty, paint and repair services, arrange related financing, and sell service contracts, vehicle protection products and credit insurance.
In 2016, we were the fifth largest public automotive retailer in the U.S., as measured by revenue. Our stores are located in 18 states with concentrations west of the Mississippi and in the Northeast and offer 30 brands of new vehicles and all major brands of used vehicles. Our operations consist of domestic, import and luxury stores in markets ranging from mid-sized regional cities to metropolitan urban areas.
Results of Operations
For the three months ended September 30, 2017 and 2016, we reported net income of $51.9 million, or $2.07 per diluted share, and $54.0 million, or $2.14 per diluted share, respectively. For the nine months ended September 30, 2017 and 2016, we reported net income of $155.8 million, or $6.19 per diluted share, and $145.7 million, or $5.69 per diluted share, respectively.
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Key Revenue and Gross Profit Metrics
Key performance metrics for revenue and gross profit were as follows (dollars in thousands):
Three Months Ended September 30, 2017 | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | ||||||||||||
New vehicle | $ | 1,553,511 | 58.0 | % | $ | 88,045 | 5.7 | % | 21.8 | % | |||||||
Used vehicle retail | 679,180 | 25.3 | 78,658 | 11.6 | 19.5 | ||||||||||||
Used vehicle wholesale | 65,739 | 2.5 | 1,174 | 1.8 | 0.3 | ||||||||||||
Finance and insurance 1 | 101,044 | 3.8 | 101,044 | 100.0 | 25.1 | ||||||||||||
Service, body and parts | 265,683 | 9.9 | 132,492 | 49.9 | 32.9 | ||||||||||||
Fleet and other | 15,185 | 0.5 | 1,608 | 10.6 | 0.4 | ||||||||||||
$ | 2,680,342 | 100.0 | % | $ | 403,021 | 15.0 | % | 100.0 | % |
Three Months Ended September 30, 2016 | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | ||||||||||||
New vehicle | $ | 1,297,511 | 57.2 | % | $ | 75,843 | 5.8 | % | 22.5 | % | |||||||
Used vehicle retail | 580,885 | 25.6 | 68,809 | 11.8 | 20.4 | ||||||||||||
Used vehicle wholesale | 75,271 | 3.3 | 918 | 1.2 | 0.3 | ||||||||||||
Finance and insurance 1 | 87,709 | 3.9 | 87,709 | 100.0 | 26.0 | ||||||||||||
Service, body and parts | 217,148 | 9.6 | 104,342 | 48.1 | 30.9 | ||||||||||||
Fleet and other | 11,443 | 0.4 | (360 | ) | (3.1 | ) | (0.1 | ) | |||||||||
$ | 2,269,967 | 100.0 | % | $ | 337,261 | 14.9 | % | 100.0 | % |
1 Commissions reported net of anticipated cancellations.
Nine Months Ended September 30, 2017 | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | ||||||||||||
New vehicle | $ | 4,147,870 | 56.2 | % | $ | 238,702 | 5.8 | % | 21.3 | % | |||||||
Used vehicle retail | 1,915,038 | 25.9 | 221,947 | 11.6 | 19.8 | ||||||||||||
Used vehicle wholesale | 206,754 | 2.8 | 4,403 | 2.1 | 0.4 | ||||||||||||
Finance and insurance 1 | 282,672 | 3.8 | 282,672 | 100.0 | 25.2 | ||||||||||||
Service, body and parts | 744,262 | 10.1 | 368,166 | 49.5 | 32.9 | ||||||||||||
Fleet and other | 86,883 | 1.2 | 4,054 | 4.7 | 0.4 | ||||||||||||
$ | 7,383,479 | 100.0 | % | $ | 1,119,944 | 15.2 | % | 100.0 | % |
Nine Months Ended September 30, 2016 | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | ||||||||||||
New vehicle | $ | 3,602,603 | 56.4 | % | $ | 215,471 | 6.0 | % | 22.3 | % | |||||||
Used vehicle retail | 1,667,258 | 26.1 | 200,311 | 12.0 | 20.7 | ||||||||||||
Used vehicle wholesale | 207,131 | 3.2 | 4,234 | 2.0 | 0.4 | ||||||||||||
Finance and insurance 1 | 246,390 | 3.9 | 246,390 | 100.0 | 25.5 | ||||||||||||
Service, body and parts | 616,088 | 9.6 | 299,060 | 48.5 | 30.9 | ||||||||||||
Fleet and other | 46,697 | 0.8 | 1,013 | 2.2 | 0.2 | ||||||||||||
$ | 6,386,167 | 100.0 | % | $ | 966,479 | 15.1 | % | 100.0 | % |
1 Commissions reported net of anticipated cancellations.
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Same Store Operating Data
We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow revenues in our existing locations. As a result, same store measures have been integrated into the discussion below.
Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in August 2016 would be included in same store operating data beginning in September 2017, after its first full complete comparable month of operation. The third quarter operating results for the same store comparisons would include results for that store in only the period of September for both comparable periods.
New Vehicle Revenue and Gross Profit
Three Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
(Dollars in thousands, except per unit amounts) | 2017 | 2016 | |||||||||||||
Reported | |||||||||||||||
Revenue | $ | 1,553,511 | $ | 1,297,511 | $ | 256,000 | 19.7 | % | |||||||
Gross profit | $ | 88,045 | $ | 75,843 | $ | 12,202 | 16.1 | ||||||||
Gross margin | 5.7 | % | 5.8 | % | (10 | )bp | 1 | ||||||||
Retail units sold | 45,452 | 38,417 | 7,035 | 18.3 | |||||||||||
Average selling price per retail unit | $ | 34,179 | $ | 33,774 | $ | 405 | 1.2 | ||||||||
Average gross profit per retail unit | $ | 1,937 | $ | 1,974 | $ | (37 | ) | (1.9 | ) | ||||||
Same store | |||||||||||||||
Revenue | $ | 1,288,680 | $ | 1,280,030 | $ | 8,650 | 0.7 | ||||||||
Gross profit | $ | 72,246 | $ | 74,903 | $ | (2,657 | ) | (3.5 | ) | ||||||
Gross margin | 5.6 | % | 5.9 | % | (30 | )bp | |||||||||
Retail units sold | 37,762 | 37,870 | (108 | ) | (0.3 | ) | |||||||||
Average selling price per retail unit | $ | 34,126 | $ | 33,801 | $ | 325 | 1.0 | ||||||||
Average gross profit per retail unit | $ | 1,913 | $ | 1,978 | $ | (65 | ) | (3.3 | ) |
1 A basis point is equal to 1/100th of one percent
19
Nine Months Ended September 30, | Increase (Decrease) | % Increase (Decrease) | |||||||||||||
(Dollars in thousands, except per unit amounts) | 2017 | 2016 | |||||||||||||
Reported | |||||||||||||||
Revenue | $ | 4,147,870 | $ | 3,602,603 | $ | 545,267 | 15.1 | % | |||||||
Gross profit | $ | 238,702 | $ | 215,471 | $ | 23,231 | 10.8 | ||||||||
Gross margin | 5.8 | % | 6.0 | % | (20 | )bp | 1 | ||||||||
Retail units sold | 121,944 | 107,225 | 14,719 | 13.7 | |||||||||||
Average selling price per retail unit | $ | 34,015 | $ | 33,599 | $ | 416 | 1.2 | ||||||||
Average gross profit per retail unit | $ | 1,957 | $ | 2,010 | $ | (53 | ) | (2.6 | ) | ||||||
Same store | |||||||||||||||
Revenue | $ | < |