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Lithia Motors 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
lad20150630_10q.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 

FORM 10-Q

 


 (Mark One)

 

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

For the quarterly period ended June 30, 2015

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to      

 

Commission file number: 001-14733

 


 

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

Oregon

 

93-0572810

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer Identification No.)

     

150 N. Bartlett Street, Medford, Oregon

 

97501

(Address of principal executive offices)

 

(Zip Code)

 

Registrant's telephone number, including area code: 541-776-6401

 


 

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

 

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

 

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

 

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

 

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

 

Class A common stock without par value

 

23,735,715

Class B common stock without par value

 

2,562,231

(Class)

 

(Outstanding at July 31, 2015)

 

 

 

 

 
 

 

 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX 

 

 

Page

PART I - FINANCIAL INFORMATION    
     

Item 1.

Financial Statements

   
       
 

Consolidated Balance Sheets (Unaudited) – June 30, 2015 and December 31, 2014

  2
       
 

Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2015 and 2014

  3
       
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2015 and 2014

  4
       
 

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2015 and 2014

  5
       
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

  6
       

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  20
       

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  44
       

Item 4.

Controls and Procedures

  45
       

PART II - OTHER INFORMATION

   
       

Item 1A.

Risk Factors

  45
       

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  45
       

Item 6.

Exhibits

  46
       

Signatures

  47

 

 
1

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

   

June 30,

   

December 31,

 
   

2015

   

2014

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 23,394     $ 29,898  

Accounts receivable, net of allowance for doubtful accounts of $1,866 and $2,191

    287,808       295,379  

Inventories, net

    1,367,317       1,249,659  

Other current assets

    32,028       32,010  

Assets held for sale

    -       8,563  

Total Current Assets

    1,710,547       1,615,509  
                 

Property and equipment, net of accumulated depreciation of $128,528 and $117,679

    836,889       816,745  

Goodwill

    199,129       199,375  

Franchise value

    150,856       150,892  

Other non-current assets

    107,434       98,411  

Total Assets

  $ 3,004,855     $ 2,880,932  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Floor plan notes payable

  $ 45,464     $ 41,047  

Floor plan notes payable: non-trade

    1,169,717       1,137,632  

Current maturities of long-term debt

    37,963       31,912  

Trade payables

    78,885       70,853  

Accrued liabilities

    157,579       153,661  

Deferred income taxes

    3,494       2,603  

Liabilities related to assets held for sale

    -       4,892  

Total Current Liabilities

    1,493,102       1,442,600  
                 

Long-term debt, less current maturities

    599,402       609,066  

Deferred revenue

    59,893       54,403  

Deferred income taxes

    36,077       42,795  

Other long-term liabilities

    64,079       58,963  

Total Liabilities

    2,252,553       2,207,827  
                 

Stockholders' Equity:

               

Preferred stock - no par value; authorized 15,000 shares; none outstanding

    -       -  

Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,742 and 23,671

    268,748       276,058  

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 2,562 and 2,562

    319       319  

Additional paid-in capital

    33,584       29,775  

Accumulated other comprehensive loss

    (622 )     (926 )

Retained earnings

    450,273       367,879  

Total Stockholders' Equity

    752,302       673,105  

Total Liabilities and Stockholders' Equity

  $ 3,004,855     $ 2,880,932  

 

See accompanying notes to consolidated financial statements.

 

 
2

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues:

                               

New vehicle

  $ 1,149,512     $ 694,484     $ 2,157,328     $ 1,274,006  

Used vehicle retail

    488,801       310,475       951,732       612,368  

Used vehicle wholesale

    66,796       44,286       129,004       86,979  

Finance and insurance

    72,463       43,838       137,067       83,469  

Service, body and parts

    182,695       114,337       356,170       218,954  

Fleet and other

    36,680       14,382       54,824       24,132  

Total revenues

    1,996,947       1,221,802       3,786,125       2,299,908  

Cost of sales:

                               

New vehicle

    1,080,170       648,490       2,026,212       1,188,988  

Used vehicle retail

    426,108       266,408       829,597       527,505  

Used vehicle wholesale

    65,390       42,782       125,437       84,144  

Service, body and parts

    91,946       58,155       180,982       111,940  

Fleet and other

    35,684       13,667       52,873       22,970  

Total cost of sales

    1,699,298       1,029,502       3,215,101       1,935,547  

Gross profit

    297,649       192,300       571,024       364,361  

Asset impairments

    6,130       -       10,260       -  

Selling, general and administrative

    195,610       125,463       387,228       247,292  

Depreciation and amortization

    10,287       5,825       20,013       11,332  

Operating income

    85,622       61,012       153,523       105,737  

Floor plan interest expense

    (4,655 )     (3,215 )     (9,304 )     (6,199 )

Other interest expense

    (4,972 )     (1,869 )     (9,800 )     (3,843 )

Other (expense) income, net

    (356 )     1,146       (724 )     2,083  

Income from continuing operations before income taxes

    75,639       57,074       133,695       97,778  

Income tax provision

    (24,416 )     (21,904 )     (41,819 )     (37,914 )

Income from continuing operations, net of income tax

    51,223       35,170       91,876       59,864  

Income from discontinued operations, net of income tax

    -       3,139       -       3,179  

Net income

  $ 51,223     $ 38,309     $ 91,876     $ 63,043  
                                 

Basic income per share from continuing operations

  $ 1.95     $ 1.35     $ 3.49     $ 2.30  

Basic income per share from discontinued operations

    -       0.12       -       0.12  

Basic net income per share

  $ 1.95     $ 1.47     $ 3.49     $ 2.42  
                                 

Shares used in basic per share calculations

    26,332       26,119       26,310       26,047  
                                 

Diluted income per share from continuing operations

  $ 1.93     $ 1.34     $ 3.47     $ 2.27  

Diluted income per share from discontinued operations

    -       0.11       -       0.12  

Diluted net income per share

  $ 1.93     $ 1.45     $ 3.47     $ 2.39  
                                 

Shares used in diluted per share calculations

    26,496       26,331       26,509       26,326  

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Net income

  $ 51,223     $ 38,309     $ 91,876     $ 63,043  

Other comprehensive income, net of tax:

                               

Gain on cash flow hedges, net of tax expense of $94, $81, $181, and $174 respectively

    165       130       304       279  

Comprehensive income

  $ 51,388     $ 38,439     $ 92,180     $ 63,322  

 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2015

   

2014

 

Cash flows from operating activities:

               

Net income

  $ 91,876     $ 63,043  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Asset impairments

    10,260       -  

Depreciation and amortization

    20,013       11,332  

Stock-based compensation

    5,822       3,259  

Loss on disposal of other assets

    44       62  

Gain on disposal of franchise

    (5,919 )     (5,744 )

Deferred income taxes

    (1,145 )     2,840  

Excess tax benefit from share-based payment arrangements

    (4,865 )     (6,058 )

(Increase) decrease (net of acquisitions and dispositions):

               

Trade receivables, net

    7,570       (20,709 )

Inventories

    (122,660 )     (77,300 )

Other assets

    (3,815 )     (5,951 )

Increase (decrease) (net of acquisitions and dispositions):

               

Floor plan notes payable

    4,417       368  

Trade payables

    8,854       1,411  

Accrued liabilities

    7,717       17,594  

Other long-term liabilities and deferred revenue

    11,161       11,659  

Net cash provided by (used in) operating activities

    29,330       (4,194 )
                 

Cash flows from investing activities:

               

Capital expenditures

    (48,008 )     (35,230 )

Proceeds from sales of assets

    145       103  

Cash paid for other investments

    (15,222 )     (3,454 )

Cash paid for acquisitions, net of cash acquired

    (87 )     (79,482 )

Proceeds from sales of stores

    12,966       10,617  

Net cash used in investing activities

    (50,206 )     (107,446 )
                 

Cash flows from financing activities:

               

Borrowings on floor plan notes payable, net: non-trade

    35,685       112,910  

Borrowings on lines of credit

    557,394       578,000  

Repayments on lines of credit

    (602,818 )     (567,000 )

Principal payments on long-term debt, scheduled

    (7,324 )     (3,693 )

Principal payments on long-term debt and capital leases, other

    (9,189 )     -  

Proceeds from issuance of long-term debt

    59,425       5,392  

Proceeds from issuance of common stock

    2,589       2,253  

Repurchase of common stock

    (16,773 )     (10,206 )

Excess tax benefit from share-based payment arrangements

    4,865       6,058  

Dividends paid

    (9,482 )     (7,557 )

Net cash provided by financing activities

    14,372       116,157  
                 

(Decrease) increase in cash and cash equivalents

    (6,504 )     4,517  
                 

Cash and cash equivalents at beginning of period

    29,898       23,686  

Cash and cash equivalents at end of period

  $ 23,394     $ 28,203  
                 
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for interest

  $ 22,262     $ 10,218  

Cash paid during the period for income taxes, net

    28,699       23,444  
                 

Supplemental schedule of non-cash activities:

               

Debt issued in connection with acquisitions

  $ -     $ 3,161  

Floor plan debt paid in connection with store disposals

    4,400       3,311  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Interim Financial Statements

 

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of June 30, 2015 and for the three- and six-month periods ended June 30, 2015 and 2014. 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 2014 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2014 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2015. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2014 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.

 

These reclassifications had no impact on previously reported net income.

 

Note 2. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

 

   

June 30,
2015

   

December 31, 2014

 

Contracts in transit

  $ 159,225     $ 162,785  

Trade receivables

    33,637       37,194  

Vehicle receivables

    33,763       34,876  

Manufacturer receivables

    54,281       56,008  

Auto loan receivables

    31,375       25,424  

Other receivables

    4,551       4,554  
      316,832       320,841  

Less: Allowances

    (2,993 )     (3,130 )

Less: Long-term portion of accounts receivable, net

    (26,031 )     (22,332 )

Total accounts receivable, net

  $ 287,808     $ 295,379  

 

Accounts receivable classifications include the following:

 

 

Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received within five to ten days of selling a vehicle.

 

Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.

 

Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.

 

Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.

 

Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.

 

 
6

 

 

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

 

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

 

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

 

Note 3. Inventories

The components of inventories, net, consisted of the following (in thousands):

 

   

June 30,

2015

   

December 31, 2014

 

New vehicles

  $ 1,024,686     $ 958,876  

Used vehicles

    292,270       240,908  

Parts and accessories

    50,361       49,875  

Total inventories

  $ 1,367,317     $ 1,249,659  

 

Note 4. Goodwill and Franchise Value

The changes in the carrying amounts of goodwill are as follows (in thousands):

 

   

Domestic

   

Import

   

Luxury

   

Consolidated

 

Balance as of December 31, 2013(1)

  $ 22,548     $ 16,797     $ 10,166     $ 49,511  

Additions through acquisitions

    68,463       62,804       18,597       149,864  

Balance as of December 31, 2014(1)

    91,011       79,601       28,763       199,375  

Reduction related to divestiture

    -       (246 )     -       (246 )

Balance as of June 30, 2015(1)

  $ 91,011     $ 79,355     $ 28,763     $ 199,129  

 

(1)

Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.

 

The changes in the carrying amounts of franchise value are as follows (in thousands):

 

   

Franchise Value

 

Balance as of December 31, 2013

  $ 71,199  

Additions through acquisitions

    80,233  

Transfers to assets held for sale

    (540 )

Balance as of December 31, 2014

    150,892  

Reduction related to divestiture

    (36 )

Balance as of June 30, 2015

  $ 150,856  

 

 
7

 

 

Note 5. Stockholders’ Equity

 

Reclassification From Accumulated Other Comprehensive Loss

The reclassification from accumulated other comprehensive loss was as follows (in thousands):

 

   

Three Months Ended June 30,

 

Affected Line Item in the

Consolidated Statements

of Operations

   

2015

   

2014

   

Loss on cash flow hedges

  $ (108 )   $ (118 )

Floor plan interest expense

Taxes

    42       45  

Income tax provision

Loss on cash flow hedges, net

  $ (66 )   $ (73 )  

 

   

Six Months Ended June 30,

 

Affected Line Item in the

Consolidated Statements

of Operations

   

2015

   

2014

   

Loss on cash flow hedges

  $ (233 )   $ (252 )

Floor plan interest expense

Taxes

    90       96  

Income tax provision

Loss on cash flow hedges, net

  $ (143 )   $ (156 )  

 

See Note 8 for more details regarding our derivative contracts.

 

Repurchases of Class A Common Stock

In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock and, on July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. Through June 30, 2015, we have repurchased 1,598,723 shares under this program at an average price of $35.56 per share. Of this amount, 98,947 shares were repurchased during the first six months of 2015 at an average price of $100.29 per share for a total of $9.9 million. As of June 30, 2015, 1,401,277 shares remained available for repurchase pursuant to this program. The authority to repurchase does not have an expiration date.

 

In addition, during the first six months of 2015, we repurchased 77,438 shares at an average price of $88.45 per share, for a total of $6.9 million, related to tax withholdings associated with the vesting of restricted stock units (“RSUs”). The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.

 

Dividends

Dividends paid on our Class A and Class B common stock were as follows:

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Dividend amount per share

  $ 0.20     $ 0.16     $ 0.36     $ 0.29  

Total amount of dividend (in thousands)

    5,266       4,179       9,482       7,557  

 

See Note 14 for a discussion of a dividend related to our second quarter 2015 financial results.

 

 
8

 

 

Note 6. Deferred Compensation and Long-Term Incentive Plan

We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to accumulate assets for retirement on a tax-deferred basis. We may make discretionary contributions to the LTIP. Discretionary contributions vest over one to seven years depending on the employee’s age and position. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement. The following is a summary related to our LTIP (dollars in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Compensation expense

  $ 463     $ 377     $ 920     $ 1,077  

Discretionary contribution

  $ 153     $ -     $ 2,249     $ 2,100  

Guaranteed annual return

    5.25 %     5.25 %     5.25 %     5.25 %

 

As of June 30, 2015 and December 31, 2014, the balance due to participants was $16.0 million and $14.2 million, respectively, and was included as a component of accrued liabilities and other long-term liabilities in the Consolidated Balance Sheets.

 

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.

 

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

 

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

 

Inputs are collected from Bloomberg on the last market day of the period and used to determine the rate used to discount the future cash flows. The valuation of the interest rate swap also takes into consideration estimates of our own, as well as the counterparty’s, risk of non-performance under the contract. See Note 8 for more details regarding our derivative contracts.

 

We estimate the value of our equity-method investment that is recorded at fair value on a non-recurring basis based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets. Because these valuations contain unobservable inputs, we classified the measurement of fair value of our equity-method investment as Level 3.

 

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

 

 
9

 

 

There were no changes to our valuation techniques during the six-month period ended June 30, 2015.

 

Assets and Liabilities Measured at Fair Value

Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):

 

Fair Value at June 30, 2015

 

Level 1

   

Level 2

   

Level 3

 

Measured on a recurring basis:

                       

Derivative contracts, net

  $ -     $ (1,187 )   $ -  
                         

Measured on a non-recurring basis:

                       

Equity-method investment

  $ -     $ -     $ 34,009  

Long-lived assets held and used:

                       

Certain buildings and improvements

                    3,367  

 

Fair Value at December 31, 2014

 

Level 1

   

Level 2

   

Level 3

 

Measured on a recurring basis:

                       

Derivative contracts, net

  $ -     $ (1,750 )   $ -  
                         

Measured on a non-recurring basis:

                       

Equity-method investment

  $ -     $ -     $ 33,282  

 

See Note 8 for more details regarding our derivative contracts.

 

Based on operating losses recognized by the equity-method investment, we determined that an impairment of our investment had occurred. Accordingly, we performed a fair value calculation for this investment and determined that a $4.1 million and an $8.3 million impairment, respectively, was required to be recorded as asset impairments in our Consolidated Statements of Operations for the three and six months ended June 30, 2015. See Note 11.

 

Long-lived assets classified as held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. An estimate of future undiscounted net cash flows associated with the long-lived assets is used to determine if the carrying value of the assets is recoverable. An impairment charge is recorded if the carrying value of the asset is determined to not be recoverable and exceeds its fair value. Due to changes in the expected future use for certain properties, we evaluated the future undiscounted net cash flows for each property. It was determined the carrying value was not recoverable and exceeded the estimated fair value. As a result of this evaluation, we recorded $2.0 million of impairment charges associated with these properties in the second quarter of 2015.

 

Fair Value Disclosures for Financial Assets and Liabilities

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.

 

 
10

 

 

We have fixed rate debt and calculate the estimated fair value of our fixed rate debt using a discounted cash flow methodology. Using estimated current interest rates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt. As of June 30, 2015, this debt had maturity dates between November 2016 and October 2034. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

 

   

June 30,

2015

   

December 31,

2014

 

Carrying value

  $ 253,934     $ 257,780  

Fair value

    260,408       270,781  

 

Note 8. Derivative Financial Instrument

From time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.

 

As of June 30, 2015, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At June 30, 2015, the one-month LIBOR rate was 0.19% per annum, as reported in the Wall Street Journal.

 

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income immediately. See Note 7.

 

The estimated amount that we expect to reclassify from accumulated other comprehensive loss to net income within the next twelve months is $1.0 million at June 30, 2015.

 

The fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows (in thousands):

 

Balance Sheet Information

  Fair Value of Liability Derivatives  

Derivatives Designated as

Hedging Instruments

 

Location in Balance Sheet

 

June 30,

2015

 

Interest Rate Swap Contract

 

Accrued liabilities

  $ 1,187  
   

Other long-term liabilities

    -  
        $ 1,187  

 

Balance Sheet Information

 

Fair Value of Liability Derivatives

 

Derivatives Designated as

Hedging Instruments

 

Location in Balance Sheet

 

December 31,

2014

 

Interest Rate Swap Contract

 

Accrued liabilities

  $ 1,194  
   

Other long-term liabilities

    556  
        $ 1,750  

 

 
11

 

 

The effect of derivative instruments on our Consolidated Statements of Operations was as follows (in thousands):

 

Derivatives in Cash

Flow Hedging

Relationships

 

Amount of Gain

Recognized in

Accumulated OCI

(Effective Portion)

 

Location of Loss

Reclassified from

Accumulated OCI

into Income

(Effective Portion)

 

Amount of Loss

Reclassified from

Accumulated OCI

into Income

(Effective Portion)

 

Location of Loss

Recognized in Income

on Derivative

(Ineffective Portion

and Amount

Excluded from

Effectiveness Testing)

 

Amount of Loss

Recognized in Income

on Derivative

(Ineffective Portion

and Amount

Excluded from

Effectiveness Testing)

 
                             

Three Months Ended June 30, 2015

       

       

       

Interest Rate Swap Contract

  $ 151  

Floor plan

interest expense

  $ (108 )

Floor plan

interest expense

  $ (191 )
                             

Three Months Ended June 30, 2014

       

       

       

Interest Rate Swap Contract

  $ 93  

Floor plan

interest expense

  $ (118 )

Floor plan

interest expense

  $ (188 )
                             

Six Months Ended June 30, 2015

       

       

       

Interest Rate Swap Contract

  $ 252  

Floor plan

interest expense

  $ (233 )

Floor plan

interest expense

  $ (368 )
                             

Six Months Ended June 30, 2014

       

       

       

Interest Rate Swap Contract

  $ 201  

Floor plan

interest expense

  $ (252 )

Floor plan

interest expense

  $ (359 )

 

See also Note 8.

 

Note 9. Assets Held for Sale and Discontinued Operations

 

Assets Held for Sale

We classify an asset group as held for sale if we have ceased operations at that location or the store meets the criteria required by U.S. generally accepted accounting standards as follows:

 

 

our management team, possessing the necessary authority, commits to a plan to sell the store;

 

the store is available for immediate sale in its present condition;

 

an active program to locate buyers and other actions that are required to sell the store are initiated;

 

a market for the store exists and we believe its sale is likely within one year;

 

active marketing of the store commences at a price that is reasonable in relation to the estimated fair market value; and

 

our management team believes it is unlikely changes will be made to the plan or the plan to dispose of the store will be withdrawn.

 

As of December 31, 2014, we had two Import stores classified as held for sale. During the first six months of 2015, we completed the sale of both of these Import stores, and recognized a gain of $5.9 million as a component of selling, general and administrative on our Consolidated Statements of Operations for the six months ended June 30, 2015.

 

 
12

 

 

As of June 30, 2015, we no longer had any stores classified as held for sale. Assets held for sale included the following (in thousands):

 

   

June 30,

2015

   

December 31,

2014

 

Inventories

  $ -     $ 6,284  

Property, plant and equipment

    -       1,739  

Intangible assets

    -       540  
    $ -     $ 8,563  

 

Liabilities related to assets held for sale included the following (in thousands):

 

   

June 30,

2015

   

December 31,

2014

 

Floor plan notes payable

  $ -     $ 4,892  

 

Discontinued Operations and the Sales of Stores

In the third quarter of 2014, we early-adopted guidance that redefined discontinued operations. As a result, we determined that individual stores which met the criteria for held for sale after our adoption date would no longer qualify for classification as discontinued operations. We had previously reclassified a store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we did not expect to have any significant continuing involvement in the store’s operations after its disposal.

 

Certain financial information related to discontinued operations and sales of stores was as follows (in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenue

  $ -     $ 3,920     $ -     $ 12,569  
                                 

Pre-tax loss from discontinued operations

  $ -     $ (532 )   $ -     $ (467 )

Net gain on disposal activities

    -       5,744       -       5,744  
      -       5,212       -       5,277  

Income tax expense

    -       (2,073 )     -       (2,098 )

Income from discontinued operations, net of income tax expense

  $ -     $ 3,139     $ -     $ 3,179  
                                 

Goodwill and other intangible assets disposed of

  $ 157     $ 221     $ 246     $ 221  

Cash generated from disposal activities

    9,286       10,617       12,966       10,617  

Floor plan debt paid in connection with disposal activities

    2,192       3,311       4,400       3,311  

 

Note 10. Net Income Per Share of Class A and Class B Common Stock

We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding unvested common shares subject to repurchase or cancellation. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.

 

 
13

 

 

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 Restated Articles of Incorporation, the Class A and Class B common stock must share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.

 

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

 

Three Months Ended June 30,

 

2015

   

2014

 

Basic EPS from Continuing Operations

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Income from continuing operations applicable to common stockholders

  $ 46,239     $ 4,984     $ 31,720     $ 3,450  

Distributed income applicable to common stockholders

    (4,754 )     (512 )     (3,769 )     (410 )

Basic undistributed income from continuing operations applicable to common stockholders

  $ 41,485     $ 4,472     $ 27,951     $ 3,040  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share

    23,770       2,562       23,557       2,562  
                                 

Basic income per share from continuing operations applicable to common stockholders

  $ 1.95     $ 1.95     $ 1.35     $ 1.35  

Basic distributed income per share from continuing operations applicable to common stockholders

    (0.20 )     (0.20 )     (0.16 )     (0.16 )

Basic undistributed income per share from continuing operations applicable to common stockholders

  $ 1.75     $ 1.75     $ 1.19     $ 1.19  

 

 
14

 

 

Three Months Ended June 30,

 

2015

   

2014

 

Diluted EPS from Continuing Operations

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed income applicable to common stockholders

  $ 4,754     $ 512     $ 3,769     $ 410  

Reallocation of distributed income as a result of conversion of dilutive stock options

    3       (3 )     3       (3 )

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

    509       -       407       -  

Diluted distributed income applicable to common stockholders

  $ 5,266     $ 509     $ 4,179     $ 407  

Undistributed income from continuing operations applicable to common stockholders

  $ 41,485     $ 4,472     $ 27,951     $ 3,040  

Reallocation of undistributed income as a result of conversion of dilutive stock options

    28       (28 )     25       (25 )

Reallocation of undistributed income due to conversion of Class B to Class A

    4,444       -       3,015       -  

Diluted undistributed income from continuing operations applicable to common stockholders

  $ 45,957     $ 4,444     $ 30,991     $ 3,015  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations

    23,770       2,562       23,557       2,562  

Weighted average number of shares from stock options

    164       -       212       -  

Conversion of Class B to Class A common shares outstanding

    2,562       -       2,562       -  

Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations

    26,496       2,562       26,331       2,562  
                                 

Diluted income per share from continuing operations applicable to common stockholders

  $ 1.93     $ 1.93     $ 1.34     $ 1.34  

Diluted distributed income per share from continuing operations applicable to common stockholders

    (0.20 )     (0.20 )     (0.16 )     (0.16 )

Diluted undistributed income per share from continuing operations applicable to common stockholders

  $ 1.73     $ 1.73     $ 1.18     $ 1.18  

 

 
15

 

  

Three Months Ended June 30,

 

2015

   

2014

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Antidilutive Securities

                               

Shares issuable pursuant to stock options not included since they were antidilutive

    17