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EX-32.2 - EXHIBIT 32.2 - LITHIA MOTORS INClad2018q1-10qex322cfocert.htm
EX-32.1 - EXHIBIT 32.1 - LITHIA MOTORS INClad2018q1-10qex321ceocert.htm
EX-31.2 - EXHIBIT 31.2 - LITHIA MOTORS INClad2018q1-10qex312cfocert.htm
EX-31.1 - EXHIBIT 31.1 - LITHIA MOTORS INClad2018q1-10qex311ceocert.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
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
 
23,945,392
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.
 
 
 
 
Consolidated Balance Sheets (Unaudited) - March 31, 2018 and December 31, 2017
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2018 and 2017
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

1



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.

2



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.

3



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.

4



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

5



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.


6



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

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, 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 acquisitions 2

Balance as of March 31, 2018
$
186,977

1 Our 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.
2 Our 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.


7



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.

8



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

 

 

 



9



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.


10



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.

11



 
 
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.

12



 
 
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.


13



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
 
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.


14



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

15



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 insurance 1
 
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 insurance 1
 
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.


16



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
 
 
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

1 A basis point is equal to 1/100th 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.
 

17




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.


18



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
 
 
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

19



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
 
 
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
 
 
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.


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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
 
 
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.
 

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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
 
 
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

 
1,067

 
1,068

 
NM

 
 
$
2,659,679

 
$
2,236,101

 
$
423,578<