UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
FORM 10-Q


(Mark One)
 
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2020
OR
[ ]☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to 
 
Commission file number: 001-14733

 

LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
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, OregonMedfordOregon97501
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 541-776-6401
(541) 776-6401
Registrant’s telephone number, including area code
 

Securities registered pursuant to Section 12(b) of the Act: 
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock without par valueLADThe New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]☒ No [ ]☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]☒ No [ ]☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] Emerging growth company [ ]

Large Accelerated Filer ☒Accelerated Filer ☐
Non-Accelerated Filer ☐Smaller Reporting Company☐
Emerging Growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒

Indicate the numberAs of April 24, 2020, there were 22,163,248 shares outstanding of each of the issuer’s classes ofregistrant’s Class A common stock asoutstanding and 600,000 shares of the latest practicable date.registrant’s Class B common stock outstanding.


Class A common stock without par value23,958,168
Class B common stock without par value1,000,000
(Class)Outstanding at November 7, 2017



LITHIA MOTORS, INC.
FORM 10-Q
INDEX
 
PART I - FINANCIAL INFORMATIONPage
   
Item 1.
Financial Statements
2
   
 
Consolidated Balance Sheets (Unaudited) - September 30, 2017March 31, 2020, and December 31, 20162019
2
   
 
Consolidated Statements of Operations (Unaudited) –- Threeand Nine Months Ended September 30, 2017March 31, 2020 and 20162019
3
   
 
Consolidated Statements of Comprehensive Income (Unaudited) – Three and Nine Months Ended September 30, 2017March 31, 2020 and 20162019
4
   
 
Consolidated Statements of Cash FlowsChanges in Stockholders’ Equity (Unaudited) – Nine- Three Months Ended September 30, 2017March 31, 2020 and 20162019
5
   
 
Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2020 and 2019
7
Condensed Notes to Consolidated Financial Statements (Unaudited)
68
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
1719
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
4338
   
Item 4.
Controls and Procedures
4338
   
PART II - OTHER INFORMATION 
   
Item 1.Legal Proceedings
4339
   
Item 1A.
Risk Factors
4339
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
45
Item 5.Other Information
4539
   
Item 6.
Exhibits
4640
   
Signature
 
4741



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)
  March 31, 2020 December 31, 2019
Assets    
Current Assets:    
Cash and cash equivalents $56.6
 $84.0
Accounts receivable, net of allowance for doubtful accounts of $6.8 and $7.3 298.2
 505.0
Inventories, net 2,512.8
 2,433.7
Other current assets 58.2
 47.8
Total Current Assets 2,925.8
 3,070.5
     
Property and equipment, net of accumulated depreciation of $298.6 and $284.3 1,631.5
 1,611.7
Operating lease right-of-use assets 244.6
 251.9
Goodwill 457.7
 454.6
Franchise value 306.0
 306.7
Other non-current assets 448.5
 388.5
Total Assets $6,014.1
 $6,083.9
     
Liabilities and Stockholders’ Equity    
Current Liabilities:    
Floor plan notes payable $389.9
 $425.2
Floor plan notes payable: non-trade 1,595.9
 1,642.4
Current maturities of long-term debt 45.8
 39.3
Trade payables 108.9
 125.3
Accrued liabilities 291.0
 336.9
Total Current Liabilities 2,431.5
 2,569.1
     
Long-term debt, less current maturities 1,489.8
 1,430.6
Deferred revenue 140.6
 137.9
Deferred income taxes 137.5
 131.1
Non-current operating lease liabilities 231.3
 238.5
Other long-term liabilities 126.9
 109.0
Total Liabilities 4,557.6
 4,616.2
     
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 22.2 and 22.6 —
 20.5
Class B common stock - no par value; authorized 25.0 shares; issued and outstanding 0.6 and 0.6 0.1
 0.1
Additional paid-in capital 26.0
 46.0
Accumulated other comprehensive loss (5.8) (0.7)
Retained earnings 1,436.2
 1,401.8
Total Stockholders’ Equity 1,456.5
 1,467.7
Total Liabilities and Stockholders’ Equity $6,014.1
 $6,083.9
 
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 March 31,
  2020 2019
Revenues:    
New vehicle retail $1,373.5
 $1,461.1
Used vehicle retail 874.4
 827.9
Used vehicle wholesale 66.7
 77.4
Finance and insurance 121.9
 117.5
Service, body and parts 329.9
 317.4
Fleet and other 37.4
 48.4
Total revenues 2,803.8
 2,849.7
Cost of sales:    
New vehicle retail 1,295.3
 1,375.2
Used vehicle retail 784.4
 743.3
Used vehicle wholesale 66.1
 76.5
Service, body and parts 161.8
 157.9
Fleet and other 35.3
 46.1
Total cost of sales 2,342.9
 2,399.0
Gross profit 460.9
 450.7
Asset impairments —
 0.5
Selling, general and administrative 346.0
 321.8
Depreciation and amortization 22.0
 19.8
Operating income 92.9
 108.6
Floor plan interest expense (14.0) (18.1)
Other interest expense, net (17.0) (15.3)
Other income, net 2.3
 2.6
Income before income taxes 64.2
 77.8
Income tax provision (18.0) (21.4)
Net income $46.2
 $56.4
     
Basic net income per share $1.99
 $2.43
Shares used in basic per share calculations 23.3
 23.2
     
Diluted net income per share $1.97
 $2.42
Shares used in diluted per share calculations 23.5
 23.2
     
Cash dividends paid per Class A and Class B share $0.30
 $0.29

See accompanying condensed notes to consolidated financial statements.


LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
  Three Months Ended March 31,
  2020 2019
Net income $46.2
 $56.4
Other comprehensive loss, net of tax: 
 
Loss on cash flow hedges, net of tax benefit of $1.8 and $0.0, respectively (5.1) —
Comprehensive income $41.1
 $56.4
See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(In millions)
(Unaudited)
Three Months Ended March 31, 2020
  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, 201922.6
 $20.5
 0.6
 $0.1
 $46.0
 $(0.7) $1,401.8
 $1,467.7
Net income—
 —
 —
 —
 —
 —
 46.2
 46.2
Loss on cash flow hedges, net of tax benefit of $1.8—
 —
 —
 —
 —
 (5.1) —
 (5.1)
Issuance of stock in connection with employee stock plans—
 2.6
 —
 —
 —
 —
 —
 2.6
Issuance of restricted stock to employees0.1
 —
 —
 —
 —
 —
 —
 —
Repurchase of Class A common stock(0.5) (32.0) —
 —
 (16.2) —
 —
 (48.2)
Compensation for stock and stock option issuances and excess tax benefits from option exercises—
 8.9
 —
 —
 (3.8) —
 —
 5.1
Dividends paid—
 —
 —
 —
 —
 —
 (7.0) (7.0)
Adjustment to adopt ASC 326—
 —
 —
 —
 —
 —
 (4.8) (4.8)
Balance at March 31, 202022.2
 $—
 0.6
 $0.1
 $26.0
 $(5.8) $1,436.2
 $1,456.5

 See accompanying condensed notes to consolidated financial statements.




LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(In millions)
(Unaudited)
Three Months Ended March 31, 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, 201822.0
 $—
 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 employees0.1
 —
 —
 —
 —
 —
 —
 —
Repurchase of Class A common stock—
 (3.1) —
 —
 —
 —
 —
 (3.1)
Class B common stock converted to Class A common stock0.2
 —
 (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)
Adjustment to adopt ASC 842—
 —
 —
 —
 —
 —
 0.9
 0.9
Balance at March 31, 201922.3
 $9.7
 0.8
 $0.1
 $28.0
 $—
 $1,212.7
 $1,250.5

 See accompanying condensed notes to consolidated financial statements.



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
  Three Months Ended March 31,
  2020 2019
Cash flows from operating activities:    
Net income $46.2
 $56.4
Adjustments to reconcile net income to net cash provided by operating activities:    
Asset impairments —
 0.5
Depreciation and amortization 22.0
 19.8
Stock-based compensation 5.1
 3.5
Loss on disposal of other assets 0.1
 —
(Gain) loss on disposal of franchise (0.1) 0.1
Deferred income taxes 8.2
 5.2
(Increase) decrease (net of acquisitions and dispositions):    
Accounts receivable, net 202.1
 49.9
Inventories (69.8) (81.4)
Other assets (6.8) 9.0
Increase (decrease) (net of acquisitions and dispositions):    
Floor plan notes payable (32.7) 34.6
Trade payables (14.6) (6.4)
Accrued liabilities (49.4) (14.5)
Other long-term liabilities and deferred revenue 11.4
 0.5
Net cash provided by operating activities 121.7
 77.2
     
Cash flows from investing activities:    
Capital expenditures (41.6) (29.1)
Proceeds from sales of assets 0.2
 0.4
Cash paid for other investments (9.3) (6.6)
Cash paid for acquisitions, net of cash acquired (72.3) —
Proceeds from sales of stores 4.7
 —
Net cash used in investing activities (118.3) (35.3)
     
Cash flows from financing activities:    
(Repayments) borrowings on floor plan notes payable, net: non-trade (43.5) 43.5
Borrowings on lines of credit 430.0
 570.0
Repayments on lines of credit (375.0) (625.0)
Principal payments on long-term debt and capital leases, scheduled (6.5) (6.2)
Principal payments on long-term debt and capital leases, other —
 (3.3)
Proceeds from issuance of long-term debt 17.2
 —
Payments of debt issuance costs (0.4) —
Proceeds from issuance of common stock 2.6
 2.3
Repurchase of common stock (48.2) (3.1)
Dividends paid (7.0) (6.7)
Net cash used in financing activities (30.8) (28.5)
(Decrease) increase in cash and cash equivalents (27.4) 13.4
Cash and cash equivalents at beginning of period 84.0
 31.6
Cash and cash equivalents at end of period $56.6
 $45.0
     
Supplemental disclosure of cash flow information:    
Cash paid during the period for interest $31.5
 $37.9
Cash paid during the period for income taxes, net 1.3
 0.2
Floor plan debt paid in connection with store disposals —
 4.8
     
Supplemental schedule of non-cash activities:    
ROU assets obtained in exchange for lease liabilities 1
 $1.8
 $257.0
1 Amounts for the three months ended March 31, 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, 2017March 31, 2020, and for the three months ended March 31, 2020 and nine-months ended September 30, 2017 and 2016.2019. 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 20162019 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 20162019, 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 20162019 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. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which replaces the existing incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance and net investments in leases recognized by a lessor in accordance with Topic 842 on leases. In addition, Topic 326 made changes to the accounting for available-for-sale debt securities. We adopted Topic 326 using a modified retrospective method for all financial assets measured at amortized cost. Results for reporting periods beginning after January 1, 2020 are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.  We recorded a decrease to retained earnings, net of tax, of $4.8 million as of January 1, 2020 for the cumulative effect of adopting Topic 326. The transition adjustment is related to updating our allowance for loan loss methodology related to our auto loan receivables. Our methodology incorporates a combination of historical loan loss experience, current conditions and forecasts, as well as the value of any underlying assets securing the receivables.

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements”, which provides guidance on accounting for credit losses on accrued interest receivable balances and guidance on including recoveries when estimating the allowance. In May 2019, the FASB issued ASU 2019-05, “Targeted Transition Relief”, which allows entities with an option to elect fair value for certain instruments upon adoption of Topic 326.

The impact of adopting Topic 326 on the accompanying Consolidated Balance Sheets as of January 1, 2020 was as follows (in millions):
Impact on Consolidated Balance Sheets December 31, 2019 Adjustments January 1, 2020
CECL Adoption:      
Accounts receivable, net of allowance for doubtful accounts of $7.3 $505.0
 $(0.5) $504.5
Other non-current assets 388.5
 (6.0) 382.5
Total Assets 6,083.9
 (6.5) 6,077.4
Deferred income taxes 131.1
 (1.7) 129.4
Total Liabilities 4,616.2
 (1.7) 4,614.5
Retained earnings 1,401.8
 (4.8) 1,397.0
Total Liabilities and Stockholders’ Equity 6,083.9
 (6.5) 6,077.4


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 $176.5 million and $171.5 million as of March 31, 2020, and December 31, 2019, respectively; and we recognized $8.5 million of revenue in the three months ended March 31, 2020, related to our adoptioncontract liability balance at December 31, 2019. 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 - Improvementsestimated 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 reclassifiedsales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the presentationsale of excess tax benefits on our Consolidated Statementsthe contract. Our contract asset balances associated with future estimated variable consideration were $8.9 million and $8.9 million as of Cash Flows between financingMarch 31, 2020 and operating cash flowsDecember 31, 2019, respectively; and recorded reclassifications between additional paid-in capitalare 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):
  March 31, 2020 December 31, 2019
Contracts in transit $120.7
 $269.7
Trade receivables 48.5
 52.8
Vehicle receivables 28.9
 50.9
Manufacturer receivables 77.4
 112.4
Auto loan receivables 56.8
 62.2
Other receivables 19.7
 19.4
  352.0

567.4
Less: Allowance for doubtful accounts (6.8) (7.3)
Less: Long-term portion of accounts receivable, net (47.0) (55.1)
Total accounts receivable, net $298.2

$505.0

  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, reaching non-accrual status, 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 balance of auto loan receivables is made up primarily of sub-prime loans secured by the related vehicle. More than 91% of the portfolio is aged less than 60 days past due with less than 9% on non-accrual status. As of March 31, 2020, the allowance for credit losses related to auto loan receivables was $12.8 million and included in allowance for doubtful accounts and other non-current assets. In accordance with Topic 326, the allowance for loan losses is estimated based on our historical write-off experience, current conditions and forecasts as well as the value of any underlying assets securing these loans 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.upon


reaching 120 days past due status. The annual activity for charges and subsequent recoveries is immaterial. The remainder of our receivables are due primarily from manufacturer partners and various third-party lenders. The historical losses related to these balances are 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):
  March 31, 2020 December 31, 2019
New vehicles $1,746.1
 $1,704.1
Used vehicles 676.9
 638.1
Parts and accessories 89.8
 91.5
Total inventories $2,512.8
 $2,433.7

  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 allocations2,3
 (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, 2018 ¹ $164.5
 $188.9
 $81.5
 $434.9
Adjustments to purchase price allocations 2
 1.6
 1.6
 1.9
 5.1
Additions through acquisitions 2
 6.2
 9.0
 2.2
 17.4
Reductions from impairments (0.3) (1.3) (0.1) (1.7)
Reductions through divestitures (0.2) (0.9) —
 (1.1)
Balance as of December 31, 2019 ¹ 171.8
 197.3
 85.5
 454.6
Additions through acquisitions 3
 0.4
 2.4
 0.4
 3.2
Reductions through divestitures (0.1) —
 —
 (0.1)
Balance as of March 31, 2020 1
 $172.1
 $199.7
 $85.9
 $457.7

1 Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
2 Our purchase price allocation for the acquisition2018 acquisitions of the CarboneRay Laks Honda, Ray Laks Acura, Day Auto Group, wasPrestige Auto Group, and Buhler Ford were finalized in the third quarter of 2017.2019. As a result, we reclassified $2.2added $22.5 million of value from goodwill to franchise value.goodwill.
3 Our purchase price allocation is preliminary for the acquisitionsa portion of the Baierl Auto Group2019 acquisitions was finalized in 2020. As a result, we added $3.2 million of goodwill. Our purchase price allocation for all other 2019 and the Downtown LA Auto Group2020 acquisitions are preliminary and the associated goodwill hasis not beenyet allocated to each of our segments. These amounts are included in other non-current assets until we finalize our purchase accounting. See also Note 12.12.


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 acquisitions27,087
Reductions through divestitures(518)
Balance as of December 31, 2016184,268
Additions through acquisitions 1
495
Adjustments to purchase price allocations 2
2,214
Balance as of September 30, 2017$186,977
 Franchise Value
Balance as of December 31, 2018$288.7
Adjustments to purchase price allocations 1
3.5
Additions through acquisitions 1
20.9
Reductions through divestitures(6.0)
Reductions from impairments(0.4)
Balance as of December 31, 2019306.7
Reductions through divestitures(0.7)
Balance as of March 31, 2020 2
$306.0

1 Our purchase price allocation is preliminary for the acquisitions of the Baierl Auto Group and the Downtown LA Auto Group and have not been included in the above franchise value additions. See also Note 12.
2Our purchase price allocation for the acquisition2018 acquisitions of the CarboneRay Laks Honda, Ray Laks Acura, Day Auto Group, wasPrestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added $24.4 million of franchise value.
2 Our purchase price allocation for the thirdremaining 2019 and 2020 acquisitions are preliminary 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. See Note 12.



As discussed further in the Business Overview, COVID-19 has adversely impacted the economy as a whole. Based on the current macro economic conditions, we assessed our goodwill, franchise value and long-lived assets for indications of impairment. We elected to perform a qualitative assessment as of March 31, 2020 and determined there were no indicators that it is more likely than not that goodwill, franchise value, or long-lived asset impairments exist. As such, 0 impairments were recognized in the first quarter of 2017, resulting in a reclassification in2020. We will continue to monitor the current yearimpact of $2.2 million from goodwill to franchise value.COVID-19 on store performance.



Note 5. Long-term Debt

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

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

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

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


Note 6.6. Stockholders’ Equity


Repurchasesof Class A Common Stock
Repurchases of our Class A Common Stock occurred under a repurchase authorization granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units ("RSUs"). In February 2016,On October 22, 2018, our Board of Directors authorized theapproved an additional $250 million repurchase of up to $250 millionauthorization of our Class A common stock.stock, increasing our total share repurchase authorization to $500 million. Share repurchases under this authorization were as follows:
  Repurchases Occurring in 2020 Cumulative Repurchases as of March 31, 2020
  Shares Average Price Shares Average Price
Share Repurchase Authorization 529,303
 $82.76
 3,684,398
 $84.19

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


As of September 30, 2017,March 31, 2020, we had $164.8$189.8 million available for repurchases pursuant to our 2016 share repurchase authorization.




In addition, during the first nine months of 2017,2020, we repurchased 32,30029,627 shares at an average price of $99.33$146.62 per share, for a total of $3.2$4.3 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.


Note 7.7. Fair Value Measurements


Fair Value DisclosuresFactors 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 Assetsidentical 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 that 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,March 31, 2020, our real estate mortgages and other debt, which includes capital leases, had maturity dates between January 12, 2019October 31, 2020, and DecemberAugust 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-monththree-month period ended September 30, 2017.March 31, 2020.


Below are our derivative liabilities that are measured at fair value (in millions):
Fair Value at March 31, 2020 Level 1 Level 2 Level 3
Measured on a recurring basis:      
Derivative contract, net $—
 $7.9
 $—
Fair Value at December 31, 2019 Level 1 Level 2 Level 3
Measured on a recurring basis:      
Derivative contract, net $—
 $1.0
 $—


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):
  March 31, 2020 December 31, 2019
Carrying value    
5.250% Senior notes due 2025 $300.0
 $300.0
4.625% Senior notes due 2027 400.0
 400.0
Real estate mortgages and other debt 479.0
 466.6
  $1,179.0

$1,166.6
Fair value    
5.250% Senior notes due 2025 $270.0
 $315.0
4.625% Senior notes due 2027 346.5
 412.0
Real estate mortgages and other debt 527.4
 468.7
  $1,143.9
 $1,195.7

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

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


Note 8.8. 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 March 31, 2020 2019
(in millions, except per share data) Class A Class B Class A Class B
Net income applicable to common stockholders - basic $45.0
 $1.2
 $54.4
 $2.0
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 1.0
 —
 1.7
 —
Net income applicable to common stockholders - diluted $46.2
 $1.2
 $56.4
 $2.0
         
Weighted average common shares outstanding – basic 22.7
 0.6
 22.3
 0.8
Conversion of Class B common shares into Class A common shares 0.6
 —
 0.8
 —
Effect of employee stock purchases and restricted stock units on weighted average common shares 0.2
 —
 0.1
 —
Weighted average common shares outstanding – diluted 23.5
 0.6
 23.2
 0.8
         
Net income per common share - basic $1.99
 $1.99
 $2.43
 $2.43
Net income per common share - diluted $1.97
 $1.97
 $2.42
 $2.42

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 period ended March 31, 2020, and 2019 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 Investment9. Segments

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

While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method. We exited this equity-method investment in December 2016.
We estimated the value of our equity-method investment, which was recorded at fair value on a non-recurring basis, based on a market valuation approach. We used prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets. Because these valuations contained unobservable inputs, we classified the measurement of fair value of our equity-method investment as Level 3.

The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):
  Three Months Ended September 30, Nine Months Ended
September 30,
  2017 2016 2017 2016
Asset impairments to write investment down to fair value $—
 $3,498
 $—
 $10,494
Our portion of the partnership’s operating losses —
 2,066
 —
 6,197
Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions —
 31
 —
 185
Tax benefits and credits generated —
 7,592
 —
 20,374



Note 10. Segments


While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three3 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-BenzMercedes 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 shopshops 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 thatwho 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
March 31,
 2017 2016 2017 2016 2020 2019
Revenues:          
  
Domestic $1,008,310
 $893,156
 $2,863,018
 $2,495,468
    
New vehicle retail $470.6
 $492.4
Used vehicle retail 327.7
 300.4
Used vehicle wholesale 26.1
 29.6
Finance and insurance 45.1
 41.8
Service, body and parts 117.2
 115.4
Fleet and other 13.7
 17.1
 1,000.4
 996.7
Import 1,209,955
 983,947
 3,276,667
 2,777,007
    
New vehicle retail 600.3
 632.6
Used vehicle retail 354.8
 341.3
Used vehicle wholesale 26.1
 27.9
Finance and insurance 58.1
 54.8
Service, body and parts 124.8
 117.7
Fleet and other 11.8
 17.3
 1,175.9
 1,191.6
Luxury 463,518
 392,537
 1,246,484
 1,111,215
    
New vehicle retail 301.0
 339.4
Used vehicle retail 191.1
 186.3
Used vehicle wholesale 14.2
 19.9
Finance and insurance 16.9
 16.5
Service, body and parts 83.4
 79.1
Fleet and other 11.5
 13.7
 618.1
 654.9
 2,681,783

2,269,640

7,386,169
 6,383,690

2,794.4
 2,843.2
Corporate and other (1,441) 327
 (2,690) 2,477
 9.4
 6.5
 $2,680,342

$2,269,967

$7,383,479
 $6,386,167

$2,803.8
 $2,849.7
Segment income1:
          
  
Domestic $31,141
 $32,292
 $84,440
 $84,420
 $27.8
 $19.8
Import 36,954
 32,934
 91,365
 86,878
 24.7
 30.0
Luxury 7,515
 7,423
 22,542
 21,736
 1.6
 8.0
 75,610

72,649

198,347
 193,034

54.1
 57.8
Corporate and other 34,541
 26,794
 111,281
 81,881
 46.8
 52.5
Depreciation and amortization (14,828) (12,206) (41,598) (36,372) (22.0) (19.8)
Other interest expense (9,905) (5,647) (23,745) (16,608) (17.0) (15.3)
Other income (expense), net 1,125
 (1,513) 11,357
 (4,534)
Other income, net 2.3
 2.6
Income before income taxes $86,543

$80,077

$255,642
 $217,401

$64.2
 $77.8
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.



  March 31, 2020 December 31, 2019
Total assets:    
Domestic $1,369.9
 $1,467.6
Import 1,332.4
 1,306.5
Luxury 911.8
 945.2
Corporate and other 2,400.0
 2,364.6
  $6,014.1
 $6,083.9


Note 10. Leases
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 25 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.

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
  March 31, 2020 December 31, 2019
Operating lease liabilities:    
Current portion included in accrued liabilities $25.4
 $25.2
Noncurrent operating lease liabilities 231.3
 238.5
Total operating lease liabilities 256.7
 263.7
Finance lease liabilities:    
Current portion included in current maturities of long-term debt 1.1
 1.1
Long-term portion of lease liabilities in long-term debt 29.2
 29.5
Total finance lease liabilities 1
 30.3
 30.6
Total lease liabilities $287.0
 $294.3
Weighted-average remaining lease term:    
Operating leases 13 years
  
Finance leases 13 years
  
Weighted-average discount rate:    
Operating leases 5.05%  
Finance leases 5.81%  
1 Corresponding 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 March 31, Three Months Ended March 31,
  2020 2019
Operating lease cost 1
 $11.9
 $12.0
Variable lease cost 2
 0.9
 0.8
Sublease income (1.1) (1.0)
Total lease costs $11.7
 $11.8

1 Includes short-term and month-to-month lease costs, which are immaterial.
Note 11. Contingencies2 Variable 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 inAs of March 31, 2020, the normal coursematurities 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 2020 $37.8
Year Ending December 31,  
2021 34.8
2022 32.0
2023 27.1
2024 24.7
Thereafter 202.9
Total minimum lease payments 359.3
Less:  
Present value adjustment (102.6)
Operating lease liabilities $256.7

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 $1.6 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 March 31, 2020, we have had a total loss of $7.9 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 offsets in our deferred tax liability and AOCI. As of March 31, 2020, the amount of net losses we expect to reclassify from AOCI into interest expense in earnings within the next twelve months is $2.1 million. The actual amount reclassified could vary due to future changes in the fair value of the derivative. NaN amounts were reclassified from AOCI in the three months ended March 31, 2020.



Note 12. Acquisitions


In the first ninethree months of 2017,2020, we completed the following acquisitions:

On May 1, 2017, Baierl Auto Group, an eight store platform based in Pennsylvania.
On August 7, 2017, Downtown LA ("DTLA") Auto Group, a seven store platform basedFebruary 17, 2020, Sacramento Lexus and Roseville Lexus in California.


Revenue and netoperating income contributed by the 20172020 acquisitions subsequent to the date of acquisition were as follows (in thousands)millions):
Three Months Ended March 31, 2020
Revenue $12.7
Operating income —

Revenue$281,416
Net income$4,378


There were no acquisitions in the first three months of 2019.
In 2016, we completed the following acquisitions:
On January 26, 2016, Singh Subaru in Riverside, California.
On February 1, 2016, Ira Toyota in Milford, Massachusetts.
On June 23, 2016, Helena Auto Center, LLC in Helena, Montana.
On August 1, 2016, Kemp Ford in Thousand Oaks, California.
On September 12, 2016, Carbone Auto Group, a nine store platform based in New York and Vermont.
On September 28, 2016, Greiner Ford Lincoln in Casper, Wyoming.
On October 5, 2016, Woodland Hills Audi in Woodland Hills, California.
On November 16, 2016, Honolulu Ford in Honolulu, Hawaii.


All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.
 
The following tables summarize the consideration paid for the 20172020 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 $72.3

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



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


The purchase price allocations for the Baierl Auto GroupSacramento Lexus and DTLA Auto GroupRoseville Lexus 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 for the 2020 acquisitions (in millions):
  Assets Acquired and Liabilities Assumed
Inventories, net $24.7
Property and equipment, net 0.5
Other non-current assets 55.7
Floor plan notes payable (7.3)
Other long-term liabilities (1.3)
  $72.3

  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


We expect substantially all of the goodwill related to acquisitions completed in 2020 to be deductible for federal income tax purposes.

In the three and nine-monththree-month periods ended September 30, 2017,March 31, 2020 and March 31, 2019, we recorded $3.5$0.5 million and $5.7$0.2 million respectively, in acquisition relatedacquisition-related expenses as a component of selling, general and administrative expense. These expenses include costs related to current year acquisitions, as well as reserve adjustments associated with contingent consideration recorded in association with previous acquisitions. We did not have any material acquisition expenses for the same periods in 2016.expense, respectively.
 
The following unaudited proforma summary presents consolidated information as if all acquisitions in the three and nine-monththree-month periods ended September 30, 2017March 31, 2020 and 20162019, had occurred on January 1, 20162019 (in thousands,millions, except per share amounts):
  Three Months Ended March 31,
  2020 2019
Revenue $2,805.5
 $2,871.8
Net income 46.3
 56.8
Basic net income per share 1.99
 2.45
Diluted net income per share 1.97
 2.44
  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,December 2019, the FinancialFASB issued ASU 2019-12, “Income Taxes (Topic 740) - Simplifying the 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.for Income Taxes.” The new standard, as amended in July 2015,pronouncement 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 - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the updated standard, an entity should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early2020, with early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017.permitted. We do not expectare currently in the adoptionprocess of ASU 2017-04 to have a material effectevaluating the effects of this pronouncement on our consolidated financial position, results of operations or cash flows.statements.

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;
Anticipated impacts on consumer demand or governmental restrictions related to the COVID-19 pandemic or otherwise;
Expected level of business interruption due to shelter in place policies or lifting of those restrictions, and when volumes and consumer demand will return;
Continuation of our sales and services, including in-store appointments and home deliveries;
Expectations regarding our inventory levels and manufacturer and lender incentives;
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 continuedintegration, 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 monetize our investment in Shift and digital innovation;
Anticipated additions of dealership locations to our portfolio in the future;
Anticipated availability offinancial condition and liquidity, including from our cash, availability on our credit facility and unfinanced operating real estate; and
Anticipated use of proceeds from our financings;
Anticipated allocations, uses and levels of capital expenditures in the future.future;
Expectations regarding compliance with financial and restrictive covenants in our credit facility and other debt agreements;
Statements regarding furloughed employees and cost reductions; 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 20162019 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 areLithia Motors, Inc. is one of the largest automotive retailers in the highly fragmented American auto retail industry. Asand providers of November 7, 2017, we offered 30 brands of new vehicles and all major brands of used vehicles in 166 storespersonal transportation solutions in the United States, and online at over 200 websites.was ranked #265 on the Fortune 500 in 2019. As of March 31, 2020, we operated 189 stores representing 30 brands in 20 states. We sellare 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. We seek to achieve operational excellence 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 protectioninsurance 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. These six different business lines, combined with our geographic and manufacturer diversification, provide a resilient, nimble business model.



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.

Our long-term strategy and value creation for our customers, employees and shareholders remains consistent with the following elements:

Driving operational excellence, innovation and diversification
We remain focused on improving performance through increasing market share and profitability at each of our locations. By promoting an entrepreneurial model, we build strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we strive to increase market share, drive operational performance, develop high-performing teams and foster manufacturer relationships.

In 2016,response to evolving consumer preferences, we were the fifth largest public automotive retailerpragmatically invest in the U.S.,modernization that supports and expands our core business. These digital strategies combine our experienced, knowledgeable workforce with our owned inventory and physical network of stores, enabling us to be agile and adapt to consumer preferences and market specific conditions. Our investments in modernization are well under way and are taking hold with our teams as they provide digital shopping experiences, contactless test drives and home delivery or curbside pickup for vehicle purchases. Our people and these engines will be powering our future national brands overlaying our physical footprint to attract a larger population of digital consumers seeking transparent, empowered, flexible and simple buying and servicing experiences.

Our performance-based culture is geared toward an incentive-based compensation structure for a majority of our personnel. We develop pay plans that are measured by revenue. Ourbased upon various factors such as customer satisfaction, profitability and individual performance metrics. These plans serve to reward team members for creating customer loyalty, achieving store potential, developing high-performing talent, meeting and exceeding manufacturer requirements and living our core values.

We have centralized many administrative functions to drive efficiencies and streamline store-level operations. The reduction of administrative functions at our stores are located in 18 states with concentrations west of the Mississippiallows our local managers to focus on customer-facing opportunities to increase revenues and in the Northeast and offer 30 brands of new vehicles and all major brands of used vehicles.gross profit. Our operations consistare supported by regional and corporate management, as well as dedicated training and personnel development programs which allow us to share best practices across our network and develop management talent.

Growth through acquisition and network optimization
We see the growth and expansion of our physical network taking us half way to our goal of 5% national market share. Increasing our physical network to between 400 and 500 locations is expected to result in 2.5% market share. This density will allow us the ability to reach most consumers within two hours or less. Our physical network leverages our digital home solutions to complete the goal of 5% national market share. Our value-based acquisition strategy targets underperforming stores with strong franchises in desirable markets. As we integrate these stores into our existing network, we focus on increasing profitability through gaining market share, elevating the customer experience and controlling costs. With our performance management strategy, standardized information systems and centrally- and regionally-performed administrative functions, we seek to gain economies of scale from our network.

We target acquiring domestic, import and luxury storesfranchises in marketscities ranging from mid-sized regional citiesmarkets 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. We believe our disciplined approach provides us with attractive acquisition opportunities and expanded coast to coast coverage.


Thoughtful capital allocation
Our capital deployment strategy continues 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.

Current Economic Conditions
Beginning in mid-March, we experienced a significant shift in our business related to the COVID-19 pandemic. For the first two months of 2020 prior to the COVID-19 pandemic, same store new vehicle revenue increased 4%, used vehicle revenues increased 22%, F&I increased 18%, and service, body, and parts increased 6%, similar to performance we experienced in 2019. These results


continued into early March then progressively declined throughout the rest of the month as "stay home" and "shelter in place" policies (“shelter in place policies”) were established by several states. Those policies created varying levels of business interruption across our locations, as approximately 95% of our markets were impacted.

While most states have deemed our business in both service and sales an “essential business,” we began to see declines, on average, of approximately 50% in new and used vehicle sales and approximately 30% in services parts and collision centers during the later half of March. Our stores declined between 15% and 75%, other than our most restricted states, Pennsylvania and Vermont, having virtually no sales. The most stable states were Montana and Texas, with very little year-over-year change.

Most of our manufacturer partners began periodic suspension of production beginning in late March with some announcing extensions into early May. We believe our current inventory levels will allow us to continue to do business with the slow down in sales driven by the pandemic. Our teams are strategically managing inventory levels by monitoring incoming units and deferring or canceling purchases if needed. Our manufacturer partners began providing us with additional incentive support in mid-March, such as increased floor plan assistance and access to cooperative advertising funds for other expense reimbursements. In addition, our manufacturer and lending partners are providing support to retail customers through increased incentives, payment deferrals of 90-180 days, as well as 0% financing on certain vehicles and term lengths.

Our decentralized approach has created unique teams that are positioned to lead through this uncertain time. Our store leaders are able to challenge their teams to be safe, responsive and innovative in this environment with actions best aligned to their local market conditions. In our vehicle sales departments, currently we are providing varying levels of service, including normal business hours to complete closures in Pennsylvania and Vermont. Where sales are allowed, we are providing in-store appointments and home delivery through both digital and traditional solutions. All of our service, parts and collision center departments have remained open during the crisis and home offerings are providing some additional offset to the weakened demand. We will continue to adjust our operations along with changes in the current environment.

We believe that volume recoveries in all departments will be linked to the lifting or modification of shelter in place policies and
a recovery will begin as consumers transition back to work and more normal lives. In response to the decline in sales, we have adjusted staffing headcount by 37%, mainly as furloughs, and have implemented marketing, vendor and inventory cost reduction or control strategies. As of the end of our first quarter, we had not yet realized the associated cost savings and expect to see these benefits early in the second quarter. We expect to be able to have team members return to work as future volume levels recover. We are providing support for employees who are impacted by COVID-19, including by providing up to two additional weeks of paid leave and assistance with employee portion of benefits premiums.

We continue to evaluate our liquidity position and cash flows to ensure we are judiciously utilizing our cash. Our main utilization of cash is acquisitions, internal investment, including capital expenditures and shareholder return in the form of dividends, and share repurchases. We have deferred the closing on all acquisitions until the second half of 2020. Additionally, we have sought to modify the structure of the acquisitions under negotiation to gain confidence in their earnings quality and preserve capital through the leasing of real estate at competitive capitalization rates with purchase options. We have deferred approximately $65 million in planned discretionary capital expenditures and have suspended share repurchases at this time. As of March 31, 2020, our adjusted leverage ratio, calculated as net debt, excluding floor plan financing, to adjusted EBITDA, was 2.18, representing the low end of our targeted range. As of March 31, 2020, we had approximately $1 billion of potential liquidity in cash, availability on our credit facilities and unfinanced real estate.
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 insurance 1
 282,672
 3.8
 282,672
 100.0
 25.2
Service, body and parts 744,262
 10.1
 368,166
 49.5
 32.9
Fleet and other 86,883
 1.2
 4,054
 4.7
 0.4
  $7,383,479
 100.0% $1,119,944
 15.2% 100.0%
  Three Months Ended March 31,  
  2020 2019 Change
Revenues      
New vehicle retail $1,373.5
 $1,461.1
 (6.0) %
Used vehicle retail 874.4
 827.9
 5.6
Finance and insurance 121.9
 117.5
 3.7
Service, body and parts 329.9
 317.4
 3.9
Total Revenues 2,803.8
 2,849.7
 (1.6)
       
Gross profit      
New vehicle retail $78.2
 $85.9
 (9.0) %
Used vehicle retail 90.0
 84.6
 6.4
Finance and insurance 121.9
 117.5
 3.7
Service, body and parts 168.1
 159.5
 5.4
Total Gross Profit 460.9
 450.7
 2.3
       
Gross profit margins      
New vehicle retail 5.7% 5.9% (20) bps
Used vehicle retail 10.3
 10.2
 10
Finance and insurance 100.0
 100.0
 —
Service, body and parts 51.0
 50.2
 80
Total Gross Profit Margin 16.4
 15.8
 60
       
Retail units sold      
New vehicles 35,907
 39,695
 (9.5) %
Used vehicles 42,631
 40,675
 4.8
       
Average selling price per retail unit      
New vehicles $38,252
 $36,809
 3.9 %
Used vehicles 20,510
 20,353
 0.8
       
Average gross profit per retail unit      
New vehicles $2,178
 $2,165
 0.6 %
Used vehicles 2,110
 2,079
 1.5
Finance and insurance 1,552
 1,462
 6.2

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

1 Commissions reported net of anticipated cancellations.




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 2016February 2019 would be included in same store operating data beginning in September 2017,March 2020, after its first full complete comparable month of operation. The thirdfirst quarter operating results for the same store comparisons would include results for that store in only the periodmonth of SeptemberMarch for both comparable periods.

  Three Months Ended March 31,  
(Dollars in millions) 2020 2019 Change
Revenues      
New vehicle retail $1,281.5
 $1,433.6
 (10.6) %
Used vehicle retail 831.6
 809.7
 2.7
Finance and insurance 114.5
 115.3
 (0.7)
Service, body and parts 311.0
 309.3
 0.5
Total Revenues 2,637.5
 2,789.1
 (5.4)
       
Gross profit      
New vehicle retail $73.0
 $84.6
 (13.7) %
Used vehicle retail 83.7
 83.0
 0.8
Finance and insurance 114.5
 115.3
 (0.7)
Service, body and parts 158.5
 155.9
 1.7
Total Gross Profit 432.6
 442.1
 (2.1)
       
Gross profit margins      
New vehicle retail 5.7% 5.9% (20) bps
Used vehicle retail 10.1
 10.3
 (20)
Finance and insurance 100.0
 100.0
 —
Service, body and parts 51.0
 50.4
 60
Total Gross Profit Margin 16.4
 15.9
 50
       
Retail units sold      
New vehicles 33,178
 38,865
 (14.6) %
Used vehicles 40,374
 39,708
 1.7
       
Average selling price per retail unit      
New vehicles $38,625
 $36,886
 4.7 %
Used vehicles 20,597
 20,390
 1.0
       
Average gross profit per retail unit      
New vehicles $2,200
 $2,177
 1.1 %
Used vehicles 2,073
 2,091
 (0.9)
Finance and insurance 1,557
 1,468
 6.1
New Vehicle Revenue and Gross Profit
  Three Months Ended September 30, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands, except per unit amounts) 2017 2016  
Reported        
Revenue $1,553,511
 $1,297,511
 $256,000
 19.7 %
Gross profit $88,045
 $75,843
 $12,202
 16.1
Gross margin 5.7% 5.8% (10)bp
1 
 
         
Retail units sold 45,452
 38,417
 7,035
 18.3
Average selling price per retail unit $34,179
 $33,774
 $405
 1.2
Average gross profit per retail unit $1,937
 $1,974
 $(37) (1.9)
        

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

        

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

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



  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 1/100th of one percent

New vehicle sales increased 19.7% and 15.1% inDuring the three and nine-month periodsmonths ended September 30, 2017March 31, 2020, we had net income of $46.2 million, or $1.97 per share on a diluted basis, compared to net income of $56.4 million, or $2.42 per share on a diluted basis, during the same periodsperiod 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, in2019. For the three and nine-month periods ended September 30, 2017 comparedfirst two months of 2020 prior to the same periods of 2016. These volume decreases were offset by a 1.0% and 1.3% increase, respectively,COVID-19 pandemic, revenues had increased 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 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, 2017business lines compared to the same period of 2016 despite a decline2019. These results continued into early March, then progressively declined as shelter in 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 periods ended September 30, 2017 compared to the same periods of 2016. This performance compares to


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%place policies were established impacting 95% 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.locations.

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, weWe 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 decreased 10.6% for the three-month period ended March 31, 2020 compared to the same period in 2019. This was due to a decrease in unit volume of 14.6%, offset by an increase in average selling prices of 4.7%, in the three-month period ended March 31, 2020 compared to the same period of 2019.




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% 10bp  
         
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 85100 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 During the three months ended March 31, 2020, our stores sold an average of 78 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 sameper store per month, compared to 70 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,vehicles per store per month for the three and nine-monthssame period of 2019.

Used vehicle revenues for the three-month period ended September 30, 2017March 31, 2020, increased 5.6% compared to the same periodsperiod 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 of our stores sold 67 and 65 retail used vehicle units, respectively, per month.
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 2016.2019. On a same store basis, gross profitused vehicle sales for the three-month period ended March 31, 2020, increased 4.4% and 3.0%, respectively, in the three and nine-month periods ended September 30, 20172.7% as compared to the same periodsperiod of 2016, primarily2019, driven by volumean increase in our core vehicle category of 5.7%. Our core vehicle category had growth partially offset in the nine-month period by a decreaseunit sales of 3.2% with an improvement in the average gross profitselling price per unit sold. The same store gross profit per unit increased $28 and decreased $24, respectively,vehicle of 2.4% for the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020, as compared to the same periodsperiod of 2016.2019.


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% 60bp  
         
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% 10bp  
         
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 3.7% increase in finance and insurance revenue in the three-month period ended March 31, 2020, compared to the same period of 2019, was primarily due to increased volume of financing and third-party extended warranty contracts related to stores acquired in 2019. 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 flatdecreased 0.7% for the three-month period ended September 30, 2017 and increased 4.8% for the nine-month period ended September 30, 2017March 31, 2020 as compared to the same periodsperiod of 2016. The slowing in the third quarter of 20172019. This was primarily due to a decline in penetration rates and a decrease in the average financeinsurance contracts sales offset by an increase in financing and insurance amount per retail unit.third-party extended warranty contract sales. On a same store basis, our finance and insurance revenues per retail unit decreased $10 and increased $42, respectively,$89 to $1,557 in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020, compared to the same periodsperiod of 2016, mainly2019, primarily due to increasesan increase in unit volume offset by flat or slightly declining penetration rates.

Trends inservice contract penetration rates for total new and used retail vehicles sold are detailed below:of 190 bps.
  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, Bodybody 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 beencontinue to prove to be more resilient during economic downturns, when owners have tendedtend to repair their existing vehicles rather than buy new vehicles.




Our service, body, and parts salesrevenue grew in nearly all areas in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020, compared to the same periodsperiod of 2016. There are2019. The growth experienced in the three-month period ended March 31, 2020, was due to an increase in body shop and customer pay work and more late-model units in operation as new vehicle sales volumes have been increasing since 2010.operation. We believe this increase inthe increased number of units in operation will continue to benefit our service, body and parts salesrevenue in the coming years as more late-model vehicles age, and requirenecessitating repairs and maintenance.

We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts. We increasedIn the three-month period ended March 31, 2020, the largest contribution to our service, body and parts revenue growth was an increase of $0.9 million, or 4.2%, in same store customer pay business 4.3% and 6.1%, respectively, in the three and nine-month periods ended September 30, 2017body shop revenue, compared to the same periodsperiod of 2016.
2019. Same store warranty sales increased 0.1% and 5.2%customer pay revenue


grew $0.7 million, or 0.4%, respectively, in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016. Warranty sales growth slowed2019. Same store warranty revenue also grew 0.5% and parts wholesale decreased 0.7% in the third quarter of 2017, as compared to the growth experience in the nine-monththree-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 asMarch 31, 2020 compared to the same periodsperiod of 2016. Our domestic and luxury stores offset this trend, resulting in the slight increase for the quarter.2019.
 
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% and 7.8%, respectively,1.7% in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016, which is in line with our revenue growth. Our2019, primarily as a result of higher gross margins increased as our mix has shifted towardtowards customer pay, which has a higher marginmargins 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 March 31, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016 
(Dollars in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Revenues:             
Domestic $2,863,018
 $2,495,468
 $367,550
 14.7% $1,000.4
 $996.7
 $3.7
 0.4 %
Import 3,276,667
 2,777,007
 499,660
 18.0
 1,175.9
 1,191.6
 (15.7) (1.3)
Luxury 1,246,484
 1,111,215
 135,269
 12.2
 618.1
 654.9
 (36.8) (5.6)
 7,386,169
 6,383,690
 1,002,479
 15.7
 2,794.4
 2,843.2
 (48.8) (1.7)
Corporate and other (2,690) 2,477
 (5,167) NM
 9.4
 6.5
 2.9
 NM
 $7,383,479
 $6,386,167
 $997,312
 15.6% $2,803.8
 $2,849.7
 $(45.9) (1.6)%
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 %
NM – not meaningful
  Three Months Ended March 31, Increase (Decrease) % Increase (Decrease)
(Dollars in millions) 2020 2019  
Segment income1:
        
Domestic $27.8
 $19.8
 $8.0
 40.4 %
Import 24.7
 30.0
 (5.3) (17.7)
Luxury 1.6
 8.0
 (6.4) (80.0)
  54.1
 57.8
 (3.7) (6.4)
Corporate and other 46.8
 52.5
 (5.7) (10.9)
Depreciation and amortization (22.0) (19.8) 2.2
 11.1
Other interest expense (17.0) (15.3) 1.7
 11.1
Other income, net 2.3
 2.6
 (0.3) NM
Income before income taxes $64.2
 $77.8
 $(13.6) (17.5)%
  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

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 Three Months Ended March 31, Decrease % Decrease
 2017 2016  2020 2019 
Retail new vehicle unit sales:                
Domestic 13,911
 12,735
 1,176
 9.2% 10,626
 11,755
 (1,129) (9.6)%
Import 26,621
 21,467
 5,154
 24.0
 19,842
 21,821
 (1,979) (9.1)
Luxury 5,029
 4,287
 742
 17.3
 5,491
 6,192
 (701) (11.3)
 45,561
 38,489
 7,072
 18.4
 35,959
 39,768
 (3,809) (9.6)
Allocated to management (109) (72) 37
 NM
 (52) (73) (21) NM
 45,452
 38,417
 7,035
 18.3% 35,907
 39,695
 (3,788) (9.5)%
NM – Not meaningful



  Nine Months Ended
September 30,		 Increase % Increase
  2017 2016  
Retail new vehicle unit sales:        
Domestic 39,407
 35,176
 4,231
 12.0%
Import 69,643
 59,581
 10,062
 16.9
Luxury 13,168
 12,667
 501
 4.0
  122,218
 107,424
 14,794
 13.8
Allocated to management (274) (199) 75
 NM
  121,944
 107,225
 14,719
 13.7%


Domestic
A summary of financial information for our Domestic segment follows:
  Three Months Ended
March 31,		 Increase (Decrease) % Increase (Decrease)
(Dollars in millions) 2020 2019  
Revenue:        
New vehicle retail $470.6
 $492.4
 $(21.8) (4.4)%
Used vehicle retail 327.7
 300.4
 27.3
 9.1
Used vehicle wholesale 26.1
 29.6
 (3.5) (11.8)
Finance and insurance 45.1
 41.8
 3.3
 7.9
Service, body and parts 117.2
 115.4
 1.8
 1.6
Fleet and other 13.7
 17.1
 (3.4) NM
  $1,000.4
 $996.7
 $3.7
 0.4
Segment income $27.8
 $19.8
 $8.0
 40.4
Retail new vehicle unit sales 10,626
 11,755
 (1,129) (9.6)
NM - not meaningful
  Three Months Ended
September 30,		 Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016  
Revenue $1,008,310
 $893,156
 $115,154
 12.9 %
Segment income $31,141
 $32,292
 $(1,151) (3.6)
Retail new vehicle unit sales 13,911
 12,735
 1,176
 9.2

  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Revenue $2,863,018
 $2,495,468
 $367,550
 14.7%
Segment income $84,440
 $84,420
 $20
 —
Retail new vehicle unit sales 39,407
 35,176
 4,231
 12.0


Our Domestic segment revenue increased 12.9% and 14.7%, respectively,0.4% in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016. Since September 2016, we acquired five additional domestic brand stores, which contributed2019 due to increasesan increase in new vehicle, used vehicle retail, finance and insurance, and service, body and parts sales.revenues, offset by a decrease in new vehicle revenues.


Our Domestic segment income decreased 3.6% and was unchanged, respectively,increased 40.4% in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016. In the three-months ended September 30, 2017, the decrease in segment income was2019, primarily due to gross profitsprofit growth of 14.4%5.5%, in line with revenues,partially offset by growth in SG&A growth of 17.7% due to expense growth exceeding the rate2.3%. Total SG&A as a percent of gross profit growth in all categories. Our Domestic segment experienced higher SG&A expenses in all areas. Additionally, floor plan interest expense increased 57.1%, comprised of approximately 26% relateddecreased from 78.1% to increased volume due to acquisitions, 9% related to increased volume at existing stores and 22% related to rising interest rates. For75.7% for the ninethree months ended September 30, 2017, segment income was flat despite growth in both revenue and gross profit. Growth in SG&A expenses of 18.6% and floor plan interest expense of 39.6% were the main drivers, offsetting all revenue growth resulting in flat segment income overMarch 31, 2020, compared to the same period of 2016.2019. The decrease for the three-month period ended March 31, 2020 was primarily driven by a decrease in personnel costs as a percentage of gross profit of 160 bps and a decrease in rent and other costs as a percentage of gross profit of 30 bps, each compared to the same period of 2019. Floor plan interest expense for domestic stores decreased 16.2% due to lower interest rates and decreased volume for the three-month period ended March 31, 2020, compared to the same period of 2019.




Import
A summary of financial information for our Import segment follows:
 Three Months Ended
September 30,		 Increase % Increase Three Months Ended
March 31,		 Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016 
Revenue $1,209,955
 $983,947
 $226,008
 23.0%
(Dollars in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Revenue:     
New vehicle retail $600.3
 $632.6
 $(32.3) (5.1)%
Used vehicle retail 354.8
 341.3
 13.5
 4.0
Used vehicle wholesale 26.1
 27.9
 (1.8) (6.5)
Finance and insurance 58.1
 54.8
 3.3
 6.0
Service, body and parts 124.8
 117.7
 7.1
 6.0
Fleet and other 11.8
 17.3
 (5.5) NM
 $1,175.9
 $1,191.6
 $(15.7) (1.3)
Segment income $36,954
 $32,934
 $4,020
 12.2
 $24.7
 $30.0
 $(5.3) (17.7)
Retail new vehicle unit sales 26,621
 21,467
 5,154
 24.0
 19,842
 21,821
 (1,979) (9.1)

NM - not meaningful
  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Revenue $3,276,667
 $2,777,007
 $499,660
 18.0%
Segment income $91,365
 $86,878
 $4,487
 5.2
Retail new vehicle unit sales 69,643
 59,581
 10,062
 16.9

Our Import segment revenue increased 23.0% and 18.0%, respectively,decreased 1.3% in the threethree-month period ended March 31, 2020 compared to the same period of 2019 due to a decrease in new vehicle revenue, partially offset by increases in used vehicle retail, finance and nine-month periodsinsurance, and service, body and parts revenues.

Import segment income decreased 17.7% in the three-month period ended September 30, 2017March 31, 2020 compared to the same period of 2019 primarily due to SG&A expense growth of 9.8%, partially offset by gross profit growth of 4.5%. Total import SG&A as a percent of gross profit increased from 78.7% to 82.7% for the three-month period ended March 31, 2020 compared to the same period of


2019. The increase for the three-month period ended March 31, 2020 was primarily driven by an increase in personnel costs as a percentage of gross profit of 250 bps compared to the same periods of 20162019. Floor plan interest expense for import stores decreased 8.2% due to increases in all major business lines. Since September 2016, we added eight import brand stores.

Segment incomelower interest rates and decreased volume for our Import segment increased 12.2% and 5.2%, respectively, in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020, compared to the same periodsperiod of 2016. In the three months ended September 30, 2017, the 12.2% growth in segment income was due to gross profits growth of 22.3%, in line with revenues, offset by SG&A expense growth of 23.2% mainly related to rising facility cost. Floor plan interest expense increased 73.6% and was a significant contributor to the slower growth in segment income. Acquisitions, resulting in increased volumes, comprised 27.5% of this increase, increased inventory levels at existing stores increased floor plan interest expense 14.2% and rising interest rates increased the expense 31.9%. For the nine months ended September 30, 2017, segment income grew 5.2% and lagged our revenue growth. Gross profit growth was 16.3% and lagged behind revenue growth for the period. Additionally, growth in SG&A expenses was 17.7%, slightly higher than the growth in gross profit, and floor plan interest expense increased 55.6% due to increased inventory levels and rising interest rates. The net effect of these factors was slower segment income growth compared to revenue growth.2019.


Luxury
A summary of financial information for our Luxury segment follows:
 Three Months Ended
September 30,		 Increase % Increase Three Months Ended
March 31,		 Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016 
Revenue $463,518
 $392,537
 $70,981
 18.1%
(Dollars in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Revenue:     
New vehicle retail $301.0
 $339.4
 $(38.4) (11.3)%
Used vehicle retail 191.1
 186.3
 4.8
 2.6
Used vehicle wholesale 14.2
 19.9
 (5.7) (28.6)
Finance and insurance 16.9
 16.5
 0.4
 2.4
Service, body and parts 83.4
 79.1
 4.3
 5.4
Fleet and other 11.5
 13.7
 (2.2) NM
 $618.1
 $654.9
 $(36.8) (5.6)
Segment income $7,515
 $7,423
 $92
 1.2
 $1.6
 $8.0
 $(6.4) (80.0)
Retail new vehicle unit sales 5,029
 4,287
 742
 17.3
 5,491
 6,192
 (701) (11.3)

NM - not meaningful
  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Revenue $1,246,484
 $1,111,215
 $135,269
 12.2%
Segment income $22,542
 $21,736
 $806
 3.7
Retail new vehicle unit sales 13,168
 12,667
 501
 4.0


Our Luxury segment revenue increased 18.1% and 12.2%, respectively,decreased 5.6% in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 20162019 due to a decrease in new vehicle revenue, partially offset by increases in used vehicle retail finance and insurance and service, body and parts sales. Inrevenues. Our highest concentration of Luxury segment stores reside in states which have had the past twelve months, we added five luxury brand stores.tightest shelter in place restrictions due to COVID-19. As a result, our Luxury segment saw steeper declines compared to our Domestic and Import segments.
 


Our Luxury segment income increased 1.2% and 3.7%, respectively,decreased 80.0% for the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016. In the three months ended September 30, 2017, the 1.2% growth in segment income was2019, primarily due to gross profit growth of 21.9%, offset by an SG&A expense growth of 4.9% and gross profit reduction of 3.3%. The Luxury segment gross profit reduction for the three-month period ended March 31, 2020, compared to the same period of 2019, was primarily due to a decrease in new vehicle retail volume of 11.3% and a 15.9% decrease in average new vehicle gross profit per unit. Total Luxury SG&A as a percent of gross profit increased from 83.4% to 90.5% for the three-month period ended March 31, 2020 compared to the same period of 2019. Detriments were seen in all SG&A categories as a percentage of gross profit, led by a 270 bps increase of 22.7%, mainly related to advertising expense.in personnel costs. Floor plan interest expense increase of 65.2%, which was comprised of 33.1% related to increased volume from acquisitions, 7.8% related to increased volume at existing stores and 24.3% related to rising interest rates. These factors resulted in slower Luxury segment income growthdecreased 9.4% for the three-month period ended March 31, 2020 compared to revenue growth. For the nine months ended September 30, 2017, segment income grew 3.7% and lagged our revenue growth for that period. Gross profit growth was 13.5%, slightly better than revenue growth for the period. This was offset by growth in SG&A expensesame period of 13.7% and floor plan interest expense growth of 37.3%2019, due to risinglower interest rates and increasing inventories. These factors resulted in slower segment income growth than revenue growth.decreased volume.


Corporate and Other
Revenues attributable to Corporate and other include the results of operations of our stand-alone body shop,shops, offset by certain unallocated reservereserves and elimination adjustments related to vehicle sales.
 Three Months Ended
September 30,		 Increase (Decrease) % Increase (Decrease) Three Months Ended
March 31,		 Increase (Decrease) % Decrease
(Dollars in thousands) 2017 2016 
(Dollars in millions) 2020 2019 Increase (Decrease) % Decrease
Revenue, net $(1,441) $327
 $(1,768) (540.7)% $9.4
 $6.5
 
Segment income $34,541
 $26,794
 $7,747
 28.9
 $46.8
 $52.5
 $(5.7) (10.9)%

NM - not meaningful
  Nine Months Ended
September 30,		 Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016  
Revenue, net $(2,690) $2,477
 $(5,167) (208.6)%
Segment income $111,281
 $81,881
 $29,400
 35.9

The decreasesincrease in Corporate and other revenue in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020, compared to the same periodsperiod of 2016 were2019 was primarily related to increased finance and insurance incentives received that were not specifically related to any particular segment, and changes to certain reserves that arewere not specifically identified with our domestic, import or luxury segment revenue, such as our reserve for revenue reversals associated with unwound vehicle sales, and elimination of revenues associated with internal corporate vehicle purchases and leases with our stores. Corporate and other revenues were impacted in 2017 from an increase in internal corporate vehicle purchases and leases with our stores resulting in negative revenues for the three and nine month-periods ended September 30, 2017.
 
Segment income attributable to Corporate and other includes amounts associated with the operating income from our stand-alone body shop,shops and certain internal corporate expense allocations that reduce reportable segment income but increase Corporate and other income. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the


capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions. Segment income attributable to Corporate and other also includes gains on the divestiture of stores.


Corporate and other segment income increased $7.7decreased $5.7 million and $29.4 million, respectively, for the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016. These increases were2019, primarily due to the addition of 18 storesan increase in the past twelve months, reducedpersonnel costs, partially offset by certain unusual expenses. The three and nine-month periods ended September 30, 2017 included acquisition expenses of $3.5 million and $5.7 million, respectively, and an insurance reserve charge of $1.7 million and $5.6 million, respectively, related storm damages. The 2016 results included impairment charges of $3.5 million and $10.5 million, respectively, for the three and nine-month periods ended September 30, 2016 related to an equity investment.a decrease in rent expense.


Asset Impairments
Asset impairments consist of the following:
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
(Dollars in thousands) 2017 2016 2017 2016
Equity-method investment $—
 $3,498
 $—
 $10,494
  Three Months Ended
March 31,
(Dollars in millions) 2020 2019
Long-lived assets $—
 $0.5



TheNo impairments were recognized in the first quarter of 2020. During the first quarter of 2019, we recorded an asset impairments recorded in 2016 wereimpairment of $0.5 million associated with our equity-method investmentcertain real properties which were under contract to sell, and were ultimately sold in a limited liability company. We evaluated this equity-method investment at the end of each reporting period and identified indications of loss resulting from other than temporary declines in value. We exited this equity-method investment in December 2016. See Note 9 of the Condensed Notes to the Consolidated Financial Statements for additional information.same year.


Selling, General and Administrative Expense (“SG&A”)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
  Three Months Ended September 30, Increase % Increase
(Dollars in thousands) 2017 2016  
Personnel $182,443
 $151,801
 $30,642
 20.2%
Advertising 24,572
 20,110
 4,462
 22.2
Rent 8,768
 6,694
 2,074
 31.0
Facility costs 14,992
 12,488
 2,504
 20.1
Other 51,466
 37,041
 14,425
 38.9
Total SG&A $282,241
 $228,134
 $54,107
 23.7%
 Three Months Ended September 30, Increase Three Months Ended March 31, Increase % Increase
As a % of gross profit 2017 2016 
(Dollars in millions) 2020 2019 Increase % Increase
Personnel 45.3% 45.0% 30bp $228.5
 $212.1
 
Advertising 6.1
 6.0
 10
 27.6
 26.5
 1.1
 4.2
Rent 2.2
 2.0
 20
 10.2
 10.2
 —
 —
Facility costs 3.7
 3.7
 —
Facility costs1
 20.1
 18.4
 1.7
 9.2
Loss on sale of assets 0.1
 —
 0.1
 NM
Other 12.7
 10.9
 180
 59.5
 54.6
 4.9
 9.0
Total SG&A 70.0% 67.6% 240bp $346.0
 $321.8
 $24.2
 7.5%

1 Includes variable lease costs related to the reimbursement of actual costs incurred by our lessors for common area maintenance, property taxes and insurance on leased property.
NM - not meaningful
  Three Months Ended March 31, Increase (Decrease)
As a % of gross profit 2020 2019 
Personnel 49.6% 47.1% 250bp
Advertising 6.0
 5.9
 10
Rent 2.2
 2.3
 (10)
Facility costs 4.4
 4.1
 30
Loss on sale of assets —
 —
 —
Other 12.9
 12.0
 90
Total SG&A 75.1% 71.4% 370bp


  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Personnel $513,439
 $445,053
 $68,386
 15.4%
Advertising 67,516
 59,229
 8,287
 14.0
Rent 23,216
 20,040
 3,176
 15.8
Facility costs 44,371
 30,920
 13,451
 43.5
Other 133,761
 107,524
 26,237
 24.4
Total SG&A $782,303
 $662,766
 $119,537
 18.0%
  Nine Months Ended
September 30,		 Increase (Decrease)
As a % of gross profit 2017 2016 
Personnel 45.8% 46.0% (20)bp
Advertising 6.0% 6.1% (10)
Rent 2.1% 2.1% —
Facility costs 4.0% 3.2% 80
Other 12.0% 11.2% 80
Total SG&A 69.9% 68.6% 130bp


SG&A expense increased 23.7% and 18.0%, respectively, in the three and nine-month periods ended September 30, 2017 compared to the same periodsas a percentage of 2016. Overall, increases in SG&A expense were due primarily to growth through acquisitions. Ingross profit was 75.1% for the three-month period ended September 30, 2017March 31, 2020 compared to 71.4% for the same period of 2019. SG&A expense increased 7.5% in the three-month period ended March 31, 2020 compared to the same period in 2016, increases relatedof 2019. Overall, SG&A expense increased due to rent expenses and other expenses outpaced the overall increase. Increased rent expensepersonnel costs in the three-month period ended September 30, 2017March 31, 2020 compared to the same period of 2019.

On a same store basis and excluding non-core charges, SG&A as a percentage of gross profit was a result of our


recent acquisitions in the current quarter with leased properties. Other expenses in74.8% for the three-month period ended September 30, 2017 include acquisition expensesMarch 31, 2020 compared to 70.8% for the same period of $3.5 million, storm insurance reserve charges of $1.7 million and other reserve adjustments related to our auto loan receivables and medical insurance. For the nine-month period ended September 30, 2017, facility cost and other expenses increased more significantly than other components of SG&A. The2019. This increase in facility costs was mainlyprimarily due to lowerincreased personnel costs as a result of a $3.4 million gain for property-related insurance proceeds and a $1.1 million gain on the salereduction of stores in the first quarter 2016. For the nine-month period ended September 30, 2017, other expenses included $5.7 million of acquisition expenses, a $5.6 million increase in storm insurance reserve related charges and increases to other reserves related to our auto loan receivables.gross profit.


SG&A expense adjusted for non-core charges was as follows (in thousands)millions):
 Three Months Ended
September 30,		 Increase % Increase Three Months Ended
March 31,		 Increase % Increase
(Dollars in thousands) 2017 2016 
(Dollars in millions) 2020 2019 Increase % Increase
Personnel $182,443
 $151,803
 $30,640
 20.2% $228.5
 $212.1
 
Advertising 24,572
 20,110
 4,462
 22.2
 27.6
 26.5
 1.1
 4.2
Rent 8,768
 6,694
 2,074
 31.0
 10.2
 10.2
 —
 —
Adjusted facility costs 14,992
 12,489
 2,503
 20.0
Facility costs1
 20.1
 18.4
 1.7
 9.2
Adjusted loss on sale of assets 0.2
 —
 0.2
 NM
Adjusted other 46,246
 37,038
 9,208
 24.9
 58.2
 54.5
 3.7
 6.8
Adjusted total SG&A $277,021
 $228,134
 $48,887
 21.4% $344.8
 $321.7
 $23.1
 7.2%
1 Includes variable lease costs related to the reimbursement of actual costs incurred by our lessors for common area maintenance, property taxes and insurance on leased property.
NM - not meaningful

 Three Months Ended
September 30,		 Increase Three Months Ended
March 31,		 Increase (Decrease)
As a % of gross profit 2017 2016  2020 2019 
Personnel 45.3% 45.0% 30bp 49.6% 47.1% 250bp
Advertising 6.1% 6.0% 10
 6.0
 5.9
 10
Rent 2.2% 2.0% 20
 2.2
 2.3
 (10)
Adjusted facility costs 3.7% 3.7% —
Facility costs 4.4
 4.1
 30
Adjusted loss on sale of assets —
 —
 —
Adjusted other 11.4% 10.9% 50
 12.6
 12.0
 60
Adjusted total SG&A 68.7% 67.6% 110bp 74.8% 71.4% 340bp


  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Personnel $513,439
 $445,055
 $68,384
 15.4%
Advertising 67,516
 59,229
 8,287
 14.0%
Rent 23,216
 20,040
 3,176
 15.8%
Adjusted facility costs 44,371
 32,007
 12,364
 38.6%
Adjusted other 122,526
 105,616
 16,910
 16.0%
Adjusted total SG&A $771,068
 $661,947
 $109,121
 16.5%

  Nine Months Ended
September 30,		 Increase (Decrease)
As a % of gross profit 2017 2016 
Personnel 45.8% 46.0% (20)bp
Advertising 6.0% 6.1% (10)
Rent 2.1% 2.1% —
Adjusted facility costs 4.0% 3.3% 70
Adjusted other 10.9% 11.0% (10)
Adjusted total SG&A 68.8% 68.5% 30bp



Adjusted SG&A for the three months ended September 30, 2017 excludes acquisition expenses of $3.5$0.8 million and ain storm insurance reserve related charge of $1.7 million. Forcharges, $0.5 million in acquisition-related expenses, and a $0.1 million net gain on store disposals in the three monthsthree-month period ended September 30, 2016 there were no adjustments to SG&A. March 31, 2020.

Adjusted SG&A for the nine month period ended September 30, 2017 excludes $5.7$0.2 million of acquisition expenserelated expenses, and $5.6a $0.1 million of storm insurance related charges. Innet loss on store disposals in the nine monththree-month period ended September 30, 2016 adjusted SG&A excludes a $1.1 million gain for the disposal of stores, offset by a $1.9 million legal reserve adjustment. March 31, 2019.

See “Non-GAAP Reconciliations” for more details.


Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment, and signage, and amortization of certain intangible assets, including customer lists and non-compete agreements.lists.
 Three Months Ended September 30, Increase % Increase Three Months Ended March 31, Increase % Increase
(Dollars in thousands) 2017 2016 
(Dollars in millions) 2020 2019 Increase % Increase
Depreciation and amortization $14,828
 $12,206
 $2,622
 21.5% $22.0
 $19.8
 


  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Depreciation and amortization $41,598
 $36,372
 $5,226
 14.4%


The increasesincrease of 11.1% in depreciation and amortization infor the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016 were2019 was primarily due to capital expenditures and acquisitions that occurred since September 30, 2016. Our largestin 2019. In the first quarter of 2020, we invested $41.6 million in capital investments were related to expanding and improving facilities subsequent to the acquisition of stores, as well as investments in improvements at our existing facilities.expenditures. These investments increasealso increased the amount of depreciable assetsdepreciation expense in the three-month period ended March 31, 2020. See the discussion under “Liquidity and amortizable expenses. In the full year of 2016 and the first nine months of 2017, we had capital expenditures of $100.8 million and $72.2 million, respectively.Capital Resources” for additional information.


Operating Margin
Operating income as a percentage of revenue, or operating margin, was as follows:
 Three Months Ended
September 30,		 Nine Months Ended
September 30,		 Three Months Ended
March 31,
 2017 2016 2017 2016 2020 2019
Operating margin 4.0% 4.1% 4.0% 4.0% 3.3% 3.8%
Operating margin adjusted for non-core charges 1
 4.1% 4.3% 4.2% 4.2% 3.4% 3.8%

1 See “Non-GAAP Reconciliations” for more details.
 
Operating margin declined slightlydecreased 50 bps in the three monthsthree-month period ended September 30, 2017March 31, 2020 compared to the same period in 2016 and was consistent with prior year2019. The decrease in operating margin for the nine monthsthree-month period ended September 30, 2017. Adjusting for non-core charges, as detailed belowMarch 31, 2020, was primarily due to an overall increase in Non-GAAP Reconciliations, adjusted operatingSG&A, partially offset by an increase in gross margin declined slightly in the three months ended September 30, 2017 compared to the same period in 2016 and was consistent with the prior year for the nine months ended September 30, 2017. Our recent acquisitions of the Baierl Auto Group and DTLA Auto Group impacted our operating margin as we continue to integrate these stores into our cost structure. We continue to focus on cost control, which allows us to leverage our cost structure in an environment of improving sales.2019.


Floor Plan Interest Expense and Floor Plan Assistance

 Three Months Ended
September 30,		   Nine Months Ended
September 30,		   Three Months Ended
March 31,		  
(Dollars in thousands) 2017 2016 % Change 2017 2016 % Change
(Dollars in millions) 2020 2019 % Change
Floor plan interest expense (new vehicles) 10,629
 6,186
 71.8% 28,013
 18,304
 53.0% $14.0
 $18.1
 (22.7)%




Floor plan interest expense increased $4.4decreased $4.1 million and $9.7 million, respectively, in the three and nine-month periodsthree-month period ended September 30, 2017March 31, 2020 compared to the same periodsperiod of 2016.2019. The 72% increase22.7% decrease in floor plan interest expense for the three-month period ended September 30, 2017March 31, 2020, compared to the same period in 2016 was due2019 includes a 9.4% decrease related to a 31% increasedecrease in same store inventory levelslevels; a 2.7% decrease related to acquisitions, a 22% increasedivestiture volume, net of increases in existing store inventory levels,acquisition volume; and a 19% increase10.6% decrease related to increasingdecreased LIBOR rates as compared to the same period of 2016. The 53% increase in floor plan interest expense for the nine-month period ended September 30, 2017 compared to the same period in 2016 was due to a 21% increase related to acquisitions, an 17% due to increasing inventory levels at existing stores and a 15% increase due to increasing LIBOR rates.2019.

Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistanceinventory and is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.


The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned.
  Three Months Ended March 31,   %
(Dollars in millions) 2020 2019 Change Change
Floor plan interest expense (new vehicles) $14.0
 $18.1
 $(4.1) (22.7)%
Floor plan assistance (included as an offset to cost of sales) (14.9) (15.1) 0.2
 (1.3)
Net new vehicle carrying costs $(0.9) $3.0
 $(3.9) NM
NM - not meaningful
  Three Months Ended September 30,   %
(Dollars in thousands) 2017 2016 Change Change
Floor plan interest expense (new vehicles) $10,629
 $6,186
 $4,443
 71.8 %
Floor plan assistance (included as an offset to cost of sales) (15,130) (12,044) (3,086) 25.6
Net new vehicle carrying costs $(4,501) $(5,858) $1,357
 (23.2)%



  Nine Months Ended
September 30,		   %
(Dollars in thousands) 2017 2016 Change Change
Floor plan interest expense (new vehicles) $28,013
 $18,304
 $9,709
 53.0 %
Floor plan assistance (included as an offset to cost of sales) (40,186) (33,614) (6,572) 19.6
Net new vehicle carrying costs $(12,173) $(15,310) $3,137
 (20.5)%


Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used and service loaner vehicle inventory financing facilitycommitments, and our revolving line of credit.
 Three Months Ended September 30, Increase % Increase Three Months Ended March 31, Increase (Decrease) % Increase (Decrease)
(Dollars in thousands) 2017 2016 
(Dollars in millions) 2020 2019 Increase (Decrease) % Increase (Decrease)
Mortgage interest $4,964
 $3,787
 $1,177
 31.1
 $6.6
 $6.9
 
Other interest 5,092
 1,939
 3,153
 162.6
 10.8
 9.0
 1.8
 20.0
Capitalized interest (151) (79) 72
 91.1
 (0.4) (0.6) (0.2) NM
Total other interest expense $9,905
 $5,647
 4,258
 75.4% $17.0
 $15.3
 $1.7
 11.1 %

  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Mortgage interest $14,049
 $11,034
 $3,015
 27.3%
Other interest 10,040
 5,889
 4,151
 70.5
Capitalized interest (344) (315) 29
 9.2
Total other interest expense $23,745
 $16,608
 7,137
 43.0%

The increases of $4.3 million and $7.1 million, respectively, in other interest expense in the three and nine-month periods ended September 30, 2017 compared to the same periods of 2016 were primarily due to higher volumes of borrowing on our credit


facility and higher mortgage interest due to additional mortgage financings and increased interest rates. In July 2017, we issued $300 million in 5.25% Senior Notes, which contributed $3.0 million of additional interest expense in the third quarter of 2017.

NM - not meaningful
Other Income (Expense), Net
  Three Months Ended September 30, Increase % Increase
(Dollars in thousands) 2017 2016  
Other Income (Expense), net $1,125
 $(1,513) $2,638
 NM
  Nine Months Ended
September 30,		 Increase % Increase
(Dollars in thousands) 2017 2016  
Other Income (Expense), net $11,357
 $(4,534) $15,891
 NM

Other income (expense), net ininterest expense for the nine-monththree-month period ended September 30, 2017 included a $9.1March 31, 2020 increased $1.7 million, gainprimarily related to legal settlementsthe additional interest expense associated with OEMs recordedthe senior notes issued in the first quarter of 2017. Other income (expense), net in 2016 included the gains and losses related to equity-method investments, which we exited in December 2016.2019.


Income Tax Provision
Our effective income tax rate was as follows:
  Three Months Ended
September 30,		 Nine Months Ended
September 30,
  2017 2016 2017 2016
Effective income tax rate 40.0% 32.5% 39.1% 33.0%
Effective income tax rate excluding tax credits generated through our equity-method investment and other non-core items 1
 40.3% 39.3% 39.1% 39.3%

1 See “Non-GAAP Reconciliations” for more details.
  Three Months Ended
March 31,
  2020 2019
Effective income tax rate 28.0% 27.5%
 
Our 2016effective income tax rate for the three-month period ended March 31, 2020 was positively affected by new marketsexcess tax credits that were generated through our equity-method investment with U.S. Bancorp Community Development Corporation. Ourbenefits on stock awards vesting in the current period and negatively affected by an increase in the current state effective tax ratesrate, primarily due to enactment of the Oregon Corporate Activity Tax beginning January 1, 2020. We estimate our annual effective tax rate, excluding non-core charges, to be 29.0%.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.  The CARES Act, among other items, includes modifications to federal net operating loss rules, the business interest deduction limitation, and the bonus depreciation eligibility of qualified improvement property. The income tax impact of the CARES Act was immaterial for the three and nine-month periods ended September 30, 2017 were negatively impacted by an increasing presence in states with higher income tax rates. Our effective tax rate for the nine-monthmonth period ended September 30, 2017 was favorably impacted by excess tax benefits relatedMarch 31, 2020. We will continue to our stock-based compensation as a resultmonitor the potential impacts of the adoption of new guidance that was applied prospectively beginning in 2017. See Note 13 of the Condensed Notes to the Consolidated Financial Statements for additional information.this legislation on future periods.
Excluding the tax credits generated by our equity-method investment and adjusting for other non-core items, our effective tax rate was slightly impacted by the recognition of excess tax benefits related to our stock-based compensation offset by our increasing presence in states with higher state income tax rates.


Non-GAAP Reconciliations
Non-GAAP measures do not have definitions under GAAP and may be defined differently by and not comparable to similarly titled measures used by other companies. As a result, we review any non-GAAP financial measures in connection with a review of the most directly comparable measures calculated in accordance with GAAP. We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures. We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations because they exclude adjustments for items not related to our ongoing core business operations and other non-cash adjustments,items, and improves the period-to-period comparability of our results from the core business operations. We use these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facility and in communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.



The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations:Operations.



 Three Months Ended September 30, 2017 Three Months Ended March 31, 2020
(Dollars in Thousands, Except per Share Amounts) As reported Insurance reserves Acquisition expenses 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 $282,241
 $(1,704) $(3,516) $277,021
 $346.0
 $(0.5) $0.1
 $(0.8) $344.8
Operating income 105,952
 1,704
 3,516
 111,172
 92.9
 0.5
 (0.1) 0.8
 94.1
                  
Income before income taxes $86,543
 $1,704
 $3,516
 $91,763
 $64.2
 $0.5
 $(0.1) $0.8
 $65.4
Income tax provision (34,657) (943) (1,380) (36,980) (18.0) (0.1) —
 (0.2) (18.3)
Net income $51,886
 $761
 $2,136
 $54,783
 $46.2
 $0.4
 $(0.1) $0.6
 $47.1
                  
Diluted net income per share $2.07
 $0.03
 $0.08
 $2.18
 $1.97
 $0.02
 $—
 $0.02
 $2.01
Diluted share count 25,076
       23.5
        
  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
(Dollars in thousands, except per share amounts) As reported Insurance reserves Acquisition expenses OEM settlement Adjusted
Selling, general and administrative $782,303
 $(5,582) $(5,653) $—
 $771,068
Operating income 296,043
 5,582
 5,653
 —
 307,278
Other (expense) income, net 11,357
 —
 —
 (9,111) 2,246
          

Income (loss) before income taxes $255,642
 $5,582
 $5,653
 $(9,111) $257,766
Income tax (provision) benefit (99,829) (2,174) (2,201) 3,423
 (100,781)
Net income (loss) $155,813
 $3,408
 $3,452
 $(5,688) $156,985
           
Diluted net income (loss) per share $6.19
 $0.14
 $0.14
 $(0.23) $6.24
Diluted share count 25,158
        
  Three Months Ended March 31, 2019
(Dollars in millions, except per share amounts) As reported Acquisition expenses Net disposal gain on sale of stores Asset impairments Adjusted
Asset impairment $0.5
 $—
 $—
 $(0.5) $—
Selling, general and administrative 321.8
 (0.2) 0.1
 —
 321.7
Operating income 108.6
 0.2
 (0.1) 0.5
 109.2
           
Income before income taxes $77.8
 $0.2
 $(0.1) $0.5
 $78.4
Income tax provision (21.4) (0.1) —
 (0.1) (21.6)
Net income $56.4
 $0.1
 $(0.1) $0.4
 $56.8
           
Diluted net income per share $2.42
 $0.01
 $—
 $0.01
 $2.44
Diluted share count 23.2
        


  Nine Months Ended September 30, 2016
(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) $—
 $—
Selling, general and administrative 662,766
 1,087
 —
 (1,906) 661,947
Operating Income (expense) 256,847
 (1,087) 10,494
 1,906
 268,160
Other (expense) income, net (4,534) —
 6,197
 —
 1,663
          

Income (loss) before income taxes $217,401
 $(1,087) $16,691
 $1,906
 $234,911
Income tax (provision) benefit (71,662) 426
 (20,374) (747) (92,357)
Net income (loss) $145,739
 $(661) $(3,683) $1,159
 $142,554
           
Diluted net income (loss) per share $5.69
 $(0.03) $(0.14) $0.05
 $5.57
Diluted share count 25,598
        


Liquidity and Capital Resources
We manage our liquidity and capital resources to fund our operating, investing and financing activities. We rely primarily on cash flows from operations and borrowings under our credit facilities or in capital markets as the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and fulfill contractual obligations. Remaining funds are used for acquisitions, investment in innovation, debt retirement, cash dividends, share repurchases and general business purposes.
 
Available Sources
Below is a summary of our immediately available funds:
  As of September 30, Increase % Increase
(Dollars in thousands) 2017 2016  
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%
Cash flows generated by operating activities and borrowings under our credit facility and other types of debt are our most significant sources of liquidity. WeAs of March 31, 2020, we had $56.6 million in cash, $338.8 million in availability under revolving lines of credit, and $162.9 million in availability under our used and service loaner vehicle financing commitments. In addition, we also have the ability to raise funds through mortgaging real estate. As of September 30, 2017, our unencumbered owned operating real estate had a book value of $282 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained additional funds of approximately $211 million at September 30, 2017;estate; however, no assurances can be provided that the appraised value of these operating properties will match or exceed their book values or that this capital source will be available on terms acceptable to us.
 
In July 2017, we issued $300 million in aggregate principal amount of 5.25% senior notes due 2025 in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. We used the net proceeds for general corporate purposes, including funding acquisitions, capital expenditures and debt repayment.

In addition to the above sources of liquidity, potential sources include the placement of subordinated debt or loans, the sale of equity securities and the sale of stores or other assets. We evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.
 




Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table summarizes our cash flows:
 Nine Months Ended September 30, Increase (Decrease) Three Months Ended March 31, Increase (Decrease)
(Dollars in thousands) 2017 2016 in Cash Flow
(Dollars in millions) 2020 2019 in Cash Flow
Net cash provided by operating activities $260,536
 $194,240
 $66,296
 $121.7
 $77.2
 $44.5
Net cash used in investing activities (464,917) (289,484) (175,433) (118.3) (35.3) (83.0)
Net cash provided by financing activities 192,676
 74,352
 118,324
Net cash used in financing activities (30.8) (28.5) (2.3)
 
Operating Activities
Cash provided by operating activities for the nine monthsthree-month period ended September 30, 2017March 31, 2020, increased $66.3$44.5 million compared to the same period of 2016,2019, primarily related to changesan increase in inventory.collections on trade receivables, offset by a decrease in borrowings of floor plan notes payable and a decrease in accrued liabilities related to compensation based accruals, compared to the same period of 2019.
 
Borrowings from and repayments to our syndicated lending groupcredit facility related to our new vehicle inventory floor plan financing are presented as financing activities. To better understand the impact of changes in inventory and the associated financing, we also consider our adjusted net cash provided by operating activities to include borrowings or repayments associated with our new vehicle floor plan credit facility.commitment.


Adjusted net cash provided by operating activities is presented below (in thousands)millions):
  Nine Months Ended September 30, Increase (Decrease)
(Dollars in thousands) 2017 2016 in Cash Flow
Net cash provided by operating activities – as reported $260,536
 $194,240
 $66,296
Add: Net borrowings on floor plan notes payable, non-trade 34,056
 93,817
 (59,761)
Less: Borrowings on floor plan notes payable, non-trade associated with acquired new vehicle inventory (85,527) (88,147) 2,620
Net cash provided by operating activities – adjusted $209,065

$199,910

$9,155
Inventories are the most significant component of our cash flow from operations. As of September 30, 2017, our new vehicle days supply was 69, or one day higher than our days supply as of December 31, 2016. Our days supply of used vehicles was 63 days as of September 30, 2017, or seven days higher than our days supply as of December 31, 2016. We calculate days supply of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
  Three Months Ended March 31, Increase (Decrease)
(Dollars in millions) 2020 2019 in Cash Flow
Net cash provided by operating activities – as reported $121.7
 $77.2
 $44.5
Add: Net (repayments) borrowings on floor plan notes payable, non-trade (43.5) 43.5
 (87.0)
Less: Borrowings on floor plan notes payable, non-trade associated with acquired new vehicle inventory (14.1) —
 (14.1)
Net cash provided by operating activities – adjusted $64.1

$120.7

$(56.6)
 
Investing Activities
Net cash used in investing activities totaled $464.9$118.3 million and $289.5$35.3 million, respectively, for the nine-monththree-month periods ended September 30, 2017March 31, 2020 and 2016. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.2019.
 
Below are highlights of significant activity related to our cash flows from investing activities:
 Nine Months Ended September 30, Increase (Decrease) Three Months Ended March 31, Increase (Decrease)
(Dollars in thousands) 2017 2016 in Cash Flow
(Dollars in millions) 2020 2019 in Cash Flow
Capital expenditures $(72,174) $(81,363) $9,189
 $(41.6) $(29.1) $(12.5)
Cash paid for acquisitions, net of cash acquired (400,558) (199,435) (201,123) (72.3) —
 (72.3)
Cash paid for other investments (7,929) (22,279) 14,350
 (9.3) (6.6) (2.7)
Proceeds from sales of stores 3,417
 11,837
 (8,420) 4.7
 —
 4.7






Capital Expenditures
Below is a summary of our capital expenditure activities:
 Nine Months Ended September 30, Three Months Ended March 31,
(Dollars in thousands) 2017 2016
(Dollars in millions) 2020 2019
Post-acquisition capital improvements $19,893
 $37,714
 $14.1
 $6.3
Facilities for open points 714
 32
 0.8
 0.2
Purchases of previously leased facilities —
 27,381
Purchase of facilities for existing operations 5.9
 1.5
Existing facility improvements 26,400
 11,810
 16.4
 10.8
Maintenance 25,167
 4,426
 4.4
 10.3
Total capital expenditures $72,174
 $81,363
 $41.6
 $29.1
 
Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet specified standards and requirements. We expect that certain facility upgrades and remodels will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.timeliness.
 
We expect to use a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer standards and requirements.


The increase in capital expenditures for the three-month period ended March 31, 2020, compared to the same period of 2019 related primarily to higher post-acquisition capital improvements due to an increase in acquisitions in the prior year. We have deferred approximately $65 million in planned discretionary capital expenditures and will continue to evaluate these investments.

If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completion of the projects, we believe we would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.

We expect to make expenditures of approximately $93 million in 2017 for capital improvements at recently acquired stores, purchases of land for expansion of existing stores, facility image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
 
Acquisitions
We focus on acquiring stores at attractive purchase prices that meet our return thresholds and strategic objectives. We look for acquisitions that diversify our brand and geographic mix as we continue to evaluate our portfolio to minimize exposure to any one manufacturer and achieve financial returns. As mentioned earlier, all potential acquisitions are being deferred until the second half of 2020.
 
We are able to subsequently floor new vehicle inventory acquired as part of an acquisition; however, the cash generated by this transaction is recorded as borrowings on floor plan notes payable, non-trade.


Adjusted net cash paid for acquisitions, as well as certain other acquisition-related information is presented below:
 Nine Months Ended September 30, Three Months Ended March 31,
 2017 2016 2020 2019
Number of stores acquired 15
 13
 2
 —
Number of stores opened 1
 1
Number of franchises added —
 1
        
(Dollars in thousands)    
(Dollars in millions)    
Cash paid for acquisitions, net of cash acquired $400,558
 $199,435
 $72.3
 $—
Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory (85,527) (88,147) (14.1) —
Cash paid for acquisitions, net of cash acquired – adjusted $315,031
 $111,288
 $58.2
 $—
 
We evaluate potential capital investments primarily based on targeted rates of return on assets and return on our net equity investment.






Financing Activities
Net cash (used in) provided or (used) inby financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:
  Nine Months Ended September 30, Increase
(Dollars in thousands) 2017 2016 in Cash Flow
Cash provided in financing activities, as reported $192,676
 $74,352
 $118,324
Adjust: Repayments (borrowings) on floor plan notes payable: non-trade (34,056) (93,817) 59,761
Cash provided (used) in financing activities – adjusted $158,620
 $(19,465) $178,085
  Three Months Ended March 31, Increase (Decrease)
(Dollars in millions) 2020 2019 in Cash Flow
Cash used in financing activities, as reported $(30.8) $(28.5) $(2.3)
Adjust: Borrowings (repayments) on floor plan notes payable: non-trade 43.5
 (43.5) 87.0
Cash provided by (used in) financing activities – adjusted $12.7
 $(72.0) $84.7

Below are highlights of significant activity related to our cash flows from financing activities, excluding net borrowings on floor plan notes payable: non-trade, which are discussed above:
  Nine Months Ended September 30, Increase (Decrease)
(Dollars in thousands) 2017 2016 in Cash Flow
Net (repayments) borrowings on lines of credit $(126,853) $97,129
 $(223,982)
Principal payments on long-term debt and capital leases, unscheduled (46,471) (5,903) (40,568)
Proceeds from issuance of long-term debt 395,905
 22,816
 373,089
Repurchases of common stock (31,521) (108,597) 77,076
Dividends paid (19,803) (17,823) (1,980)
Borrowing and Repayment Activity
During the first nine months of 2017, we raised net proceeds of $349.4 million from our Senior Notes offering and real estate mortgage debt. We used the funds to pay down our outstanding balances on our long-term debt and our lines of credit, acquire stores and fund repurchases of common stock. Our debt to total capital ratio, excluding floor plan notes payable, was 49.5% at September 30, 2017 compared to 46.5% at September 30, 2016.
  Three Months Ended March 31, Increase (Decrease)
(Dollars in millions) 2020 2019 in Cash Flow
Net borrowings (repayments) on lines of credit $55.0
 $(55.0) $110.0
Proceeds from issuance of long-term debt 17.2
 —
 17.2
Repurchases of common stock (48.2) (3.1) (45.1)
Dividends paid (7.0) (6.7) (0.3)
  
Equity Transactions
On February 25, 2016,October 22, 2018, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. We repurchased a total of 342,300558,930 shares of our Class A common stock at an average price of $92.08$86.15 per share in the first ninethree months of 2017.2020. This included 310,000529,303 shares as part of the repurchase plan at an average price per share of $91.33$82.76 and 32,30029,627 shares related to tax withholding on vesting RSUs at an average price of $99.33.$146.62 per share. As of September 30, 2017,March 31, 2020, we had $164.8$189.8 million remaining available for repurchases and the authorization does not have an expiration date.

In the first ninethree months of 2017,2020, we declared and paid dividends on our Class A and Class B common stock as follows:
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 2020 $0.30
 $7.0
 
We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.
 




Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt:
 As of September 30, 2017  As of March 31, 2020 
(Dollars in thousands) Outstanding Remaining Available  
(Dollars in millions) Outstanding Remaining Available  
Floor plan note payable: non-trade $1,598,111
 $—
 
1 
 $1,595.9
 $—
 
1 
Floor plan notes payable 114,833
 —
   389.9
 —
  
Used vehicle inventory financing facility 5,000
 45,000
 
2 
Used and service loaner vehicle inventory financing commitments 204.0
 162.9
 
2 
Revolving lines of credit 221,654
 223,831
 
2, 3 
 —
 338.8
 
2, 3 
Real estate mortgages 476,559
 —
 
  
 608.9
 —
 
  
5.25% Senior Subordinated Notes due 2025 300,000
 —
 
5.250% Senior notes due 2025 300.0
 —
 
4.625% Senior notes due 2027 400.0
 —
 
Other debt 12,699
 —
 
  
 33.1
 —
 
  
Total debt outstanding 2,728,856
 268,831
   3,531.8
 501.7
  
Less: unamortized debt issuance costs (6,960) —
  (10.4) —
 
Total debt $2,721,896
 $268,831
  $3,521.4
 $501.7
 

1 As of September 30, 2017,March 31, 2020, we had a $1.9$2.1 billion new vehicle floor plan commitment as part of our credit facility.
2 The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly.
3 Available credit is based on the borrowing base amount effective as of August 31, 2017.February 29, 2020. This amount is reduced by $8.3$16.8 million for outstanding letters of credit.


Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment by $350 million to $2.4 billion and extend the maturity to August 2022. ThisOur syndicated credit facility (“credit facility”) is comprised of 1819 financial institutions, including seven manufacturer-affiliated finance companies. Under our credit facility we are permittedcompanies, with a maturity date of January 2025.

We have the option to allocatereallocate the total financing commitment amongcommitments, provided that the used vehicle inventory floor plan financing forcommitment does not exceed 16.5% of aggregate commitments, the revolving loan commitment does not exceed 18.75% of aggregate commitments, the service loaner floor plan financing commitment does not exceed $100 million, and the sum of these commitments plus the new vehicle inventory floor plan financing for used vehicles (upcommitment does not exceed the aggregate total financing commitment of $2.8 billion. Additionally, we may request an increase in the aggregate new vehicle floor plan commitment of up to a maximum of 16.5% of$400 million provided that the total aggregate commitment) and revolving financing for general corporate purposes, including acquisitions and working capital (up to a maximum of 18.75% of the total commitment). Our credit facility may be expanded to $2.75 billion total availability, subject to lender approval.commitment does not exceed $3.2 billion. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.


Our obligations under our revolving syndicated credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts receivable (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our revolving syndicated credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.

We have the ability to deposit up to $50 million in cash in Principal Reduction (PR) accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of September 30, 2017, we had no balances in our PR accounts.

If the outstanding principal balance on our new vehicle inventory floor plan commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving line of credit commitment less the outstanding balance on the line less outstanding letters of credit. The reserve amount will decrease the revolving line of credit availability and may be used to repay the new vehicle floor plan commitment balance.


The interest rate on the credit facility varies based on the type of debt, with the rate of one-month LIBOR plus 1.25%1.10% for new vehicle floor plan financing, one-month LIBOR plus 1.50%1.40% for used vehicle floor plan financing;financing, 1.20% for service loaner floor plan financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.25%1.00% to 2.50%,2.00% depending on our leverage ratio. The annual interest rate associated with our new vehicle floor plan commitment was 2.48%2.08% at September 30, 2017.March 31, 2020. The annual interest rate associated with our used vehicle inventory financing facility andfloor plan commitment was 2.38% at March 31, 2020. The annual interest rate associated with our service loaner floor plan commitment was 2.18% at March 31, 2020. The annual interest rate associated with our revolving line of credit was 2.73% and 2.48%, respectively,2.23% at September 30, 2017.March 31, 2020.


Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.




Under our credit facility, we are required to maintain the ratios detailed in the following table:
Debt Covenant Ratio Requirement As of September 30, 2017March 31, 2020
Current ratio Not less than 1.10 to 1 1.321.34 to 1
Fixed charge coverage ratio Not less than 1.20 to 1 2.822.68 to 1
Leverage ratio Not more than 5.005.75 to 1 2.932.67 to 1


 
As of September 30, 2017,March 31, 2020, we were in compliance with all covenants. We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.


If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which are the termination of the agreement, acceleration of the amounts owed and the seizure and sale of our assets comprising the collateral for the loans. A breach would also trigger cross-defaults under other debt agreements.


Although we refer to the lenders’ obligations to make loans as “commitments,” each lender’s obligations to make any loan or other credit accommodations under the credit facility is subject to the satisfaction of the conditions precedent specified in the credit agreement including, for example, that our representations and warranties in the agreement are true and correct in all material respects as of the date of each credit extension. If we are unable to satisfy the applicable conditions precedent, we may not be able to request new loans or other credit accommodations under our credit facility.

Other Lines of Credit
Our other lines of credit include a commitment of up to $20.0 million, secured by certain assets from select Chrysler locations and a commitment of $60.0 million with Ford Motor Credit Company, secured by certain assets from all Ford locations. These other lines of credit mature in 2021 and have interest rates up to 6.53%. As of March 31, 2020, no amounts were outstanding on these other lines of credit.

Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for certain new vehicles at certain stores and vehicles that are designated for use as service loaners. The variable interest rates on these floor plan notes payable commitments vary by manufacturer. At September 30, 2017, $114.8manufacturer and are variable rates. As of March 31, 2020, $389.9 million was outstanding on these arrangements.agreements at interest rates ranging up to 6.25%. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.

5.25%Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 3.0% to 5.3% at March 31, 2020. The mortgages are payable in various installments through August 1, 2038. As of March 31, 2020, we had fixed interest rates on 73% of our outstanding mortgage debt.
Our other debt, which totaled $33.1 million at March 31, 2020, includes finance leases and sellers’ notes. See Note 10 of the Condensed Notes to the Consolidated Financial Statements for additional information on finance leases.

5.250% Senior Notes Due 2025
On July 24, 2017, we issued $300 million in aggregate principleprincipal amount of 5.25%5.250% 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 $5.04.625% Senior Notes Due 2027
On December 9, 2019, we issued $400 million in aggregate principal amount of underwriting4.625% Senior Notes due 2027 to eligible purchasers in a private placement under Rule 144A and other fees in connection with this issuance, which is being amortized as interest expense over the termRegulation S of the Notes. TheSecurities Act of 1933. Interest accrues on the Senior Notes will be fullyfrom December 9, 2019 and unconditionally guaranteed, jointlyis payable semiannually on June 15 and severally,December 15. We may redeem the Senior Notes in whole or in part, on or after December 15, 2022, at the redemption prices set forth in the Indenture. Prior to December 15, 2022, we may redeem the Senior Notes, in whole or in part, at 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 termsprice equal to 100% of the principal amount thereof plus a make-whole premium set forth in the Indenture. In addition, prior to December 15, 2022, we may redeem up to 40% of the Senior Notes from the proceeds of certain equity offerings. Upon certain change of control events (as set forth in certain circumstances,the Indenture), the holders of the Senior Notes may restrict our abilityrequire us to among other things, incur additional indebtedness, pay dividends, repurchase our common stock, or merge, consolidate or sell all or substantially all our assets.a portion of the Senior Notes at a purchase price of 101% of their principal amount plus accrued and unpaid interest, if any, to the date of purchase.

We used the net proceeds for general corporate purposes, which included funding acquisitions, capital expenditures and debt repayment.

Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 3.0% to 5.0% at September 30, 2017. The mortgages are payable in various installments through October 2034. As of September 30, 2017, we had fixed interest rates on 78% of our outstanding mortgage debt.
Our other debt includes capital leases and sellers’ notes. The interest rates associated with our other debt ranged from 3.1% to 8.0% at September 30, 2017. This debt, which totaled $12.7 million at September 30, 2017, is due in various installments through December 2050.


Recent Accounting Pronouncements
See Note 13 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.


 


Critical Accounting Policies and Use of Estimates
There have been no material changes in the critical accounting policies and use of estimates described in our 20162019 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2017. 22, 2019.


See also Note 1 and Note 3 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q for additional information including the impact of our January 1, 2020 adoption of Topic 326 - Measurement of Credit Losses on Financial Instruments and related updates.

Seasonality and Quarterly Fluctuations
Historically, our sales have been lower in the first quarter of each year due to consumer purchasing patterns and inclement weather in certain of our markets. As a result, financial performance is expected to be lower during the first quarter than during the second, third and fourth quarters of each fiscal year. We believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating results.
 
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
 
Item 3.Quantitative and Qualitative Disclosures About Market Risk
 
ThereWith the exception of the impacts of COVID-19, which are discussed elsewhere in this document, there have been no material changes in our reported market risks or risk management policies since the filing of our 20162019 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 28, 2017.22, 2019.


Item 4.Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
We evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
Changes in Internal Control Over Financial Reporting
During the three months ended March 31, 2020, we implemented certain internal controls in connection with our adoption of Topic 326. There waswere no changeother changes in our internal control over financial reporting that occurred during our lastmost recent fiscal quarter that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION
 
Item 1.Legal Proceedings


See Note 11We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the Condensed Notes toresolution of legal proceedings arising in the Consolidated Financial Statements for additional information.normal course of business will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.


Item 1A.Risk Factors
 
The risk factors below are modified from those that are included in our 2016 Annual Report on Form 10-K which was filed with the Securities and Exchange Commission on February 28, 2017 to account for our recent note placement and the expansion of our credit facility. The information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our 2019 Annual Report on Form 10-K, which was filed with the SEC on February 22, 2019. We have described in our 2019 Annual Report on Form 10-K, under “Risk Factors” in Item 1A, the primary risks related to our business and securities. We provide below the material changes to our risk factors described in that report.


Our indebtedness and lease obligationsThe recent outbreak of the novel coronavirus could materially adversely affect our business, financial health, limit our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Muchcondition, results of our debt is secured by a substantial portion of our assets. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.



Our indebtedness and lease obligations could have important consequences to us, including the following:
limitations on our ability to complete acquisitions;
impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes;
reduced funds available for our operations and other purposes, ascash flows.

The recent outbreak of the novel coronavirus (COVID-19) pandemic has resulted in widespread travel and transportation restrictions and closures of commercial spaces and industrial facilities in and across the United States and the world, including in the states and regions in which we operate. In connection with the COVID-19 pandemic, we have seen a larger portion ofsignificant decline in all revenue levels in certain locations. We have modified certain business practices to conform to government restrictions and best practices encouraged by government and regulatory authorities, and are developing and implementing risk mitigation plans for critical items and services required to continue our operations. We are monitoring and managing our cash flow from operations would be dedicatedflows and have enacted cost saving measures to respond to the payment of principal and interest on our indebtedness; and
exposure to the risk of increasing interest rates as certain borrowings are, and willvolatile environment. In addition, we continue to be, at variable rates of interest.

In addition,assess our loan agreements and the indenture governing our 5.25% notes due in 2025 contain covenants that limit our discretion with respect to business matters, including incurring additional debt, granting additional security interests in our assets, acquisition activity, disposing of assets and other business matters. Other covenants are financial in nature, including current ratio, fixed charge coverage and leverage ratio calculations. A breach of any ofcapital deployment strategy. However, these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements. For example, a default under our $2.4 billion syndicated credit facility could trigger a default and acceleration of our repayment obligations under the indenture governing our $300 million aggregate principal amount 5.25% Notes due in 2025, and vice versa.

We have granted in favor of certain of our lenders and other secured parties, including those under our $2.4 billion revolving syndicated credit facility, a security interest in a substantial portion of our assets. If we default on our obligations under those agreements, the secured parties may be able to foreclose upon their security interests and otherwise be entitled to obtain or control those assets.

Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of default has occurred, the outstanding indebtedness could become immediately due and owing.

If these events were to occur, wemeasures may not be ablesufficient to payprevent adverse impacts on our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take,business and financial condition from COVID-19.

The declines in order to comply with these agreements.

In addition, the lenders’ obligations to make certain loans or other credit accommodations undersales and service revenue and ongoing disruptions in our credit facility is subjectoperations due to the satisfaction of certain conditions precedent including, for example, that our representations and warranties in the agreement and related loan documents are true and correct in all material respects as of the date of the proposed credit extension. If any of our representations and warranties in those agreements are not true and correct in all material respects as of the date of a proposed credit extension, or if other conditions precedent are not satisfied, weCOVID-19 pandemic may not be able to request new loans or other credit accommodations under those credit facilities, which could have a material adverseadversely impact on our business, results of operations, financial condition and cash flows.

Additionally, The degree to which COVID-19 may impact our real estate debt generally has a five to ten-year term, after which the debt needs to be renewed or replaced. A decline in the appraised value of real estate or a reduction in the loan-to-value lending ratios for new or renewed real estate loans could result in our inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable to us, requiring us to find replacement lenders or to refinance at lower loan amounts.

As of September 30, 2017, approximately 86% of our total debt was variable rate. The majority of our variable rate debt is indexed to the one-month LIBOR rate. The current interest rate environment is at historically low levels, and interest rates will likely increase in the future. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations and financial condition is unknown at this time and cash flows.

We may not be able to satisfy our debt obligations uponwill depend on future developments, including the occurrenceultimate geographic spread of a change in control or another event of default under our credit agreement or indenture.

UponCOVID-19, the occurrence of a change in control or another event of default as defined in our credit agreement,severity and the agent under the credit agreement will have the right to declare all outstanding obligations immediately due and payable and to terminate the availability of future advances to us. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under the credit agreement in the event of a change in control or fundamental change. A "change in control" as defined in our credit agreement includes, among other events, the acquisition by any person, or two or more persons acting in concert, in either case other than Lithia Holdings Company, L.L.C., Sid DeBoer or Bryan DeBoer, of beneficial ownership (within


the meaning of Rule 13d-3duration of the SEC under the Securities Exchange Act of 1934) of 20%pandemic, and further actions that may be taken by governmental authorities or more of the outstanding shares of our voting stockbusinesses or individuals on a fully diluted basis.

Upon a change of control as definedtheir own initiatives in the indenture governing our 5.25% Senior Notes due in 2025, the holders of the notes may require us to repurchase all or a portion of the notes at a purchase price of 101% of their principal amount plus accrued and unpaid interest, if any,response to the date of purchase. Generally, if an event of default occurs under the indenture, the trustee or the holders of at least 25% in principal amount of the then outstanding notes may declare all of the notes to be due and payable.pandemic.

In the event we were unable to satisfy the above obligations, it could have a material adverse impact on our business and our common stock holders.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
 
We repurchased the following shares of our Class A common stock during the thirdfirst quarter of 2017:2020:
  
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
August 23,157
 103.23
 23,000
 167,037
September 20,000
 113.16
 20,000
 164,774
  63,157
 $104.62
 63,000
 $164,774
  
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
January —
 $—
 —
 $233,603
February —
 —
 —
 233,603
March 558,930
 86.15
 529,303
 189,796
  558,930
 $86.15
 529,303
 $189,796

1 Effective February 29, 2016, On October 22, 2018, our Board of Directors authorized the repurchase of up toapproved a $250 million of our Class A common stock.repurchase authorization. This authorization does not have an expiration date and it replaced the previous authorizations, which limited the number of shares we were authorized to repurchase.date.
2 Of the shares repurchased in the thirdfirst quarter of 2017, 157 shares2020, 29,627 were related to the tax withholdings on vesting RSUs.


Item 5.Other Information

Subsequent to the earnings release filed on a Current Report on Form 8-K on October 25, 2017, and prior to the filing of this Quarterly Report on Form 10-Q, we recorded an elimination of internal used vehicle wholesale transactions and new and used vehicle retail sales. The transactions had no impact on gross profits and were primarily associated with recently acquired stores. This elimination resulted in a reduction of both revenues and cost of sales for the three and nine months ended September 30, 2017 of $10.0 million for used vehicle wholesales, or 15.2% and 4.8%, respectively, of used vehicle wholesale revenues; $3.6 million for new vehicles or 0.2% and 0.1%, respectively, of new vehicle revenues and $0.4 million for used vehicle retail or 0.1% and less than 0.1%, respectively, of used vehicle retail revenues. Adjusted for this elimination, total revenues were $2.7 billion and $7.4 billion, respectively, and total cost of sales were $2.3 billion and $6.3 billion, respectively, for the the three and nine months ended September 30, 2017. This elimination had no other impact to our Consolidated Statements of Operations.



Item 6.Exhibits
 
The following exhibits are filed herewith and this list is intended to constitute the exhibit index.
3.1
Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to
exhibit Exhibit 3.1 to ourthe Company’s Form 10-K for the year ended December 31, 1999)10-Q filed July 26, 2019).
3.2
2017Second Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.1Exhibit 3.2 to the Company’s Form 8-K datedfiled 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 ChiefPrincipal 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 ChiefPrincipal 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.INSInline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover page formatted as Inline XBRL and contained in Exhibit 101.




SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 7, 2017April 24, 2020LITHIA MOTORS, INC.
  
 
By: /s/ John F. North III
/s/ Tina Miller
 John F. North IIITina Miller
 Senior Vice President and Chief Financial Officer
 (Duly Authorized Officer and Principal Financial and
Accounting Officer)


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