Edgar Filing: ASBURY AUTOMOTIVE GROUP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016



o	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: 001-31262

ASBURY AUTOMOTIVE GROUP, INC.

(Exact name of Registrant as specified in its charter)



	Delaware		01-0609375
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

	2905 Premiere Parkway NW, Suite 300 Duluth, Georgia		30097
	(Address of principal executive offices)		(Zip Code)

(770) 418-8200

(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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 o

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	x	Accelerated Filer	o

Non-Accelerated Filer	o	Smaller Reporting Company	o

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The number of shares of common stock outstanding as of October 25, 2016 was 22,158,411.

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ASBURY AUTOMOTIVE GROUP, INC.

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		Page
PART I—Financial Information
Item 1.	Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40

	PART II—Other Information

Item 1.	Legal Proceedings	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 4.	Mine Safety Disclosures	41
Item 6.	Exhibits	42
	Signatures	43
	Index to Exhibits	44

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except par value and share data)

(Unaudited)



	September 30, 2016			December 31, 2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	3.7		$	2.8
Contracts-in-transit	128.9			175.7
Accounts receivable, net	111.9			119.5
Inventories	892.4			917.2
Deferred income taxes	12.2			11.8
Assets held for sale	94.3			27.6
Other current assets	93.7			88.4
Total current assets	1,337.1			1,343.0
PROPERTY AND EQUIPMENT, net	800.3			772.8
GOODWILL	128.0			130.2
INTANGIBLE FRANCHISE RIGHTS	48.5			48.5
OTHER LONG-TERM ASSETS	12.6			11.4
Total assets	$	2,326.5		$	2,305.9
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Floor plan notes payable—trade, net	$	105.3		$	138.8
Floor plan notes payable—non-trade, net	664.2			573.4
Current maturities of long-term debt	13.9			13.9
Accounts payable and accrued liabilities	271.1			281.7
Liabilities associated with assets held for sale	45.3			—
Total current liabilities	1,099.8			1,007.8
LONG-TERM DEBT	916.3			940.4
DEFERRED INCOME TAXES	18.7			13.7
OTHER LONG-TERM LIABILITIES	36.1			29.5
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued or outstanding	—			—
Common stock, $.01 par value; 90,000,000 shares authorized; 40,752,536 and 40,507,313 shares issued, including shares held in treasury, respectively	0.4			0.4
Additional paid-in capital	546.6			537.2
Retained earnings	544.4			444.3
Treasury stock, at cost; 18,592,091 and 15,696,543 shares, respectively	(829.4		)	(663.9		)
Accumulated other comprehensive loss	(6.4		)	(3.5		)
Total shareholders' equity	255.6			314.5
Total liabilities and shareholders' equity	$	2,326.5		$	2,305.9

See accompanying Notes to Condensed Consolidated Financial Statements

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ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)



	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2016		2015			2016		2015
REVENUE:
New vehicle	$	940.9	$	964.0		$	2,676.3	$	2,720.7
Used vehicle	476.4		493.0			1,407.5		1,474.0
Parts and service	200.4		190.6			584.9		555.5
Finance and insurance, net	65.4		68.8			192.6		197.6
TOTAL REVENUE	1,683.1		1,716.4			4,861.3		4,947.8
COST OF SALES:
New vehicle	893.4		911.7			2,536.6		2,568.2
Used vehicle	446.6		459.6			1,307.7		1,371.6
Parts and service	77.4		72.4			222.9		207.6
TOTAL COST OF SALES	1,417.4		1,443.7			4,067.2		4,147.4
GROSS PROFIT	265.7		272.7			794.1		800.4
OPERATING EXPENSES (INCOME):
Selling, general, and administrative	185.7		188.8			549.2		546.4
Depreciation and amortization	7.8		7.5			23.0		22.0
Other operating expenses (income), net	1.5		(0.2		)	4.2		0.1
INCOME FROM OPERATIONS	70.7		76.6			217.7		231.9
OTHER EXPENSES (INCOME):
Floor plan interest expense	5.0		4.1			14.4		12.0
Other interest expense, net	13.2		10.7			40.0		31.5
Swap interest expense	0.8		1.0			2.4		2.0
Gain on divestitures	—		(21.4		)	—		(21.4		)
Total other expenses (income), net	19.0		(5.6		)	56.8		24.1
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	51.7		82.2			160.9		207.8
Income tax expense	19.3		31.0			60.8		79.6
INCOME FROM CONTINUING OPERATIONS	32.4		51.2			100.1		128.2
Discontinued operations, net of tax	—		(0.1		)	—		(0.1		)
NET INCOME	$	32.4	$	51.1		$	100.1	$	128.1
EARNINGS PER COMMON SHARE:
Basic—
Continuing operations	$	1.47	$	1.98		$	4.39	$	4.80
Discontinued operations	—		(0.01		)	—		—
Net income	$	1.47	$	1.97		$	4.39	$	4.80
Diluted—
Continuing operations	$	1.47	$	1.96		$	4.37	$	4.77
Discontinued operations	—		—			—		(0.01		)
Net income	$	1.47	$	1.96		$	4.37	$	4.76
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic	22.0		25.9			22.8		26.7
Restricted stock	0.0		0.1			0.0		0.1
Performance share units	0.1		0.1			0.1		0.1
Diluted	22.1		26.1			22.9		26.9

See accompanying Notes to Condensed Consolidated Financial Statements

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ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	32.4		$	51.1		$	100.1		$	128.1
Other comprehensive income (loss):
Change in fair value of cash flow swaps	1.0			(4.0		)	(4.8		)	(5.0		)
Income tax (expense) benefit associated with cash flow swaps	(0.4		)	1.5			1.9			1.9
Comprehensive income	$	33.0		$	48.6		$	97.2		$	125.0

See accompanying Notes to Condensed Consolidated Financial Statements

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ASBURY AUTOMOTIVE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	For the Nine Months Ended September 30,
	2016			2015
CASH FLOW FROM OPERATING ACTIVITIES:
Net income	$	100.1		$	128.1
Adjustments to reconcile net income to net cash provided by operating activities—
Depreciation and amortization	23.0			22.0
Stock-based compensation	9.1			7.7
Deferred income taxes	6.4			1.0
Impairment expenses	3.1			—
Loaner vehicle amortization	15.6			13.0
Excess tax benefit on share-based arrangements	(0.2		)	(4.5		)
Gain on divestitures	—			(21.4		)
Other adjustments, net	2.5			3.0
Changes in operating assets and liabilities, net of acquisitions and divestitures—
Contracts-in-transit	46.8			23.3
Accounts receivable	7.5			4.4
Inventories	78.1			55.2
Other current assets	(111.0		)	(90.8		)
Floor plan notes payable—trade, net	(20.4		)	(19.0		)
Accounts payable and accrued liabilities	(11.0		)	19.3
Other long-term assets and liabilities, net	1.5			3.7
Net cash provided by operating activities	151.1			145.0
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures—excluding real estate	(47.3		)	(34.6		)
Capital expenditures—real estate	(10.6		)	(22.4		)
Purchases of previously leased real estate	(19.6		)	—
Acquisitions	—			(69.4		)
Divestitures	—			56.3
Proceeds from the sale of assets	—			2.3
Net cash used in investing activities	(77.5		)	(67.8		)
CASH FLOW FROM FINANCING ACTIVITIES:
Floor plan borrowings—non-trade	2,920.4			3,151.2
Floor plan borrowings—acquisitions	—			16.7
Floor plan repayments—non-trade	(2,813.9		)	(3,036.7		)
Floor plan repayments—divestitures	—			(17.2		)
Proceeds from borrowings	—			82.9
Repayments of borrowings	(11.2		)	(8.6		)
Payment of debt issuance costs	(2.7		)	(1.3		)
Repurchases of common stock, including shares associated with net share settlement of employee share-based awards	(165.5		)	(267.7		)
Excess tax benefit on share-based arrangements	0.2			4.5
Net cash used in financing activities	(72.7		)	(76.2		)
Net increase in cash and cash equivalents	0.9			1.0
CASH AND CASH EQUIVALENTS, beginning of period	2.8			2.9
CASH AND CASH EQUIVALENTS, end of period	$	3.7		$	3.9

See Note 9 "Supplemental Cash Flow Information" for further details

See accompanying Notes to Condensed Consolidated Financial Statements

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ASBURY AUTOMOTIVE GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF BUSINESS

We are one of the largest automotive retailers in the United States, operating 98 new vehicle franchises (81 dealership locations) in 17 metropolitan markets within nine states as of September 30, 2016. Our stores offer an extensive range of automotive products and services, including new and used vehicles; parts and service, which includes repair and maintenance services, replacement parts, and collision repair services; and finance and insurance products. As of September 30, 2016, we offered 28 brands of new vehicles and our new vehicle revenue brand mix consisted of 45% imports, 34% luxury, and 21% domestic brands. We also operated 25 collision repair centers that serve customers in our local markets.

Our retail network is made up of dealerships operating primarily under the following locally-branded dealership groups:

• Coggin dealerships operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;

• Courtesy dealerships operating in Tampa, Florida;

• Crown dealerships operating in North Carolina, South Carolina and Virginia;

• Gray-Daniels dealerships operating in the Jackson, Mississippi area;

• McDavid dealerships operating in Austin, Dallas and Houston, Texas;

• Nalley dealerships operating in metropolitan Atlanta, Georgia;

• North Point dealerships operating in the Little Rock, Arkansas area; and

• Plaza dealerships operating in metropolitan St. Louis, Missouri.

In addition, as of September 30, 2016 we owned and operated four stand-alone used vehicle stores under the "Q auto" brand name in Florida.

Our operating results are generally subject to changes in the economic environment as well as seasonal variations. Historically, we have generated more revenue and operating income in the second, third, and fourth quarters than in the first quarter of the calendar year. Generally, the seasonal variations in our operations are caused by factors related to weather conditions, changes in manufacturer incentive programs, model changeovers and consumer buying patterns, among other things.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and reflect the consolidated accounts of Asbury Automotive Group, Inc. and our wholly owned subsidiaries. All intercompany transactions have been eliminated in consolidation.

In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation of the Condensed Consolidated Financial Statements as of September 30, 2016, and for the three and nine months ended September 30, 2016 and 2015, have been included. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for any other interim period, or any full year period. Our Condensed Consolidated Financial Statements should be read together with our Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the periods presented. Actual results could differ materially from these estimates. Estimates and assumptions are reviewed quarterly and the effects of any revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying Condensed Consolidated Financial Statements include, but are not limited to, those relating to inventory valuation reserves, reserves for chargebacks against revenue recognized from the sale of finance and insurance products, certain

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assumptions related to intangible and long-lived assets, reserves for insurance programs, and reserves for certain legal or similar proceedings relating to our business operations.

Contracts-In-Transit

Contracts-in-transit represent receivables from third-party finance companies for the portion of new and used vehicle purchase price financed by customers through sources arranged by us.

Revenue Recognition

Revenue from the sale of new and used vehicles (which excludes sales tax) is recognized upon the latest of delivery, passage of title, signing of the sales contract or approval of financing. Revenue from the sale of parts, service and collision repair work (which excludes sales tax) is recognized upon delivery of parts to the customer or at the time vehicle service or repair work is completed, as applicable. Manufacturer incentives and rebates, including manufacturer holdbacks, floor plan interest assistance and certain advertising assistance, are recognized as a reduction of new vehicle cost of sales at the time the related vehicles are sold.

We receive commissions from third-party lending and insurance institutions for arranging customer financing and from the sale of vehicle service contracts, guaranteed auto protection (known as "GAP") insurance, and other insurance, to customers (collectively "F&I"). We may be charged back for F&I commissions in the event a contract is prepaid, defaulted upon, or terminated ("chargebacks"). F&I commissions are recorded at the time a vehicle is sold and a reserve for future chargebacks is established based on historical chargeback experience and the termination provisions of the applicable contract. F&I commissions, net of estimated future chargebacks, are included in Finance and Insurance, net in the accompanying Condensed Consolidated Statements of Income.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. For all periods presented, there were no adjustments to the numerator necessary to compute diluted earnings per share.

Assets Held for Sale and Liabilities Associated with Assets Held for Sale

Certain amounts have been classified as Assets Held for Sale in the accompanying Condensed Consolidated Balance Sheets. Assets and liabilities classified as held for sale include (i) assets and liabilities associated with pending dealership disposals, (ii) real estate not currently used in our operations that we are actively marketing to sell, and (iii) the related mortgage notes payable, if applicable. Classification as held for sale begins on the date that we have met all of the criteria for classification as held for sale.

At the time of classifying assets as held for sale and at the end of each reporting period, we compare the carrying value of these assets to estimates of fair value to assess for impairment. We compare the carrying value to estimates of fair value utilizing the assistance of third-party broker opinions of value and third-party desktop appraisals to assist in our fair value estimates.

Statements of Cash Flows

Borrowings and repayments of floor plan notes payable to a lender unaffiliated with the manufacturer from which we purchase a particular new vehicle ("Non-Trade") and all floor plan notes payable relating to pre-owned vehicles (together referred to as "Floor Plan Notes Payable—Non-Trade"), are classified as financing activities on the accompanying Condensed Consolidated Statements of Cash Flows, with borrowings reflected separately from repayments. The net change in floor plan notes payable to a lender affiliated with the manufacturer from which we purchase a particular new vehicle (collectively referred to as "Floor Plan Notes Payable—Trade") is classified as an operating activity on the accompanying Condensed Consolidated Statements of Cash Flows. Borrowings of floor plan notes payable associated with inventory acquired in connection with all acquisitions and repayments made in connection with all divestitures are classified as financing activities in the accompanying Condensed Consolidated Statement of Cash Flows. Cash flows related to floor plan notes payable included in operating activities differ from cash flows related to floor plan notes payable included in financing activities only to the extent that the former are payable to a lender affiliated with the manufacturer from which we purchased the related inventory, while the latter are payable to a lender not affiliated with the manufacturer from which we purchased the related inventory.

Loaner vehicles account for a significant portion of Other Current Assets in the accompanying Condensed Consolidated Balance Sheet. We acquire loaner vehicles either with available cash or through borrowings from either our manufacturer

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affiliated lenders or through our senior secured credit agreement with Bank of America, as administrative agent, and the other agents and lenders party thereto (the "2016 Senior Credit Facility"). Loaner vehicles are initially used by our service department for only a short period of time (typically six to twelve months) before we seek to sell them. Therefore, we classify the acquisition of loaner vehicles in Other Current Assets and the borrowings and repayments of loaner vehicle notes payable in Accounts Payable and Accrued Liabilities in the accompanying Condensed Consolidated Statements of Cash Flows. Loaner vehicles are depreciated over the service period to their estimated value. At the end of the loaner service period, loaner vehicles are transferred from Other Current Assets to used vehicle inventory. These transfers are reflected as non-cash transfers between Other Current Assets and Inventory in the accompanying Condensed Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as real estate, property, and equipment. The new standard will become effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within that year. The standard can be adopted either retrospectively to each reporting period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption of the standard is permitted, but not before annual reporting periods beginning on or after December 15, 2016. We are currently in the process of evaluating the impact of adoption, our method for adoption, and the need for additional disclosure as part of adoption. As a result, our evaluation of the new standard will extend over future periods.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, to simplify the measurement of inventory by changing the subsequent measurement guidance from the lower of cost or market to the lower of cost and net realizable value. Application of the standard, which is required to be applied prospectively, is required for fiscal years beginning on or after December 15, 2016 and for interim periods within that year. We do not expect the adoption of this new guidance to have a material impact on our consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, to simplify the classification of deferred taxes on the balance sheet. The new guidance would require that deferred taxes be classified as non-current assets and liabilities based on the tax paying jurisdiction. The standard, which allows for early adoption, can be applied prospectively or retrospectively, and is required to be adopted for fiscal years beginning on or after December 15, 2016 and for interim periods within that year. We are currently evaluating the expected impact of adopting this new guidance on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), a new standard on lease accounting. The new standard will supersede the existing lease accounting guidance and apply to all entities. The guidance defines new principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. The new standard will become effective for annual reporting periods beginning on or after December 15, 2018 and for interim periods within that year. Early adoption of this standard is permitted and adoption is required to be done using a modified retrospective approach. We are currently evaluating the expected impact of adopting this new guidance on our consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718), to simplify the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Application of the standard is required for fiscal years beginning on or after December 15, 2016 and for interim periods within that year. Further, application can be either prospective or retrospective depending on each of the provisions in the guidance. We are currently evaluating the expected impact of adopting this new guidance on our consolidated financial statements.

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3. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:



	As of
	September 30, 2016			December 31, 2015
	(In millions)
Vehicle receivables	$	39.5		$	46.3
Manufacturer receivables	42.1			43.1
Other receivables	31.7			31.4
Total accounts receivable	113.3			120.8
Less—Allowance for doubtful accounts	(1.4		)	(1.3		)
Accounts receivable, net	$	111.9		$	119.5

4. INVENTORIES

Inventories consisted of the following:



	As of
	September 30, 2016		December 31, 2015
	(In millions)
New vehicles	$	694.9	$	739.2
Used vehicles	156.4		134.1
Parts and accessories	41.1		43.9
Total inventories	$	892.4	$	917.2

The lower of cost or market reserves reduced total inventories by $6.6 million and $6.2 million as of September 30, 2016 and December 31, 2015, respectively. In addition to the inventories shown above, as of September 30, 2016 we had $33.5 million of inventories classified as Assets Held for Sale on the accompanying Condensed Consolidated Balance Sheets as they were associated with pending dealership disposals. As of September 30, 2016 and December 31, 2015, certain automobile manufacturer incentives reduced new vehicle inventory cost by $7.9 million and $9.6 million, respectively.

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5. ASSETS AND LIABILITIES HELD FOR SALE

Assets and liabilities classified as held for sale include (i) assets and liabilities associated with pending dealership disposals, (ii) real estate not currently used in our operations that we are actively marketing to sell and (iii) the related mortgage notes payable, if applicable.

A summary of assets held for sale and liabilities associated with assets held for sale is as follows:



	As of
	September 30, 2016		December 31, 2015
	(In millions)
Assets:
Inventories	$	33.5	$	—
Other current assets	3.1		—
Property and equipment, net	55.5		27.6
Goodwill	2.2		—
Total assets	94.3		27.6
Liabilities:
Floor plan notes payable—trade	13.1		—
Floor plan notes payable—non-trade	15.7		—
Current maturities of long-term debt	1.0		—
Accounts payable and accrued liabilities	3.1		—
Long-term debt	12.4		—
Total liabilities	45.3		—
Net assets held for sale:	$	49.0	$	27.6

As of September 30, 2016, there were five franchises (four dealership locations) pending disposition, with assets and liabilities totaling $83.2 million and $45.3 million, respectively.

Assets held for sale, comprising real estate not currently used in our operations, totaled $11.1 million and $27.6 million as of September 30, 2016 and December 31, 2015, respectively, and there were no liabilities associated with these real estate assets held for sale as of September 30, 2016 and December 31, 2015. Additionally, during the nine months ended September 30, 2016, we recorded $0.7 million of impairment expense on one of these real estate properties based on offers received from prospective buyers.

During the first quarter of 2016, we reclassified one vacant property with a net book value of $7.4 million to Assets Held for Sale and the related $4.9 million mortgage to Liabilities Associated with Assets Held for Sale. In connection with the reclassification of the property, we recorded $1.5 million of impairment expense based on a third-party broker's opinion of value. During the third quarter of 2016, based on our revised intent to use this property and another property, with a net book value of $15.8 million, in our future operations, we reclassified these properties into Property and Equipment, net, and the associated $4.9 million mortgage into Current Maturities of Long-Term Debt and Long-Term Debt.

For the nine months ended September 30, 2016, the above impairments, along with an additional $0.9 million impairment recorded on real estate not classified as held for sale, were recorded in Other Operating Expenses (Income), net in our accompanying Condensed Consolidated Statements of Income.

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6. FLOOR PLAN NOTES PAYABLE

Floor plan notes payable consisted of the following:



	As of
	September 30, 2016			December 31, 2015
	(In millions)
Floor plan notes payable—trade (a)	$	117.5		$	138.8
Floor plan notes payable offset account	(12.2		)	—
Total floor plan notes payable—trade, net	$	105.3		$	138.8

Floor plan notes payable—non-trade (b)	$	688.1		$	710.8
Floor plan notes payable offset account	(23.9		)	(137.4		)
Total floor plan notes payable—non-trade, net	$	664.2		$	573.4

_____________________________


(a)	Floor plan notes payable—trade as of September 30, 2016 does not include $13.1 million classified as Liabilities Associated with Assets Held for Sale.


(b)	Floor plan notes payable—non-trade as of September 30, 2016 does not include $15.7 million classified as Liabilities Associated with Assets Held for Sale.

During August 2016, we established a floor plan offset account with Ford Motor Credit Company which allows us to transfer cash to the account as an offset of our outstanding Floor Plan Notes Payable—Trade, net. Additionally, we have a similar floor plan offset account with Bank of America which allows us to offset our outstanding Floor Plan Notes Payable—Non-Trade, net. These accounts allow us to transfer cash to reduce the amount of outstanding floor plan notes payable that would otherwise accrue interest, while retaining the ability to transfer amounts from the floor plan offset accounts into our operating cash accounts within one to two days. As of September 30, 2016 and December 31, 2015 we had $36.1 million and $137.4 million, respectively, in these floor plan offset accounts.

7. LONG-TERM DEBT

Long-term debt consisted of the following:



	As of
	September 30, 2016			December 31, 2015
	(In millions)
6.0% Senior Subordinated Notes due 2024	$	600.0		$	600.0
Mortgage notes payable bearing interest at fixed and variable rates (a)	184.6			194.3
Real estate credit agreement (b)	52.2			64.0
Restated master loan agreement	95.0			97.9
Capital lease obligations	3.4			3.5
Total debt outstanding	935.2			959.7
Add: unamortized premium on 6.0% Senior Subordinated Notes due 2024	7.8			8.4
Less: debt issuance costs	(12.8		)	(13.8		)
Long-term debt, including current portion	930.2			954.3
Less: current portion	(13.9		)	(13.9		)
Long-term debt	$	916.3		$	940.4

_____________________________


(a)	Mortgage notes payable as of September 30, 2016 does not include a $4.3 million mortgage note payable classified as Liabilities Associated with Assets Held for Sale.


(b)	Real estate credit agreement as of September 30, 2016 does not include a $9.1 million mortgage note payable classified as Liabilities Associated with Assets Held for Sale.

We are a holding company with no independent assets or operations. For all relevant periods presented, our 6.0% Notes have been fully and unconditionally guaranteed, on a joint and several basis, by substantially all of our subsidiaries. Any subsidiaries which have not guaranteed such notes are "minor" (as defined in Rule 3-10(h) of Regulation S-X). As of

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September 30, 2016, there were no significant restrictions on the ability of our subsidiaries to distribute cash to us or our guarantor subsidiaries.

8. FINANCIAL INSTRUMENTS AND FAIR VALUE

In determining fair value, we use various valuation approaches, including market and income approaches. Accounting standards establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing the asset or liability, developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1-Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2-Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Assets and liabilities utilizing Level 2 inputs include interest rate swap instruments, exchange-traded debt securities that are not actively traded or do not have a high trading volume, mortgage notes payable, and the assessment of impairment for manufacturer franchise rights and certain real estate properties on a non-recurring basis.

Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Asset and liability measurements utilizing Level 3 inputs include those used in estimating the fair value of certain non-financial assets and non-financial liabilities in purchase acquisitions.

The availability of observable inputs can vary and is affected by a wide variety of factors. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment required to determine fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

Fair value is a market-based exit price measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, our assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. We use inputs that are current as of the measurement date, including during periods of significant market fluctuations.

Financial instruments consist primarily of cash and cash equivalents, contracts-in-transit, accounts receivable, cash surrender value of corporate-owned life insurance policies, accounts payable, floor plan notes payable, subordinated long-term debt, mortgage notes payable, and interest rate swap instruments. The carrying values of our financial instruments, with the exception of subordinated long-term debt and mortgage notes payable, approximate fair value due to (i) their short-term nature, (ii) recently completed market transactions, or (iii) existence of variable interest rates, which approximate market rates. The fair value of our subordinated long-term debt is based on reported market prices in an inactive market which reflects Level 2 inputs. We estimate the fair value of our mortgage notes payable using a present value technique based on current market interest rates for similar types of financial instruments which reflect Level 2 inputs.

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A summary of the carrying values and fair values of our 6.0% Notes and our mortgage notes payable is as follows:



	As of
	September 30, 2016		December 31, 2015
	(In millions)
Carrying Value:
6.0% Senior Subordinated Notes due 2024	$	607.8	$	608.4
Mortgage notes payable (a)	331.8		356.2
Total carrying value	$	939.6	$	964.6

Fair Value:
6.0% Senior Subordinated Notes due 2024	$	618.0	$	618.0
Mortgage notes payable (a)	351.5		362.6
Total fair value	$	969.5	$	980.6

_____________________________


(a)	Mortgage notes payable as of September 30, 2016 does not include mortgages with an aggregate carrying value of $13.4 million classified as Liabilities Associated with Assets Held for Sale.

Interest Rate Swap Agreements

In June 2015, we entered into an interest rate swap agreement with a notional principal amount of $100.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR rate, through maturity in February 2025. The notional value of this swap was $96.9 million as of September 30, 2016 and is reducing over its remaining term to $53.1 million at maturity.

In November 2013, we entered into an interest rate swap agreement with a notional principal amount of $75.0 million. This swap was designed to provide a hedge against changes in variable rate cash flows regarding fluctuations in the one month LIBOR rate, through maturity in September 2023. The notional value of this swap as of September 30, 2016 was $64.9 million and the notional value will reduce over its remaining term to $38.7 million at maturity.

The fair value of cash flow swaps is calculated as the present value of expected future cash flows, determined on the basis of forward interest rates and present value factors. Fair value estimates reflect a credit adjustment to the discount rate applied to all expected cash flows under the swaps. Other than this input, all other inputs used in the valuation of these swaps are designated to be Level 2 fair values. The fair value liabilities related to the swaps as of September 30, 2016 and December 31, 2015, were $10.7 million and $6.0 million, respectively. The following table provides information regarding the fair value of our interest rate swap agreements and the impact on the Condensed Consolidated Balance Sheets:



	As of
	September 30, 2016		December 31, 2015
	(In millions)
Accounts payable and accrued liabilities	$	2.7	$	2.8
Other long-term liabilities	8.0		3.2
Total fair value	$	10.7	$	6.0

Both of our interest rate swaps qualify for cash flow hedge accounting treatment. During the three and nine months ended September 30, 2016 and 2015, neither of our cash flow swaps contained any ineffectiveness, nor was any ineffectiveness recognized in earnings. Information about the effect of our interest rate swap agreements on the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, is as follows (in millions):



For the Three Months Ended September 30,	Results Recognized in Accumulated Other Comprehensive Loss (Effective Portion)			Location of Results Reclassified from Accumulated Other Comprehensive Loss to Earnings	Amount Reclassified from Accumulated Other Comprehensive Loss to Earnings–Active Swaps
2016	$	0.2		Swap interest expense	$	(0.8	)
2015	$	(5.0	)	Swap interest expense	$	(1.0	)

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For the Nine Months Ended September 30,	Results Recognized in Accumulated Other Comprehensive Loss (Effective Portion)			Location of Results Reclassified from Accumulated Other Comprehensive Loss to Earnings	Amount Reclassified from Accumulated Other Comprehensive Loss to Earnings–Active Swaps
2016	$	(7.2	)	Swap interest expense	$	(2.4	)
2015	$	(7.0	)	Swap interest expense	$	(2.0	)

On the basis of yield curve conditions as of September 30, 2016 and including assumptions about future changes in fair value, we expect the amount to be reclassified out of Accumulated Other Comprehensive Loss into earnings within the next 12 months will be losses of $2.7 million.

9. SUPPLEMENTAL CASH FLOW INFORMATION

During the nine months ended September 30, 2016 and 2015, we made interest payments, including amounts capitalized, totaling $46.5 million and $38.4 million, respectively. Included in these interest payments are $14.3 million and $12.2 million, of floor plan interest payments during the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016 and 2015, we made income tax payments, net of refunds received, totaling $65.1 million and $52.4 million, respectively.

During the nine months ended September 30, 2016 and 2015, we transferred $86.6 million and $83.8 million, respectively, of loaner vehicles from Other Current Assets to Inventory on our Condensed Consolidated Balance Sheets.

10. COMMITMENTS AND CONTINGENCIES

Our dealerships are party to dealer and framework agreements with applicable vehicle manufacturers. In accordance with these agreements, each dealership has certain rights and is subject to restrictions typical in the industry. The ability of these manufacturers to influence the operations of the dealerships or the loss of any of these agreements could have a materially negative impact on our operating results.

In some instances, manufacturers may have the right, and may direct us, to implement costly capital improvements to dealerships as a condition to entering into, renewing, or extending franchise agreements with them. Manufacturers also typically require that their franchises meet specific standards of appearance. These factors, either alone or in combination, could cause us to use our financial resources on capital projects that we might not have planned for or otherwise determined to undertake.

From time to time, we and our dealerships are or may become involved in various claims relating to, and arising out of, our business and our operations. These claims may involve, but not be limited to, financial and other audits by vehicle manufacturers or lenders and certain federal, state, and local government authorities, which have historically related primarily to (i) incentive and warranty payments received from vehicle manufacturers, or allegations of violations of manufacturer agreements or policies, (ii) compliance with lender rules and covenants, and (iii) payments made to government authorities relating to federal, state, and local taxes, as well as compliance with other government regulations. Claims may also arise through litigation, government proceedings, and other dispute resolution processes. Such claims, including class actions, could relate to, but may not be limited to, the practice of charging administrative fees and other fees and commissions, employment-related matters, truth-in-lending and other dealer assisted financing obligations, contractual disputes, actions brought by governmental authorities, and other matters. We evaluate pending and threatened claims and establish loss contingency reserves based upon outcomes we currently believe to be probable and reasonably estimable.

We believe we have adequately accrued for the potential impact of loss contingencies that are probable and reasonably estimable. Based on our review of the various types of claims currently known to us, there is no indication of material reasonably possible losses in excess of amounts accrued in the aggregate. We currently do not anticipate that any known claim will materially adversely affect our financial condition, liquidity, or results of operations. However, the outcome of any matter cannot be predicted with certainty, and an unfavorable resolution of one or more matters presently known or arising in the future could have a material adverse effect on our financial condition, liquidity, or results of operations.

A significant portion of our business involves the sale of vehicles, parts, or vehicles composed of parts that are manufactured outside the United States. As a result, our operations are subject to customary risks of importing merchandise, including fluctuations in the relative values of currencies, import duties, exchange controls, trade restrictions, work stoppages, and general political and socio-economic conditions in foreign countries. The United States or the countries from which our products are imported may, from time to time, impose new quotas, duties, tariffs, or other restrictions; or adjust

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presently prevailing quotas, duties, or tariffs, which may affect our operations, and our ability to purchase imported vehicles and/or parts at reasonable prices.

Substantially all of our facilities are subject to federal, state and local provisions regarding the discharge of materials into the environment. Compliance with these provisions has not had, nor do we expect such compliance to have, any material effect upon our capital expenditures, net earnings, financial condition, liquidity or competitive position. We believe that our current practices and procedures for the control and disposition of such materials comply with applicable federal, state, and local requirements. No assurances can be provided, however, that future laws or regulations, or changes in existing laws or regulations, would not require us to expend significant resources in order to comply therewith.

We had $9.4 million of letters of credit outstanding as of September 30, 2016, which are required by certain of our insurance providers. In addition, as of September 30, 2016, we maintained a $5.0 million surety bond line in the ordinary course of our business. Our letters of credit and surety bond line are considered to be off balance sheet arrangements.

Our other material commitments include (i) floor plan notes payable, (ii) operating leases, (iii) long-term debt and (iv) interest on long-term debt, as described elsewhere herein.

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

Forward-Looking Information

Certain of the discussions and information included or incorporated by reference in this report may constitute "forward-looking statements" within the meaning of the federal securities laws. Forward-looking statements are statements that are not historical in nature and may include statements relating to our goals, plans and projections regarding industry and general economic trends, our expected financial position, results of operations or market position and our business strategy. Such statements can generally be identified by words such as "may," "target," "could," "would," "will," "should," "believe," "expect," "anticipate," "plan," "intend," "foresee," and other similar words or phrases. Forward-looking statements may also relate to our expectations and assumptions with respect to, among other things:


•	our ability to execute our business strategy;


•	the seasonally adjusted annual rate ("SAAR") of new vehicle sales in the U.S.;


•	our ability to further improve our operating cash flows, and the availability of capital and liquidity;


•	our estimated future capital expenditures;


•	general economic conditions and its impact on our revenues and expenses;


•	our parts and service revenue due to, among other things, improvements in manufacturing quality;


•	the variable nature of significant components of our cost structure;


•	our ability to limit our exposure to regional economic downturns due to our geographic diversity and brand mix;


•	manufacturers' willingness to continue to use incentive programs to drive demand for their product offerings;


•	our ability to leverage our common systems, infrastructure and processes in a cost-efficient manner;


•	our capital allocation strategy, including as it relates to acquisitions and divestitures, stock repurchases, dividends and capital expenditures;


•	the continued availability of financing, including floor plan financing for inventory;


•	the ability of consumers to secure vehicle financing at favorable rates;


•	the growth of import and luxury brands over the long-term;


•	our ability to mitigate any future negative trends in new vehicle sales; and


•	our ability to increase our cash flow and net income as a result of the foregoing and other factors.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual future results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to:

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•	changes in general economic and business conditions, including changes in employment levels, consumer demand, preferences and confidence levels, the availability and cost of credit, fuel prices, levels of discretionary personal income and interest rates;


•	our ability to execute our balanced automotive retailing and service business strategy;


•	adverse conditions affecting the vehicle manufactures whose brands we sell, and their ability to design, manufacture, deliver, and market their vehicles successfully;


•	changes in the mix, and total number, of vehicles we are able to sell;


•	our outstanding indebtedness and our continued ability to comply with applicable covenants in our various financing and lease agreements, or to obtain waivers of these covenants as necessary;


•	high levels of competition in our industry, which may create pricing and margin pressures on our products and services;


•	our relationships with manufacturers of the vehicles we sell and our ability to renew, and enter into new framework and dealer agreements with vehicle manufacturers whose brands we sell, on terms acceptable to us;


•	the availability of manufacturer incentive programs and our ability to earn these incentives;


•	failure of our management information systems or any security breaches;


•	changes in laws and regulations governing the operation of automobile franchises, including trade restrictions, consumer protections, accounting standards, taxation requirements, and environmental laws;


•	adverse results from litigation or other similar proceedings involving us;


•	our ability to generate sufficient cash flows, maintain our liquidity and obtain any necessary additional funds for working capital, capital expenditures, acquisitions, stock repurchases and/or dividends, debt maturity payments, and other corporate purposes;


•	any disruptions in the financial markets, which may impact our ability to access capital;


•	our relationships with, and the financial stability of, our lenders and lessors;


•	significant disruptions in the production and delivery of vehicles and parts for any reason, including natural disasters, product recalls, work stoppages, significant property loss or other occurrences that are outside of our control;


•	our ability to execute our initiatives and other strategies; and


•	our ability to leverage gains from our dealership portfolio.

Many of these factors are beyond our ability to control or predict, and their ultimate impact could be material. Moreover, the factors set forth under "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and other cautionary statements made in this report should be read and considered as forward-looking statements subject to such uncertainties. Forward-looking statements speak only as of the date of they are made, and we expressly disclaim any obligation to update any forward-looking statement contained herein.

OVERVIEW

We are one of the largest automotive retailers in the United States. As of September 30, 2016 we owned and operated 98 new vehicle franchises (81 dealership locations), representing 28 brands of automobiles and 25 collision centers in 17 metropolitan markets within nine states. Our stores offer an extensive range of automotive products and services, including new and used vehicles; parts and service, which includes repair and maintenance services, replacement parts, and collision repair services; and finance and insurance products. As of September 30, 2016, our new vehicle revenue brand mix consisted of 45% imports, 34% luxury, and 21% domestic brands.

Our retail network is made up of dealerships operating primarily under the following locally-branded dealership groups:

• Coggin dealerships operating primarily in Jacksonville, Fort Pierce and Orlando, Florida;

• Courtesy dealerships operating in Tampa, Florida;

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• Crown dealerships operating in North Carolina, South Carolina and Virginia;

• Gray-Daniels dealerships operating in the Jackson, Mississippi area;

• McDavid dealerships operating in Austin, Dallas and Houston, Texas;

• Nalley dealerships operating in metropolitan Atlanta, Georgia;

• North Point dealerships operating in the Little Rock, Arkansas area; and

• Plaza dealerships operating in metropolitan St. Louis, Missouri.

In addition, as of September 30, 2016 we owned and operated four stand-alone used vehicle stores under the "Q auto" brand name in Florida.

Our revenues are derived primarily from: (i) the sale of new vehicles; (ii) the sale of used vehicles to individual retail customers ("used retail") and to other dealers at auction ("wholesale") (the terms "used retail" and "wholesale" collectively referred to as "used"); (iii) repair and maintenance services, including collision repair, the sale of automotive replacement parts, and the reconditioning of used vehicles (collectively referred to as "parts and service"); and (iv) the arrangement of third-party vehicle financing and the sale of a number of vehicle protection products (collectively referred to as "F&I"). We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle sold, our parts and service operations based on aggregate gross profit, and F&I based on dealership generated F&I gross profit per vehicle sold.

We assess the organic growth of our revenue and gross profit on a same store basis. We believe that our assessment on a same store basis represents an important indicator of comparative financial performance and provides relevant information to assess our performance at our existing locations. Same store amounts consist of information from dealerships for identical months in each comparative period, commencing with the first month we owned the dealership. Additionally, amounts related to divested dealerships are excluded from each comparative period.

Our continued organic growth is dependent upon the execution of our balanced automotive retailing and service business strategy, the continued strength of our brand mix, and the production and allocation of desirable vehicles from the automobile manufacturers whose brands we sell. Our vehicle sales have historically fluctuated with product availability as well as local and national economic conditions, including consumer confidence, availability of consumer credit, fuel prices, and employment levels. Additionally, our ability to sell certain new and used vehicles can be negatively impacted by a number of factors, some of which are outside of our control and may include manufacturer imposed stop-sales or open safety recalls, primarily due to, but not limited to, vehicle safety concerns or a vehicle's failure to meet environmental related requirements. We believe that the impact on our business of any future negative trends in new vehicle sales would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure, and (iii) our brand mix. We believe that our diversified new vehicle revenue brand mix is well positioned for growth over the long-term.

U.S. new vehicle SAAR during the nine months ended September 30, 2016 was 17.3 million compared to 17.2 million during the nine months ended September 30, 2015. The automotive retail business continues to benefit from the availability of credit to consumers and relatively low overall unemployment levels, fuel prices, and interest rates. Demand for new vehicles is generally highest during the second, third, and fourth quarters of each year and, accordingly, we expect our revenues and operating results to generally be higher during these periods. We typically experience higher sales of luxury vehicles in the fourth quarter, which have higher average selling prices and gross profit per vehicle retailed. Revenues and operating results may be impacted significantly from quarter-to-quarter by changing economic conditions, vehicle manufacturer incentive programs, or adverse weather events.

Our gross profit margin varies with our revenue mix. The sale of new vehicles generally results in lower gross profit margin than used vehicle sales, sales of parts and service, and sales of F&I products. As a result, when used vehicle, parts and service, and F&I revenue increase as a percentage of total revenue, we expect our overall gross profit margin to increase.

Selling, general, and administrative ("SG&A") expenses consist primarily of fixed and incentive-based compensation, advertising, rent, insurance, utilities, and other customary operating expenses. A significant portion of our cost structure is variable (such as sales commissions), or controllable (such as advertising), which we believe better allows us to adapt to changes in the retail environment over the long-term. We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit, advertising expense on a per vehicle retailed ("PVR") basis, and all other SG&A expenses in the aggregate as a percentage of total gross profit.

We had total available liquidity of $367.5 million as of September 30, 2016, which consisted of cash and cash equivalents of $3.7 million, $36.1 million of funds in our floor plan offset accounts, and borrowing availability of $238.0 million and $89.7

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million under our revolving credit facility and our used vehicle floor plan facility, respectively. For further discussion of our liquidity, please refer to "Liquidity and Capital Resources" below.

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015



	For the Three Months Ended September 30,					Increase (Decrease)			% Change
	2016		2015			Increase (Decrease)			% Change
	(Dollars in millions, except per share data)
REVENUE:
New vehicle	$	940.9	$	964.0		$	(23.1	)	(2	)%
Used vehicle	476.4		493.0			(16.6		)	(3	)%
Parts and service	200.4		190.6			9.8			5	%
Finance and insurance, net	65.4		68.8			(3.4		)	(5	)%
TOTAL REVENUE	1,683.1		1,716.4			(33.3		)	(2	)%
GROSS PROFIT:
New vehicle	47.5		52.3			(4.8		)	(9	)%
Used vehicle	29.8		33.4			(3.6		)	(11	)%
Parts and service	123.0		118.2			4.8			4	%
Finance and insurance, net	65.4		68.8			(3.4		)	(5	)%
TOTAL GROSS PROFIT	265.7		272.7			(7.0		)	(3	)%
OPERATING EXPENSES (INCOME):
Selling, general, and administrative	185.7		188.8			(3.1		)	(2	)%
Depreciation and amortization	7.8		7.5			0.3			4	%
Other operating expenses (income), net	1.5		(0.2		)	1.7			NM
INCOME FROM OPERATIONS	70.7		76.6			(5.9		)	(8	)%
OTHER EXPENSES (INCOME):
Floor plan interest expense	5.0		4.1			0.9			22	%
Other interest expense, net	13.2		10.7			2.5			23	%
Swap interest expense	0.8		1.0			(0.2		)	(20	)%
Gain on divestitures	—		(21.4		)	21.4			100	%
Total other expenses (income), net	19.0		(5.6		)	24.6			NM
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	51.7		82.2			(30.5		)	(37	)%
Income tax expense	19.3		31.0			(11.7		)	(38	)%
INCOME FROM CONTINUING OPERATIONS	32.4		51.2			(18.8		)	(37	)%
Discontinued operations, net of tax	—		(0.1		)	0.1			100	%
NET INCOME	$	32.4	$	51.1		$	(18.7	)	(37	)%
Income from continuing operations per common share—Diluted	$	1.47	$	1.96		$	(0.49	)	(25	)%
Net income per common share—Diluted	$	1.47	$	1.96		$	(0.49	)	(25	)%

______________________________

NM—Not Meaningful

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	For the Three Months Ended September 30,
	2016		2015
REVENUE MIX PERCENTAGES:
New vehicle	55.9	%	56.2	%
Used vehicle retail	25.1	%	25.5	%
Used vehicle wholesale	3.2	%	3.2	%
Parts and service	11.9	%	11.1	%
Finance and insurance, net	3.9	%	4.0	%
Total revenue	100.0	%	100.0	%
GROSS PROFIT MIX PERCENTAGES:
New vehicle	17.9	%	19.2	%
Used vehicle retail	12.0	%	13.0	%
Used vehicle wholesale	(0.8	)%	(0.7	)%
Parts and service	46.3	%	43.3	%
Finance and insurance, net	24.6	%	25.2	%
Total gross profit	100.0	%	100.0	%
GROSS PROFIT MARGIN	15.8	%	15.9	%
SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT	69.9	%	69.2	%

Total revenue during the third quarter of 2016 decreased by $33.3 million (2%) compared to the third quarter of 2015, due to a $23.1 million (2%) decrease in new vehicle revenue, a $16.6 million (3%) decrease in used vehicle revenue, and a $3.4 million (5%) decrease in F&I revenue, partially offset by a $9.8 million (5%) increase in parts and service revenue. During the three months ended September 30, 2016, gross profit decreased by $7.0 million (3%) driven by a $4.8 million (9%) decrease in new vehicle gross profit, a $3.6 million (11%) decrease in used vehicle gross profit, and a $3.4 million (5%) decrease in F&I gross profit, partially offset by a $4.8 million (4%) increase in parts and service gross profit. Our total gross profit margin decreased by 10 basis points to 15.8% for the third quarter of 2016.

Income from operations during the third quarter of 2016 decreased by $5.9 million (8%) compared to the third quarter of 2015, primarily due to the $7.0 million (3%) decrease in gross profit and a $1.7 million increase in other operating expense, partially offset by the $3.1 million (2%) decrease in SG&A expense. Total other expenses increased by $24.6 million, primarily due to the impact of a $21.4 million gain on divestiture recorded during the third quarter of 2015 and a $2.5 million increase in interest expense during the third quarter of 2016. As a result, income from continuing operations before income taxes decreased $30.5 million (37%) which resulted in a $11.7 million (38%) decrease in income tax expense. Net income decreased by $18.7 million (37%) during the third quarter of 2016 as compared to the third quarter of 2015.

We assess the organic growth of our revenue and gross profit on a same store basis. We believe that our assessment on a same store basis represents an important indicator of comparative financial performance and provides relevant information to assess our performance at our existing locations. As such, for the following discussion, same store amounts consist of information from dealerships for identical months in each comparative period, commencing with the first month we owned the dealership. Additionally, amounts related to divested dealerships are excluded from each comparative period.

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New Vehicle—



	For the Three Months Ended September 30,				Increase (Decrease)			% Change
	2016		2015		Increase (Decrease)			% Change
	(Dollars in millions, except for per vehicle data)
As Reported:
Revenue:
Luxury	$	318.2	$	322.3	$	(4.1	)	(1	)%
Import	427.2		442.5		(15.3		)	(3	)%
Domestic	195.5		199.2		(3.7		)	(2	)%
Total new vehicle revenue	$	940.9	$	964.0	$	(23.1	)	(2	)%
Gross profit:
Luxury	$	20.8	$	20.4	$	0.4		2	%
Import	18.3		20.5		(2.2		)	(11	)%
Domestic	8.4		11.4		(3.0		)	(26	)%
Total new vehicle gross profit	$	47.5	$	52.3	$	(4.8	)	(9	)%
New vehicle units:
Luxury	6,061		6,381		(320		)	(5	)%
Import	15,522		16,501		(979		)	(6	)%
Domestic	5,232		5,482		(250		)	(5	)%
Total new vehicle units	26,815		28,364		(1,549		)	(5	)%

Same Store:
Revenue:
Luxury	$	318.2	$	321.8	$	(3.6	)	(1	)%
Import	423.2		417.6		5.6			1	%
Domestic	195.5		199.2		(3.7		)	(2	)%
Total new vehicle revenue	$	936.9	$	938.6	$	(1.7	)	—	%
Gross profit:
Luxury	$	20.8	$	20.4	$	0.4		2	%
Import	18.2		19.4		(1.2		)	(6	)%
Domestic	8.4		11.4		(3.0		)	(26	)%
Total new vehicle gross profit	$	47.4	$	51.2	$	(3.8	)	(7	)%
New vehicle units
Luxury	6,061		6,371		(310		)	(5	)%
Import	15,363		15,563		(200		)	(1	)%
Domestic	5,232		5,482		(250		)	(5	)%
Total new vehicle units	26,656		27,416		(760		)	(3	)%

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New Vehicle Metrics—



	For the Three Months Ended September 30,						Increase (Decrease)			% Change
	2016			2015			Increase (Decrease)			% Change
As Reported:
Revenue per new vehicle sold	$	35,089		$	33,987		$	1,102		3	%
Gross profit per new vehicle sold	$	1,771		$	1,844		$	(73	)	(4	)%
New vehicle gross margin	5.0		%	5.4		%	(0.4		)%

Luxury:
Gross profit per new vehicle sold	$	3,432		$	3,197		$	235		7	%
New vehicle gross margin	6.5		%	6.3		%	0.2		%
Import:
Gross profit per new vehicle sold	$	1,179		$	1,242		$	(63	)	(5	)%
New vehicle gross margin	4.3		%	4.6		%	(0.3		)%
Domestic:
Gross profit per new vehicle sold	$	1,606		$	2,080		$	(474	)	(23	)%
New vehicle gross margin	4.3		%	5.7		%	(1.4		)%

Same Store:
Revenue per new vehicle sold	$	35,148		$	34,235		$	913		3	%
Gross profit per new vehicle sold	$	1,778		$	1,868		$	(90	)	(5	)%
New vehicle gross margin	5.1		%	5.5		%	(0.4		)%

Luxury:
Gross profit per new vehicle sold	$	3,432		$	3,202		$	230		7	%
New vehicle gross margin	6.5		%	6.3		%	0.2		%
Import:
Gross profit per new vehicle sold	$	1,185		$	1,247		$	(62	)	(5	)%
New vehicle gross margin	4.3		%	4.6		%	(0.3		)%
Domestic:
Gross profit per new vehicle sold	$	1,606		$	2,080		$	(474	)	(23	)%
New vehicle gross margin	4.3		%	5.7		%	(1.4		)%

New vehicle revenue decreased by $23.1 million (2%) primarily as a result of a 5% decrease in new vehicle units sold, partially offset by a 3% increase in revenue per new vehicle sold. Same store new vehicle revenue decreased by $1.7 million primarily as a result of a 3% decrease in new vehicle units sold, partially offset by a 3% increase in revenue per new vehicle sold.

U.S. new vehicle SAAR decreased by 2%, from 17.8 million for the three months ended September 30, 2015 to 17.5 million for the three months ended September 30, 2016. Same store unit volumes at our luxury and domestic dealerships were each down 5%.

Same store new vehicle gross profit for the three months ended September 30, 2016 decreased by $3.8 million (7%), due to a 3% decrease in unit volumes and a 5% decrease in gross profit per vehicle sold. Gross profit margin for the three months ended September 30, 2016 decreased by 40 basis points to 5.1%. The decrease in our gross profit margin was primarily attributable to aggressive sales targets and a reduction in certain manufacturers' incentive programs primarily at our domestic brand dealerships.

We believe that our new vehicle inventory continues to be well-aligned with current consumer demand, with approximately 72 days of supply in our inventory as of September 30, 2016.

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Used Vehicle—



	For the Three Months Ended September 30,						Increase (Decrease)			% Change
	2016			2015			Increase (Decrease)			% Change
	(Dollars in millions, except for per vehicle data)
As Reported:
Revenue:
Used vehicle retail revenue	$	423.3		$	438.8		$	(15.5	)	(4	)%
Used vehicle wholesale revenue	53.1			54.2			(1.1		)	(2	)%
Used vehicle revenue	$	476.4		$	493.0		$	(16.6	)	(3	)%
Gross profit:
Used vehicle retail gross profit	$	31.9		$	35.2		$	(3.3	)	(9	)%
Used vehicle wholesale gross profit	(2.1		)	(1.8		)	(0.3		)	(17	)%
Used vehicle gross profit	$	29.8		$	33.4		$	(3.6	)	(11	)%
Used vehicle retail units:
Used vehicle retail units	20,030			21,306			(1,276		)	(6	)%

Same Store:
Revenue:
Used vehicle retail revenue	$	419.6		$	422.0		$	(2.4	)	(1	)%
Used vehicle wholesale revenue	52.7			52.3			0.4			1	%
Used vehicle revenue	$	472.3		$	474.3		$	(2.0	)	—	%
Gross profit:
Used vehicle retail gross profit	$	31.9		$	34.0		$	(2.1	)	(6	)%
Used vehicle wholesale gross profit	(2.0		)	(1.6		)	(0.4		)	(25	)%
Used vehicle gross profit	$	29.9		$	32.4		$	(2.5	)	(8	)%
Used vehicle retail units:
Used vehicle retail units	19,774			20,294			(520		)	(3	)%

Used Vehicle Metrics—



	For the Three Months Ended September 30,						Increase (Decrease)			% Change
	2016			2015			Increase (Decrease)			% Change
As Reported:
Revenue per used vehicle retailed	$	21,133		$	20,595		$	538		3	%
Gross profit per used vehicle retailed	$	1,593		$	1,652		$	(59	)	(4	)%
Used vehicle retail gross margin	7.5		%	8.0		%	(0.5		)%

Same Store:
Revenue per used vehicle retailed	$	21,220		$	20,794		$	426		2	%
Gross profit per used vehicle retailed	$	1,613		$	1,675		$	(62	)	(4	)%
Used vehicle retail gross margin	7.6		%	8.1		%	(0.5		)%

Used vehicle revenue decreased by $16.6 million (3%) as a result of a 6% decrease in used vehicle retail units sold, partially offset by a 3% increase in revenue per used vehicle retailed. Same store used vehicle revenue decreased by $2.0 million due to a 3% decrease in used vehicle retail units sold, partially offset by a 2% increase in revenue per used vehicle retailed.

For the three months ended September 30, 2016 same store used vehicle retail gross margin decreased 50 basis points to 7.6% as a result of the 4% decrease in used vehicle gross profit per vehicle retailed and the 2% increase in revenue per used vehicle retailed.

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Our supply of used vehicle inventory was negatively impacted by manufacturer stop-sale programs and reached 40 days supply as of September 30, 2016, which is above our target range of 30 to 35 days.

Parts and Service—



	For the Three Months Ended September 30,						Increase (Decrease)			% Change
	2016			2015			Increase (Decrease)			% Change
	(Dollars in millions)
As Reported:
Parts and service revenue	$	200.4		$	190.6		$	9.8		5	%
Parts and service gross profit:
Customer pay	67.0			63.5			3.5			6	%
Warranty	19.9			18.5			1.4			8	%
Wholesale parts	5.1			5.3			(0.2		)	(4	)%
Parts and service gross profit, excluding reconditioning and preparation	$	92.0		$	87.3		$	4.7		5	%
Parts and service gross margin, excluding reconditioning and preparation	45.9		%	45.8		%	0.1		%
Reconditioning and preparation	$	31.0		$	30.9		$	0.1		—	%
Total parts and service gross profit	$	123.0		$	118.2		$	4.8		4	%
Total parts and service gross margin	61.4		%	62.0		%	(0.6		)%

Same Store:
Parts and service revenue	$	199.2		$	185.2		$	14.0		8	%
Parts and service gross profit:
Customer pay	66.7			62.3			4.4			7	%
Warranty	19.8			17.8			2.0			11	%
Wholesale parts	5.0			5.0			—			—	%
Parts and service gross profit, excluding reconditioning and preparation	$	91.5		$	85.1		$	6.4		8	%
Parts and service gross margin, excluding reconditioning and preparation	45.9		%	46.0		%	(0.1		)%
Reconditioning and preparation	$	30.7		$	29.6		$	1.1		4	%
Total parts and service gross profit	$	122.2		$	114.7		$	7.5		7	%
Total parts and service gross margin	61.3		%	61.9		%	(0.6		)%

The $9.8 million (5%) increase in parts and service revenue was primarily the result of increases of $7.0 million (5%) in customer pay revenue and $3.7 million (11%) in warranty revenue. Same store parts and service revenue increased by $14.0 million (8%) to $199.2 million during the three months ended September 30, 2016 from $185.2 million during the three months ended September 30, 2015. The increase in same store parts and service revenue was primarily due to increases of $9.1 million (7%) in customer pay revenue and $4.7 million (14%) in warranty revenue. On a same store basis our parts and service gross margin decreased by 60 basis points primarily due to a shift in parts and service revenue towards customer pay and warranty.

Parts and service gross profit, excluding reconditioning and preparation, increased by $4.7 million (5%) to $92.0 million and same store gross profit, excluding reconditioning and preparation, increased by $6.4 million (8%) to $91.5 million. The increase in same store gross profit is primarily due to the increase in customer pay gross profit, which has benefited from our strategic focus to improve customer retention and the recent trend of increasing new vehicle sales over the past few years.

We continue to focus on increasing our parts and service revenue, specifically our customer pay business, over the long-term by upgrading equipment, improving customer retention and customer satisfaction, and capitalizing on our dealer training programs.

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Finance and Insurance, net—



	For the Three Months Ended September 30,				Increase (Decrease)			% Change
	2016		2015		Increase (Decrease)			% Change
	(Dollars in millions, except for per vehicle data)
As Reported:
Finance and insurance, net	$	65.4	$	68.8	$	(3.4	)	(5	)%
Finance and insurance, net per vehicle sold	$	1,396	$	1,385	$	11		1	%

Same Store:
Finance and insurance, net	$	64.7	$	66.4	$	(1.7	)	(3	)%
Finance and insurance, net per vehicle sold	$	1,393	$	1,392	$	1		—	%

F&I revenue decreased by $3.4 million (5%) during the third quarter of 2016 as compared to the third quarter of 2015 and same store F&I revenue decreased by $1.7 million (3%) over the same period of time. We attribute the decreases in finance and insurance, net to lower retail vehicle sales.

Selling, General, and Administrative Expense—



	For the Three Months Ended September 30,								Increase (Decrease)			% of Gross Profit Increase (Decrease)
	2016		% of Gross Profit		2015		% of Gross Profit		Increase (Decrease)			% of Gross Profit Increase (Decrease)
	(Dollars in millions)
As Reported:
Personnel costs	$	86.4	32.5	%	$	86.1	31.6	%	$	0.3		0.9	%
Sales compensation	28.6		10.8	%	30.3		11.1	%	(1.7		)	(0.3	)%
Share-based compensation	3.0		1.1	%	2.4		0.9	%	0.6			0.2	%
Outside services	19.6		7.4	%	19.9		7.3