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

---

---

		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

---

		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

---

		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

---

		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				—

---

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):

 

 

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.

 

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

 

 

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 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:

 

 

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):

 

 

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.

 

---

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):

 

 

 

  

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):

 

 

 

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 $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.

 

 

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.

 

On May 10, 2016, the Board filed its Motion to Dismiss the consolidated complaint. Mr. DeBoer filed his Motion to Dismiss on May 12, 2016. These Motions supersede the Motions filed in February, prior to the consolidation of the two cases. At this juncture, the parties have fully briefed the pending Motions. A hearing on the Motions to Dismiss the consolidated complaint will be held on Thursday, July 21, 2016.

 

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 not material.

 

---

Note 12. 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 and 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.

 

Note 13. Subsequent Events

 

Common Stock Dividend

On July 25, 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 second quarter 2016 financial results. The dividend will total approximately $6.4 million and will be paid on August 26, 2016 to shareholders of record on August 12, 2016.

 

Credit Facility

On July 27, 2016, we amended our existing credit facility to increase the total financing commitment by $300 million to $2.05 billion and extend the maturity to July 2021. This syndicated credit facility is comprised of 18 financial institutions, including eight manufacturer-affiliated finance companies. Under our credit facility we are permitted to allocate the total financing commitment among floor plan financing for new vehicle inventory, floor plan financing for used vehicles (up to a maximum of $350 million) and revolving financing for general corporate purposes, including acquisitions and working capital (up to a maximum of $400 million). Our credit facility may be expanded to $2.4 billion total availability, subject to lender approval. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.

 

---

---