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Lithia Motors 10-Q 2016
lad20160531_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, 2016

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

 

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

or organization)    
     

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

 

23,401,321

Class B common stock without par value

 

1,762,231

(Class)

 

Outstanding at July 29, 2016

  

 
 

 

 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

 

 

PART I - FINANCIAL INFORMATION

Page

     

Item 1.

Financial Statements

2

   

 

 

Consolidated Balance Sheets (Unaudited) - June 30, 3016 and December 31, 2015

   

 

 

Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2016 and 2015

   

 

 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2016 and 2015

   

 

 

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2016 and 2015

   

 

 

Condensed Notes to Consolidated Financial Statements (Unaudited)

   

 

Item 2.

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

18 

   

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44 

   

 

Item 4.

Controls and Procedures

44 

   

 

PART II - OTHER INFORMATION

44 

   

 

Item 1A.

Risk Factors

44 

   

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44

   

 

Item 6.

Exhibits

45

     

Signatures

  46

 

 
1

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

   

June 30, 2016

   

December 31, 2015

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 15,044     $ 45,008  

Accounts receivable, net of allowance for doubtful accounts of $3,972 and $2,243

    305,293       308,462  

Inventories, net

    1,582,274       1,470,987  

Other current assets

    38,192       54,408  

Total Current Assets

    1,940,803       1,878,865  
                 

Property and equipment, net of accumulated depreciation of $152,048 and $137,853

    898,239       876,660  

Goodwill

    214,444       213,220  

Franchise value

    162,296       157,699  

Other non-current assets

    106,288       100,855  

Total Assets

  $ 3,322,070     $ 3,227,299  
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Floor plan notes payable

  $ 56,767     $ 48,083  

Floor plan notes payable: non-trade

    1,316,747       1,265,872  

Current maturities of long-term debt

    28,053       38,891  

Trade payables

    77,979       70,871  

Accrued liabilities

    184,160       167,108  

Total Current Liabilities

    1,663,706       1,590,825  
                 

Long-term debt, less current maturities

    626,543       606,463  

Deferred revenue

    73,540       66,734  

Deferred income taxes

    54,647       53,129  

Other long-term liabilities

    86,173       81,984  

Total Liabilities

    2,504,609       2,399,135  
                 

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 23,416 and 23,676

    168,950       258,410  

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,762 and 2,542

    219       316  

Additional paid-in capital

    37,230       38,822  

Accumulated other comprehensive loss

          (277

)

Retained earnings

    611,062       530,893  

Total Stockholders' Equity

    817,461       828,164  

Total Liabilities and Stockholders' Equity

  $ 3,322,070     $ 3,227,299  

  

See accompanying condensed 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,

 
   

2016

   

2015

   

2016

   

2015

 

Revenues:

                               

New vehicle

  $ 1,209,037     $ 1,149,512     $ 2,305,092     $ 2,157,328  

Used vehicle retail

    553,647       488,801       1,086,373       951,732  

Used vehicle wholesale

    66,714       66,796       131,860       129,004  

Finance and insurance

    81,043       72,463       158,681       137,067  

Service, body and parts

    202,265       182,695       398,940       356,170  

Fleet and other

    20,633       36,680       35,254       54,824  

Total revenues

    2,133,339       1,996,947       4,116,200       3,786,125  

Cost of sales:

                               

New vehicle

    1,136,175       1,080,170       2,165,464       2,026,212  

Used vehicle retail

    486,422       426,108       954,871       829,597  

Used vehicle wholesale

    65,228       65,390       128,544       125,437  

Service, body and parts

    103,666       91,946       204,222       180,982  

Fleet and other

    19,812       35,684       33,881       52,873  

Total cost of sales

    1,811,303       1,699,298       3,486,982       3,215,101  

Gross profit

    322,036       297,649       629,218       571,024  

Asset impairments

    3,498       6,130       6,996       10,260  

Selling, general and administrative

    215,526       195,610       434,632       387,228  

Depreciation and amortization

    12,503       10,287       24,166       20,013  

Operating income

    90,509       85,622       163,424       153,523  

Floor plan interest expense

    (6,209

)

    (4,655

)

    (12,118

)

    (9,304

)

Other interest expense, net

    (5,502

)

    (4,972

)

    (10,961

)

    (9,800

)

Other expense, net

    (1,495

)

    (356

)

    (3,021

)

    (724

)

Income before income taxes

    77,303       75,639       137,324       133,695  

Income tax provision

    (25,875

)

    (24,416

)

    (45,626

)

    (41,819

)

Net income

  $ 51,428     $ 51,223     $ 91,698     $ 91,876  
                                 

Basic net income per share

  $ 2.02     $ 1.95     $ 3.58     $ 3.49  

Shares used in basic per share calculations

    25,462       26,332       25,639       26,310  
                                 

Diluted net income per share

  $ 2.01     $ 1.93     $ 3.56     $ 3.47  

Shares used in diluted per share calculations

    25,534       26,496       25,754       26,509  

 

 See accompanying condensed notes to consolidated financial statements.

 

 
3

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended
June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Net income

  $ 51,428     $ 51,223     $ 91,698     $ 91,876  

Other comprehensive income, net of tax:

                               

Gain on cash flow hedges, net of tax expense of $72, $94, $175 and $181, respectively

    114       165       277       304  

Comprehensive income

  $ 51,542     $ 51,388     $ 91,975     $ 92,180  

 

See accompanying condensed notes to consolidated financial statements.

 

 
4

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

Six Months Ended June 30,

 
   

2016

   

2015

 

Cash flows from operating activities:

               

Net income

  $ 91,698     $ 91,876  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Asset impairments

    6,996       10,260  

Depreciation and amortization

    24,166       20,013  

Stock-based compensation

    6,018       5,822  

(Gain) loss on disposal of other assets

    (4,512

)

    44  

Gain on disposal of franchise

    (1,102

)

    (5,919

)

Deferred income taxes

    5,704       (1,145

)

Excess tax benefit from share-based payment arrangements

    (4,384

)

    (4,865

)

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

               

Trade receivables, net

    6,564       7,570  

Inventories

    (114,052

)

    (122,660

)

Other assets

    5,688       (3,815

)

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

               

Floor plan notes payable

    8,685       4,417  

Trade payables

    6,678       8,854  

Accrued liabilities

    17,595       7,717  

Other long-term liabilities and deferred revenue

    10,668       11,161  

Net cash provided by operating activities

    66,410       29,330  
                 

Cash flows from investing activities:

               

Capital expenditures

    (43,247

)

    (48,008

)

Proceeds from sales of assets

    197       145  

Cash paid for other investments

    (16,690

)

    (15,222

)

Cash paid for acquisitions, net of cash acquired

    (18,807

)

    (87

)

Proceeds from sales of stores

    11,837       12,966  

Net cash used in investing activities

    (66,710

)

    (50,206

)

                 

Cash flows from financing activities:

               

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

    58,622       35,685  

Borrowings on lines of credit

    487,623       557,394  

Repayments on lines of credit

    (468,955

)

    (602,818

)

Principal payments on long-term debt, scheduled

    (8,062

)

    (7,324

)

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

    (2,303

)

    (9,189

)

Proceeds from issuance of long-term debt

    12,080       59,425  

Proceeds from issuance of common stock

    3,329       2,589  

Repurchase of common stock

    (104,858

)

    (16,773

)

Excess tax benefit from share-based payment arrangements

    4,384       4,865  

Dividends paid

    (11,524

)

    (9,482

)

Net cash used in (provided by) financing activities

    (29,664

)

    14,372  

Decrease in cash and cash equivalents

    (29,964

)

    (6,504

)

Cash and cash equivalents at beginning of period

    45,008       29,898  

Cash and cash equivalents at end of period

  $ 15,044     $ 23,394  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for interest

  $ 24,960     $ 22,262  

Cash paid during the period for income taxes, net

    9,684       28,699  
                 

Supplemental schedule of non-cash activities:

               

Floor plan debt paid in connection with store disposals

  $ 5,284     $ 4,400  

Non-cash consideration given in connection with acquisitions

    2,637        

 

 See accompanying condensed notes to consolidated financial statements.

  

 
5

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Interim Financial Statements

 

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of June 30, 2016 and for the three and six months ended June 30, 2016 and 2015. 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 2015 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2015 is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2016. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 2015 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 condensed 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, 2016

   

December 31, 2015

 

Contracts in transit

  $ 159,069     $ 168,460  

Trade receivables

    38,524       33,749  

Vehicle receivables

    34,441       36,470  

Manufacturer receivables

    61,109       59,215  

Auto loan receivables

    54,412       42,490  

Other receivables

    3,001       3,033  
      350,556       343,417  

Less: Allowances

    (3,972

)

    (2,243

)

Less: Long-term portion of accounts receivable, net

    (41,291

)

    (32,712

)

Total accounts receivable, net

  $ 305,293     $ 308,462  

 

Accounts receivable classifications include the following:

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 
6

 

 

The long-term portion of accounts receivable 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, 2016

   

December 31, 2015

 

New vehicles

  $ 1,172,198     $ 1,113,613  

Used vehicles

    354,420       302,911  

Parts and accessories

    55,656       54,463  

Total inventories

  $ 1,582,274     $ 1,470,987  

 

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, 2014 ¹

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

Additions through acquisitions

    6,892       5,029       2,170       14,091  

Reduction related to divestiture

          (246

)

          (246

)

Balance as of December 31, 2015 ¹

    97,903       84,384       30,933       213,220  

Additions through acquisitions

    966       1,283       193       2,442  

Reduction related to divestiture

    (1,218

)

                (1,218

)

Balance as of June 30, 2016 ¹

  $ 97,651     $ 85,667     $ 31,126     $ 214,444  

 

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, 2014

  $ 150,892  

Additions through acquisitions

    6,843  

Reduction related to divestiture

    (36

)

Balance as of December 31, 2015

    157,699  

Additions through acquisitions

    5,115  

Reduction related to divestiture

    (518

)

Balance as of June 30, 2016

  $ 162,296  

 

Note 5. Stockholders’ Equity

Repurchases of Class A Common Stock

Repurchases of our Class A Common Stock occurred under repurchase authorizations granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units ("RSUs").

 

In August 2011, our Board of Directors authorized the repurchase of up to 2 million shares of our Class A common stock and, on July 20, 2012, our Board of Directors authorized the repurchase of 1 million additional shares of our Class A common stock. Effective February 29, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. This authorization replaced the existing authorizations, increasing the total and establishing a maximum dollar rather than share amount.

 

 
7

 

 

Share repurchases under our authorizations were as follows:

 

   

Repurchases Occurring in

the Six Months Ended

June 30, 2016

   

Cumulative Repurchases as

of June 30, 2016

 
   

Shares

   

Average Price

   

Shares

   

Average Price

 

2011 Share Repurchase Authorization

    599,123     $ 79.21       2,327,636     $ 51.09  

2016 Share Repurchase Authorization

    622,225     $ 78.52       622,225     $ 78.52  

 

As of June 30, 2016, we had $201.1 million available for repurchases pursuant to our 2016 share repurchase authorization.

 

In addition, during the first six months of 2016, we repurchased 94,363 shares at an average price of $90.48 per share, for a total of $8.5 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.

 

Class B Common Stock Conversion

On March 2, 2016, Lithia Holding Company, L.L.C. (“Holding Company”), which is managed and controlled by Sidney B. DeBoer, our Chairman of the Board, notified us that it had converted 780,000 shares of our Class B Common Stock into shares of our Class A Common Stock and distributed them to certain members of Holding Company in redemption of their membership interests in Holding Company. At that time, this transaction decreased the voting power of Holding Company to 42.4% from 52.3%, but did not result in any person acquiring voting control over us.

 

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,

 
   

2016

   

2015

   

2016

   

2015

 

Dividend amount per share

  $ 0.25     $ 0.20     $ 0.45     $ 0.36  

Total amount of dividend (in thousands)

    6,373       5,266       11,524       9,482  

 

See Note 13 for a discussion of a dividend related to our second quarter 2016 financial results.

 

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,

 
   

2016

   

2015

   

2016

   

2015

 

Compensation expense

  $ 252     $ 463     $ 532     $ 920  

Discretionary contribution

  $ 10     $ 153     $ 1,392     $ 2,249  

Guaranteed annual return

    5.25

%

    5.25

%

    5.25

%

    5.25

%

 

As of June 30, 2016 and December 31, 2015, the balance due, comprised of both amounts participants elected to defer and discretionary contributions, was $20.1 million and $19.7 million, respectively, and was included as a component of accrued liabilities and other long-term liabilities in the Consolidated Balance Sheets.

 

Assets to fund the obligations of the LTIP are held in a Rabbi Trust and must be used only for purposes of providing benefits under the plan, other than in an event of insolvency. The assets held by the Rabbi Trust are invested in corporate-owned life insurance. As of June 30, 2016 and December 31, 2015, the value of the assets held by the Rabbi trust were $21.0 million and $15.4 million, respectively, and are recorded as a component of other non-current assets in the Consolidated Balance Sheets.

 

 
8

 

 

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

 

There were no changes to our valuation techniques during the six-month period ended June 30, 2016.

 

Assets and Liabilities Measured at Fair Value

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

 

Fair Value at June 30, 2016

 

Level 1

   

Level 2

   

Level 3

 

Measured on a non-recurring basis:

                       

Equity-method investment

  $     $     $ 11,157  

 

 

Fair Value at December 31, 2015

 

Level 1

   

Level 2

   

Level 3

 

Measured on a non-recurring basis:

                       

Equity-method investment

  $     $     $ 22,284  

Long-lived assets held and used:

                       

Certain buildings and improvements

  $     $     $ 6,559  

  

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 $7.0 million and a $8.3 million impairment, respectively, was required to be recorded as asset impairments in our Consolidated Statements of Operations for the six months ended June 30, 2016 and 2015, respectively. See Note 9.

 

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.

 

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, 2016, this debt had maturity dates between May 1, 2018 and October 1, 2034. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

 

 
9

 

 

   

June 30, 2016

   

December 31, 2015

 

Carrying value

  $ 281,886     $ 297,463  

Fair value

    286,628       296,961  

 

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

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

 

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

 

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

 

Three Months Ended June 30,

 

2016

   

2015

 

Basic EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Net income applicable to common stockholders

  $ 47,869     $ 3,559     $ 46,239     $ 4,984  

Distributed net income applicable to common stockholders

    (5,932

)

    (441

)

    (4,754

)

    (512

)

Basic undistributed net income applicable to common stockholders

  $ 41,937     $ 3,118     $ 41,485     $ 4,472  
                                 

Denominator:

                               

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

    23,700       1,762       23,770       2,562  
                                 

Earnings per Share:

                               

Basic net income per share applicable to common stockholders

  $ 2.02     $ 2.02     $ 1.95     $ 1.95  

Basic distributed net income per share applicable to common stockholders

    (0.25

)

    (0.25

)

    (0.20

)

    (0.20

)

Basic undistributed net income per share applicable to common stockholders

  $ 1.77     $ 1.77     $ 1.75     $ 1.75  

 

 
10

 

 

Three Months Ended June 30,

 

2016

   

2015

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed net income applicable to common stockholders

  $ 5,932     $ 441     $ 4,754     $ 512  

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

    1       (1

)

    3       (3

)

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

    440             509        

Diluted distributed net income applicable to common stockholders

  $ 6,373     $ 440     $ 5,266     $ 509  
                                 

Undistributed net income applicable to common stockholders

  $ 41,937     $ 3,118     $ 41,485     $ 4,472  

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

    9       (9

)

    28       (28

)

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

    3,109             4,444        

Diluted undistributed net income from continuing operations applicable to common stockholders

  $ 45,055     $ 3,109     $ 45,957     $ 4,444  

Denominator:

                               

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

    23,700       1,762       23,770       2,562  

Weighted average number of shares from stock options

    72             164        

Conversion of Class B to Class A common shares outstanding

    1,762             2,562        

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

    25,534       1,762       26,496       2,562  
                                 

Earnings per Share:

                               

Diluted net income per share applicable to common stockholders

  $ 2.01     $ 2.01     $ 1.93     $ 1.93  

Diluted distributed net income per share applicable to common stockholders

    (0.25

)

    (0.25

)

    (0.20

)

    (0.20

)

Diluted undistributed net income per share applicable to common stockholders

  $ 1.76     $ 1.76     $ 1.73     $ 1.73  

 

 

Three Months Ended June 30,

 

2016

   

2015

 

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        

 

 
11

 

 

Six Months Ended June 30,

 

2016

   

2015

 

Basic EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Net income applicable to common stockholders

  $ 84,445     $ 7,253     $ 82,929     $ 8,947  

Distributed net income applicable to common stockholders

    (10,612

)

    (912

)

    (8,559

)

    (923

)

Basic undistributed net income applicable to common stockholders

  $ 73,833     $ 6,341     $ 74,370     $ 8,024  
                                 

Denominator:

                               

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

    23,611       2,028       23,748       2,562  
                                 

Earnings per Share:

                               

Basic net income per share applicable to common stockholders

  $ 3.58     $ 3.58     $ 3.49     $ 3.49  

Basic distributed net income per share applicable to common stockholders

    (0.45

)

    (0.45

)

    (0.36

)

    (0.36

)

Basic undistributed net income per share applicable to common stockholders

  $ 3.13     $ 3.13     $ 3.13     $ 3.13  

 

 
12

 

 

Six Months Ended June 30,

 

2016

   

2015

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Numerator:

                               

Distributed net income applicable to common stockholders

  $ 10,612     $ 912     $ 8,559     $ 923  

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

    5       (5

)

    7       (7

)

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

    907             916        

Diluted distributed net income applicable to common stockholders

  $ 11,524     $ 907     $ 9,482     $ 916  
                                 

Undistributed net income applicable to common stockholders

  $ 73,833     $ 6,341     $ 74,370     $ 8,024  

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

    28       (28

)

    61       (61

)

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

    6,313             7,963        

Diluted undistributed net income applicable to common stockholders

  $ 80,174     $ 6,313     $ 82,394     $ 7,963  
                                 

Denominator:

                               

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

    23,611       2,028       23,748       2,562  

Weighted average number of shares from stock options

    115             199        

Conversion of Class B to Class A common shares outstanding

    2,028             2,562        

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

    25,754       2,028       26,509       2,562  
                                 

Earnings per Share:

                               

Diluted net income per share applicable to common stockholders

  $ 3.56     $ 3.56     $ 3.47     $ 3.47  

Diluted distributed net income per share applicable to common stockholders

    (0.45

)

    (0.45

)

    (0.36

)

    (0.36

)

Diluted undistributed net income per share applicable to common stockholders

  $ 3.11     $ 3.11     $ 3.11     $ 3.11  

 

Six Months Ended June 30,

 

2016

   

2015

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Antidilutive Securities

                               

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

    10             16        

  

Note 9. Equity-Method Investment

In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with an initial equity contribution of $4.1 million. We made additional equity contributions to the entity of $11.4 million in the first six months of 2016 and $22.8 million in the full year of 2015. We are obligated to make $49.8 million of total contributions in quarterly installments to the entity over a two-year period ending October 2016, of which $38.3 million in contributions have been made as of June 30, 2016.

 

This investment generates new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.

 

 
13

 

 

While U.S. Bancorp Community Development Corporation exercises management control over the limited liability company, due to the economic interest we hold in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method.

 

The following amounts related to this equity-method investment were recorded in our Consolidated Balance Sheets (in thousands):

 

   

June 30, 2016

   

December 31, 2015

 

Carrying value, recorded as a component of other non-current assets

  $ 11,157     $ 22,284  

Present value of obligation associated with future equity contributions, recorded as a component of accrued liabilities and other long-term liabilities

    11,317       22,511  

 

 

The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):

 

   

Three Months Ended

June 30,

   

Six Months Ended
June 30,

 
   

2016

   

2015

   

2016

   

2015

 

Asset impairments to write investment down to fair value

  $ 3,498     $ 4,130     $ 6,996     $ 8,260  

Our portion of the partnership’s operating losses

    2,065       1,733       4,131       3,465  

Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions

    62       183       154       394  

Tax benefits and credits generated

    6,837       7,652       12,782       14,902  

 

Note 10. Segments

While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three reportable segments based on their economic similarities: Domestic, Import and Luxury.

 

Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-Benz and Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products.

 

Corporate and other revenue and income includes the results of operations of our stand-alone body shop offset by unallocated corporate overhead expenses, such as corporate personnel costs, and certain unallocated reserve and elimination adjustments. Additionally, certain internal corporate expense allocations increase segment income for Corporate and other while decreasing segment income for the other reportable segments. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters that perform certain dealership functions.

 

We define our chief operating decision maker (“CODM”) to be certain members of our executive management group. Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, except for the internal allocation within Corporate and other discussed above. Our CODM measures the performance of each operating segment based on several metrics, including earnings from operations, and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the operating segments.

 

 
14

 

 

Certain financial information on a segment basis is as follows (in thousands):

 

   

Three Months Ended
June 30,

   

Six Months Ended
June 30,