LITHIA MOTORS INC - Quarter Report: 2016 September (Form 10-Q)

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		September 30, 2016				December 31, 2015
Assets
Current Assets:
Cash and cash equivalents		$	24,116			$	45,008
Accounts receivable, net of allowance for doubtful accounts of $4,413 and $2,243			317,664				308,462
Inventories, net			1,657,693				1,470,987
Other current assets			33,225				54,408
Total Current Assets			2,032,698				1,878,865
Property and equipment, net of accumulated depreciation of $157,940 and $137,853			991,721				876,660
Goodwill			219,021				213,220
Franchise value			163,220				157,699
Other non-current assets			156,946				100,855
Total Assets		$	3,563,606			$	3,227,299
Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable		$	73,762			$	48,083
Floor plan notes payable: non-trade			1,351,940				1,265,872
Current maturities of long-term debt			26,674				38,891
Trade payables			78,442				70,871
Accrued liabilities			204,361				167,108
Total Current Liabilities			1,735,179				1,590,825
Long-term debt, less current maturities			727,191				606,463
Deferred revenue			77,577				66,734
Deferred income taxes			58,721				53,129
Other long-term liabilities			98,848				81,984
Total Liabilities			2,697,516				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 23,405 and 23,676			167,596				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			39,359				38,822
Accumulated other comprehensive loss			—				(277	)
Retained earnings			658,916				530,893
Total Stockholders' Equity			866,090				828,164
Total Liabilities and Stockholders' Equity		$	3,563,606			$	3,227,299

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Revenues:
New vehicle		$	1,297,511			$	1,227,080			$	3,602,603			$	3,384,408
Used vehicle retail			580,885				505,885				1,667,258				1,457,617
Used vehicle wholesale			75,271				69,472				207,131				198,476
Finance and insurance			87,709				76,633				246,390				213,700
Service, body and parts			217,148				189,796				616,088				545,966
Fleet and other			11,443				15,979				46,697				70,803
Total revenues			2,269,967				2,084,845				6,386,167				5,870,970
Cost of sales:
New vehicle			1,221,668				1,149,923				3,387,132				3,176,135
Used vehicle retail			512,076				443,598				1,466,947				1,273,195
Used vehicle wholesale			74,353				68,892				202,897				194,329
Service, body and parts			112,806				95,846				317,028				276,828
Fleet and other			11,803				15,399				45,684				68,272
Total cost of sales			1,932,706				1,773,658				5,419,688				4,988,759
Gross profit			337,261				311,187				966,479				882,211
Asset impairments			3,498				4,131				10,494				14,391
Selling, general and administrative			228,134				223,728				662,766				610,956
Depreciation and amortization			12,206				10,531				36,372				30,544
Operating income			93,423				72,797				256,847				226,320
Floor plan interest expense			(6,186	)			(4,951	)			(18,304	)			(14,255	)
Other interest expense, net			(5,647	)			(4,900	)			(16,608	)			(14,700	)
Other expense, net			(1,513	)			(307	)			(4,534	)			(1,031	)
Income before income taxes			80,077				62,639				217,401				196,334
Income tax provision			(26,036	)			(19,248	)			(71,662	)			(61,067	)
Net income		$	54,041			$	43,391			$	145,739			$	135,267
Basic net income per Class A and Class B share		$	2.15			$	1.65			$	5.72			$	5.14
Shares used in basic per share calculations			25,194				26,289				25,490				26,304
Diluted net income per Class A and Class B share		$	2.14			$	1.64			$	5.69			$	5.10
Shares used in diluted per share calculations			25,290				26,480				25,598				26,500
Cash dividend declared per Class A and Class B share		$	0.25			$	0.20			$	0.70			$	0.56

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		Three Months Ended September 30,								Nine Months Ended September 30,
		2016				2015				2016				2015
Net income		$	54,041			$	43,391			$	145,739			$	135,267
Other comprehensive income, net of tax:
Gain on cash flow hedges, net of tax expense of $0, $103, $175 and $283, respectively			—				161				277				465
Comprehensive income		$	54,041			$	43,552			$	146,016			$	135,732

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		Nine Months Ended September 30,
		2016				2015
Cash flows from operating activities:
Net income		$	145,739			$	135,267
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments			10,494				14,391
Depreciation and amortization			36,372				30,544
Stock-based compensation			8,665				8,579
(Gain) loss on disposal of other assets			(4,299	)			27
Gain on disposal of franchise			(1,102	)			(5,919	)
Deferred income taxes			9,782				(7,955	)
Excess tax benefit from share-based payment arrangements			(4,388	)			(4,923	)
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net			(5,911	)			9,685
Inventories			(85,564	)			(132,407	)
Other assets			4,627				(5,339	)
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable			18,122				5,604
Trade payables			6,153				7,768
Accrued liabilities			32,874				16,949
Other long-term liabilities and deferred revenue			18,227				34,651
Net cash provided by operating activities			189,791				106,922
Cash flows from investing activities:
Capital expenditures			(81,363	)			(62,159	)
Proceeds from sales of assets			1,756				229
Cash paid for other investments			(22,279	)			(20,693	)
Cash paid for acquisitions, net of cash acquired			(199,435	)			(34,920	)
Proceeds from sales of stores			11,837				12,966
Net cash used in investing activities			(289,484	)			(104,577	)
Cash flows from financing activities:
Borrowings on floor plan notes payable, net: non-trade			93,817				36,204
Borrowings on lines of credit			841,623				878,340
Repayments on lines of credit			(744,494	)			(939,817	)
Principal payments on long-term debt, scheduled			(12,217	)			(11,048	)
Principal payments on long-term debt and capital leases, other			(5,903	)			(9,189	)
Proceeds from issuance of long-term debt			22,816				75,675
Proceeds from issuance of common stock			5,191				4,313
Repurchase of common stock			(108,597	)			(24,198	)
Excess tax benefit from share-based payment arrangements			4,388				4,923
Dividends paid			(17,823	)			(14,739	)
Net cash provided by financing activities			78,801				464
(Decrease) increase in cash and cash equivalents			(20,892	)			2,809
Cash and cash equivalents at beginning of period			45,008				29,898
Cash and cash equivalents at end of period		$	24,116			$	32,707
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	36,641			$	31,140
Cash paid during the period for income taxes, net			29,478				50,917
Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions		$	—			$	2,160
Non-cash assets transferred in connection with acquisitions			2,637				—
Debt assumed in connection with acquisitions			19,657				—
Acquisition of capital leases in connection with acquisitions			11,366				—
Floor plan debt paid in connection with store disposals			5,284				4,400

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Note 1. Interim Financial Statements

 

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of September 30, 2016 and for the three and nine months ended September 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):

 

  

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.

 

  

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):

 

 

Note 4. Goodwill and Franchise Value

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

 

 

  

1	Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
2	Our purchase price allocation is preliminary for the acquisitions related to the Carbone Auto Group and Casper Ford and the associated goodwill has not been allocated to each of our segments. See also Note 12.

 

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

 

  

1	Our purchase price allocation is preliminary for the acquisitions related to the Carbone Auto Group and Casper Ford and have not been included in the above franchise value additions. See also Note 12.

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.

 

Share repurchases under our authorizations were as follows:

 

  

As of September 30, 2016, we had $197.4 million available for repurchases pursuant to our 2016 share repurchase authorization.

 

In addition, during the first nine months of 2016, we repurchased 94,725 shares at an average price of $90.46 per share, for a total of $8.6 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:

 

  

See Note 14 for a discussion of a dividend related to our third 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 a period of time up 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):

 

  

As of September 30, 2016 and December 31, 2015, the balance due, comprised of both amounts participants elected to defer and discretionary contributions, was $21.1 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 September 30, 2016 and December 31, 2015, the value of the assets held by the Rabbi trust were $21.1 million and $15.4 million, respectively, and are recorded as a component of other non-current assets 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 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 nine-month period ended September 30, 2016.

 

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):

 

  

 

  

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 $10.5 million and a $12.4 million impairment, respectively, was required to be recorded as asset impairments in our Consolidated Statements of Operations for the nine months ended September 30, 2016 and 2015. See Note 9.

 

Long-lived assets held and used are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the assets may not be recoverable. During the second quarter of 2015, we evaluated the future undiscounted net cash flows associated with certain properties and 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.

 

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 September 30, 2016, this debt had maturity dates between May 1, 2018 and December 31, 2050. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

 

  

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):

  

 

  

  

 

  

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 $17.1 million in the first nine 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 $44.0 million in contributions have been made as of September 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.

 

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):

 

  

  

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

 

  

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.

 

  

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

 

*Segment income for each of the segments is defined as income before income taxes, depreciation and amortization, other interest expense and other expense, net.

 

 

 

 

  

Note 11. Contingencies

 

Litigation

We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.

 

  

In Re Lithia Motors Derivative Litigation

On December 14, 2015, Shiva Y. Stein, a Lithia shareholder, filed derivative claims on behalf of Lithia against its Board of Directors, listing Lithia as a nominal defendant. The case, Stein v. DeBoer, et al., Case No. 15CV33696, is pending in the Circuit Court of the State of Oregon for Marion County. Ms. Stein’s claims relate to the adoption of a transition agreement between Lithia and Sidney B. DeBoer, as disclosed in a Current Report on Form 8-K filed September 16, 2015. Ms. Stein alleges that Lithia's directors breached their fiduciary duties of loyalty and due care, and wasted corporate assets, when they approved the agreement with Mr. DeBoer. Ms. Stein also alleges a claim against Sidney B. DeBoer, asserting that he has been unjustly enriched by the agreement. Ms. Stein is seeking relief in the amount of damages allegedly sustained by Lithia as a result of the alleged breaches of fiduciary duty and alleged corporate waste, disgorgement and imposition of a constructive trust on all property and profits Sidney B. DeBoer received as a result of the alleged wrongful conduct, and an award of the costs and disbursements of the lawsuit, including reasonable attorney fees, costs, and expenses. The Board and Mr. DeBoer filed Motions to Dismiss the Stein suit on February 26, 2016.

 

On February 12, 2016, Marty A. Jessos, a Lithia shareholder, also filed derivative claims on behalf of Lithia against its Board of Directors, listing Lithia as a nominal defendant. The case, Jessos v. DeBoer, et al., Case No. 16CV04181, was filed in the Circuit Court of the State of Oregon for Multnomah County. The Jessos suit involves the same subject matter and alleges substantially the same facts, claims, and causes of action as the Stein suit. On March 22, 2016, the Jessos suit was transferred to Marion County Circuit Court. On April 4, 2016, the parties filed a Stipulation and [Proposed] Order of Consolidation in the Stein suit to consolidate both Stein and Jessos under the Stein suit, Case No. 15CV33696. On April 4, 2016, the Court signed the consolidation order. The case is now known as In re Lithia Motors Derivative Litigation, Case No. 15CV33696. Plaintiffs filed their consolidated complaint on April 15, 2016.

 

The Board and Mr. DeBoer filed Motions to Dismiss the consolidated complaint on May 10, 2016. The Court issued its ruling on the Motions on August 12, 2016. The Court determined that a majority of the Board was independent, but also that Plaintiffs alleged sufficient facts to withstand the Motions to Dismiss. For that reason, the Court denied the Board's and Mr. DeBoer's Motions. The Board and Mr. DeBoer filed their Answers to the consolidated complaint on October 10, 2016. The parties are now engaged in discovery.

 

California Wage and Hour Litigations

In June 2012, Mr. Robles and Mr. Laredo brought claims against DCH Tustin Acura (Robles vs. Tustin Motors, Inc., Case No. 30-2012-00579414, filed in the Superior Court of California, Orange County) alleging that the employer underpaid technicians in light of California Wage Order provisions that require an employer to pay at least two times the minimum wage for each hour worked if the employee is required to bring his or her own tools. The complaint was amended in late 2013 to include allegations that the employer failed to pay technicians for non-productive time and/or time spent performing tasks not compensated by the flat-rate compensation system; off-the-clock time worked; and wages due at termination. The amended complaint also alleged that the employer failed to provide technicians accurate and complete wage statements; and statutory meal and rest periods. Plaintiffs are now seeking relief on behalf of all employees at all DCH Auto Group dealerships in California. Plaintiffs also seek attorney fees and costs. These Plaintiffs (and several other former technicians in separate-but-partially-overlapping actions) also seek relief under California’s Private Attorney General Action (PAGA) provisions, which allow private plaintiffs to recover civil penalties on behalf of the State of California. DCH successfully compelled arbitration based on arbitration agreements between these claimants and the employer, although certain representative claims were excluded and stayed pending arbitration.

 

DCH and these claimants settled their individual claims in arbitration in 2015. In April 2016, DCH and plaintiffs agreed in principle to settle the representative claims, although this settlement has not yet been approved by either an independent arbitrator or the California courts as expressly contemplated by the parties and required by applicable law as a condition of the agreed release of claims. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. As a result, we believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.

 

In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer vs. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. Plaintiffs also seek attorney fees and costs. DCH has sought to compel arbitration based on Plaintiffs’ arbitration agreements. Plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions. DCH is defending itself against these claims, and DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. As a result, we believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.

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Note 12. Acquisitions

In the first nine months of 2016, we completed the following acquisitions:

•          On January 26, 2016, we acquired Singh Subaru in Riverside, California.

•          On February 1, 2016, we acquired Ira Toyota Milford in Milford, Massachusetts.

•          On June 23, 2016, we acquired Helena Auto Center, LLC in Helena, Montana.

•          On August 1, 2016, we acquired Kemp Ford in Thousand Oaks, California.

•          On September 12, 2016, we acquired the Carbone Auto Group, a nine store platform based in New York and Vermont.

•          On September 28, 2016, we acquired Greiner Ford Lincoln in Casper, Wyoming.

 

Revenue and operating income contributed by 2016 acquisitions subsequent to the date of acquisition were as follows (in thousands):

 

  

All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.

 

No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

  

The purchase price allocations for the Carbone Auto Group and Greiner Ford Lincoln acquisitions are preliminary and we have not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. Management has recorded the purchase price allocations based upon information that is currently available. Unallocated items are recorded as a component of other non-current assets in the Consolidated Balance Sheets. Management expects to finalize its purchase price allocations in the fourth quarter of 2016.

 

 

  

We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes.

 

  

The following unaudited pro forma summary presents consolidated information as if all acquisitions in the nine-month periods ended September 30, 2016 and 2015 had occurred on January 1, 2015 (in thousands, except for per share amounts):

 

  

 

  

These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.

Note 13. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect this amendment will have on our consolidated financial statements and related disclosures and believe the financial impact is not material. We have not yet selected a transition method.

 

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory (Topic 330)." ASU 2015-11 simplifies the accounting for the valuation of all inventory not accounted for using the last-in, first-out method by prescribing inventory be valued at the lower of cost or net realizable value. ASU 2015-11 is effective for public companies' annual periods, including interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption is permitted. We do not expect the adoption of ASU 2015-11 to have a material effect on our financial position, results of operations or cash flows.

 

In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requires disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. We are evaluating the effect this pronouncement will have on our consolidated financial statements and related disclosures.

 

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." ASU 2016-09 simplifies the accounting for several aspects of 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. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are evaluating the effect this pronouncement will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method.

 

In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provides guidance for eight cash flow classification issues to reduce diversity in practice. The clarification includes guidance on items such as debt prepayment or debt extinguishment cost, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect this pronouncement will have on our consolidated financial statements and related disclosures.

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Note 14. Subsequent Events

 

Common Stock Dividend

On October 18, 2016, our Board of Directors approved a dividend of $0.25 per share on our Class A and Class B common stock related to our third quarter 2016 financial results. The dividend will total approximately $6.3 million and will be paid on November 25, 2016 to shareholders of record on November 11, 2016.

 

Acquisition

On October 5, 2016, we acquired the inventory, equipment and intangible assets of Audi Auto Gallery in Woodland Hills, California. The store will be relocated to Calabasas, California. We paid $22.4 million in cash for this acquisition.

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