XFRA:LMO Lithia Motors Inc Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

 
FORM 10-Q
 

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                  

Commission file number: 001-14733
 


LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon
 
93-0572810
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
150 N. Bartlett Street, Medford, Oregon
 
97501
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code:  541-776-6401



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]   No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ]     Accelerated filer [X]   Non-accelerated filer [  ] (Do not check if a smaller reporting company)    Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [  ]  No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A common stock without par value
 
21,839,324
Class B common stock without par value
 
3,512,231
(Class)
 
(Outstanding at July 27, 2012)
 


 
 

 
 
LITHIA MOTORS, INC.
FORM 10-Q
INDEX

PART I - FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011
2
     
 
Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2012 and 2011
3
     
 
Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2012 and 2011
4
     
 
Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2012 and 2011
5
     
 
Condensed Notes to Consolidated Financial Statements (Unaudited)
6
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
     
Item 4.
Controls and Procedures
33
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
34
     
Item 1A.
Risk Factors
34
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
     
Item 6.
Exhibits
35
     
Signatures
36
 
 
1

 
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
   
June 30,
2012
   
December 31,
2011
 
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 16,247     $ 20,851  
Accounts receivable, net of allowance for doubtful accounts of $292 and $261
    117,747       99,407  
Inventories, net
    617,568       506,484  
Deferred income taxes
    3,976       4,730  
Other current assets
    10,588       16,719  
Total Current Assets
    766,126       648,191  
                 
Property and equipment, net of accumulated depreciation of $104,328 and $99,115
    387,652       373,779  
Goodwill
    22,608       18,958  
Franchise value
    59,319       59,095  
Deferred income taxes
    29,849       29,270  
Other non-current assets
    18,021       16,840  
Total Assets
  $ 1,283,575     $ 1,146,133  
                 
 
               
Liabilities and Stockholders' Equity
               
Current Liabilities:
               
Floor plan notes payable
  $ 13,743     $ 114,760  
Floor plan notes payable: non-trade
    482,390       229,180  
Current maturities of long-term debt
    7,718       8,221  
Trade payables
    40,196       31,712  
Accrued liabilities
    79,758       72,711  
Total Current Liabilities
    623,805       456,584  
                 
Long-term debt, less current maturities
    224,746       278,653  
Deferred revenue
    30,110       25,146  
Other long-term liabilities
    19,921       18,629  
Total Liabilities
    898,582       779,012  
                 
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 21,861 and 22,195
    263,559       279,366  
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 3,512 and 3,762
    437       468  
Additional paid-in capital
    10,949       10,918  
Accumulated other comprehensive loss
    (3,718 )     (4,508 )
Retained earnings
    113,766       80,877  
Total Stockholders' Equity
    384,993       367,121  
Total Liabilities and Stockholders' Equity
  $ 1,283,575     $ 1,146,133  
 
See accompanying condensed notes to consolidated financial statements.
 
 
2

 
 
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations 
(In thousands, except share amounts)
(Unaudited)
 
   
Three Months Ended June 30,
    Six Months Ended June 30,  
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
New vehicle
  $ 470,424     $ 347,727     $ 874,712     $ 648,367  
Used vehicle retail
    212,767       176,591       408,188       333,069  
Used vehicle wholesale
    36,083       29,153       70,419       58,690  
Finance and insurance
    27,870       20,886       53,290       40,185  
Service, body and parts
    88,585       80,937       175,033       154,698  
Fleet and other
    11,394       17,193       24,375       20,335  
Total revenues
    847,123       672,487       1,606,017       1,255,344  
Cost of sales:
                               
New vehicle
    435,785       319,726       808,947       597,760  
Used vehicle retail
    181,023       149,590       347,530       283,084  
Used vehicle wholesale
    35,779       28,885       69,697       58,023  
Service, body and parts
    45,343       41,242       90,198       79,242  
Fleet and other
    11,004       15,907       23,585       18,502  
Total cost of sales
    708,934       555,350       1,339,957       1,036,611  
Gross profit
    138,189       117,137       266,060       218,733  
Asset impairments
    -       490       115       872  
Selling, general and administrative
    96,167       82,768       187,757       159,902  
Depreciation and amortization
    4,261       4,217       8,460       8,309  
Operating income
    37,761       29,662       69,728       49,650  
Floor plan interest expense
    (3,119 )     (3,359 )     (6,069 )     (5,821 )
Other interest expense
    (2,549 )     (3,011 )     (5,296 )     (6,303 )
Other income, net
    820       171       1,319       248  
Income from continuing operations before income taxes
    32,913       23,463       59,682       37,774  
Income tax provision
    (12,422 )     (8,777 )     (22,395 )     (14,700 )
Income from continuing operations, net of income tax
    20,491       14,686       37,287       23,074  
Income from discontinued operations, net of income tax
    -       140       -       457  
Net income
  $ 20,491     $ 14,826     $ 37,287     $ 23,531  
                                 
Basic income per share from continuing operations
  $ 0.80     $ 0.56     $ 1.44     $ 0.87  
Basic income per share from discontinued operations
    -       -       -       0.02  
Basic net income per share
  $ 0.80     $ 0.56     $ 1.44     $ 0.89  
                                 
Shares used in basic per share calculations
    25,730       26,437       25,860       26,389  
                                 
Diluted income per share from continuing operations
  $ 0.78     $ 0.55     $ 1.42     $ 0.86  
Diluted income per share from discontinued operations
    -       -       -       0.02  
Diluted net income per share
  $ 0.78     $ 0.55     $ 1.42     $ 0.88  
                                 
Shares used in diluted per share calculations
    26,185       26,860       26,331       26,779  
 
See accompanying condensed notes to consolidated financial statements.
 
 
3

 
 
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
 
   
Three Months Ended June 30,
    Six Months Ended June 30,  
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 20,491     $ 14,826     $ 37,287     $ 23,531  
Other comprehensive income (loss), net of tax:
                               
Gain (loss) on cash flow hedges, net of tax expense (benefit) of $225, ($35), $490 and $285, respectively     364       (56 )     790       506  
Comprehensive income
  $ 20,855     $ 14,770     $ 38,077     $ 24,037  
 
See accompanying condensed notes to consolidated financial statements.
 
 
4

 
 
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
    Six Months Ended June 30,  
   
2012
   
2011
 
Cash flows from operating activities:
           
Net income
  $ 37,287     $ 23,531  
Adjustments to reconcile net income to net cash used in operating activities:
         
Asset impairments
    115       872  
Depreciation and amortization
    8,460       8,309  
Depreciation and amortization within discontinued operations
    -       197  
Stock-based compensation
    1,512       1,034  
Gain on disposal of other assets
    (983 )     (190 )
Loss from disposal activities within discontinued operations
    -       53  
Deferred income taxes
    302       2,060  
Excess tax benefit from share-based payment arrangements
    (1,026 )     (278 )
(Increase) decrease (net of acquisitions and dispositions):
               
Trade receivables, net
    (18,305 )     (6,579 )
Inventories
    (109,592 )     (60,498 )
Other current assets
    4,680       (461 )
Other non-current assets
    (1,847 )     (884 )
Increase (decrease) (net of acquisitions and dispositions):
               
Floor plan notes payable
    (94,305 )     1,744  
Trade payables
    7,289       4,679  
Accrued liabilities
    7,671       7,757  
Other long-term liabilities and deferred revenue
    6,700       1,418  
Net cash used in operating activities
    (152,042 )     (17,236 )
                 
Cash flows from investing activities:
               
Principal payments received on notes receivable
    50       72  
Capital expenditures
    (22,693 )     (7,855 )
Proceeds from sales of assets
    4,940       11,358  
Cash paid for acquisitions, net of cash acquired
    (12,782 )     (53,302 )
Payments for life insurance policies
    (1,934 )     (1,001 )
Proceeds from sales of stores
    2,901       412  
Net cash used in investing activities
    (29,518 )     (50,316 )
                 
Cash flows from financing activities:
               
Borrowings on floor plan notes payable: non-trade
    251,844       65,789  
Borrowings on lines of credit
    177,623       34,000  
Repayments on lines of credit
    (212,623 )     (9,000 )
Principal payments on long-term debt, scheduled
    (4,000 )     (4,405 )
Principal payments on long-term debt and capital leases, other
    (32,049 )     (21,865 )
Proceeds from issuance of long-term debt
    14,169       6,664  
Proceeds from issuance of common stock
    2,671       1,833  
Repurchase of common stock
    (20,607 )     (142 )
Excess tax benefit from share-based payment arrangements
    1,026       278  
Decrease in restricted cash
    3,300       -  
Dividends paid
    (4,398 )     (3,168 )
Net cash provided by financing activities
    176,956       69,984  
                 
Increase (decrease) in cash and cash equivalents
    (4,604 )     2,432  
                 
Cash and cash equivalents at beginning of period
    20,851       9,306  
Cash and cash equivalents at end of period
  $ 16,247     $ 11,738  
                 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 11,690     $ 12,276  
Cash paid during the period for income taxes, net
    14,217       9,788  
                 
Supplemental schedule of non-cash activities:
               
Floor plan debt acquired in connection with acquisitions
  $ -     $ 18,553  
Acquisition of assets with capital leases
    2,470       -  
Floor plan debt paid in connection with store disposals
    6,712       -  
See accompanying condensed notes to consolidated financial statements.
 
5

 
 
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Interim Financial Statements

Basis of Presentation
These condensed Consolidated Financial Statements contain unaudited information as of June 30, 2012 and for the three- and six-month periods ended June 30, 2012 and 2011. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2011 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2011 is derived from our 2011 Annual Report on Form 10-K. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2011 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented. These reclassifications had no impact on previously reported net income.

Note 2. Inventories
The components of inventory consisted of the following (in thousands):

   
June 30,
2012
   
December 31,
2011
 
New vehicles
  $ 456,551     $ 372,838  
Used vehicles
    132,534       106,622  
Parts and accessories
    28,483       27,024  
Total inventories
  $ 617,568     $ 506,484  

Note 3. Goodwill
The changes in the carrying amounts of goodwill are as follows (in thousands):

   
Goodwill
 
Balance as of December, 31, 2010, gross
  $ 305,452  
Accumulated impairment loss
    (299,266 )
Balance as of December 31, 2010, net
    6,186  
Additions through acquisitions
    12,869  
Goodwill allocated to dispositions
    (97 )
Balance as of December 31, 2011, net
    18,958  
Additions through acquisitions
    3,881  
Goodwill allocated to dispositions
    (231 )
Balance as of June 30, 2012, net
  $ 22,608  
 
 
6

 

Note 4. Credit Facility
On April 17, 2012, we executed a new $650 million credit facility, which is comprised of 10 financial institutions, including four manufacturer-affiliated finance companies. This credit facility provides a $500 million new vehicle floor plan commitment, $100 million in used vehicle inventory financing and a $50 million revolving line of credit for general corporate use including working capital and acquisitions. We have the ability to expand the credit facility to $800 million total availability upon credit approval. The credit facility expires on April 16, 2017.  All borrowings from, and repayments to, our syndicated lending group are presented in the Consolidated Statements of Cash Flows as financing activities. The interest rate on the credit facility varies based on the type of debt with the rate ranging from the 1-month LIBOR plus 1.50% to the 1-month LIBOR plus 2.50%. Our financial covenants related to this credit facility include maintaining a current ratio of not less than 1.20x, a fixed charge coverage ratio of not less than 1.20x and a leverage ratio of not more than 5.0x. As of June 30, 2012, $482.4 million was outstanding on our new vehicle floor plan commitment, $52.0 million was outstanding on our used vehicle inventory financing facility and our revolving line of credit was undrawn.

Note 5. Commitments and Contingencies

Litigation
We are party to numerous legal proceedings arising in the normal course of our business. While we cannot predict with certainty the outcomes of these matters, 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.

Text Messaging Claims
In April 2011, a third party vendor assisted us in promoting a targeted “0% financing on used vehicles” advertising campaign during a limited sale period. The marketing included sending a “Short Message Service” communication to cell phones (a “text message”) of our previous customers. The message was sent to over 50,000 cell phones in 14 states. The message indicated that the recipients could “Opt-Out” of receiving any further messages by replying “STOP,” but, due to a technical error, some recipients who responded requesting to be unsubscribed nonetheless may have received a follow-on message.

On or about April 21, 2011, a Complaint for Damages, Injunctive and Declaratory Relief was filed against us (Kevin McClintic vs. Lithia Motors, 11-2-14632-4 SEA, Superior Court of the State of Washington for King County) alleging the text messaging activity violated State of Washington anti-texting and consumer protection laws and the federal Telephone Consumer Protection Act, and seeking statutory damages of $500 for each violation, trebled, plus injunctive relief and attorney fees. The suit seeks class action designation for all similarly situated entities and individuals. The suit has been removed to the United States District Court for the Western District of Washington at Seattle.

On July 5, 2011, we participated in a mediation of the McClintic case and subsequently entered into a settlement agreement with the plaintiffs, which is subject to final court approval. Under this settlement agreement, we agreed to pay a total of $2.5 million, all of which such amounts will be reimbursed by the vendor pursuant to contractual indemnification. On June 11, 2012, the court preliminarily approved the settlement.  The court set a final approval hearing for October 11, 2012.  No assurances can be given that the court will grant final approval of the settlement.

On July 5, 2011, a complaint was filed alleging nearly identical claims, also seeking class action designation (Dan McLaren vs. Lithia Motors, Civil # 11-810, United States District Court of Oregon, Portland Division).  Subsequently, the complaint was amended to include claims against the vendor.  The class representative in the McLaren case attempted to intervene in the McClintic case. This intervention motion was denied on October 19, 2011.
 
The McLaren case was stayed pending the outcome of the McClintic matter by order of the court on or about October 11, 2011; the stay was lifted on or about June 19, 2012, following with the preliminary settlement approval in the McClintic case. Now that McClintic has been granted preliminary approval, the defendants have moved the court to dismiss the McLaren case. No assurances can be given that the court will dismiss the McLaren case.
 
 
7

 
 
Alaska Consumer Protection Act Claims
In December 2006, a suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-13341 CI, and in April, 2007, a second case (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) (now consolidated)), in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. In the suits, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan (a “dealer reserve”). The suit seeks statutory damages of $500 for each violation (or three times plaintiff’s actual damages, whichever is greater), and attorney fees and costs and the plaintiffs sought class action certification.  Before and during the pendency of these suits, we engaged in settlement discussions with the State of Alaska through its Office of Attorney General with respect to the first two practices enumerated above. As a result of those discussions, we entered into a Consent Judgment subject to court approval and permitted potential class members to “opt-out” of the proposed settlement. Counsel for the plaintiffs attempted to intervene and, after various motions, hearings and an appeal to the state Court of Appeals, the Consent Judgment became final.
 
Plaintiffs then filed a motion in November 2010 seeking certification of a class (i) for the 339 customers who “opted-out” of the state settlement, (ii) for those customers who did not qualify for recovery under the Consent Judgment but were allegedly eligible for recovery under the Plaintiffs’ broader interpretation of the applicable statutes, and (iii) arguing that since the State’s suit against our dealerships did not address the loan fee/discount (dealer reserve) claim, for those customers who arranged their vehicle financing through us. On June 14, 2011, the Trial Court granted Plaintiffs’ motion to certify a class without addressing either the merits of the claims or the size of the classes. We intend to defend the claims vigorously and do not believe the novel “dealer reserve” claim has merit.

The ultimate resolution of these matters cannot be predicted with certainty, and an unfavorable resolution of any of the matters could have a material adverse effect on our results of operations, financial condition or cash flows.

Note 6. Stockholders’ Equity

Share Repurchases
In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. Through June 30, 2012 we have repurchased 1,120,147 shares, of which 823,092 were purchased in 2012 at an average price of $24.17 per share. At June 30, 2012, 879,853 shares remained available for repurchase. This plan does not have an expiration date and we may continue to repurchase shares from time to time in the future as conditions warrant.

Dividends
During 2012, we paid dividends of $0.07 per share on our Class A and Class B common stock, or a total of $1.8 million, related to our fourth quarter 2011 financial results, and of $0.10 per share, or a total of $2.6 million, related to our first quarter 2012 financial results. See Note 17 for a discussion of a dividend related to our second quarter 2012 financial results.

Note 7. Asset Impairment Charges
Long-lived assets classified as held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. An estimate of future undiscounted net cash flows associated with the long-lived assets is used to determine if the carrying value of the assets is recoverable. An impairment charge is recorded if the asset is determined to not be recoverable and the carrying value of the asset exceeds its fair value.
 
 
8

 

Triggering events were determined to have occurred related to certain properties due to changes in the expected future use. We evaluated the future undiscounted net cash flows for each property and determined the carrying value was not recoverable. We concluded the carrying value of the assets exceeded the fair value. As a result, asset impairments were recorded as a component of continuing operations as follows (in thousands):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Long-lived assets
  $ -     $ 490     $ 115     $ 872  

Note 8. Stock-Based Compensation
In the first quarter of 2012, we issued restricted stock units (“RSUs”) covering 168,000 shares of our Class A common stock to certain employees. The RSUs are not participating securities and fully vest on the fourth anniversary of the grant date.

Our executives and other key employees received 89,000 of the 168,000 issued. These shares are subject to forfeiture, in whole or in part, based upon minimum performance measures and continuation of employment. If minimum performance measures are met, the number of RSUs ultimately received under these awards is subject to attainment of specific earnings per share thresholds. Each earnings per share threshold specifies an attainment level ranging from 75% to 150% of the base number of units identified in the award. Therefore, at the 150% maximum attainment level, the number of shares awarded to executive officers and other key employees would increase by 44,500 shares for a total award of 133,500 shares. Failure to achieve the minimum performance threshold in 2012 will result in forfeiture of the entire award. The final attainment will be calculated using the 2012 adjusted net income per share from continuing operations with the attainment percentage determined on a pro-rata basis ranging between 75% and 150%. 

We estimated compensation expense, based on a fair value methodology, of $4.2 million related to the RSUs, which will be recognized over the vesting period. Of this amount, approximately $0.9 million is expected to be recognized in 2012.

In the second quarter of 2012, we issued RSUs covering 12,870 shares of our Class A common stock to members of our Board of Directors. All of these awards will vest 25% on the first day of the month following our quarterly board meetings.  We estimated compensation expense, based on a fair value methodology, of $0.4 million related to these RSUs, which will be recognized over the vesting period.  Of this amount, approximately $0.3 million is expected to be recognized in 2012.

Note 9. Deferred Compensation and Long-term Incentive Plan
We offer a deferred compensation and long-term incentive plan (the “Plan”) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. We may make discretionary contributions to the Plan. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, participants may defer a portion of their compensation and are fully vested in their respective deferrals.

In March 2012, we made a discretionary contribution of $1.9 million to the Plan. Participants will receive a guaranteed return of 5.9% in 2012. We recognized compensation expense related to the Plan of $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2012 and $0.3 million for both the three and six months ended June 30, 2011.

 
9

 

Note 10. 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 and credit risk; and
 
·
Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.

We use the income approach to determine the fair value of our interest rate swaps using observable Level 2 market expectations at each measurement date and an income approach to convert estimated future cash flows to a single present value amount (discounted) assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term borrowings, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future reset rates to discount those future cash flows to present value at the measurement date.
 
Inputs are collected from Bloomberg on the last market day of the period. The same methodology is used to determine the rate used to discount the future cash flows. The valuation of the interest rate swaps also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.

We estimate the value of long-lived assets that are recorded at fair value 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. Real estate appraisers’ and brokers’ valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. As these valuations contain unobservable inputs, we classified the measurement of fair value of long-lived assets as Level 3.

There were no changes to our valuation techniques during the six-month period ended June 30, 2012.

Assets and Liabilities Measured at Fair Value
Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):
 
 
Fair Value at June 30, 2012
 
Level 1
   
Level 2
   
Level 3
 
Measured on a recurring basis:
                 
Derivative contracts, net
  $ -     $ (6,362 )   $ -  
 
 
10

 

Fair Value at December 31, 2011
 
Level 1
   
Level 2
   
Level 3
 
Measured on a recurring basis:
                 
Derivative contracts, net
  $ -     $ (7,530 )   $ -  
                         
Measured on a non-recurring basis:
                       
Long-lived assets held and used:
                       
Certain buildings and improvements
  $ -     $ -     $ 2,500  

See Note 11 for more details regarding our derivative contracts.

Fair Value Disclosures for Financial Assets and Liabilities
We determined the carrying amounts of cash equivalents, accounts receivables, trade payables, accrued liabilities and short-term borrowings approximate fair value because of the short term nature 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 and calculate the estimated fair value of our fixed rate debt using a discounted cash flow methodology. Using 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 June 30, 2012, this debt had maturity dates between October 2014 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

   
June 30,
2012
   
December 31, 2011
 
Carrying value
  $ 94,201     $ 64,463  
Fair value
    98,634       73,551  

Note 11. Derivative Instruments
We enter into interest rate swaps to manage the variability of our interest rate exposure, thus fixing a portion of our interest expense in a rising or falling rate environment. 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.

At June 30, 2012 and December 31, 2011, the net fair value of all of our agreements totaled a loss of $6.4 million and $7.5 million, respectively, which was recorded on our Consolidated Balance Sheets as a component of accrued liabilities and other long-term liabilities. The estimated amount expected to be reclassified into earnings within the next twelve months was $3.4 million at June 30, 2012.

As of June 30, 2012, we had outstanding the following interest rate swaps with U.S. Bank Dealer Commercial Services:
 
·
$25 million interest rate swap at a fixed rate of 4.495% per annum, variable rate adjusted on the 26th of each month, matures January 25, 2013;
 
·
$25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month, matures April 30, 2013;
 
·
$25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month, matures April 30, 2013 and
 
·
$25 million interest rate swap at a fixed rate of 5.587% per annum, variable rate adjusted on the 1st and 16th of each month, matures June 15, 2016.
 
 
11

 
 
We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR rate at June 30, 2012 was 0.25% per annum, as reported in the Wall Street Journal.

At June 30, 2012 and December 31, 2011, the fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows (in thousands):

Balance Sheet Information
 
Fair Value of Liability Derivatives
 
   
Location in Balance
Sheet
 
June 30,
2012
 
Derivatives Designated as Hedging
Instruments
         
Interest Rate Swap Contracts
 
Accrued liabilities
  $ 3,123  
   
Other long-term liabilities
    3,239  
        $ 6,362  

Balance Sheet Information
 
Fair Value of Liability Derivatives
 
   
Location in Balance
Sheet
 
December 31,
2011
 
Derivatives Designated as Hedging
Instruments
         
Interest Rate Swap Contracts
 
Accrued liabilities
  $ 3,522  
   
Other long-term liabilities
    4,008  
        $ 7,530  

The effect of derivative instruments on our Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2012 and 2011 was as follows (in thousands):

 
 
 
Derivatives in Cash
Flow Hedging
Relationships
 
Amount of
Gain (Loss)
Recognized
in
Accumulated
OCI (Effective
Portion)
 
Location of
Gain (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)
 
                       
Three Months Ended
June 30, 2012
     
 
     
 
     
Interest Rate Swap Contracts
  $ 239  
Floor plan
interest
expense
  $ (350 )
Floor plan
interest
expense
  $ (730 )
                             
Three Months Ended
June 30, 2011
       
 
       
 
       
Interest Rate Swap Contracts
  $ (508 )
Floor plan
interest
expense
  $ (416 )
Floor plan
interest
expense
  $ (861 )
 
 
12

 

Derivatives in Cash
Flow Hedging
Relationships
 
Amount of
Gain (Loss)
Recognized
in
Accumulated
OCI (Effective
Portion)
 
Location of
Gain (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)
 
                       
Six Months Ended
June 30, 2012
             
 
     
Interest Rate Swap Contracts
  $ 522  
Floor plan
Interest
expense
  $ (758 )
  Floor plan
Interest
expense
  $ (1,384 )
                             
Six Months Ended
June 30, 2011
                           
Interest Rate Swap Contracts
  $ (119 )
 Floor plan
Interest
expense
  $ (910 )
Floor plan
Interest
expense
  $ (1,273 )

See also Note 10.

Note 12. Related Party Transactions
On March 27, 2012, we completed the sale of an 80% interest in our Nissan, Volkswagen and BMW stores in Medford, Oregon to our Vice Chairman, Dick Heimann. The price of the intangible assets of the Nissan, Volkswagen and BMW stores was $1.2 million. We received proceeds of $9.6 million, of which $2.9 million was received in cash and $6.7 million was received through the payoff of floor plan financing. The sale of the 80% interest in the stores resulted in a gain of $0.7 million and was recorded as a component of selling, general and administrative expense on our Consolidated Statements of Operations.

The Nissan and Volkswagen stores were purchased for the book value of the inventory as defined by the original terms of an option agreement provided to Mr. Heimann in 2009. The price of the intangible assets of $1.2 million was based on the fair value of the intangible assets related to the BMW store. We corroborated the fair value of the BMW store’s intangible assets with independent third party broker opinions and financial projections using a fair value income approach.

Concurrent to the sale of the interest in the three stores, we entered into a shared service agreement with the stores. This agreement allows the stores to lease our employees, use the Lithia name, utilize accounting support functions and receive consulting services.

We retained a 20% interest in the stores as of the transition date. We determined that we are not the primary beneficiary of the stores and the risk and rewards associated with our investment are based on ownership percentages. We determined we maintained significant influence over the operations. As a result, the stores do not qualify for consolidation and our 20% interest is accounted for under the equity method. We recorded the equity investment at fair value of $0.8 million as of the transition date which resulted in a gain of $0.2 million, which was recorded as a component of other income on our Consolidated Statements of Operations. We determined the fair value of our equity investment based on independent third party broker opinions and financial projections using a fair value income approach.

As of June 30, 2012, our equity investment increased by $0.1 million to $0.9 million and was recorded as a component of other non-current assets in our Consolidated Balance Sheets.

 
13

 

Note 13. Acquisitions
On April 30, 2012, we acquired the inventory, equipment and intangible assets and assumed certain liabilities of Bellingham Chevrolet and Cadillac in Bellingham, Washington from Jerry Chambers Chevrolet.

On June 12, 2012, we acquired the inventory, equipment and intangible assets and assumed certain liabilities of Fairbanks GMC Buick from Gene’s GMC, LLC.

Consideration paid for the acquisitions totaled $12.8 million and was paid in cash. The fair values of assets acquired and liabilities assumed are not material to our Consolidated Balance Sheets. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition. Pro forma results of operations are not materially different than actual results of operations.

We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes. We did not have any material acquisition related expenses in the three or six months ended June 30, 2012.

Note 14. Discontinued Operations
In 2011, we sold three stores: a Chrysler Jeep Dodge FIAT store in Concord, California; a Volkswagen store in Thornton, Colorado; and a GMC Buick and Kia store in Cedar Rapids, Iowa. The associated results of operations for these locations are classified as discontinued operations as follows (in thousands):
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
  $ -     $ 20,141     $ -     $ 40,281  
                                 
Pre-tax gain from discontinued operations
  $ -     $ 280     $ -     $ 797  
Loss on disposal activities
    -       (53 )     -       (53 )
      -       227       -       744  
Income tax expense
    -       (87 )     -       (287 )
Income from discontinued operations, net of income tax expense
  $ -     $ 140     $ -     $ 457  

Note 15. 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 shareholders. 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. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.
 
 
14

 

Following is a reconciliation of the income from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS for the three- and six-month periods ended June 30, 2012 and 2011 (in thousands, except per share amounts):

Three Months Ended June 30,
 
2012
   
2011
 
Basic EPS from Continuing Operations
 
Class A
   
Class B
   
Class A
   
Class B
 
Numerator:
                       
Income from continuing operations applicable to common stockholders
  $ 17,681     $ 2,810     $ 12,596     $ 2,090  
Distributed income applicable to common stockholders
    (2,230 )     (354 )     (1,588 )     (264 )
Basic undistributed income from continuing operations applicable to common stockholders
  $ 15,451     $ 2,456     $ 11,008     $ 1,826  
                                 
Denominator:
                               
Weighted average number of shares outstanding used to calculate basic income per share
    22,201       3,529       22,675       3,762  
                                 
Basic income per share from continuing operations applicable to common stockholders
  $ 0.80     $ 0.80     $ 0.56     $ 0.56  
Basic distributed income per share from continuing operations applicable to common stockholders
    (0.10 )     (0.10 )     (0.07 )     (0.07 )
Basic undistributed income per share from continuing operations applicable to common stockholders
  $ 0.70     $ 0.70     $ 0.49     $ 0.49  

Three Months Ended June 30,
 
2012
   
2011
 
Diluted EPS from Continuing Operations
 
Class A
   
Class B
   
Class A
   
Class B
 
Numerator:
                       
Distributed income applicable to common stockholders
  $ 2,230     $ 354     $ 1,588     $ 264  
Reallocation of distributed income as a result of conversion of dilutive stock options
    6       (6 )     (5 )     5  
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
    348       -       269       -  
Diluted distributed income applicable to common stockholders
  $ 2,584     $ 348     $ 1,852     $ 269  
Undistributed income from continuing operations applicable to common stockholders
  $ 15,451     $ 2,456     $ 11,008     $ 1,826  
Reallocation of undistributed income as a result of conversion of dilutive stock options
    43       (43 )     28       (28 )
Reallocation of undistributed income due to conversion of Class B to Class A
    2,413       -       1,798       -  
Diluted undistributed income from continuing operations applicable to common stockholders
  $ 17,907     $ 2,413     $ 12,834     $ 1,798  
                         
Denominator:
                       
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
    22,201       3,529       22,675       3,762  
Weighted average number of shares from stock options
    455       -       423       -  
Conversion of Class B to Class A common shares outstanding
    3,529       -       3,762       -  
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
    26,185       3,529       26,860       3,762  
                                 
Diluted income per share from continuing operations applicable to common stockholders
  $ 0.78     $ 0.78     $ 0.55     $ 0.55  
Diluted distributed income per share from continuing operations applicable to common stockholders
    (0.10 )     (0.10 )     (0.07 )     (0.07 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
  $ 0.68     $ 0.68     $ 0.48     $ 0.48  
 
 
15

 

Three Months Ended June 30,
 
2012
   
2011
 
Diluted EPS
 
Class A
   
Class B
   
Class A
   
Class B
 
Antidilutive Securities
                       
Shares issuable pursuant to stock options not included since they were antidilutive
    45         -       142         -  

Six Months Ended June 30,
 
2012
   
2011
 
Basic EPS from Continuing Operations
 
Class A
   
Class B
   
Class A
   
Class B
 
Numerator:
                       
Income from continuing operations applicable to common stockholders
  $ 32,040     $ 5,247     $ 19,785     $ 3,289  
Distributed income applicable to common stockholders
    (3,779 )     (619 )     (2,716 )     (452 )
Basic undistributed income from continuing operations applicable to common stockholders
  $ 28,261     $ 4,628     $ 17,069     $ 2,837  
                                 
Denominator:
                               
Weighted average number of shares outstanding used to calculate basic income per share
    22,221       3,639       22,627       3,762  
                                 
Basic income per share from continuing operations applicable to common stockholders
  $ 1.44     $ 1.44     $ 0.87     $ 0.87  
Basic distributed income per share from continuing operations applicable to common stockholders
    (0.17 )     (0.17 )     (0.12 )     (0.12 )
Basic undistributed income per share from continuing operations applicable to common stockholders
  $ 1.27     $ 1.27     $ 0.75     $ 0.75  

 
16

 

Six Months Ended June 30,
 
2012
   
2011
 
Diluted EPS from Continuing Operations
 
Class A
   
Class B
   
Class A
   
Class B
 
Numerator:
                       
Distributed income applicable to common stockholders
  $ 3,779     $ 619     $ 2,716     $ 452  
Reallocation of distributed income as a result of conversion of dilutive stock options
    11       (11 )     7       (7 )
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding
    608       -       445       -  
Diluted distributed income applicable to common stockholders
  $ 4,398     $ 608     $ 3,168     $ 445  
Undistributed income from continuing operations applicable to common stockholders
  $ 28,261     $ 4,628     $ 17,069     $ 2,837  
Reallocation of undistributed income as a result of conversion of dilutive stock options
    83       (83 )     41       (41 )
Reallocation of undistributed income due to conversion of Class B to Class A
    4,545       -       2,796       -  
Diluted undistributed income from continuing operations applicable to common stockholders
  $ 32,889     $ 4,545     $ 19,906     $ 2,796  
                                 
Denominator:
                               
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations
    22,221       3,639       22,627       3,762  
Weighted average number of shares from stock options
    471       -       390       -  
Conversion of Class B to Class A common shares outstanding
    3,639       -       3,762       -  
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations
    26,331       3,639       26,779       3,762  
                                 
Diluted income per share from continuing operations applicable to common stockholders
  $ 1.42     $ 1.42     $ 0.86     $ 0.86  
Diluted distributed income per share from continuing operations applicable to common stockholders
    (0.17 )     (0.17 )     (0.12 )     (0.12 )
Diluted undistributed income per share from continuing operations applicable to common stockholders
  $ 1.25     $ 1.25     $ 0.74     $ 0.74  

Six Months Ended June 30,
 
2012
   
2011
 
Diluted EPS
 
Class A
   
Class B
   
Class A
   
Class B
 
Antidilutive Securities
                       
Shares issuable pursuant to stock options not included since they were antidilutive
    90         -       334         -  
 
 
17

 
 
Note 16. Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that amends the accounting guidance on goodwill impairment testing. The amendments in this accounting standard update are intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments in this accounting standard update are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this accounting standard update will not have an impact on our consolidated financial position, results of operations, or cash flows, as it is intended to simplify the assessment for goodwill impairment.

Note 17. Subsequent Events

Common Stock Dividend
On July 25, 2012, we announced that our Board of Directors approved a dividend of $0.10 per share on our Class A and Class B Common stock related to our second quarter 2012 financial results. The dividend will total approximately $2.6 million and will be paid on August 24, 2012 to shareholders of record on August 10, 2012.

Share Repurchase Plan
On July 20, 2012 our Board of Directors increased our existing authorization allowing the repurchase of 1,000,000 additional shares of our Class A common stock. This brings the total remaining repurchase authorization to 1,879,853 shares as of July 27, 2012.

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

Forward-Looking Statements and Risk Factors
Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A. in this Form 10-Q and in the Risk Factors section of our Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission (“SEC”).

While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statement.

Overview
We are a leading operator of automotive franchises and a retailer of new and used vehicles and services. As of July 27, 2012, we offered 27 brands of new vehicles and all brands of used vehicles in 85 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks and replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance.
 
 
18

 

Our mission statement is: “Driven by our employees and preferred by our customers, Lithia is the leading automotive retailer in each of our markets.” We offer our customers personal, convenient, flexible hometown service combined with the large company advantages of selection, competitive pricing, broad access to financing, consistent service, competence and guarantees. We strive for diversification in our products, services, brands and geographic locations to insulate us from 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 management information systems, our emphasis on standardized operating practices and administrative functions performed centrally in Medford, Oregon, we seek to gain economies of scale from our dealership network.

Results of Continuing Operations
For the three months ended June 30, 2012 and 2011, we reported income from continuing operations, net of tax, of $20.5 million, or $0.78 per diluted share, and $14.7 million, or $0.55 per diluted share, respectively.

For the six months ended June 30, 2012 and 2011, we reported income from continuing operations, net of tax, of $37.3 million, or $1.42 per diluted share, and $23.1 million, or $0.86 per diluted share, respectively.

Discontinued Operations
Results for sold or closed stores qualifying for reclassification under the applicable accounting guidance are presented as discontinued operations in our Consolidated Statements of Operations. As a result, our results from continuing operations are presented on a comparable basis for all periods. We did not have any stores classified as discontinued operations during the three and six months ended June 30, 2012. Income from discontinued operations, net of tax, for the three and six months ended June 30, 2011 totaled $0.1 million and $0.5 million, respectively.

Key Performance Metrics
Key performance metrics for revenue and gross profit were as follows for the three and six months ended June 30, 2012 and 2011 (dollars in thousands):
 
Three months ended
June 30, 2012
 
Revenues
   
Percent of
Total
Revenues
   
Gross
Profit
   
Gross
Profit
Margin
   
Percent of
Total
Gross Profit
 
New vehicle
  $ 470,424       55.5 %   $ 34,639       7.4 %     25.0 %
Used vehicle retail
    212,767       25.1       31,744       14.9       23.0  
Used vehicle wholesale
    36,083       4.3       304       0.8       0.2  
Finance and insurance(1)
    27,870       3.3       27,870       100.0       20.2  
Service, body and parts
    88,585       10.5       43,242       48.8       31.3  
Fleet and other
    11,394       1.3       390       3.4       0.3  
    $ 847,123       100.0 %   $ 138,189       16.3 %     100.0 %
 
Three months ended
June 30, 2011
 
Revenues
   
Percent of
Total
Revenues
   
Gross
Profit
   
Gross
Profit
Margin
   
Percent of
Total
Gross Profit
 
New vehicle
  $ 347,727       51.7 %   $ 28,001       8.1 %     23.9 %
Used vehicle retail
    176,591       26.3       27,001       15.3       23.1  
Used vehicle wholesale
    29,153       4.3       268       0.9       0.2  
Finance and insurance(1)
    20,886       3.1       20,886       100.0       17.8  
Service, body and parts
    80,937       12.0       39,695       49.0       33.9  
Fleet and other
    17,193       2.6       1,286       7.5       1.1  
    $ 672,487       100.0 %   $ 117,137       17.4 %     100.0 %
 
 
19

 
 
Six months ended
June 30, 2012
 
Revenues
   
Percent of
Total
Revenues
   
Gross
Profit
   
Gross
Profit
Margin
   
Percent of
Total
Gross Profit
 
New vehicle
  $ 874,712       54.5 %   $ 65,765       7.5 %     24.7 %
Used vehicle retail
    408,188       25.4       60,658       14.9       22.8  
Used vehicle wholesale
    70,419       4.4       722       1.0       0.3  
Finance and insurance(1)
    53,290       3.3       53,290       100.0       20.0  
Service, body and parts
    175,033       10.9       84,835       48.5       31.9  
Fleet and other
    24,375       1.5       790       3.2       0.3  
    $ 1,606,017       100.0 %   $ 266,060       16.6 %     100.0 %
 
Six months ended
June 30, 2011
 
Revenues
   
Percent of
Total
Revenues
   
Gross
Profit
   
Gross
Profit
Margin
   
Percent of
Total
Gross Profit
 
New vehicle
  $ 648,367       51.6 %   $ 50,607       7.8 %     23.1 %
Used vehicle retail
    333,069       26.5       49,985       15.0       22.9  
Used vehicle wholesale
    58,690       4.8       667       1.1       0.3  
Finance and insurance(1)
    40,185       3.2       40,185       100.0       18.4  
Service, body and parts
    154,698       12.3       75,456       48.8       34.5  
Fleet and other
    20,335       1.6       1,833       9.0       0.8  
    $ 1,255,344       100.0 %   $ 218,733       17.4 %     100.0 %

(1) Commissions reported net of anticipated cancellations.

Same Store Operating Data
We believe that same store comparisons are a key indicator of our financial performance. Same store metrics demonstrate our ability to profitably grow our revenue in our existing locations. As a result, same store comparisons have been integrated into the discussion below.

A same store metric represents stores that were operating during the three- and six-month periods ended June 30, 2012, and only includes the months when operations occur in both comparable periods. For example, a store acquired in May 2011 would be included in same store operating data beginning in June 2012, after its first full complete comparable month of operation. Thus, operating results for same store comparisons would include only the period of June for both comparable periods.

New Vehicle Revenues
   
Three Months Ended
June 30,
             
   
2012
   
2011
   
Increase
   
%
Increase
 
(Dollars in thousands, except per unit amounts)
                       
Reported
                       
Revenue
  $ 470,424     $ 347,727     $ 122,697       35.3 %
Retail units sold
    14,406       10,725       3,681       34.3  
Average selling price per retail unit
  $ 32,655     $ 32,422     $ 233       0.7  
                                 
Same store
                               
Revenue
  $ 454,445     $ 339,427     $ 115,018       33.9 %
Retail units sold
    13,939       10,486       3,453       32.9  
Average selling price per retail unit
  $ 32,602     $ 32,370     $ 232       0.7  

   
Six Months Ended
June 30,
             
   
2012
   
2011
   
Increase
   
%
Increase
 
(Dollars in thousands, except per unit amounts)
                       
Reported
                       
Revenue
  $ 874,712     $ 648,367     $ 226,345       34.9 %
Retail units sold
    26,875       20,250       6,625       32.7  
Average selling price per retail unit
  $ 32,547     $ 32,018     $ 529       1.7  
                                 
Same store
                               
Revenue
  $ 825,948     $ 636,106     $ 189,842       29.8 %
Retail units sold
    25,570       19,877       5,693       28.6  
Average selling price per retail unit
  $ 32,301     $ 32,002     $ 299       0.9  
 
 
20

 
 
New vehicle sales in the second quarter of 2012 improved compared to the second quarter of 2011 driven by increased volume. Demand for new vehicles continues to be strong as same store sales volume increased 33% and 29%, respectively, in the three- and six-month periods ended June 30, 2012 compared to the same periods in 2011. We remain focused on increasing our share of overall new vehicle sales within our markets and continue to have an operational objective of increasing market share.

Used Vehicle Retail Revenues
   
Three Months Ended
June 30,
         
 
 
   
2012
   
2011
   
Increase
   
%
Increase
 
(Dollars in thousands, except per unit amounts)
                       
Reported
                       
Retail revenue
  $ 212,767     $ 176,591     $ 36,176       20.5 %
Retail units sold
    11,923       10,085       1,838       18.2  
Average selling price per retail unit
  $ 17,845     $ 17,510     $ 335       1.9  

Same store
                       
Retail revenue
  $ 205,794     $ 171,768     $ 34,026       19.8 %
Retail units sold
    11,546       9,847       1,699       17.3  
Average selling price per retail unit
  $ 17,824     $ 17,444     $ 380       2.2  

   
Six Months Ended
June 30,
         
 
 
   
2012
   
2011
   
Increase
   
%
Increase
 
(Dollars in thousands, except per unit amounts)
                       
Reported
                       
Retail revenue
  $ 408,188     $ 333,069     $ 75,119       22.6 %
Retail units sold
    23,431       19,591       3,840       19.6  
Average selling price per retail unit
  $ 17,421     $ 17,001     $ 420       2.5  

Same store
                       
Retail revenue
  $ 388,771     $ 325,676     $ 63,095       19.4 %
Retail units sold
    22,403       19,197       3,206       16.7  
Average selling price per retail unit
  $ 17,354     $