LITHIA MOTORS, INC.

FORM 10-Q

INDEX



PART I - FINANCIAL INFORMATION		Page

Item 1.	Financial Statements	2

	Consolidated Balance Sheets (Unaudited) - September 30, ~~2017~~2019, and December 31, ~~2016~~2018	2

	Consolidated Statements of Operations (Unaudited) –- Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	3

	Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	4

	Consolidated Statements of ~~Cash Flows~~Changes in Stockholders' Equity (Unaudited) – - Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018	5

	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2019 and 2018	7

	Condensed Notes to Consolidated Financial Statements (Unaudited)	68

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1720

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4344

Item 4.	Controls and Procedures	4344

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	4345

Item 1A.	Risk Factors	43

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	45

Item 5.2.	~~Other Information~~ Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 6.	Exhibits	46

Signature		47

~~LITHIA MOTORS, INC. AND SUBSIDIARIES~~

~~Consolidated Balance Sheets~~

~~(In thousands)~~

~~(Unaudited)~~

September 30, 2017 December 31, 2016
Assets
Current Assets:
Cash and cash equivalents $ 38,577
$ 50,282
Accounts receivable, net of allowance for doubtful accounts of $6,145 and $5,281 446,613
417,714
Inventories, net 1,966,456
1,772,587
Other current assets 59,622
46,611
Total Current Assets 2,511,268
2,287,194

Property and equipment, net of accumulated depreciation of $190,962 and $167,300 1,087,920
1,006,130
Goodwill 257,185
259,399
Franchise value 186,977
184,268
Other non-current assets 328,243
107,159
Total Assets $ 4,371,593
$ 3,844,150

Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable $ 114,833
$ 94,602
Floor plan notes payable: non-trade 1,598,111
1,506,895
Current maturities of long-term debt 17,619
20,965
Trade payables 103,105
88,423
Accrued liabilities 241,094
211,109
Total Current Liabilities 2,074,762
1,921,994

Long-term debt, less current maturities 991,333
769,916
Deferred revenue 98,265
81,929
Deferred income taxes 66,474
59,075
Other long-term liabilities 109,383
100,460
Total Liabilities 3,340,217
2,933,374

Stockholders' Equity:
Preferred stock - no par value; authorized 15,000 shares; none outstanding —
—
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,966 and 23,382 148,880
165,512
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762 124
219
Additional paid-in capital 42,373
41,225
Retained earnings 839,999
703,820
Total Stockholders' Equity 1,031,376
910,776
Total Liabilities and Stockholders' Equity $ 4,371,593
$ 3,844,150

~~See accompanying condensed notes to consolidated financial statements.~~

~~LITHIA MOTORS, INC. AND SUBSIDIARIES~~

~~Consolidated Statements ofOperations~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

Three Months Ended September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Revenues:
New vehicle $ 1,553,511
$ 1,297,511
$ 4,147,870
$ 3,602,603
Used vehicle retail 679,180
580,885
1,915,038
1,667,258
Used vehicle wholesale 65,739
75,271
206,754
207,131
Finance and insurance 101,044
87,709
282,672
246,390
Service, body and parts 265,683
217,148
744,262
616,088
Fleet and other 15,185
11,443
86,883
46,697
Total revenues 2,680,342
2,269,967
7,383,479
6,386,167
Cost of sales:
New vehicle 1,465,466
1,221,668
3,909,168
3,387,132
Used vehicle retail 600,522
512,076
1,693,091
1,466,947
Used vehicle wholesale 64,565
74,353
202,351
202,897
Service, body and parts 133,191
112,806
376,096
317,028
Fleet and other 13,577
11,803
82,829
45,684
Total cost of sales 2,277,321
1,932,706
6,263,535
5,419,688
Gross profit 403,021
337,261
1,119,944
966,479
Asset impairments —
3,498
—
10,494
Selling, general and administrative 282,241
228,134
782,303
662,766
Depreciation and amortization 14,828
12,206
41,598
36,372
Operating income 105,952
93,423
296,043
256,847
Floor plan interest expense (10,629 ) (6,186 ) (28,013 ) (18,304 )
Other interest expense, net (9,905 ) (5,647 ) (23,745 ) (16,608 )
Other income (expense), net 1,125
(1,513 ) 11,357
(4,534 )
Income before income taxes 86,543
80,077
255,642
217,401
Income tax provision (34,657 ) (26,036 ) (99,829 ) (71,662 )
Net income $ 51,886
$ 54,041
$ 155,813
$ 145,739

Basic net income per share $ 2.07
$ 2.15
$ 6.21
$ 5.72
Shares used in basic per share calculations 25,008
25,194
25,090
25,490

Diluted net income per share $ 2.07
$ 2.14
$ 6.19
$ 5.69
Shares used in diluted per share calculations 25,076
25,290
25,158
25,598

Cash dividends declared per Class A and Class B share $ 0.27
$ 0.25
$ 0.79
$ 0.70

~~See accompanying condensed notes to consolidated financial statements.~~

~~LITHIA MOTORS, INC. AND SUBSIDIARIES~~

~~Consolidated Statements of Comprehensive Income~~

~~(In thousands)~~

~~(Unaudited)~~

Three Months Ended September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Net income $ 51,886
$ 54,041
$ 155,813
$ 145,739
Other comprehensive income, net of tax:

Gain on cash flow hedges, net of tax expense of $0, $0, $0, and $175, respectively —
—
—
277
Comprehensive income $ 51,886
$ 54,041
$ 155,813
$ 146,016



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In millions) (Unaudited)
	September 30, 2019			December 31, 2018
Assets
Current Assets:
Cash and cash equivalents	$	27.1		$	31.6
Accounts receivable, net of allowance for doubtful accounts of $6.9 and $7.2	459.7			529.4
Inventories, net	2,386.4			2,365.3
Other current assets	56.7			65.1
Total Current Assets	2,929.9			2,991.4

Property and equipment, net of accumulated depreciation of $272.1 and $240.5	1,482.6			1,448.0
Operating lease right-of-use assets	249.5			—
Goodwill	456.8			434.9
Franchise value	309.1			288.7
Other non-current assets	309.6			221.0
Total Assets	$	5,737.5		$	5,384.0

Liabilities and Stockholders’ Equity
Current Liabilities:
Floor plan notes payable	$	407.5		$	324.4
Floor plan notes payable: non-trade	1,594.5			1,733.3
Current maturities of long-term debt	26.3			25.9
Trade payables	127.0			126.3
Accrued liabilities	328.1			283.6
Total Current Liabilities	2,483.4			2,493.5

Long-term debt, less current maturities	1,287.8			1,358.2
Deferred revenue	133.8			121.7
Deferred income taxes	130.0			91.2
Noncurrent operating lease liabilities	235.2			—
Other long-term liabilities	108.1			122.2
Total Liabilities	4,378.3			4,186.8

Stockholders’ Equity:
Preferred stock - no par value; authorized 15.0 shares; none outstanding	—			—
Class A common stock - no par value; authorized 100.0 shares; issued and outstanding 22.6 and 22.0	16.9			—
Class B common stock - no par value; authorized 25.0 shares; issued and outstanding 0.6 and 1.0	0.1			0.1
Additional paid-in capital	3.4			35.0
Accumulated other comprehensive loss	(1.9		)	—
Retained earnings	1,340.7			1,162.1
Total Stockholders’ Equity	1,359.2			1,197.2
Total Liabilities and Stockholders’ Equity	$	5,737.5		$	5,384.0

See accompanying condensed notes to consolidated financial statements.

~~LITHIA MOTORS, INC. AND SUBSIDIARIES~~

~~Consolidated Statements of Cash Flows~~

~~(In thousands)~~

~~(Unaudited)~~

Nine Months Ended September 30,
2017 2016
Cash flows from operating activities:
Net income $ 155,813
$ 145,739
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments —
10,494
Depreciation and amortization 41,598
36,372
Stock-based compensation 8,396
8,665
Gain on disposal of other assets (382 ) (4,299 )
Gain on disposal of franchise —
(1,102 )
Deferred income taxes 7,398
9,782
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net (13,345 ) (5,911 )
Inventories (16,098 ) (85,564 )
Other assets 15,207
4,688
Increase (net of acquisitions and dispositions):
Floor plan notes payable 12,126
18,122
Trade payables 12,397
6,153
Accrued liabilities 25,907
32,874
Other long-term liabilities and deferred revenue 11,519
18,227
Net cash provided by operating activities 260,536
194,240

Cash flows from investing activities:
Capital expenditures (72,174 ) (81,363 )
Proceeds from sales of assets 12,327
1,756
Cash paid for other investments (7,929 ) (22,279 )
Cash paid for acquisitions, net of cash acquired (400,558 ) (199,435 )
Proceeds from sales of stores 3,417
11,837
Net cash used in investing activities (464,917 ) (289,484 )

Cash flows from financing activities:
Borrowings on floor plan notes payable, net: non-trade 34,056
93,817
Borrowings on lines of credit 1,306,000
841,623
Repayments on lines of credit (1,432,853 ) (744,494 )
Principal payments on long-term debt and capital leases, scheduled (13,697 ) (12,278 )
Principal payments on long-term debt and capital leases, other (46,471 ) (5,903 )
Proceeds from issuance of long-term debt 395,905
22,816
Payments of debt issuance costs (4,517 ) —
Proceeds from issuance of common stock 5,577
5,191
Repurchase of common stock (31,521 ) (108,597 )
Dividends paid (19,803 ) (17,823 )
Net cash provided by financing activities 192,676
74,352
Decrease in cash and cash equivalents (11,705 ) (20,892 )
Cash and cash equivalents at beginning of period 50,282
45,008
Cash and cash equivalents at end of period $ 38,577
$ 24,116

Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 51,160
$ 36,641
Cash paid during the period for income taxes, net 89,206
29,478
Floor plan debt paid in connection with store disposals —
5,284

Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions $ 1,748
$ —
Non-cash assets transferred in connection with acquisitions —
2,637
Debt assumed in connection with acquisitions 86,902
19,657
Issuance of Class A common stock in connection with acquisitions 2,137
—



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In millions, except per share amounts) (Unaudited)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Revenues:
New vehicle	$	1,824.8		$	1,733.0		$	4,993.3		$	4,914.5
Used vehicle retail	916.3			805.9			2,632.4			2,325.6
Used vehicle wholesale	74.4			92.0			233.5			253.2
Finance and insurance	136.3			121.1			382.7			342.1
Service, body and parts	340.5			311.3			993.3			908.4
Fleet and other	40.1			28.7			168.6			104.4
Total revenues	3,332.4			3,092.0			9,403.8			8,848.2
Cost of sales:
New vehicle	1,724.8			1,632.1			4,711.9			4,625.2
Used vehicle retail	816.6			719.6			2,355.0			2,078.5
Used vehicle wholesale	73.3			90.6			229.7			249.0
Service, body and parts	169.0			156.9			492.2			461.9
Fleet and other	37.8			26.6			159.8			98.5
Total cost of sales	2,821.5			2,625.8			7,948.6			7,513.1
Gross profit	510.9			466.2			1,455.2			1,335.1
Asset impairments	—			—			0.5			—
Selling, general and administrative	343.2			309.0			1,021.5			939.9
Depreciation and amortization	20.9			19.6			60.9			55.3
Operating income	146.8			137.6			372.3			339.9
Floor plan interest expense	(17.9		)	(16.0		)	(55.5		)	(45.1		)
Other interest expense, net	(14.8		)	(15.0		)	(45.0		)	(40.7		)
Other income, net	3.3			2.4			8.9			5.4
Income before income taxes	117.4			109.0			280.7			259.5
Income tax provision	(32.2		)	(15.9		)	(77.2		)	(53.7		)
Net income	$	85.2		$	93.1		$	203.5		$	205.8

Basic net income per share	$	3.67		$	3.85		$	8.77		$	8.34
Shares used in basic per share calculations	23.2			24.2			23.2			24.7

Diluted net income per share	$	3.64		$	3.84		$	8.72		$	8.31
Shares used in diluted per share calculations	23.4			24.3			23.3			24.8

Cash dividends paid per Class A and Class B share	$	0.30		$	0.29		$	0.89		$	0.85

See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (In millions) (Unaudited)
	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Net income	$	85.2		$	93.1	$	203.5		$	205.8
Other comprehensive income, net of tax:
Loss on cash flow hedges, net of tax benefit of $0.4, $0.0, $0.7, and $0.0, respectively	(1.0		)	—		(1.9		)	—
Comprehensive income	$	84.2		$	93.1	$	201.6		$	205.8

See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity (In millions) (Unaudited)
Three and Nine Months Ended September 30, 2019
	Common Stock								Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
	Class A				Class B
	Shares	Amount			Shares		Amount
Balance at December 31, 2018	22.0	$	—		1.0		$	0.1	$	35.0		$	—		$	1,162.1		$	1,197.2
Net income	—	—			—		—		—			—			56.4			56.4
Issuance of stock in connection with employee stock plans	—	2.3			—		—		—			—			—			2.3
Issuance of restricted stock to employees	0.1	—			—		—		—			—			—			—
Repurchase of Class A common stock	—	(3.1		)	—		—		—			—			—			(3.1		)
Class B common stock converted to Class A common stock	0.2	—			(0.2	)	—		—			—			—			—
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—	10.5			—		—		(7.0		)	—			—			3.5
Dividends paid	—	—			—		—		—			—			(6.7		)	(6.7		)
Retained Earnings Adjustment for Adoption of ASC 842	—	—			—		—		—			—			0.9			0.9
Balance at March 31, 2019	22.3	9.7			0.8		0.1		28.0			—			1,212.7			1,250.5
Net income	—	—			—		—		—			—			61.9			61.9
Loss on cash flow hedges, net of tax benefit of $0.3	—	—			—		—		—			(0.9		)	—			(0.9		)
Issuance of stock in connection with employee stock plans	0.1	2.8			—		—		—			—			—			2.8
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—	0.5			—		—		3.4			—			—			3.9
Option premiums paid	—	—			—		—		(31.4		)	—			(5.1		)	(36.5		)
Dividends paid	—	—			—		—		—			—			(7.0		)	(7.0		)
Balance at June 30, 2019	22.4	13.0			0.8		0.1		—			(0.9		)	1,262.5			1,274.7
Net income	—	—			—		—		—			—			85.2			85.2
Loss on cash flow hedges, net of tax benefit of $0.4	—	—			—		—		—			(1.0		)	—			(1.0		)
Issuance of stock in connection with employee stock plans	—	2.9			—		—		—			—			—			2.9
Class B common stock converted to Class A common stock	0.2	—			(0.2	)	—		—			—			—			—
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—	1.0			—		—		3.4			—			—			4.4
Dividends paid	—	—			—		—		—			—			(7.0		)	(7.0		)
Balance at September 30, 2019	22.6	$	16.9		0.6		$	0.1	$	3.4		$	(1.9	)	$	1,340.7		$	1,359.2

See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity (In millions) (Unaudited)
Three and Nine Months Ended September 30, 2018
	Common Stock								Additional Paid-In Capital			Accumulated Other Comprehensive Loss		Retained Earnings			Total Stockholders’ Equity
	Class A					Class B
	Shares		Amount			Shares	Amount
Balance at December 31, 2017	23.9		$	149.1		1.0	$	0.1	$	11.3		$	—	$	922.7		$	1,083.2
Net income	—		—			—	—		—			—		52.1			52.1
Issuance of stock in connection with employee stock plans	—		1.8			—	—		—			—		—			1.8
Issuance of restricted stock to employees	0.1		—			—	—		—			—		—			—
Repurchase of Class A common stock	(0.1	)	(8.2		)	—	—		—			—		—			(8.2		)
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—		0.3			—	—		3.3			—		—			3.6
Dividends paid	—		—			—	—		—			—		(6.8		)	(6.8		)
Retained earnings adjustment for adoption of ASC 606	—		—			—	—		—			—		1.4			1.4
Balance at March 31, 2018	23.9		143.0			1.0	0.1		14.6			—		969.4			1,127.1
Net income	—		—			—	—		—			—		60.7			60.7
Issuance of stock in connection with employee stock plans	0.1		2.7			—	—		—			—		—			2.7
Repurchase of Class A common stock	(0.6	)	(59.1		)	—	—		—			—		—			(59.1		)
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—		7.8			—	—		(4.5		)	—		—			3.3
Option premiums received (paid)	—		—			—	—		33.4			—		—			33.4
Dividends paid	—		—			—	—		—			—		(7.2		)	(7.2		)
Balance at June 30, 2018	23.4		94.4			1.0	0.1		43.5			—		1,022.9			1,160.9
Net income	—		—			—	—		—			—		93.1			93.1
Issuance of stock in connection with employee stock plans	—		2.9			—	—		—			—		—			2.9
Repurchase of Class A common stock	(0.5	)	(47.7		)	—	—		—			—		—			(47.7		)
Compensation for stock and stock option issuances and excess tax benefits from option exercises	—		0.5			—	—		2.4			—		—			2.9
Dividends paid	—		—			—	—		—			—		(7.0		)	(7.0		)
Balance at September 30, 2018	22.9		$	50.1		1.0	$	0.1	$	45.9		$	—	$	1,109.0		$	1,205.1

See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (In millions) (Unaudited)
	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities:
Net income	$	203.5		$	205.8
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments	0.5			—
Depreciation and amortization	60.9			55.3
Stock-based compensation	11.8			9.8
Gain on disposal of other assets	—			(0.1		)
Gain on disposal of franchise	(9.1		)	(15.4		)
Deferred income taxes	39.5			19.5
(Increase) decrease (net of acquisitions and dispositions):
Accounts receivable, net	69.7			63.4
Inventories	(4.1		)	(14.5		)
Other assets	22.3			12.0
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable	83.1			8.1
Trade payables	0.1			3.6
Accrued liabilities	(36.5		)	8.6
Other long-term liabilities and deferred revenue	11.8			23.1
Net cash provided by operating activities	453.5			379.2

Cash flows from investing activities:
Capital expenditures	(91.9		)	(113.4		)
Proceeds from sales of assets	0.8			2.0
Cash paid for other investments	(6.7		)	(62.1		)
Cash paid for acquisitions, net of cash acquired	(142.8		)	(374.0		)
Proceeds from sales of stores	40.9			32.9
Net cash used in investing activities	(199.7		)	(514.6		)

Cash flows from financing activities:
(Repayments) borrowings on floor plan notes payable, net: non-trade	(114.0		)	61.7
Borrowings on lines of credit	2,147.0			1,964.5
Repayments on lines of credit	(2,209.6		)	(1,860.2		)
Principal payments on long-term debt and capital leases, scheduled	(18.0		)	(16.9		)
Principal payments on long-term debt and capital leases, other	(11.0		)	(5.3		)
Proceeds from issuance of long-term debt	—			62.1
Payments of debt issuance costs	(0.4		)	(0.4		)
Proceeds from issuance of common stock	8.0			7.4
Repurchase of common stock	(3.1		)	(81.6		)
Dividends paid	(20.7		)	(21.0		)
Payments of contingent consideration related to acquisitions	—			(0.8		)
Other financing activity	(36.5		)	—
Net cash (used in) provided by financing activities	(258.3		)	109.5
Decrease in cash and cash equivalents	(4.5		)	(25.9		)
Cash and cash equivalents at beginning of period	31.6			57.3
Cash and cash equivalents at end of period	$	27.1		$	31.4

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	107.6		$	88.9
Cash paid during the period for income taxes, net	13.8			2.9
Floor plan debt paid in connection with store disposals	12.3			33.1

Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions	$	26.4		$	125.1
Debt assumed in connection with acquisitions	—			10.8
ROU assets obtained in exchange for lease liabilities ¹	260.3			—

¹Amounts for the nine months ended September 30, 2019 include the transition adjustment for the adoption of Topic 842.

See accompanying condensed notes to consolidated financial statements.

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.1. Interim Financial Statements

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of September 30, ~~2017~~2019, and for the three and ~~nine-months~~nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our ~~2016~~2018 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, ~~2016~~2018, is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February ~~28, 2017.~~22, 2019. The unaudited interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our ~~2016~~2018 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 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet, as right-of-use assets with corresponding operating lease liabilities. In July 2018, the FASB issued ASU No. 2018-11, “Targeted Improvements - Leases (Topic 842).” This update provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the prior periods presented. If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We adopted the new standard as of January 1, 2019 using the transition method that provides for a cumulative-effect adjustment to retained earnings upon adoption. The Consolidated Financial Statements for the three and nine-month periods ended September 30, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue to be reported in accordance with our historical accounting policy. We elected the package of practical expedients, which permits us to not reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease recognition exemption for all leases that qualify. We have both real estate leases and equipment leases that are impacted by the new guidance. Most of our leases do not provide an implicit rate, therefore we use our incremental borrowing rate at the commencement date in determining the present value of lease payments. Adoption of the new standard resulted in the derecognition of a deferred gain from prior completed sale-leaseback transactions. This adjustment, net of tax, was recorded as $0.9 million increase in retained earnings. See Note 10.

The impact of adopting Topic 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows (in millions):



Impact on Consolidated Balance Sheets	December 31, 2018		Adjustments			January 1, 2019
Operating lease right-of-use assets	$	—	$	259.7		$	259.7
Total Assets	5,384.0		259.7			5,643.7
Operating lease liabilities:
Accrued liabilities	283.6		26.6			310.2
Deferred revenue	121.7		(1.3		)	120.4
Noncurrent operating lease liabilities	—		243.9			243.9
Other long-term liabilities	122.2		(10.3		)	111.9
Total Liabilities	4,186.8		258.8			4,445.6
Retained earnings	1,162.1		0.9			1,163.0
Total Liabilities and Stockholders’ Equity	5,384.0		259.7			5,643.7

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. ~~These reclassifications~~

Note 2. Contract Liabilities and Assets

Contract Liabilities

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 $166.4 million and $149.6 million as of September 30, 2019, and December 31, 2018, respectively; and we recognized $6.4 million and $18.5 million of revenue in the three and nine months ended September 30, 2019, respectively, related to our ~~adoption~~contract liability balance at December 31, 2018. Our contract liability balance is included in accrued liabilities and deferred revenue.

Contract Assets

Revenue from finance and insurance sales is recognized, net of ~~ASU 2016-09, "Compensation - Stock Compensation - Improvements~~estimated charge-backs, at the time of the sale of the related 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 ~~Employee Share-Based Payment Accounting." Specifically, we reclassified~~sales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the ~~presentation~~sale of ~~excess tax benefits on our Consolidated Statements~~the contract. Our contract asset balances associated with future estimated variable consideration were $8.9 million and $9.2 million as of ~~Cash Flows between financing~~September 30, 2019 and ~~operating cash flows~~December 31, 2018, respectively; and ~~recorded reclassifications between additional paid-in capital~~are included in trade receivables and ~~retained earnings. See also Note 13.~~other non-current assets.

Note 2.3. Accounts Receivable and Contract Assets

Accounts receivable consisted of the following (in ~~thousands)~~millions):



	September 30, 2019			December 31, 2018
Contracts in transit	$	235.7		$	294.0
Trade receivables	54.8			54.3
Vehicle receivables	44.3			51.6
Manufacturer receivables	104.0			105.5
Auto loan receivables	62.5			61.5
Other receivables	4.0			6.8
	505.3			573.7
Less: Allowance for doubtful accounts	(6.9		)	(7.2		)
Less: Long-term portion of accounts receivable, net	(38.7		)	(37.1		)
Total accounts receivable, net	$	459.7		$	529.4

September 30, 2017 December 31, 2016
Contracts in transit $ 225,564
$ 233,506
Trade receivables 45,243
45,193
Vehicle receivables 53,166
43,937
Manufacturer receivables 85,307
76,948
Auto loan receivables 75,651
69,859
Other receivables 16,892
3,857
501,823

473,300
Less: Allowance (6,145 ) (5,281 )
Less: Long-term portion of accounts receivable, net (49,065 ) (50,305 )
Total accounts receivable, net $ 446,613

$ 417,714

Accounts receivable classifications include the following:

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

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

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

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

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

Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest

income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.

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

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

Note 3.4. Inventories

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



	September 30, 2019		December 31, 2018
New vehicles	$	1,651.4	$	1,700.1
Used vehicles	645.0		576.8
Parts and accessories	90.0		88.4
Total inventories	$	2,386.4	$	2,365.3

September 30, 2017 December 31, 2016
New vehicles $ 1,412,668
$ 1,338,110
Used vehicles 474,948
368,067
Parts and accessories 78,840
66,410
Total inventories $ 1,966,456
$ 1,772,587

Note 4.5. Goodwill and Franchise Value

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

Domestic Import Luxury Consolidated
Balance as of December 31, 2015 ¹ $ 97,903
$ 84,384
$ 30,933
$ 213,220
Additions through acquisitions²
18,154
21,795
7,448
47,397
Reductions through divestitures (1,218 ) —
—
(1,218 )
Balance as of December 31, 2016 ¹
114,839
106,179
38,381
259,399
Adjustments to purchase price allocations^2,3
(817 ) (1,006 ) (391 ) (2,214 )
Balance as of September 30, 2017 ¹ $ 114,022
$ 105,173
$ 37,990
$ 257,185



	Domestic			Import			Luxury		Consolidated
Balance as of December 31, 2017 ¹	$	114.0		$	104.3		$	38.0	$	256.3
Additions through acquisitions ²	51.4			85.8			43.5		180.7
Reductions through divestitures	(0.9		)	(1.2		)	—		(2.1		)
Balance as of December 31, 2018 ¹	164.5			188.9			81.5		434.9
Adjustments to purchase price allocations ³	1.6			1.6			1.9		5.1
Additions through acquisitions ³	6.2			9.0			2.2		17.4
Reductions through divestitures	(0.1		)	(0.5		)	—		(0.6		)
Balance as of September 30, 2019 ¹	$	172.2		$	199.0		$	85.6	$	456.8

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.~~

³~~Our purchase price allocation is preliminary for the~~2017 acquisitions of the Baierl Auto Group, ~~and~~ the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and the ~~associated goodwill has not been~~2018 acquisition of Broadway Ford were finalized in 2018. Also, our purchase price allocation for the 2018 acquisition of Prestige Auto Group was preliminary and was allocated to ~~each~~our segments in 2018. As a result, we added $180.7 million of goodwill.

³Our purchase price allocation for the acquisitions of the Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added $22.5 million of goodwill. Our purchase price allocation for the 2019 acquisitions of Hamilton Honda, Morgantown Ford, Mission Viejo Land Rover Jaguar, and Hazleton Honda is preliminary and goodwill is not yet allocated to our segments. ~~See also Note 12.~~These amounts are included in other non-current assets until we finalize our purchase accounting.

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

Franchise Value
Balance as of December 31, 2015 $ 157,699
Additions through acquisitions 27,087
Reductions through divestitures (518 )
Balance as of December 31, 2016 184,268
Additions through acquisitions¹
495
Adjustments to purchase price allocations ²
2,214
Balance as of September 30, 2017 $ 186,977



	Franchise Value
Balance as of December 31, 2017	$	187.0
Additions through acquisitions ¹	103.5
Reductions through divestitures	(1.8		)
Balance as of December 31, 2018	288.7
Adjustments to purchase price allocations ²	3.5
Additions through acquisitions ²	20.9
Reductions through divestitures	(4.0		)
Balance as of September 30, 2019	$	309.1

¹Our purchase price allocation ~~is preliminary~~ for the 2017 acquisitions of the Baierl Auto Group, ~~and~~ the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and ~~have not been included~~the 2018 acquisition of Broadway Ford were finalized in 2018. Also, our purchase price allocation for the ~~above~~2018 acquisition of Prestige Auto Group was preliminary and was allocated to our segments in 2018. As a result, we added $103.5 million of franchise ~~value additions. See also Note 12.~~value.

²Our purchase price allocation for the ~~acquisition~~acquisitions of the ~~Carbone~~Ray Laks Honda, Ray Laks Acura, Day Auto Group, ~~was~~Prestige Auto Group, and Buhler Ford were finalized in ~~the third quarter~~2019. As a result, we added $24.4 million of ~~2017, resulting in a reclassification in the current year of $2.2 million from goodwill to~~ franchise value.

~~Note 5. Long-term Debt~~

~~Long-term debt consisted~~ Our purchase price allocation for the 2019 acquisitions of ~~the following:~~Hamilton Honda, Morgantown Ford, Mission Viejo Land Rover Jaguar, and Hazleton Honda is preliminary

(Dollars in thousands) September 30, 2017 December 31, 2016
Real estate mortgages $ 476,559
$ 428,367
5.25% Senior Notes due 2025 300,000
—
Used vehicle inventory financing facility and revolving lines of credit 226,654
353,507
Capital leases and other debt 12,699
11,191
Total long-term debt outstanding 1,015,912
793,065
Less: unamortized debt issuance costs (6,960 ) (2,184 )
Less: current maturities (net of current debt issuance costs) (17,619 ) (20,965 )
Long-term debt $ 991,333
$ 769,916

and franchise value is not yet allocated to our segments. These amounts are included in other non-current assets until we finalize our purchase accounting.

~~5.25% Senior Notes Due 2025~~

On July 24, 2017, we issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 ("the Notes") to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notes from July 24, 2017 and is payable semiannually on February 1 and August 1. The first interest payment is due on February 1, 2018. We may redeem the Notes in whole or in part at any time prior to August 1, 2020 at a price equal to 100% of the principal amount plus a make-whole premium set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest to the date of purchase.

We paid approximately $5.0 million in underwriting and other fees in connection with this issuance, which will be amortized as interest expense over the term of the Notes. The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by each of our existing and future restricted subsidiaries that is a borrower under, or that guarantees obligations under, our credit facility or other indebtedness. The terms of the Notes, in certain circumstances, may restrict our ability to, among other things, incur additional indebtedness, pay dividends, repurchase our common stock, or merge, consolidate or sell all or substantially all our assets.

~~Credit Facility~~

On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion. This syndicated credit facility is comprised of 18 financial institutions, including seven manufacturer-affiliated finance companies. Our credit facility provides for up to $1.9 billion in new vehicle inventory floor plan financing, up to $250 million in used vehicle inventory floor plan financing and a maximum of $250 million in revolving financing for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $2.75 billion total availability, subject to lender approval.

Note 6.6. Stockholders’ Equity

Repurchasesof Class A Common Stock

~~Repurchases~~In May 2019, we entered into a structured repurchase agreement involving the use 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~~capped call options for the ~~vesting of restricted stock units ("RSUs"). In February 2016, our Board of Directors authorized the repurchase of up to $250 million~~purchase of our Class A common stock. ~~Share repurchases under~~We paid a fixed sum upon execution of the agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of the agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or Class A shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We paid a net premium of $36.5 million in the second quarter of 2019 to enter into this ~~authorization were~~agreement, which was recorded as ~~follows:~~

Repurchases Occurring in the Nine Months Ended September 30, 2017 Cumulative Repurchases as of September 30, 2017
Shares Average Price Shares Average Price
2016 Share Repurchase Authorization 310,000
$ 91.33
1,023,725
$ 83.25

a reduction of additional paid-in-capital and retained earnings. As of September 30, ~~2017, we had $164.8 million available for repurchases pursuant to our 2016 share repurchase authorization.~~2019, the options were outstanding.

In addition, during the first nine months of 2017, we repurchased 32,300 shares at an average price of $99.33 per share, for a total of $3.2 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.

Note 7.7. Fair Value Measurements

~~Fair Value Disclosures~~Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

Level 1 - quoted prices in active markets for ~~Financial Assets~~identical securities;

Level 2 - other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads, credit risk; and ~~Liabilities~~

Level 3 - significant unobservable inputs, including our own assumptions in determining fair value.

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

We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt. As of September 30, ~~2017,~~2019, our real estate mortgages and other debt, which includes capital leases, had maturity dates between ~~January 12, 2019~~October 1, 2020, and ~~December~~August 31, ~~2050.~~2038.

We have derivative instruments consisting of interest rate collars. The fair value of derivative liabilities is measured using observable Level 2 market expectations at each measurement date and is recorded as current liabilities and other long-term liabilities in the Consolidated Balance Sheets. See Note 11 for more details regarding our derivative contracts.

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

There were no changes to our valuation techniques during the nine-month period ended September 30, ~~2017.~~2019.

Below are our derivative liabilities that are measured at fair value (in millions):



Fair Value at September 30, 2019	Level 1		Level 2		Level 3
Measured on a recurring basis:
Derivative contract, net	$	—	$	2.6	$	—

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)~~millions):



	September 30, 2019		December 31, 2018
Carrying value
5.25% Senior notes due 2025	$	300.0	$	300.0
Real estate mortgages and other debt	452.2		445.8
	$	752.2	$	745.8
Fair value
5.25% Senior notes due 2025	$	313.5	$	278.6
Real estate mortgages and other debt	459.5		448.7
	$	773.0	$	727.3

September 30, 2017 December 31, 2016
Carrying value
5.25% Senior Notes due 2025 $ 300,000
$ —
Real Estate Mortgages and Other Debt 382,562
286,660
$ 682,562

$ 286,660
Fair value
5.25% Senior Notes due 2025 $ 309,750
$ —
Real Estate Mortgages and Other Debt 403,009
293,522
$ 712,759
$ 293,522

Below are our long-lived assets that were measured at fair value (in millions):



Fair Value at December 31, 2018	Level 1		Level 2		Level 3
Measured on a non-recurring basis:
Long-lived assets held and used:
Certain buildings and improvements	$	—	$	—	$	2.3

Long-lived assets held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. During the nine months ended September 30, 2019, we evaluated the future undiscounted net cash flows associated with certain properties, which were under contract to sell, and determined the carrying value was not recoverable and exceeded the estimated fair value. As a result of this evaluation, we recorded $0.5 million of impairment charges associated with a property in 2019. The long-lived asset impaired in the first quarter of 2019 was sold in the second quarter of 2019.

Note 8.8. 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,~~millions, except per share amounts):



Three Months Ended September 30,	2019				2018
(in millions, except per share data)	Class A		Class B		Class A		Class B
Net income applicable to common stockholders - basic	$	83.0	$	2.2	$	89.3	$	3.8
Reallocation of net income due to conversion of Class B to Class A common shares outstanding	0.2		—		0.3		—
Conversion of Class B common shares into Class A common shares	2.0		—		3.5		—
Net income applicable to common stockholders - diluted	$	85.2	$	2.2	$	93.1	$	3.8

Weighted average common shares outstanding – basic	22.6		0.6		23.2		1.0
Conversion of Class B common shares into Class A common shares	0.6		—		1.0		—
Effect of dilutive stock options on weighted average common shares	0.2		—		0.1		—
Weighted average common shares outstanding – diluted	23.4		0.6		24.3		1.0

Net income per common share - basic	$	3.67	$	3.67	$	3.85	$	3.85
Net income per common share - diluted	$	3.64	$	3.64	$	3.84	$	3.84

Three Months Ended September 30, 2017 2016
(in thousands, except per share data) Class A Class B Class A Class B
Net income applicable to common stockholders - basic $ 49,687
$ 2,199
$ 50,262
$ 3,779
Reallocation of net income as a result of conversion of dilutive stock options 1
(1 ) 1
(1 )
Reallocation of net income due to conversion of Class B to Class A common shares outstanding 285
—
439
—
Conversion of Class B common shares into Class A common shares 1,908
—
3,326
—
Effect of dilutive stock options on net income 5
(5 ) 13
(13 )
Net income applicable to common stockholders - diluted $ 51,886
$ 2,193
$ 54,041
$ 3,765

Weighted average common shares outstanding – basic 23,948
1,060
23,432
1,762
Conversion of Class B common shares into Class A common shares 1,060
—
1,762
—
Effect of dilutive stock options on weighted average common shares 68
—
96
—
Weighted average common shares outstanding – diluted 25,076
1,060
25,290
1,762

Net income per common share - basic $ 2.07
$ 2.07
$ 2.15
$ 2.15
Net income per common share - diluted $ 2.07
$ 2.07
$ 2.14
$ 2.14
The effect of antidilutive securities on Class A and Class B common stock was evaluated for the three-month periods ended September 30, 2019, and 2018 and was determined to be immaterial.

Three Months Ended September 30, 2017 2016
Diluted EPS Class A Class B Class A Class B
Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive 9
—
—
—

Nine Months Ended September 30, 2017 2016
(in thousands, except per share data) Class A Class B Class A Class B
Net income applicable to common stockholders - basic $ 147,876
$ 7,937
$ 134,533
$ 11,206
Reallocation of distributed net income as a result of conversion of dilutive stock options 3
(3 ) 5
(5 )
Reallocation of distributed net income due to conversion of Class B to Class A common shares outstanding 1,006
—
1,365
—
Conversion of Class B common shares into Class A common shares 6,909
—
9,794
—
Effect of dilutive stock options on net income 19
(19 ) 42
(42 )
Net income applicable to common stockholders - diluted $ 155,813
$ 7,915
$ 145,739
$ 11,159

Weighted average common shares outstanding – basic 23,812
1,278
23,530
1,960
Conversion of Class B common shares into Class A common shares 1,278
—
1,960
—
Effect of dilutive stock options on weighted average common shares 68
—
108
—
Weighted average common shares outstanding – diluted 25,158
1,278
25,598
1,960

Net income per common share - basic $ 6.21
$ 6.21
$ 5.72
$ 5.72
Net income per common share - diluted $ 6.19
$ 6.19
$ 5.69
$ 5.69

Nine Months Ended September 30, 2017 2016
Diluted EPS Class A Class B Class A Class B
Antidilutive Securities
Shares issuable pursuant to stock options not included since they were antidilutive 10
—
—
—

~~Note 9. Equity-Method Investment~~



Nine Months Ended September 30,	2019				2018
(in millions, except per share data)	Class A		Class B		Class A		Class B
Net income applicable to common stockholders - basic	$	198.2	$	5.3	$	197.5	$	8.3
Reallocation of net income due to conversion of Class B to Class A common shares outstanding	0.6		—		0.8		—
Conversion of Class B common shares into Class A common shares	4.7		—		7.5		—
Net income applicable to common stockholders - diluted	$	203.5	$	5.3	$	205.8	$	8.3

Weighted average common shares outstanding – basic	22.6		0.6		23.7		1.0
Conversion of Class B common shares into Class A common shares	0.6		—		1.0		—
Effect of employee stock purchases and restricted stock units on weighted average common shares	0.1		—		0.1		—
Weighted average common shares outstanding – diluted	23.3		0.6		24.8		1.0

Net income per common share - basic	$	8.77	$	8.77	$	8.34	$	8.34
Net income per common share - diluted	$	8.72	$	8.72	$	8.31	$	8.31

In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with a total equity contribution of $49.8 million. This investment generated new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.

While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method. We exited this equity-method investment in December 2016.

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

The ~~following amounts related~~effect of antidilutive securities on Class A and Class B common stock was evaluated for the nine-month period ended September 30, 2019, and 2018 and was determined to ~~this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):~~be immaterial.

Three Months Ended September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Asset impairments to write investment down to fair value $ —
$ 3,498
$ —
$ 10,494
Our portion of the partnership’s operating losses —
2,066
—
6,197
Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions —
31
—
185
Tax benefits and credits generated —
7,592
—
20,374

Note ~~10.~~9. Segments

While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into ~~three~~3 reportable segments based on their economic similarities: Domestic, Import and Luxury.

Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, ~~Mercedes-Benz~~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 ~~shop~~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 ~~that~~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 isare 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)~~millions):


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016			2019			2018			2019			2018
Revenues:
Domestic	$	1,008,310		$	893,156		$	2,863,018		$	2,495,468
New vehicle													$	613.0		$	600.1		$	1,682.7		$	1,711.2
Used vehicle retail													328.1			288.2			949.6			836.5
Used vehicle wholesale													30.3			37.0			89.5			104.5
Finance and insurance													48.1			42.5			137.2			125.6
Service, body and parts													122.8			114.7			359.2			335.4
Fleet and other													15.5			15.3			47.6			50.4
													1,157.8			1,097.8			3,265.8			3,163.6
Import	1,209,955			983,947			3,276,667			2,777,007
New vehicle													824.8			787.8			2,198.1			2,227.4
Used vehicle retail													380.9			334.6			1,085.7			977.9
Used vehicle wholesale													28.4			35.2			85.3			94.3
Finance and insurance													65.2			60.5			180.9			167.1
Service, body and parts													129.2			114.8			374.2			340.8
Fleet and other													9.2			3.5			38.1			22.0
													1,437.7			1,336.4			3,962.3			3,829.5
Luxury	463,518			392,537			1,246,484			1,111,215
New vehicle													387.0			347.6			1,110.2			988.0
Used vehicle retail													206.7			182.5			596.0			510.3
Used vehicle wholesale													16.4			19.9			59.0			54.4
Finance and insurance													19.2			16.4			54.1			44.6
Service, body and parts													84.9			76.9			248.0			218.6
Fleet and other													15.2			9.6			81.7			31.0
													729.4			652.9			2,149.0			1,846.9
	2,681,783			2,269,640			7,386,169			6,383,690			3,324.9			3,087.1			9,377.1			8,840.0
Corporate and other	(1,441		)	327			(2,690		)	2,477			7.5			4.9			26.7			8.2
	$	2,680,342		$	2,269,967		$	7,383,479		$	6,386,167		$	3,332.4		$	3,092.0		$	9,403.8		$	8,848.2
Segment income¹:
Domestic	$	31,141		$	32,292		$	84,440		$	84,420		$	37.9		$	25.3		$	94.1		$	79.5
Import	36,954			32,934			91,365			86,878			48.3			37.4			117.8			90.6
Luxury	7,515			7,423			22,542			21,736			13.0			11.7			36.5			30.5
	75,610			72,649			198,347			193,034			99.2			74.4			248.4			200.6
Corporate and other	34,541			26,794			111,281			81,881			50.6			66.8			129.3			149.5
Depreciation and amortization	(14,828		)	(12,206		)	(41,598		)	(36,372		)	(20.9		)	(19.6		)	(60.9		)	(55.3		)
Other interest expense	(9,905		)	(5,647		)	(23,745		)	(16,608		)	(14.8		)	(15.0		)	(45.0		)	(40.7		)
Other income (expense), net	1,125			(1,513		)	11,357			(4,534		)
Other income, net													3.3			2.4			8.9			5.4
Income before income taxes	$	86,543		$	80,077		$	255,642		$	217,401		$	117.4		$	109.0		$	280.7		$	259.5

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.



	September 30, 2019		December 31, 2018
Total assets:
Domestic	$	1,460.1	$	1,488.0
Import	1,318.5		1,224.2
Luxury	865.7		934.6
Corporate and other	2,093.2		1,737.2
	$	5,737.5	$	5,384.0

Note 10. Leases

Lease Accounting

We lease certain dealerships, office space, land and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have elected not to bifurcate lease and nonlease components related to leases of real property.

Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 26 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do no contain any material residual value guarantees or material restrictive covenants.

We rent or sublease certain real estate to third parties.

As described further in “Note 1. Interim Financial Statements,” we adopted Topic 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 840.

The table below presents the lease-related liabilities recorded on the balance sheet (in millions):

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Floor plan interest expense:
Domestic $ 9,900
$ 6,303
$ 26,570
$ 19,031
Import 8,007
4,613
20,608
13,241
Luxury 4,494
2,720
11,018
8,027
22,401
13,636
58,196
40,299
Corporate and other (11,772 ) (7,450 ) (30,183 ) (21,995 )
$ 10,629
$ 6,186
$ 28,013
$ 18,304



	September 30, 2019			December 31, 2018
Operating lease liabilities:
Current portion included in accrued liabilities	$	25.8		$	—
Noncurrent operating lease liabilities	235.2			—
Total operating lease liabilities	261.0			—
Financing lease liabilities:
Current portion included in current maturities of long-term debt	1.0			2.0
Long-term portion of lease liabilities in long-term debt	29.3			28.8
Total financing lease liabilities ¹	30.3			30.8
Total lease liabilities	$	291.3		$	30.8
Weighted-average remaining lease term:
Operating leases	13 years
Finance leases	13 years
Weighted-average discount rate:
Operating leases	5.08		%
Finance leases	5.81		%

¹Corresponding finance lease assets are not material and are included in property and equipment, net of accumulated depreciation.

The components of lease costs, which were included in selling, general and administrative in our Consolidated Statements of Operations, were as follows (in millions):

September 30, 2017 December 31, 2016
Total assets:
Domestic $ 1,256,960
$ 1,225,387
Import 1,067,466
959,355
Luxury 590,515
511,779
Corporate and other 1,456,652
1,147,629
$ 4,371,593
$ 3,844,150



	Three Months Ended September 30,			Nine Months Ended September 30,
	2019			2019
Operating lease cost ¹	$	12.2		$	36.5
Variable lease cost ²	0.1			1.3
Sublease income	(1.2		)	$	(3.4	)
Total lease costs	$	11.1		34.4

¹Includes short-term and month-to-month lease costs, which are immaterial.

~~Note 11. Contingencies~~²Variable lease cost generally includes reimbursement for actual costs incurred by our lessors for common area maintenance, property taxes and insurance on leased real estate.

~~Litigation~~

~~We are party to numerous legal proceedings arising in~~As of September 30, 2019, the ~~normal course~~maturities of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.operating lease liabilities were as follows (in millions):



	Operating Leases
Remainder of 2019	$	9.9
Year Ending December 31,
2020	37.6
2021	34.4
2022	31.5
2023	26.4
Thereafter	228.2
Total minimum lease payments	368.0
Less:
Present value adjustment	(107.0		)
Operating lease liabilities	$	261.0

~~California Wage and Hour Litigations~~

In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. The plaintiffs also seek attorney fees and costs. DCH has sought to compel arbitration based on plaintiffs’ arbitration agreements. The plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.

During the pendency of Holzer, related cases were filed that made substantially similar non-technician claims. DCH and all non-technician claimants settled their individual claims in mediation in 2017. In January 2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, although this settlement has not yet been approved by the California courts as expressly contemplated by the parties and required by applicable law as a condition of the agreed release of claims. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. We believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.

Note ~~12.~~11. Derivative Financial Instruments

We account for derivative financial instruments by recording the fair value as either an asset or liability in our Consolidated Balance Sheets and recognize the resulting gains or losses as adjustments to accumulated other comprehensive income (loss). We do not hold or issue derivative financial instruments for trading or speculative purposes. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss (“AOCI”) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.

In the second quarter of 2019, to hedge the business exposure to rising interest rates on a portion of our variable rate debt, we entered into a 5-year zero-cost interest rate collar, with an aggregate notional amount of $300 million. This instrument hedges interest rate risk related to a portion of our $1.7 billion of non-trade floor plan notes payable.

The gains and losses from the cash flow hedge are recorded in AOCI and released to interest expense in the same period that the hedged interest expense on the floor plan is recognized. As of September 30, 2019, we had a loss of $2.6 million recorded associated with the fair value of our derivative instrument, included as a component of accrued liabilities and other long-term liabilities with the offset in AOCI. As of September 30, 2019, the amount of net losses we expect to reclassify from AOCI into interest expense in earnings within the next twelve months is immaterial. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives. NaN amounts were reclassified from AOCI in the three or nine months ended September 30, 2019.

Note 12. Acquisitions

In the first nine months of ~~2017,~~2019, we completed the following acquisitions:

On May 1, ~~2017, Baierl Auto Group, an eight store platform based~~2019, Hamilton Honda in Hamilton Township, New Jersey.

On May 20, 2019, Morgantown Ford in Morgantown, West Virginia.

On July 1, 2019, Mission Viejo Jaguar Land Rover, California.

On August 19, 2019, Hazleton Honda, Pennsylvania.

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

Revenue and ~~net~~operating income contributed by the ~~2017~~2019 acquisitions subsequent to the date of acquisition were as follows (in ~~thousands)~~millions):



Nine Months Ended September 30,	2019
Revenue	$	100.7
Operating income	1.9

Revenue $ 281,416
Net income $ 4,378

In ~~2016,~~the first nine months of 2018, we completed the following acquisitions:

On January ~~26, 2016, Singh Subaru~~15, 2018, Ray Laks Honda in ~~Riverside, California.~~Orchard Park, New York and Ray Laks Acura in Buffalo, New York.

On February ~~1, 2016, Ira Toyota in Milford, Massachusetts.~~

~~On June 23, 2016, Helena Auto Center, LLC in Helena, Montana.~~

~~On August 1, 2016, Kemp Ford in Thousand Oaks, California.~~

~~On September 12, 2016, Carbone~~26, 2018, Day Auto Group, a ~~nine~~7 store platform based in Pennsylvania.

On March 1, 2018, Prestige Auto Group, a 6 store platform based in New ~~York~~Jersey and ~~Vermont.~~New York.

On ~~September 28, 2016, Greiner~~April 2, 2018, Broadway Ford ~~Lincoln~~ in ~~Casper, Wyoming.~~Idaho Falls, Idaho.

On ~~October 5, 2016, Woodland Hills Audi in Woodland Hills, California.~~

~~On November 16, 2016, Honolulu~~April 23, 2018, Buhler Ford in ~~Honolulu, Hawaii.~~Eatontown, New Jersey.

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

The following tables summarize the consideration paid for the ~~2017~~2019 acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in ~~thousands)~~millions):



	Consideration
Cash paid, net of cash acquired	$	142.8
Debt issued	26.4
	$	169.2

Consideration
Cash paid, net of cash acquired $ 400,558
Equity securities issued ¹
2,137
Debt issued 1,748
$ 404,443

¹In partial consideration for the purchase of Baierl Auto Group, we issued 4,489 shares of our Class A common stock on May 1, 2017 and will issue an additional 17,957 shares over the next four years for a total of 22,446 shares. As of May 1, 2017, these shares were deemed outstanding for purposes of calculating basic and diluted EPS and had a market value of $2.1 million, based on the closing price of our Class A common stock on May 1, 2017 of $95.22 per share. See also Note 8.

The purchase price allocations for the ~~Baierl Auto Group~~Hamilton Honda, Morgantown Ford, Mission Viejo Jaguar Land Rover, and ~~DTLA Auto Group~~Hazleton Honda 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. The following table details the preliminary purchase price allocations (in millions):



	Assets Acquired and Liabilities Assumed
Inventories, net	$	60.0
Property and equipment, net	5.0
Other non-current assets	131.9
Other long-term liabilities	(27.7		)
	$	169.2

Assets Acquired and Liabilities Assumed
Trade receivables, net $ 15,554
Inventories 190,079
Franchise value —
Property and equipment 57,217
Other assets 249,725
Floor plan notes payable (75,065 )
Debt and capital lease obligations (11,837 )
Other liabilities (21,230 )
$ 404,443

In the three and nine-month periods ended September 30, ~~2017,~~2019, we recorded ~~$3.5~~$0.2 million and ~~$5.7~~$1.9 million, respectively, in ~~acquisition related~~acquisition-related expenses as a component of selling, general and administrative ~~expense. These~~expense, respectively. Comparatively, we recorded $0.2 million and $4.3 million of acquisition-related expenses ~~include costs related to current year acquisitions, as well as reserve adjustments associated with contingent consideration recorded~~ in ~~association with previous acquisitions. We did not have any material acquisition expenses for~~each of the same periods in ~~2016.~~2018.

The following unaudited proforma summary presents consolidated information as if all acquisitions in the three and nine-month periods ended September 30, ~~2017~~2019 and ~~2016~~2018, had occurred on January 1, ~~2016~~2018 (in ~~thousands,~~millions, except per share amounts):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	3,337.1	$	3,188.9	$	9,557.0	$	9,326.8
Net income	85.2		93.6		204.0		205.6
Basic net income per share	3.67		3.87		8.79		8.34
Diluted net income per share	3.63		3.86		8.74		8.30

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenue $ 2,773,082
$ 2,792,994
$ 8,032,963
$ 7,941,561
Net income 53,488
59,925
164,938
163,473
Basic net income per share 2.14
2.38
6.57
6.41
Diluted net income per share 2.13
2.37
6.56
6.39

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

Note ~~13.~~13. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We have evaluated the effect this amendment will have on our most significant types of transactions and expect the timing of most of our revenue recognition to generally remain the same. A portion of the transaction price related to sales of finance and insurance contracts will likely be considered variable consideration and subject to accelerated recognition under the new standard. The new standard requires an entity to estimate variable consideration and apply the constraint in determining the transaction price. We are still evaluating how much variable consideration should be constrained and at what

point the constraint is resolved, which will also determine the amount of any potential cumulative effect adjustment. As a result, we have not yet quantified the impact to our consolidated financial statements.

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

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. In January 2017, we adopted this new guidance. As a result, we recorded the following:

~~Reclassified $0.2 million as a decrease to additional paid-in capital and an increase to retained earnings related to our policy election to record forfeitures as they occur.~~

All prior periods presented in our Consolidated Statements of Cash Flows have been adjusted for the presentation of excess tax benefits on the cash flow statement. This resulted in a $4.4 million reclassification between financing and operating cash flows.

We had $0.3 million of tax-affected state net operating loss carryforwards related to excess tax benefits for which a deferred tax asset had not been recognized. At adoption, this amount was recorded with the offset to retained earnings. Additionally, we do not believe that it is more-likely-than-not that the asset will be utilized and, as a result, a valuation allowance in the same amount was recorded that offset the impact to retained earnings.

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance for eight cash flow classification issues to reduce diversity in practice. The clarification includes guidance on items such as debt prepayment or debt extinguishment cost, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect this pronouncement will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, ~~"Intangibles~~“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~~unit’s fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting." ASU 2017-09 reduces both diversity in practice and cost and complexity when changing the terms or conditions of a share-based payment award. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. ASU 2017-09 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. We do not expect the adoption of ASU 2017-09 to have a material effect on our financial position, results of operations or cash flows.

~~Note 14. Subsequent Events~~

~~Disposal of Stores~~

~~On October 16, 2017, we disposed of Spokane Mercedes in Spokane, Washington. The disposal generated cash of approximately $13.2 million.~~

~~Common Stock Dividend~~

On October 23, 2017, our Board of Directors approved a dividend of $0.27 per share on our Class A and Class B common stock related to our third quarter 2017 financial results. The dividend will total approximately $6.7 million and will be paid on November 24, 2017 to shareholders of record on November 10, 2017.

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

Forward-Looking Statements and Risk Factors

Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”, ~~“outlook,”~~“outlook”, “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,”“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 selling, general and administrative expenses (“SG&A&A”) as a percentage of gross profit and all projections;

Anticipated ~~continued~~integration, success and growth of ~~acquisitions;~~acquired stores;

Anticipated ability to capture additional market share;

Anticipated ability to find accretive acquisitions;

Expected revenues from acquired stores;

Anticipated synergies, ability to increase ownership and ability to monetize our investment in Shift;

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.~~future; and

Our strategies for customer retention, growth, market position, financial results and risk management.

The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results to materially differ from the results expressed or implied by these statements. Certain important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A in this Form 10-Q and in the Risk Factors section of our ~~2016~~2018 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.~~Commission (SEC).

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~~Lithia Motors, Inc. is one of the largest automotive retailers ~~in the highly fragmented American auto retail industry. As~~and providers of ~~November 7, 2017, we offered 30 brands of new vehicles and all major brands of used vehicles in 166 stores~~personal transportation solutions in the United States, and, ~~online at over 200 websites.~~in 2019, was ranked #265 on the Fortune 500. As of September 30, 2019, we operated 184 stores representing 30 brands in 19 states. We ~~sell~~are a growth company powered by people and innovation. By purchasing and building strong businesses that have yet to realize their potential, we generate significant cash flows while maintaining low leverage. Operational excellence is achieved by refocusing the business on the consumer experience and by utilizing proprietary performance measurements to increase market share and profitability. Lithia’s unique growth model reinvests to expand its nationwide network and to fund incremental modernization that supports and expands our core business with the goal of providing transportation solutions wherever, whenever and however consumers desire.

We offer a wide range of products and services including new and used vehicles, finance and ~~replacement parts, provide vehicle maintenance, warranty, paint and repair services, arrange related financing, and sell service contracts, vehicle protection~~insurance products and ~~credit insurance.~~automotive repair and maintenance. We strive for diversification in our products, services, brands and geographic locations to reduce dependence on any one manufacturer, reduce susceptibility to changing consumer preferences, manage market risk and maintain profitability.

We seek to provide customers a seamless, blended online and physical retail experience with broad selection and access to specialized expertise and knowledge. Our physical network enables us to provide convenient touch points for customers and provide services throughout the vehicle life cycle. We use digital technologies to further activate our physical network and capture additional earnings.

We build long-term value for our customers, employees and shareholders through the following strategies:

Driving operational excellence

We remain focused on achieving operational excellence at existing locations. Operations are structured to promote an entrepreneurial environment at the dealership level. Each store’s general manager and department managers, with assistance from regional and corporate management, are responsible for developing successful retail plans in their local markets. They drive dealership operations, personnel development, manufacturer relationships, store culture and financial performance. Strong performance creates synergistic benefits such as increased vehicle trade-ins resulting in additional used vehicle sales, incremental finance and insurance sales and ultimately, increased units in operation and customer retention, which generate additional service revenues.

In ~~2016,~~order to mitigate fluctuations in vehicle sales and general economic conditions, we ~~were~~link compensation to performance for the ~~fifth largest public automotive retailer in the U.S.,~~majority of our management and sales personnel. We develop pay plans that are measured based upon various factors such as dealership and department profitability, customer satisfaction and individual performance metrics. These plans also serve to reward personnel for meeting their annual operating plans and achieving earnings potential.

We have centralized many administrative functions to drive efficiencies and streamline store-level operations. The reduction of administrative functions at our stores allows our local managers to focus on customer-facing opportunities to increase revenues and gross profit. Our operations are supported by our dedicated training and personnel development program, which shares best practices across our dealership network and seeks to develop management talent.

Growth through acquisition and network optimization

Our value-based acquisition strategy focuses on purchasing strong businesses that have yet to realize their earnings potential. As we integrate these stores into our existing network, we focus on improving performance. Our success is measured by ~~revenue. Our stores are located in~~ 18 ~~states with concentrations west~~achieving profitability through increasing market share and retaining customers while controlling costs. With our performance management strategy, standardized information systems and centrally- and regionally-performed administrative functions, we seek to gain economies of ~~the Mississippi and in the Northeast and offer 30 brands of new vehicles and all major brands of used vehicles. Our operations consist of~~scale from our dealership network.

We target acquiring domestic, import and luxury ~~stores~~franchises in ~~markets~~cities ranging from mid-sized regional ~~cities~~markets to metropolitan ~~urban areas.~~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. We focus on successfully integrating acquired stores to achieve targeted returns. Platform acquisitions may include one or more locations which do not meet our criteria. We regularly optimize and balance our network through strategic divestitures to ensure continued high performance. The divestiture of these underperforming stores increases availability of capital and personnel resources and reduces future capital expenditures for facility improvements. We believe our disciplined approach and the current economic environment provide us with attractive acquisition opportunities and expanded coast to coast coverage.

Modernization and diversification

Driving growth and achieving earnings potential generates the free cash flow that allows us to invest in modernization, diversification and digital initiatives, thereby providing more ways to meet consumers’ personal transportation needs. We strategically invest in modernization that supports and expands our core business with the goal of providing customers with choices that meet their desire for affordability, convenience and transparency. We prioritize creating internal solutions to improve our existing operations, gain vertical and horizontal adjacencies to our core business, and expand our market share.

During the third quarter, in the Pittsburgh market, we activated a convenient sell-from-home customer experience powered by our proprietary technology. This is part of our multi-faceted expansion of digital conveniences and expands upon buy-from-home technology launched earlier during 2019.

Thoughtful capital allocation

Our capital deployment strategy is to target a 65% investment in acquisitions, 25% investment in capital expenditures, modernization and diversification and 10% in shareholder return in the form of dividends and share repurchases. This disciplined approach, combined with our ability to successfully integrate newly-acquired locations, drives growth and profitability. During the first nine months of 2019, we paid $20.7 million in dividends and invested $91.9 million in our stores through capital expenditures. We continue to manage our liquidity and available cash to prepare for future acquisition and innovation opportunities. As of September 30, 2019, our adjusted leverage ratio, calculated as net debt, excluding floorplan financing, to adjusted EBITDA, was less than 2.0, representing the low end of our targeted range. We have liquidity in cash, availability on our credit facility and unfinanced real estate. Our liquidity, combined with our ability to access the debt and equity markets, positions us for continued growth through acquisitions and investments in innovation.

~~Results of Operations~~

For the three months ended September 30, 2017 and 2016, we reported net income of $51.9 million, or $2.07 per diluted share, and $54.0 million, or $2.14 per diluted share, respectively. For the nine months ended September 30, 2017 and 2016, we reported net income of $155.8 million, or $6.19 per diluted share, and $145.7 million, or $5.69 per diluted share, respectively.

Key Revenue and Gross Profit Metrics

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

Three Months Ended
September 30, 2017 Revenues
Percent of
Total Revenues

Gross Profit

Gross Profit
Margin

Percent of Total
Gross Profit
New vehicle $ 1,553,511
58.0 % $ 88,045
5.7 % 21.8 %
Used vehicle retail 679,180
25.3
78,658
11.6
19.5
Used vehicle wholesale 65,739
2.5
1,174
1.8
0.3
Finance and insurance ¹
101,044
3.8
101,044
100.0
25.1
Service, body and parts 265,683
9.9
132,492
49.9
32.9
Fleet and other 15,185
0.5
1,608
10.6
0.4
$ 2,680,342
100.0 % $ 403,021
15.0 % 100.0 %

Three Months Ended
September 30, 2016 Revenues
Percent of
Total Revenues

Gross Profit

Gross Profit
Margin

Percent of Total
Gross Profit
New vehicle $ 1,297,511
57.2 % $ 75,843
5.8 % 22.5 %
Used vehicle retail 580,885
25.6
68,809
11.8
20.4
Used vehicle wholesale 75,271
3.3
918
1.2
0.3
Finance and insurance ¹
87,709
3.9
87,709
100.0
26.0
Service, body and parts 217,148
9.6
104,342
48.1
30.9
Fleet and other 11,443
0.4
(360 ) (3.1 ) (0.1 )
$ 2,269,967
100.0 % $ 337,261
14.9 % 100.0 %

¹~~Commissions reported net of anticipated cancellations.~~

Nine Months Ended
September 30, 2017 Revenues
Percent of
Total Revenues

Gross Profit

Gross Profit
Margin

Percent of Total
Gross Profit
New vehicle $ 4,147,870
56.2 % $ 238,702
5.8 % 21.3 %
Used vehicle retail 1,915,038
25.9
221,947
11.6
19.8
Used vehicle wholesale 206,754
2.8
4,403
2.1
0.4
Finance and insurance¹
282,672
3.8
282,672
100.0
25.2
Service, body and parts 744,262
10.1
368,166
49.5
32.9
Fleet and other 86,883
1.2
4,054
4.7
0.4
$ 7,383,479
100.0 % $ 1,119,944
15.2 % 100.0 %



	Three Months Ended September 30,								Nine Months Ended September 30,
	2019			2018			Change		2019			2018			Change
Revenues
New vehicle	$	1,824.8		$	1,733.0		5.3	%	$	4,993.3		$	4,914.5		1.6	%
Used vehicle retail	916.3			805.9			13.7		2,632.4			2,325.6			13.2
Finance and insurance	136.3			121.1			12.6		382.7			342.1			11.9
Service, body and parts	340.5			311.3			9.4		993.3			908.4			9.3
Total Revenues	3,332.4			3,092.0			7.8		9,403.8			8,848.2			6.3

Gross profit
New vehicle	$	100.0		$	100.9		(0.9)	%	$	281.4		$	289.3		(2.7)	%
Used vehicle retail	99.7			86.4			15.4		277.4			247.1			12.3
Finance and insurance	136.3			121.1			12.6		382.7			342.1			11.9
Service, body and parts	171.5			154.5			11.0		501.1			446.6			12.2
Total Gross Profit	510.9			466.2			9.6		1,455.2			1,335.1			9.0

Gross profit margins
New vehicle	5.5		%	5.8		%	(30	) bps	5.6		%	5.9		%	(30	) bps
Used vehicle retail	10.9			10.7			20		10.5			10.6			(10	)
Finance and insurance	100.0			100.0			—		100.0			100.0			—
Service, body and parts	50.4			49.6			80		50.4			49.2			120
Total Gross Profit Margin	15.3			15.1			20		15.5			15.1			40

Retail units sold
New vehicles	48,508			48,790			(0.6)	%	134,090			139,314			(3.7)	%
Used vehicles	44,143			39,751			11.0		127,683			114,961			11.1

Average selling price per retail unit
New vehicles	$	37,618		$	35,519		5.9	%	$	37,238		$	35,276		5.6	%
Used vehicles	20,756			20,274			2.4		20,617			20,229			1.9

Average gross profit per retail unit
New vehicles	$	2,061		$	2,068		(0.3	)%	$	2,098		$	2,077		1.0	%
Used vehicles	2,258			2,172			4.0		2,173			2,149			1.1
Finance and insurance	1,471			1,367			7.6		1,462			1,345			8.7

Nine Months Ended
September 30, 2016 Revenues
Percent of
Total Revenues

Gross Profit

Gross Profit
Margin

Percent of Total
Gross Profit
New vehicle $ 3,602,603
56.4 % $ 215,471
6.0 % 22.3 %
Used vehicle retail 1,667,258
26.1
200,311
12.0
20.7
Used vehicle wholesale 207,131
3.2
4,234
2.0
0.4
Finance and insurance¹
246,390
3.9
246,390
100.0
25.5
Service, body and parts 616,088
9.6
299,060
48.5
30.9
Fleet and other 46,697
0.8
1,013
2.2
0.2
$ 6,386,167
100.0 % $ 966,479
15.1 % 100.0 %

¹ ~~Commissions reported net of anticipated cancellations.~~

Same Store Operating Data

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

Same store measures reflect results for stores that were operating in each comparison period and only include the months when operations occurred in both periods. For example, a store acquired in August ~~2016~~2018 would be included in same store operating data beginning in September ~~2017,~~2019, after its first full complete comparable month of operation. The third quarter operating results for the same store comparisons would include results for that store in only the ~~period~~month of September for both comparable periods.



	Three Months Ended September 30,								Nine Months Ended September 30,
(Dollars in millions)	2019			2018			Change		2019			2018			Change
Revenues
New vehicle	$	1,772.9		$	1,695.7		4.6	%	$	4,801.1		$	4,765.7		0.7	%
Used vehicle retail	898.8			788.2			14.0		2,543.2			2,257.9			12.6
Finance and insurance	133.0			118.3			12.4		371.3			331.9			11.9
Service, body and parts	332.0			303.2			9.5		955.3			879.0			8.7
Total Revenues	3,249.7			3,018.8			7.6		9,060.1			8,573.3			5.7

Gross profit
New vehicle	$	96.6		$	98.6		(2.0)	%	$	269.5		$	280.0		(3.8)	%
Used vehicle retail	97.7			85.4			14.4		269.9			241.7			11.7
Finance and insurance	133.0			118.3			12.4		371.3			331.9			11.9
Service, body and parts	167.6			150.9			11.1		483.0			433.4			11.4
Total Gross Profit	498.5			456.8			9.1		1,405.9			1,296.9			8.4

Gross profit margins
New vehicle	5.4		%	5.8		%	(40	) bps	5.6		%	5.9		%	(30	) bps
Used vehicle retail	10.9			10.8			10		10.6			10.7			(10	)
Finance and insurance	100.0			100.0			—		100.0			100.0			—
Service, body and parts	50.5			49.8			70		50.6			49.3			130
Total Gross Profit Margin	15.3			15.1			20		15.5			15.1			40

Retail units sold
New vehicles	47,141			47,590			(0.9)	%	129,001			134,509			(4.1)	%
Used vehicles	43,305			38,717			11.9		123,555			111,094			11.2

Average selling price per retail unit
New vehicles	$	37,609		$	35,631		5.6	%	$	37,217		$	35,430		5.0	%
Used vehicles	20,754			20,358			1.9		20,584			20,324			1.3

Average gross profit per retail unit
New vehicles	$	2,049		$	2,073		(1.2	)%	$	2,089		$	2,081		0.4	%
Used vehicles	2,257			2,205			2.4		2,184			2,175			0.4
Finance and insurance	1,471			1,371			7.3		1,470			1,351			8.8

~~New Vehicle Revenue and Gross Profit~~

Three Months Ended September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Revenue $ 1,553,511
$ 1,297,511
$ 256,000
19.7 %
Gross profit $ 88,045
$ 75,843
$ 12,202
16.1
Gross margin 5.7 % 5.8 % (10 )bp
¹

Retail units sold 45,452
38,417
7,035
18.3
Average selling price per retail unit $ 34,179
$ 33,774
$ 405
1.2
Average gross profit per retail unit $ 1,937
$ 1,974
$ (37 ) (1.9 )

Same store

Revenue $ 1,288,680
$ 1,280,030
$ 8,650
0.7
Gross profit $ 72,246
$ 74,903
$ (2,657 ) (3.5 )
Gross margin 5.6 % 5.9 % (30 )bp

Retail units sold 37,762
37,870
(108 ) (0.3 )
Average selling price per retail unit $ 34,126
$ 33,801
$ 325
1.0
Average gross profit per retail unit $ 1,913
$ 1,978
$ (65 ) (3.3 )

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

Nine Months Ended
September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Revenue $ 4,147,870
$ 3,602,603
$ 545,267
15.1 %
Gross profit $ 238,702
$ 215,471
$ 23,231
10.8
Gross margin 5.8 % 6.0 % (20 )bp
¹

Retail units sold 121,944
107,225
14,719
13.7
Average selling price per retail unit $ 34,015
$ 33,599
$ 416
1.2
Average gross profit per retail unit $ 1,957
$ 2,010
$ (53 ) (2.6 )

Same store

Revenue $ 3,602,946
$ 3,582,725
$ 20,221
0.6
Gross profit $ 207,549
$ 214,415
$ (6,866 ) (3.2 )
Gross margin 5.8 % 6.0 % (20 )bp

Retail units sold 105,870
106,599
(729 ) (0.7 )
Average selling price per retail unit $ 34,032
$ 33,609
$ 423
1.3
Average gross profit per retail unit $ 1,960
$ 2,011
$ (51 ) (2.5 )

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

~~New vehicle sales increased 19.7% and 15.1% in~~During the three ~~and nine-month periods~~months ended September 30, ~~2017~~2019, we had net income of $85.2 million, or $3.64 per share on a diluted basis, compared to ~~the same periods~~net income of ~~2016, primarily driven by an increase in volume related to acquisitions.~~

Same store new vehicle unit sales decreased 0.3% and 0.7%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. These volume decreases were offset by$93.1 million, or $3.84 per share on a ~~1.0% and 1.3% increase, respectively, in average price per unit for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. On a same store~~diluted basis, our stores performed better than national new vehicle sales levels, which decreased 1.2% and 1.9% , respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016.

~~Same store unit sales increased (decreased) as follows:~~

Three months ended September 30, 2017 compared to the same period of 2016 National growth in the three months ended September 30, 2017 compared to the same period of 2016 ¹ Nine months ended September 30, 2017 compared to the same period of 2016 National growth in the nine months ended September 30, 2017 compared to the same period of 2016 ¹
Domestic brand same store unit sales change (5.8 )% (2.9 )% (3.1 )% (3.6 )%
Import brand same store unit sales change 4.5
0.6
2.7
(0.6 )
Luxury brand same store unit sales change (7.8 ) (2.7 ) (9.7 ) 0.3
Overall (0.3 ) (1.2 ) (0.7 ) (1.9 )

¹ ~~National auto unit sales and seasonally adjusted annual rate ("SAAR") data obtained from Stephens Auto Unit Sales and SAAR report as of September 2017.~~

National new vehicle sales market growth continues to moderate for all brands. Our domestic brand unit volume change outperformed the national average for the nine-month period ended September 30, 2017 compared toduring the same period of ~~2016 despite a decline in~~2018. During the third quarter of 2017 that exceeded the national domestic brand decline for the same period. Our performance, compared to the national trend for domestic brands, was mainly driven by Chrysler, which had same store unit sales decreases of 9.0% and 3.4%, respectively, offset by Ford, which had a same store unit sales increases of 6.5% and 1.5%, respectively, for the three and nine-month periodsnine months ended September 30, ~~2017~~2019, we had net income of $203.5 million, or $8.72 per share on a diluted basis, compared to net income of $205.8 million, or $8.31 per share on a diluted basis, during the same ~~periods~~period of ~~2016. This performance compares to~~2018.

national market decreases of 10.3% and 8.0%, respectively, for Chrysler and 0.9% and 2.9%, respectively, for Ford for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016.

Our import brand unit volume outperformed the national average for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. Our Toyota stores, which comprised 21.2% of our total new vehicle unit sales in the third quarter of 2017, grew 11.3% and 4.0% for the three and nine-month periods ended September 30, 2017 compared to the same periods in 2016. This compares to national market increases of 8.3% and 0.5%, respectively, for the three and nine-months ended September 30, 2017 compared to the same periods of 2016. Our Honda stores, which comprised 20.4% of our total new vehicle unit sales in the third quarter of 2017, had same store unit increases of 2.1% and 1.1%, respectively, for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. The national average unit volume increases were 0.8% and 0.3%, respectively, for Honda in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016.

The period-over-period volume decreases for our luxury brand unit volume exceeded the national average in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. The decreases were primarily associated with our BMW and Mercedes stores, which comprised 3.3% and 1.2%, respectively, of our total new vehicle unit sales in the third quarter of 2017. Our BMW stores had same store unit sales decreases of 24.6% and 18.6%, respectively, for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. This compares to national average decreases for BMW of 7.5% and 5.2% for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. Our Mercedes stores had same store unit sales decreases of 7.1% and 12.1%, respectively, for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. This compares to national average decreases for Mercedes of 7.1% and 3.0% for the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. Our luxury brands were down more 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. Additionally, our BMW stores lost market share.

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. We have established a company-wide target of achieving 25% higher sales than the national OEM average. As of September 30, 2017, our sales were 9% higher than the national OEM average.

New vehicle gross profit increased 16.1% and 10.8%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. On a same store basis, new vehicle gross profit decreased 3.5% and 3.2% in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. The same store average gross profit per unit for new vehicles decreased $65 and $51 in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016.

Vehicles

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. Same store new vehicle revenues increased 4.6% and 0.7%, respectively, for the three and nine-month periods ended September 30, 2019 compared to the same periods in 2018. This was due to increases in average selling prices of 5.6% and 5.0%, offset by decreases in unit volume of 0.9% and 4.1%, in the three and nine-month periods ended September 30, 2019, respectively, compared to the same periods of 2018. This was driven by the increased performance of our luxury segment, which saw overall increases in unit sales while maintaining higher than average selling prices compared to our other segments. Our stores remain nimble in their volume and gross margin strategies and adapt to local and regional market conditions.

Used ~~Vehicle Retail Revenue and Gross Profit~~

Three Months Ended September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Retail revenue $ 679,180
$ 580,885
$ 98,295
16.9 %
Retail gross profit $ 78,658
$ 68,809
$ 9,849
14.3
Retail gross margin 11.6 % 11.8 % (20 )bp

Retail units sold 34,717
29,636
5,081
17.1
Average selling price per retail unit $ 19,563
$ 19,601
$ (38 ) (0.2 )
Average gross profit per retail unit $ 2,266
$ 2,322
$ (56 ) (2.4 )

Same store

Retail revenue $ 593,285
$ 572,862
$ 20,423
3.6
Retail gross profit $ 71,248
$ 68,215
$ 3,033
4.4
Retail gross margin 12.0 % 11.9 % 10 bp

Retail units sold 30,115
29,171
944
3.2
Average selling price per retail unit $ 19,701
$ 19,638
$ 63
0.3
Average gross profit per retail unit $ 2,366
$ 2,338
$ 28
1.2

Nine Months Ended
September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Retail revenue $ 1,915,038
$ 1,667,258
$ 247,780
14.9 %
Retail gross profit $ 221,947
$ 200,311
$ 21,636
10.8
Retail gross margin 11.6 % 12.0 % (40 )bp

Retail units sold 97,671
84,783
12,888
15.2
Average selling price per retail unit $ 19,607
$ 19,665
$ (58 ) (0.3 )
Average gross profit per retail unit $ 2,272
$ 2,363
$ (91 ) (3.9 )

Same store

Retail revenue $ 1,730,495
$ 1,656,119
$ 74,376
4.5
Retail gross profit $ 205,438
$ 199,432
$ 6,006
3.0
Retail gross margin 11.9 % 12.0 % (10 )bp

Retail units sold 87,553
84,148
3,405
4.0
Average selling price per retail unit $ 19,765
$ 19,681
$ 84
0.4
Average gross profit per retail unit $ 2,346
$ 2,370
$ (24 ) (1.0 )

Vehicles

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned ~~("CPO"~~(“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 September 30, 2017 compared to the same period of 2016 Nine months ended September 30, 2017 compared to the same period of 2016
Certified pre-owned vehicles (5.3 )% (1.2 )%
Core vehicles 7.6
6.4
Value autos 9.3
10.8
Overall 3.6
4.5

The increases in same store used vehicle sales were primarily driven by increased unit sales in our core and value auto categories. For value autos, average selling prices increased 4.8% and 5.7%, respectively, for During the ~~three and nine-months~~nine months ended September 30, 2017 compared to the same periods of 2016. For core autos, average selling prices increased 1.1% and 0.2%, respectively, for the three and nine-months ended September 30, 2017 compared to the same periods of 2016. These increases offset the decreases in growth of our CPO vehicles, which had difficult comparisons as this category had double digit growth in 2016. On an annualized average, as of September 30, 2017 and 2016, each of2019, our stores sold ~~67 and 65 retail~~an average of 74 used ~~vehicle units, respectively,~~vehicles per ~~month.~~store per month, compared to 68 used vehicles per store per month for the same period of 2018.

Used ~~retail~~ vehicle gross profit increased 14.3% and 10.8%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. On a same store basis, gross profit increased 4.4% and 3.0%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016, primarily driven by volume growth, partially offset in the nine-month period by a decrease in the average gross profit per unit sold. The same store gross profit per unit increased $28 and decreased $24, respectively,revenues for the three and nine-month periods ended September 30, ~~2017~~2019, increased 13.7% and 13.2%, respectively, compared to the same periods of ~~2016.~~2018. On a same store basis, used vehicle sales for the three and nine-month periods ended September 30, 2019, increased 14.0% and 12.6% as compared to the respective periods of 2018, driven by increases in our core vehicle category of 19.5% and 17.6%, respectively. Our core vehicle category had growth in unit sales of 17.8% and 16.5%, with an improvement in average selling price per vehicle of 1.4% and 1.0% for the three and nine-month periods ended September 30, 2019, respectively, as compared to the same periods of 2018.

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 September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Wholesale revenue $ 65,739
$ 75,271
$ (9,532 ) (12.7 )%
Wholesale gross profit $ 1,174
$ 918
$ 256
27.9
Wholesale gross margin 1.8 % 1.2 % 60 bp

Wholesale units sold 11,122
10,853
269
2.5
Average selling price per wholesale unit $ 5,911
$ 6,936
$ (1,025 ) (14.8 )
Average gross profit per retail unit $ 106
$ 85
$ 21
24.7

Nine Months Ended
September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Wholesale revenue $ 206,754
$ 207,131
$ (377 ) (0.2 )%
Wholesale gross profit $ 4,403
$ 4,234
$ 169
4.0
Wholesale gross margin 2.1 % 2.0 % 10 bp

Wholesale units sold 32,868
30,140
2,728
9.1
Average selling price per wholesale unit $ 6,290
$ 6,872
$ (582 ) (8.5 )
Average gross profit per retail unit $ 134
$ 140
$ (6 ) (4.3 )

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
September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Revenue $ 101,044
$ 87,709
$ 13,335
15.2 %
Average finance and insurance per retail unit $ 1,260
$ 1,289
$ (29 ) (2.2 )%

Same store
Revenue $ 87,371
$ 86,951
$ 420
0.5 %
Average finance and insurance per retail unit $ 1,287
$ 1,297
$ (10 ) (0.8 )%

Nine Months Ended
September 30, Increase % Increase
(Dollars in thousands, except per unit amounts) 2017 2016
Reported
Revenue $ 282,672
$ 246,390
$ 36,282
14.7 %
Average finance and insurance per retail unit $ 1,287
$ 1,283
$ 4
0.3 %

Same store
Revenue $ 257,155
$ 245,397
$ 11,758
4.8 %
Average finance and insurance per retail unit $ 1,329
$ 1,287
$ 42
3.3 %

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 increases in finance and insurance revenue in the three and nine-month periods ended September 30, 2019, compared to the same periods of 2018, were primarily due to expanded product offerings and increased penetration rates. 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 ~~were flat~~increased 12.4% and 11.9% for the ~~three-month period~~three and nine-month periods ended September 30, ~~2017 and increased 4.8% for the nine-month period ended September 30, 2017~~2019, respectively, as compared to the same periods of ~~2016. The slowing~~2018. These increases were driven by increases in ~~the third quarter of 2017 was primarily due to a decline in penetration rates and a decrease in the average~~ finance and insurance ~~amount~~revenues per retail ~~unit.~~unit, combined with increases in used vehicle unit volume, and slightly offset by decreases in new vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit ~~decreased $10~~increased $100 to $1,471 and ~~increased $42,~~$119 to $1,470 per unit, respectively, in the three and nine-month periods ended September 30, ~~2017~~2019, compared to the same periods of ~~2016, mainly~~2018, primarily due to increases in ~~unit volume offset by flat or slightly declining penetration rates.~~

~~Trends in~~service contract penetration rates ~~for total new~~of 250 and ~~used retail vehicles sold are detailed below:~~170 basis points, respectively.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Finance and insurance 75 % 76 % 76 % 77 %
Service contracts 45
44
45
44
Lifetime lube, oil and filter contracts 26
27
26
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~~body and ~~Parts Revenue and Gross Profit~~

Three Months Ended September 30, Increase % Increase
(Dollars in thousands) 2017 2016
Reported
Customer pay $ 143,842
$ 118,915
$ 24,927
21.0 %
Warranty 63,350
53,203
10,147
19.1
Wholesale parts 39,463
30,543
8,920
29.2
Body shop 19,028
14,487
4,541
31.3
Total service, body and parts $ 265,683
$ 217,148
$ 48,535
22.4 %

Service, body and parts gross profit $ 132,492
$ 104,342
$ 28,150
27.0 %
Service, body and parts gross margin 49.9 % 48.1 % 180 bp

Same store
Customer pay $ 123,001
$ 117,904
$ 5,097
4.3 %
Warranty 52,836
52,801
35
0.1
Wholesale parts 30,836
29,844
992
3.3
Body shop 14,683
13,842
841
6.1
Total service, body and parts $ 221,356
$ 214,391
$ 6,965
3.2 %

Service, body and parts gross profit $ 109,591
$ 103,025
$ 6,566
6.4 %
Service, body and parts gross margin 49.5 % 48.1 % 140 bp

Nine Months Ended
September 30, Increase % Increase
(Dollars in thousands) 2017 2016
Reported
Customer pay $ 402,313
$ 339,640
$ 62,673
18.5 %
Warranty 174,552
145,747
28,805
19.8
Wholesale parts 111,796
88,710
23,086
26.0
Body shop 55,601
41,991
13,610
32.4
Total service, body and parts $ 744,262
$ 616,088
$ 128,174
20.8 %

Service, body and parts gross profit $ 368,166
$ 299,060
$ 69,106
23.1 %
Service, body and parts gross margin 49.5 % 48.5 % 100 bp

Same store
Customer pay $ 358,724
$ 338,078
$ 20,646
6.1 %
Warranty 152,738
145,140
7,598
5.2
Wholesale parts 92,124
87,958
4,166
4.7
Body shop 44,723
40,966
3,757
9.2
Total service, body and parts $ 648,309
$ 612,142
$ 36,167
5.9 %

Service, body and parts gross profit $ 320,345
$ 297,185
$ 23,160
7.8 %
Service, body and parts gross margin 49.4 % 48.5 % 90 bp

parts

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 ~~sales~~revenue grew in all areas in the three and nine-month periods ended September 30, ~~2017~~2019, compared to the same periods of ~~2016. There are~~2018. The growth experienced in the three and nine-month periods ended September 30, 2019, was due to an increase in warranty work and more late-model units in ~~operation as new vehicle sales volumes have been increasing since 2010.~~operation. We believe ~~this increase in~~the increased number of units in operation will

continue to benefit our service, body and parts ~~sales~~revenue in the coming years as more late-model vehicles age, ~~and require~~necessitating repairs and maintenance.

We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts. ~~We increased~~In the three and nine-month periods ended September 30, 2019, the largest contributions to our service, body and parts revenue growth were increases of $15.2 million, or 9.1%, and $38.8 million, or 8.1%, respectively, in same store customer pay ~~business 4.3%~~revenue, compared to the same periods of 2018. Same store warranty revenue grew 11.1% and ~~6.1%, respectively,~~14.2% in the three and nine-month periods ended September 30, ~~2017~~2019, respectively, compared to the same periods of ~~2016.~~

~~Same store warranty sales increased 0.1%~~2018. Performance in parts wholesale and ~~5.2%, respectively,~~body shop grew 8.0% and 3.8% in the three and nine-month periods ended September 30, ~~2017~~2019, respectively, compared to the same periods of 2016. Warranty sales growth slowed in the third quarter of 2017, as compared to the growth experience in the nine-month period ended September 30, 2017. This is due to slowing warranty work related to recalls, particularly Honda and Toyota, which had decreases in warranty sales of 39.2% and 14.9%, respectively, in the three month period ended September 30, 2017 and decreases of 14.9% and 11.3%, respectively, in the nine-month period ended September 30, 2017 as compared to the same periods of 2016. Our domestic and luxury stores offset this trend, resulting in the slight increase for the quarter.2018.

~~The increases in same-store warranty work by segment were as follows:~~

Three months ended September 30, 2017 compared to the same period of 2016 Nine months ended September 30, 2017 compared to the same period of 2016
Domestic 10.0 % 6.5 %
Import (11.5 ) (0.3 )
Luxury 9.8
13.8

Same store wholesale parts increased 3.3% and 4.7% in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. We target independent repair shops, competing new vehicle dealers and wholesale accounts to expand parts sales to other repair shops.

Same store body shop increased 6.1% and 9.2%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016. Our stores have increased production through calculated adjustments to optimize personnel and equipment.

Same store service, body and parts gross profit increased ~~6.4%~~11.1% and ~~7.8%, respectively,~~11.4% in the three and nine-month periods ended September 30, ~~2017~~2019, respectively, compared to the same periods of ~~2016, which is in line with our revenue growth. Our~~2018, primarily as a result of higher gross margins ~~increased~~ as our mix has shifted ~~toward~~towards customer pay, which has a higher ~~margin~~margins than other ~~service.~~service work.

Segments

Certain financial information by segment is as follows:

Three Months Ended September 30, Increase (Decrease) % Increase
(Dollars in thousands) 2017 2016
Revenues:
Domestic $ 1,008,310
$ 893,156
$ 115,154
12.9 %
Import 1,209,955
983,947
226,008
23.0
Luxury 463,518
392,537
70,981
18.1
2,681,783
2,269,640
412,143
18.2
Corporate and other (1,441 ) 327
(1,768 ) NM
$ 2,680,342
$ 2,269,967
$ 410,375
18.1 %

~~NM - not meaningful~~


	Nine Months Ended September 30,					Increase (Decrease)			% Increase		Three Months Ended September 30,				Increase				% Increase
(Dollars in thousands)	2017			2016											Increase				% Increase
(Dollars in millions)											2019		2018		Increase				% Increase
Revenues:						Increase (Decrease)			% Increase
Domestic	$	2,863,018		$	2,495,468	$	367,550		14.7	%	$	1,157.8	$	1,097.8	Increase		$	60.0	% Increase		5.5	%
Import	3,276,667			2,777,007		499,660			18.0		1,437.7		1,336.4		101.3				7.6
Luxury	1,246,484			1,111,215		135,269			12.2		729.4		652.9		76.5				11.7
	7,386,169			6,383,690		1,002,479			15.7		3,324.9		3,087.1		237.8				7.7
Corporate and other	(2,690		)	2,477		(5,167		)	NM		7.5		4.9		2.6				NM
	$	7,383,479		$	6,386,167	$	997,312		15.6	%	$	3,332.4	$	3,092.0	$	240.4			7.8	%

NM - not meaningful

Three Months Ended September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016
Segment income¹:

Domestic $ 31,141
$ 32,292
$ (1,151 ) (3.6 )%
Import 36,954
32,934
4,020
12.2
Luxury 7,515
7,423
92
1.2
75,610
72,649
2,961
4.1
Corporate and other 34,541
26,794
7,747
28.9
Depreciation and amortization (14,828 ) (12,206 ) 2,622
21.5
Other interest expense (9,905 ) (5,647 ) 4,258
75.4
Other income (expense), net 1,125
(1,513 ) 2,638
NM
Income before income taxes $ 86,543
$ 80,077
$ 6,466
8.1 %



	Nine Months Ended September 30,				Increase		% Increase
(Dollars in millions)	2019		2018		Increase		% Increase
Revenues:
Domestic	$	3,265.8	$	3,163.6	$	102.2	3.2	%
Import	3,962.3		3,829.5		132.8		3.5
Luxury	2,149.0		1,846.9		302.1		16.4
	9,377.1		8,840.0		537.1		6.1
Corporate and other	26.7		8.2		18.5		NM
	$	9,403.8	$	8,848.2	$	555.6	6.3	%

NM –- not meaningful

Nine Months Ended
September 30, Increase % Increase
(Dollars in thousands) 2017 2016
Segment income¹:

Domestic $ 84,440
$ 84,420
$ 20
— %
Import 91,365
86,878
4,487
5.2
Luxury 22,542
21,736
806
3.7
198,347
193,034
5,313
2.8
Corporate and other 111,281
81,881
29,400
35.9
Depreciation and amortization (41,598 ) (36,372 ) 5,226
14.4
Other interest expense (23,745 ) (16,608 ) 7,137
43.0
Other income (expense), net 11,357
(4,534 ) 15,891
NM
Income before income taxes $ 255,642
$ 217,401
$ 38,241
17.6 %

~~NM – Not meaningful~~



	Three Months Ended September 30,						Increase (Decrease)			% Increase (Decrease)
(Dollars in millions)	2019			2018			Increase (Decrease)			% Increase (Decrease)
Segment income¹:
Domestic	$	37.9		$	25.3		$	12.6		49.8	%
Import	48.3			37.4			10.9			29.1
Luxury	13.0			11.7			1.3			11.1
	99.2			74.4			24.8			33.3
Corporate and other	50.6			66.8			(16.2		)	(24.3	)
Depreciation and amortization	(20.9		)	(19.6		)	1.3			6.6
Other interest expense	(14.8		)	(15.0		)	(0.2		)	(1.3	)
Other income, net	3.3			2.4			0.9			NM
Income before income taxes	$	117.4		$	109.0		$	8.4		7.7	%

¹Segment income for each reportable segment is defined as income before income taxes, depreciation and amortization, other interest expense and other expense, net.

NM – not meaningful


	Three Months Ended September 30,				Increase	% Increase		Nine Months Ended September 30,						Increase (Decrease)			% Increase (Decrease)
	2017		2016											Increase (Decrease)			% Increase (Decrease)
Retail new vehicle unit sales:					Increase	% Increase
(Dollars in millions)								2019			2018			Increase (Decrease)			% Increase (Decrease)
Segment income¹:																	% Increase (Decrease)
Domestic	13,911		12,735		1,176	9.2	%	$	94.1		$	79.5		Increase (Decrease)	$	14.6		18.4	%
Import	26,621		21,467		5,154	24.0		117.8			90.6			27.2			30.0
Luxury	5,029		4,287		742	17.3		36.5			30.5			6.0			19.7
	45,561		38,489		7,072	18.4		248.4			200.6			47.8			23.8
Allocated to management	(109	)	(72	)	37	NM
	45,452		38,417		7,035	18.3	%
Corporate and other								129.3			149.5			(20.2		)	(13.5	)
Depreciation and amortization								(60.9		)	(55.3		)	5.6			10.1
Other interest expense								(45.0		)	(40.7		)	4.3			10.6
Other income, net								8.9			5.4			3.5			NM
Income before income taxes								$	280.7		$	259.5		$	21.2		8.2	%

¹Segment income for each reportable segment is defined as income before income taxes, depreciation and amortization, other interest expense and other expense, net.

NM – not meaningful



	Three Months Ended September 30,				Increase (Decrease)		% Increase (Decrease)
	2019		2018		Increase (Decrease)		% Increase (Decrease)
Retail new vehicle unit sales:
Domestic	14,284		14,695		(411	)	(2.8	)%
Import	26,994		27,295		(301	)	(1.1	)
Luxury	7,342		6,860		482		7.0
	48,620		48,850		(230	)	(0.5	)
Allocated to management	(112	)	(60	)	52		NM
	48,508		48,790		(282	)	(0.6	)%

NM – Not meaningful


	Nine Months Ended September 30,				Increase	% Increase			Nine Months Ended September 30,					Increase (Decrease)		% Increase (Decrease)
	2017		2016			% Increase		2019			2018			Increase (Decrease)		% Increase (Decrease)
Retail new vehicle unit sales:					Increase
Domestic	39,407		35,176		4,231	12.0	%		39,569			42,048		(2,479	)	(5.9	)%
Import	69,643		59,581		10,062	16.9			74,180			78,311		(4,131	)	(5.3	)
Luxury	13,168		12,667		501	4.0			20,566			19,248		1,318		6.8
	122,218		107,424		14,794	13.8			134,315			139,607		(5,292	)	(3.8	)
Allocated to management	(274	)	(199	)	75	NM			(225	)		(293	)	(68	)	NM
	121,944		107,225		14,719	13.7	%		134,090			139,314		(5,224	)	(3.7	)%



~~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~~	Medford	Oregon	97501
(Address of principal executive offices)				(Zip Code)

~~Registrant's telephone number, including area code:~~ ~~541-776-6401~~



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐



Title of each class	Trading Symbol(s)	Name of each exchange on which registered	Outstanding at October 25, 2019
Class A common stock without par value	~~23,958,168~~LAD	The New York Stock Exchange	22,644,997
Class B common stock without par value	~~1,000,000~~
~~(Class)~~LAD	~~Outstanding at November 7, 2017~~The New York Stock Exchange	600,000



	September 30, 2017		December 31, 2016
Assets
Current Assets:
Cash and cash equivalents	$	38,577	$	50,282
Accounts receivable, net of allowance for doubtful accounts of $6,145 and $5,281	446,613		417,714
Inventories, net	1,966,456		1,772,587
Other current assets	59,622		46,611
Total Current Assets	2,511,268		2,287,194

Property and equipment, net of accumulated depreciation of $190,962 and $167,300	1,087,920		1,006,130
Goodwill	257,185		259,399
Franchise value	186,977		184,268
Other non-current assets	328,243		107,159
Total Assets	$	4,371,593	$	3,844,150

Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable	$	114,833	$	94,602
Floor plan notes payable: non-trade	1,598,111		1,506,895
Current maturities of long-term debt	17,619		20,965
Trade payables	103,105		88,423
Accrued liabilities	241,094		211,109
Total Current Liabilities	2,074,762		1,921,994

Long-term debt, less current maturities	991,333		769,916
Deferred revenue	98,265		81,929
Deferred income taxes	66,474		59,075
Other long-term liabilities	109,383		100,460
Total Liabilities	3,340,217		2,933,374

Stockholders' Equity:
Preferred stock - no par value; authorized 15,000 shares; none outstanding	—		—
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,966 and 23,382	148,880		165,512
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762	124		219
Additional paid-in capital	42,373		41,225
Retained earnings	839,999		703,820
Total Stockholders' Equity	1,031,376		910,776
Total Liabilities and Stockholders' Equity	$	4,371,593	$	3,844,150



	Franchise Value
Balance as of December 31, 2015	$	157,699
Additions through acquisitions	27,087
Reductions through divestitures	(518		)
Balance as of December 31, 2016	184,268
Additions through acquisitions¹	495
Adjustments to purchase price allocations ²	2,214
Balance as of September 30, 2017	$	186,977



	Repurchases Occurring in the Nine Months Ended September 30, 2017			Cumulative Repurchases as of September 30, 2017
	Shares	Average Price		Shares	Average Price
2016 Share Repurchase Authorization	310,000	$	91.33	1,023,725	$	83.25



	Consideration
Cash paid, net of cash acquired	$	400,558
Equity securities issued ¹	2,137
Debt issued	1,748
	$	404,443



	Assets Acquired and Liabilities Assumed
Trade receivables, net	$	15,554
Inventories	190,079
Franchise value	—
Property and equipment	57,217
Other assets	249,725
Floor plan notes payable	(75,065		)
Debt and capital lease obligations	(11,837		)
Other liabilities	(21,230		)
	$	404,443



Three Months Ended September 30, 2017	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	1,553,511	58.0	%	$	88,045	5.7	%	21.8	%
Used vehicle retail	679,180		25.3		78,658		11.6		19.5
Used vehicle wholesale	65,739		2.5		1,174		1.8		0.3
Finance and insurance ¹	101,044		3.8		101,044		100.0		25.1
Service, body and parts	265,683		9.9		132,492		49.9		32.9
Fleet and other	15,185		0.5		1,608		10.6		0.4
	$	2,680,342	100.0	%	$	403,021	15.0	%	100.0	%



Three Months Ended September 30, 2016	Revenues		Percent of Total Revenues		Gross Profit			Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	1,297,511	57.2	%	$	75,843		5.8	%	22.5	%
Used vehicle retail	580,885		25.6		68,809			11.8		20.4
Used vehicle wholesale	75,271		3.3		918			1.2		0.3
Finance and insurance ¹	87,709		3.9		87,709			100.0		26.0
Service, body and parts	217,148		9.6		104,342			48.1		30.9
Fleet and other	11,443		0.4		(360		)	(3.1	)	(0.1	)
	$	2,269,967	100.0	%	$	337,261		14.9	%	100.0	%



Nine Months Ended September 30, 2017	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	4,147,870	56.2	%	$	238,702	5.8	%	21.3	%
Used vehicle retail	1,915,038		25.9		221,947		11.6		19.8
Used vehicle wholesale	206,754		2.8		4,403		2.1		0.4
Finance and insurance¹	282,672		3.8		282,672		100.0		25.2
Service, body and parts	744,262		10.1		368,166		49.5		32.9
Fleet and other	86,883		1.2		4,054		4.7		0.4
	$	7,383,479	100.0	%	$	1,119,944	15.2	%	100.0	%



Nine Months Ended September 30, 2016	Revenues		Percent of Total Revenues		Gross Profit		Gross Profit Margin		Percent of Total Gross Profit
New vehicle	$	3,602,603	56.4	%	$	215,471	6.0	%	22.3	%
Used vehicle retail	1,667,258		26.1		200,311		12.0		20.7
Used vehicle wholesale	207,131		3.2		4,234		2.0		0.4
Finance and insurance¹	246,390		3.9		246,390		100.0		25.5
Service, body and parts	616,088		9.6		299,060		48.5		30.9
Fleet and other	46,697		0.8		1,013		2.2		0.2
	$	6,386,167	100.0	%	$	966,479	15.1	%	100.0	%



	Three months ended September 30, 2017 compared to the same period of 2016		National growth in the three months ended September 30, 2017 compared to the same period of 2016 ¹		Nine months ended September 30, 2017 compared to the same period of 2016		National growth in the nine months ended September 30, 2017 compared to the same period of 2016 ¹
Domestic brand same store unit sales change	(5.8	)%	(2.9	)%	(3.1	)%	(3.6	)%
Import brand same store unit sales change	4.5		0.6		2.7		(0.6	)
Luxury brand same store unit sales change	(7.8	)	(2.7	)	(9.7	)	0.3
Overall	(0.3	)	(1.2	)	(0.7	)	(1.9	)



	~~FORM 10-Q~~



	Three months ended September 30, 2017 compared to the same period of 2016		Nine months ended September 30, 2017 compared to the same period of 2016
Certified pre-owned vehicles	(5.3	)%	(1.2	)%
Core vehicles	7.6		6.4
Value autos	9.3		10.8
Overall	3.6		4.5



	Three Months Ended September 30,				Increase (Decrease)
As a % of gross profit	2019		2018		Increase (Decrease)
Personnel	46.2	%	45.7	%	50	bp
Advertising	5.5		6.1		(60	)
Rent	2.0		2.3		(30	)
Facility costs	3.8		3.9		(10	)
Gain on sale of assets	(1.8	)	(3.4	)	160
Other	11.5		11.7		(20	)
Total SG&A	67.2	%	66.3	%	90	bp



	Three Months Ended September 30, 2017
(Dollars in Thousands, Except per Share Amounts)	As reported			Insurance reserves			Acquisition expenses			Adjusted
Selling, general and administrative	$	282,241		$	(1,704	)	$	(3,516	)	$	277,021
Operating income	105,952			1,704			3,516			111,172

Income before income taxes	$	86,543		$	1,704		$	3,516		$	91,763
Income tax provision	(34,657		)	(943		)	(1,380		)	(36,980		)
Net income	$	51,886		$	761		$	2,136		$	54,783

Diluted net income per share	$	2.07		$	0.03		$	0.08		$	2.18
Diluted share count	25,076



	Three Months Ended September 30, 2016
(Dollars in thousands, except per share amounts)	As reported			Equity-method investment			Adjusted
Asset impairment	$	3,498		$	(3,498	)	$	—
Operating income	93,423			3,498			96,921
Other income (expense)	(1,513		)	2,066			553

Income before income taxes	$	80,077		$	5,564		$	85,641
Income tax provision	(26,036		)	(7,592		)	(33,628		)
Net income (loss)	$	54,041		$	(2,028	)	$	52,013

Diluted net income (loss) per share	$	2.14		$	(0.08	)	$	2.06
Diluted share count	25,290


	Nine Months Ended September 30, 2017															Three Months Ended September 30, 2019
(Dollars in thousands, except per share amounts)	As reported			Insurance reserves			Acquisition expenses			OEM settlement			Adjusted
(Dollars in millions, except per share amounts)																As reported			Acquisition expenses			Net disposal gain on sale of stores			Insurance reserves			Adjusted
Selling, general and administrative	$	782,303		$	(5,582	)	$	(5,653	)	$	—		$	771,068		$	343.2		$	(0.2	)	$	9.4		$	(1.1	)	$	351.3
Operating income	296,043			5,582			5,653			—			307,278
Other (expense) income, net	11,357			—			—			(9,111		)	2,246
Operating income (loss)																146.8			0.2			(9.4		)	1.1			138.7

Income (loss) before income taxes	$	255,642		$	5,582		$	5,653		$	(9,111	)	$	257,766		$	117.4		$	0.2		$	(9.4	)	$	1.1		$	109.3
Income tax (provision) benefit	(99,829		)	(2,174		)	(2,201		)	3,423			(100,781		)	(32.2		)	(0.1		)	2.7			(0.3		)	(29.9		)
Net income (loss)	$	155,813		$	3,408		$	3,452		$	(5,688	)	$	156,985		$	85.2		$	0.1		$	(6.7	)	$	0.8		$	79.4

Diluted net income (loss) per share	$	6.19		$	0.14		$	0.14		$	(0.23	)	$	6.24		$	3.64		$	—		$	(0.28	)	$	0.03		$	3.39
Diluted share count	25,158															23.4


	Nine Months Ended September 30, 2016															Three Months Ended September 30, 2018
(Dollars in thousands, except per share amounts)	As reported			Disposal gain on sale of stores			Equity-method investment			Legal reserve adjustment			Adjusted
Asset impairment	$	10,494		$	—		$	(10,494	)	$	—		$	—
(Dollars in millions, except per share amounts)																As reported			Net disposal gain on sale of stores			Tax attributes			Adjusted
Selling, general and administrative	662,766			1,087			—			(1,906		)	661,947			$	309.0		$	15.7		$	—		$	324.7
Operating Income (expense)	256,847			(1,087		)	10,494			1,906			268,160
Other (expense) income, net	(4,534		)	—			6,197			—			1,663
Operating income (loss)																137.6			(15.7		)	—			121.9

Income (loss) before income taxes	$	217,401		$	(1,087	)	$	16,691		$	1,906		$	234,911		$	109.0		$	(15.7	)	$	—		$	93.3
Income tax (provision) benefit	(71,662		)	426			(20,374		)	(747		)	(92,357		)	(15.9		)	4.1			(12.8		)	(24.6		)
Net income (loss)	$	145,739		$	(661	)	$	(3,683	)	$	1,159		$	142,554		$	93.1		$	(11.6	)	$	(12.8	)	$	68.7

Diluted net income (loss) per share	$	5.69		$	(0.03	)	$	(0.14	)	$	0.05		$	5.57		$	3.84		$	(0.48	)	$	(0.53	)	$	2.83
Diluted share count	25,598															24.3



	Nine Months Ended September 30, 2019
(Dollars in millions, except per share amounts)	As reported			Acquisition expenses			Net disposal gain on sale of stores			Insurance reserves			Asset impairments			Adjusted
Asset impairment	$	0.5		$	—		$	—		$	—		$	(0.5	)	$	—
Selling, general and administrative	1,021.5			(1.9		)	9.1			(9.5		)	—			1,019.2
Operating income (loss)	372.3			1.9			(9.1		)	9.5			0.5			375.1

Income (loss) before income taxes	$	280.7		$	1.9		$	(9.1	)	$	9.5		$	0.5		$	283.5
Income tax (provision) benefit	(77.2		)	(0.5		)	2.6			(2.6		)	(0.1		)	(77.8		)
Net income (loss)	$	203.5		$	1.4		$	(6.5	)	$	6.9		$	0.4		$	205.7

Diluted net income (loss) per share	$	8.72		$	0.06		$	(0.28	)	$	0.29		$	0.02		$	8.81
Diluted share count	23.3



	Nine Months Ended September 30, 2018
(Dollars in millions, except per share amounts)	As reported			Net disposal gain on sale of stores			Acquisition expenses			Insurance reserves			Tax attributes			Adjusted
Selling, general and administrative	$	939.9		$	15.7		$	(3.3	)	$	(1.5	)	$	—		$	950.8
Operating income (loss)	339.9			(15.7		)	3.3			1.5			—			329.0

Income (loss) before income taxes	$	259.5		$	(15.7	)	$	3.3		$	1.5		$	—		$	248.6
Income tax (provision) benefit	(53.7		)	4.1			(0.9		)	(0.4		)	(14.2		)	(65.1		)
Net income (loss)	$	205.8		$	(11.6	)	$	2.4		$	1.1		$	(14.2	)	$	183.5

Diluted net income (loss) per share	$	8.31		$	(0.47	)	$	0.10		$	0.04		$	(0.57	)	$	7.41
Diluted share count	24.8



	As of September 30,				Increase		% Increase
(Dollars in thousands)	2017		2016		Increase		% Increase
Cash and cash equivalents	$	38,577	$	24,116	$	14,461	60.0	%
Available credit on the credit facilities	268,831		122,138		146,693		120.1
Total current available funds	307,408		146,254		161,154		110.2
Estimated funds from unfinanced real estate	211,379		193,247		18,132		9.4
Total estimated available funds	$	518,787	$	339,501	$	179,286	52.8	%



Dividend paid:	Dividend amount per share		Total amount of dividend (in thousands)
March 2017	$	0.25	$	6,292
May 2017	$	0.27	$	6,760
August 2017	$	0.27	$	6,751



Dividend paid:	Dividend amount per share		Total amount of dividend (in millions)
March 2019	$	0.29	$	6.7
May 2019	$	0.30	$	7.0
August 2019	$	0.30	$	7.0


	As of September 30, 2017						As of September 30, 2019
(Dollars in thousands)	Outstanding			Remaining Available
(Dollars in millions)							Outstanding			Remaining Available
Floor plan note payable: non-trade	$	1,598,111		$	—	¹	$	1,594.5		$	—	¹
Floor plan notes payable	114,833			—			407.5			—
Used vehicle inventory financing facility	5,000			45,000		²	332.0			—		²
Revolving lines of credit	221,654			223,831		^{2, 3}	69.0			249.5		^{2, 3}
Real estate mortgages	476,559			—			585.1			—
5.25% Senior Subordinated Notes due 2025	300,000			—			300.0			—
Other debt	12,699			—			33.5			—
Total debt outstanding	2,728,856			268,831			3,321.6			249.5
Less: unamortized debt issuance costs	(6,960		)	—			(5.5		)	—
Total debt	$	2,721,896		$	268,831		$	3,316.1		$	249.5



Debt Covenant Ratio	Requirement	As of September 30, ~~2017~~2019
Current ratio	Not less than 1.10 to 1	~~1.32~~	1.28 to 1
Fixed charge coverage ratio	Not less than 1.20 to 1	~~2.82~~	2.36 to 1
Leverage ratio	Not more than 5.00 to 1	~~2.93~~	2.51 to 1


	Total number of shares purchased ²	Average price paid per share		Total number of shares purchased as part of publicly announced plans ¹	Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands)¹		Total number of shares purchased ²	Average price paid per share		Total number of shares purchased as part of publicly announced plans ¹	Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands)¹
July	20,000	$	97.69	20,000	$	169,411	—	$	—	—	$	233,603
August	23,157	103.23		23,000	167,037		127	131.88		—	233,603
September	20,000	113.16		20,000	164,774		—	—		—	233,603
	63,157	$	104.62	63,000	$	164,774	127	$	131.88	—	$	233,603



3.1	Restated Articles of Incorporation of Lithia Motors, Inc.~~, as amended May 13, 1999~~ (incorporated by reference to ~~exhibit~~ Exhibit 3.1 to ~~our~~the Company’s Form ~~10-K for the year ended December 31, 1999)~~10-Q filed July 26, 2019).
3.2	~~2017~~Second Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to ~~exhibit 3.1~~Exhibit 3.2 to the Company’s Form 8-K ~~dated~~filed April ~~28, 2017 and filed with Securities and Exchange Commission on May 3, 2017)~~25, 2019).
4.1	Indenture, dated as of July 24, 2017, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017 and filed with the Securities and Exchange Commission on July 24, 2017).
4.2	Form of 5.250% Senior Notes due 2025 (included as part of Exhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017 and filed with the Securities and Exchange Commission on July 24, 2017).
~~10.1~~	~~Sixth Amendment to Amended and Restated Loan Agreement dated July 12, 2017.~~
~~10.2~~	Seventh Amendment to Amended and Restated Loan Agreement dated August 1, 2017 (incorporated by reference to exhibit 10.1 to Form 8-K dated August 1, 2017 and filed with the Securities and Exchange Commission on August 3, 2017)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of ~~Chief~~Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of ~~Chief~~Principal Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.



Date: ~~November 7, 2017~~October 25, 2019	LITHIA MOTORS, INC.

	By: ~~/s/ John F. North III~~ /s/ Tina Miller
	~~John F. North III~~Tina Miller
	Senior Vice President and Chief Financial Officer
	(Duly Authorized Officer and Principal Financial and
	Accounting Officer)