LITHIA MOTORS INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - LITHIA MOTORS INC	lad2018q1-10qex322cfocert.htm
EX-32.1 - EXHIBIT 32.1 - LITHIA MOTORS INC	lad2018q1-10qex321ceocert.htm
EX-31.2 - EXHIBIT 31.2 - LITHIA MOTORS INC	lad2018q1-10qex312cfocert.htm
EX-31.1 - EXHIBIT 31.1 - LITHIA MOTORS INC	lad2018q1-10qex311ceocert.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, 2018

[ ] 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		23,945,392
Class B common stock without par value		1,000,000
(Class)		Outstanding at April 27, 2018

LITHIA MOTORS, INC.

FORM 10-Q

INDEX



PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	2

	Consolidated Balance Sheets (Unaudited) - March 31, 2018 and December 31, 2017	2

	Consolidated Statements of Operations (Unaudited) – Three Months Ended March 31, 2018 and 2017	3

	Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2018 and 2017	4

	Condensed Notes to Consolidated Financial Statements (Unaudited)	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	35

Signature		36

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)



	March 31, 2018		December 31, 2017
Assets
Current Assets:
Cash and cash equivalents	$	68,985	$	57,253
Accounts receivable, net of allowance for doubtful accounts of $6,260 and $7,386	479,638		521,938
Inventories, net	2,365,924		2,132,744
Other current assets	56,893		70,847
Total Current Assets	2,971,440		2,782,782

Property and equipment, net of accumulated depreciation of $209,300 and $197,802	1,220,882		1,185,169
Goodwill	256,283		256,320
Franchise value	186,977		186,977
Other non-current assets	451,401		271,818
Total Assets	$	5,086,983	$	4,683,066

Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable	$	145,128	$	116,774
Floor plan notes payable: non-trade	1,832,824		1,802,252
Current maturities of long-term debt	168,876		18,876
Trade payables	116,928		111,362
Accrued liabilities	240,169		251,717
Total Current Liabilities	2,503,925		2,300,981

Long-term debt, less current maturities	1,181,230		1,028,476
Deferred revenue	107,355		103,111
Deferred income taxes	58,965		56,277
Other long-term liabilities	108,403		111,003
Total Liabilities	3,959,878		3,599,848

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 23,985 and 23,968	143,017		149,123
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,000	124		124
Additional paid-in capital	14,558		11,309
Retained earnings	969,406		922,662
Total Stockholders' Equity	1,127,105		1,083,218
Total Liabilities and Stockholders' Equity	$	5,086,983	$	4,683,066

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



	Three Months Ended March 31,
	2018			2017
Revenues:
New vehicle	$	1,454,725		$	1,210,304
Used vehicle retail	715,574			602,223
Used vehicle wholesale	75,955			71,503
Finance and insurance	106,505			86,777
Service, body and parts	285,697			232,574
Fleet and other	21,223			32,720
Total revenues	2,659,679			2,236,101
Cost of sales:
New vehicle	1,367,778			1,140,186
Used vehicle retail	641,963			533,440
Used vehicle wholesale	75,029			69,986
Service, body and parts	147,289			119,380
Fleet and other	19,509			31,457
Total cost of sales	2,251,568			1,894,449
Gross profit	408,111			341,652
Selling, general and administrative	297,494			242,772
Depreciation and amortization	16,854			12,739
Operating income	93,763			86,141
Floor plan interest expense	(13,534		)	(8,052		)
Other interest expense, net	(11,806		)	(6,671		)
Other income, net	1,374			9,845
Income before income taxes	69,797			81,263
Income tax provision	(17,736		)	(30,536		)
Net income	$	52,061		$	50,727

Basic net income per share	$	2.08		$	2.01
Shares used in basic per share calculations	25,050			25,180

Diluted net income per share	$	2.07		$	2.01
Shares used in diluted per share calculations	25,158			25,250

Cash dividends paid per Class A and Class B share	$	0.27		$	0.25

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities:
Net income	$	52,061		$	50,727
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	16,854			12,739
Stock-based compensation	3,574			2,619
(Gain) loss on disposal of other assets	(44		)	279
Loss on disposal of franchise	19			—
Deferred income taxes	2,688			(417		)
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net	42,628			76,123
Inventories	(98,862		)	(42,298		)
Other assets	14,651			(3,776		)
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable	17,692			2,429
Trade payables	6,933			(7,617		)
Accrued liabilities	(13,574		)	31,116
Other long-term liabilities and deferred revenue	4,253			4,750
Net cash provided by operating activities	48,873			126,674

Cash flows from investing activities:
Capital expenditures	(42,004		)	(16,039		)
Proceeds from sales of assets	105			399
Cash paid for other investments	(7,599		)	(6,863		)
Cash paid for acquisitions, net of cash acquired	(324,367		)	—
Proceeds from sales of stores	363			—
Net cash used in investing activities	(373,502		)	(22,503		)

Cash flows from financing activities:
Borrowings (repayments) on floor plan notes payable, net: non-trade	47,841			(2,110		)
Borrowings on lines of credit	893,966			231,000
Repayments on lines of credit	(586,728		)	(351,433		)
Principal payments on long-term debt and capital leases, scheduled	(4,715		)	(4,648		)
Principal payments on long-term debt and capital leases, other	—			(9,743		)
Proceeds from issuance of long-term debt	—			27,878
Payments of debt issuance costs	(40		)	—
Proceeds from issuance of common stock	1,841			1,523
Repurchase of common stock	(8,273		)	(9,188		)
Dividends paid	(6,759		)	(6,292		)
Acquisition contingent consideration	(772		)	—
Net cash provided by (used in) financing activities	336,361			(123,013		)
Increase (decrease) in cash and cash equivalents	11,732			(18,842		)
Cash and cash equivalents at beginning of period	57,253			50,282
Cash and cash equivalents at end of period	$	68,985		$	31,440

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	30,263		$	17,261
Cash paid during the period for income taxes, net	1,156			8
Floor plan debt paid in connection with store disposals	3,832			—

Supplemental schedule of non-cash activities:
Debt assumed in connection with acquisitions	$	10,661		$	—

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Interim Financial Statements

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of March 31, 2018 and for the three-months ended March 31, 2018 and 2017. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2017 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2017 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2018. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2017 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. We adopted this standard utilizing a cumulative effect transition method effective January 2018. Except for the changes below, we have consistently applied the accounting policies to all periods presented in these consolidated financial statements.

See also Notes 2 and 12.

Reclassifications

Certain immaterial reclassifications of amounts previously reported have been made to the accompanying condensed Consolidated Financial Statements to maintain consistency and comparability between periods presented.

Note 2. Revenue Recognition

The following describes our major product lines, which represent the disaggregation of our revenues to transactions that are similar in nature, amount, timing, uncertainties and economic factors.

New Retail Vehicle and Used Retail Vehicle Sales

Revenue from the retail sale of a vehicle is recognized at a point in time, as all performance obligations are satisfied when a contract is signed by the customer, financing has been arranged or collectibility is probable and the control of the vehicle is transferred to the customer. The transaction price for a retail vehicle sale is specified in the contract with the customer and includes all cash and non-cash consideration. In a retail vehicle sale, customers often trade in their current vehicle. The trade-in is measured at its stand-alone selling price in the contract, utilizing various third-party pricing sources. There are no other non-cash forms of consideration related to retail sales. All vehicle rebates are applied to the vehicle purchase price at the time of the sale, and are therefore incorporated into the price of the contract at the time of the exchange. We do not allow the return of new or used vehicles, except where mandated by state law.

Service, Body and Parts Sales

Revenue from service, body and parts sales is recognized upon the transfer of control of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale and are not significant.

We are the obligor on our lifetime oil contracts. Revenue is allocated to these performance obligations and is recognized over time as services are provided to the customer. The amount of revenue recognized is calculated, net of cancellations, using an input method, which most closely depicts performance of the contracts. Our contract liability balances were $131.9 million and $126.1 million as of March 31, 2018 and December 31, 2017, respectively; and we recognized $5.7 million of revenue in the three months ended March 31, 2018, related to our opening contract liability balance.

Finance and Insurance Sales

Revenue from finance and insurance sales is recognized, net of estimated charge-backs, at the time of the sale of the related vehicle. As a part of the vehicle sale, we seek to arrange financing for customers and sell a variety of add-ons, such as extended warranty

service contracts. These products are inherently attached to the governing vehicle and performance of the obligation cannot be performed without the underlying sale of the vehicle. We act as an agent in the sale of these contracts as the pricing is set by the third-party provider and our commission is preset. A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the sale of the contract under the new standard. We recognized a $9.2 million asset associated with future estimated variable consideration on January 1, 2018 related to contracts sold on or before December 31, 2017. Our contract asset balance was $9.2 million as of March 31, 2018 and is included in trade receivables and other non-current assets.

Note 3. Accounts Receivable and Contract Assets

Accounts receivable consisted of the following (in thousands):



	March 31, 2018			December 31, 2017
Contracts in transit	$	260,287		$	286,578
Trade receivables	50,705			45,895
Vehicle receivables	47,781			60,022
Manufacturer receivables	91,826			96,141
Auto loan receivables	72,270			75,052
Other receivables	4,195			14,634
	527,064			578,322
Less: Allowance for doubtful accounts	(6,260		)	(7,386		)
Less: Long-term portion of accounts receivable, net	(41,166		)	(48,998		)
Total accounts receivable, net	$	479,638		$	521,938

Accounts receivable classifications include the following:


•	Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received approximately ten days after selling a vehicle.


•	Trade receivables are comprised of amounts due from customers for open charge accounts, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.


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


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


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

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

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

The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.

Note 4. Inventories

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



	March 31, 2018		December 31, 2017
New vehicles	$	1,743,864	$	1,553,751
Used vehicles	536,478		500,011
Parts and accessories	85,582		78,982
Total inventories	$	2,365,924	$	2,132,744

Note 5. Goodwill and Franchise Value

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



	Domestic			Import			Luxury			Consolidated
Balance as of December 31, 2016 ¹	$	114,839		$	106,179		$	38,381		$	259,399
Adjustments to purchase price allocations²	(817		)	(1,006		)	(391		)	(2,214		)
Reductions through divestitures	—			(865		)	—			(865		)
Balance as of December 31, 2017 ¹	114,022			104,308			37,990			256,320
Additions through acquisitions ³	—			—			—			—
Reductions through divestitures	—			(37		)	—			(37		)
Balance as of March 31, 2018 ¹	$	114,022		$	104,271		$	37,990		$	256,283

¹Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.

²Our 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.

³Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group, Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, and Prestige Auto Group and the associated goodwill has not been allocated to each of our segments. See also Note 10.

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



	Franchise Value
Balance as of December 31, 2016	$	184,268
Additions through acquisitions	495
Adjustments to purchase price allocations ¹	2,214
Balance as of December 31, 2017	186,977
Additions through acquisitions²	—
Balance as of March 31, 2018	$	186,977

¹Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification of $2.2 million from goodwill to franchise value.

²Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group, Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, and Prestige Auto Group and have not been included in the above franchise value additions. See also Note 10.

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 Three Months Ended March 31, 2018			Cumulative Repurchases as of March 31, 2018
	Shares	Average Price		Shares	Average Price
2016 Share Repurchase Authorization	50,000	$	99.02	1,092,725	$	84.55

As of March 31, 2018, we had $157.6 million available for repurchases pursuant to our 2016 share repurchase authorization.

In addition, during the first three months of 2018, we repurchased 29,545 shares at an average price of $112.43 per share, for a total of $3.3 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.

Note 7. 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 March 31, 2018, 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 three-month period ended March 31, 2018.

A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term fixed interest rate debt is as follows (in thousands):



	March 31, 2018		December 31, 2017
Carrying value
5.25% Senior Notes due 2025	$	300,000	$	300,000
Real Estate Mortgages and Other Debt	360,891		376,880
	$	660,891	$	676,880
Fair value
5.25% Senior Notes due 2025	$	300,750	$	312,750
Real Estate Mortgages and Other Debt	364,468		385,337
	$	665,218	$	698,087

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,	2018					2017
(in thousands, except per share data)	Class A		Class B			Class A		Class B
Net income applicable to common stockholders - basic	$	49,983	$	2,078		$	47,826	$	2,901
Reallocation of distributed net income as a result of conversion of dilutive stock options	1		(1		)	1		(1		)
Reallocation of distributed net income due to conversion of Class B to Class A common shares outstanding	269		—			359		—
Conversion of Class B common shares into Class A common shares	1,801		—			2,534		—
Effect of dilutive stock options on net income	7		(7		)	7		(7		)
Net income applicable to common stockholders - diluted	$	52,061	$	2,070		$	50,727	$	2,893

Weighted average common shares outstanding – basic	24,050		1,000			23,740		1,440
Conversion of Class B common shares into Class A common shares	1,000		—			1,440		—
Effect of employee stock purchases and restricted stock units on weighted average common shares	108		—			70		—
Weighted average common shares outstanding – diluted	25,158		1,000			25,250		1,440

Net income per common share - basic	$	2.08	$	2.08		$	2.01	$	2.01
Net income per common share - diluted	$	2.07	$	2.07		$	2.01	$	2.01



Three Months Ended March 31,	2018		2017
Diluted EPS	Class A	Class B	Class A	Class B
Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive	26	—	—	—

Note 9. 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 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 shops 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 who 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 are evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, except for the internal allocation within Corporate and other discussed above. Our CODM measures the performance of each operating segment based on several metrics, including earnings from operations, and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the operating segments.

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



	Three Months Ended March 31,
	2018			2017
Revenues:
Domestic
New vehicle	$	513,529		$	485,257
Used vehicle retail	264,827			244,997
Used vehicle wholesale	33,607			32,287
Finance and insurance	40,001			36,209
Service, body and parts	107,142			93,402
Fleet and other	11,510			7,607
	970,616			899,759
Import
New vehicle	667,602			551,881
Used vehicle retail	307,689			247,276
Used vehicle wholesale	28,196			26,836
Finance and insurance	51,696			40,573
Service, body and parts	109,655			88,663
Fleet and other	5,595			16,243
	1,170,433			971,472
Luxury
New vehicle	278,521			176,317
Used vehicle retail	142,904			110,606
Used vehicle wholesale	14,199			12,223
Finance and insurance	12,251			7,995
Service, body and parts	64,793			48,032
Fleet and other	3,827			8,630
	516,495			363,803
	2,657,544			2,235,034
Corporate and other	2,135			1,067
	$	2,659,679		$	2,236,101
Segment income¹:
Domestic	$	25,618		$	25,442
Import	23,020			22,172
Luxury	6,886			4,713
	55,524			52,327
Corporate and other	41,559			38,501
Depreciation and amortization	(16,854		)	(12,739		)
Other interest expense	(11,806		)	(6,671		)
Other income (expense), net	1,374			9,845
Income before income taxes	$	69,797		$	81,263

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 March 31,
	2018			2017
Floor plan interest expense:
Domestic	$	11,612		$	7,954
Import	9,429			5,873
Luxury	5,133			3,076
	26,174			16,903
Corporate and other	(12,640		)	(8,851		)
	$	13,534		$	8,052



	March 31, 2018		December 31, 2017
Total assets:
Domestic	$	1,406,219	$	1,338,232
Import	1,231,503		1,137,934
Luxury	696,761		641,118
Corporate and other	1,752,500		1,565,782
	$	5,086,983	$	4,683,066

Note 10. Acquisitions

In the first three months of 2018, we completed the following acquisitions:


•	On January 15, 2018, Ray Laks Honda in Orchard Park, New York and Ray Laks Acura in Buffalo, New York.


•	On February 26, 2018, Day Auto Group, a seven store platform based in Pennsylvania.


•	On March 1, 2018, Prestige Auto Group, a six store platform based in New Jersey and New York.

Revenue and net loss contributed by the 2018 acquisitions subsequent to the date of acquisition were as follows (in thousands):



Revenue	$	84,629
Net loss	$	(142	)

In 2017, we completed the following acquisitions:


•	On May 1, 2017, we acquired Baierl Auto Group: an eight store platform based in Pennsylvania.


•	On August 7, 2017, we acquired Downtown LA ("DTLA") Auto Group, a seven store platform based in California.


•	On November 11, 2017, we acquired Albany CJD Fiat in Albany, New York.


•	On November 15, 2017, we acquired Crater Lake Ford Lincoln and Crater Lake Mazda in Medford, Oregon.

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

The following tables summarize the consideration paid for the 2018 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	$	324,367

The purchase price allocations for the Baierl Auto Group, Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, Crater Lake Mazda, Ray Laks Honda, Ray Laks Acura, Day Auto Group, and Prestige 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	$	328
Inventories	153,422
Property and equipment	9,201
Other assets	174,474
Floor plan notes payable	(10,661		)
Other liabilities	(2,397		)
	324,367
Goodwill	—
	$	324,367

In the three-month period ended March 31, 2018, we recorded $0.9 million in acquisition related expenses as a component of selling, general and administrative expense. We did not have any material acquisition expenses for the same period in 2017.

The following unaudited proforma summary presents consolidated information as if all acquisitions in the three-month periods ended March 31, 2018 and 2017 had occurred on January 1, 2017 (in thousands, except per share amounts):



	Three Months Ended March 31,
	2018		2017
Revenue	$	2,822,370	$	2,825,619
Net income	50,737		53,034
Basic net income per share	2.03		2.11
Diluted net income per share	2.02		2.10

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 11. Recent Accounting Pronouncements

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 have both real estate leases and equipment leases that will be impacted by the new guidance. We continue to evaluate the effect this pronouncement will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the updated standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.

Note 12. Changes in Accounting Policies

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment replaced most of the existing revenue recognition guidance. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We adopted this standard utilizing a cumulative effect transition method effective January 2018. While the adoption of the new standard did not have a significant effect on earnings or on the timing of our most significant types of transactions, we made the following changes to our revenue policies:

•

A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and subject to accelerated recognition under the new standard. Accordingly, we recognized a $9.2 million asset associated with future estimated variable consideration and a net of tax increase to retained earnings of $6.5 million. We do not believe there will be a significant impact to future revenue recognized.


•	The adoption of the new standard clarifies the determination and capitalization of direct costs incurred. As a result, we reassessed the method used to capitalize and amortize direct costs associated with the sale of lifetime lube, oil and filter contracts, which resulted in a $7.2 million reduction in prepaid commissions and a net of tax $5.1 million reduction to retained earnings.

These changes had an immaterial effect on our Consolidated Statements of Operations and the following impact on our Consolidated Balance Sheets (in thousands):



	As Reported					Balances without the adoption of Topic 606
Impact on Consolidated Balance Sheets	March 31, 2018		Adjustments			Balances without the adoption of Topic 606
Trade receivables	$	50,705	$	(3,631	)	$	47,074
Other current assets	56,893		(1,835		)	55,058
Other non-current assets	451,401		3,789			455,190
Total Assets	5,086,983		(1,677		)	5,085,306
Deferred income taxes	58,965		(599		)	58,366
Total Liabilities	3,959,878		(599		)	3,959,279
Retained earnings	969,406		(1,078		)	968,328
Total Liabilities and Stockholders' Equity	5,086,983		(1,677		)	5,085,306

Note 13. Subsequent Events

Repurchase of Class A Common Stock

Since March 31, 2018, we repurchased 40,000 shares at a weighted average price of $96.78 per share and, as of April 27, 2018, under our existing share repurchase authorization, $153.7 million remained available for share repurchases.

Acquisition of Stores

On April 3, 2018, we acquired the inventory, real estate, equipment and intangible assets of Broadway Ford in Idaho Falls, Idaho. We paid cash of approximately $26.1 million for this store.

On April 23, 2018, we acquired the inventory, equipment and intangible assets of Buhler Ford in Eatontown, New Jersey. We paid cash of approximately $12.5 million for this store.

Common Stock Dividend

On April 23, 2018, our Board of Directors approved a dividend of $0.29 per share on our Class A and Class B common stock related to our first quarter 2018 financial results. The dividend will total approximately $7.2 million and will be paid on May 25, 2018 to shareholders of record on May 11, 2018.

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 2017 Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission. Such factors include, but are not limited to:


•	Changing economic conditions, including changes in consumer demand, the availability of credit, fuel prices and interest rates;


•	Natural disasters, adverse weather conditions, acts of God or other incidents;


•	Increasing competition in our industry;


•	Adverse conditions affecting one or more key manufacturers whose brands we sell;


•	Availability of manufacturer incentives, warranty and other promotional programs;


•	Manufacturers relationships and our ability to renew or enter into new franchise agreements on acceptable terms;


•	Changes in laws and regulations;


•	Breaches in our data security systems or in systems used by our vendor partners; and


•	Our ability to acquire and successfully integrate additional stores

By their nature, forward-looking statements involve risks and uncertainties because they relate to events that depend on circumstances that may or may not occur in the future. You should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statement.

Overview

We are one of the largest automotive retailers in the United States and are among the fastest growing companies in the Fortune 500 (#318-2017) with 186 stores representing 28 brands in eighteen states as of April 27, 2018. We offer vehicles online and through our nationwide retail network. Our "Growth Powered by People" strategy drives us to innovate and continuously improve the customer experience.

We believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth through consolidation. In 2017, the top ten automotive retailers, as reported by Automotive News, represented approximately 7% of the stores in the United States. 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 acquisition strategy has been to acquire dealerships at prices that meet our internal investment targets and, through the application of our centralized operating structure, leverage costs and improve store profitability. We believe our disciplined approach and the current economic environment provides us with attractive acquisition opportunities.

We also believe that we can continue to improve operations at our existing stores. By promoting entrepreneurial leadership within our general and department managers, we strive for continuous improvement to drive sales and capture market share in our local

markets. Our goal is to retail an average of 85 used vehicles per store per month and we believe we can make additional improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle franchise at each location. Our service, body and parts operations provide important repeat business for our stores. We continue to grow this business through increased marketing efforts, competitive pricing on routine maintenance items and diverse commodity product offerings.

During the first quarter of 2018, we focused on growth through acquisitions. Newly acquired stores generally have a lower operating efficiency than our other stores and negatively impact our operating margin initially. We continue to focus on accelerating the integration of acquired stores to leverage our cost structure and increase incremental profitability.

Results of Operations

For the three months ended March 31, 2018 and 2017, we reported net income of $52.1 million, or $2.07 per diluted share, and $50.7 million, or $2.01 per diluted share, respectively.

Key Revenue and Gross Profit Metrics

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



Three Months Ended March 31, 2018	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	1,454,725	54.7	%	$	86,947	6.0	%	21.3	%
Used vehicle retail	715,574		26.9		73,611		10.3		18.0
Used vehicle wholesale	75,955		2.9		926		1.2		0.2
Finance and insurance¹	106,505		4.0		106,505		100.0		26.1
Service, body and parts	285,697		10.7		138,408		48.4		33.9
Fleet and other	21,223		0.8		1,714		8.1		0.5
	$	2,659,679	100.0	%	$	408,111	15.3	%	100.0	%



Three Months Ended March 31, 2017	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	1,210,304	54.1	%	$	70,118	5.8	%	20.5	%
Used vehicle retail	602,223		26.9		68,783		11.4		20.1
Used vehicle wholesale	71,503		3.2		1,517		2.1		0.4
Finance and insurance¹	86,777		3.9		86,777		100.0		25.4
Service, body and parts	232,574		10.4		113,194		48.7		33.1
Fleet and other	32,720		1.5		1,263		3.9		0.5
	$	2,236,101	100.0	%	$	341,652	15.3	%	100.0	%

¹ Commissions reported net of anticipated cancellations.

Same Store Operating Data

We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow revenues in our existing locations. As a result, same store measures have been integrated into the discussion below.

Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in February 2017 would be included in same store operating data beginning in March 2018, 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.

New Vehicle Revenue and Gross Profit



	Three Months Ended March 31,						Increase (Decrease)				% Increase (Decrease)
(Dollars in thousands, except per unit amounts)	2018			2017			Increase (Decrease)				% Increase (Decrease)
Reported
Revenue	$	1,454,725		$	1,210,304		$	244,421			20.2	%
Gross profit	$	86,947		$	70,118		$	16,829			24.0
Gross margin	6.0		%	5.8		%	20		bp	¹

Retail units sold	41,497			35,616			5,881				16.5
Average selling price per retail unit	$	35,056		$	33,982		$	1,074			3.2
Average gross profit per retail unit	$	2,095		$	1,969		$	126			6.4

Same store
Revenue	$	1,183,204		$	1,201,912		$	(18,708	)		(1.6	)
Gross profit	$	68,102		$	69,091		$	(989	)		(1.4	)
Gross margin	5.8		%	5.7		%	10		bp

Retail units sold	33,886			35,415			(1,529		)		(4.3	)
Average selling price per retail unit	$	34,917		$	33,938		$	979			2.9
Average gross profit per retail unit	$	2,010		$	1,951		$	59			3.0

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

New vehicle sales increased 20.2% in the three-month period ended March 31, 2018 compared to the same period of 2017, primarily driven by an increase in volume related to acquisitions.

Excluding the impact of acquisitions, on a same store basis, new vehicle sales decreased 1.6% in the three-month period ended March 31, 2018 compared to the same period of 2017. This decrease was primarily due to a 4.3% decrease in unit sales, partially offset by a 2.9% increase in average selling price per unit for the three-month period ended March 31, 2018 compared to the same period of 2017. The national new vehicle sales market experienced 2.1% growth during the first quarter of 2018 compared to the same period of 2017.

Same store unit sales increased (decreased) as follows:



	Three months ended March 31, 2018 compared to the same period of 2017		National growth in the three months ended March 31, 2018 compared to the same period of 2017 ¹
Domestic brand same store unit sales change	(6.0	)%	0.7	%
Import brand same store unit sales change	(4.5	)	2.4
Luxury brand same store unit sales change	2.2		7.9
Overall	(4.3	)	2.1

¹ National auto unit sales and seasonally adjusted annual rate ("SAAR") data obtained from Stephens Auto Unit Sales and SAAR report as of March 2018.

The unit volume decrease for our domestic brands exceeded the national average for the three-month period ended March 31, 2018 compared to the same period of 2017. Our performance, compared to the national trend for domestic brands, was mainly driven by General Motors and Chrysler, which had same store unit sales decreases of 7.1% and 5.8%, respectively, for the three-month period ended March 31, 2018 compared to the same period of 2017. This performance compares to the national market increases of 3.8% for General Motors and 1.0% for Chrysler for the same period. Our Ford stores experienced a same store unit sales decrease of 5.1% compared to a national market decrease of 3.1% for the three-month period ended March 31, 2018 compared to the same period of 2017.

The unit volume decrease for our import brands exceeded the national average for the three-month period ended March 31, 2018 compared to the same period of 2017. This decrease was primarily driven by our Honda stores, which comprised 18.9% of our total new vehicle unit sales in the first quarter of 2018. Our Honda stores had a same store unit decrease of 11.6% for the three-month period ended March 31, 2018 compared to the same period of 2017, while the national average unit volume decrease was 0.8% for Honda for the same period. Our Toyota stores, which comprised 18.8% of our total new vehicle unit sales in the first quarter of 2018, grew 6.2% for the three-month period ended March 31, 2018 compared to the same period in 2017, while the national market for Toyota increased by 7.4% for the same period.

Our luxury brand unit volume increased 2.2% the in the three-month period ended March 31, 2018 compared to the same period of 2017, which underperformed the national trend for luxury brands, and was primarily associated with our BMW stores, which comprised 3.5% of our same store new vehicle unit sales in the first quarter of 2018. Our BMW stores had a same store unit sales decrease of 6.9% for the three-month period ended March 31, 2018 compared to the same period of 2017, while the national average was an increase for BMW of 3.0% for the same period. This was offset by the performance of our Mercedes stores, accounting for 1.1% of our same store new vehicle unit sales in the first quarter of 2018, that had same store unit sales increases of 26.6% for the three-month period ended March 31, 2018 compared to the same period of 2017, while the national average was a decrease for Mercedes of 0.7% for the same period. The growth in our luxury brands was less than the national average due to decreases in our local markets. We are concentrated in areas such as Seattle and New Jersey, where new vehicle registrations were down.

We seek to grow our new vehicle sales organically by gaining share in the markets we serve. To increase awareness and customer traffic, we use a combination of traditional, digital and social media advertisements to reach customers.

New vehicle gross profit increased 24.0% in the three-month period ended March 31, 2018 compared to the same period of 2017. On a same store basis, new vehicle gross profit decreased 1.4% in the three-month period ended March 31, 2018 compared to the same period of 2017. The same store average gross profit per unit for new vehicles increased $59 in the three-month period ended March 31, 2018 compared to the same period of 2017.

Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, arranging of third party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work.

Used Vehicle Retail Revenue and Gross Profit



	Three Months Ended March 31,						Increase (Decrease)			% Increase (Decrease)
(Dollars in thousands, except per unit amounts)	2018			2017			Increase (Decrease)			% Increase (Decrease)
Reported
Retail revenue	$	715,574		$	602,223		$	113,351		18.8	%
Retail gross profit	$	73,611		$	68,783		$	4,828		7.0
Retail gross margin	10.3		%	11.4		%	(110		)bp

Retail units sold	36,114			30,783			5,331			17.3
Average selling price per retail unit	$	19,814		$	19,563		$	251		1.3
Average gross profit per retail unit	$	2,038		$	2,234		$	(196	)	(8.8	)

Same store
Retail revenue	$	622,389		$	595,041		$	27,348		4.6
Retail gross profit	$	65,878		$	68,260		$	(2,382	)	(3.5	)
Retail gross margin	10.6		%	11.5		%	(90		)bp

Retail units sold	31,677			30,404			1,273			4.2
Average selling price per retail unit	$	19,648		$	19,571		$	77		0.4
Average gross profit per retail unit	$	2,080		$	2,245		$	(165	)	(7.3	)

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. We have established a company-wide target of achieving a per store average of 85 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of used units, from late model CPO models to vehicles over ten years old.

Same store sales of used vehicles increased (decreased) as follows:



	Three months ended March 31, 2018 compared to the same period of 2017
Manufacturer CPO vehicles	(6.3	)%
Core vehicles	12.7
Value autos	(1.5	)
Overall	4.6

The increase in same store used vehicle sales was primarily driven by increased unit sales in our core vehicles category. For core vehicles, same store unit sales increased 11.1% and average selling price increased 1.6% for the three-months ended March 31, 2018 compared to the same period of 2017. The growth in our core vehicles category was offset by decreases in our CPO vehicles and value autos. The decrease in CPO vehicle sales was driven by a 2.5% decrease in same store unit sales and a 3.8% decrease in average selling price for the three-month period ended March 31, 2018 compared to the same period of 2017. Our value autos category had a 2.9% decrease in same store unit sales, offset by a 1.4% increase in average selling price for the three-months ended March 31, 2018 compared to the same period of 2017.

On an annualized average, as of March 31, 2018 and 2017, each of our stores sold 67 and 66 retail used vehicle units per month, respectively.

Used retail vehicle gross profit increased 7.0% in the three-month period ended March 31, 2018 compared to the same period of 2017. On a same store basis, gross profit decreased 3.5%, in the three-month period ended March 31, 2018 compared to the same period of 2017, primarily driven by a decrease in the average gross profit per unit, partially offset by an increase in units sold. The

same store gross profit per unit decreased $165 for the three-month period ended March 31, 2018 compared to the same period of 2017.

Our used vehicle operations provide an opportunity to generate sales to customers unable or unwilling to purchase a new vehicle, sell brands other than the store’s new vehicle franchise(s) and increase sales from finance and insurance and parts and service.

Used Vehicle Wholesale Revenue and Gross Profit



	Three Months Ended March 31,						Increase (Decrease)			% Increase (Decrease)
(Dollars in thousands, except per unit amounts)	2018			2017			Increase (Decrease)			% Increase (Decrease)
Reported
Wholesale revenue	$	75,955		$	71,503		$	4,452		6.2	%
Wholesale gross profit	$	926		$	1,517		$	(591	)	(39.0	)
Wholesale gross margin	1.2		%	2.1		%	(90		)bp

Wholesale units sold	11,687			10,840			847			7.8
Average selling price per wholesale unit	$	6,499		$	6,596		$	(97	)	(1.5	)
Average gross profit per retail unit	$	79		$	140		$	(61	)	(43.6	)

Wholesale transactions are vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to age or other factors. Wholesale vehicles are typically sold at or near cost and do not comprise a meaningful component of our gross profit.

Finance and Insurance



	Three Months Ended March 31,				Increase		% Increase
(Dollars in thousands, except per unit amounts)	2018		2017		Increase		% Increase
Reported
Revenue	$	106,505	$	86,777	$	19,728	22.7	%
Average finance and insurance per retail unit	1,372		1,307		65		5.0

Same store
Revenue	$	90,509	$	86,130	$	4,379	5.1	%
Average finance and insurance per retail unit	1,380		1,309		71		5.4

We believe that arranging timely vehicle financing is an important part of our ability to sell vehicles and we attempt to arrange financing for every vehicle we sell. We also offer related products such as extended warranties, insurance contracts and vehicle and theft protection.

The increase in finance and insurance revenue in the three-month period ended March 31, 2018 was primarily due to increased volume related to acquisitions, combined with expanded product offerings. Third-party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. Same store finance and insurance revenues increased 5.1% for the three-month period ended March 31, 2018 as compared to the same period of 2017. This increase was driven by an increase in finance and insurance revenues per retail unit, combined with an increase in used vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit increased $71 in the three-month period ended March 31, 2018 compared to the same period of 2017, primarily due to increased penetration rates related to service contracts.

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



	Three Months Ended March 31,
	2018		2017
Finance and insurance	74	%	77	%
Service contracts	47		47
Lifetime lube, oil and filter contracts	25		27

We seek to increase our penetration of vehicle financing on the number of vehicles that we sell and to offer a comprehensive suite of products. We target an average F&I per retail unit of $1,450. We believe improved performance from sales training and revised compensation plans will be critical factors in achieving this target.

Service, Body and Parts Revenue and Gross Profit



	Three Months Ended March 31,						Increase (Decrease)			% Increase
(Dollars in thousands)	2018			2017			Increase (Decrease)			% Increase
Reported
Customer pay	$	149,848		$	122,620		$	27,228		22.2	%
Warranty	68,308			54,499			13,809			25.3
Wholesale parts	45,609			36,702			8,907			24.3
Body shop	21,932			18,753			3,179			17.0
Total service, body and parts	$	285,697		$	232,574		$	53,123		22.8	%

Service, body and parts gross profit	$	138,408		$	113,194		$	25,214		22.3	%
Service, body and parts gross margin	48.4		%	48.7		%	(30		) bp

Same store
Customer pay	$	125,295		$	121,085		$	4,210		3.5	%
Warranty	55,657			53,988			1,669			3.1
Wholesale parts	36,668			36,263			405			1.1
Body shop	18,332			18,226			106			0.6
Total service, body and parts	$	235,952		$	229,562		$	6,390		2.8	%

Service, body and parts gross profit	$	116,078		$	111,724		$	4,354		3.9	%
Service, body and parts gross margin	49.2		%	48.7		%	50		bp

We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.

Our service, body and parts revenue grew in all areas in the three-month period ended March 31, 2018 compared to the same period of 2017. The growth experienced in the first quarter of 2018 was due to acquisitions, combined with more late-model units in operation from 2010 to 2016 and a plateauing new vehicle market. We believe the increased number of units in operation will continue to benefit our service, body and parts revenue in the coming years as more late-model vehicles age, necessitating repairs and maintenance.

We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts. We increased our same store customer pay revenue 3.5% in the three-month period ended March 31, 2018 compared to the same period of 2017.

Same store warranty revenue increased 3.1% in the three-month period ended March 31, 2018 compared to the same period of 2017. Warranty sales growth was primarily driven by an increase in domestic segment recalls, particularly Chrysler and Ford, which had increases of 14.4% and 13.8%, respectively. These increases were offset by decreases in Honda and Nissan warranty work of 23.8% and 26.5%, respectively, in the three month period ended March 31, 2018 as compared to the same period of 2017.

The increase (decrease) in same-store warranty work by segment was as follows:



	Three months ended March 31, 2018 compared to the same period of 2017
Domestic	11.7	%
Import	(3.7	)
Luxury	2.8

Same store wholesale parts revenue increased 1.1% in the three-month period ended March 31, 2018 compared to the same period of 2017. We target independent repair shops, competing new vehicle dealers and wholesale accounts to expand parts sales to other repair shops.

Same store body shop revenue increased 0.6% in the three-month period ended March 31, 2018 compared to the same period of 2017.

Same store service, body and parts gross profit increased 3.9% in the three-month period ended March 31, 2018 compared to the same period of 2017, which is slightly higher than our revenue growth. Our gross margins increased as our mix shifted toward customer pay, which has a higher margin than other service.

Segments

Certain financial information by segment is as follows:



	Three Months Ended March 31,				Increase		% Increase
(Dollars in thousands)	2018		2017		Increase		% Increase
Revenues:
Domestic	$	970,616	$	899,759	$	70,857	7.9	%
Import	1,170,433		971,472		198,961		20.5
Luxury	516,495		363,803		152,692		42.0
	2,657,544		2,235,034		422,510		18.9
Corporate and other	2,135

LITHIA MOTORS INC - FORM 10-Q - April 27, 2018

Attached files