UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
___________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2017
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of incorporation or organization)
93-0572810
(I.R.S. Employer Identification No.)
150 N. Bartlett Street, Medford, Oregon
(Address of principal executive offices)
97501
(Zip Code)
541-776-6401
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, without par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
__________ _________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes [X] No[ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: [ ]
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-
K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule
12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller
reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $2,236,488,000 computed by
reference to the last sales price ($94.23) as reported by the New York Stock Exchange for the Registrant’s Class A common stock, as of the last business day of the
Registrant’s most recently completed second fiscal quarter (June 30, 2017).
The number of shares outstanding of the Registrant’s common stock as of February 23, 2018 was: Class A: 24,020,790 shares and Class B: 1,000,000 shares.
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2018 Annual Meeting of Shareholders.
Documents Incorporated by Reference
LITHIA MOTORS, INC.
2017 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosure
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
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1
Item 1. Business
PART I
Forward-Looking Statements
Certain statements in this Annual Report, including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business” constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”,
“outlook,” “target”, “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or
other comparable terms. Examples of forward-looking statements in this Form 10-K include, among others, statements we make
regarding:
•
•
Future market conditions;
Expected operating results, such as improved store performance; continued improvement of selling, general and
administrative expenses (“SG&A”) as a percentage of gross profit and all projections;
• Anticipated integration, success and growth of acquired stores;
• Anticipated ability to capture additional market share;
• Anticipated ability to find accretive acquisitions;
•
Expected revenues from acquired stores;
• Anticipated additions of dealership locations to our portfolio in the future;
• Anticipated availability of liquidity from our unfinanced operating real estate;
• Anticipated levels of capital expenditures in the future; and
• Our strategies for customer retention, growth, market position, financial results and risk management.
The forward-looking statements contained in this Annual Report 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. Some of those important
factors are discussed in Part I, Item 1A. Risk Factors, and in Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and, from time to time, in our other filings we make with the Securities and Exchange
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 were founded in 1946 and incorporated in Oregon in 1968. We completed our initial public offering in 1996. We are one of the
largest automotive retailers in the United States and are among the fastest growing companies in the Fortune 500 (#318-2017) with
171 stores representing 30 brands in eighteen states as of February 23, 2018 We offer vehicles online and through our nationwide
retail network. Our "Growth Powered by People" strategy drives us to innovate and continuously improve the customer experience.
Our dealerships are located across the United States. We seek domestic, import and luxury franchises in cities ranging from mid-
sized regional markets to metropolitan markets. We evaluate all brands for expansion opportunities provided the market is large
enough to support adequate new vehicle sales to justify the required capital investment.
2
The following table sets forth information about stores that were part of our operations as of December 31, 2017:
State
Number of
Stores
Percent of 2017
Revenue
California
Oregon
New Jersey
Texas
New York
Montana
Washington
Alaska
Pennsylvania
Nevada
Idaho
Hawaii
Iowa
North Dakota
Vermont
New Mexico
Massachusetts
Wyoming
Total
42
26
11
16
11
11
6
9
8
4
4
5
7
3
2
2
1
1
169
24.6%
15.1
12.3
11.0
6.8
5.4
4.5
3.9
2.7
2.6
2.6
2.4
2.3
1.1
0.8
0.7
0.6
0.6
100.0%
Business Strategy and Operations
We offer customers convenient personalized service combined with the large company advantages of selection, competitive pricing
and broad access to financing and warranties. We strive for diversification in our products, services, brands and geographic locations
to manage market risk and to maintain profitability. We have developed a centralized support structure to reduce store level
administrative functions. This allows store personnel to focus on providing a positive customer experience. With our performance
management strategy, standardized information systems and centrally and regionally-performed administrative functions, we seek to
gain economies of scale from our dealership network.
We offer a variety of luxury, import and domestic new vehicle brands and models, reducing our dependence on any one
manufacturer and our susceptibility to changing consumer preferences. Encompassing economy and luxury cars, sport utility
vehicles (SUVs), crossovers, minivans and trucks, we believe our brand mix is well-suited to what customers demand in the markets
we serve. Our new vehicle unit mix of 56% import, 32% domestic and 12% luxury compares to the national market mix of 48%,
44% and 8%, respectively, for the year ended December 31, 2017.
Our mission statement is “Growth Powered by People." We seek to expand our business through acquiring stores with strong brands
which meet our investment metrics. Additionally, we focus on unlocking the potential of our existing stores by designing agile
approaches tailored for the local market and identifying operational opportunities with our performance management reporting.
Operations are structured to promote an entrepreneurial environment at the dealership level. Each store’s general manager and
department managers, with assistance from regional and corporate management, are responsible for developing successful retail plans
in their local markets. They are responsible for driving dealership operations, personnel development, manufacturer relationships,
store culture and financial performance.
We have centralized many administrative functions to streamline store-level operations. Accounts payable, accounts receivable, credit
and collections, accounting and taxes, payroll and benefits, information technology, legal, human resources, personnel development,
treasury, cash management, advertising and marketing are all centralized at our corporate headquarters or regional accounting
processing centers. The reduction of administrative functions at our stores allows our local managers to focus on customer-facing
opportunities to increase revenues and gross profit. Our operations are supported by our dedicated training and personnel
development program, which shares best practices across our dealership network and seeks to develop management talent.
3
During 2017, we focused on achieving our mission through acquisitions and through organic growth within our existing stores.
We purchased 18 stores and opened one new store during 2017. We invested $349.4 million, net of floor plan debt, to acquire these
stores and we expect these acquisitions to add over $1.7 billion in annual revenues. Additionally, these acquisitions allow us to
maintain an appropriate franchise mix and leverage our cost structure. We focus on successfully integrating acquired stores to
achieve targeted returns.
We also organically grew our existing stores in 2017 by:
•
•
•
•
increasing revenues in all core business lines;
capturing a greater percentage of overall new vehicle sales in our local markets;
capitalizing on a used vehicle market that is approximately three times larger than the new vehicle market by increasing sales
of late model, lower-mileage used vehicles and value autos, which are older, higher mileage vehicles; and
growing our service, body and parts revenues as units in operation increase.
We target SG&A as a percentage of gross profit in the upper 60% range and monitor how efficiently we leverage our cost structure
by evaluating throughput. For 2017, our SG&A as a percentage of gross profit was 69.2% compared to 69.1% in 2016. Adjusted for
a non-core charge, SG&A as percentage of gross profit was 68.8% and 68.9%, respectively, for 2017 and 2016. As noted above, we
acquired eighteen stores and opened one new store in 2017; we acquired fifteen stores and one franchise, and opened one new store
in 2016. The increase in SG&A as a percentage of gross profit was due to our recent acquisitions, which tend to have less cost
efficient structures until we can fully integrate their operations.
We evaluate how to allocate capital, including returning cash to our investors and investing in our stores. During 2017, we paid $26.5
million in dividends, spent $33.8 million to repurchase 361,000 shares, or 2% of total outstanding shares, and purchased a capped call
option of 325,000 shares for $33.4 million. We also invested in our facilities, making $105.4 million in capital expenditures. We
continue to manage our liquidity and available cash to prepare for future acquisition opportunities. As of December 31, 2017, we had
$279.8 million in available funds in cash and availability on our credit facilities, with an estimated additional $236.1 million available if
we financed our unencumbered owned real estate.
New Vehicles
In 2017, we sold 167,146 new vehicles, generating 22.4% of our gross profit for the year. New vehicle sales have the potential to
create incremental future profit opportunities through certain manufacturer incentive programs, resale of used vehicles acquired
through trade-in, arranging of third-party financing, vehicle service and insurance contracts, and future service and repair work.
4
In 2017, we represented 30 domestic and import brands ranging from economy to luxury cars, SUVs, crossovers, minivans and light
trucks.
Manufacturer
Percent of 2017 New
Vehicle Revenue
Percent of 2017
New Vehicle Gross
Profit
Chrysler, Jeep, Dodge, Ram, Alfa Romeo
Honda, Acura
Toyota
Chevrolet, Cadillac, GMC, Buick
BMW, MINI
Ford, Lincoln
Subaru
Volkswagen, Audi
Nissan
Mercedes, Smart
Hyundai
Lexus
Kia
Mazda
Porsche
Fiat
Volvo
Mitsubishi
Total
* Less than 0.1%
18.5%
16.4
15.6
10.9
7.6
8.5
5.9
4.8
3.5
2.9
1.9
1.1
1.2
0.2
0.8
0.1
0.1
— *
100.0%
14.6%
20.0
15.6
9.8
8.9
7.5
3.4
4.9
4.9
4.2
2.4
1.1
0.8
0.2
1.4
0.2
0.1
— *
100.0%
We purchase our new car inventory directly from manufacturers, who generally allocate new vehicles to stores based on availability,
monthly sales levels and market area demand. Accordingly, we rely on the manufacturers to provide us with vehicles that meet
consumer demand at suitable locations, with appropriate quantities and prices. However, if high demand vehicles, or vehicles with
certain option configurations are in short supply, we attempt to exchange vehicles with other automotive retailers and between our
own stores to accommodate customer demand and to balance inventory.
Used Vehicles
At each new vehicle store, we also sell used vehicles. In 2017, we sold 129,913 retail used vehicles, which generated 18.9% of our
gross profit.
Our used vehicle operations give us an opportunity to:
•
•
•
•
generate sales to customers unable or unwilling to purchase a new vehicle;
generate sales of vehicle brands other than the store’s new vehicle franchise(s);
increase vehicle sales by aggressively pursuing customer trade-ins; and
increase finance and insurance revenues and service and parts sales.
We classify our used vehicles in three categories: manufacturer certified pre-owned used vehicles ("CPO"); late model, lower-mileage
vehicles ("Core Product") and higher mileage, older vehicles ("Value Autos"). We offer CPO vehicles at most of our franchised
dealerships. These vehicles undergo additional reconditioning and receive an extended OEM-provided warranty. Core Product are
reconditioned and offer a Lithia certified warranty. Value Autos undergo a safety check and a lesser degree of reconditioning and are
offered to customers who desire a less expensive vehicle or a lower monthly payment.
We acquire our used vehicles through customer trade-ins, purchases from non-Lithia stores, independent vehicle wholesalers and
private parties, and at closed auctions.
Our near-term goal for used vehicles is to retail an average of 85 units per store per month. As of December 31, 2017, our stores
sold an annualized average of 67 retail used units per month. We believe used vehicle sales represent a significant area for organic
growth. As new vehicle sales growth rates return to average historical levels and we continue our focus on growing used retail sales,
we believe our target is achievable.
5
Wholesale transactions result from vehicles we have acquired via trade-in from customers or vehicles we have attempted to sell via
retail that we elect to dispose of due to inventory age or other factors. As part of our used vehicle strategy, we have concentrated on
directing more lower-priced, older vehicles to retail sale rather than wholesale disposal.
Vehicle Financing, Service Contracts and Other Products
As part of the vehicle sales process, we assist in arranging customer vehicle financing options as well as offering extended
warranties, insurance contracts and vehicle and theft protection products. The sale of these items generated 25.5% of our gross
profit in 2017.
We believe that arranging vehicle financing is an important part of our ability to sell vehicles and related products and services. Our
sales personnel and finance and insurance managers receive training in securing customer financing and possess extensive knowledge
of available financing alternatives. We attempt to arrange financing for every vehicle we sell and we offer customers financing on a
“same day” basis, giving us an advantage, particularly over smaller competitors who do not generate enough sales to attract our
breadth of finance sources.
We earn a commission on each finance, service and insurance contract we write and subsequently sell to a third party. We normally
arrange financing for customers by selling the contracts to outside sources on a non-recourse basis to avoid the risk of default.
We arranged vehicle financing on 76.0% of the vehicles we sold during 2017. Our presence in multiple markets and changes in
technology surrounding the credit application process have allowed us to utilize a larger network of lenders across a broader
geographic area. Additionally, we continue to see the availability of consumer credit expand with lenders increasing the loan-to-value
amount available to most customers. These shifts afford us the opportunity to sell additional or more comprehensive products, while
remaining within a loan-to-value framework acceptable to our lenders.
We also market third-party extended warranty contracts, insurance contracts and vehicle and theft protection products to our
customers. These products and services yield higher profit margins than vehicle sales and contribute significantly to our profitability.
Extended warranty and service contracts for vehicles provide coverage for certain repairs beyond the duration or scope of the
manufacturer’s warranty. We believe the sale of extended warranties, service contracts and vehicle and theft protection products
increases our service and parts business by building a customer base for future repair work at our locations.
When customers finance an automobile purchase, we offer them life, accident and disability insurance coverage, as well as
guaranteed auto protection coverage that provides protection from loss incurred by the difference in the amount owed and the
amount received under a comprehensive insurance claim. We receive a commission on each policy sold.
We offer a lifetime lube, oil and filter (“LOF”) service, which, in 2017, was purchased by 25.0% of our total new and used vehicle
buyers. This service, where customers prepay for their LOF services, helps us retain customers by building customer loyalty and
provides opportunities for selling additional routine maintenance items and generating repeat service business. In 2017, we sold an
average of $64 of additional maintenance on each lifetime oil service we performed.
Service, Body and Parts
I n 2017, our service, body and parts operations generated 32.5% of our gross profit. These operations are an integral part of
establishing customer loyalty and contribute significantly to our overall revenue and profits. We provide parts and service for the new
vehicle brands sold by our stores, as well as service and repair most other makes and models.
The service and parts business provides important repeat revenues to our stores, which we seek to grow organically. Customer pay
revenues represent sales for vehicle maintenance, service performed on vehicles that have fallen outside the manufacturer warranty
period, repairs not covered by a manufacturer warranty, or maintenance and service on other makes and models. We believe
increasing our product and service offerings for customers differentiates us from independent repair shops and dealerships with less
scale. Our service and parts revenues benefit from the increases we have seen in new vehicle sales over the last few years as there
are a greater number of late model vehicles in operation, which tend to visit franchised dealership locations more frequently than older
vehicles due to the manufacturer warranty period. Additionally, certain franchises provide routine maintenance, such as oil changes,
for two to four years after a vehicle is sold, which provides for future service and parts revenues.
6
We focus on growing our customer pay business and market our parts and service products by notifying owners when their vehicles
are due for periodic service. This encourages preventive maintenance rather than post-breakdown repairs. The number of customers
who purchase our lifetime LOF service helps to improve customer loyalty and provides opportunities for repeat parts and service
business.
Revenues from the service and parts departments are particularly important during economic downturns, when owners tend to repair
their existing vehicles rather than buy new vehicles. This partially mitigates the effects of a drop in new vehicle sales that may occur
in a recessionary economic environment.
We believe body shops provide an attractive opportunity to grow our business, and we continue to evaluate potential locations to
expand. We currently operate 25 collision repair centers: five in each of Oregon and Texas; three in Pennsylvania; two each in Idaho,
New York and Washington; and one each in Alaska, Iowa, Montana, Nevada, Vermont and Wyoming.
Segments
We report three business segments: Domestic, Import and Luxury. For certain financial information by segment, see Notes 1 and 18
of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Marketing
We believe that stores with strong local identities and customer loyalty are critical to our success. We want our customers’
experiences to be so satisfying that we earn their business for life. In conjunction with our manufacturer partners, we utilize an
owner marketing strategy consisting of database analysis, email, traditional mail and phone contact to anticipate, listen and respond to
customer needs.
To increase awareness and traffic at our stores and websites, we use a combination of traditional, digital and social media to reach
potential customers. Total advertising expense, net of manufacturer credits, was $93.3 million in 2017, $81.4 million in 2016 and
$69.9 million in 2015. In 2017, 22% of those funds were spent in traditional media and 78% were spent in digital and owner
communications and other media outlets. In all of our communications, we seek to convey the promise of a positive customer
experience, competitive pricing and wide selection.
Certain advertising and marketing expenditures are offset by manufacturer cooperative programs which require us to submit requests
for reimbursement to manufacturers for qualifying advertising expenditures. These advertising credits are not tied to specific vehicles
and are earned as qualifying expenses are incurred. These reimbursements are recognized as a reduction of advertising expense.
Manufacturer cooperative advertising credits were $22.8 million in 2017, $20.3 million in 2016 and $19.8 million in 2015.
Many people now shop online before visiting our stores. We maintain websites for all of our stores and corporate sites (Lithia.com,
DCHAuto.com, CarboneCars.com, Baierl.com, and DTLAMotors.com), to generate customer leads for our stores. We also support a
corporate site (LithiaMotors.com) which provides our communities, investors, employees and recruits additional information about
our company.
Our retail websites enable our customers to:
•
•
•
•
•
•
•
•
•
locate our stores and identify the new vehicle brands sold at each store;
search new and pre-owned vehicle inventory;
view current pricing and specials;
calculate payments for purchase or lease;
obtain a value for their vehicle to trade or sell to us;
submit credit applications;
shop for and order manufacturers’ vehicle parts;
schedule service appointments; and
provide feedback about their experience.
Mobile traffic now accounts for over 60% of our web traffic and all of our sites utilize responsive technology to enhance the mobile
and tablet experience. We are working with our stores and manufacturer partners to develop additional tools that enable customers to
complete as much of the vehicle buying process online before arriving at our stores: saving them time, improving their experience and
increasing our productivity.
7
We post our inventory on major new and used vehicle listing services (cars.com, autotrader.com, cargurus.com, kbb.com,
edmunds.com, craigslist, and hundreds of local webpages) to reach online shoppers. We also employ search engine optimization,
search engine marketing, online display and re-targeting as well as video pre-roll to reach more online prospects. We also encourage
our stores to dedicate a larger share of their advertising spend to promoting service and repair work as we focus on customer
acquisition and the value of customer retention.
Social influence marketing represents a cost-effective method to enhance our corporate reputation, our stores’ reputations, and
increase vehicle sales and service. We deploy tools and training to our employees in ways that will help us listen to our customers and
create more advocates for Lithia, DCH, Carbone, Baierl, and Downtown LA.
We also encourage our stores to give back to their local communities through financial and non-financial participation in local
charities and events. Through Lithia4Kids and DCH's sponsorship of The National Teen Safe Driving Foundation, our initiatives to
increase employee volunteerism and community involvement, we focus the impact of our contributions on projects that support
opportunities and the safety and development of young people.
Franchise Agreements
Each of our stores operates under a separate agreement (a “Franchise Agreement”) with the manufacturer of the new vehicle brand it
sells.
Typical automobile Franchise Agreements specify the locations within a designated market area at which the store may sell vehicles
and related products and perform approved services. The designation of such areas and the allocation of new vehicles among stores
are at the discretion of the manufacturer. Franchise Agreements do not, however, guarantee exclusivity within a specified territory.
A Franchise Agreement may impose requirements on the store with respect to:
facilities and equipment;
inventories of vehicles and parts;
•
•
• minimum working capital;
training of personnel; and
•
performance standards for market share and customer satisfaction.
•
Each manufacturer closely monitors compliance with these requirements and requires each store to submit monthly financial
statements. Franchise Agreements also grant a store the right to use and display manufacturers’ trademarks, service marks and
designs in the manner approved by each manufacturer.
We have determined the useful life of a Franchise Agreement is indefinite, even though certain Franchise Agreements are renewed
after one to six years. In our experience, agreements are routinely renewed without substantial cost and there are legal remedies to
help prevent termination. Certain Franchise Agreements have no termination date. In addition, state franchise laws protect franchised
automotive retailers. Under certain laws, a manufacturer may not terminate or fail to renew a franchise without good cause or
prevent any reasonable changes in the capital structure or financing of a store.
The typical Franchise Agreement provides for early termination or non-renewal by the manufacturer upon:
a change of management or ownership without manufacturer consent;
insolvency or bankruptcy of the dealer;
death or incapacity of the dealer/manager;
conviction of a dealer/manager or owner of certain crimes;
•
•
•
•
• misrepresentation of certain sales or inventory information by the store, dealer/manager or owner to the manufacturer;
•
•
•
•
failure to adequately operate the store;
failure to maintain any license, permit or authorization required for the conduct of business;
poor market share; or
low customer satisfaction index scores.
Franchise Agreements generally provide for prior written notice before a franchise may be terminated under most circumstances. We
also sign master framework agreements with most manufacturers that impose additional requirements. See Item 1A, “Risk Factors.”
8
Competition
The retail automotive business is highly competitive. Currently, there are approximately 18,000 dealers in the United States, many of
whom are independent stores managed by individuals, families or small retail groups. We compete primarily with other automotive
retailers, both publicly- and privately-held.
Vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a vehicle brand may
operate. In addition, our Franchise Agreements typically limit our ability to acquire multiple dealerships of a given brand within a
particular market area. Certain state franchise laws also restrict us from relocating our dealerships, or establishing new dealerships of
a particular brand, within any area that is served by another dealer with the same brand. To the extent that a market has multiple
dealers of a particular brand, as certain markets we operate in do, we are subject to significant intra-brand competition.
We are larger and have more financial resources than most private automotive retailers with which we currently compete in the
majority of our regional markets. We compete directly with retailers with similar or greater resources in markets such as metropolitan
New York, the greater Los Angeles area, Seattle, Washington; Spokane, Washington; Anchorage, Alaska; Portland, Oregon and the
San Francisco Bay Area, California. If we enter other new markets, we may face competitors that are larger or have access to
greater financial resources. We do not have any cost advantage in purchasing new vehicles from manufacturers. We rely on
advertising and merchandising, pricing, our customer guarantees and sales model, our sales expertise, service reputation and the
location of our stores to sell new vehicles.
Regulation
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our business. In every state in
which we operate, we must obtain various licenses to operate our businesses, including dealer, sales and finance and insurance
licenses issued by state regulatory authorities. Numerous laws and regulations govern our business, including those relating to our
sales, operations, financing, insurance, advertising and employment practices. These laws and regulations include state franchise laws
and regulations, consumer protection laws, privacy laws, escheatment laws, anti-money laundering laws and federal and state wage-
hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to numerous federal, state and local laws and regulations. In recent years, there
has been an increase in activity related to oversight of consumer lending by the Consumer Financial Protection Bureau ("CFPB"),
which has broad regulatory powers. The CFPB does not have direct authority over automotive dealers; however, its regulation of
larger automotive finance companies and other financial institutions could affect our financing activities. Claims arising out of actual
or alleged violations of law may be asserted against us or our stores by individuals, a class of individuals, or governmental entities.
These claims may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct
store operations and fines.
The vehicles we sell are also subject to rules and regulations of various federal and state regulatory agencies.
Environmental, Health, and Safety Laws and Regulations
Our operations involve the use, handling, storage and contracting for recycling and/or disposal of materials such as motor oil and
filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires
and fuel. Consequently, our business is subject to a complex variety of federal, state and local requirements that regulate the
environment and public health and safety.
Most of our stores use above ground storage tanks, and, to a lesser extent, underground storage tanks, primarily for petroleum-based
products. Storage tanks are subject to periodic testing, containment, upgrading and removal under the Resource Conservation and
Recovery Act and its state law counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other
discharges from storage tanks or other sources. In addition, water quality protection programs under the federal Water Pollution
Control Act (commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and local programs
govern certain discharges from our operations. Similarly, certain air emissions from operations, such as auto body painting, may be
subject to the federal Clean Air Act and related state and local laws. Health and safety standards promulgated by the Occupational
Safety and Health Administration of the United States Department of Labor and related state agencies also apply.
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Certain stores may become a party to proceedings under the Comprehensive Environmental Response, Compensation, and Liability
Act, or CERCLA, typically in connection with materials that were sent to former recycling, treatment and/or disposal facilities owned
and operated by independent businesses. The remediation or clean-up of facilities where the release of a regulated hazardous
substance occurred is required under CERCLA and other laws.
We incur certain costs to comply with environmental, health and safety laws and regulations in the ordinary course of our business.
We do not anticipate, however, that the costs of such compliance will have a material adverse effect on our business, results of
operations, cash flows or financial condition, although such outcome is possible given the nature of our operations and the extensive
environmental, public health and safety regulatory framework. We may become aware of minor contamination at certain of our
facilities, and we conduct investigations and remediation at properties as needed. In certain cases, the current or prior property owner
may conduct the investigation and/or remediation or we have been indemnified by either the current or prior property owner for such
contamination. We do not currently expect to incur significant costs for remediation. However, no assurances can be given that
material environmental commitments or contingencies will not arise in the future, or that they do not already exist but are unknown to
us.
Employees
Our mission statement is "Growth Powered by People". We cultivate an entrepreneurial, high-performance culture and strive to
develop leaders from within and innovate the customer experience. We continue to develop tools, training and growth opportunities
that accelerate the depth of our talent. One example of this is our Accelerated Management Program (AMP), which began in 2016.
This program is designed to deepen the knowledge of future leaders in all aspects of our business and develop leadership skills to
better position participants for a future as a general manager in one of our stores or as a regional leader. This program continues to
produce new leaders from within the Company, with a 84% increase in the number of management positions filled by internally-
developed candidates in 2017.
As of December 31, 2017, we employed approximately 12,899 persons on a full-time equivalent basis.
Seasonality and Quarterly Fluctuations
Historically, our sales have been lower during the first quarter of each year due to consumer purchasing patterns during the holiday
season and inclement weather in certain of our markets. Our franchise diversification and cost controls have moderated this
seasonality. However, if conditions occur that weaken automotive sales, such as severe weather in the geographic areas in which our
dealerships operate, war, high fuel costs, depressed economic conditions including unemployment or weakened consumer confidence
or similar adverse conditions, our revenues for the year may be disproportionately adversely affected.
Available Information and NYSE Compliance
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission
(“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). You may inspect and copy our reports, proxy statements,
and other information filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet Web site at
http://www.sec.gov where you may access copies of our SEC filings. We also make available free of charge, on our website at
www.lithiainvestorrelations.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably
practicable after they are filed electronically with the SEC. The information found on our website is not part of this Annual Report on
Form 10-K. You may also obtain copies of these reports by contacting Investor Relations at 877-331-3084.
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Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks described below are not the
only ones facing our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our
business operations.
Risks related to our business
The automotive retail industry is sensitive to changing economic conditions and various other factors. Our business and results of
operations are substantially dependent on new vehicle sales levels in the United States and in our particular geographic markets
and the level of gross profit margins that we can achieve on our sales of new vehicles, all of which are very difficult to predict.
Our business is heavily dependent on consumer demand and preferences. A downturn in overall levels of consumer spending may
materially and adversely affect our revenues and gross profit margins. Retail vehicle sales are cyclical and historically have
experienced periodic downturns characterized by weak demand. These cycles are often dependent on general economic conditions
and consumer confidence, as well as the level of discretionary personal income and credit availability. Economic conditions may be
anemic for an extended period of time, or deteriorate in the future. This would have a material adverse effect on our retail business,
particularly sales of new and used automobiles.
In addition, our performance is subject to local economic, competitive and other conditions prevailing in our various geographic
areas. Our dealerships are currently located in limited markets in 18 states, with sales in the top three states accounting for 52% of
our revenue in 2017. Our results of operations, therefore, depend substantially on general economic conditions, consumer spending
levels and other factors in those markets and could be materially adversely affected to the extent these markets experience sustained
economic downturns regardless of improvements in the U.S. economy overall.
Historically, in times of rapid increase in crude oil and fuel prices, sales of vehicles have dropped, particularly in the short term, as the
economy slows, consumer confidence wanes and fuel costs become more prominent to the consumer’s buying decision. In
sustained periods of higher fuel costs, consumers who do purchase vehicles tend to prefer smaller, more fuel-efficient vehicles
(which typically have lower margins) or hybrid vehicles (which can be in limited supply during these periods). A significant portion
of our new vehicle revenue and gross profit is derived from domestic manufacturers. These manufacturers have historically sold a
higher percentage of trucks and SUVs than import or luxury brands. They may, therefore, experience a more significant decline in
sales in the event that fuel prices increase.
Approximately 17.1 million, 17.5 million, and 17.4 million new vehicles were sold in the United States in 2017, 2016, and 2015,
respectively. Certain industry analysts have predicted that new vehicle sales will decline below 17 million for 2018. If new vehicle
production exceeds the rate at which new vehicles are sold, our gross profit per vehicle could be adversely affected by this excess
and any resulting changes in manufacturer incentive and marketing programs. See the risk factor “If manufacturers or distributors
discontinue or change sales incentives, warranties and other promotional programs, our business, results of operations, financial
condition and cash flows may be materially adversely affected” below. Economic conditions and the other factors described above
may also materially adversely impact our sales of used vehicles, parts and repair and maintenance services, and automotive finance
and insurance products.
Natural disasters and adverse weather conditions can disrupt our business.
Our dealerships are in states and regions in the U.S. in which actual or threatened natural disasters and severe weather events (such
as hurricanes, earthquakes, fires, floods, landslides, wind and/or hail storms) or other extraordinary events have in the past, and may
in the future, disrupt our dealership operations and impair the value of our dealership property. A disruption in our operations may
adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, the
automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property at
dealership locations. The exposure on any single claim under our property and casualty insurance, medical insurance and workers’
compensation insurance varies based upon type of coverage. Our maximum exposure on any single claim is $5.5 million, subject to
certain aggregate limit thresholds.
The automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters and
adverse weather events may affect the flow of inventory or parts to us or our manufacturing partners.
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Such disruptions could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Increasing competition among automotive retailers reduces our profit margins on vehicle sales and related businesses. Further,
the use of the Internet in the car purchasing process could materially adversely affect us.
Automobile retailing is a highly competitive business. Our competitors include publicly and privately-owned dealerships, of which
certain competitors are larger and have greater financial and marketing resources than we have. Many of our competitors sell the
same or similar makes of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost
advantage in purchasing new vehicles from manufacturers due to the volume of purchases or otherwise.
Our finance and insurance business and other related businesses, which have higher margins than sales of new and used vehicles, are
subject to strong competition from various financial institutions and others.
The Internet has become a significant part of the sales process in our industry. Customers are using the Internet to compare pricing
for vehicles and related finance and insurance services, which may further reduce margins for new and used vehicles and profits for
related finance and insurance services. If Internet new vehicle sales are allowed to be conducted without the involvement of
franchised dealers, our business could be materially adversely affected. In addition, other franchise groups have aligned themselves
with services offered on the Internet or are investing heavily in the development of their own Internet capabilities, which could
materially adversely affect our business, results of operations, financial condition and cash flows.
Our Franchise Agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our
revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same
markets where we operate or if existing franchised dealers increase their market share in our markets.
In addition, we may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise.
Our operating margins may decline over time as we expand into markets where we do not have a leading position.
Changes to the automotive industry and consumer views on car ownership could materially adversely affect our business, results
of operations, financial condition and cash flows.
The automotive industry is predicted to experience rapid change in the years to come, including increases in ride-sharing services,
advances in electric vehicle production and driverless technology. Ride-sharing services such as Uber and Lyft provide consumers
with mobility options outside of the traditional car ownership and lease alternatives. The overall impact of these options on the
automotive industry is uncertain, and may include lower levels of new vehicle sales. Manufacturers continue to invest in increasing
production and quality of AEVs (all-electric vehicles), which generally require less maintenance than traditional cars and trucks. The
effects of AEVs on the automotive industry are uncertain and may include reduced parts and service revenues, as well as changes in
the level of sales of certain F&I products such as extended warranty and lifetime lube, oil and filter contracts. Technological
advances are also facilitating the development of driverless vehicles. The eventual timing of availability of driverless vehicles is
uncertain due to regulatory requirements, technological hurdles, and uncertain consumer acceptance of these technologies. The effect
of driverless vehicles on the automotive industry is uncertain and could include changes in the level of new and used vehicle sales, the
price of new vehicles, and the role of franchised dealers, any of which could materially and adversely affect our business.
A decline of available financing in the lending market may adversely affect our vehicle sales volume.
A significant portion of buyers finance their vehicle purchases. One of the primary finance sources used by consumers in connection
with the purchase of a new or used vehicle is the manufacturer captive finance company. These captive finance companies rely, to a
certain extent, on the public debt markets to provide the capital necessary to support their financing programs. In addition, the
captive finance companies will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio. In
addition, sub-prime lenders have historically provided financing for consumers who, for a variety of reasons, including poor credit
histories and lack of down payment, do not have access to more traditional finance sources. If lenders tighten their credit standards
or there is a decline in the availability of
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credit in the lending market, the ability of consumers to purchase vehicles could be limited, which could have a material adverse
effect on our business, results of operations, financial condition and cash flows.
Adverse conditions affecting one or more key manufacturers may negatively affect our business, results of operations, financial
condition and cash flows.
We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. Events that adversely affect a
manufacturer’s ability to timely deliver new vehicles may adversely affect us by reducing our supply of popular new vehicles, leading
to lower sales in our stores during those periods than would otherwise occur. We depend on our manufacturers to deliver high-
quality, defect-free vehicles. If manufacturers experience quality issues, our financial performance may be adversely impacted. In
addition, the discontinuance of a particular brand could negatively impact our revenues and profitability.
Vehicle manufacturers would be adversely affected by economic downturns or recessions, adverse fluctuations in currency
exchange rates, significant declines in the sales of their new vehicles, increases in interest rates, declines in their credit ratings, port
closures, labor strikes or similar disruptions (including within their major suppliers), supply shortages or rising raw material costs,
rising employee benefit costs, adverse publicity that may reduce consumer demand for their products, product defects, vehicle recall
campaigns, litigation, poor product mix or unappealing vehicle design, or other adverse events. These and other risks could materially
adversely affect any manufacturer and limit its ability to profitably design, market, produce or distribute new vehicles, which, in turn,
could materially adversely affect our business, results of operations, financial condition and cash flows.
We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major
vehicle manufacturer. We purchase substantially all of our new vehicles from various manufacturers or distributors at the prevailing
prices available to all franchised dealers. Our sales volume could be materially adversely impacted by the manufacturers’ or
distributors’ inability to supply our stores with an adequate supply of vehicles.
In the event of a manufacturer or distributor bankruptcy, we could be held liable for damages related to product liability claims,
intellectual property suits or other legal actions. These legal actions are typically directed towards the vehicle manufacturer and it is
customary for manufacturers to indemnify us from exposure related to any judgments associated with the claims. However, if
damages could not be collected from the manufacturer or distributor, we could be named in lawsuits and judgments could be levied
against us.
Many new manufacturers are entering the automotive industry. New companies have raised capital to produce fully electric vehicles
or to license battery technology to existing manufacturers. Tesla has demonstrated the ability to successfully introduce electric
vehicles to the marketplace. Foreign manufacturers from China and India are producing significant volumes of new vehicles and are
entering the U.S. and selecting partners to distribute their products. Because the automotive market in the U.S. is mature and the
overall level of new vehicle sales may not increase in the coming years, the success of new competitors will likely be at the expense
of other, established brands. This could have a material adverse impact on our success in the future.
Federal regulations around fuel economy standards and “greenhouse gas” emissions have continued to increase. New requirements
may adversely affect any manufacturer’s ability to profitably design, market, produce and distribute vehicles that comply with such
regulations. We could be adversely impacted in our ability to market and sell these vehicles at affordable prices and in our ability to
finance these inventories. These regulations could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
If manufacturers or distributors discontinue or change sales incentives, warranties and other promotional programs, our business,
results of operations, financial condition and cash flows may be materially adversely affected.
We depend upon the manufacturers and distributors for sales incentives, warranties and other programs that are intended to promote
new vehicle sales or supplement dealer income. Manufacturers and distributors routinely make changes to their incentive programs.
Key incentive programs include:
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customer rebates;
dealer incentives on new vehicles;
special financing rates on certified, pre-owned cars; and
below-market financing on new vehicles and special leasing terms.
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Our financial condition could be materially adversely impacted by a discontinuation or change in our manufacturers’ or distributors’
incentive programs. In addition, certain manufacturers use criteria such as a dealership’s manufacturer-determined customer
satisfaction index (“CSI" score), facility image compliance, employee training, digital marketing and parts purchase programs as
factors governing participation in incentive programs. To the extent we do not meet minimum score requirements, we may be
precluded from receiving certain incentives, which could materially adversely affect our business, results of operations, financial
condition and cash flows.
Franchised automotive retailers perform factory authorized service work and sell original replacement parts on vehicles covered by
warranties issued by the automotive manufacturer. For the year ended December 31, 2017, approximately 24% of our service, body
and parts revenue was for work covered by manufacturer warranties or manufacturer-sponsored maintenance services. To the
extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty work, our service, body and parts
sales volume could be adversely affected.
The ability of our stores to make new vehicle sales depends in large part upon the manufacturers and, therefore, any disruption
or change in our relationships could impact our business.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most popular vehicles usually produce the
highest profit margins and are frequently in short supply. If we cannot obtain sufficient quantities of the most popular models, our
profitability may be adversely affected. Sales of less desirable models may reduce our profit margins.
Each of our stores operates pursuant to a Franchise Agreement with each of the respective manufacturers for which it serves as
franchisee. Each of our stores may obtain new vehicles from manufacturers, service vehicles, sell new vehicles, and display vehicle
manufacturers’ brand only to the extent permitted under these agreements. As a result of the terms of our Franchise Agreements,
manufacturers exert significant control over the day-to-day operations at our stores. Such agreements contain provisions for
termination or non-renewal for a variety of causes, including service retention, facility compliance, customer satisfaction and sales
and financial performance. From time to time, certain of our stores have failed to comply with certain provisions of their franchise
agreements, and we cannot ensure that our stores will be able to comply with these provisions in the future.
Our Franchise Agreements expire at various times, and there can be no assurances that we will be able to renew these agreements on
a timely basis or on acceptable terms or at all. Actions taken by a manufacturer to exploit its bargaining position in negotiating the
terms of renewals of franchise agreements or otherwise could also have a material adverse effect on our revenues and profitability. If
a manufacturer terminates or fails to renew one or more of our significant franchise agreements or a large number of our franchise
agreements, such action could have a material adverse effect on our business, results of operations, financial condition and cash
flows.
Our Franchise Agreements also specify that, except in certain situations, we cannot operate a franchise by another manufacturer in
the same building as the manufacturer’s franchised store. This may require us to build new facilities at a significant cost. Moreover,
our manufacturers generally require that the store meet defined image standards. These commitments could require us to make
significant capital expenditures.
Our Franchise Agreements do not give us the exclusive right to a given geographic area. Manufacturers may be able to establish new
franchises or relocate existing franchises, subject to applicable state franchise laws. The establishment of or relocation of franchises
in our markets could have a material adverse effect on the business, financial condition and results of operations of our stores in the
market in which the action is taken.
Manufacturer stock ownership requirements and restrictions may impair our ability to maintain or renew franchise agreements or
issue additional equity.
Certain of our Franchise Agreements prohibit transfers of ownership interests of a store or, in some cases, the ownership interests of
the store’s indirect parent companies, including the Company. Agreements with various manufacturers, including, among others,
Honda/Acura, Hyundai, Mazda, Volkswagen, Mercedes-Benz, Subaru, Toyota, Ford/Lincoln, GM, and Nissan, provide that, under
certain circumstances, we may lose a franchise and/or be forced to sell one or more stores or their assets if there occurs a prohibited
transfer of ownership interests (in some cases not defined or defined ambiguously) or a person or entity acquires an ownership
interest in us above a specified level (ranging from 20% to 50% depending on the particular manufacturer’s restrictions and falling as
low as 5% if another vehicle
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manufacturer or distributor is the entity acquiring the ownership interest) without the approval of the manufacturer. Transactions in
our stock by our stockholders or prospective stockholders, including transactions in our Class B common stock, are generally
outside of our control and may result in the termination or non-renewal of one or more of our franchises, may result in a forced sale
of one or more of our stores or their assets at a price below fair market value or may impair our ability to negotiate new franchise
agreements for dealerships we desire to acquire in the future, which may have a material adverse effect on our business, results of
operations, financial condition and cash flows. These restrictions may also prevent or deter a prospective acquirer from acquiring
control of us or otherwise adversely affect the market price of our Class A common stock or limit our ability to restructure our debt
obligations.
If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or
renegotiation of their franchise agreements. Additionally, federal bankruptcy law can override protections afforded under state
dealer laws.
State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise agreement unless it has first
provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Certain state
dealer laws allow dealers to file protests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to
avoid the termination or non-renewal. If dealer laws are repealed in the states where we operate, manufacturers may be able to
terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the
protection of state dealer laws, it may also be more difficult to renew our franchise agreements upon expiration or on terms
acceptable to us.
In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in the future. Manufacturer
lobbying efforts (including those of Tesla) may lead to the repeal or revision of these laws. If manufacturers obtain the ability to
directly retail vehicles and do so in our markets, such competition could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
As evidenced by the bankruptcy proceedings of both Chrysler and GM in 2009, state dealer laws do not afford continued protection
from manufacturer terminations or non-renewal of franchise agreements. No assurances can be given that a manufacturer will not
seek protection under bankruptcy laws, or that, in this event, they will not seek to terminate franchise rights held by us.
Import product restrictions, currency valuations, and foreign trade risks may impair our ability to sell foreign vehicles or parts
profitably.
A significant portion of the vehicles we sell are manufactured outside the U.S., and all of the vehicles we sell include parts
manufactured outside the U.S. As a result, our operations are subject to customary risks of importing merchandise, including
currency fluctuation, import duties, exchange rates, trade restrictions, work stoppages, transportation costs, natural or man-made
disasters, and general political and socio-economic conditions in other countries. The U.S. or the countries from which our products
are imported, may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas,
duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices.
Changes in U.S. trade policies, including the North American Free Trade Agreement or policies intended to penalize foreign
manufacturing or imports, and policies of foreign countries in reaction to those changes could increase the prices we pay for some of
the new vehicles and parts we sell. Any changes that increase the costs of vehicles and parts generally, to the extent passed on to
customers, could negatively affect customer demand and our revenues and profitability. If not passed on to our customers, any cost
increases will adversely affect our profitability. Any cost increase that disproportionately applies to manufacturers that sell to us could
adversely affect our business compared to other automobile retailers.
Our operations are subject to extensive governmental laws and regulations. If we are found to be in purported violation of or
subject to liabilities under any of these laws, or if new laws or regulations are enacted that adversely affect our operations, our
business, operating results, and prospects could suffer.
We are subject to federal, state and local laws and regulations in the eighteen states in which we operate, such as those relating to
franchising, motor vehicle sales, retail installment sales, leasing, finance and insurance, marketing, licensing, consumer protection,
consumer privacy, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety.
In addition, with respect to employment practices, we are subject to various laws and regulations, including complex federal, state
and local wage and hour and anti-discrimination laws. New laws and regulations are enacted on an ongoing basis. With the number of
stores we operate, the number of personnel we employ
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and the large volume of transactions we handle, it is likely that technical mistakes will be made. These regulations affect our
profitability and require ongoing training. Current practices in stores may become prohibited. We are responsible for ensuring that
continued compliance with laws is maintained. If there are unauthorized activities, the state and federal authorities have the power to
impose civil penalties and sanctions, suspend or withdraw dealer licenses or take other actions. These actions could materially impair
our activities or our ability to acquire new stores in those states where violations occurred. Further, private causes of action on behalf
of individuals or a class of individuals could result in significant damages or injunctive relief.
We may be involved in legal proceedings arising from the conduct of our business, including litigation with customers, employee-
related lawsuits, class actions, purported class actions and actions brought by governmental authorities. Claims arising out of actual
or alleged violations of law may be asserted against us or any of our dealers by individuals, either individually or through class
actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial
monetary damages and legal defense costs, injunctive relief, criminal and civil fines and penalties and damage our reputation and
sales.
Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as
well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales
laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with
vehicle sales. In recent years, private plaintiffs and state attorneys general in the U.S. have increased their scrutiny of advertising,
sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the
amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly
restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which was signed into law on July 21,
2010, established the Consumer Financial Protection Bureau (the "CFPB"), a new independent federal agency funded by the U.S.
Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress. Although automotive dealers are
generally excluded, the Dodd-Frank Act has led to additional, indirect regulation of automotive dealers, in particular, their sale and
marketing of finance and insurance products, through its regulation of automotive finance companies and other financial institutions.
In March 2013, the CFPB issued supervisory guidance highlighting its concern that the practice of automotive dealers being
compensated for arranging customer financing through discretionary markup of wholesale rates offered by financial institutions
(“dealer markup”) results in a significant risk of pricing disparity in violation of The Equal Credit Opportunity Act (the “ECOA”). The
CFPB recommended that financial institutions under its jurisdiction take steps to ensure compliance with the ECOA, which may
include imposing controls on dealer markup, monitoring and addressing the effects of dealer markup policies, and eliminating dealer
discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to
certain groups of consumers.
Our marketing and disclosure regarding the sale and servicing of vehicles is regulated by federal, state and local agencies including
the Federal Trade Commission ("FTC") and state attorneys general. For example, in January 2016, we settled FTC allegations that we
did not adequately disclose information about used vehicles with open safety recalls. Under the settlement, we did not make any
payments or admit wrong-doing, but we did agree to make specified disclosures on our website and to provide that disclosure to
certain customers who had previously purchased a used vehicle from us.
If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or
protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal
investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense
costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to
conduct dealership operations.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances
and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we
may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities under
federal and state statutes. These federal and state statutes impose liability for investigation and remediation of contamination without
regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have
incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and state
statutes. In addition, we may be subject
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to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which
hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us.
Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you
that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws
and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse effect
on our business, results of operations, financial condition, cash flows and prospects.
Breaches in our data security systems or in systems used by our vendor partners, including cyber-attacks or unauthorized data
distribution by employees or affiliated vendors, or disruptions to access and connectivity of our information systems could impact
our operations or result in the loss or misuse of customers’ proprietary information.
Our information technology systems are important to operating our business efficiently. We employ information technology systems,
including websites, that allow for the secure handling and processing of customers’ proprietary information. The failure of our
information technology systems, and those of our partner software and technology vendors, to perform as we anticipate could
disrupt our business and could expose us to a risk of loss or misuse of this information, litigation and potential liability.
We collect, process, and retain personally identifiable information regarding customers, associates and vendors in the normal course
of our business. Our internal and third-party systems are under a moderate level of risk from hackers or other individuals with
malicious intent to gain unauthorized access to our systems. Cyber-attacks are growing in number and sophistication thus presenting
an ongoing threat to systems, whether internal or external, used to operate the business on a day-to-day basis. We invest in
reasonable commercial security technology to protect our data and business processes against many of these risks. We also purchase
insurance to mitigate the potential financial impact of many of these risks. Despite the security measures we have in place, our
facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost
or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in
the misappropriation, loss, or other unauthorized disclosure of confidential information, or degradation of services provided by critical
business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales,
reputation with current and potential customers, associates or vendors, as well as other operational and financial impacts derived
from investigations, litigation, imposition of penalties or other means.
Our ability to increase revenues and profitability through acquisitions depends on our ability to acquire and successfully integrate
additional stores.
General
The U.S. automobile industry is considered a mature industry in which minimal growth is expected in unit sales of new vehicles.
Accordingly, a principal component of our growth in sales is to make acquisitions in our existing markets and in new geographic
markets. To complete the acquisition of additional stores, we need to successfully address each of the following challenges.
Manufacturers
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a franchised store. In determining
whether to approve an acquisition, a manufacturer considers many factors, including our financial condition, ownership structure,
the number of stores currently owned and our performance with those stores. Obtaining manufacturer approval of acquisitions also
takes a significant amount of time, typically 60 to 90 days. In the past, manufacturers have not consented to our purchase of
franchised stores due to the performance of existing stores. We cannot assure you that manufacturers will approve future
acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.
Most major manufacturers have now established limitations or guidelines on the:
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•
•
•
number of such manufacturers’ stores that may be acquired by a single owner;
number of stores that may be acquired in any market or region;
percentage of market share that may be controlled by one automotive retailer group;
ownership of stores in contiguous markets;
performance requirements for existing stores; and
frequency of acquisitions.
17
In addition, such manufacturers generally require that no other manufacturers’ brands be sold from the same store location, and
many manufacturers have site control agreements in place that limit our ability to change the use of the facility without their approval.
A manufacturer also considers our past performance as measured by the Minimum Sales Responsibility (“MSR”) scores, CSI scores
and Sales Satisfaction Index (“SSI”) scores at our existing stores. At any point in time, certain stores may have scores below the
manufacturers’ sales zone averages or have achieved sales below the targets manufacturers have set. Our failure to maintain
satisfactory scores and to achieve market share performance goals could restrict our ability to complete future store acquisitions.
Acquisition Risks
We will face risks commonly encountered with growth through acquisitions. These risks include, without limitation:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
failing to assimilate the operations and personnel of acquired dealerships;
straining our existing systems, procedures, structures and personnel;
failing to achieve predicted sales levels;
incurring significantly higher capital expenditures and operating expenses, which could substantially limit our operating or
financial flexibility;
entering new, unfamiliar markets;
encountering undiscovered liabilities and operational difficulties at acquired dealerships;
disrupting our ongoing business;
diverting our management resources;
failing to maintain uniform standards, controls and policies;
impairing relationships with employees, manufacturers and customers as a result of changes in management;
incurring increased expenses for accounting and computer systems, as well as integration difficulties;
failing to obtain a manufacturer’s consent to the acquisition of one or more of its dealership franchises or renew the
franchise agreement on terms acceptable to us;
incorrectly valuing entities to be acquired; and
incurring additional facility renovation costs or other expenses required by the manufacturer.
In addition, we may not adequately anticipate all of the demands that growth will impose on our systems, procedures and structures.
Consummation and Competition
We may not be able to complete future acquisitions at acceptable prices and terms or identify suitable candidates. In addition,
increased competition in the future for acquisition candidates could result in fewer acquisition opportunities for us and higher
acquisition prices. The magnitude, timing, pricing and nature of future acquisitions will depend upon various factors, including:
•
•
•
•
•
•
•
the availability of suitable acquisition candidates;
competition with other dealer groups for suitable acquisitions;
the negotiation of acceptable terms with sellers and with manufacturers;
our financial capabilities and ability to obtain financing on acceptable terms;
our stock price;
our ability to maintain required financial covenant levels after the acquisition; and
the availability of skilled employees to manage the acquired businesses.
Operating and Financial Condition
Although we conduct what we believe to be a prudent level of investigation, an unavoidable level of risk remains regarding the actual
operating condition of acquired stores and we may not have an accurate understanding of each acquired store’s financial condition
and performance. Similarly, most of the dealerships we acquire do not have financial statements audited or prepared in accordance
with U.S. generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition
and performance of our acquired businesses. Until we assume control of the business, we may not be able to ascertain the actual
value or understand the potential liabilities of the acquired businesses and their earnings potential. These risks may not be adequately
mitigated by the indemnification obligations we negotiated with sellers.
Limitations on Our Capital Resources
We make a substantial capital investment when we acquire dealerships. Limitations on our capital resources would restrict our ability
to complete new acquisitions or could limit our operating or financial flexibility.
18
We finance acquisitions activity with cash flows from our operations, borrowings under our credit arrangements, proceeds from our
offering of senior notes, proceeds from mortgage financing and the issuance of shares of Class A common stock. The size of our
acquisition activity in recent years magnifies risks associated with debt service obligations. These risks include potential lower
earnings per share, our inability to pay dividends and potential negative impacts to the debt covenants we negotiated under our credit
agreement.
If we fail to meet the covenants in our credit facility or our senior notes indenture, or if some other event occurs that results in a
default or an acceleration of our repayment obligations under our debt instruments, we may not be able to refinance our debt on
terms acceptable to us or at all. We may not be able to obtain financing in the future due to the market price of our Class A common
stock and overall market conditions. Additionally, a substantial amount of assets of our dealerships are pledged to secure the
indebtedness under our credit facility and our other floor plan financing indebtedness. These pledges may limit our ability to borrow
from other sources in order to fund our acquisitions.
Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our goodwill and other
intangible assets for impairment at least annually, which could result in a material, non-cash write-down of goodwill or
franchise rights and could materially adversely affect our business, results of operations, and financial condition.
Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when
events or changes in circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal
intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. A decrease in our market
capitalization or profitability increases the risk of goodwill impairment. Negative or declining cash flows or a decline in actual or
planned revenues for our stores increases the risk of franchise rights impairment. An impairment loss could have a material adverse
effect on our business, results of operations, financial condition and cash flows. As of December 31, 2017, our balance sheet
reflected carrying amounts of $256.3 million in goodwill, and $187.0 million million in franchise value.
We are subject to substantial risk of loss under our various self-insurance programs including property and casualty, open lot
vehicle coverage, workers’ compensation and employee medical coverage. Our insurance does not fully cover all of our
operational risks, and changes in the cost of insurance or the availability of insurance could materially increase our insurance
costs or result in a decrease in our insurance coverage.
We have a significant concentration of our property values at each dealership location, including vehicle and parts inventories and our
facilities. Natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides and wind or hail
storms) or other extraordinary events subject us to property loss and business interruption. Illegal or unethical conduct by employees,
customers, vendors and unaffiliated third parties can also impact our business. Other potential liabilities arising out of our operations
may involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties
in connection with alleged violations of regulatory requirements.
Under our self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims-handling
expenses. Costs in excess of these retained risks may be insured under various contracts with third-party insurance carriers. As of
December 31, 2017, we had total reserve amounts associated with these programs of $31.2 million.
The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of our
insurance purchasing change. The operation of automobile dealerships is subject to a broad variety of risks. In certain instances, our
insurance may not fully cover an insured loss depending on the magnitude and nature of the claim. Accordingly, we cannot assure
that we will not be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial
condition, results of operations or cash flows. Additionally, changes in the cost of insurance or the availability of insurance in the
future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance
coverage and increase the portion of our risks that we self-insure.
19
Our indebtedness and lease obligations could materially adversely affect our financial health, limit our ability to finance future
acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much 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 make 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, as a larger portion of our cash flow from operations would
be dedicated to the payment of principal and interest on our indebtedness; and
exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of
interest.
In addition, our loan agreements and our senior note indenture 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 of 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.
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 would likely be immediately due and owing.
If these events were to occur, we may not be able to pay 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, in order to comply with these agreements.
In addition, the lenders' obligations to make loans or other credit accommodations under certain credit agreements is subject to the
satisfaction of certain conditions precedent including, for example, that our representations and warranties in the agreement 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, we may not be able to request new loans or other credit accommodations under those credit facilities,
which could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Additionally, 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 December 31, 2017, 76% 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, financial condition and cash flows.
20
We may not be able to satisfy our debt obligations upon the occurrence of a change in control under our debt instruments.
Upon the occurrence of a change in control as defined in our credit agreement, 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. Upon
the occurrence of a change in control, as defined in our senior notes indenture, the holders of our senior notes will have the right to
require us to purchase all or any part of such holders' notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any. 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. In the event we were unable to
satisfy these obligations, it could have a material adverse impact on our business and our common stock holders. 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-3 of the SEC under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares
of our voting stock on a fully diluted basis.
We have a significant relationship with a third-party warranty insurer and administrator. This third-party is the obligor of service
warranty policies sold to our customers. Additionally, we have agreements in place that allow for future income based on the
claims experience on policies sold to our customers.
We sell service warranty policies to our customers issued by a third-party obligor. We receive additional fee income if actual claims
are less than the amounts reserved for anticipated claims and the costs of administration and administrator profit.
A decline in the financial health of the third-party insurer could jeopardize the claims reserves held by the administrator, and prevent
us from collecting the experience payments anticipated to be earned in future years. While the amount we receive varies annually, the
loss of this income could negatively impact our business, results of operations, financial condition and cash flows. Further, the
inability of the insurer to honor service warranty claims would likely result in reputational risk to us and might result in claims to
cover any default by the insurer.
The loss of key personnel or the failure to attract additional qualified management personnel could adversely affect our
operations and growth.
Our success depends to a significant degree on the efforts and abilities of our senior management. Further, we have identified Bryan
B. DeBoer in most of our store franchise agreements as the individual who controls the franchises and upon whose financial
resources and management expertise the manufacturers may rely when awarding or approving the transfer of any franchise. If we
lose these key personnel, our business may suffer.
In addition, as we expand, we will need to hire additional managers and other employees. The market for qualified employees in the
industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly
competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key
employees or the inability to attract additional qualified managers could have a material adverse effect on our business, results of
operations, financial condition and cash flows. In addition, the lack of qualified managers or other employees employed by potential
acquisition candidates may limit our ability to consummate future acquisitions.
Significant voting control is currently held by Sidney B. DeBoer, who may have interests different from our other shareholders.
Further, all of the 1.0 million shares of our Class B common stock held by Lithia Holding Company, LLC (“Lithia Holding”)
are pledged to secure indebtedness of Lithia Holding. The failure to repay the indebtedness could result in the sale of such shares
and the loss of this significant voting control.
Sidney B. DeBoer, our Founder and Chairman of the Board, is the sole managing member of Lithia Holdings, which holds all of the
outstanding shares of our Class B common stock. A holder of Class B common stock is entitled to ten votes for each share held,
while a holder of Class A common stock is entitled to one vote per share held. On most matters, the Class A and Class B common
stock vote together as a single class. As of February 23, 2018, Lithia Holding controlled, and Mr. DeBoer had the authority to vote,
29% of the aggregate number of votes eligible to be cast by shareholders for the election of directors and most other shareholder
actions. This amount of voting control may make
21
certain changes in control or transactions more difficult. The interests of Mr. DeBoer may not always coincide with our interests as a
company or the interests of other shareholders.
Lithia Holding has pledged 1.0 million shares of our Class B common stock to secure a loan from U.S. Bank National Association. If
Lithia Holding is unable to repay the loan, the bank could foreclose on the Class B common stock, which would result in the
automatic conversion of such shares to Class A common stock. The market price of our Class A common stock could decline if the
bank foreclosed on the pledged stock and subsequently sold such stock in the open market.
Risks related to investing in our Class A common stock
Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover, which could impair the market price
of our Class A common stock.
We are an Oregon corporation, and certain provisions of Oregon law and our Restated Articles of Incorporation may have anti-
takeover effects. These provisions could delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider
to be in his or her best interest. These provisions may also affect attempts that might result in a premium over the market price for
the shares held by shareholders, and may make removal of the incumbent management and directors more difficult, which, under
certain circumstances, could reduce the market price of our Class A common stock.
Our issuance of preferred stock could adversely affect holders of Class A common stock.
Our Board of Directors is authorized to issue a series of preferred stock without any action on the part of our holders of Class A
common stock. Our Board of Directors also has the power, without shareholder approval, to set the terms of any such series of
preferred stock that may be issued, including voting powers, preferences over our Class A common stock with respect to dividends
or if we voluntarily or involuntarily dissolve or distribute our assets, and other terms. If we issue preferred stock in the future that
has preference over our Class A common stock with respect to the payment of dividends or upon our liquidation, dissolution or
winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Class A common stock, the rights of
holders of our Class A common stock or the price of our Class A common stock could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities, collision repair and paint
shops, supply facilities, automobile storage lots, parking lots and offices located in the states listed under the caption Overview in
Item 1. We believe our facilities are currently adequate for our needs and are in good repair. Some of our facilities do not currently
meet manufacturer image or size requirements and we are actively working to find a mutually acceptable outcome in terms of timing
and overall cost. We own our corporate headquarters in Medford, Oregon, and numerous other properties used in our operations.
Certain of our owned properties are mortgaged. As of December 31, 2017, we had outstanding mortgage debt of $470.0 million. We
also lease certain properties, providing future flexibility to relocate our retail stores as demographics, economics, traffic patterns or
sales methods change. Most leases provide us the option to renew the lease for one or more lease extension periods. We also hold
certain vacant facilities and undeveloped land for future expansion.
22
Item 3. Legal Proceedings
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the
resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material
adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
California Wage and Hour Litigations
In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No.
BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales
persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest
periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at
termination. The plaintiffs also seek attorney fees and costs. 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. In January 2017, DCH
and all non-technician plaintiffs agreed in principle to settle the representative claims, and this settlement was approved by the
California courts in December 2017. 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.
Item 4. Mine Safety Disclosure
Not applicable.
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Stock Prices and Dividends
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. The following table presents the high
and low sale prices for our Class A common stock, as reported on the New York Stock Exchange Composite Tape for each of the
quarters in 2016 and 2017:
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
High
Low
105.38 $
93.16
95.67
101.89
105.32 $
98.05
120.48
123.50
72.30
68.70
69.36
75.85
83.38
80.88
87.90
105.00
The number of shareholders of record and approximate number of beneficial holders of Class A common stock as of February 23,
2018 was 520 and 32,147, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, LLC.
Sidney B. DeBoer Trust U.T.A.D. January 30, 1997 (the "Trust") is the manager of Lithia Holding Company, L.L.C., and Sidney
DeBoer, as the trustee of the Trust, has the authority to vote all of the issued and outstanding shares of our Class B common stock.
Dividends declared on our Class A and Class B common stock during 2015, 2016 and 2017 were as follows:
Quarter declared:
2015
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend amount
per share
Total amount of
dividends paid (in
thousands)
$
$
$
0.16 $
0.20
0.20
0.20
0.20 $
0.25
0.25
0.25
0.25 $
0.27
0.27
0.27
4,216
5,266
5,257
5,246
5,151
6,373
6,299
6,308
6,292
6,760
6,751
6,741
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.
Recent Sale of Unregistered Securities
On May 1, 2017, we agreed to issue 22,446 shares of Class A common stock to Lee W. Baierl as partial consideration for the
purchase of Northland Ford, Inc., an entity we acquired in connection with our acquisition of the Baierl Auto Group. Under the
agreement, we issued 4,489 shares to Mr. Baierl on May 1, 2017 and will issue 4,489 additional shares to him on each of January 1,
2018, 2019, and 2020; on January 1, 2021, we will issue to him the final 4,490 shares. The shares were issued to Mr. Baierl, an
accredited investor, in a transaction exempt from Section 4(a)(2) of the Securities Act of 1933.
24
Repurchases of Equity Securities
We made the following repurchases of our common stock during the fourth quarter of 2017:
Total number of
shares
purchased
Total number of
shares purchased as
part of publicly
announced plan(1)
Maximum dollar
value of shares that
may yet be purchased
under publicly
announced plan (in
thousands)(1)
October
November
December
Total(2)
(1)
162,559
162,559
162,559
162,559
In February 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock.
Through December 31, 2017, we have repurchased 1,042,725 shares at an average price of $92.79 per share. This authority to
repurchase shares does not have an expiration date.
Includes 157 shares repurchased in association with tax withholdings on the vesting of RSUs.
19,000 $
—
—
19,000
19,000 $
157
—
19,157
(2)
Average price
paid per share
116.58
113.95
—
116.56
25
Stock Performance Graph
The following line-graph shows the annual percentage change in the cumulative total returns for the past five years on an assumed
$100 initial investment and reinvestment of dividends, on (a) Lithia Motors, Inc.’s Class A common stock; (b) the Russell 2000; and
(c) an auto peer group index composed of Penske Automotive Group, AutoNation, Sonic Automotive, Group 1 Automotive, and
Asbury Automotive Group, the only other comparable publicly traded automobile dealerships in the United States as of December 31,
2017. The peer group index utilizes the same methods of presentation and assumptions for the total return calculation as does Lithia
Motors and the Russell 2000. All companies in the peer group index are weighted in accordance with their market capitalizations.
Company/Index
Lithia Motors, Inc.
Auto Peer Group
Russell 2000
Base
Period
12/31/2012
12/31/2013
Indexed Returns for the Year Ended
12/31/2015
12/31/2014
12/31/2016
$100.00 $
100.00
100.00
186.73 $
135.40
138.83
235.10 $
161.18
145.62
291.34 $
147.93
139.19
267.51 $
145.09
168.85
26
12/31/2017
317.13
142.69
193.59
Item 6. Selected Financial Data
You should read the Selected Financial Data in conjunction with "Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” our Consolidated Financial Statements and Notes thereto and other financial information
contained elsewhere in this Annual Report on Form 10-K.
(In thousands, except per share
amounts)
Consolidated Statements of Operations
Data:
Revenues:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Gross Profit:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total gross profit
Operating income (1) (2)
Income from continuing operations before
income taxes (1)
Income from continuing operations (1)
Basic income per share from continuing
operations
Basic income per share from discontinued
operations
Basic net income per share
Shares used in basic per share
Diluted income per share from continuing
operations
Diluted income per share from discontinued
operations
Diluted net income per share
Shares used in diluted per share
Year Ended December 31,
2017
2016
2015
2014
2013
$
5,763,587 $
2,544,379
277,844
385,863
1,015,773
99,064
$ 10,086,510 $
4,938,436 $
2,226,951
276,616
330,922
844,505
60,727
8,678,157 $
4,552,301 $
1,927,016
261,530
283,018
738,990
101,397
7,864,252 $
3,077,670 $
1,362,481
195,699
190,381
512,124
51,971
5,390,326 $
2,256,598
1,032,224
158,235
139,007
383,483
36,202
4,005,749
$
$
$
$
$
$
$
$
$
339,843 $
286,835
4,786
385,863
493,124
5,635
1,516,086 $
289,412 $
263,684
4,313
330,922
410,283
2,701
1,301,315 $
280,370 $
241,249
4,457
283,018
363,921
2,619
1,175,634 $
198,184 $
179,253
3,646
190,381
249,736
2,122
823,322 $
151,118
150,858
2,711
139,007
185,570
1,689
630,953
408,986 $
338,364 $
302,735 $
231,899 $
183,518
347,069 $
283,523 $
262,704 $
210,495 $
165,788
245,217 $
197,058 $
182,999 $
135,540 $
105,214
9.78 $
7.76 $
6.96 $
5.19 $
—
9.78 $
—
7.76 $
—
6.96 $
0.12
5.31 $
4.08
0.03
4.11
25,065
25,409
26,290
26,121
25,805
9.75 $
7.72 $
6.91 $
5.14 $
—
9.75 $
—
7.72 $
—
6.91 $
0.12
5.26 $
4.02
0.03
4.05
25,145
25,521
26,490
26,382
26,191
Cash dividends paid per common share
$
1.06 $
0.95 $
0.76 $
0.61 $
0.39
27
$
2017
481,801 $
(In thousands)
Consolidated Balance Sheets Data:
Working capital
Inventories
Total assets
Floor plan notes payable
Long-term debt, including current maturities
Total stockholders’ equity (2)
(1)
2013
209,038
859,019
1,723,930
713,855
251,363
534,722
Includes $14.0 million, $20.1 million, and $1.9 million in non-cash charges related to asset impairments for the years ended 2016,
2015 and 2014, respectively. We did not record any non-cash charges related to asset impairments in 2017 and 2013. See Notes
1, 4 and 17 of Notes to Consolidated Financial Statements for additional information.
As of December 31,
2015
288,040 $
2,132,744
4,683,066
1,919,026
1,047,352
1,083,218
1,470,987
3,225,130
1,313,955
1,772,587
3,844,150
1,601,497
1,249,659
2,879,093
1,178,679
2014
172,909 $
2016
365,200 $
643,186
828,164
639,138
673,105
790,881
910,776
(2) Reclassifications of amounts previously reported have been made to the selected financial data to maintain consistency and
comparability between periods presented.
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Item 1. Business, Item 1A. Risk Factors, and our Consolidated
Financial Statements and Notes thereto.
Overview
We are one of the largest automotive franchises in the United States and are among the fastest growing companies in the Fortune 500
(#318-2017). As of February 23, 2018, we offered 30 brands of new vehicles and all brands of used vehicles in 171 stores in the
United States and online at over 200 websites. We sell new and used cars and replacement parts; provide vehicle maintenance,
warranty, paint and repair services; arrange related financing; and sell vehicle service contracts, vehicle protection products and
credit insurance.
We believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth
through consolidation. In 2017, the top ten automotive retailers, as reported by Automotive News, represented approximately 7% of
the stores in the United States. Our dealerships are located across the United States. We seek domestic, import and luxury franchises
in cities ranging from mid-sized regional markets to metropolitan markets. We evaluate all brands for expansion opportunities
provided the market is large enough to support adequate new vehicle sales to justify the required capital investment. Our acquisition
strategy has been to acquire dealerships at prices that meet our internal investment targets and, through the application of our
centralized operating structure, leverage costs and improve store profitability. We believe our disciplined approach and the current
economic environment provides us with attractive acquisition opportunities.
We also believe that we can continue to improve operations at our existing stores. By promoting entrepreneurial leadership within our
general and department managers, we strive for continuous improvement to drive sales and capture market share in our local
markets. Our goal is to retail an average of 85 used vehicles per store per month and we believe we can make additional
improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new
vehicle franchise at each location. Our service, body and parts operations provide important repeat business for our stores. We
continue to grow this business through increased marketing efforts, competitive pricing on routine maintenance items and diverse
commodity product offerings. In 2017, we continued to experience organic growth and profitability through increasing market share
and maintaining a lean cost structure, while adding significant revenue to our base through acquisitions.
As sales volume increases and we gain leverage in our cost structure, we anticipate targeting SG&A as a percentage of gross profit in
the upper 60% range. This metric may be impacted by recently acquired stores, as they may not be fully integrated into our cost
structure. We focus on accelerating the integration of acquired stores to increase incremental profitability.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make certain
estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities and reported amounts of revenues and expenses at the date of the financial statements. Certain accounting policies
require us to make difficult and subjective judgments on matters that are inherently uncertain. The following accounting policies
involve critical accounting estimates because they are particularly dependent on assumptions made by management. While we have
made our best estimates based on facts and circumstances available to us at the time, different estimates could have been used in the
current period. Changes in the accounting estimates we used are reasonably likely to occur from period to period, which may have a
material impact on the presentation of our financial condition and results of operations.
Our most critical accounting estimates include those related to goodwill and franchise value, long-lived assets, charge-backs for
various contracts, lifetime lube, oil and filter contracts, self-insurance programs, revenue, income taxes, equity investments and
acquisitions. We also have other key accounting policies for valuation of accounts receivable and expense accruals. However, these
policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our
financial statements. We review our estimates, judgments and assumptions periodically and reflect the effects of revisions in the
period that they are deemed to be necessary. We believe that these estimates are reasonable. However, actual results could differ
materially from these estimates.
29
Goodwill and Franchise Value
We are required to test our goodwill and franchise value for impairment at least annually, or more frequently if conditions indicate
that an impairment may have occurred. Goodwill is tested for impairment at the reporting unit level. Our reporting units are individual
retail automotive stores as this is the level at which discrete financial information is available and for which operating results are
regularly reviewed by our chief operating decision maker to allocate resources and assess performance.
We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2017, we evaluated our goodwill using a
qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting
unit exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair
value is less than the carrying amount, the first step of the two-step goodwill impairment test is performed.
As of December 31, 2017, we had $256.3 million of goodwill on our balance sheet associated with 151 reporting units No reporting
unit accounted for more than 2.4% of our total goodwill as of December 31, 2017. The annual goodwill impairment analysis, which
we perform as of October 1 of each year, did not result in an indication of impairment in 2017, 2016 or 2015.
We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. We
have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2017, we evaluated our
indefinite-lived intangible assets using a qualitative assessment process. If the qualitative factors determine that it is more likely than
not that the fair value of the individual store's franchise value exceeds the carrying amount, the franchise value is not impaired and the
second step is not necessary. If the qualitative assessment determines it is more likely than not that the fair value is less than the
carrying amount, then a quantitative valuation of our franchise value is performed and an impairment would be recorded.
As of December 31, 2017, we had $187.0 million of franchise value on our balance sheet associated with 151 stores. No individual
store accounted for more than 5% of our total franchise value as of December 31, 2017. Our impairment testing of franchise value
did not indicate any impairment in 2017, 2016 or 2015.
We are subject to financial statement risk to the extent that our goodwill or franchise rights become impaired due to decreases in the
fair value. A future decline in performance, decreases in projected growth rates or margin assumptions or changes in discount rates
could result in a potential impairment, which could have a material adverse impact on our financial position and results of operations.
Furthermore, if a manufacturer becomes insolvent, we may be required to record a partial or total impairment on the franchise value
and/or goodwill related to that manufacturer. No individual manufacturer accounted for more than 18% of our total franchise value
and goodwill as of December 31, 2017.
See Notes 1 and 5 of Notes to Consolidated Financial Statements for additional information.
Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review each asset group for
impairment when events or circumstances indicate that their carrying amounts may not be recoverable. We determined an asset
group is comprised of the long-lived assets used in the operations of an individual store.
We determine a triggering event has occurred by reviewing store forecasted and historical financial performance. An asset group is
evaluated for recoverability if it has an operating loss in the current year and two of the prior three years. Additionally, we may
judgmentally evaluate an asset group if its financial performance indicates it may not support the carrying amount of the long-lived
assets. If a store meets these criteria, we estimate the projected undiscounted cash flows for each asset group based on internally
developed forecasts. If the undiscounted cash flows are lower than the carrying value of the asset group, we determine the fair value
of the asset group based on additional market data, including recent experience in selling similar assets.
We hold certain property for future development or investment purposes. If a triggering event is deemed to have occurred, we
evaluate the property for impairment by comparing its estimated fair value based on listing price less costs to sell and other market
data, including similar property that is for sale or has been recently sold, to the current carrying value. If the carrying value is more
than the estimated fair value, an impairment is recorded.
30
Although we believe our property and equipment and assets held and used are appropriately valued, the assumptions and estimates
used may change and we may be required to record impairment charges to reduce the value of these assets. A future decline in store
performance, decrease in projected growth rates or changes in other operating assumptions could result in an impairment of long-
lived asset groups, which could have a material adverse impact on our financial position and results of operations.
In 2017 and 2016, we did not record any impairments to long-lived assets; however, in 2015, we recorded $3.6 million of impairment
charges associated with certain properties and equipment. As the expected future use of these facilities changed, the long-lived assets
were tested for recoverability and were determined to have a carrying value exceeding their fair value.
See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information.
Charge-backs for Various Contracts
We receive commissions from the sale of vehicle service contracts and certain other insurance contracts. The contracts are sold
through unrelated third parties, but we may be charged back for a portion of the commissions in the event of early termination of the
contracts by customers. We record commissions at the time of sale of the vehicles, net of an estimated liability for future charge-
backs. We have established a reserve for estimated future charge-backs based on an analysis of historical charge-backs in
conjunction with estimated lives of the applicable contracts. If future cancellations are different than expected, we could have
additional expense related to the cancellations in future periods, which could have a material adverse impact on our financial position
and results of operations.
As of December 31, 2017, the reserve for future cancellations totaled $52.7 million and is included in accrued liabilities and other
long-term liabilities on our Consolidated Balance Sheets. A 10% increase in expected cancellations would result in an additional
reserve of $5.3 million.
See Note 7 of Notes to Consolidated Financial Statements for additional information.
Lifetime Lube, Oil and Filter Contracts
We retain the obligation for lifetime lube, oil and filter service contracts sold to our customers. Payments we receive upon sale of the
lifetime oil contracts are deferred and recognized in revenue over the expected life of the service agreement to best match the
expected timing of the costs to be incurred to perform the service. We estimate the timing and amount of future costs for claims and
cancellations related to our lifetime lube, oil and filter contracts using historical experience rates and estimated future costs. If, in the
future, usage and cancellations were different than expected or claims cost increased, we could have additional expenses related these
contracts, reducing profitability.
As of December 31, 2017, the deferred revenue related to these self-insured contracts was $127.3 million.
See Note 7 of Notes to Consolidated Financial Statements for additional information.
Self-Insurance Programs
We self-insure a portion of our property and casualty insurance, vehicle open lot coverage, medical insurance and workers’
compensation insurance. We engage third-parties to assist in estimating the loss exposure related to the self-retained portion of the
risk associated with these insurances. Additionally, we analyze our historical loss and claims trends associated with these programs.
The exposure on any single claim under our property and casualty insurance, medical insurance and workers’ compensation
insurance varies based upon type of coverage. Our maximum exposure on any single claim is $5.5 million, subject to certain
aggregate limit thresholds. Although we believe we have sufficient insurance, exposure to uninsured or underinsured losses may
result in the recognition of additional charges, which could have a material adverse impact on our financial position and results of
operations.
As of December 31, 2017, we had liabilities associated with these programs of $31.2 million recorded as a component of accrued
liabilities and other long-term liabilities on our Consolidated Balance Sheets.
See Note 7 of Notes to Consolidated Financial Statements for additional information.
Revenue
Revenue is earned from the sale of new and used vehicles, parts and service or from commissions earned on the arrangement of
financing or sales of third party contracts and insurance products. We recognize revenue from the sale
31
of new and used vehicles and the the commissions earned associated with finance and insurance when a contract is signed by the
customer, financing has been arranged or collectibility is reasonably assured and the delivery of the vehicle to the customer is made.
Parts and service revenues are recognized upon completion and delivery of the parts or service to the customer. In May 2014, the
Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts
with Customers,"which amends the accounting guidance related to revenues. We have evaluated the effect of this amendment to
revenue recognition and expect the timing of our revenue recognition to generally remain the same.
See Notes 1 and 19 of Notes to Consolidated Financial Statements for additional information.
Income Taxes
As of December 31, 2017, we had deferred tax assets of $76.3 million, net of valuation allowance of $0.6 million, and deferred tax
liabilities of $132.5 million. The principal components of our deferred tax assets are related to allowances and accruals, deferred
revenue and cancellation reserves. The principal components of our deferred tax liabilities are related to depreciation on property and
equipment, inventories and goodwill. As a result of the tax reform passed in December 2017, we recorded a reduction in the value of
our net deferred tax liability of $32.9 million.
We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences
become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and
carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
Based upon the scheduled reversal of deferred tax liabilities, and our projections of future taxable income over the periods in which
the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of the unreserved
deductible differences.
As of December 31, 2017, we had a $0.6 million valuation allowance against our deferred tax assets associated with state net
operating losses. Since these amounts are dependent on generating future taxable income, we evaluated the income expectations in
the underlying states and determined that it is unlikely these amounts will be fully utilized. If we are unable to meet the projected
taxable income levels utilized in our analysis, and depending on the availability of feasible tax planning strategies, we might record an
additional valuation allowance on a portion or all of our deferred tax assets in the future.
See Note 13 of Notes to Consolidated Financial Statements for additional information.
Equity-Method Investment Associated with New Markets Tax Credits
In 2016 and 2015, we held an equity investment in a limited liability company managed by U.S. Bancorp Community Development
Corporation. This investment generated new market 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 the appropriate
accounting for our ownership portion of the entity was under the equity method of accounting. The equity-method investment
generated operating losses on a quarterly basis and, accordingly, we were required to assess the investment for other than temporary
impairment on a quarterly basis. We exited this equity-method investment in December 2016.
See Notes 1, 12 and 17 of Notes to Consolidated Financial Statements for additional information.
Acquisitions
We account for acquisitions using the purchase method of accounting which requires recognition of assets acquired and liabilities
assumed at fair value as of the date of the acquisition. Determination of the estimated fair value assigned to each assets acquired or
liability assumed can materially impact the net income in subsequent periods through depreciation and amortization and potential
impairment charges.
The most significant items we generally acquire in a transaction are inventory, long-lived assets, intangible franchise rights and
goodwill. The fair value of acquired inventory is based on manufacturer invoice cost and market data. We estimate the fair value of
property and equipment based on a market valuation approach. Additionally, we may use a
32
cost valuation approach to value long-lived assets when a market valuation approach is unavailable. We apply an income approach for
the fair value of intangible franchise rights which discounts the projected future net cash flow using an appropriate discount rate that
reflects the risks associated with such projected future cash flow.
See Notes 1 and 14 of Notes to Consolidated Financial Statements for additional information.
Results of Operations
For the year ended December 31, 2017, we reported net income of $245.2 million, or $9.75 per diluted share. For the years ended
December 31, 2016 and 2015, we reported net income of $197.1 million, or $7.72 per diluted share, and $183.0 million, or $6.91 per
diluted share, respectively.
Key Performance Metrics
Certain key performance metrics for revenue and gross profit were as follows (dollars in thousands):
2017
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
2016
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
2015
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
Revenues
$
5,763,587
2,544,379
277,844
385,863
1,015,773
99,064
10,086,510
Revenues
$
4,938,436
2,226,951
276,616
330,922
844,505
60,727
8,678,157
4,552,301
1,927,016
261,530
283,018
738,990
101,397
7,864,252
Revenues
$
$
$
$
Percent of
Total Revenues Gross Profit
57.1% $
25.2
2.8
3.8
10.1
1.0
339,843
286,835
4,786
385,863
493,124
5,635
1,516,086
100.0% $
Percent of
Total Revenues Gross Profit
56.9% $
25.7
3.2
3.8
9.7
0.7
289,412
263,684
4,313
330,922
410,283
2,701
1,301,315
100.0% $
Percent of
Total Revenues Gross Profit
57.9% $
24.5
3.3
3.6
9.4
1.3
280,370
241,249
4,457
283,018
363,921
2,619
1,175,634
100.0% $
Gross Profit
Margin
Percent of Total
Gross Profit
5.9%
11.3
1.7
100.0
48.5
5.7
15.0%
22.4%
18.9
0.3
25.5
32.5
0.4
100.0%
Gross Profit
Margin
Percent of Total
Gross Profit
5.9%
11.8
1.6
100.0
48.6
4.4
15.0%
22.2%
20.3
0.3
25.4
31.5
0.3
100.0%
Gross Profit
Margin
Percent of Total
Gross Profit
6.2%
12.5
1.7
100.0
49.2
2.6
14.9%
23.8%
20.5
0.4
24.1
31.0
0.2
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. Therefore, we have integrated same store measures 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 November 2016 would be included in same store operating data
beginning in December 2017, after its first complete comparable month of operations. The fourth quarter operating results for the
same store comparisons would include results for that store in only the period of December for both comparable periods.
33
New Vehicle Revenue and Gross Profit
(Dollars in thousands, except per unit amounts)
Reported
Revenue
Gross profit
Gross margin
$
$
Year Ended
December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
5,763,587
339,843
$
$
4,938,436
289,412
$
$
825,151
50,431
5.9%
5.9%
—
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
167,146
34,482
2,033
$
$
145,772
33,878
1,985
$
$
$
$
Same store
Revenue
Gross profit
Gross margin
$
$
4,959,751
290,309
$
$
4,898,292
286,519
$
$
5.9%
5.8%
10 bps
21,374
604
48
61,459
3,790
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
144,308
34,369
2,012
$
$
144,728
33,845
1,980
$
$
$
$
(420)
524
32
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands, except per unit amounts)
Reported
Revenue
Gross profit
$
$
4,938,436
289,412
$
$
4,552,301
280,370
$
$
Gross margin
5.9%
6.2%
386,135
9,042
)
bps
(30
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
145,772
33,878
1,985
$
$
137,486
33,111
2,039
$
$
$
$
8,286
767
(54)
Same store
Revenue
Gross profit
Gross margin
$
$
4,670,738
273,207
$
$
4,520,429
277,724
$
$
5.8%
6.1%
150,309
(4,517)
)
bps
(30
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
(1) A basis point is equal to 1/100th of one percent.
137,998
33,846
1,980
$
$
136,707
33,067
2,032
$
$
$
$
1,291
779
(52)
New vehicle sales increased in 2017 compared to 2016 and in 2016 compared to 2015 primarily driven by acquisitions. In 2017, we
acquired 18 stores and opened one store. In 2016, we acquired 15 stores and one franchise and opened one store.
Excluding the impact of acquisitions, on a same store basis, new vehicle sales increased 1.3% and included a 0.3% decrease in unit
volume, offset by a 1.5% increase in the average selling price per retail unit in 2017 compared to 2016. New vehicle sales increased
3.3% in 2016 compared to 2015, primarily due to a 0.9% increase in unit volume and a 2.4% increase in average selling price per
retail unit. The increases in average selling price are primarily a function of annual increases in manufacturer suggested retail price
over the manufacturers' invoice cost of vehicles.
34
16.7 %
17.4
14.7
1.8
2.4
1.3 %
1.3
(0.3)
1.5
1.6
8.5 %
3.2
6.0
2.3
(2.6)
3.3 %
(1.6)
0.9
2.4
(2.6)
Same store unit sales growth compared to national performance was as follows:
Domestic brand same store unit sales growth
Import brand same store unit sales growth
Luxury brand same store unit sales growth
Overall
National growth
in 2017
compared to
2016
2017 compared
to 2016
2016 compared
to 2015
National growth
in 2016
compared to
2015
(1.6)%
2.1
(7.8)
(0.3)
(3.3)%
(1.1)
1.2
(1.9)
(0.7)%
3.1
(3.7)
1.0
(0.7)%
1.2
1.7
0.4
National new vehicle sales market growth continues to moderate for all brands. Our domestic brand unit volume outperformed the
national average despite an overall decline in 2017, primarily driven by Ford, which had a same store unit sales increase of 2.3%
compared to a national decrease of 1.2%, and Chrysler, which had a same store unit sales decrease of 2.2% compared to a national
decrease of 8.4%. The outperformance of these brands was offset by General Motors, which had a same store sales unit decrease of
2.7% compared to a national decrease of 1.4%.
Our import brand unit sales growth outperformed the national average during 2017 primarily driven by Toyota, which comprised
18.6% of new vehicle unit sales in 2017 and had a same store unit sales increase of 3.1% compared to a national decrease of 0.6%,
Honda, which had a same store unit sales increase of 1.9% compared to a national increase of 0.2%, and Subaru, which had a same
store unit sales increase of 7.1% compared to a national increase of 5.3%.
Our luxury brand unit volume decreased 7.8% during 2017 compared to a national average increase of 1.2%, primarily driven by
BMW, which had a same store unit decrease of 15.3% compared to a national average decrease of 3.4% and Mercedes, which had a
same store decrease of 3.3% compared to a national average decrease of 1.4%.
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. In 2017, our sales were 9% higher than the
national OEM average.
New vehicle gross profit increased 17.4% in 2017 compared to 2016, primarily driven by the increase in unit sales gained through
dealership acquisitions. On a same store basis, new vehicle gross profit decreased 1.3% in 2017 compared to 2016. The decrease in
unit sales on a same store basis, combined with a lower average gross profit per unit, resulted in a same store decline in gross profit.
On a same store basis, the average gross profit per new retail unit decreased $32, or 1.6%, in 2017 compared to 2016. Consumers
are increasingly aware of our wholesale cost of vehicles and average transaction prices for new vehicle sales due to the proliferation
of third-party providers distributing this information over the Internet. As a result, the average gross profit realized on new vehicle
sales has been under pressure for the last several years across the automobile industry. In addition, w e have pursued a volume-based
strategy because this creates additional used vehicle trade-in opportunities, finance and insurance sales and future service work,
which we believe will generate incremental business in future periods that will offset the lower new vehicle gross profit per unit that
has occurred as a result of this strategy.
New vehicle gross profit increased 3.2% in 2016 compared to 2015, driven by dealership acquisitions. On a same store basis, gross
profit decreased 1.6% in 2016 compared to 2015, primarily due to a greater number of vehicles sold, offset by a decline in the
average gross profit per retail vehicle sold.
35
Year Ended
December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
Used Vehicle Retail Revenue and Gross Profit
(Dollars in thousands, except per unit amounts)
Reported
Retail revenue
Retail gross profit
$
$
Retail gross margin
11.3%
11.8%
2,544,379
286,835
$
$
2,226,951
263,684
$
$
317,428
23,151
)
bps
(50
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
129,913
19,585
2,208
$
$
113,498
19,621
2,323
$
$
$
$
16,415
(36)
(115)
Same store
Retail revenue
Retail gross profit
Retail gross margin
$
$
2,288,290
263,119
$
$
2,204,795
261,589
$
$
11.5%
11.9%
83,495
1,530
)
bps
(40
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
116,359
19,666
2,261
$
$
112,387
19,618
2,328
$
$
$
$
3,972
48
(67)
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands, except per unit amounts)
Reported
Retail revenue
Retail gross profit
$
$
2,226,951
263,684
$
$
1,927,016
241,249
$
$
Retail gross margin
11.8%
12.5%
299,935
22,435
)
bps
(70
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
113,498
19,621
2,323
$
$
$
$
99,109
19,443
2,434
$
$
14,389
178
(111)
Same store
Retail revenue
Retail gross profit
Retail gross margin
$
$
2,119,831
251,484
$
$
1,909,209
239,444
$
$
11.9%
12.5%
210,622
12,040
)
bps
(60
Retail units sold
Average selling price per retail unit
Average gross profit per retail unit
107,519
19,716
2,339
$
$
$
$
98,235
19,435
2,437
$
$
9,284
281
(98)
Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer CPO
vehicles; Core Vehicles, or late-model vehicles with lower mileage; and Value Autos, or older vehicles with over 80,000 miles.
Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade
to retail used vehicle sales.
Same store sales of used vehicles increased (decreased) as follows:
Manufacturer CPO vehicles
Core vehicles
2017 compared to
2016
2016 compared to
2015
(2.7)%
6.2
11.1%
12.2
14.3 %
8.8
14.5
(0.2)
(5.0)
3.8 %
0.6
3.5
0.2
(2.9)
15.6 %
9.3
14.5
0.9
(4.6)
11.0 %
5.0
9.5
1.4
(4.0)
Value autos
Overall
9.9
3.8
6.5
11.0
36
The same store sales increases in 2017 compared to 2016 were primarily driven by increased unit sales in our core and value auto
categories of 6.2% and 9.9%, respectively. For core autos, same store increases in units sold were offset by decreases in average
selling price and gross profit per unit of 0.1% and 1.0%, respectively. Value autos had an increase in average selling price of 5.4%,
offset by a decrease of 2.9% in gross profit per unit. These increases were offset by a decrease in our CPO vehicles in 2017
compared to 2016, mainly related to our import and luxury stores. The same store increases in 2016 compared to 2015 were a result
of increases in unit sales and average selling price as our mix shifted toward higher-priced CPO and core vehicles and away from
value autos.
On average, in 2017 and 2016, each of our stores sold 67 and 66 retail used vehicle units per month, respectively. We continue to
target increasing sales to 85 units per store per month.
Used retail vehicle gross profit increased 8.8% in 2017 compared to 2016, primarily driven by acquisitions. On a same store basis,
gross profit increased 0.6% in 2017 compared to 2016, due to increased unit volume and increased average selling price, offset by
margin declines. During the year, we began to see a flattening of certified pre-owned vehicle unit sales and a decrease in margins in
all three categories due in part to an increase in the number of off-lease vehicles entering the used vehicle market as a result of
increased new vehicle leasing since 2010.
Used retail vehicle gross profit dollars increased 9.3% in 2016 compared to 2015 due to acquisitions. On a same store basis, gross
profit increased 5.0% in 2016 compared to 2015 due to increased unit volume and increased selling prices, offset by a decline in
gross profit per unit.
Used Vehicle Wholesale Revenue and Gross Profit
(Dollars in thousands, except per unit amounts)
Reported
Wholesale revenue
Wholesale gross profit
Wholesale gross margin
$
$
Wholesale units sold
Average selling price per wholesale unit
Average gross profit per retail unit
Same store
Wholesale revenue
Wholesale gross profit
Wholesale gross margin
Wholesale units sold
Average selling price per wholesale unit
Average gross profit per retail unit
$
$
$
$
$
$
Year Ended
December 31,
2017
2016
Increase (Decrease)
% Increase
(Decrease)
277,844
4,786
$
$
276,616
4,313
$
$
1.7%
1.6%
1,228
473
10 bps
43,912
6,327
109
$
$
40,615
6,811
106
$
$
3,297
(484)
3
0.4 %
11.0
8.1
(7.1)
2.8
238,474
4,019
$
$
273,679
4,394
$
$
(35,205)
(375)
(12.9)%
(8.5)
1.7%
1.6%
10 bps
37,150
6,419
108
$
$
40,349
6,783
109
$
$
(3,199)
(364)
(1)
(7.9)
(5.4)
(0.9)
37
5.8 %
(3.2)
6.4
(0.6)
(9.4)
0.4 %
(9.4)
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands, except per unit amounts)
Reported
Wholesale revenue
Wholesale gross profit
Wholesale gross margin
1.6%
1.7%
$
$
276,616
4,313
$
$
261,530
4,457
$
$
15,086
(144)
)
bps
(10
Wholesale units sold
Average selling price per wholesale unit
Average gross profit per retail unit
Same store
Wholesale revenue
Wholesale gross profit
Wholesale gross margin
Wholesale units sold
Average selling price per wholesale unit
Average gross profit per retail unit
$
$
$
$
$
$
40,615
6,811
106
$
$
38,167
6,852
117
$
$
2,448
(41)
(11)
260,809
4,171
$
$
259,772
4,606
$
$
1.6%
1.8%
1,037
(435)
)
bps
(20
38,158
6,835
109
$
$
37,909
6,853
122
$
$
249
(18)
(13)
0.7
(0.3)
(10.7)
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 inventory age or other factors. Wholesale vehicles are typically sold at or near inventory cost and do not
comprise a meaningful component of our gross profit.
Finance and Insurance
(Dollars in thousands, except per unit amounts)
Reported
Revenue
Average finance and insurance per retail unit
Same store
Revenue
Average finance and insurance per retail unit
(Dollars in thousands, except per unit amounts)
Reported
Revenue
Average finance and insurance per retail unit
Same store
Revenue
Average finance and insurance per retail unit
Year Ended
December 31,
2017
2016
Increase
% Increase
385,863 $
1,299
330,922 $
1,276
54,941
23
347,583 $
1,333
329,031 $
1,280
18,552
53
Year Ended
December 31,
16.6%
1.8
5.6%
4.1
2016
2015
Increase
% Increase
330,922 $
1,276
283,018 $
1,196
47,904
80
317,015 $
1,291
281,351 $
1,198
35,664
93
16.9%
6.7
12.7%
7.8
$
$
$
$
The increase in finance and insurance revenue in 2017 compared to 2016 was primarily due to acquisitions combined with expanded
product offerings. Third-party extended warranty and insurance contracts yield higher profit margins than vehicle sales and
contribute significantly to our profitability. During 2017, we focused on expanding the products available through our primary
underwriter to drive additional profitability despite relatively flat penetration rates. Finance and insurance sales in 2016 compared to
2015 increased primarily due to increased volume, complemented by increased finance and insurance penetration rates.
38
Trends in same store penetration rates for total new and used retail vehicles sold are detailed below:
Vehicle financing
Service contracts
Lifetime lube, oil and filter contracts
2017
2016
2015
76%
44%
25%
76%
44%
26%
77%
42%
25%
In 2017, penetration rates remained relatively consistent with 2016. In 2016, the improved penetration rates associated with service
contracts was a main contributor to the increase in finance and insurance revenues. We seek to increase our penetration rates in all
categories on the number of vehicles that we sell and to offer a comprehensive suite of products. We target an average F&I per unit
retailed of $1,450. We believe improved performance from sales training and revised pay plans will be critical factors in achieving this
target.
Service, Body and Parts Revenue and Gross Profit
(Dollars in thousands)
Reported
Customer pay
Warranty
Wholesale parts
Body shop
Total service, body and parts
Service, body and parts gross profit
Service, body and parts gross margin
Same store
Customer pay
Warranty
Wholesale parts
Body shop
Total service, body and parts
Service, body and parts gross profit
Service, body and parts gross margin
Year Ended
December 31,
2017
2016
Increase (Decrease)
% Increase
$
$
$
$
$
$
547,102
239,834
153,059
75,778
1,015,773
$
$
462,492
199,049
123,440
59,524
844,505
$
$
84,610
40,785
29,619
16,254
171,268
493,124
$
410,283
$
48.5%
48.6%
82,841
)
bps
(10
481,796
207,074
126,375
61,977
877,222
$
$
457,782
197,428
122,001
57,791
835,002
$
$
24,014
9,646
4,374
4,186
42,220
428,169
$
405,661
$
22,508
48.8%
48.6%
20 bps
39
18.3%
20.5
24.0
27.3
20.3
20.2%
5.2%
4.9
3.6
7.2
5.1
5.5%
(Dollars in thousands)
Reported
Customer pay
Warranty
Wholesale parts
Body shop
Total service, body and parts
Service, body and parts gross profit
Service, body and parts gross margin
Same store
Customer pay
Warranty
Wholesale parts
Body shop
Total service, body and parts
Service, body and parts gross profit
$
$
$
$
$
$
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
462,492
199,049
123,440
59,524
844,505
$
$
414,197
165,902
111,557
47,334
738,990
$
$
48,295
33,147
11,883
12,190
105,515
410,283
$
363,921
$
48.6%
49.2%
46,362
)
bps
(60
437,650
187,410
112,393
55,099
792,552
$
$
408,740
164,213
110,754
47,334
731,041
$
$
387,091
$
359,834
$
28,910
23,197
1,639
7,765
61,511
27,257
)
bps
(40
11.7%
20.0
10.7
25.8
14.3
12.7%
7.1%
14.1
1.5
16.4
8.4
7.6%
Service, body and parts gross margin
48.8%
49.2%
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 of our overall
profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners
have tended to repair their existing vehicles rather than buy new vehicles.
Our service, body and parts sales grew in all areas in 2017 compared to 2016 and in 2016 compared to 2015. The growth in 2017
was primarily due to acquisitions, combined with more late-model units in operation, offset by one less service day during the year.
The growth in 2016 was mainly due to more late-model units in operation as new vehicle sales volumes increased annually from 2010
to 2016. We believe this increase in units in operation will continue to benefit our service, body and parts sales in the coming years as
more late-model vehicles age, necessitating repairs and maintenance.
We focus on retaining customers by offering competitively priced routine maintenance and through our marketing efforts. We
increased our same store customer pay business 5.2% in 2017 compared to 2016 and by 7.1% in 2016 compared to 2015.
Same store warranty sales increased 4.9% in 2017 compared to 2016, primarily due to increases related to Chrysler and Ford of
11.4% and 11.7%, respectively, offset by decreases related to Honda and Toyota of 16.6% and 11.5%, respectively, as warranty
work related to recalls was more significant in 2016. Same store warranty sales increased 14.1% in 2016 compared to 2015,
primarily due to significant vehicle recalls across multiple manufacturers. Additionally, we saw increases in warranty sales due to the
growing number of units in operation. Routine maintenance, such as oil changes, offered by certain brands, including BMW, Toyota
and General Motors, for two to four years after a vehicle is sold, provides for future work as consumers return to the franchised
dealer for this maintenance item.
Increases (decreases) in same-store warranty work by segment were as follows:
Domestic
Import
Luxury
2017 compared to
2016
2016 compared to
2015
9.1 %
(1.5)
11.0
10.5 %
28.1
(1.1)
Same store wholesale parts revenue grew 3.6% and 1.5%, respectively, in 2017 compared to 2016 and in 2016 compared to 2015,
primarily due to increased parts sales to independent repair shops, competing new vehicle dealers and wholesale accounts.
40
Same store body shop grew 7.2% and 16.4%, respectively, in 2017 compared to 2016 and in 2016 compared to 2015. These
increases were due to increased productivity as we increased capacity and improved work flow. We focus on obtaining direct repair
relationships with insurance companies as a strategy to increase business.
Same store service, body and parts gross profit increased 5.5% and 7.6%, respectively, in 2017 compared to 2016 and in 2016
compared to 2015. The growth in gross profit in 2017 compared to 2016 was relatively consistent with revenue growth. Our gross
profit growth in 2016 compared to 2015 was relatively consistent with revenue growth, as well with the continued growth in
warranty work in 2016 compared to 2015.
Segments
Certain financial information by segment is as follows:
(Dollars in thousands)
Revenues:
Domestic
Import
Luxury
Corporate and other
(Dollars in thousands)
Revenues:
Domestic
Import
Luxury
Corporate and other
(Dollars in thousands)
Segment income*:
Domestic
Import
Luxury
Corporate and other
Depreciation and amortization
Other interest expense
Other (expense) income, net
Income before income taxes
Year Ended
December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
$
3,845,830 $
4,432,760
1,810,085
10,088,675
(2,165)
$ 10,086,510 $
3,381,715 $
3,764,255
1,528,760
8,674,730
3,427
8,678,157 $
464,115
668,505
281,325
1,413,945
(5,592)
1,408,353
13.7 %
17.8
18.4
16.3
(163.2)
16.2
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
$
$
3,381,715 $
3,764,255
1,528,760
8,674,730
3,427
8,678,157 $
3,038,883 $
3,330,949
1,490,632
7,860,464
3,788
7,864,252 $
342,832
433,306
38,128
814,266
(361)
813,905
11.3 %
13.0
2.6
10.4
(9.5)
10.3
Year Ended
December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
106,210 $
110,204
31,467
247,881
114,321
(49,369)
(23,207)
(6,103)
283,523 $
(1,002)
7,572
5,555
12,125
53,045
8,353
11,569
18,298
63,546
(0.9)%
6.9
17.7
4.9
46.4
16.9
49.9
NM
22.4
$ 105,208 $
117,776
37,022
260,006
167,366
(57,722)
(34,776)
12,195
$ 347,069 $
41
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
(Dollars in thousands)
Segment income*:
Domestic
Import
Luxury
Corporate and other
Depreciation and amortization
Other interest expense
Other (expense) income, net
Income before income taxes
*Segment income for each reportable segment is defined as Income before income taxes, depreciation and amortization, other interest
expense and other (expense) income, net.
$ 283,523 $ 262,704 $
$ 106,210 $ 115,145 $
110,204
31,467
247,881
114,321
(49,369)
(23,207)
(6,103)
98,751
36,391
250,287
74,514
(41,600)
(19,491)
(1,006)
(8,935)
11,453
(4,924)
(2,406)
39,807
7,769
3,716
5,097
20,819
(7.8)%
11.6
(13.5)
(1.0)
53.4
18.7
19.1
NM
7.9
NM - Not meaningful
Retail new vehicle unit sales:
Domestic
Import
Luxury
Allocated to management
Retail new vehicle unit sales:
Domestic
Import
Luxury
Allocated to management
Year Ended
December 31,
2017
2016
53,288
94,634
19,597
167,519
(373)
167,146
47,707
80,769
17,591
146,067
(295)
145,772
Year Ended
December 31,
Increase
(Decrease)
% Increase
(Decrease)
5,581
13,865
2,006
21,452
(78)
21,374
11.7 %
17.2
11.4
14.7
(26.4)
14.7
2016
2015
Increase
% Increase
47,707
80,769
17,591
146,067
(295)
145,772
45,080
75,091
17,556
137,727
(241)
137,486
2,627
5,678
35
8,340
54
8,286
5.8%
7.6
0.2
6.1
22.4
6.0
Domestic
A summary of financial information for our Domestic segment follows:
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
Year Ended
December 31,
$
$
2017
3,845,830 $
105,208 $
53,288
2016
3,381,715 $
106,210 $
47,707
Increase
(Decrease)
% Increase
(Decrease)
464,115
(1,002)
5,581
13.7 %
(0.9)
11.7
42
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
Year Ended
December 31,
$
$
2016
3,381,715 $
106,210 $
47,707
2015
3,038,883 $
115,145 $
45,080
Increase
(Decrease)
% Increase
(Decrease)
342,832
(8,935)
2,627
11.3 %
(7.8)
5.8
Revenues in our Domestic segment increased in all major business lines in 2017 compared to 2016, primarily related to opening one
and acquiring five stores during 2017. New vehicle unit sales increased 11.7% overall, but declined 1.6% on a same store basis.
Additionally, our Domestic stores increased their used vehicle unit sales, improved finance and insurance income per retail unit and
experienced strong growth in service, body and parts revenues. The acquisition of eight stores in 2016 contributed 3.7% of the
11.3% increase.
Our Domestic segment income decreased 0.9% in 2017 compared to 2016. The decrease in segment income was due to gross profit
growth of 14.1% offset by a 16.5% increase in SG&A and a 39.5% increase in floor plan interest expense. Our domestic segment
experienced increases in all areas of SG&A during 2017. Increases in floor plan interest were primarily driven by increasing rates,
compounded by increased volume related to acquisitions, as well as higher inventory levels at existing stores.
The decrease in our Domestic operating results in 2016 compared to 2015 was primarily a result of increased SG&A expenses,
which offset an increase in gross profits. The increase in SG&A during 2016 was primarily driven by increased variable costs
associated with increased sales volume and the acquisition of eight stores.
Import
A summary of financial information for our Import segment follows:
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
Year Ended
December 31,
2017
4,432,760 $
117,776 $
94,634
2016
3,764,255 $
110,204 $
80,769
Increase
668,505
7,572
13,865
Year Ended
December 31,
2016
3,764,255 $
110,204 $
80,769
2015
3,330,949 $
98,751 $
75,091
Increase
433,306
11,453
5,678
$
$
$
$
%
Increase
17.8%
6.9
17.2
%
Increase
13.0%
11.6
7.6
The increase in our Import segment revenue in 2017 compared to 2016 resulted from increases in all business lines. On a same store
basis, new vehicle unit sales for our Import stores outpaced national performance. Additionally, Import revenues benefited from
improved used vehicle sales due to increased volume, increased finance and insurance revenues as a result of increased volume and
finance and insurance income per retail unit sold and improved service, body and parts revenues. The acquisition of nine stores
contributed 8.3% of the 17.8% increase.
Our segment income increased 6.9% in 2017 compared to 2016 mainly due to the improvements in all revenue categories discussed
above and an increase in gross profit, offset by increases in SG&A and floor plan interest expenses. Gross profit for our import
segment increased 17.0% in 2017 compared to 2016, in line with our revenues. Our Import segment experienced a 17.8% increase in
SG&A, primarily driven by increases in all areas excluding personnel and rent, which remained steady. Floor plan interest expense
increased 55.3% during 2017 and was a significant contributor to lower segment income growth compared to 2016. This increase
was driven by a combination of increased volume due to the acquisition of nine stores during 2017, increased inventory levels at
existing stores and increasing interest rates.
Improvements in our Import operating results in 2016 compared to 2015 were primarily a result of increased revenues in all major
business lines and a slight increase in gross margins, while maintaining a consistent SG&A as a percent of gross profit.
43
Luxury
A summary of financial information for our Luxury segment follows:
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
(Dollars in thousands)
Revenue
Segment income
Retail new vehicle unit sales
Year Ended
December 31,
$
$
2017
1,810,085 $
37,022 $
19,597
2016
1,528,760 $
31,467 $
17,591
Increase
281,325
5,555
2,006
%
Increase
18.4%
17.7
11.4
Year Ended
December 31,
$
$
2016
1,528,760 $
31,467 $
17,591
2015
1,490,632 $
36,391 $
17,556
Increase
(Decrease)
% Increase
(Decrease)
38,128
(4,924)
35
2.6 %
(13.5)
0.2
Our Luxury segment revenue increased in 2017 compared to 2016 primarily due to our acquisition of four stores and improvements
in finance and insurance and service body and parts revenues. New vehicle unit sales declined 7.8% on a same store basis mainly
related to our BMW and Mercedes franchises.
Our Luxury segment income increased 17.7% in 2017 compared to 2016. This increase was due to gross profit growth of 17.6%,
offset by an increase in SG&A of 16.0%, primarily related to an increase in advertising expense, and an increase in floor plan interest
expense of 43.3%. As a percentage of gross profit, SG&A decreased 109 basis points in 2017 compared to 2016. The 43.3%
increase in floor plan interest expense during 2017 was due to a combination of increased volume from acquisitions, increased
volume at existing stores and rising interest rates.
Our Luxury segment revenue increased in 2016 compared to 2015 primarily due to our acquisition of one store and improvements in
finance and insurance and service body and parts revenues. New vehicle unit sales declined 3.7% on a same store basis mainly
related to our BMW, Audi and Mercedes franchises. Our Luxury segment income decreased in 2016 compared to 2015 primarily
related to increases in our SG&A and floor plan interest expense that outpaced growth in revenues and gross profits.
See Note 18 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K for additional information.
Corporate and Other
Revenue attributable to Corporate and other includes the results of operations of our stand-alone collision center, offset by certain
unallocated reserve and elimination adjustments related to vehicle sales.
(Dollars in thousands)
Revenue
Segment income
(Dollars in thousands)
Revenue
Segment income
NM - not meaningful
Year Ended
December 31,
2017
2016
Increase
(Decrease)
$
$
(2,165) $
167,366 $
3,427 $
114,321 $
(5,592)
53,045
% Increase
(Decrease)
NM
46.4%
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
$
$
3,427 $
114,321 $
3,788 $
74,514 $
(361)
39,807
(9.5)%
53.4
The decreases in Corporate and other revenues in 2017 compared to 2016 and in 2016 compared to 2015 were primarily related to
changes in certain reserves that are 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
44
affected in 2017 by an increase in internal corporate vehicle purchases and leases with our stores resulting in negative revenues.
These internal corporate expense allocations are also 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.
The increases in Corporate and other segment income in 2017 compared to 2016 and 2016 compared to 2015 were related to
increased internal corporate expense allocations and increased store count. Additionally, 2015 included an $18.3 million charge
associated with a transition agreement. See Note 15 of Notes to Consolidated Financial Statements for additional information
regarding the transition agreement.
Asset Impairment Charges
Asset impairments recorded as a component of operations consist of the following (in thousands):
Equity-method investment
Long-lived assets
Year Ended December 31,
2016
2017
2015
$
— $
—
13,992 $
—
16,521
3,603
We recorded asset impairments in 2016 and 2015 associated with our equity-method investment in a limited liability company that
participated in the NMTC Program. 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.
Additionally, in 2015, we recorded asset impairments of $3.6 million associated with certain properties and equipment. As the
expected future use of these facilities and equipment changed, the long-lived assets were tested for recoverability and were
determined to have a carrying value exceeding their fair value.
See Notes 1, 4, 12 and 17 of Notes to Consolidated Financial Statements for additional information.
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.
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
Year Ended
December 31,
2017
2016
Increase
% Increase
$
$
695,527 $
93,312
33,399
55,813
171,327
1,049,378 $
597,185 $
81,363
26,785
43,883
150,374
899,590 $
98,342
11,949
6,614
11,930
20,953
149,788
16.5%
14.7
24.7
27.2
13.9
16.7
Year Ended
December 31,
2017
2016
Increase
(Decrease)
45.9%
6.2
2.2
3.7
11.2
69.2%
45.9%
6.3
2.1
3.4
11.4
69.1%
—
(10)
10
30
(20)
10 bps
45
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
Year Ended
December 31,
2016
2015
Increase
% Increase
$
$
597,185 $
81,363
26,785
43,883
150,374
899,590 $
556,719 $
69,935
23,817
39,738
120,966
811,175 $
40,466
11,428
2,968
4,145
29,408
88,415
7.3%
16.3
12.5
10.4
24.3
10.9
Year Ended
December 31,
2016
2015
45.9%
6.3
2.1
3.4
11.4
69.1%
47.4%
5.9
2.0
3.4
10.3
69.0%
Increase
(Decrease)
(150) bps
40
10
—
110
10 bps
SG&A increased $149.8 million in 2017 compared to 2016, primarily due to acquisitions. Additionally, SG&A in 2017 included $5.6
million of storm related insurance charges and $5.7 million in acquisition expenses, offset by a $5.1 million gain on the sale of one of
our stores.
SG&A increased $88.4 million in 2016 compared to 2015, primarily driven by increased variable cost associated with increased sales
volume and store count. Additionally, SG&A in 2016 included a $3.9 million legal reserve adjustment, offset by a $1.1 million gain
associated with the sale of one of our stores.
SG&A adjusted for non-core charges was as follows (in thousands):
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
Year Ended
December 31,
2017
2016
Increase
$
$
695,527 $
93,312
33,399
60,918
160,091
1,043,247 $
597,185 $
81,363
26,785
44,971
146,437
896,741 $
98,342
11,949
6,614
15,947
13,654
146,506
%
Increase
16.5%
14.7
24.7
35.5
9.3
16.3
Year Ended
December 31,
2017
2016
Increase
(Decrease)
45.9%
6.2
2.2
4.0
10.5
68.8%
45.9%
6.3
2.1
3.5
11.1
68.9%
—
(10)
10
50
(60)
(10) bps
46
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
$
$
597,185 $
81,363
26,785
44,971
146,437
896,741 $
538,423 $
69,935
23,817
45,656
120,967
798,798 $
58,762
11,428
2,968
(685)
25,470
97,943
10.9 %
16.3
12.5
(1.5)
21.1
12.3
Year Ended
December 31,
2016
2015
Increase
(Decrease)
45.9%
6.3
2.1
3.5
11.1
68.9%
45.8%
5.9
2.0
3.9
10.3
67.9%
10 bps
40
10
(40)
80
100 bps
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 related to tradenames.
(Dollars in thousands)
Depreciation and amortization
(Dollars in thousands)
Depreciation and amortization
Year Ended
December 31,
2017
2016
Increase
%
Increase
$
57,722 $
49,369 $
8,353
16.9%
Year Ended
December 31,
2016
2015
Increase
%
Increase
$
49,369 $
41,600 $
7,769
18.7%
Acquisition activity contributed to the increases in depreciation and amortization in 2017 compared to 2016 and in 2016 compared to
2015. During 2017, we purchased approximately $105 million in depreciable buildings and improvements as a part of our acquisitions
of Baierl Auto Group and Downtown LA Auto Group. During 2016, we purchased approximately $27 million in depreciable buildings
and improvements as a part of the acquisition of Carbone Auto Group. Capital expenditures totaled $105.4 million and $100.8 million,
respectively, in 2017 and 2016. These investments increase the amount of depreciable assets. See the discussion under Liquidity and
Capital Resources for additional information.
Operating Income
Operating income as a percentage of revenue, or operating margin, was as follows:
Operating margin
Operating margin adjusted for non-core charges(1)
(1) See “Non-GAAP Reconciliations” for additional information.
Year Ended December 31,
2016
3.9%
4.1%
2015
3.8%
4.3%
2017
4.1%
4.1%
In 2017, our operating margin improved 20 basis points compared to 2016. Adjusting for non-core charges, including storm related
insurance charges and acquisition expenses, our operating margin remained flat compared to 2016 at 4.1%. In 2016, our operating
margin was affected by acquisition activity, as well as a legal reserve adjustment. Adjusting for those non-core charges, our operating
margin was 4.1% in 2016. Acquired stores generally have a lower operating efficiency than our other stores and negatively impact
our operating margin as we integrate them into our cost structure.
47
I n 2015, our operating margin was affected by asset impairments and a charge of $18.3 million associated with a transition
agreement. Adjusting for those non-core charges, our operating margin was 4.3%% in 2015.
Floor Plan Interest Expense and Floor Plan Assistance
Floor plan interest expense increased $13.8 million in 2017 compared to 2016, due to an increase in inventory levels related to
acquisitions, an increase in existing store levels, and increasing interest rates. Changes in the average outstanding balances on our
floor plan facilities increased the expense $5.1 million and changes in the interest rates on our floor plan facilities increased the
expense $8.7 million during 2017 compared to 2016.
Floor plan interest expense increased $6.0 million in 2016 compared to 2015, primarily as a result of increases in the average
outstanding balances on our floor plan facilities due to an increase in new vehicle inventory levels. Changes in the average outstanding
balances on our floor plan facilities increased the expense $4.3 million and changes in the interest rates on our floor plan facilities
increased the expense $1.7 million during 2016 compared to 2015.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards,
floor plan assistance 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:
(Dollars in thousands)
Floor plan interest expense (new vehicles)
Floor plan assistance (included as an offset to cost of
sales)
Net new vehicle carrying costs (benefit)
$
$
(Dollars in thousands)
Floor plan interest expense (new vehicles)
Floor plan assistance (included as an offset to cost of
sales)
Net new vehicle carrying costs (benefit)
$
$
Year Ended
December 31,
2017
2016
Increase
(Decrease)
% Increase
(Decrease)
39,336 $
25,531 $
13,805
54.1 %
(55,962)
(16,626) $
(46,328)
(20,797) $
9,634
(4,171)
20.8
(20.1)
Year Ended
December 31,
2016
2015
Increase
(Decrease)
% Increase
(Decrease)
25,531 $
19,534 $
5,997
30.7 %
(46,328)
(20,797) $
(41,438)
(21,904) $
4,890
(1,107)
11.8
(5.1)
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used vehicle inventory
financing facility and our revolving line of credit.
(Dollars in thousands)
Mortgage interest
Other interest
Capitalized interest
Total other interest expense
(Dollars in thousands)
Mortgage interest
Other interest
Capitalized interest
Total other interest expense
$
$
$
$
Year Ended
December 31,
2017
2016
Increase
(Decrease)
19,054 $
16,246
(524)
34,776 $
15,102 $
8,519
(414)
23,207 $
% Increase
(Decrease)
26.2%
90.7
26.6
49.9
3,952
7,727
110
11,569
Year Ended
December 31,
2016
2015
Increase
(Decrease)
%
Increase
15,102 $
8,519
(414)
23,207 $
13,295 $
6,646
(450)
19,491 $
1,807
1,873
(36)
3,716
13.6 %
28.2
(8.0)
19.1
48
The increase in other interest expense in 2017 compared to 2016 was primarily due to the issuance of $300 million in aggregate
principal amount of 5.25% Senior Notes due 2025 in July 2017 and increases in mortgage borrowings related to acquisitions. See also
Note 6 of Notes to Consolidated Financial Statements for additional information.
The increase in other interest expense in 2016 compared to 2015 was primarily due to an increase in other interest related to higher
volumes of borrowing on our credit facility and higher mortgage borrowings.
Other (Expense) Income, net
Other (expense) income, net primarily includes other income associated with legal settlements with the OEMs, interest income and
the gains and losses related to equity-method investments.
(Dollars in thousands)
Other (expense) income, net
(Dollars in thousands)
Other (expense) income, net
NM - Not meaningful.
Year Ended
December 31,
2017
2016
Increase
%
Increase
$
12,195 $
(6,103) $
18,298
NM
Year Ended
December 31,
2016
2015
Increase
%
Increase
$
(6,103) $
(1,006) $
5,097
NM
The increase in other (expense) income, net in 2017 compared to 2016 was primarily due to a $9.1 million gain related to legal
settlements with OEMs recorded in the first quarter of 2017 compared to $8.3 million in operating losses recorded in 2016 related to
our equity-method investment with U.S. Bancorp Community Development Corporation, which we exited in December 2016. Other
(expense) income, net, recorded in 2015 was primarily due to operating losses of $6.9 million recognized related to our equity-
method investment with U.S. Bancorp Community Development Corporation.
Income Tax Provision
Our effective income tax rate was as follows:
Year Ended December 31,
2016
2015
2017
Effective income tax rate
Effective income tax rate excluding tax credits generated through our equity-
method investment and other non-core items(1)
29.3%
30.5%
38.7%
38.6%
30.3%
38.4%
(1) See “Non-GAAP Reconciliations” for more details.
Our effective income tax rate in 2017 was positively impacted by the enactment of tax legislation commonly known as the Tax Cuts
and Jobs Act, signed into law on Friday, December 22, 2017, which required a revaluation of all deferred tax assets and deferred tax
liabilities as of the date the legislation was signed. Additionally, our effective income tax rate in 2017 was positively impacted by
excess tax benefits related to our stock-based compensation as a result of the adoption of new guidance that was applied
prospectively beginning in 2017. Partially offsetting these benefits were negative impacts from an increasing presence in states with
higher income tax rates. Our effective income tax rates in 2016 and 2015 were positively affected by new markets tax credits that
were generated through our equity-method investment with U.S. Bancorp Community Development Corporation.
Excluding the revaluation of deferred tax assets and liabilities as a result of the enactment of new legislation, tax credits generated by
our equity-method investment and other non-core tax attributes, our effective income tax rate for 2017 would have been 38.7%, an
increase of 10 basis points compared to the rate for 2016.
Non-GAAP Reconciliations
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, 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
49
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 (dollars in thousands, except per share amounts):
As reported
Insurance
Reserves
Acquisition
expense
OEM
Settlement
Disposal gain
on sale of
stores
Tax reform
Adjusted
Selling, general and
administrative
$ 1,049,378 $
(5,582) $
(5,653) $
— $
5,104 $
— $ 1,043,247
Year Ended December 31, 2017
Operating income
408,986
5,582
5,653
—
(5,104)
—
415,117
Other (expense)
income, net
Income before
income taxes
Income tax
(provision)
benefit
Net income
Diluted net income
per share
Diluted share count
12,195
—
—
(9,111)
—
—
3,084
$
347,069 $
5,582 $
5,653 $
(9,111) $
(5,104) $
— $
344,089
$
$
(101,852)
245,217 $
(2,174)
3,408 $
(2,202)
3,451 $
3,423
(5,688) $
2,482
(2,622) $
(32,901)
(32,901) $
(133,224)
210,865
9.75 $
25,145
0.14 $
0.14 $
(0.23) $
(0.10) $
(1.31) $
8.39
Year Ended December 31, 2016
Asset impairments
$
13,992 $
— $
(13,992) $
Legal Reserve Tax attribute
— $
— $
Adjusted
—
As
reported
Disposal gain
on sale of
stores
Equity-method
investment
Selling, general and administrative
899,590
1,087
—
(3,936)
—
896,741
Operating income
338,364
(1,087)
13,992
3,936
—
355,205
Other (expense) income, net
(6,103)
—
8,262
—
—
2,159
Income before income taxes
Income tax (provision) benefit
Net income
Diluted net income per share
Diluted share count
$
$
$
283,523 $
(86,465)
197,058 $
(1,087) $
426
(661) $
22,254 $
(28,530)
(6,276) $
3,936 $
(3,250)
686 $
— $
(1,320)
(1,320) $
308,626
(119,139)
189,487
7.72 $
25,521
(0.03) $
(0.25) $
0.03 $
(0.05) $
7.42
50
Asset impairments
$
20,124 $
— $
(3,603) $
(16,521) $
— $
Year Ended December 31, 2015
As
reported
Disposal gain
on sale of
stores
Asset
impairment
Equity-
method
investment
Transition
Agreement
Adjusted
—
Selling, general and
administrative
811,175
5,919
—
—
(18,296)
798,798
Income from operations
302,735
(5,919)
3,603
16,521
18,296
335,236
Other (expense) income, net
(1,006)
—
—
6,930
—
5,924
Income before income taxes
Income tax (provision) benefit
Net income
$ 262,704 $
(79,705)
$ 182,999 $
(5,919) $
2,309
(3,610) $
3,603 $
(1,385)
2,218 $
23,451 $
(30,832)
(7,381) $
18,296 $ 302,135
(6,507)
(116,120)
11,789 $ 186,015
Diluted net income per share
Diluted share count
$
6.91 $
26,490
(0.14) $
0.08 $
(0.28) $
0.45 $
7.02
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 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, debt
retirement, cash dividends, share repurchases and general business purposes.
Available Sources
Below is a summary of our immediately available funds (in thousands):
Cash and cash equivalents
Available credit on the credit facilities
Total current available funds
Estimated funds from unfinanced real estate
Total estimated available funds
$
As of December 31,
2017
2016
57,253 $
222,502
279,755
236,135
50,282 $
138,090
188,372
168,383
356,755 $
Increase
6,971
84,412
91,383
67,752
159,135
%
Increase
13.9%
61.1
48.5
40.2
44.6
$ 515,890 $
Cash flows generated by operating activities and from our credit facility are our most significant sources of liquidity. We also have
the ability to raise funds through mortgaging real estate. As of December 31, 2017, our unencumbered owned operating real estate
had a book value of $314.8 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained
additional funds of approximately $236.1 million at December 31, 2017; however, no assurances can be provided that the appraised
value of these 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 Senior Notes 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 debentures 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.
51
Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table
summarizes our cash flows (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by financing activities
$
Year Ended December 31,
2016
90,905 $
2017
148,856 $
(538,198)
396,313
(351,693)
266,062
2015
79,551
(169,733)
105,292
Operating Activities
Cash provided by operating activities increased $58.0 million in 2017 compared to 2016, primarily as a result of increased profitability
and a decrease in trade receivables growth related to the timing of collections, partially offset by an increase in inventories related to
increasing volumes at existing locations, compared to the previous year's cash flows.
Borrowings from and repayments to our syndicated lending group 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 net cash provided by operating activities adjusted to include cash activity associated with our new vehicle credit facility.
Adjusted net cash provided by operating activities is presented below (in thousands):
Net cash provided by operating activities – as reported
Add: Net borrowings on floor plan notes payable: non-trade
Less: Borrowings on floor plan notes payable: non-trade associated with
acquired new vehicle inventory
Net cash provided by operating activities – adjusted
Net cash provided by operating activities – as reported
Add: Net borrowings on floor plan notes payable: non-trade
Less: Borrowings on floor plan notes payable: non-trade associated with
acquired new vehicle inventory
Net cash provided by operating activities – adjusted
Year Ended
December 31,
2017
2016
148,856 $
241,479
90,905 $
252,893
(111,017)
279,318 $
(94,550)
249,248 $
Year Ended
December 31,
2016
2015
90,905 $
252,893
79,551 $
136,201
(94,550)
249,248 $
(25,642)
190,110 $
Increase
(Decrease)
57,951
(11,414)
(16,467)
30,070
Increase
(Decrease)
11,354
116,692
(68,908)
59,138
$
$
$
$
Inventories are the most significant component of our cash flow from operations. As of December 31, 2017, our new vehicle days
supply was 69 days, or one day higher than our days supply as of December 31, 2016. Our days supply of used vehicles was 67
days as of December 31, 2017, or eleven days higher than our days supply as of December 31, 2016. We attribute the increase in
used vehicle days supply to a combination of an increasing supply of off-lease vehicles and the integration of newly acquired stores,
which ended the year with higher days supply than our other stores. 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.
Investing Activities
Net cash used in investing activities totaled $538.2 million and $351.7 million, respectively, for 2017 and 2016. Cash flows from
investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.
52
Below are highlights of significant activity related to our cash flows from investing activities (in thousands):
Capital expenditures
Cash paid for acquisitions, net of cash acquired
Cash paid for other investments
Proceeds from sales of stores
Capital expenditures
Cash paid for acquisitions, net of cash acquired
Cash paid for other investments
Proceeds from sales of stores
Capital Expenditures
Below is a summary of our capital expenditure activities (in thousands):
Post-acquisition capital improvements
Facilities for open points
Purchases of previously leased facilities
Existing facility improvements
Maintenance
Total capital expenditures
Year Ended
December 31,
2017
(105,378) $
(460,394)
(8,570)
20,943
2016
(100,761) $
(234,700)
(30,280)
11,837
Year Ended
December 31,
2016
(100,761) $
(234,700)
(30,280)
11,837
2015
(83,244) $
(71,615)
(28,110)
12,966
Increase
(Decrease)
(4,617)
(225,694)
21,710
9,106
Increase
(Decrease)
(17,517)
(163,085)
(2,170)
(1,129)
Year Ended December 31,
2016
2015
2017
41,193 $
511
—
29,563
34,111
105,378 $
31,489 $
—
24,016
24,249
21,007
100,761 $
32,802
3,338
9,946
20,245
16,913
83,244
$
$
$
$
Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet manufacturer image
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.
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 image standards and requirements.
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 $131 million in 2018 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 opportunistic 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.
53
We are able to subsequently floor new vehicle inventory acquired as part of an acquisition; however, the cash generated by these
transactions are 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 (dollars in thousands):
Number of stores acquired
Number of stores opened
Number of franchises added
Year Ended December 31,
2016
2015
2017
18
1
—
15
1
1
6
1
1
Cash paid for acquisitions, net of cash acquired
Less: Borrowings on floor plan notes payable: non-trade associated with
$
(460,394) $
(234,700) $
(71,615)
acquired new vehicle inventory
Cash paid for acquisitions, net of cash acquired – adjusted
111,017
(349,377) $
94,550
(140,150) $
25,642
(45,973)
$
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 provided by financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:
Cash provided by financing activities, as reported
Less: cash provided by borrowings of floor plan notes payable:
non-trade
Cash provided by (used in) financing activities, as adjusted
$
$
Year Ended December 31,
2016
266,062
$
$
2017
396,313
2015
105,292
(241,479)
154,834
$
(252,893)
13,169
$
(136,201)
(30,909)
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 (in thousands):
Net borrowings (repayments) on lines of credit
Principal payments on long-term debt and capital leases, other
Proceeds from the issuance of long-term debt
Payments of debt issuance costs
Repurchases of common stock
Dividends paid
Other financing activity
Net borrowings (repayments) on lines of credit
Principal payments on long-term debt, unscheduled
Proceeds from the issuance of long-term debt
Repurchases of common stock
Dividends paid
54
$
$
Year Ended
December 31,
2017
(81,717) $
(50,288)
395,905
(4,664)
(33,753)
(26,544)
(33,396)
2016
121,261 $
(27,703)
66,466
—
(112,939)
(24,131)
—
Year Ended
December 31,
2016
121,261 $
(27,703)
66,466
(112,939)
(24,131)
2015
(36,523) $
(9,189)
75,675
(31,548)
(19,985)
Increase
(Decrease) in
Cash Flow
(202,978)
(22,585)
329,439
(4,664)
79,186
(2,413)
(33,396)
Increase
(Decrease) in
Cash Flow
157,784
(18,514)
(9,209)
(81,391)
(4,146)
Borrowing and Repayment Activity
During 2017, we raised net proceeds of $395.9 million through the issuance of our Senior Notes and mortgages and borrowed $81.7
million, net, on our lines of credit. These funds were primarily used for acquisitions, share repurchases and capital expenditures.
Our debt to total capital ratio, excluding floor plan notes payable, was 49.2% at December 31, 2017 compared to 46.5% at
December 31, 2016. We partially funded our 2017 acquisition activity with additional debt.
Equity Transactions
Under the share repurchase program authorized by our Board of Directors and repurchases associated with stock compensation
activity, we repurchased 361,457 shares of our Class A common stock at an average price of $93.38 per share in 2017. As of
December 31, 2017, we had $162.6 million available for repurchase under our share repurchase program. The authority to
repurchase does not have an expiration date.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, in December 2017, we entered into
a structured repurchase agreement involving the use of capped call options for the purchase of our Class A common stock. We paid
a fixed sum upon execution of the agreement in exchange for the right to receive either a pre-determined amount of cash or stock.
Upon expiration of the agreement, if the closing market price of our common stock is above the pre-determined price, we will have
our initial investment returned with a premium. If the closing market price of our common stock is at or below the pre-determined
price, we will receive the number of shares specified in the agreement. We paid net premiums of $33.4 million in December 2017 to
enter this agreement and, as of December 31, 2017, the options were outstanding.
During 2017, we paid dividends on our Class A and Class B Common Stock as follows:
Dividend paid:
March 2017
May 2017
August 2017
November 2017
Dividend
amount per
share
Total amount of
dividend (in
thousands)
$
0.25 $
0.27
0.27
0.27
6,292
6,760
6,751
6,741
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 (in thousands):
Outstanding as of
December 31, 2017
Remaining Available
as of December 31,
2017
$
Floor plan notes payable: non-trade
Floor plan notes payable
Used vehicle inventory financing facility
Revolving lines of credit
Real estate mortgages
5.25% Senior notes due 2025
Other debt
Unamortized debt issuance costs
Total debt
(1) As of December 31, 2017, we had a $1.9 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.
1,802,252 $
116,774
177,222
94,568
469,969
300,000
12,512
(6,919)
2,966,378 $
$
$
— (1)
—
— (2)
222,502 (2),(3)
—
—
—
— (4)
222,502
55
(3) Available credit is based on the borrowing base amount effective as of November 30, 2017. This amount is reduced by $9.2
million for outstanding letters of credit.
(4) We adopted an accounting standard update that requires debt issuance costs be presented on the balance sheet as a reduction
from the carrying amount of the related debt liability. We adopted the standard retrospectively and have presented all debt
issuance costs as a reduction from the carrying amount of the related debt liability for both current and prior periods. See Note 6
of the Notes to Consolidated Financial Statements for additional information.
Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion which matures
in August 2022. This syndicated credit facility is comprised of eighteen financial institutions, including seven manufacturer-affiliated
finance companies. Under our credit facility we are permitted to allocate up to $1.9 billion in new vehicle inventory floor plan
financing and up to a total of $500 million in used vehicle inventory floor plan financing and 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. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements
of Cash Flows as financing activities.
The availability of the revolving line of credit under our syndicated credit facility is determined according to a borrowing base
comprised of a portion of certain accounts, receivables, invoices, inventory and equipment. The borrowing base is reduced by the
sum of the outstanding aggregate principal balance of new and used vehicle floor plan loans and new and used swing line loans.
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 December
31, 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 decreases 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% for new vehicle
floor plan financing, one-month LIBOR plus 1.50% for used vehicle floor plan financing; and a variable interest rate on the revolving
financing ranging from the one-month LIBOR plus 1.25% to 2.50%, depending on our leverage ratio. The annual interest rate
associated with our new vehicle floor plan commitment was 2.82% at December 31, 2017. The annual interest rate associated with
our used vehicle inventory financing facility and our revolving line of credit was 3.07% and 3.07%, respectively, at December 31,
2017.
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.
56
Under our credit facility, we are required to maintain the ratios detailed in the following table:
Debt Covenant Ratio
Current ratio
Fixed charge coverage ratio
Leverage ratio
Requirement
Not less than 1.10 to 1
Not less than 1.20 to 1
Not more than 5.00 to 1
As of December 31,
2017
1.21 to 1
2.82 to 1
2.59 to 1
As of December 31, 2017, 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 revolving syndicated 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 revolving syndicated credit facility.
Other Lines of Credit
We have other lines of credit with a total financing commitment of $3.5 million for general corporate purposes, including acquisitions
and working capital. Substantially all of these other lines of credit mature in 2019 and have interest rates ranging up to 2.94%. As of
December 31, 2017, $0.6 million was 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 and vehicles that are
designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are
variable rates. As of December 31, 2017, $116.8 million was outstanding on these agreements at interest rates ranging up to 5.50%.
Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the
Consolidated Statements of Cash Flows.
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 December
31, 2017. The mortgages are payable in various installments through October 2034. As of December 31, 2017, we had fixed interest
rates on 78.9% of our outstanding mortgage debt.
Our other debt includes capital leases and sellers’ notes. Additionally, in 2015, our equity contribution obligations associated with the
new markets tax credit equity-method investment were included in other debt. The interest rates associated with our other debt
ranged from 3.1% to 8.0% at December 31, 2017. This debt, which totaled $12.5 million at December 31, 2017, is due in various
installments through December 2050.
5.25% Senior Notes Due 2025
O n July 24, 2017, we issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 ("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
57
Used vehicle inventory financing facility(1)
Revolving lines of credit(1)(3)
Real estate mortgages, including interest(3)
5.25% Senior Notes Due 2025, including
interest (3)
Other debt, including capital leases and
interest
Charge-backs on various contracts
Operating leases(2)
Self-insurance programs
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.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2017, was as follows (in thousands):
Payments Due By Period
Contractual Obligation
Floor plan notes payable: non-trade(1)
Floor plan notes payable(1)
Total
1,802,252 $
$
2018
1,802,252 $
2019 and 2020 2021 and 2022
— $
— $
116,774
177,222
94,568
571,549
116,774
—
111
36,327
—
—
457
119,187
—
177,222
94,000
128,164
426,339
16,089
31,500
31,500
347,250
2023 and
beyond
—
—
—
—
287,871
319,591
41
243,242
5,723
1,203,718
(1) Amounts for new vehicle floor plan commitment, floor plan notes payable, the used vehicle inventory financing facility and the
revolving lines of credit do not include estimated interest payments. See Notes 1 and 6 in the Notes to Consolidated Financial
Statements.
1,731
27,352
38,357
14,354
2,053,347 $
327,909
52,744
408,396
31,227
4,008,980 $
3,305
22,495
67,139
7,385
251,468 $
3,282
2,856
59,658
3,765
500,447 $
$
(2) Amounts for operating lease commitments do not include sublease income, and certain operating expenses such as maintenance,
insurance and real estate taxes. See Note 7 in the Notes to Consolidated Financial Statements.
(3) Balances exclude net impact of debt issuance costs. See Note 6 in the Notes to Consolidated Financial Statements.
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.
Inflation and Changing Prices
Inflation and changing prices did not have a material impact on our revenues or income from operations in the years ended
December 31, 2017, 2016 and 2015.
58
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
Our syndicated credit facility, other floor plan notes payable and certain real estate mortgages are structured as variable rate debt. The
interest rates on our variable rate debt are tied to either the one-month LIBOR, 3-month LIBOR, or the prime rate. These debt
obligations, therefore, expose us to variability in interest payments due to changes in these rates. Certain floor plan debt is based on
open-ended lines of credit tied to each individual store from the various manufacturer finance companies.
Our variable-rate floor plan notes payable, variable rate mortgage notes payable and other credit line borrowings subject us to market
risk exposure. As of December 31, 2017, we had $2.3 billion outstanding under such agreements at a weighted average interest rate
of 2.7% per annum. A 10% increase in interest rates, or 27 basis points, would increase annual interest expense by approximately
$4.1 million, net of tax, based on amounts outstanding as of December 31, 2017.
Fixed Rate Debt
The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate
debt will increase as interest rates fall because we would expect to be able to refinance for a lower rate. Conversely, the fair value of
fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair value but do not impact earnings or
cash flows.
As of December 31, 2017, we had $676.9 million of long-term fixed interest rate debt outstanding and recorded on the balance sheet,
with maturity dates between January 12, 2019 and December 31, 2050. Based on discounted cash flows using current interest rates
for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $698.1
million as of December 31, 2017.
Risk Management Policies
We assess interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may adversely impact
expected future cash flows and by evaluating hedging opportunities. Our policy is to manage this risk through a mix of fixed rate and
variable rate debt structures.
We maintain risk management controls to monitor interest rate cash flow attributable to both our outstanding and forecasted debt
obligations, as well as our offsetting hedge positions. The risk management controls include assessing the impact to future cash
flows of changes in interest rates.
Item 8. Financial Statements and Supplementary Financial Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15 of Part IV of this document.
Quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2017 is included following the
financial statements and notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on
Form 10-K. 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.
59
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially
affected or is reasonably likely to materially affect our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this
assessment, we used the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of
internal controls over financial reporting during the year of the acquisition while integrating the acquired operations. Management’s
evaluation of internal control over financial reporting excludes the operations of the eighteen stores acquired in 2017, which
represented 11% of total assets as of December 31, 2017 and 6% of total revenues for the year ended December 31, 2017.
Based on our assessment, our management concluded that, as of December 31, 2017, our internal control over financial reporting
was effective.
KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our internal control over
financial reporting as of December 31, 2017, which is included in Item 8 of this Form 10-K.
Item 9B. Other Information
None.
60
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item will be included in our Proxy Statement for our 2018 Annual Meeting of Shareholders and, upon
filing, is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item will be included in our Proxy Statement for our 2018 Annual Meeting of Shareholders and, upon
filing, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
The following table summarizes equity securities authorized for issuance as of December 31, 2017.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
Weighted average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a)) (c) (2)
Plan Category
Equity compensation plans approved by
shareholders
Equity compensation plans not approved by
shareholders
Total
(1) There is no exercise price associated with our restricted stock units.
(2)
—
344,804
344,804
(1)
$—
—
$—
1,665,697
—
1,665,697
Includes 1,383,827 shares available pursuant to our 2013 Amended and Restated Stock Incentive Plan and 281,870 shares
available pursuant to our Employee Stock Purchase Plan.
The additional information required by this item will be included in our Proxy Statement for our 2018 Annual Meeting of Shareholders
and, upon filing, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included in our Proxy Statement for our 2018 Annual Meeting of Shareholders and, upon
filing, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by this item will be included in our Proxy Statement for our 2018 Annual Meeting of Shareholders and, upon
filing, is incorporated herein by reference.
61
Item 15. Exhibits and Financial Statement Schedules
PART IV
Financial Statements and Schedules
The Consolidated Financial Statements, together with the reports thereon of KPMG LLP, Independent Registered Public Accounting
Firm, are included on the pages indicated below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
Page
F- 1
F- 4
F- 5
F- 6
F- 7
F- 8
F- 9
F- 35
There are no schedules required to be filed herewith.
Item 16. Form 10-K Summary
None.
Exhibit Index
The following exhibits are filed herewith. An asterisk (*) beside the exhibit number indicates the exhibits containing a management
contract, compensatory plan or arrangement.
Exhibit
Description
2.1
2.1.1
2.1.2
3.1
3.2
4.1
4.2
Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014
(incorporated by reference to exhibit 2.1 to the Company’s Form 8-K filed October 3, 2014)
First Amendment to Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited
effective July 15, 2014 (incorporated by reference to exhibit 2.2 to the Company’s Form 10-Q for the quarter ended
June 30, 2014)
Second Amendment to Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited
effective November 13, 2014 (incorporated by reference to exhibit 2.1.2 to the Company’s Form 10-K for the year
ended December 31, 2014)
Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to
exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 1999)
2013 Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.1 to the Company’s
Form 8-K filed August 26, 2013)
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).
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*
2009 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement for
its 2009 annual meeting of shareholders filed on March 20, 2009)
62
Exhibit
Description
10.1.1*
10.2*
10.2.1*
10.2.2*
10.2.3*
10.3*
10.3.1*
Amendment 2014-1 to the Lithia Motors, Inc. 2009 Employee Stock Purchase Plan (incorporated by reference to
exhibit 10.1.1 to the Company’s Form 10-K for the year ended December 31, 2014)
Lithia Motors, Inc. 2013 Amended and Restated Stock Incentive Plan (incorporated by reference to exhibit 10.1 to the
Company’s Form 8-K filed May 2, 2013)
RSU Deferral Plan (incorporated by reference to exhibit 10.3.1 to the Company’s Form 10-K for the year ended
December 31, 2011)
Amendment to RSU Deferral Plan (incorporated by reference to exhibit 10.2.2 to the Company’s Form 10-K for the
year ended December 31, 2014)
Restricted Stock Unit (RSU) Deferral Election Form (incorporated by reference to exhibit 10.2.3 to the Company’s
Form 10-K for the year ended December 31, 2014)
Form of Restricted Stock Unit Agreement (2016 Performance- and Time-Vesting) (for Senior Executives)
(incorporated by reference to exhibit 10.3.3 to the Company’s Form 10-K for the year ended December 31, 2015)
Form of Restricted Stock Unit Agreement (2017 Performance- and Time-Vesting) (for Senior Executives)
(incorporated by reference to exhibit 10.3.1 to the Company's Form 10-K for the year ended December 31, 2016)
10.3.2*
Form of Restricted Stock Unit Agreement (2018 Performance- and Time-Vesting) (for Senior Executives)
10.3.3*
Form of Restricted Stock Unit Agreement (Time-Vesting) (incorporated by reference to exhibit 10.3.2 to the
Company's Form 10-K for the year ended December 31, 2016)
10.4*
10.5*
10.6
10.6.1
10.6.2
10.6.3
10.6.4
10.6.6
10.6.7
10.7*
10.8*
10.9*
Lithia Motors, Inc. 2013 Discretionary Support Services Variable Performance Compensation Plan (incorporated by
reference to exhibit 10.2 to the Company’s Form 8-K filed May 2, 2013)
Form of Outside Director Nonqualified Deferred Compensation Agreement (incorporated by reference to exhibit 10.20
to the Company’s Form 10-K for the year ended December 31, 2005)
Amended and Restated Loan Agreement among Lithia Motors, Inc., the subsidiaries of Lithia Motors, Inc. listed on the
signature pages of the agreement or that thereafter become borrowers thereunder, the lenders party thereto from time
to time, and U.S. Bank National Association (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K
filed October 3, 2014)
First Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.4 to the
Company’s Form 10-Q for the quarter ended March 31, 2015)
Second Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.1 to the
Company’s Form 8-K filed December 22, 2015)
Third Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.1 to the
Company’s Form 10-Q for the quarter ended June 30, 2016)
Fourth Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.2 to the
Company’s Form 10-Q for the quarter ended June 30, 2016)
Sixth Amendment to Amended and Restated Loan Agreement dated July 12, 2017. (incorporated by reference to exhibit
10.1 to the Company's Form 10-Q for the quarter ended September 30, 2017)
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)
Amended and Restated Split-Dollar Agreement (incorporated by reference to exhibit 10.17 to the Company’s Form 10-
K for the year ended December 31, 2012)
Form of Indemnity Agreement for each Named Executive Officer (incorporated by reference to exhibit 10.1 to the
Company’s Form 8-K filed May 29, 2009)
Form of Indemnity Agreement for each non-management Director (incorporated by reference to exhibit 10.2 to the
Company’s Form 8-K filed May 29, 2009)
10.10*
Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan (incorporated by
reference to exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 2016)
63
Exhibit
Description
10.10.1*
10.10.2*
10.11*
10.12*
10.13*
12
21
23
31.1
31.2
32.1
32.2
Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of
Discretionary Contribution Award for Sidney DeBoer (incorporated by reference to exhibit 10.22.1 to the Company’s
Form 10-K for the year ended December 31, 2010)
Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of
Discretionary Contribution Award (incorporated by reference to exhibit 10.22.2 to the Company’s Form 10-K for the
year ended December 31, 2010)
Transition Agreement dated September 14, 2015 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by
reference to exhibit 10.1 to the Company’s Form 8-K filed September 17, 2015)
Director Service Agreement effective January 1, 2016 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated
by reference to Exhibit 10.2 to the Company’s Form 8-K filed September 17, 2015)
Form of Employment and Change in Control Agreement dated February 4, 2016 between Lithia Motors, Inc. and Bryan
DeBoer (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed February 5, 2016)(1)
Ratio of Earnings to Combined Fixed Charges
Subsidiaries of Lithia Motors, Inc.
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of
1934.
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.
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
XBRL Taxonomy Extension Presentation Linkbase Document.
101.PRE
(1) Substantially similar agreements exist between Lithia Motors, Inc. and each of Scott Hillier, Christopher S. Holzshu, John F.
North III, George Liang, Mark DeBoer, Tom Dobry and Bryan Osterhout. The "Cash Change in Control Benefits" under the
agreements with Mr. Mark DeBoer and Mr. Dobry provide for 12 months of base salary rather than 24 months.
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 23, 2018
LITHIA MOTORS, INC.
By /s/ Bryan B. DeBoer
Bryan B. DeBoer
Director, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on February 23, 2018:
Signature
Title
/s/ Bryan B. DeBoer
Bryan B. DeBoer
/s/ John F. North, III
John F. North, III
/s/ Sidney B. DeBoer
Sidney B. DeBoer
/s/ Thomas R. Becker
Thomas Becker
/s/ Susan O. Cain
Susan O. Cain
/s/ Kenneth E. Roberts
Kenneth E. Roberts
/s/ David J. Robino
David J. Robino
Director, President and Chief Executive Officer.
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
65
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lithia Motors, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in stockholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2017 and the related notes (collectively, the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 23, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1993.
Portland, Oregon
February 23, 2018
F- 1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lithia Motors, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lithia Motors, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31,
2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements
of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period
ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report dated
February 23, 2018 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired 18 dealerships during 2017, and management excluded from its assessment of the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2017, all of these acquired stores’ internal control over
financial reporting. The total assets of these 18 stores represented approximately 11% of consolidated total assets as of December 31,
2017 and approximately 6% of consolidated revenues for the year ended December 31, 2017. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of these 18 dealerships.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become
F- 2
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Portland, Oregon
February 23, 2018
F- 3
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
December 31,
2017
2016
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $7,386 and $5,281
Inventories, net
Other current assets
Total Current Assets
Property and equipment, net of accumulated depreciation of $197,802 and $167,300
Goodwill
Franchise value
Other non-current assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable
Floor plan notes payable: non-trade
Current maturities of long-term debt
Trade payables
Accrued liabilities
Total Current Liabilities
Long-term debt, less current maturities
Deferred revenue
Deferred income taxes
Other long-term liabilities
Total Liabilities
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 23,968 and 23,382
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762
Additional paid-in capital
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
$
$
$
57,253 $
521,938
2,132,744
70,847
2,782,782
1,185,169
256,320
186,977
271,818
4,683,066 $
116,774 $
1,802,252
18,876
111,362
251,717
2,300,981
1,028,476
103,111
56,277
111,003
3,599,848
—
149,123
124
11,309
922,662
1,083,218
4,683,066 $
50,282
417,714
1,772,587
46,611
2,287,194
1,006,130
259,399
184,268
107,159
3,844,150
94,602
1,506,895
20,965
88,423
211,109
1,921,994
769,916
81,929
59,075
100,460
2,933,374
—
165,512
219
41,225
703,820
910,776
3,844,150
See accompanying notes to consolidated financial statements.
F- 4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Year Ended December 31,
2017
2016
2015
5,763,587 $
2,544,379
277,844
385,863
1,015,773
99,064
10,086,510
5,423,744
2,257,544
273,058
522,649
93,429
8,570,424
1,516,086
—
1,049,378
57,722
408,986
(39,336)
(34,776)
12,195
347,069
(101,852)
245,217 $
4,938,436 $
2,226,951
276,616
330,922
844,505
60,727
8,678,157
4,649,024
1,963,267
272,303
434,222
58,026
7,376,842
1,301,315
13,992
899,590
49,369
338,364
(25,531)
(23,207)
(6,103)
283,523
(86,465)
197,058 $
9.78 $
25,065
7.76 $
25,409
9.75 $
25,145
7.72 $
25,521
4,552,301
1,927,016
261,530
283,018
738,990
101,397
7,864,252
4,271,931
1,685,767
257,073
375,069
98,778
6,688,618
1,175,634
20,124
811,175
41,600
302,735
(19,534)
(19,491)
(1,006)
262,704
(79,705)
182,999
6.96
26,290
6.91
26,490
1.06 $
0.95 $
0.76
$
$
$
$
$
Revenues:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle
Used vehicle retail
Used vehicle wholesale
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Asset impairments
Selling, general and administrative
Depreciation and amortization
Operating income
Floor plan interest expense
Other interest expense
Other (expense) income, net
Income before income taxes
Income tax provision
Net income
Basic net income per share
Shares used in basic per share calculations
Diluted net income per share
Shares used in diluted per share calculations
Cash dividends paid per Class A and Class B share
See accompanying notes to consolidated financial statements.
F- 5
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive income, net of tax:
Gain on cash flow hedges, net of tax expense of $0, $175 and $399
Comprehensive income
Year Ended December 31,
2017
2016
2015
245,217 $
197,058 $
182,999
—
245,217 $
277
197,335 $
649
183,648
$
$
See accompanying notes to consolidated financial statements.
F- 6
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
Common Stock
Class A
Class B
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Retained
Earnings
Total
Stockholders'
Equity
23,671
—
$ 276,058
—
2,562 $
—
319 $
—
29,775 $
—
(926)
$ 367,879 $
182,999
—
—
—
—
—
74
217
6,065
—
(306)
(31,548)
—
—
—
—
—
—
20
3
(20)
(3)
—
—
—
—
—
649
—
—
—
—
—
—
—
—
—
—
—
7,832
—
23,676
—
258,410
—
—
—
2,542
—
—
—
316
—
9,047
—
38,822
—
—
—
—
(19,985)
(277)
—
530,893
197,058
—
—
—
—
93
241
6,932
—
—
—
—
—
(1,408)
(112,939)
780
97
(780)
(97)
—
—
—
—
—
277
—
—
—
—
—
—
—
—
—
673,105
182,999
649
6,065
—
(31,548)
—
16,879
(19,985)
828,164
197,058
277
6,932
—
(112,939)
—
—
—
13,012
—
—
—
—
—
2,403
—
—
—
—
(24,131)
15,415
(24,131)
23,382
165,512
1,762
219
41,225
—
703,820
910,776
—
—
90
91
—
—
7,509
—
(361)
(33,753)
—
—
—
—
—
—
—
—
—
—
762
95
(762)
(95)
(169)
—
—
—
—
—
—
—
169
245,217
—
245,217
—
—
—
—
—
—
—
—
7,509
—
(33,753)
—
11,272
(33,396)
(26,544)
—
— —
—
7,623
— —
—
—
—
—
—
—
—
3,649
(33,396)
—
—
—
—
—
—
(26,544)
Balance at December 31,
2014
Net income
Gain on cash flow hedges,
net of tax expense of
$399
Issuance of stock in
connection with employee
stock plans
Issuance of restricted stock
to employees
Repurchase of Class A
common stock
Class B common stock
converted to Class A
common stock
Compensation for stock and
stock option issuances and
excess tax benefits from
option exercises
Dividends paid
Balance at December 31,
2015
Net income
Gain on cash flow hedges,
net of tax expense of
$175
Issuance of stock in
connection with employee
stock plans
Issuance of restricted stock
to employees
Repurchase of Class A
common stock
Class B common stock
converted to Class A
common stock
Compensation for stock and
stock option issuances and
excess tax benefits from
option exercises
Dividends paid
Balance at December 31,
Adjustment to adopt ASU
2016
2016-09
Net income
Issuance of stock in
connection with employee
stock plans
Issuance of restricted stock
to employees
Repurchase of Class A
common stock
Class B common stock
converted to Class A
common stock
Compensation for stock and
stock option issuances and
excess tax benefits from
option exercises
Option premiums paid
Dividends paid
Issuance of stock in
connection with
acquisitions
Balance at December 31,
2017
4
2,137
—
—
—
—
—
2,137
23,968
$ 149,123
1,000 $
124 $
11,309 $
— $ 922,662 $
1,083,218
See accompanying notes to consolidated financial statements.
F- 7
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments
Depreciation and amortization
Stock-based compensation
(Gain) loss on disposal of other assets
Gain from disposal activities
Deferred income taxes
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net
Inventories
Other assets
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable
Trade payables
Accrued liabilities
Other long-term liabilities and deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Proceeds from sales of assets
Cash paid for other investments
Cash paid for acquisitions, net of cash acquired
Proceeds from sales of stores
Net cash used in investing activities
Cash flows from financing activities:
Borrowings on floor plan notes payable: non-trade, net
Borrowings on lines of credit
Repayments on lines of credit
Principal payments on long-term debt, scheduled
Principal payments on long-term debt and capital leases, other
Proceeds from issuance of long-term debt
Payment of debt issuance costs
Proceeds from issuance of common stock
Repurchase of common stock
Dividends paid
Other financing activity
Net cash provided by financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes, net
Floor plan debt paid in connection with store disposals
Year Ended December 31,
2017
2016
2015
$
245,217 $
197,058 $
182,999
—
57,722
11,272
(438)
(5,110)
(2,798)
(57,360)
(193,099)
(3,120)
20,273
20,008
37,227
19,062
148,856
(105,378)
15,201
(8,570)
(460,394)
20,943
(538,198)
13,992
49,369
11,047
(4,343)
(1,102)
10,138
(105,961)
(168,847)
(13,305)
16,385
16,449
42,852
27,173
90,905
(100,761)
2,211
(30,280)
(234,700)
11,837
(351,693)
241,479
1,754,450
(1,836,167)
(18,218)
(50,288)
395,905
(4,664)
7,509
(33,753)
(26,544)
(33,396)
396,313
6,971
50,282
57,253 $
252,893
1,244,343
(1,123,082)
(16,717)
(27,703)
66,466
—
6,932
(112,939)
(24,131)
—
266,062
5,274
45,008
50,282 $
20,124
41,600
11,871
203
(5,919)
12,341
(13,047)
(197,079)
(31,290)
7,035
674
16,273
33,766
79,551
(83,244)
270
(28,110)
(71,615)
12,966
(169,733)
136,201
1,261,597
(1,298,120)
(15,404)
(9,189)
75,675
—
6,065
(31,548)
(19,985)
—
105,292
15,110
29,898
45,008
68,850 $
127,258
3,699
49,730 $
57,236
5,284
41,098
86,533
4,400
$
$
Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions
Non-cash assets transferred in connection with acquisitions
Debt forgiven in connection with acquisitions
Debt assumed in connection with acquisitions
Acquisition of assets with capital leases
Issuance of Class A common stock in connection with acquisition
$
1,748 $
—
—
84,333
—
2,137
— $
2,637
—
48,081
8,916
—
2,160
—
1,374
—
—
—
See accompanying notes to consolidated financial statements.
F- 8
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Organization and Business
We are one of the largest automotive retailers in the United States and are among the fastest growing companies in the
Fortune 500 (#318-2017) with 171 stores representing 30 brands in 18 states. We offer vehicles online and through our nationwide
retail network. Our "Growth Powered by People" strategy drives us to innovate and continuously improve the customer experience.
Our dealerships are located across the United States. We seek domestic, import and luxury franchises in cities ranging from mid-
sized regional markets to metropolitan markets. We evaluate all brands for expansion opportunities provided the market is large
enough to support adequate new vehicle sales to justify the required capital investment.
Basis of Presentation
The accompanying Consolidated Financial Statements reflect the results of operations, the financial position and the cash
flows for Lithia Motors, Inc. and its directly and indirectly wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts without restrictions.
Accounts Receivable
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 within five to ten days of selling a vehicle.
Trade receivables are comprised of amounts due from customers, 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.
Receivables are recorded at invoice and do not bear interest until they are 60 days past due. The allowance for doubtful
accounts represents an estimate of the amount of net losses inherent in our portfolio of accounts receivable as of the reporting date.
We estimate an allowance for doubtful accounts based on our historical write-off experience and consider recent delinquency trends
and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted
and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial. See
Note 2.
Inventories
Inventories are valued at the lower of net realizable value or cost, using the specific identification method for new vehicles,
pooled approach for used vehicles, and the lower of cost (first-in, first-out) or market method for parts. The cost of new and used
vehicle inventories includes the cost of any equipment added, reconditioning and transportation. Certain acquired inventories are
valued using the last-in first-out (LIFO) method. The LIFO reserve associated with this inventory as of December 31, 2017 and 2016
was immaterial.
Manufacturers reimburse us for holdbacks, floor plan interest assistance and advertising assistance, which are reflected as a
reduction in the carrying value of each vehicle purchased. We recognize advertising assistance, floor plan interest assistance,
holdbacks, cash incentives and other rebates received from manufacturers that are tied to specific vehicles as a reduction to cost of
sales as the related vehicles are sold.
Parts purchase discounts that we receive from the manufacturer are reflected as a reduction in the carrying value of the
parts purchased from the manufacturer and are recognized as a reduction to cost of goods sold as the related inventory is sold. See
Note 3.
F- 9
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives on the straight-line basis.
Leasehold improvements made at the inception of the lease or during the term of the lease are amortized on a straight-line basis over
the shorter of the life of the improvement or the remaining term of the lease.
The range of estimated useful lives is as follows:
Buildings and improvements
Service equipment
Furniture, office equipment, signs and fixtures
5 to 40 years
5 to 15 years
3 to 10 years
The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant remodels and betterments
are capitalized. In addition, interest on borrowings for major capital projects, significant remodels, and betterments are capitalized.
Capitalized interest becomes a part of the cost of the depreciable asset and is depreciated according to the estimated useful lives as
previously stated. For the years ended December 31, 2017, 2016 and 2015, we recorded capitalized interest of $0.5 million, $0.4
million and $0.5 million, respectively.
When an asset is retired, or otherwise disposed of, the related cost and accumulated depreciation are removed from the
accounts and any gain or loss is credited or charged to income from operations.
Leased property meeting certain criteria are recorded as capital leases. We have capital leases for certain locations, expiring
at various dates through December 31, 2050. Our capital leases are included in property and equipment on our Consolidated Balance
Sheets. Amortization of capitalized leased assets is computed on a straight-line basis over the term of the lease, unless the lease
transfers title or it contains a bargain purchase option, in which case, it is amortized over the asset’s useful life and is included in
depreciation expense. Capital lease obligations are recorded as the lesser of the estimated fair market value of the leased property or
the net present value of the aggregated future minimum payments and are included in current maturities of long-term debt and long-
term debt on our Consolidated Balance Sheets. Interest associated with these obligations is included in other interest expense in the
Consolidated Statements of Operations. See Note 7.
Long-lived assets held and used by us are reviewed for impairment whenever events or circumstances indicate that the
carrying amount of assets may not be recoverable. We consider several factors when evaluating whether there are indications of
potential impairment related to our long-lived assets, including store profitability, overall macroeconomic factors and the impact of
our strategic management decisions. If recoverability testing is performed, we evaluate assets to be held and used by comparing the
carrying amount of an asset to future net undiscounted cash flows associated with the asset, including its disposition. If such assets
are considered to be impaired, the amount by which the carrying amount of the assets exceeds the fair value of the assets is
recognized as a charge to income from operations. See Note 4.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately
identifiable intangible assets. Other identifiable intangible assets, such as franchise rights, are separately recognized if the intangible
asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.
Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances
indicate the carrying amount of the reporting unit more likely than not exceeds fair value. We have the option to qualitatively or
quantitatively assess goodwill for impairment and we evaluated our goodwill using a qualitative assessment process. Goodwill is
tested for impairment at the reporting unit level. Our reporting units are individual stores as this is the level at which discrete financial
information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate
resources and assess performance.
We test our goodwill for impairment on October 1 of each year. In 2017, we evaluated our goodwill using a qualitative
assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting unit exceeds
the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less
than the carrying amount, the first step of the two-step goodwill impairment test is performed. See Note 5.
F- 10
Franchise Value
We enter into agreements (“Franchise Agreements”) with the manufacturers. Franchise value represents a right received
under Franchise Agreements with manufacturers and is identified on an individual store basis.
We evaluated the useful lives of our Franchise Agreements based on the following factors:
•
•
•
certain of our Franchise Agreements continue indefinitely by their terms;
certain of our Franchise Agreements have limited terms, but are routinely renewed without substantial cost to us;
other than franchise terminations related to the unprecedented reorganizations of Chrysler and General Motors, and
allowed by bankruptcy law, we are not aware of manufacturers terminating Franchise Agreements against the wishes of
the franchise owners in the ordinary course of business. A manufacturer may pressure a franchise owner to sell a
franchise when the owner is in breach of the franchise agreement over an extended period of time;
•
state dealership franchise laws typically limit the rights of the manufacturer to terminate or not renew a franchise;
• we are not aware of any legislation or other factors that would materially change the retail automotive franchise system;
•
and
as evidenced by our acquisition and disposition history, there is an active market for most automotive dealership
franchises within the United States. We attribute value to the Franchise Agreements acquired with the dealerships we
purchase based on the understanding and industry practice that the Franchise Agreements will be renewed indefinitely
by the manufacturer.
Accordingly, we have determined that our Franchise Agreements will continue to contribute to our cash flows indefinitely
and, therefore, have indefinite lives.
As an indefinite-lived intangible asset, franchise value is tested for impairment at least annually, and more frequently if events
or circumstances indicate the carrying value may exceed fair value. The impairment test for indefinite-lived intangible assets requires
the comparison of estimated fair value to carrying value. An impairment charge is recorded to the extent the fair value is less than the
carrying value. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. We
evaluated our indefinite-lived intangible assets using a qualitative assessment process. We have determined the appropriate unit of
accounting for testing franchise value for impairment is each individual store.
We test our franchise value for impairment on October 1 of each year. In 2017, we evaluated our franchise value using a
qualitative assessment process. If the qualitative factors discussed above determine that it is more likely than not that the fair value of
the individual store's franchise value exceeds the carrying amount, the franchise value is not impaired and the second step is not
necessary. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying value, then a
quantitative valuation of our franchise value is performed and an impairment would be recorded. See Note 5.
Equity-Method Investments
In 2016 and 2015, we owned investments in certain partnerships which we accounted for under the equity method. These
investments are included as a component of other non-current assets in our Consolidated Balance Sheets. We determined that we
lacked certain characteristics to direct the operations of the businesses and, as a result, do not qualify to consolidate these
investments. Activity related to our equity-method investments is recognized in our Consolidated Statements of Operations as follows:
•
•
•
•
an other than temporary decline in fair value is reflected as an asset impairment;
our portion of the operating gains and losses is included as a component of other (expense) income, net;
the amortization related to the discounted fair value of future equity contributions is recognized over the life of the
investments as non-cash interest expense; and
tax benefits and credits are reflected as a component of our income tax provision.
Periodically, whenever events or circumstances indicate that the carrying amount of assets may be impaired, we evaluate the
equity-method investments for indications of loss resulting from an other than temporary decline. If
F- 11
the equity-method investment is determined to be impaired, the amount by which the carrying amount exceeds the fair value of the
investment is recognized as a charge to income from operations. See Notes 12 and 17.
Advertising
We expense production and other costs of advertising as incurred as a component of selling, general and administrative
expense. Additionally, manufacturer cooperative advertising credits for qualifying, specifically-identified advertising expenditures are
recognized as a reduction of advertising expense. Advertising expense and manufacturer cooperative advertising credits were as
follows (in thousands):
Year Ended December 31,
Advertising expense, gross
Manufacturer cooperative advertising credits
Advertising expense, net
2017
2016
2015
$ 116,124 $ 101,656 $
(22,812)
93,312 $
(20,293)
81,363 $
$
89,736
(19,801)
69,935
Contract Origination Costs
Contract origination commissions paid to our employees directly related to the sale of our self-insured lifetime lube, oil and
filter service contracts are deferred and charged to expense in proportion to the associated revenue to be recognized.
Legal Costs
We are a party to numerous legal proceedings arising in the normal course of business. We accrue for certain legal costs,
including attorney fees and potential settlement claims related to various legal proceedings that are estimable and probable. See Note
7.
Stock-Based Compensation
Compensation costs associated with equity instruments exchanged for employee and director services are measured at the
grant date, based on the fair value of the award. If there is a performance-based element to the award, the expense is recognized
based on the estimated attainment level, estimated time to achieve the attainment level and/or the vesting period. Estimates of fair
value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. The fair
value of non-vested stock awards is based on the intrinsic value on the date of grant. Shares to be issued upon the exercise of stock
options and the vesting of stock awards will come from newly issued shares. See Note 10.
In January 2017, we adopted ASU 2016-09, which 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. 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 upon adoption 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 and a $5.0 million reclassification between financing
and operating cash flows for the years ended December 31, 2016 and 2015, respectively.
• 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. See Note 13.
Income and Other Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities,
their respective tax bases, operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance, if needed, reduces deferred tax assets when it is more likely than not that some or all of the
deferred tax assets will not be realized.
F- 12
When there are situations with uncertainty as to the timing of the deduction, the amount of the deduction, or the validity of
the deduction, we adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained.
Positions that meet this criterion are measured using the largest benefit that is more than 50% likely to be realized. Interest and
penalties are recorded as income tax provision in the period incurred or accrued when related to an uncertain tax position. See Note
13.
We account for all taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction
(i.e., sales, use, value-added) on a net (excluded from revenues) basis.
Concentration of Risk and Uncertainties
We purchase substantially all of our new vehicles and inventory from various manufacturers at the prevailing prices charged
by auto manufacturers to all franchised dealers. Our overall sales could be impacted by the auto manufacturers’ inability or
unwillingness to supply dealerships with an adequate supply of popular models.
We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. In the event that
manufacturers are unable to supply the needed level of vehicles, our financial performance may be adversely impacted.
We depend on our manufacturers to deliver high-quality, defect-free vehicles. In the event that manufacturers experience
future quality issues, our financial performance may be adversely impacted.
We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy,
of a major vehicle manufacturer. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’
inability to supply the stores with an adequate supply of vehicles. We also receive incentives and rebates from our manufacturers,
including cash allowances, financing programs, discounts, holdbacks and other incentives. These incentives are recorded as accounts
receivable in our Consolidated Balance Sheets until payment is received. Our financial condition could be materially adversely
impacted by the manufacturers’ or distributors’ inability to continue to offer these incentives and rebates at substantially similar
terms, or to pay our outstanding receivables.
We enter into Franchise Agreements with the manufacturers. The Franchise Agreements generally limit the location of the
dealership and provide the auto manufacturer approval rights over changes in dealership management and ownership. The auto
manufacturers are also entitled to terminate the Franchise Agreement if the dealership is in material breach of the terms. Our ability to
expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of additional dealerships. See also
“Goodwill” and “Franchise Value” above.
We have a credit facility with a syndicate of 18 financial institutions, including seven manufacturer-affiliated finance
companies. Several of these financial institutions also provide vehicle financing for certain new vehicles, vehicles that are designated
for use as service loaners and mortgage financing. This credit facility is the primary source of floor plan financing for our new
vehicle inventory and also provides used vehicle financing and a revolving line of credit. The term of the facility extends through
August 2022. At maturity, our financial condition could be materially adversely impacted if lenders are unable to provide credit that
has typically been extended to us or with terms unacceptable to us. Our financial condition could be materially adversely impacted if
these providers incur losses in the future or undergo funding limitations. See Note 6.
We anticipate continued organic growth and growth through acquisitions. This growth will require additional credit which
may be unavailable or with terms unacceptable to us. If these events were to occur, we may not be able to borrow sufficient funds
to facilitate our growth.
Financial Instruments, Fair Value and Market Risks
The carrying amounts of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings
approximate fair value because of the short-term nature and current market rates of these instruments.
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the estimates. See Note 12.
F- 13
We have variable rate floor plan notes payable, mortgages and other credit line borrowings that subject us to market risk
exposure. At December 31, 2017, we had $2.3 billion outstanding in variable rate debt. These borrowings had interest rates ranging
from 2.75% t o 4.25% per annum. An increase or decrease in the interest rates would affect interest expense for the period
accordingly.
The fair value of long-term, fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest
rate debt will increase as interest rates fall because we could refinance for a lower rate. Conversely, the fair value of fixed interest
rate debt will decrease as interest rates rise. The interest rate changes affect the fair value, but do not impact earnings or cash flows.
We monitor our fixed interest rate debt regularly, refinancing debt that is materially above market rates if permitted. See Note 12.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and related
notes to financial statements. Changes in such estimates may affect amounts reported in future periods.
Estimates are used in the calculation of certain reserves maintained for charge-backs on estimated cancellations of service
contracts; life, accident and disability insurance policies; finance fees from customer financing contracts and uncollectible accounts
receivable.
We also use estimates in the calculation of various expenses, accruals and reserves, including anticipated losses related to
workers’ compensation insurance; anticipated losses related to self-insurance components of our property and casualty and medical
insurance; self-insured lifetime lube, oil and filter service contracts; discretionary employee bonuses, the Transition Agreement with
Sidney B. DeBoer, our Chairman of the Board; warranties provided on certain products and services; legal reserves and stock-based
compensation. We also make certain estimates regarding the assessment of the recoverability of long-lived assets, indefinite-lived
intangible assets and deferred tax assets.
We offer a limited warranty on the sale of most retail used vehicles. This warranty is based on mileage and time. We also
offer a mileage and time based warranty on parts used in our service repair work and on tire purchases. The cost that may be
incurred for these warranties is estimated at the time the related revenue is recorded. A reserve for these warranty liabilities is
estimated based on current sales levels, warranty experience rates and estimated costs per claim. The annual activity for reserve
increases and claims is immaterial. As of December 31, 2017 and 2016, the accrued warranty balance was $0.4 million and $0.4
million, respectively.
Fair Value of Assets Acquired and Liabilities Assumed
We estimate the fair value of the assets acquired and liabilities assumed in a business combination using various assumptions.
The most significant assumptions used relate to determining the fair value of property and equipment and intangible franchise rights.
We estimate the fair value of property and equipment based 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.
We estimate the fair value of our franchise rights primarily using the Multi-Period Excess Earnings (“MPEE”) model. The
forecasted cash flows used in the MPEE model contain inherent uncertainties, including significant estimates and assumptions related
to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and
business plans to estimate the future cash flows that each franchise will generate. We have determined that only certain cash flows of
the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to
their present value equivalent taking into consideration factors such as a risk-free rate, a peer group average beta, an equity risk
premium and a small stock risk premium. Additionally, we also may use a market approach to determine the fair value of our
franchise rights. These market data points include our acquisition and divestiture experience and third-party broker estimates.
F- 14
We use a relief-from-royalty method to determine the fair value of a trade name. Future cost savings associated with
owning, rather than licensing, a trade name is estimated based on a royalty rate and management’s forecasted sales projections. The
discount rate applied to the future cost savings factors an equity market risk premium, small stock risk premium, an average peer
group beta, a risk-free interest rate and a premium for forecast risk.
Revenue Recognition
Revenue from the sale of a vehicle is recognized when a contract is signed by the customer, financing has been arranged or
collectibility is reasonably assured and the delivery of the vehicle to the customer is made. We do not allow the return of new or used
vehicles, except where mandated by state law.
Revenue from parts and service is recognized upon delivery of the parts or service to the customer. We allow for customer
returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from
the time of sale, and are not significant.
Finance fees earned for notes placed with financial institutions in connection with customer vehicle financing are recognized,
net of estimated charge-backs, as finance and insurance revenue upon acceptance of the credit by the financial institution and
recognition of the sale of the vehicle.
Insurance income from third party insurance companies for commissions earned on credit life, accident and disability
insurance policies sold in connection with the sale of a vehicle are recognized, net of anticipated cancellations, as finance and
insurance revenue upon execution of the insurance contract and recognition of the sale of the vehicle.
Commissions from third party service contracts are recognized, net of anticipated cancellations, as finance and insurance
revenue upon sale of the contracts and recognition of the sale of the vehicle. We also participate in future underwriting profit,
pursuant to retrospective commission arrangements, which is recognized in income as earned.
Revenue related to self-insured lifetime lube, oil and filter service contracts is deferred and recognized based on expected
future claims for service. The expected future claims experience is evaluated periodically to ensure it remains appropriate given actual
claims history.
Segment Reporting
While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three
reportable segments based on their economic similarities: Domestic, Import and Luxury.
Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler,
General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured
primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that
sell new vehicles manufactured primarily by BMW, Mercedes-Benz and Lexus. The franchises in each segment also sell used
vehicles, parts and automotive services, and automotive finance and insurance products.
Corporate and other revenue and income include the results of operations of our stand-alone collision center 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 operating segments. These internal corporate expense allocations are used to increase
comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal
allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within
our corporate headquarters that perform certain dealership functions.
We define our chief operating decision maker (“CODM”) to be certain members of our executive management group.
Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM.
We derive the operating results of the segments directly from our internal management reporting system. The accounting policies
used to derive segment results are substantially the same as those used to determine our consolidated results, excepted for the internal
allocation within Corporate and other discussed above. Our CODM measures the performance of each reportable segment based on
several metrics, including earnings from operations,
F- 15
and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the reportable segments. See
Note 18.
(2) Accounts Receivable
Accounts receivable consisted of the following (in thousands):
December 31,
Contracts in transit
Trade receivables
Vehicle receivables
Manufacturer receivables
Auto loan receivables
Other receivables
Less: Allowance for doubtful accounts
Less: Long-term portion of accounts receivable, net
Total accounts receivable, net
Accounts receivable classifications include the following:
2017
286,578 $
45,895
60,022
96,141
75,052
14,634
578,322
(7,386)
(48,998)
521,938 $
2016
233,506
45,193
43,937
76,948
69,859
3,857
473,300
(5,281)
(50,305)
417,714
$
$
•
•
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 within five to ten days of selling a vehicle.
Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and
others for commissions earned on service contracts and insurance products.
• Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
• Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and
warranty claims.
• Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and
insurance products.
Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until
repayment, charge-off or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to
interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60
days past due.
The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly.
Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all
appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for
charges and subsequent recoveries is immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated
Balance Sheets.
(3) Inventories
The components of inventories consisted of the following (in thousands):
December 31,
New vehicles
Used vehicles
Parts and accessories
Total inventories
2017
1,553,751 $
500,011
78,982
2,132,744 $
2016
1,338,110
368,067
66,410
1,772,587
$
$
The new vehicle inventory cost is generally reduced by manufacturer holdbacks and incentives, while the related floor plan
notes payable are reflective of the gross cost of the vehicle. As of December 31, 2017 and 2016, the
F- 16
carrying value of inventory had been reduced by $19.8 million and $18.1 million, respectively, for assistance received from
manufacturers as discussed in Note 1.
(4) Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
Land
Building and improvements
Service equipment
Furniture, office equipment, signs and fixtures
Less accumulated depreciation
Construction in progress
2017
346,680 $
685,516
94,121
231,454
1,357,771
(197,802)
1,159,969
25,200
1,185,169 $
2016
318,832
611,798
80,953
141,248
1,152,831
(167,300)
985,531
20,599
1,006,130
$
$
Long-lived Asset Impairment Charges
In 2015, we recorded $3.6 million of impairment charges associated with certain property and equipment. As the expected
future use of these facilities and equipment changed, the long-lived assets were tested for recoverability and were determined to have
a carrying value exceeding their fair value. We did not record any impairment charges associated with property and equipment in
2017 or 2016.
(5) Goodwill and Franchise Value
The following is a roll-forward of goodwill (in thousands):
Import
Luxury
Domestic
$
Balance as of December 31, 2015 ¹
Additions through acquisitions 2
Reductions through divestitures
Balance as of December 31, 2016 ¹
Adjustments to purchase price allocations 2,3
Reductions through divestitures
Balance as of December 31, 2017 ¹
(1) Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
(2) Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification of $2.2
84,384 $
21,795
—
106,179
(1,006)
(865)
104,308 $
30,933 $
7,448
—
38,381
(391)
—
37,990 $
97,903 $
18,154
(1,218)
114,839
(817)
—
Consolidated
213,220
47,397
(1,218)
259,399
(2,214)
(865)
256,320
114,022 $
$
million from goodwill to franchise value.
(3) Our purchase price allocation is preliminary for the acquisition of the Baierl Auto Group, Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford
Lincoln, and Crater Lake Mazda and the associated goodwill has not been allocated to each of our segments. See Note 14.
The following is a roll-forward of franchise value (in thousands):
Franchise
Value
Balance as of December 31, 2015
157,699
27,087
Additions through acquisitions
(518)
Reductions through divestitures
Balance as of December 31, 2016
184,268
495
Additions through acquisitions 1
2,214
Adjustments to purchase price allocations 2
186,977
Balance as of December 31, 2017
(1) Our purchase price allocation is preliminary for the acquisition of the Baierl Auto Group, Downtown LA Auto Group, Albany Chrysler, Crater Lake Ford
$
$
Lincoln, and Crater Lake Mazda and the associated franchise value has not been allocated to each of our segments. See Note 14.
(2) Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification of $2.2
million from goodwill to franchise value.
F- 17
(6) Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt (in thousands):
December 31,
Floor plan notes payable: non-trade
Floor plan notes payable
Total floor plan debt
Used vehicle inventory financing facility
Revolving lines of credit
Real estate mortgages
5.25% Senior notes due 2025
Other debt
Total long-term debt outstanding
Less: unamortized debt issuance costs
Less: current maturities (net of current debt issuance costs)
Long-term debt
2017
1,802,252 $
116,774
1,919,026 $
2016
1,506,895
94,602
1,601,497
177,222 $
94,568
469,969
300,000
12,512
1,054,271
(6,919)
(18,876)
1,028,476 $
211,000
142,507
428,367
—
11,191
793,065
(2,184)
(20,965)
769,916
$
$
$
$
Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion which
matures in August 2022. This syndicated credit facility is comprised of 18 financial institutions, including seven manufacturer-
affiliated finance companies. Under our credit facility we are permitted to allocate up to $1.9 billion in new vehicle inventory floor
plan financing and up to a total of $500 million in used vehicle inventory floor plan financing and 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. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements
of Cash Flows as financing activities.
The availability of the revolving line of credit under our syndicated credit facility is determined according to a borrowing
base comprised of a portion of certain accounts, receivables, invoices, inventory and equipment. The borrowing base is reduced by
the sum of the outstanding aggregate principal balance of new and used vehicle floor plan loans and new and used swing line loans.
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 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 December 31,
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 decreases 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% for
new vehicle floor plan financing, one-month LIBOR plus 1.50% for used vehicle floor plan financing; and a variable interest rate on
the revolving financing ranging from the one-month LIBOR plus 1.25% to 2.50%, depending on our leverage ratio. The annual
interest rate associated with our new vehicle floor plan commitment was 2.82% at December 31, 2017. The annual interest rate
associated with our used vehicle inventory financing facility and our revolving line of credit was 3.07% at December 31, 2017.
F- 18
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
Current ratio
Fixed charge coverage ratio
Leverage ratio
Requirement
Not less than 1.10 to 1
Not less than 1.20 to 1
Not more than 5.00 to 1
As of December 31, 2017
1.21 to 1
2.82 to 1
2.59 to 1
Other Lines of Credit
We have other lines of credit with a total financing commitment of $3.5 million for general corporate purposes, including
acquisitions and working capital. Substantially all of these other lines of credit mature in 2019 and have interest rates ranging up to
2.94%. As of December 31, 2017, $0.6 million was 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 and vehicles that are
designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are
variable rates. As of December 31, 2017, $116.8 million was outstanding on these agreements at interest rates ranging up to 5.50%.
Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the
Consolidated Statements of Cash Flows.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 2.8% to 5.0% at
December 31, 2017. The mortgages are payable in various installments through October 2034. As of December 31, 2017, we had
fixed interest rates on 78.9% 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 December 31, 2017. This debt, which totaled $12.5 million at December 31, 2017, is due in various installments through
December 2050.
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.
Future Principal Payments
The schedule of future principal payments associated with real estate mortgages, our 5.25% Senior Notes and other debt as
of December 31, 2017 was as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total principal payments
F- 19
$
18,948
47,888
40,236
43,291
61,103
571,014
$ 782,480
(7) Commitments and Contingencies
Leases
We lease certain facilities under non-cancelable operating and capital leases. These leases expire at various dates through
2050. Certain lease commitments contain fixed payment increases at predetermined intervals over the life of the lease, while other
lease commitments are subject to escalation clauses of an amount equal to the increase in the cost of living based on the “Consumer
Price Index - U.S. Cities Average - All Items for all Urban Consumers” published by the U.S. Department of Labor, or a substantially
equivalent regional index. Lease expense related to operating leases is recognized on a straight-line basis over the life of the lease.
The minimum lease payments under our operating and capital leases after December 31, 2017 are as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
Less: sublease rentals
$
38,357
34,587
32,552
30,673
28,985
243,242
408,396
(8,005)
$ 400,391
Rent expense, net of sublease income, for all operating leases was $33.4 million, $26.8 million, and $23.8 million for the
years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included as a component of selling, general and
administrative expenses in our Consolidated Statements of Operations.
In connection with dispositions of stores, we occasionally assign or sublet our interests in any real property leases
associated with such stores to the purchaser. We often retain responsibility for the performance of certain obligations under such
leases to the extent that the assignee or sublessee does not perform. Additionally, we may remain subject to the terms of any
guarantees and have correlating indemnification rights against the assignee or sublessee in the event of non-performance, as well as
certain other defenses. We may also be called upon to perform other obligations under these leases, such as environmental
remediation of the premises or repairs upon termination of the lease. We currently have no reason to believe that we will be called
upon to perform any such services; however, there can be no assurance that any future performance required by us under these
leases will not have a material adverse effect on our financial condition or results of operations.
Charge-Backs for Various Contracts
We have recorded a liability of $52.7 million as of December 31, 2017 for our estimated contractual obligations related to
potential charge-backs for vehicle service contracts, lifetime oil change contracts and other various insurance contracts that are
terminated early by the customer. We estimate that the charge-backs will be paid out as follows (in thousands):
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
27,352
16,113
6,382
2,183
673
41
52,744
Lifetime Lube, Oil and Filter Contracts
We retain the obligation for lifetime lube, oil and filter service contracts sold to our customers and assumed the liability of
certain existing lifetime lube, oil and filter contracts. These amounts are recorded as deferred revenues. At the time of sale, we defer
the full sale price and recognize the revenue based on the rate we expect future costs to be incurred. As of December 31, 2017, we
had a deferred revenue balance of $127.3 million associated with these contracts and estimate the deferred revenue will be recognized
as follows (in thousands):
F- 20
Year Ending December 31,
2018
2019
2020
2021
2022
Thereafter
Total
$
$
25,212
20,048
15,913
13,292
11,368
41,424
127,257
The current portion of this deferred revenue balance is recorded as a component of accrued liabilities in our Consolidated
Balance Sheets.
We periodically evaluate the estimated future costs of these assumed contracts and record a charge if future expected claim
and cancellation costs exceed the deferred revenue to be recognized. As of December 31, 2017, we had a reserve balance of $3.4
million recorded as a component of accrued liabilities and other long-term liabilities in our Consolidated Balance Sheets. The charges
associated with this reserve were recognized in 2011 and earlier.
Self-insurance Programs
We self-insure a portion of our property and casualty insurance, vehicle open lot coverage, medical insurance and workers’
compensation insurance. Third parties are engaged to assist in estimating the loss exposure related to the self-retained portion of the
risk associated with these insurances. Additionally, we analyze our historical loss and claims experience to estimate the loss exposure
associated with these programs. As of December 31, 2017 and 2016, we had liabilities associated with these programs of $31.2
million and $32.8 million, respectively, recorded as a component of accrued liabilities and other long-term liabilities in our
Consolidated Balance Sheets.
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that
the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material
adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
California Wage and Hour Litigations
In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc.,
Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and
sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal
and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and
wages due at termination. The plaintiffs also seek attorney fees and costs. 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. In January
2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, and this settlement was approved by
the California courts in December 2017. 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.
(8) Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A common stock are not convertible into any other series or class of our securities. Each share of
Class B common stock, however, is freely convertible into one share of Class A common stock at the option of the holder of the
Class B common stock. All shares of Class B common stock shall automatically convert to shares of Class A common stock (on a
share-for-share basis, subject to adjustment) on the earliest record date for an annual meeting of our stockholders on which the
number of shares of Class B common stock outstanding is less than 1% of the total number of shares of common stock outstanding.
Shares of Class B common stock may not be transferred to third parties, except for transfers to certain family members and in other
limited circumstances.
F- 21
Holders of Class A common stock are entitled to one vote for each share held of record and holders of Class B common
stock are entitled to ten votes for each share held of record. The Class A common stock and Class B common stock vote together as
a single class on all matters submitted to shareholders.
Repurchases of Class A Common Stock
Repurchases of our Class A Common Stock occurred under repurchase authorizations granted by our Board of Directors
and related to shares withheld as part of the vesting of restricted stock units ("RSUs").
In August 2011, our Board of Directors authorized the repurchase of up to 2 million shares of our Class A common stock
and, on July 20, 2012, our Board of Directors authorized the repurchase of 1 million additional shares of our Class A common stock.
Effective February 29, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock.
This authorization replaced the existing authorizations, increasing the total and establishing a maximum dollar rather than share
amount.
Share repurchases under our authorizations were as follows:
2016 Share Repurchase Authorization
Repurchases Occurring in 2017
Average Price
92.79
329,000 $
Shares
Cumulative Repurchases as of
December 31, 2017
Shares
1,042,725 $
Average Price
83.86
As of December 31, 2017, we had $162.6 million available for repurchases pursuant to our 2016 share repurchase
authorization.
In addition, during 2017, we repurchased 32,457 shares at an average price of $99.40 per share, for a total of $3.2 million,
related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with
stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.
The following is a summary of our repurchases in the years ended December 31, 2017, 2016 and 2015:
Year Ended December 31,
Shares repurchased pursuant to repurchase authorizations
Total purchase price (in thousands)
Average purchase price per share
Shares repurchased in association with tax withholdings on the vesting of RSUs
2017
329,000
30,527 $
92.79 $
2016
1,312,848
104,370 $
79.50 $
32,457
94,826
2015
228,737
24,676
107.88
77,649
$
$
In December 2017, we entered into a structured repurchase agreement involving the use of capped call options for the
purchase of our Class A common stock. We paid a fixed sum upon execution of the agreement in exchange for the right to receive
either a pre-determined amount of cash or stock. Upon expiration of the agreement, if the closing market price of our common stock
is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our
election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of
shares specified in the agreement. We paid net premiums of $33.4 million in December 2017 to enter this agreement, which was
recorded as a reduction of additional paid-in capital and, as of December 31, 2017, the options were outstanding.
F- 22
Dividends
We declared and paid dividends on our Class A and Class B Common Stock as follows:
Quarter declared
2015
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend
amount per
Class A and
Class B share
Total amount of
dividends paid
(in thousands)
$
$
$
0.16 $
0.20
0.20
0.20
0.20 $
0.25
0.25
0.25
0.25 $
0.27
0.27
0.27
4,216
5,266
5,257
5,246
5,151
6,373
6,299
6,308
6,292
6,760
6,751
6,741
Reclassification From Accumulated Other Comprehensive Loss
The reclassification from accumulated other comprehensive loss was as follows (in thousands):
Year Ended December 31,
Loss on cash flow hedges
Income tax benefits
Loss on cash flow hedges, net
See Note 11.
2017
2016
2015
Affected Line Item
in the Consolidated Statement
of Operations
$
$
— $
—
— $
(219) $
85
(134) $
(449) Floor plan interest expense
174 Income tax provision
(275)
(9) 401(k) Profit Sharing, Deferred Compensation and Long-Term Incentive Plans
We have a defined contribution 401(k) plan and trust covering substantially all full-time employees. The annual contribution
to the plan is at the discretion of our Board of Directors. Contributions of $5.8 million, $5.4 million, and $5.3 million were recognized
for the years ended December 31, 2017, 2016 and 2015, respectively. Employees may contribute to the plan if they meet certain
eligibility requirements.
We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to
accumulate assets for retirement on a tax deferred basis. We may, depending on position, also make discretionary contributions to the
LTIP. These discretionary contributions vest between one and seven years based on the employee’s age. Additionally, a participant
may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or
retirement.
The following is a summary related to our LTIP (in thousands):
Year Ended December 31,
Compensation expense
Total discretionary contribution
Guaranteed annual return
2017
2016
2015
$
$
$
$
1,059
1,730
5.00%
$
$
1,081
1,785
5.25%
1,812
2,249
5.25%
As of December 31, 2017 and 2016, the balance due to participants was $27.9 million and $23.5 million, respectively, and
was included as a component of other long-term liabilities in the Consolidated Balance Sheets.
F- 23
(10) Stock-Based Compensation
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) allows for the issuance of 1,500,000 shares of our Class A
common stock. The 2009 ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal
Revenue Code of 1986, as amended, and is administered by the Compensation Committee of the Board of Directors.
Eligible employees are entitled to defer up to 10% of their base pay for the purchase of stock, up to $25,000 of fair market
value of our Class A common stock annually. The purchase price is equal to 85% of the fair market value at the end of the purchase
period.
Following is information regarding our 2009 ESPP:
Year Ended December 31,
Shares purchased pursuant to 2009 ESPP
Weighted average per share price of shares purchased
Weighted average per share discount from market value for shares purchased
As of December 31,
Shares available for purchase pursuant to 2009 ESPP
$
$
2017
90,881
86.13
15.20
2017
281,870
Compensation expense related to our 2009 ESPP is calculated based on the 15% discount from the per share market price
on the date of grant.
2013 Stock Incentive Plan
Our 2013 Stock Incentive Plan, as amended, (the “2013 Plan”) allows for the grant of a total of 3.8 million shares in the
form of stock appreciation rights, qualified stock options, nonqualified stock options and shares of restricted stock to our officers,
key employees, directors and consultants. The 2013 Plan is administered by the Compensation Committee of the Board of Directors
and permits accelerated vesting of outstanding awards upon the occurrence of certain changes in control. As of December 31, 2017,
1,383,827 shares of Class A common stock were available for future grants. As of December 31, 2017, there were no stock
appreciation rights, qualified stock options, nonqualified stock options or shares of restricted stock outstanding.
Restricted Stock Units (“RSUs”)
RSU grants vest over a period of time up to four years from the date of grant. RSU activity was as follows:
Balance, December 31, 2016
Granted
Vested
Forfeited
Balance, December 31, 2017
RSUs
298,984 $
162,356
(90,215)
(26,321)
344,804
Weighted average
grant date fair value
80.37
99.24
69.61
83.86
91.81
We granted 52,056 time-vesting RSUs to members of our Board of Directors and employees in 2017. Each grant entitles the
holder to receive shares of our Class A common stock upon vesting. A portion of the RSUs vest over four years, beginning on the
second anniversary of the grant date, for employees and vests quarterly for our Board of Directors, over their service period.
Certain key employees were granted 110,300 performance and time-vesting RSUs in 2017. Of these, 83,510 shares were
earned based on attaining various target levels of operational performance. Based on the levels of performance achieved in 2017, a
weighted average attainment level of 57.2% for these RSUs was met. These RSUs will vest over four years from the grant date.
Stock-Based Compensation
As of December 31, 2017, unrecognized stock-based compensation related to outstanding, but unvested RSUs was $12.5
million, which will be recognized over the remaining weighted average vesting period of 2.1 years.
F- 24
Certain information regarding our stock-based compensation was as follows:
Year Ended December 31,
Per share intrinsic value of non-vested stock granted
Weighted average per share discount for compensation expense recognized under
2017
2016
2015
$
99.24 $
82.90 $
88.74
the 2009 ESPP
Total intrinsic value of stock options exercised (in millions)
Fair value of non-vested stock that vested during the period (in millions)
Stock-based compensation recognized in Consolidated Statements of Operations, as
a component of selling, general and administrative expense (in millions)
Tax benefit recognized in Consolidated Statements of Operations (in millions)
Cash received from options exercised and shares purchased under all share-based
arrangements (in millions)
Tax deduction realized related to stock options exercised (in millions)
15.20
—
69.6
11.3
3.5
7.8
9.0
13.00
—
47.5
11.0
3.8
7.0
8.9
15.89
0.5
19.3
11.9
4.2
6.5
7.6
(11) Derivative Financial Instruments
From time to time, we have entered into interest rate swaps to fix a portion of our interest expense. We do not enter into
derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR
benchmark. That is, we do not engage in interest rate speculation using derivative instruments. Typically, we designate all interest
rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate
swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no
longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain
or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the
forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized
in income immediately.
The effect of derivative instruments in our Consolidated Statements of Operations was as follows (in thousands):
Location of loss
reclassified
from
Accumulated
OCI into
Income
(effective
portion)
Amount of loss
reclassified from
Accumulated OCI
into Income
(effective portion)
Location of loss
recognized in
Income on
derivative
(ineffective
portion and
amount
excluded from
effectiveness
testing)
Amount of loss
recognized in
Income on
derivative
(ineffective
portion and
amount excluded
from
effectiveness
testing)
Derivatives in Cash Flow
Hedging Relationships
Amount of gain
recognized in
Accumulated OCI
(effective portion)
Year Ended December 31,
2016
Interest rate swap contract
Year Ended December 31,
2015
$
Floor plan
Floor plan
233
interest expense $
(219)
interest expense $
(352)
Interest rate swap contract
$
599
interest expense $
(449)
interest expense $
(758)
Floor plan
Floor plan
We did not have any activity related to the effect of derivative instruments in 2017.
F- 25
(12) Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•
•
•
Level 1 - quoted prices in active markets for identical securities;
Level 2 - other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment
spreads, credit risk; and
Level 3 - significant unobservable inputs, including our own assumptions in determining fair value.
We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term
borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We
believe the carrying value of our variable rate debt approximates fair value.
We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We
calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the
estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest
rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair
value of the debt. As of December 31, 2017, our real estate mortgages and other debt, which includes capital leases, had maturity
dates between January 12, 2019 and December 31, 2050.
There were no changes to our valuation techniques during the year ended December 31, 2017.
A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term
fixed interest rate debt is as follows (in thousands):
December 31,
Carrying value
5.25% Senior Notes due 2025
Real Estate Mortgages and Other Debt
Fair value
5.25% Senior Notes due 2025
Real Estate Mortgages and Other Debt
(13) Income Taxes
Income Tax Provision
The income tax provision was as follows (in thousands):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2017
2016
$
$
$
$
300,000 $
376,880
676,880 $
—
286,660
286,660
312,750 $
385,337
698,087 $
—
293,522
293,522
2017
2016
2015
$
$
95,128 $
16,883
112,011
(14,257)
4,098
(10,159)
101,852 $
68,088 $
13,884
81,972
4,893
(400)
4,493
86,465 $
58,408
14,572
72,980
6,046
679
6,725
79,705
At December 31, 2017 and 2016, we had income taxes receivable of $22.5 million and $2.4 million, respectively, included as
a component of other current assets in our Consolidated Balance Sheets.
The reconciliation between amounts computed using the federal income tax rate of 35% and our income tax provision is
shown in the following tabulation (in thousands):
F- 26
Year Ended December 31,
Federal tax provision at statutory rate
State taxes, net of federal income tax benefit
Equity investment basis difference
Non-deductible items
Permanent differences related to stock-based compensation
Net change in valuation allowance
General business credits
Deferred revaluation for change in statutory tax rate
Other
Income tax provision
$
2017
121,474 $
13,308
—
1,316
(822)
330
(934)
(32,901)
81
$
101,852 $
2016
2015
99,233 $
10,784
9,470
1,436
139
(5,133)
(27,950)
—
(1,514)
86,465 $
91,947
9,357
11,048
882
156
(3,303)
(29,093)
—
(1,289)
79,705
Deferred Taxes
Individually significant components of the deferred tax assets and (liabilities) are presented below (in thousands):
December 31,
Deferred tax assets:
Deferred revenue and cancellation reserves
Allowances and accruals, including state NOL carryforward amounts
Credits and other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Inventories
Goodwill
Property and equipment, principally due to differences in depreciation
Prepaid expenses and other
Total deferred tax liabilities
Total
2017
2016
$
$
39,397 $
36,314
1,112
(557)
76,266
(20,926)
(35,042)
(73,399)
(3,176)
(132,543)
(56,277) $
49,332
49,074
1,781
(227)
99,960
(22,253)
(41,107)
(93,943)
(1,732)
(159,035)
(59,075)
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to,
bonus depreciation that will allow for full expensing of qualified property, reduction of the U.S. federal corporate tax rate, a new
limitation on deductible interest expense, and limitations on the deductibility of certain executive compensation.
We remeasured certain federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in
the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which
could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. At December 31,
2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, we have made a
reasonable estimate of the effects on our existing deferred tax balances. The provisional amount recorded related to the
remeasurement of our deferred tax balance was $32.9 million, which is included as a component of income tax expense from
continuing operations. Included in this amount is an estimated $2 million attributable to full expensing on certain assets and the
executive compensation limitation. In all cases, we will continue to make and refine our calculations as additional analysis is
completed, further guidance is issued, or new information is made available.
We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available
carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
As of December 31, 2017, we had a $0.6 million valuation allowance recorded associated with our deferred tax assets. The
entire allowance is associated with state net operating losses primarily generated in previous years. The valuation allowance increased
$0.3 million in the current year primarily as a result of establishing allowances related
F- 27
to previously off balance sheet NOLs as part of the January 2017 adoption of ASU 2016-09, "Compensation - Stock Compensation -
Improvements to Employee Share-Based Payment Accounting." See Note 1 Summary of Significant Accounting Policies for
additional information regarding the adoption of ASU 2016-09.
As of December 31, 2017, we had state net operating loss carryforward amounts totaling approximately $2.4 million, tax
effected, with expiration dates through 2037. We believe that it is more likely than not that the benefit from certain state NOL
carryforward amounts will not be realized. In recognition of this risk, we have recorded a valuation allowance of $0.6 million on the
deferred tax assets relating to these state NOL carryforwards. We had $1.0 million, tax effected, in state tax credit carryforwards
with expiration dates through 2027. We believe it is more likely than not that the benefits from these state tax credit carryforwards
will be realized.
Unrecognized Tax Benefits
The following is a reconciliation of our unrecognized tax benefits (in thousands):
Balance, December 31, 2015
Decrease related to tax positions taken - prior year
Balance, December 31, 2016
Decrease related to tax positions taken - prior year
Balance, December 31, 2017
$
$
$
1,031
(1,031)
—
—
—
The unrecognized tax benefits recorded were acquired as part of the acquisition of DCH. We recorded a tax indemnification
asset related to the unrecognized tax benefit as we determined the amount would be recoverable from the seller. As anticipated,
settlements were reached during the year resulting in cash settlements related to the unrecognized tax benefits. As a result, we have
no unrecognized tax benefits recorded as of December 31, 2017.
Open tax years at December 31, 2017 included the following:
Federal
20 states
(14) Acquisitions
2014 - 2017
2013 - 2017
In 2017, we completed the following acquisitions:
• On May 1, 2017, we acquired Baierl Auto Group: an eight store platform based in Pennsylvania.
• On August 7, 2017, we acquired Downtown LA ("DTLA") Auto Group, a seven store platform based in California.
• On November 11, 2017, we acquired Albany CJD Fiat in Albany, New York.
• On November 15, 2017, we acquired Crater Lake Ford Lincoln and Crater Lake Mazda in Medford, Oregon.
Revenue and operating income contributed by the 2017 acquisitions subsequent to the date of acquisition were as follows (in
thousands):
Year Ended December 31,
Revenue
Operating income
$
2017
617,300
9,316
In 2016, we completed the following acquisitions:
• On January 26, 2016, we acquired Riverside Subaru in Riverside, California.
• On February 1, 2016, we acquired Ira Toyota in Milford, Massachusetts.
• On June 23, 2016, we acquired the Helena Buick GMC franchises in Helena, Montana.
• On August 1, 2016, we acquired Thousand Oaks Ford in Thousand Oaks, California.
• On September 12, 2016, we acquired Carbone Auto Group: a nine store platform in New York and Vermont.
• On September 28, 2016, we acquired Greiner Ford Lincoln in Casper, Wyoming.
• On October 5, 2016, we acquired Woodland Hills Audi in Woodland Hills, California.
F- 28
• On November 16, 2016, we acquired 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 in cash and equity securities for the acquisitions and the preliminary
amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):
Consideration paid for the Year Ended December 31,
Cash paid, net of cash acquired
Property and equipment transferred
Equity securities issued
Debt issued
Assets acquired and liabilities assumed for the Year Ended December 31,
Trade receivables, net
Inventories
Franchise value
Property and equipment
Other assets
Floor plan notes payable
Debt and capital lease obligations
Other liabilities
Goodwill
2017
2016
460,394 $
—
2,137
1,748
464,279
$
234,700
2,637
—
—
237,337
2017
2016
46,864 $
189,747
—
146,835
187,549
(72,495)
(13,727)
(20,494)
464,279
—
464,279 $
—
148,915
27,087
75,345
990
(30,134)
(22,813)
(9,450)
189,940
47,397
237,337
$
$
$
$
The purchase price allocation for the Baierl Auto Group, DTLA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln and
Crater Lake Mazda acquisitions is preliminary as we have not obtained all of the detailed information to finalize the opening balance
sheet related to real estate purchased, leases assumed and the allocation of franchise value to each reporting unit. Management has
recorded the purchase price allocations based on the information that is currently available.
We account for franchise value as an indefinite-lived intangible asset. We recognized $6.0 million and $1.0 million,
respectively, in acquisition related expenses as a component of selling, general and administrative expenses in the Consolidated
Statements of Operations in 2017 and 2016, respectively.
The following unaudited pro forma summary presents consolidated information as if the acquisitions had occurred on
January 1 of the previous year (in thousands, except for per share amounts):
Year Ended December 31,
Revenue
Net income
Basic net income per share
Diluted net income per share
$
2017
10,879,567 $
254,966
10.17
10.14
2016
10,727,906
219,756
8.65
8.61
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, plant and
equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing
related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are
included in the reported pro forma revenues and earnings.
F- 29
(15) Related Party Transactions
Transition Agreement
In September 2015, we entered into a transition agreement with Sidney B. DeBoer, our Chairman of the Board, which
provided him certain benefits until his death. The agreement has an effective date of January 1, 2016 and the initial payment of these
benefits began in the third quarter of 2016.
We recorded a charge of $18.3 million in 2015 as a component of selling, general and administrative expense in our
Consolidated Statement of Operations related to the present value of estimated future payments due pursuant to this agreement. We
believe that this estimate is reasonable; however, actual cash flows could differ materially. We will periodically evaluate whether
significant changes in our assumptions have occurred and record an adjustment if future expected cash flows are significantly
different than the reserve recorded.
The balance associated with this agreement was $16.8 million and $17.3 million as of December 31, 2017 and 2016,
respectively, and was included as a component of accrued liabilities and other long-term liabilities in our Consolidated Balance Sheets.
(16) 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 unvested common shares subject to repurchase or cancellation. 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 incremental common shares issuable upon the exercise of stock options and unvested restricted shares
subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants 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. Our Restated Articles of Incorporation require that the Class A and Class B common stock must 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 stockholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which
would have the effect of adversely altering 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.
F- 30
Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and
diluted EPS (in thousands, except per share amounts):
Year Ended December 31,
2017
2016
2015
(in thousands, except per share data)
Net income applicable to common
stockholders - basic
Reallocation of distributed net income as a
result of conversion of dilutive stock
options
Reallocation of distributed net income due
to conversion of Class B to Class A
common shares outstanding
Conversion of Class B common shares into
Class A common shares
Effect of dilutive stock options on net
income
Net income applicable to common
stockholders - diluted
Weighted average common shares
outstanding – basic
Conversion of Class B common shares into
Class A common shares
Effect of employee stock purchases and
restricted stock units on weighted
average common shares
Weighted average common shares
outstanding – diluted
Class A Class B Class A Class B Class A Class B
$ 233,399 $
11,818 $ 182,369 $
14,689 $ 165,172 $
17,827
4
(4)
8
(8)
15
(15)
1,275
—
1,791
—
1,932
10,505
—
12,833
—
15,760
—
—
34
(34)
57
(57)
120
(120)
$ 245,217 $
11,780 $ 197,058 $
14,624 $ 182,999 $
17,692
23,857
1,208
23,515
1,894
23,729
2,561
1,208
—
1,894
—
2,561
80
—
112
—
200
—
—
25,145
1,208
25,521
1,894
26,490
2,561
Net income per common share - basic
Net income per common share - diluted
$
$
9.78 $
9.75 $
9.78 $
9.75 $
7.76 $
7.72 $
7.76 $
7.72 $
6.96 $
6.91 $
6.96
6.91
Antidilutive Securities
Shares issuable pursuant to employee stock
purchases not included since they were
antidulutive
(17) Equity-Method Investments
12
—
—
—
16
—
In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp
Community Development Corporation with an initial equity contribution of $4.1 million. We made additional equity contributions to
the entity of $22.9 million in 2015 and $22.8 million in 2016. We were obligated to make $49.8 million of total contributions to the
entity over a two-year period ended October 2016, all of which had been made as of December 31, 2016.
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.
F- 31
As of December 31, 2017 and 2016 no amounts related to this equity-method investment were recorded in our Consolidated
Balance Sheets.
The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations
(in thousands):
Year Ended December 31,
Asset impairments to write investment down to fair value
Our portion of the partnership’s operating losses
Non-cash interest expense related to the amortization of the discounted fair
value of future equity contributions
Tax benefits and credits generated
$
2017
2016
2015
— $
—
—
—
13,992 $
8,262
185
28,530
16,521
6,929
674
30,831
(18) Segments
Certain financial information on a segment basis is as follows (in thousands):
Year Ended December 31,
Revenues:
Domestic
Import
Luxury
Corporate and other
2017
2016
2015
$
$
3,845,830 $
4,432,760
1,810,085
10,088,675
(2,165)
10,086,510 $
3,381,715 $
3,764,255
1,528,760
8,674,730
3,427
8,678,157 $
3,038,883
3,330,949
1,490,632
7,860,464
3,788
7,864,252
Segment income*:
Domestic
Import
Luxury
$
115,145
98,751
36,391
250,287
74,514
(41,600)
(19,491)
(1,006)
262,704
*Segment income for each of the segments is defined as Income from operations before income taxes, depreciation and amortization,
other interest expense and other (expense) income, net.
Corporate and other
Depreciation and amortization
Other interest expense
Other (expense) income, net
105,208 $
117,776
37,022
260,006
167,366
(57,722)
(34,776)
12,195
347,069 $
106,210 $
110,204
31,467
247,881
114,321
(49,369)
(23,207)
(6,103)
283,523 $
Income before income taxes
$
Year Ended December 31,
Floor plan interest expense:
Domestic
Import
Luxury
Corporate and other
2017
2016
2015
$
$
37,196 $
29,009
15,756
81,961
(42,625)
39,336 $
26,445 $
18,665
10,999
56,109
(30,578)
25,531 $
21,061
14,959
9,096
45,116
(25,582)
19,534
F- 32
December 31,
Total assets:
Domestic
Import
Luxury
Corporate and other
2017
2016
$
$
1,338,232 $
1,137,934
641,118
1,565,782
4,683,066 $
1,225,387
959,355
511,779
1,147,629
3,844,150
(19) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09,
"Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace
most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is
effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods
beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or
cumulative effect transition method.
We have evaluated the effect of this amendment and expect the timing of our revenue recognition to generally remain the
same, except as detailed below:
• A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and
subject to accelerated recognition under the new standard. Upon adoption, we will recognize an asset associated with future
estimated variable consideration and do not believe there will be a significant impact to future revenue recognized.
The guidance provided clarification on how to determine and capitalize direct costs incurred. As a result, we reassessed the
method used to capitalize and amortize direct cost associated with the sale of lifetime oil, lube and filter contracts.
•
Upon adoption, we plan to record a net, after-tax cumulative effect adjustment to retained earnings which will have an
immaterial impact on our 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. The new standard results in the recording of a right-of-use asset and a lease liability for all leases with a term longer
than 12 months. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those
annual periods. We intend to adopt this ASU on January 1, 2019. While management is still evaluating the impact of adopting the
provisions of this ASU, we expect that it will have a material impact due to the recognition of right-of-use assets and lease liabilities
due to real estate leases. We continue to identify and evaluate if there are other leases impacted. The majority of our real estate leases
are classified as operating leases under the current guidance. We expect ASU 2016-02 to impact our consolidated balance sheets
primarily due to the recognition of a right-of-use asset and an associated lease liability and our consolidated income statement related
to the changes in expense recognition.
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 financial 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. An entity should perform its annual, or interim, 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
F- 33
for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including
interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for
interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect the adoption of ASU 2017-04 to have
a material effect on our financial position, results of operations or cash flows.
(20) Subsequent Events
Common Stock Dividend
On February 12, 2018, we declared a dividend of $0.27 per share on our Class A and Class B common stock related to our
fourth quarter 2017 financial results. The dividend will total approximately $6.8 million and will be paid on March 23, 2018 to
shareholders of record on March 9, 2018.
Acquisition
On January 15, 2018, we acquired the inventory, real property, equipment and intangible assets of Ray Laks Honda, in
Orchard Park, New York and Ray Laks Acura, in Buffalo, New York. We paid $26.2 million in cash for these acquisitions.
Line of Credit
On February 14, 2018, we entered into a Loan Agreement ("Agreement") with U.S. Bank National Association, as lender.
The Agreement provides for a maximum revolving line of credit in the amount of $150.0 million, with an interest rate of one-month
LIBOR plus 1.50%. The line of credit matures in August 2018 or earlier if we renegotiate the terms of our existing credit facility
agreement.
F- 34
LITHIA MOTORS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth our unaudited quarterly financial data (in thousands, except per share amounts):(1)
Revenue
Gross profit
Operating income
Income before income taxes
Net income
Basic net income per share
Diluted net income per share
First Quarter Second Quarter Third Quarter
Fourth
Quarter(2)
2017 $
2016
2,236,101 $
1,982,861
2,467,036 $
2,133,339
2,680,342 $
2,269,967
2,703,030
2,291,990
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
341,652
307,182
86,141
72,915
81,263
60,021
50,727
40,270
2.01
1.56
2.01
1.55
375,271
322,036
103,950
90,509
87,836
77,303
53,200
51,428
2.12
2.02
2.12
2.01
403,021
337,261
105,952
93,423
86,543
80,077
51,886
54,041
2.07
2.15
2.07
2.15
396,141
334,837
112,942
81,518
91,427
66,122
89,404
51,319
3.58
2.04
3.56
2.03
(1) Quarterly data may not add to yearly totals due to rounding.
(2) During the fourth quarter of 2017, we recognized a $32.9 million provisional income tax benefit due to the revaluation of our
deferred tax liability as a result of the U.S. tax reform bill enacted in December 2017 and a $4.9 million LIFO benefit, net of tax,
primarily related to amounts expensed in the prior three quarters of 2017.
F- 35
(Senior Executives, 2018 Performance- and Time-vesting)
LITHIA MOTORS, INC.
RESTRICTED STOCK UNIT AGREEMENT
(2018 Performance- and Time-vesting)
This Restricted Stock Unit Agreement (“Agreement”) is entered into pursuant to the 2013 Amended and Restated
Stock Incentive Plan (the “Plan”) adopted by the Board of Directors and shareholders of Lithia Motors, Inc., an Oregon
corporation (the “Company”), as amended from time to time. Unless otherwise defined herein, capitalized terms in this
Agreement have the meanings given to them in the Plan. Any inconsistency between this Agreement and the terms and
conditions of the Plan will be resolved in favor of the Plan. Compensation paid pursuant to this Agreement is intended to qualify
as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986 (the “Code”).
“Recipient” [ ]
Number of Restricted Stock Units (“RSUs”) [ ]
“Date of Grant” January 1, 2018
1. GRANT OF RESTRICTED STOCK UNIT AWARD
1.1 The Grant. The Company hereby awards to Recipient, and Recipient hereby accepts, the RSUs specified above
on the terms and conditions set forth in this Agreement and the Plan (the “Award”). Each RSU represents the right to receive
one share of Class A Common Stock of the Company (a “Share”) on an applicable Settlement Date, as defined in Section 1.3 of
this Agreement, subject to the terms of this Agreement and the Plan.
1.2 Forfeiture; Vesting; Clawback. The RSUs are subject to forfeiture in accordance with the performance criteria
specified in Section 1.2(a) of this Agreement. Any RSUs not forfeited will vest according to the schedule set forth in Section
1.2(b) of this Agreement. The RSUs, the Shares issued upon vesting of the RSUs and any proceeds received upon the sale of
the Shares are subject to recovery by the Company as specified in Section 1.2(c) of this Agreement.
(a) Forfeiture.
(i)
The RSUs are subject to forfeiture based on the Company’s 2018 pro forma earnings per share,
calculated as specified in Section 1.2(a)(iii) of this Agreement (the “2018 Pro Forma EPS”). The
number of RSUs that will be forfeited is determined according to the highest earnings per share
threshold set forth on the table below (each, an “EPS Threshold”) that the 2018 Pro Forma EPS
meets or exceeds. The table below specifies the applicable percentage of RSUs that will be retained
(the “Earned RSUs”), subject to adjustment as provided in Section 1.2(a)(ii), at the specified EPS
Threshold. When the Committee certifies the number of Earned RSUs as provided in Section 1.2(a)(iii),
all RSUs that are not Earned RSUs will be forfeited.
EPS Threshold
$10.50 (highest)
Any amount between $8.95 and $9.25 (inclusive)
$6.80
Any amount between $0.01 and $6.79 (inclusive)
$ 0.00 or negative 2018 Pro Forma EPS (lowest)
Percentage of
Earned RSUs
150.0%
100.0%
50.0%
41.667%
0.0%
(ii) If the 2018 Pro Forma EPS is at least $6.81 and less than $8.95, the percentage of Earned RSUs will be
determined on a pro-rata basis and the number of Earned RSUs will be rounded to the nearest whole RSU. If the 2018 Pro
Forma EPS is at least $9.26 and less than $10.50, the percentage of Earned RSUs will be determined on a pro-rata basis and the
number of Earned RSUs will be rounded to the nearest whole RSU. If the 2018 Pro Forma EPS is positive but less than $6.80,
the percentage of Earned RSUs will be 41.667%.
Example 1: If the 2018 Pro Forma EPS is $7.26, the percentage of Earned RSUs would be 50.0% plus
an additional percentage calculated as follows: (a) 50%, multiplied by a fraction, (i) the numerator of
which is the amount by which 2018 Prof Forma EPS exceeds $6.80 and (ii) the denominator of which
is $2.15:
50% ($0.46/2.15) = 10.7%
The resulting percentage of Earned RSUs correlating to an EPS of $7.26 would be 60.7%. If the
Award were 1,000 RSUs, the number of Earned RSUs would be 60.7% of 1,000, or 607 RSUs. The
number of forfeited RSUs would be 1,000 minus 607, or 393. The Earned RSUs would be subject to
the vesting according to the schedule specified in Section 1.2(b) of this Agreement.
(iii) The 2018 Pro Forma EPS will be calculated by deducting from the Company’s consolidated diluted
income (loss) per share, as set forth in the audited consolidated statement of income for the Company and its subsidiaries for the
2018 fiscal year, non-operational transactions or disposal activities, for example:
i. asset impairment and disposal gain;
ii. gains or losses on the sale of real estate or stores;
iii. gains or losses on equity investment;
iv.
v. related income tax adjustments for any of the above.
reserves for real estate leases, Company-owned service contracts (e.g., lifetime oil), and legal matters; and
As soon as practicable, the Director of Internal Audit of the Company shall calculate the 2018 Pro Forma EPS, and shall submit
those calculations to the Committee. At or prior to the regularly scheduled meeting of the Committee held in the first fiscal
quarter of 2019, the Committee shall certify in writing (which may consist of approved minutes of the meeting) the 2018 Pro
Forma EPS and the number of Earned RSUs. Unless otherwise required under this Agreement, no Shares or other amounts shall
be delivered or paid unless the Committee certifies the 2018 Pro Forma EPS and the number of Earned RSUs. The Committee
may reduce the amount of the compensation payable upon the attainment of the performance goals based on such factors as it
deems appropriate, including subjective factors.
(b) Vesting. Subject to the continued employment of Recipient with the Company or any Subsidiary, (i) 0% of the
Earned RSUs shall vest on the date that the Committee certifies the number of Earned RSUs and (ii) the remaining Earned
RSUs shall vest on the dates set forth in the table below (each, a “Vesting Date”). The number of Shares to which Recipient is
entitled on each Vesting Date shall be rounded up to the nearest whole Share (except for the last Vesting Date, on which all
remaining RSUs shall vest).
Vesting Date
January 1, 2020
January 1, 2021
January 1, 2022
Vesting of
Award
33%
33%
34%
Example 2: If there are 607 Earned RSUs, and the Committee certifies the number of
Earned RSUs on February 1, 2019, the Earned RSUs would vest and entitle Recipient to
receive Shares, subject to continued employment, as follows.
Vesting Date
January 1, 2020
January 1, 2021
January 1, 2022
Vesting of
Award
33%
33%
34%
Shares
202
202
203
(c) Clawback. If the Company’s financial statements are restated at any time within three years after the Committee certifies
the number of Earned RSUs under Section 1.2(a)(iii) of this Agreement, the 2018 Pro Forma EPS shall be recalculated (the
resulting number, the “Recalculated 2018 Pro Forma EPS”) based on the restated financial statements. If, based on the
Company’s restated financial statements, the Recalculated 2018 Pro Forma EPS is less than the 2018 Pro Forma EPS that the
Committee previously certified, (i) any Earned RSUs subject to vesting shall be adjusted to reflect the number of RSUs that
would have been Earned RSUs based on the Recalculated 2018 Pro Forma EPS and (ii) Recipient shall repay to the Company
(1) a number of Shares calculated by subtracting the number of Shares Recipient should have received based on the
Recalculated 2018 Pro Forma EPS from the number of Shares Recipient received under this Award (the “Excess Shares”) and
(2) any dividend paid on the Excess Shares (the “Excess Dividends”). If any Excess Shares are sold by Recipient before the
Company’s demand for repayment (including any Shares withheld for taxes under Section 4 of this Agreement), in lieu of
repaying the Company the Excess Shares that were sold Recipient shall repay to the Company 100% of the proceeds of such
sale or sales. The Committee may, in its sole discretion, reduce the amount to be repaid by Recipient to take into account the tax
consequences of such repayment for Recipient. No additional RSUs shall be deemed Earned RSUs based on Recalculated 2018
Pro Forma EPS.
If any portion of the Excess Shares and Excess Dividends was deferred under the RSU Deferral Plan effective January
1, 2012 (the “Deferral Plan”), that portion shall be recovered by canceling the amounts so deferred under the Deferral Plan and
any dividends or other earnings credited under the Deferral Plan with respect to such cancelled amounts. The Company may
seek direct repayment from Recipient of any Excess Shares, Excess Dividends and proceeds not so recovered and may, to the
extent permitted by applicable law, offset such amounts against any compensation or other amounts owed by the Company to
Recipient. In particular, such amounts may be recovered by offset against the after-tax proceeds of deferred compensation
payouts under the Company’s Deferred Compensation Plan, the Company’s Supplemental Executive Retirement Plan at the
times such deferred compensation payouts occur under the terms of those plans. Amounts that remain unpaid for more than 60
days after demand by the Company shall accrue interest at the rate used from time to time for crediting interest under the
Deferred Compensation Plan.
1.3 Settlement of Earned RSUs. There is no obligation for the Company to make payments or distributions with
respect to RSUs except, subject to the terms and conditions of this Agreement, the issuance of Shares to settle vested RSUs
after the applicable Vesting Date. The Company’s issuance of one Share for each vested Earned RSU (“ Settlement”) may be
subject to such conditions, restrictions and contingencies as the Committee shall determine. Unless receipt of the Shares is validly
deferred pursuant to the Deferral Plan, and except as otherwise provided in any Amended Employment and Change in Control
Agreement between the Company and Recipient (as the same may be
amended and/or restated from time to time), Earned RSUs shall be settled as soon as practicable after the applicable Vesting
Date (each date of Settlement, a “Settlement Date”), but in no event later than March 15 of the calendar year following the
calendar year in which the Vesting Date occurs. Notwithstanding the foregoing, the payment dates set forth in this Section 1.3
have been specified for the purpose of complying with the short-term deferral exception under Code Section 409A, and to the
extent payments are made during the periods permitted under Code Section 409A (including applicable periods before or after the
specified payment dates set forth in this Section 1.3), the Company shall be deemed to have satisfied its obligations under the
Plan and shall be deemed not to be in breach of its payment obligations hereunder.
1.4 Termination of Recipient’s Employment.
(a) Voluntary or Involuntary Termination . Except as otherwise provided in this Section 1.4, if Recipient’s
employment with the Company or any Subsidiary terminates as a result of a voluntary or involuntary termination, all outstanding
unvested RSUs (whether or not determined to be Earned RSUs) shall immediately be forfeited. Recipient shall not be treated as
terminating employment if Recipient is on an approved leave of absence.
(b) Death. If Recipient’s employment with the Company or any Subsidiary terminates as a result of Recipient’s death
that occurs on or after January 1, 2018, Recipient shall become vested in a prorated number of Earned RSUs. The prorated
portion of the Earned RSUs that is vested as of Recipient’s death shall be the total number of Earned RSUs multiplied by a
fraction, the numerator of which shall be the number of full months elapsed from the Date of Grant through the date of
Recipient’s death, and the denominator of which shall be 48. The Vesting Date for additional RSUs vesting under this Section
1.4(b) shall be the date of Recipient’s death. Payment upon death shall be the total number of shares vested as a result of this
Section 1.4(b), reduced by the number of Shares previously delivered to Recipient.
(c) Disability. If Recipient becomes Disabled while employed by the Company or a Subsidiary, Earned RSUs shall
continue to vest as scheduled in Section 1.2 of this Agreement for so long as Recipient remains Disabled. If Recipient dies while
Disabled, Section 1.4(b) of this Agreement shall apply.
(d) Qualified Retirement. If Recipient terminates employment due to a Qualified Retirement that occurs on or after
January 1, 2019, Recipient shall become vested in a prorated number of Earned RSUs. A “Qualified Retirement” means
Recipient voluntarily terminates employment on or after Recipient attains age 65 and has at least four complete years of
employment with the Company or a Subsidiary. The prorated portion of the Earned RSUs that is vested as of Recipient’s
Qualified Retirement shall be the total number of Earned RSUs multiplied by a fraction, the numerator of which shall be the
number of full months elapsed from the Date of Grant through the date of Recipient’s Qualified Retirement, and the denominator
of which shall be 48. The Vesting Date for additional RSUs vesting under this Section 1.4(d) shall be the date of Recipient’s
Qualified Retirement. Payment upon Qualified Retirement shall be the total number of shares vested as a result of this Section
1.4(d), reduced by the number of Shares previously delivered to Recipient.
Notwithstanding anything in this Agreement to the contrary, in no event will any Settlement occur prior to the applicable Vesting
Date (i.e., the Vesting Date set forth in Section 1.2 unless the Vesting Date is earlier pursuant to Section 1.4 as a result of
Recipient’s death or Qualified Retirement).
2. REPRESENTATIONS AND COVENANTS OF RECIPIENT
2.1 No Representations by or on Behalf of the Company. Recipient is not relying on any representation, warranty
or statement made by the Company or any agent, employee or officer, director, shareholder or other controlling person of the
Company regarding the RSUs or this Agreement.
2.2 Tax Considerations. The Company has advised Recipient to seek Recipient’s own tax and financial advice with
regard to the federal and state tax considerations resulting from Recipient’s receipt of the Award, the vesting of the Award and
Recipient’s receipt of the Shares upon Settlement of the vested portion of the Award. Recipient understands that the Company,
to the extent required by law, will report to appropriate taxing authorities the payment
to Recipient of compensation income upon the grant, vesting and/or Settlement of RSUs under the Award and Recipient shall be
solely responsible for the payment of all federal and state taxes resulting from such grant, vesting and/or Settlement.
2.3 Agreement to Enter into Lock-Up Agreement with an Underwriter. Recipient understands and agrees that
whenever the Company undertakes a firmly underwritten public offering of its securities, Recipient will, if requested to do so by
the managing underwriter in such offering, enter into an agreement not to sell or dispose of any securities of the Company owned
or controlled by Recipient, including any of the RSUs or the Shares, provided that such restriction will not extend beyond 12
months from the effective date of the registration statement filed in connection with such offering.
3. GENERAL RESTRICTIONS OF TRANSFERS OF RSUS
3.1 No Transfers of RSUs. Recipient agrees for himself or herself and his or her executors, administrators and other
successors in interest that none of the RSUs, nor any interest therein, may be voluntarily or involuntarily sold, transferred,
assigned, donated, pledged, hypothecated or otherwise disposed of, gratuitously or for consideration.
3.2 Award Adjustments. The number of RSUs granted under this Award shall, at the discretion of the Committee,
be subject to adjustment under the Plan in the event the outstanding shares of Common Stock are hereafter increased, decreased,
changed into or exchanged for a different number or kind of shares of Common Stock or for other securities of the Company or
of another corporation, by reason of any reorganization, merger, consolidation, reclassification, stock split up, combination of
shares of Common Stock, or dividend payable in shares of Common Stock or other securities of the Company. If Recipient
receives any additional RSUs pursuant to the Plan, such additional (or other) RSUs shall be deemed granted hereunder and shall
be subject to the same restrictions and obligations on the RSUs as originally granted as imposed by this Agreement.
3.3 Invalid Transfers. Any disposition of the RSUs other than in strict compliance with the provisions of this
Agreement shall be void.
4. PAYMENT OF TAX WITHHOLDING AMOUNTS. To the extent the Company is responsible for withholding income
taxes, Recipient must pay to the Company or make adequate provision for the payment of all Tax Withholding. If any RSUs are
scheduled to vest during a period in which trading is not permitted under the Company’s insider trading policy, to satisfy the Tax
Withholding requirement, Recipient irrevocably elects to settle the Tax Withholding obligation by the Company withholding a
number of Shares otherwise deliverable upon vesting having a market value sufficient to satisfy the statutory minimum tax
withholding of Recipient. If the Company later determines that additional Tax Withholding was or has become required beyond
any amount paid or provided for by Recipient, Recipient will pay such additional amount to the Company immediately upon
demand by the Company. If Recipient fails to pay the amount demanded, the Company may withhold that amount from other
amounts payable by the Company to Recipient.
5. MISCELLANEOUS PROVISIONS
5.1 Amendment and Modification. Except as otherwise provided by the Plan, this Agreement may be amended,
modified and supplemented only by written agreement of all of the parties hereto.
5.2 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by Recipient without the prior written consent of the Company.
5.3 Governing Law. To the extent not preempted by federal law, this Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed in accordance with the internal laws of the State of Oregon applicable to
the construction and enforcement of contracts wholly executed in Oregon by residents of Oregon and wholly performed in
Oregon. Any action or proceeding brought by any party hereto shall be brought
only in a state or federal court of competent jurisdiction located in the County of Multnomah in the State of Oregon and all parties
hereto hereby submit to the in personal jurisdiction of such court for purposes of any such action or procedure.
5.4 Arbitration. The parties agree to submit any dispute arising under this Agreement to final, binding, private
arbitration in Portland, Oregon. This includes not only disputes about the meaning or performance of this Agreement, but disputes
about its negotiation, drafting or execution. The dispute will be determined by a single arbitrator in accordance with the then-
existing rules of arbitration procedure of Multnomah County, Oregon Circuit Court, except that there shall be no right of de novo
review in Circuit Court and the arbitrator may charge his or her standard arbitration fees rather than the fees prescribed in the
Multnomah County Circuit Court arbitration procedures. The proceeding will be commenced by the filing of a civil complaint in
Multnomah County Circuit Court and a simultaneous request for transfer to arbitration. The parties expressly agree that they may
choose an arbitrator who is not on the list provided by the Multnomah County Circuit Court Arbitration Department, but if they
are unable to agree upon the single arbitrator within 10 days of receipt of the Arbitration Department list, they will ask the
Arbitration Department to make the selection for them. The arbitrator will have full authority to determine all issues, including
arbitrability; to award any remedy, including permanent injunctive relief; and to determine any request for costs and expenses in
accordance with Section 5.5 of this Agreement. The arbitrator’s award may be reduced to final judgment in Multnomah County
Circuit Court. The complaining party shall bear the arbitration expenses and may seek their recovery if it prevails.
Notwithstanding any other provision of this Agreement, an aggrieved party may seek a temporary restraining order or preliminary
injunction in Multnomah County Circuit Court to preserve the status quo during the arbitration proceeding.
5.5 Attorney Fees. If any suit, action or proceeding is instituted in connection with any controversy arising out of this
Agreement or the enforcement of any right hereunder, the prevailing party will be entitled to recover, in addition to costs, such
sums as the court or arbitrator may adjudge reasonable as attorney fees, including fees on any appeal.
5.6 Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and
shall not constitute a part hereof.
5.7 Entire Agreement. This Agreement and the Plan embody the entire agreement and understanding of the parties
hereto in respect of the subject matter contained herein and supersedes all prior written or oral communications or agreements all
of which are merged herein. There are no restrictions, promises, warranties, covenants or undertakings, other than those
expressly set forth or referred to herein.
5.8 No Waiver. No waiver of any provision of this Agreement or any rights or obligations of any party hereunder
shall be effective, except pursuant to a written instrument signed by the party or parties waiving compliance, and any such waiver
shall be effective only in the specific instance and for the specific purpose stated in such writing.
5.9 Severability of Provisions. In the event that any provision hereof is found invalid or unenforceable pursuant to
judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms.
5.10 Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference.
Except as otherwise set forth herein, this Agreement shall be construed in accordance with the provisions of the Plan and any
interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. The
Committee shall have the final authority to interpret and construe the Plan and this Agreement and to make any and all
determinations under them, and its decision shall be final, binding and conclusive upon Recipient and his or her legal
representative in respect to any questions arising under the Plan or this Agreement.
5.11 Notices. All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed
duly given if delivered personally or by courier service, or if mailed by certified mail, return receipt requested, prepaid and
addressed to the Company executive offices to the attention of the Corporate Secretary, or if to Recipient, to the address
maintained by the personnel department, or such other address as such party shall have furnished to the other party in writing.
5.12 Acceptance of Agreement. Unless Recipient notifies the Corporate Secretary in writing within 14 days after
the Date of Grant that Recipient does not wish to accept this Agreement, Recipient will be deemed to have accepted this
Agreement and will be bound by the terms of this Agreement and the Plan.
5.13 No Right of Employment. Nothing contained in the Plan or this Agreement shall be construed as giving
Recipient any right to be retained, in any position, as an employee of the Company or any Subsidiary.
[Remainder of this page left blank intentionally.]
Recipient and the Company have executed this Agreement effective as of the Date of Grant.
RECIPIENT
Signature
Type or Print Name:
Social Security Number:
COMPANY LITHIA MOTORS, INC.
By:
Name: Chris Holzshu
Title: Chief Human Resources Officer
* Please take the time to read and understand this Agreement. If you have any specific questions or do not fully
understand any of the provisions, please contact stockinfo@lithia.com.
EXHIBIT 12
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table shows the ratio of earnings to combined fixed charges for us and our consolidated subsidiaries for the dates
indicated.
(Dollars in Thousands)
Earnings
Income from continuing operations before income taxes
Fixed charges
Amortization of capitalized interest
Capitalized interest
Total earnings
Fixed Charges
Floor plan interest expense
Other interest expense (1)
Capitalized interest costs
Interest component of rent expense
Total fixed charges
2017
Year Ended December 31,
2015
2014
2016
$
347,069 $
83,453
283,523 $
54,096
262,704 $
46,413
210,495 $
29,797
320
(524)
430,318
308
(414)
240,172
297
(450)
191,803
287
(407)
155,820
39,336
34,776
524
8,817
83,453
25,531
23,207
414
4,944
54,096
19,534
19,491
450
6,938
46,413
13,861
10,742
407
4,787
29,797
2013
165,788
25,820
280
(85)
115,243
12,373
8,350
85
5,012
25,820
Ratio of earnings to fixed charges
5.2x
4.4x
4.1x
5.2x
4.5x
(1) Other interest expense includes amortization of debt issuance costs
For purposes of these ratios, “earnings” consist of income from continuing operations before income taxes and fixed charges, and
“fixed charges” consist of interest expense on indebtedness and the interest component of rental expense, and amortization of debt
discount and issuance expenses.
We did not have any preferred stock outstanding for the periods presented above, and therefore the ratios of earnings to combined
fixed charges and preferred stock dividends would be the same as the ratios of earnings to combined fixed charges presented above.
SUBSIDIARIES OF LITHIA MOTORS, INC.
(as of December 31, 2017)
EXHIBIT 21
NAME OF ENTITY
STATE OF
ORIGIN
Lithia Imports of Anchorage, Inc.
Lithia NA, Inc.
Lithia of Anchorage, Inc.
Lithia of Fairbanks, Inc.
Lithia of South Central AK, Inc.
Lithia of Wasilla, LLC
DCH (Oxnard) Inc.
DCH CA LLC
DCH Calabasas-A, LLC
DCH California Investments LLC
DCH California Motors Inc.
DCH Del Norte, INC.
DCH Korean Imports LLC
DCH Mission Valley LLC
DCH Oxnard 1521 Imports Inc.
DCH Riverside-S, Inc.
DCH Simi Valley Inc.
DCH Temecula Imports LLC
DCH Temecula Motors LLC
DCH Thousand Oaks-F, Inc.
Alaska
Alaska
Alaska
Alaska
Alaska
Alaska
California
California
California
California
California
California
California
California
California
California
California
California
California
California
ASSUMED BUSINESS NAME(S)
(if different than entity name)
Lithia Hyundai of Anchorage
Lithia Kia of Anchorage
Lithia Anchorage Auto Body
BMW of Anchorage
MINI of Anchorage
Lithia Chrysler Jeep Dodge of Anchorage
Lithia Value Autos
Chevrolet Buick GMC of Fairbanks
Chevrolet of South Anchorage
Chevrolet of Wasilla
Lithia Chrysler Jeep Dodge Ram of Wasilla
DCH Honda of Oxnard
Honda of Oxnard
Supercraft Auto Body & Paint
DCH Used Car Superstore
DCH Acura of Temecula
DCH Acura Temecula
Audi Calabasas
DCH Toyota of Oxnard
Toyota of Oxnard
DCH Scion of Oxnard
DCH Lexus of Oxnard
Lexus of Oxnard
DCH Lexus of Santa Barbara
DCH Kia of Temecula
DCH Honda of Mission Valley
DCH Audi of Oxnard
Audi of Oxnard
DCH Subaru of Riverside
DCH Toyota of Simi Valley
Toyota of Simi Valley
DCH Scion of Simi Valley
DCH Honda of Temecula
DCH Honda Temecula
DCH Chrysler Jeep Dodge of Temecula
DCH Chrysler Jeep of Temecula
DCH Dodge of Temecula
DCH Ford of Thousand Oaks
DCH Torrance Imports Inc.
California
DCH Toyota of Torrance
DCH Scion of Torrance
Torrance Toyota
Torrance Scion
Toyota Scion
LA Motors Holding, LLC
LAD Carson-N, LLC
LAD-AU, LLC
LAD-MB, LLC
LAD-N, LLC
LAD-P, LLC
LAD-T, LLC
LAD-V, LLC
Lithia CIMR, Inc.
Lithia FMF, Inc.
Lithia Fresno, Inc.
Lithia JEF, Inc.
Lithia MMF, Inc.
Lithia NC, Inc.
Lithia NF, Inc.
Lithia of Concord I, Inc.
Lithia of Concord II, Inc.
Lithia of Eureka, Inc.
Lithia of Lodi, Inc.
Lithia of Santa Rosa, Inc.
Lithia of Stockton, Inc.
Lithia of Stockton-V, Inc.
Lithia of Walnut Creek, Inc.
Lithia Sea P, Inc.
Lithia Seaside, Inc.
Lithia TR, Inc.
Lithia VF, Inc.
LLL Sales CO LLC
Tustin Motors Inc.
Dah Chong Hong CA Trading LLC
DCH Auto Group (USA) Inc.
DCH Holdings LLC
DCH Mamaroneck LLC
DCH North America Inc.
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
California
Delaware
Delaware
Delaware
Delaware
Delaware
Carson Nissan
Audi Downtown LA
Downtown LA Motors
Nissan of Downtown LA
Porsche Downtown LA
Toyota of Downtown LA
Volkswagen of Downtown LA
Lithia Chevrolet of Redding
Lithia Ford of Fresno
Lithia Ford Lincoln of Fresno
Lithia Subaru of Fresno
Fresno Mitsubishi
Lithia Hyundai of Fresno
Lithia Mazda of Fresno
Lithia Suzuki of Fresno
Nissan of Clovis
Lithia Nissan of Fresno
Lithia Chrysler Dodge Jeep Ram of Concord
Lithia FIAT of Concord
Lithia Chrysler Jeep Dodge of Eureka
Lodi Toyota
Lodi Scion
Lithia Chrysler Jeep Dodge of Santa Rosa
Nissan of Stockton,
Kia of Stockton
Volkswagen of Stockton
Diablo Subaru of Walnut Creek
Porsche of Monterey
BMW of Monterey
Lithia Toyota of Redding
Lithia Scion of Redding
Volvo of Fresno
DCH Gardena Honda
Gardena Honda
Gardena Honda, a DCH Company
All-Savers Auto Sales & Leasing
Honda Acura
DCH Tustin Acura
Tustin Acura
DCH Toyota City
DCH Scion City
DCH NY Motors LLC
DCH TL Holdings LLC
DCH TL NY Holdings LLC
Lithia Armory Garage, LLC
Lithia Auction & Recon, LLC
Lithia BA Holding, Inc.
Lithia Buffalo-A, LLC
Lithia Crater Lake-F, Inc.
Lithia Crater Lake-M, Inc.
Lithia of Honolulu-F, LLC
Lithia Orchard Park-H, LLC
Lithia of Honolulu-A, Inc.
Lithia of Honolulu-BGMCC, LLC
Lithia of Honolulu-V, LLC
Lithia of Maui-H, LLC
Lithia CCTF, Inc.
Lithia Ford of Boise, Inc.
Lithia of Pocatello, Inc.
Lithia of TF, Inc.
Lithia AcDM, Inc.
Lithia HDM, Inc.
Lithia MBDM, Inc.
Lithia NDM, Inc.
Lithia of Des Moines, Inc.
Lithia VAuDM, Inc.
Milford DCH, Inc.
Lithia CDH, Inc.
Lithia HGF, Inc.
Lithia LBGGF, Inc.
Lithia LHGF, Inc.
Lithia LSGF, Inc.
Lithia of Billings II LLC
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Hawaii
Hawaii
Hawaii
Hawaii
Idaho
Idaho
Idaho
Idaho
Iowa
Iowa
Iowa
Iowa
Iowa
Iowa
Massachusetts
Montana
Montana
Montana
Montana
Montana
Montana
DCH Wappingers Falls Toyota
DCH Wappingers Falls Auto Group
DCH Wappingers Falls Scion
Armory Chrysler Dodge Jeep Ram Fiat of Albany
Auction & Recon
Ray Laks Acura of Buffalo
Crater Lake Ford Lincoln
Crater Lake Mazda
Honolulu Ford
Ray Laks Honda of Orchard Park
Acura of Honolulu
Honolulu Buick GMC
Honolulu Buick GMC Cadillac
Honolulu Cadillac
Honolulu Volkswagen
Island Honda
Chevrolet of Twin Falls
Lithia Ford of Boise
Lithia Ford Lincoln of Boise
Auto Credit of Idaho
Lithia Body & Paint of Boise
Lithia Chrysler Jeep Dodge of Pocatello
Lithia Hyundai of Pocatello
Lithia Dodge Trucks of Pocatello
Lithia Chrysler Jeep Dodge of Twin Falls
Acura of Johnston
Honda of Ames
Mercedes Benz of Des Moines
European Motorcars Des Moines
Lithia Nissan of Ames
BMW of Des Moines
European Motorcars Des Moines
Lithia Body and Paint of Des Moines
Audi Des Moines
Lithia Volkswagen of Des Moines
Assured Used Cars & Trucks
Lithia Audi of Des Moines
DCH Toyota of Milford
Lithia Chrysler Jeep Dodge of Helena
Honda of Great Falls
Lithia Buick GMC of Great Falls
Lithia Hyundai of Great Falls
Lithia Subaru of Great Falls
Lithia Toyota of Billings
Lithia Scion of Billings
Lithia of Billings, Inc.
Lithia of Great Falls, Inc.
Lithia of Helena, Inc.
Lithia of Missoula II LLC
Lithia of Missoula, Inc.
Lithia of Missoula III, Inc.
Lithia Reno Sub-Hyun, Inc.
Lithia SALMIR, Inc.
797 Valley Street, LLC
Dah Chong Hong Trading Corporation
Daron Motors LLC
DCH Bloomfield LLC
DCH DMS NJ, LLC
Montana
Montana
Montana
Montana
Montana
Montana
Nevada
Nevada
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
DCH Essex Inc. fka DCH-Millburn Inc. (fka DCH
Essex LLC)
DCH Financial NJ, LLC
New Jersey
New Jersey
DCH Freehold LLC
DCH Freehold-V, LLC
DCH Investments Inc. (New Jersey)
DCH Leasing Corporation
DCH Monmouth LLC
DCH Montclair LLC
DCH Motors LLC
DCH Support Services, LLC
Freehold Nissan LLC
Lithia Eatontown-F, LLC
Lithia Paramus-M, LLC
Lithia Ramsey-B, LLC
Lithia Ramsey-L, LLC
Lithia Ramsey-M, LLC
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
New Jersey
Lithia Chrysler Jeep Dodge of Billings
Lithia Chrysler Jeep Dodge of Great Falls
Chevrolet of Helena
Lithia Toyota of Missoula
Lithia Scion of Missoula
Lithia Chrysler Jeep Dodge of Missoula
Lithia Auto Center of Missoula
Lithia Ford of Missoula
Lithia Reno Subaru
Lithia Body & Paint
Lithia Volkswagen of Reno
Lithia Hyundai of Reno
Lithia Chrysler Jeep of Reno
DCH Academy Honda
Academy Honda
DCH Bloomfield BMW
DCH Essex BMW
Essex BMW
BMW of Bloomfield
Parkway BMW
DCH Audi
DCH Maplewood Audi
DCH Millburn Audi
Essex Motors
Millburn Audi
Freehold Toyota
DCH Freehold Toyota
DCH Freehold Scion
DCH Volkswagen of Freehold
BMW of Freehold
Montclair Acura
DCH Montclair Acura
Kay Honda
DCH Motors
DCH Kay Honda
DCH Freehold Nissan
Freehold Nissan
Lithia Ramsey-T, LLC
Paramus Collision, LLC
New Jersey
New Jersey
Paramus World Motors LLC
New Jersey
Sharlene Realty LLC
LDLC, LLC
Lithia CJDSF, Inc.
Carbone Auto Body, LLC
DCH Investments, Inc. (New York)
DCH Management Inc.
DCH Nanuet LLC
Lithia Middletown-L, LLC
Lithia of Troy, LLC
Lithia of Utica-1, LLC
Lithia of Utica-2, LLC
Lithia of Utica-3, LLC
Lithia of Yorkville-1, LLC
Lithia of Yorkville-2, LLC
Lithia of Yorkville-3, LLC
Lithia of Yorkville-4, LLC
Lithia of Yorkville-5, LLC
Lithia ND Acquisition Corp. #1
Lithia ND Acquisition Corp. #3
Lithia ND Acquisition Corp. #4
Cadillac of Portland Lloyd Center, LLC
Fuse Auto Sales, LLC
Hutchins Eugene Nissan, Inc.
New Jersey
New Mexico
New Mexico
New York
New York
New York
New York
New York
New York
New York
New York
New York
New York
New York
New York
New York
New York
North Dakota
North Dakota
North Dakota
Oregon
Oregon
Oregon
Hutchins Imported Motors, Inc.
Oregon
LAD Advertising, Inc.
LBMP, LLC
LFKF, LLC
LGPAC, Inc.
Lithia Aircraft, Inc.
Lithia Auto Services, Inc.
Lithia BNM, Inc.
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
DCH Paramus Honda
Paramus Honda
Crown Leasing
DCH Brunswick Toyota
DCH Brunswick Scion
DCH Collision Center
Lithia Dodge of Las Cruces
Lithia Chrysler Jeep Dodge of Santa Fe
DCH Honda of Nanuet
Carbone Subaru
BMW of Utica
Don’s Ford
Don’s Subaru
Carbone Chevrolet Buick Cadillac GMC
Carbone Chrysler Dodge Jeep Ram
Carbone Honda
Carbone Hyundai
Carbone Nissan
Lithia Ford Lincoln of Grand Forks
Lithia Chrysler Jeep Dodge of Grand Forks
Lithia Toyota of Grand Forks
Lithia Scion of Grand Forks
Lithia Toyota Scion of Grand Forks
Cadillac of Portland
Lithia Nissan of Eugene
Lithia Toyota of Springfield
Lithia Scion of Springfield
Lithia Toyota Scion of Springfield
LAD Advertising
LAD Printing
The Print Shop at the Commons
The Print Shop
BMW Portland
Lithia Ford of Klamath Falls
Lithia’s Grants Pass Auto Center
Xpress Lube
Lithia Community Development Company, Inc.
Lithia DE, Inc.
Oregon
Oregon
Lithia DM, Inc.
Lithia Financial Corporation
Lithia HPI, Inc.
Lithia Klamath, Inc.
Lithia Medford Hon, Inc.
Lithia Motors Support Services, Inc.
Lithia MTLM, Inc.
Lithia of Bend #1, LLC
Lithia of Bend #2, LLC
Lithia of Eugene, LLC
Lithia of Portland, LLC
Lithia of Portland I, Inc.
Lithia of Roseburg, Inc.
Lithia Oregon Investments - 1, LLC
Lithia Oregon Investments - 2, LLC
Lithia Real Estate, Inc.
Lithia Rose-FT, Inc.
Lithia SOC, Inc.
LMBB, LLC
LMBP, LLC
LMOP, LLC
LSTAR, LLC
Medford Insurance, LLC
RFA Holdings, LLC
Salem-B, LLC
Salem-H, LLC
Salem-V, LLC
Southern Cascades Finance Corporation
Baierl Auto Parts, Inc.
Baierl Automotive Corporation
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Oregon
Pennsylvania
Pennsylvania
Lithia Chrysler Jeep Dodge of Eugene
Lithia Dodge
Lithia Chrysler Jeep Dodge
Xpress Lube
Lithia Leasing
Lithia Chrysler Jeep Dodge of Klamath Falls
Lithia Toyota of Klamath Falls
Lithia Scion of Klamath Falls
Lithia Klamath Falls Auto Center
Lithia Body and Paint of Klamath Falls
Lithia Honda
Lithia’s LAD Travel Service
Lithia Toyota
Lithia Scion
Lithia Toyota Scion
Bend Honda
Chevrolet Cadillac of Bend
Lithia Body & Paint of Bend
Lithia FIAT of Eugene
Buick GMC of Portland
Lithia Chrysler Dodge Jeep Ram of Portland
Lithia Chrysler Dodge Ram of Portland
Lithia Chrysler Jeep Dodge of Roseburg
Lithia Roseburg Auto Center
N/A
N/A
Lithia Ford Lincoln of Roseburg
Assured Dealer Services of Roseburg
Lithia Subaru of Oregon City
Mercedes-Benz of Beaverton
Mercedes-Benz of Portland
Smart Center of Portland
MINI of Portland
BMW of Salem
Honda of Salem
Volkswagen of Salem
Baierl Acura
Baierl Automotive
Baierl Automotive
Baierl Budget Cars
Baierl Buick
Baierl Chevrolet
Baierl Chevrolet Cadillac
Baierl Cadillac
Baierl Collision Center
Baierl Daewoo
Baierl Honda
Baierl Honda Pre-Owned
Baierl Isuzu Truck
Baierl Kia
Baierl Mitsubishi
Baierl Subaru
Baierl Subaru-Buick
Baierl Subaru-Mitsubishi
Baierl Truck Depot
Baierl Used Car Supercenter
Baierl Used Cars
Baierl Automotive
Baierl Toyota-Scion
Baierl Toyota
Baierl Ford
Baierl Collision Center
Lithia Chrysler Jeep Dodge of Bryan College Station
All American Chrysler Jeep Dodge of Odessa
All American Chrysler Jeep Dodge of San Angelo
All American Autoplex
All American Chevrolet of Midland
All American Chevrolet of Odessa
All American Chevrolet of San Angelo
All American Chrysler Jeep Dodge of Midland
Access Ford Lincoln of Corpus Christi
Baierl Chevrolet, Inc.
Baierl Holding Corporation
Cranberry Automotive, Inc.
Elizabeth Collision, LLC
Lithia Monroeville-A, LLC
Lithia Monroeville-C, LLC
Lithia Monroeville-F, LLC
Lithia Monroeville-V, LLC
Lithia Moon-S, LLC
Lithia Moon-V, LLC
Lithia Pittsburgh-S, LLC
Lithia Pleasant Hills-T, LLC
Lithia Uniontown-C, LLC
Northland Ford Inc.
PA Real Estate, LLC
PA Support Services, LLC
Zelienople Real Estate I, L.P.
Zelienople Real Estate, L.L.C.
Lithia Automotive, Inc.
Lithia Bryan Texas, Inc.
Lithia CJDO, Inc.
Lithia CJDSA, Inc.
Lithia CM, Inc.
Lithia CO, Inc.
Lithia CSA, Inc.
Lithia DMID, Inc.
Lithia FLCC, LLC
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
South Dakota
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Lithia HMID, Inc.
Lithia NSA, Inc.
Lithia of Abilene, Inc.
Lithia of Clear Lake, LLC
Lithia of Corpus Christi, Inc.
Lithia of Killeen, LLC
Lithia TA, Inc.
Lithia TO, Inc.
Lithia of Bennington - 1, LLC
Lithia of Bennington - 2, LLC
Lithia of Bennington - 3, LLC
Lithia of Bennington - 4, LLC
Camp Automotive, Inc.
Lithia Dodge of Tri-Cities, Inc.
Lithia of Bellingham, LLC
Lithia of Seattle, Inc.
Lithia of Spokane, Inc.
Lithia of Spokane II, Inc.
Lithia of Casper, LLC
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Texas
Vermont
Vermont
Vermont
Vermont
Washington
Washington
Washington
Washington
Washington
Washington
Wyoming
Lithia Hyundai of Odessa
Honda of San Angelo
All American Autoplex
Honda of Abilene
Subaru of Clear Lake
Lithia Chrysler Jeep Dodge of Corpus Christi
Lithia Dodge of Corpus Christi
All American Chevrolet of Killeen
Lithia Toyota of Abilene
Lithia Scion of Abilene
Lithia Toyota of Odessa
Lithia Scion of Odessa
Carbone Ford of Bennington
Carbone Hyundai of Bennington
Carbone Honda of Bennington
Carbone Toyota of Bennington
Camp BMW
Camp Chevrolet
Subaru of Spokane
Camp Cadillac
Lithia Chrysler Jeep Dodge of Tri-Cities
Chevrolet Cadillac of Bellingham
Chambers Chevrolet Cadillac of Bellingham
Chevrolet Buick GMC Cadillac of Bellingham
BMW Seattle
Mercedes Benz of Spokane
Lithia Chrysler Dodge Jeep Ram of Spokane
Greiner Ford Lincoln of Casper
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Lithia Motors, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-190192, 333-43593, 333-69169, 333-156410,
333-39092, 333-61802, 333-106686, 333-116839, 333-116840, 333-135350, 333-161590 and 333-168737) on Form S-8 of our
reports dated February 23, 2018, with respect to the consolidated balance sheets of Lithia Motors, Inc. and subsidiaries as of
December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income, changes in
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes
(collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as of
December 31, 2017, which reports appear in the December 31, 2017 annual report on Form 10-K of Lithia Motors, Inc.
Our report on the effectiveness of internal control over financial reporting as of December 31, 2017 contains an explanatory
paragraph stating that management excluded from its assessment of the effectiveness of Lithia Motors, Inc. and subsidiaries' internal
control over financial reporting as of December 31, 2017, 18 acquired stores' internal control over financial reporting. The total
assets of these 18 stores represented approximately 11% of consolidated total assets as of December 31, 2017 and approximately 6%
of consolidated revenues for the year ended December 31, 2017. Our audit of internal control over financial reporting for Lithia
Motors, Inc. and subsidiaries also excluded an evaluation of the internal control over financial reporting of these 18 stores.
/s/ KPMG LLP
Portland, Oregon
February 23, 2018
I, Bryan B. DeBoer, certify that:
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2018
/s/ Bryan B. DeBoer
Bryan B. DeBoer
President and Chief Executive Officer
Lithia Motors, Inc.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
I, John F. North, III, certify that:
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 23, 2018
/s/ John F. North, III
John F. North, III
Senior Vice President and Chief Financial Officer
Lithia Motors, Inc.
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
In connection with the Annual Report of Lithia Motors, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2017
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bryan B. DeBoer, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
EXHIBIT 32.1
/s/ Bryan B. DeBoer
Bryan B. DeBoer
President and Chief Executive Officer
Lithia Motors, Inc.
February 23, 2018
CERTIFICATION OF CHIEF 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
In connection with the Annual Report of Lithia Motors, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2017
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John F. North, III, Senior Vice President
and Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
EXHIBIT 32.2
operations of the Company.
/s/ John F. North, III
John F. North, III
Senior Vice President and Chief Financial Officer
Lithia Motors, Inc.
February 23, 2018