0001023128-19-000115.txt : 20190726 0001023128-19-000115.hdr.sgml : 20190726 20190726163136 ACCESSION NUMBER: 0001023128-19-000115 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190726 DATE AS OF CHANGE: 20190726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITHIA MOTORS INC CENTRAL INDEX KEY: 0001023128 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 930572810 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14733 FILM NUMBER: 19978357 BUSINESS ADDRESS: STREET 1: 150 NORTH BARTLETT STREET CITY: MEDFORD STATE: OR ZIP: 97501 BUSINESS PHONE: 541-776-6401 MAIL ADDRESS: STREET 1: 150 NORTH BARTLETT STREET CITY: MEDFORD STATE: OR ZIP: 97501 10-Q 1 lad2019q2-10q.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
(541) 776-6401
Registrant's telephone number, including area code
 
 

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 No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
 ☒
 
Accelerated Filer
 ☐
Non-Accelerated Filer
 ☐
 
Smaller Reporting Company
 
 
 
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
Securities registered pursuant to Section 12(b) of the Act: 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
 
Outstanding at July 26, 2019
Class A common stock without par value
 
LAD
 
The New York Stock Exchange
 
22,415,392
Class B common stock without par value
 
LAD
 
The New York Stock Exchange
 
800,000




LITHIA MOTORS, INC.
FORM 10-Q
INDEX 
 
PART I - FINANCIAL INFORMATION
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Changes in Stockholders' Equity (Unaudited) - Three and Six Months Ended June 30, 2019, and 2018
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2019 and 2018
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 

1



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
(Unaudited)
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
44.7

 
$
31.6

Accounts receivable, net of allowance for doubtful accounts of $6.6 and $7.2
 
489.2

 
529.4

Inventories, net
 
2,431.9

 
2,365.3

Other current assets
 
65.7

 
65.1

Total Current Assets
 
3,031.5

 
2,991.4

 
 
 
 
 
Property and equipment, net of accumulated depreciation of $262.8 and $240.5
 
1,463.0

 
1,448.0

Operating lease right-of-use assets
 
255.0

 

Goodwill
 
457.3

 
434.9

Franchise value
 
309.1

 
288.7

Other non-current assets
 
258.7

 
221.0

Total Assets
 
$
5,774.6

 
$
5,384.0

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Floor plan notes payable
 
$
414.1

 
$
324.4

Floor plan notes payable: non-trade
 
1,709.6

 
1,733.3

Current maturities of long-term debt
 
25.4

 
25.9

Trade payables
 
129.4

 
126.3

Accrued liabilities
 
326.8

 
283.6

Total Current Liabilities
 
2,605.3

 
2,493.5

 
 
 
 
 
Long-term debt, less current maturities
 
1,324.1

 
1,358.2

Deferred revenue
 
129.3

 
121.7

Deferred income taxes
 
98.5

 
91.2

Noncurrent operating lease liabilities
 
240.3

 

Other long-term liabilities
 
102.4

 
122.2

Total Liabilities
 
4,499.9

 
4,186.8

 
 
 
 
 
Stockholders' Equity:
 
 
 
 
Preferred stock - no par value; authorized 15.0 shares; none outstanding
 

 

Class A common stock - no par value; authorized 100.0 shares; issued and outstanding 22.4 and 22.0
 
13.0

 

Class B common stock - no par value; authorized 25.0 shares; issued and outstanding 0.8 and 1.0
 
0.1

 
0.1

Additional paid-in capital
 

 
35.0

Accumulated other comprehensive loss
 
(0.9
)
 

Retained earnings
 
1,262.5

 
1,162.1

Total Stockholders' Equity
 
1,274.7

 
1,197.2

Total Liabilities and Stockholders' Equity
 
$
5,774.6

 
$
5,384.0

 
See accompanying condensed notes to consolidated financial statements.

2



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions, except per share amounts)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
 
New vehicle
 
$
1,707.4

 
$
1,726.8

 
$
3,168.5

 
$
3,181.5

Used vehicle retail
 
888.3

 
804.1

 
1,716.2

 
1,519.7

Used vehicle wholesale
 
81.7

 
85.3

 
159.1

 
161.3

Finance and insurance
 
129.0

 
114.5

 
246.5

 
221.0

Service, body and parts
 
335.5

 
311.4

 
652.9

 
597.1

Fleet and other
 
79.8

 
54.4

 
128.2

 
75.6

Total revenues
 
3,221.7

 
3,096.5

 
6,071.4

 
5,756.2

Cost of sales:
 
 
 
 
 
 
 
 
New vehicle
 
1,612.0

 
1,625.3

 
2,987.2

 
2,993.1

Used vehicle retail
 
795.1

 
717.0

 
1,538.4

 
1,359.0

Used vehicle wholesale
 
79.9

 
83.4

 
156.4

 
158.4

Service, body and parts
 
165.2

 
157.7

 
323.1

 
305.0

Fleet and other
 
75.9

 
52.4

 
122.0

 
71.9

Total cost of sales
 
2,728.1

 
2,635.8

 
5,127.1

 
4,887.4

Gross profit
 
493.6

 
460.7

 
944.3

 
868.8

Asset impairments
 

 

 
0.5

 

Selling, general and administrative
 
356.5

 
333.3

 
678.3

 
630.8

Depreciation and amortization
 
20.2

 
18.8

 
40.0

 
35.7

Operating income
 
116.9

 
108.6

 
225.5

 
202.3

Floor plan interest expense
 
(19.4
)
 
(15.6
)
 
(37.5
)
 
(29.2
)
Other interest expense, net
 
(15.0
)
 
(13.8
)
 
(30.3
)
 
(25.6
)
Other income, net
 
3.0

 
1.6

 
5.6

 
3.0

Income before income taxes
 
85.5

 
80.8

 
163.3

 
150.5

Income tax provision
 
(23.6
)
 
(20.1
)
 
(45.0
)
 
(37.8
)
Net income
 
$
61.9

 
$
60.7

 
$
118.3

 
$
112.7

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
2.65

 
$
2.45

 
$
5.10

 
$
4.52

Shares used in basic per share calculations
 
23.4

 
24.8

 
23.2

 
24.9

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
2.63

 
$
2.44

 
$
5.08

 
$
4.50

Shares used in diluted per share calculations
 
23.5

 
24.9

 
23.3

 
25.0

 
 
 
 
 
 
 
 
 
Cash dividends paid per Class A and Class B share
 
$
0.30

 
$
0.29

 
$
0.59

 
$
0.56

 
See accompanying condensed notes to consolidated financial statements.

3



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
61.9

 
$
60.7

 
$
118.3

 
$
112.7

Other comprehensive income, net of tax:
 
 
 
 
 

 

Loss on cash flow hedges, net of tax expense of $0.3, $0.0, $0.3, and $0.0, respectively
 
(0.9
)
 

 
(0.9
)
 

Comprehensive income
 
$
61.0

 
$
60.7

 
$
117.4

 
$
112.7

 
See accompanying condensed notes to consolidated financial statements.


4



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In millions)
(Unaudited)
Three and Six Months Ended June 30, 2019
 
 Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
 Class A
 
 Class B
 
 
 Shares
 
 Amount
 
 Shares
 
 Amount
 
Balance at December 31, 2018
22.0

 
$

 
1.0

 
$
0.1

 
$
35.0

 
$

 
$
1,162.1

 
$
1,197.2

Net income

 

 

 

 

 

 
56.4

 
56.4

Issuance of stock in connection with employee stock plans

 
2.3

 

 

 

 

 

 
2.3

Issuance of restricted stock to employees
0.1

 

 

 

 

 

 

 

Repurchase of Class A common stock

 
(3.1
)
 

 

 

 

 

 
(3.1
)
Class B common stock converted to Class A common stock
0.2

 

 
(0.2
)
 

 

 

 

 

Compensation for stock and stock option issuances and excess tax benefits from option exercises

 
10.5

 

 

 
(7.0
)
 

 

 
3.5

Dividends paid

 

 

 

 

 

 
(6.7
)
 
(6.7
)
Retained Earnings Adjustment for Adoption of ASC 842

 

 

 

 

 

 
0.9

 
0.9

Balance at March 31, 2019
22.3

 
9.7

 
0.8

 
0.1

 
28.0

 
$

 
1,212.7

 
1,250.5

Net income

 

 

 

 

 

 
61.9

 
61.9

Loss on cash flow hedges, net of tax expense of $0.3

 

 

 

 

 
(0.9
)
 

 
(0.9
)
Issuance of stock in connection with employee stock plans
0.1

 
2.8

 

 

 

 

 

 
2.8

Compensation for stock and stock option issuances and excess tax benefits from option exercises

 
0.5

 

 

 
3.4

 

 

 
3.9

Option premiums paid

 

 

 

 
(31.4
)
 

 
(5.1
)
 
(36.5
)
Dividends paid

 

 

 

 

 

 
(7.0
)
 
(7.0
)
Balance at June 30, 2019
22.4

 
$
13.0

 
0.8

 
$
0.1

 
$

 
$
(0.9
)
 
$
1,262.5

 
$
1,274.7


 See accompanying condensed notes to consolidated financial statements.

5



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In millions)
(Unaudited)
Three and Six Months Ended June 30, 2018
 
 Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained Earnings
 
Total Stockholders' Equity
 
 Class A
 
 Class B
 
 
 Shares
 
 Amount
 
 Shares
 
 Amount
 
Balance at December 31, 2017
23.9

 
$
149.1

 
1.0

 
$
0.1

 
$
11.3

 

 
$
922.7

 
$
1,083.2

Net income

 

 

 

 

 

 
52.1

 
52.1

Issuance of stock in connection with employee stock plans

 
1.8

 

 

 

 

 

 
1.8

Issuance of restricted stock to employees
0.1

 

 

 

 

 

 

 

Repurchase of Class A common stock
(0.1
)
 
(8.2
)
 

 

 

 

 

 
(8.2
)
Compensation for stock and stock option issuances and excess tax benefits from option exercises

 
0.3

 

 

 
3.3

 

 

 
3.6

Dividends paid

 

 

 

 

 

 
(6.8
)
 
(6.8
)
Retained earnings adjustment for adoption of ASC 606

 

 

 

 

 

 
1.4

 
1.4

Balance at March 31, 2018
23.9

 
143.0

 
1.0

 
0.1

 
14.6

 

 
969.4

 
1,127.1

Net income

 

 

 

 

 

 
60.7

 
60.7

Issuance of stock in connection with employee stock plans
0.1

 
2.7

 

 

 

 

 

 
2.7

Repurchase of Class A common stock
(0.6
)
 
(59.1
)
 

 

 

 

 

 
(59.1
)
Compensation for stock and stock option issuances and excess tax benefits from option exercises

 
7.8

 

 

 
(4.5
)
 

 

 
3.3

Option premiums received (paid)

 

 

 

 
33.4

 

 

 
33.4

Dividends paid

 

 

 

 

 

 
(7.2
)
 
(7.2
)
Balance at June 30, 2018
23.4

 
$
94.4

 
1.0

 
$
0.1

 
$
43.5

 
$

 
$
1,022.9

 
$
1,160.9


 See accompanying condensed notes to consolidated financial statements.


6



LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income
 
$
118.3

 
$
112.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Asset impairments
 
0.5

 

Depreciation and amortization
 
40.0

 
35.7

Stock-based compensation
 
7.4

 
6.8

Gain on disposal of other assets
 

 
(0.1
)
Loss on disposal of franchise
 
0.3

 
0.4

Deferred income taxes
 
7.6

 
0.3

(Increase) decrease (net of acquisitions and dispositions):
 
 
 
 
Accounts receivable, net
 
40.1

 
47.9

Inventories
 
(63.0
)
 
(35.5
)
Other assets
 
6.4

 
20.6

Increase (decrease) (net of acquisitions and dispositions):
 
 
 
 
Floor plan notes payable
 
89.7

 
15.1

Trade payables
 
3.5

 
2.9

Accrued liabilities
 
(8.8
)
 
5.5

Other long-term liabilities and deferred revenue
 
2.4

 
24.0

Net cash provided by operating activities
 
244.4

 
236.3

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(57.8
)
 
(72.4
)
Proceeds from sales of assets
 
0.8

 
1.8

Cash paid for other investments
 
(6.7
)
 
(7.1
)
Cash paid for acquisitions, net of cash acquired
 
(75.0
)
 
(374.6
)
Proceeds from sales of stores
 
28.9

 
0.8

Net cash used in investing activities
 
(109.8
)
 
(451.5
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
(Repayments) borrowings on floor plan notes payable, net: non-trade
 
(11.1
)
 
85.8

Borrowings on lines of credit
 
1,411.0

 
1,353.3

Repayments on lines of credit
 
(1,450.0
)
 
(1,254.1
)
Principal payments on long-term debt and capital leases, scheduled
 
(12.0
)
 
(9.6
)
Principal payments on long-term debt and capital leases, other
 
(11.0
)
 
(5.3
)
Proceeds from issuance of long-term debt
 

 
62.1

Payments of debt issuance costs
 
(0.2
)
 
(0.2
)
Proceeds from issuance of common stock
 
5.1

 
4.5

Repurchase of common stock
 
(3.1
)
 
(33.9
)
Dividends paid
 
(13.7
)
 
(13.9
)
Payments of contingent consideration related to acquisitions
 

 
(0.8
)
Other financing activity
 
(36.5
)
 

Net cash (used in) provided by financing activities
 
(121.5
)
 
187.9

Increase (decrease) in cash and cash equivalents
 
13.1

 
(27.3
)
Cash and cash equivalents at beginning of period
 
31.6

 
57.3

Cash and cash equivalents at end of period
 
$
44.7

 
$
30.0

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for interest
 
$
69.5

 
$
54.7

Cash paid during the period for income taxes, net
 
7.2

 
2.3

Floor plan debt paid in connection with store disposals
 
4.8

 
5.2

 
 
 
 
 
Supplemental schedule of non-cash activities:
 
 
 
 
Debt issued in connection with acquisitions
 
$
26.4

 
$
125.1

Debt assumed in connection with acquisitions
 

 
10.8

ROU assets obtained in exchange for lease liabilities 1
 
260.3

 

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

 See accompanying condensed notes to consolidated financial statements.

7



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

The impact of adopting Topic 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows (in millions):
Impact on Consolidated Balance Sheets
 
December 31, 2018
 
Adjustments
 
January 1, 2019
Operating lease right-of-use assets
 
$

 
$
259.7

 
$
259.7

Total Assets
 
5,384.0

 
259.7

 
5,643.7

Operating lease liabilities:
 
 
 
 
 


Accrued liabilities
 
283.6

 
26.6

 
310.2

Deferred revenue
 
121.7

 
(1.3
)
 
120.4

Noncurrent operating lease liabilities
 

 
243.9

 
243.9

Other long-term liabilities
 
122.2

 
(10.3
)
 
111.9

Total Liabilities
 
4,186.8

 
258.8

 
4,445.6

Retained earnings
 
1,162.1

 
0.9

 
1,163.0

Total Liabilities and Stockholders' Equity
 
5,384.0

 
259.7

 
5,643.7



Reclassifications
Certain immaterial reclassifications of amounts previously reported have been made to the accompanying condensed Consolidated Financial Statements to maintain consistency and comparability between periods presented.


8



Note 2. Contract Liabilities and Assets

Contract Liabilities
We are the obligor on our lifetime oil contracts. Revenue is allocated to these performance obligations and is recognized over time as services are provided to the customer. The amount of revenue recognized is calculated, net of cancellations, using an input method, which most closely depicts performance of the contracts. Our contract liability balances were $160.7 million and $149.6 million as of June 30, 2019, and December 31, 2018, respectively; and we recognized $6.2 million and $12.1 million of revenue in the three and six months ended June 30, 2019, respectively, related to our contract liability balance at December 31, 2018. Our contract liability balance is included in accrued liabilities and deferred revenue.

Contract Assets
Revenue from finance and insurance sales is recognized, net of estimated charge-backs, at the time of the sale of the related vehicle. We act as an agent in the sale of these contracts as the pricing is set by the third-party provider, and our commission is preset. A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the sale of the contract. Our contract asset balances associated with future estimated variable consideration were $8.9 million and $9.2 million as of June 30, 2019 and December 31, 2018, respectively; and are included in trade receivables and other non-current assets.

Note 3. Accounts Receivable and Contract Assets

Accounts receivable consisted of the following (in millions):
 
 
June 30, 2019
 
December 31, 2018
Contracts in transit
 
$
254.5

 
$
294.0

Trade receivables
 
54.4

 
54.3

Vehicle receivables
 
57.8

 
51.6

Manufacturer receivables
 
102.4

 
105.5

Auto loan receivables
 
61.1

 
61.5

Other receivables
 
3.2

 
6.8

 
 
533.4


573.7

Less: Allowance for doubtful accounts
 
(6.6
)
 
(7.2
)
Less: Long-term portion of accounts receivable, net
 
(37.6
)
 
(37.1
)
Total accounts receivable, net
 
$
489.2


$
529.4



Accounts receivable classifications include the following:

Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received approximately ten days after selling a vehicle.
Trade receivables are comprised of amounts due from customers for open charge accounts, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.
Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.
Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.

Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.

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


9



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

Note 4. Inventories

The components of inventories, net, consisted of the following (in millions):
 
 
June 30, 2019
 
December 31, 2018
New vehicles
 
$
1,751.3

 
$
1,700.1

Used vehicles
 
591.5

 
576.8

Parts and accessories
 
89.1

 
88.4

Total inventories
 
$
2,431.9

 
$
2,365.3



Note 5. Goodwill and Franchise Value

The changes in the carrying amounts of goodwill are as follows (in millions):
 
 
Domestic
 
Import
 
Luxury
 
Consolidated
Balance as of December 31, 2017 ¹
 
$
114.0

 
$
104.3

 
$
38.0

 
$
256.3

Additions through acquisitions 2
 
51.4

 
85.8

 
43.5

 
180.7

Reductions through divestitures
 
(0.9
)
 
(1.2
)
 

 
(2.1
)
Balance as of December 31, 2018 ¹
 
164.5

 
188.9

 
81.5

 
434.9

Adjustments to purchase price allocations 3
 
1.6

 
1.6

 
1.9

 
5.1

Additions through acquisitions 3
 
6.2

 
9.0

 
2.2

 
17.4

Reductions through divestitures
 
(0.1
)
 

 

 
(0.1
)
Balance as of June 30, 2019 1
 
$
172.2

 
$
199.5

 
$
85.6

 
$
457.3

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 2017 acquisitions of the Baierl Auto Group, the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and the 2018 acquisition of Broadway Ford were finalized in 2018. Also, our purchase price allocation for the 2018 acquisition of Prestige Auto Group was preliminary and was allocated to our segments in 2018. As a result, we added $180.7 million of goodwill.
3 Our purchase price allocation for the acquisitions of the Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added $22.5 million of goodwill.

The changes in the carrying amounts of franchise value are as follows (in millions):
 
Franchise Value
Balance as of December 31, 2017
$
187.0

Additions through acquisitions 1
103.5

Reductions through divestitures
(1.8
)
Balance as of December 31, 2018
288.7

Adjustments to purchase price allocations 2
3.5

Additions through acquisitions 2
20.9

Reductions through divestitures
(4.0
)
Balance as of June 30, 2019
$
309.1

1 Our purchase price allocation for the 2017 acquisitions of the Baierl Auto Group, the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and the 2018 acquisition of Broadway Ford were finalized in 2018. Also, our purchase price allocation for the 2018 acquisition of Prestige Auto Group was preliminary and was allocated to our segments in 2018. As a result, we added $103.5 million of franchise value.
2 Our purchase price allocation for the acquisitions of the Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added $24.4 million of franchise value.


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Note 6. Stockholders’ Equity

Repurchases of Class A Common Stock
In May 2019, 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 Class A shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We paid a net premium of $36.5 million in the second quarter of 2019 to enter into this agreement, which was recorded as a reduction of additional paid-in-capital and retained earnings. As of June 30, 2019, the options were outstanding.

Note 7. 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 June 30, 2019, our real estate mortgages and other debt, which includes capital leases, had maturity dates between October 1, 2020, and August 31, 2038.

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

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

There were no changes to our valuation techniques during the six-month period ended June 30, 2019.

Below are our derivative liabilities that are measured at fair value (in millions):
Fair Value at June 30, 2019
 
Level 1
 
Level 2
 
Level 3
Measured on a recurring basis:
 
 
 
 
 
 
Derivative contract, net
 
$

 
$
1.2

 
$




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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 millions):
 
 
June 30, 2019
 
December 31, 2018
Carrying value
 
 
 
 
5.25% Senior notes due 2025
 
$
300.0

 
$
300.0

Real estate mortgages and other debt
 
456.5

 
445.8

 
 
$
756.5


$
745.8

Fair value
 
 
 
 
5.25% Senior notes due 2025
 
$
306.4

 
$
278.6

Real estate mortgages and other debt
 
457.7

 
448.7

 
 
$
764.1

 
$
727.3



Below are our long-lived assets that were measured at fair value (in millions):
Fair Value at December 31, 2018
 
Level 1
 
Level 2
 
Level 3
Measured on a non-recurring basis:
 
 
 
 
 
 
Long-lived assets held and used:
 
 
 
 
 
 
Certain buildings and improvements
 
$

 
$

 
$
2.3



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

Note 8. Net Income Per Share of Class A and Class B Common Stock

We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding common shares underlying equity awards that are unvested or subject to forfeiture. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the common shares issuable upon the net exercise of stock options and unvested RSUs and is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
 
Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Under our Articles of Incorporation, the Class A and Class B common stock share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.


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Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in millions, except per share amounts):
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