EX-99 5 ex99-4.htm EXHIBIT 99.4 ex99-4.htm

Exhibit 99.4

 

LITHIA MOTORS, INC.

UNAUDITED PRO FORMA COMBINED CONDENSED

FINANCIAL INFORMATION

 

The unaudited pro forma combined condensed financial statements have been prepared to give effect to the acquisition by Lithia Motors, Inc. (“Lithia”) of DCH Auto Group (USA), Inc. (“DCH”) on October 1, 2014. The unaudited pro forma combined condensed financial statements were prepared using the purchase method of accounting in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 805 "Business Combinations" and with the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements.

 

The unaudited pro forma combined condensed balance sheet as of June 30, 2014 reflects the acquisition as if it had been completed on June 30, 2014.

 

The unaudited pro forma combined condensed statements of operations for the six months ended June 30, 2014 and for the year ended December 31, 2013 illustrate the effect of the acquisition of DCH as if it had occurred on January 1, 2013. The unaudited pro forma combined condensed statement of operations for the six months ended June 30, 2014 combines the historical unaudited statement of operations of Lithia for the six months ended June 30, 2014 and DCH's historical unaudited statement of operations for the six months ended June 30, 2014. The unaudited pro forma combined condensed statement of operations for the year ended December 31, 2013 combines the historical audited statement of operations of Lithia for the year ended December 31, 2013 and DCH’s historical audited statements of operations for the year ended December 31, 2013.

 

The pro forma combined condensed balance sheet and statement of operations were adjusted to reflect certain reclassification adjustments to conform DCH's presentation to Lithia’s presentation. Refer to Note 3 for a description of these reclassification adjustments.

 

The unaudited pro forma combined condensed financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the Lithia Annual Report on Form 10-K for the year ended December 31, 2013 and the Lithia Quarterly Report on Form 10-Q for the period ended June 30, 2014 as well as the historical consolidated financial statements and accompanying notes for DCH contained in Exhibits 99.2, and 99.3 included with Lithia’s current report on Form 8-K/A dated October 1, 2014.

 

The unaudited pro forma combined condensed financial information is presented based on the assumptions and adjustments described in the accompanying notes that we believe are reasonable. The historical financial information has been adjusted to give effect to pro forma adjustments that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) for the purposes of the pro forma combined condensed statements of operations, expected to have a continuing impact on the combined results of Lithia. In addition, certain non-recurring expenses expected to be incurred within the first twelve months after the acquisition are also not reflected in the pro forma statements. The unaudited pro forma combined condensed financial statements do not include any pro forma adjustments relating to costs of integration that the combined company may incur or post-integration cost reductions that may be realized as such adjustments would be forward-looking.

 

The pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred as of the date or during the periods presented nor is it necessarily indicative of future operating results or financial position.

 

 

 
 
 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Pro Forma Combined Condensed Balance Sheet

As of June 30, 2014

(In thousands)

(Unaudited)

 

       

DCH Auto Group

 

Pro Forma

     
   

Lithia

 

(USA), Inc.

 

Adjustments

   

Pro Forma

   

Motors, Inc.

  

(Note3)

  

(Note 4)

    

Combined

Assets

                  

Current Assets:

                  

    Cash and cash equivalents

$

                 28,203

$

                 12,473

$

                         -

 

$

                 40,676

    Contracts in transit and accounts receivable, net

  

               191,228

 

                 74,938

 

                         -

   

               266,166

    Inventories, net

  

               981,223

 

               285,147

 

                 23,201

 (a)

 

            1,289,571

    Deferred income taxes

  

                      222

 

                   8,942

 

                  (8,739)

 (h)

 

                      425

    Other current assets

  

                 12,028

 

                   5,531

 

                         -

   

                 17,559

        Total Current Assets

  

            1,212,904

 

               387,031

 

                 14,462

   

            1,614,397

                   

Property and equipment, net

  

               528,254

 

               223,616

 

                 13,840

 (b)

 

               765,710

Goodwill

  

                 65,004

 

               111,866

 

                 38,253

 (c)

 

               215,123

Franchise value

  

                 77,728

 

                 30,660

 

                 55,343

 (c)

 

               163,731

Deferred income taxes

  

                 14,624

 

                         -

 

                (14,624)

 (h)

 

                         -

Other non-current assets

  

                 41,613

 

                   6,593

 

                 15,581

 (d)

 

                 63,787

        Total Assets

$

            1,940,127

$

               759,766

$

               122,855

 

$

            2,822,748

                   

 

                  

Liabilities and Stockholders' Equity

                  

Current Liabilities:

                  

    Floor plan notes payable

$

                 20,598

$

                 37,171

$

                (20,656)

 (e)

$

                 37,113

    Floor plan notes payable: non-trade

  

               806,684

 

               248,832

 

                         -

   

            1,055,516

    Current maturities of long-term debt

  

                   7,578

 

                 69,030

 

                  (5,734)

 (e)

 

                 70,874

    Trade payables

  

                 56,384

 

                 29,013

 

                         -

   

                 85,397

    Accrued liabilities

  

               112,742

 

                 48,233

 

                   1,705

 (f),(g)

 

               162,680

        Total Current Liabilities

  

            1,003,986

 

               432,279

 

                (24,685)

    

            1,411,580

                   

Long-term debt, less current maturities

  

               260,835

 

                 17,715

 

               358,313

 (e)

 

               636,863

Deferred revenue

  

                 48,918

 

                         -

 

                         -

   

                 48,918

Deferred income taxes

  

                         -

 

                 42,985

 

                 29,402

 (h)

 

                 72,387

Other long-term liabilities

  

                 34,537

 

                   5,439

 

                   1,437

 (f),(g)

 

                 41,413

        Total Liabilities

  

            1,348,276

 

               498,418

 

               364,467

   

            2,211,161

                   

Total stockholders' equity and equity subject to

                  

possible redemption

  

               591,851

 

               261,348

 

              (241,612)

 (i)

 

               611,587

       Total Liabilities and Stockholders' Equity

$

            1,940,127

$

               759,766

$

               122,855

 

$

            2,822,748

 

See accompanying notes to the unaudited pro forma condensed statements. 

 

 
 
 

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Pro Forma Condensed Statements of Operations

For the Six Months Ended June 30, 2014

(In thousands, except per share amounts)

(Unaudited) 

 

       

DCH Auto Group

 

Pro Forma

     
   

Lithia

 

(USA), Inc.

 

Adjustments

   

Pro Forma

   

Motors, Inc.

  

(Note3)

  

(Note 4)

    

Combined

Revenues:

                  

   New vehicle

$

            1,274,006

$

               703,573

$

                         -

 

$

            1,977,579

   Used vehicle retail

  

               612,368

 

               196,659

 

                         -

   

               809,027

   Used vehicle wholesale

  

                 86,979

 

                 51,369

 

                         -

   

               138,348

   Finance and insurance

  

                 83,469

 

                 32,929

 

                         -

   

               116,398

   Service, body and parts

  

               218,954

 

                 97,710

 

                         -

   

               316,664

   Fleet and other

  

                 24,132

 

                   9,186

 

                         -

   

                 33,318

        Total revenues

  

            2,299,908

 

            1,091,426

 

                         -

   

            3,391,334

Cost of sales:

                  

   New vehicle

  

            1,188,988

 

               662,808

 

                         -

 (j)

 

            1,851,796

   Used vehicle retail

  

               527,505

 

               173,491

 

                         -

   

               700,996

   Used vehicle wholesale

  

                 84,144

 

                 50,575

 

                         -

   

               134,719

   Service, body and parts

  

               111,940

 

                 47,516

 

                         -

   

               159,456

   Fleet and other

  

                 22,970

 

                   8,889

 

                         -

   

                 31,859

        Total cost of sales

  

            1,935,547

 

               943,279

 

                         -

   

            2,878,826

Gross profit

  

               364,361

 

               148,147

 

                         -

   

               512,508

Selling, general and administrative

  

               247,292

 

               125,652

 

                  (1,403)

 (k),(l),(m)

 

               371,541

Gain (loss) on sale of assets

      

                         -

 

                         -

   

                         -

Depreciation and amortization

  

                 11,332

 

                   6,114

 

                  (1,496)

 (n)

 

                 15,950

        Operating income

  

               105,737

 

                 16,381

 

                   2,899

   

               125,017

   Floor plan interest expense

  

                  (6,199)

  

                  (1,934)

  

                         -

   

                  (8,133)

   Other interest expense

  

                  (3,843)

  

                  (3,240)

  

                  (1,526)

 (o),(p)

 

                  (8,609)

   Other income, net

  

                   2,083

 

                          2

 

                         -

   

                   2,085

Income from continuing operations before income taxes

  

                 97,778

 

                 11,209

 

                   1,373

   

               110,360

Income tax provision

  

                (37,914)

  

                  (4,583)

  

                     (535)

 (q)

 

                (43,032)

Income from continuing operations, net of income tax

  

                 59,864

 

                   6,626

 

                      838

   

                 67,328

Income from discontinued operations, net of income tax

  

                   3,179

 

                 13,349

 

                         -

   

                 16,528

Net income

$

                 63,043

$

                 19,975

$

                      838

 

$

                 83,856

                   

Basic income per share from continuing operations

$

                     2.30

         

$

                     2.56

Basic income per share from discontinued operations

  

                     0.12

           

0.63

Basic net income per share

$

                     2.42

         

$

                     3.19

                   

Shares used in basic per share calculations

  

                 26,047

     

                      269

 (r)

 

                 26,316

                   

Diluted income per share from continuing operations

$

                     2.27

         

$

                     2.53

Diluted income per share from discontinued operations

  

                     0.12

           

                     0.62

Diluted net income per share

$

                     2.39

         

$

                     3.15

                   

Shares used in diluted per share calculations

  

                 26,326

     

                      269

 (r)

 

                 26,595

                   

 

See accompanying notes to the unaudited pro forma condensed statements.

 

 
 
 

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES 

Pro Forma Combined Condensed Statements of Operations

For the Year Ended December 31, 2013

(In thousands, except per share amounts)

 

       

DCH Auto Group

 

Pro Forma

     
   

Lithia

 

(USA), Inc.

 

Adjustments

   

Pro Forma

   

Motors, Inc.

  

(Note3)

  

(Note 4)

    

Combined

Revenues:

                  

   New vehicle

$

              2,256,598

$

              1,356,733

$

                           -

 

$

              3,613,331

   Used vehicle retail

  

              1,032,224

 

                 391,148

 

                           -

   

              1,423,372

   Used vehicle wholesale

  

                 158,235

 

                   94,296

 

                           -

   

                 252,531

   Finance and insurance

  

                 139,007

 

                   58,661

 

                           -

   

                 197,668

   Service, body and parts

  

                 383,483

 

                 183,529

 

                           -

   

                 567,012

   Fleet and other

  

                   36,202

 

                     9,842

 

                           -

   

                   46,044

        Total revenues

  

              4,005,749

 

              2,094,209

 

                           -

   

              6,099,958

Cost of sales:

                  

   New vehicle

  

              2,105,480

 

              1,283,576

 

                   (1,649)

 (j)

 

              3,387,407

   Used vehicle retail

  

                 881,366

 

                 342,474

 

                           -

   

              1,223,840

   Used vehicle wholesale

  

                 155,524

 

                   94,735

 

                           -

   

                 250,259

   Service, body and parts

  

                 197,913

 

                   88,572

 

                           -

   

                 286,485

   Fleet and other

  

                   34,513

 

                     9,473

 

                           -

   

                   43,986

        Total cost of sales

  

              3,374,796

 

              1,818,830

 

                   (1,649)

    

              5,191,977

Gross profit

  

                 630,953

 

                 275,379

 

                     1,649

   

                 907,981

Asset impairments

  

                           -

 

                     1,914

 

                           -

   

                     1,914

Selling, general and administrative

  

                 427,400

 

                 218,713

 

                   (2,508)

 (k),(l),(m)

 

                 643,605

Gain (loss) on sale of assets

      

                           -

 

                           -

     

Depreciation and amortization

  

                   20,035

 

                   13,220

 

                   (3,985)

 (n)

 

                   29,270

        Operating income

  

                 183,518

 

                   41,532

 

                     8,142

   

                 233,192

   Floor plan interest expense

  

                 (12,373)

  

                   (3,868)

  

                           -

   

                 (16,241)

   Other interest expense

  

                   (8,350)

  

                   (9,045)

  

                   (3,026)

 (o),(p)

 

                 (20,421)

   Other income, net

  

                     2,993

 

                           -

 

                           -

   

                     2,993

Income from continuing operations before income taxes

  

                 165,788

 

                   28,619

 

                     5,116

   

                 199,523

Income tax provision

  

                 (60,574)

  

                 (12,043)

  

                   (1,911)

 (q)

 

                 (74,528)

Income from continuing operations, net of income tax

  

                 105,214

 

                   16,576

 

                     3,205

   

                 124,995

Income (loss) from discontinued operations, net of income tax

  

                        786

 

                        (50)

  

                           -

   

                        736

Net income

$

                 106,000

$

                   16,526

$

                     3,205

 

$

                 125,731

                   

Basic income per share from continuing operations

$

                       4.08

         

$

                       4.79

Basic income per share from discontinued operations

  

0.03

           

0.03

Basic net income per share

$

                       4.11

         

$

                       4.82

                   

Shares used in basic per share calculations

  

                   25,805

     

                        269

 (r)

 

                   26,074

                   

Diluted income per share from continuing operations

$

                       4.02

         

$

                       4.72

Diluted income per share from discontinued operations

  

                       0.03

           

                       0.03

Diluted net income per share

$

                       4.05

         

$

                       4.75

                   

Shares used in diluted per share calculations

  

                   26,191

     

                        269

(r)

 

                   26,460

                   
                   

 

See accompanying notes to the unaudited pro forma condensed statements.

 

 
 
 

 

 

NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED

FINANCIAL INFORMATION

 

1.

Basis of Presentation

 

The following unaudited pro forma combined condensed financial statements have been prepared to give effect to the acquisition by Lithia of DCH on October 1, 2014. The unaudited pro forma combined condensed financial statements were prepared using the purchase method of accounting in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 805 "Business Combinations" and with the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma combined condensed financial statements.

 

The pro forma adjustments are based on management's preliminary estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the acquisition and certain other adjustments. The unaudited pro forma combined condensed balance sheet as of June 30, 2014 gives effect to the acquisition of DCH as if it was completed on that date, and was derived from the historical unaudited consolidated balance sheet of DCH as of June 30, 2014 combined with Lithia’s historical unaudited consolidated balance sheet as of June 30, 2014.

 

The unaudited pro forma combined condensed statements of operations for the six months ended June 30, 2014 and the year ended December 31, 2013 illustrate the effect of the acquisition of DCH as if it had occurred on January 1, 2013, and were derived from the unaudited consolidated statement of operations for the six months ended June 30, 2014 and the historical audited consolidated statement of operations for DCH for the twelve months ended December 31, 2013, combined with Lithia’s unaudited consolidated statement of operations for the six months ended June 30, 2014 and historical audited consolidated statement of operations for the year ended December 31, 2013, respectively.

 

The pro forma combined condensed balance sheet and statements of operations were also adjusted to reflect certain reclassifications to conform DCH’s presentation to Lithia’s presentation. Refer to Note 3 for a description of these reclassification adjustments.

 

2.

Description of Acquisition

 

On October 1, 2014, Lithia completed its previously announced acquisition of DCH, for approximately $578.6 million in cash and 268,770 shares of Lithia Class A common stock. The aggregate cash paid consist of $577.0 million plus an estimated final payment of $1.6 million based on the purchase price reflecting the final acquisition balance sheet. Lithia has agreed to make future payments based on gains recognized on the sale of certain real estate properties if they occur within 60 months after closing. Additionally, Lithia assumed $69.6 million in floor plan notes payable and long-term debt.

 

The total preliminary acquisition consideration is as follows (in thousands):

 

Cash paid for initial consideration

$

577,028

Final purchase price adjustment

  

1,579

Fair value of contingent consideration

  

1,500

268,770 of Class A common stock valued at $73.43 per share

  

19,736

Total preliminary purchase price

$

599,843

 

Estimated Purchase Price Allocation

 

Under the purchase method of accounting, the total estimated purchase price shown in the table above is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information currently available, and Lithia may adjust the preliminary purchase price allocation after obtaining more information regarding, among other things, assets valuations, liabilities assumed and revisions to preliminary estimates.

 

 
 
 

 

 

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The preliminary allocation of the purchase price estimated at the October 1, 2014 acquisition date is as follows (in thousands):

 

Total preliminary purchase price

    

$

599,843

         

Estimated fair value of net tangible assets acquired and liabilities assumed:

    

   Cash and cash equivalents

$

10,540

    

   Accounts receivables, net

  

64,667

    

   Inventories

  

273,916

    

   Other current assets

  

5,414

    

   Property and equipment, net

  

245,535

    

   Other assets

  

9,273

    

   Floor plan notes payable

  

(17,045)

    

   Trade payables

  

(37,424)

    

   Accrued liabilities

  

(55,753)

    

   Long-term debt

  

(52,532)

    

   Other liabilities

  

(7,090)

    
       

439,501

Estimated fair value of identifiable intangible assets acquired:

    

   Franchise value

$

86,003

    

   Trade name

  

12,500

    
       

98,503

   Estimated net deferred tax liability

      

(87,364)

   Estimated goodwill

    

$

149,203

 

3.

Reclassifications

 

Certain reclassifications have been made to conform DCH’s historical financial statements to Lithia’s presentation. These reclassifications consisted of the following:

 

 

●

Floor plan financing for vehicles with manufacturer-affiliated lenders of $37.2 million was reclassified from current maturities of long-term debt to floor plan notes payable as of June 30, 2014

 

●

Estimated financing for new vehicle inventory of $248.8 million was reclassified from current maturities of long-term debt to floor plan notes payable, non-trade as of June 30, 2014

 

●

Revenues related to the wholesaling of used vehicles for $51.4 million and $94.3 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from used vehicle retail revenues to used vehicle wholesale revenues

 

●

Revenues related to fleet sales for $9.2 million and $9.8 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from new vehicle revenues to fleet and other revenues

 

●

Costs related to the wholesaling of used vehicles for $50.6 million and $94.7 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from used vehicle retail cost of sales to used vehicle wholesale cost of sales

 

●

Costs related to the internal reconditioning of new vehicles for $1.8 million and $3.2 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from service, body and parts cost of sales to new vehicle cost of sales

 

●

Costs related to the internal reconditioning of used vehicles for $6.0 million and $10.9 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from service, body and parts cost of sales to used vehicle cost of sales

 

●

Cost associated with finance and insurance of $299,000 for the year ended December 31, 2013 were reclassified from finance and insurance cost of sales to finance and insurance revenues

 

 

 
 
 

 

 

●

Costs related to fleet sales for $8.9 million and $9.5 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from new vehicle cost of sales to fleet and other cost of sales

 

●

Gain (loss) on the sale of assets for $(14,000) and $4.0 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from gain (loss) on the sale of assets to selling, general and administrative

 

●

Real estate rental income of $396,000 and $860,000, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from other income, to selling, general and administrative

 

●

Estimated interest expense for new vehicle floor plan financing of $1.9 million and $3.9 million, respectively, for the six months ended June 30, 2014 and year ended December 31, 2013 were reclassified from other interest expense to floor plan interest expense.

  

 

4.

Pro Forma Adjustments

 

Pro forma adjustments are necessary to reflect the estimated purchase price, to adjust amounts related to DCH’s net tangible and intangible assets to an estimate of their fair values, to reflect the amortization expense related to the estimate amortizable intangible assets, to reflect changes in depreciation and amortization expense resulting from the estimated fair value adjustments to net tangible assets and to reflect the income tax effect related to the pro forma adjustments.

 

The following pro forma adjustments are included in the unaudited pro forma combined condensed balance sheet and statements of operations:

 

 

a.

To eliminate the last-in, first-out (LIFO) inventory reserve.

 

b.

To record property, plant and equipment fair-value adjustment.

 

c.

To record the following adjustments to goodwill and franchise value (in thousands):

 

   

Franchise Value

  

Goodwill

Estimated value acquired from transaction

$

86,003

$

150,119

Less: DCH’s historical goodwill and intangible assets

  

(30,660)

  

(111,866)

 

$

55,343

$

38,253

 

 

d.

To record other non-current asset fair value adjustments mainly related to the DCH trade name

 

e.

To record the following adjustment to long-term debt (in thousands):

 

Financing of cash paid for acquisition purchase price

$

578,607

Financing of cash paid for loan associated with ESOP and repurchase of shares in the DCH Auto Group Senior Stock Purchase Plan

 

 

 

 29,149

Less: DCH’s new vehicle floor plan notes payable paid off at closing

  

 (1,227)

Less: DCH’s mortgages paid off at closing

  

(44,203)

Less: DCH’s line of credit paid off at closing

  

(230,403)

 

$

331,923

 

 

f.

To record contingent consideration contemplated in acquisition purchase price

 

g.

To record accrued and other long-term liabilities fair value adjustments

 

h.

To record the net deferred tax liability resulting from purchase accounting

 

i.

To record the following adjustments to shareholders’ equity (in thousands):

 

Elimination of DCH’s historical stockholders’ equity

$

(261,348)

Fair value of Lithia Class A common stock issued in connection with the acquisition

  

 19,736

 

$

(241,612)

 

 

 
 
 

 

 

j.

To eliminate the LIFO inventory valuation impact of $1.6 million for the year ended December 31, 2013. DCH did not record a LIFO inventory valuation impact for the six months ended June 30, 2014

 

k.

To eliminate non-recurring direct and incremental acquisition-related costs such as legal, accounting, valuation, and other professional services and expenses associated with the transaction, of which Lithia has incurred $163,000 through June 30, 2014 and expects to incur an additional $1.1 million. While presented in the Unaudited Pro Forma Combined Condensed Balance Sheet, the expected future costs have been excluded from the Unaudited Pro Forma Combined Condensed Statements of Operations

 

l.

To eliminate expenses associated with the ESOP that was terminated prior to the acquisition

 

m.

To record the accretion of favorable and unfavorable lease reserves

 

n.

To record the depreciation adjustment for the change in basis and amortization of the DCH trade name

 

o.

To eliminate the interest expense associated with DCH’s terminated interest rate swap

 

p.

To record the interest expense associated with the financing structure used to fund the acquisition

 

q.

To record the estimated income tax expense associated with the pro forma adjustments

 

r.

To reflect the share count adjustment for the Lithia common stock issued in connection with the acquisition

 

5.

Integration, Restructuring, and Transaction Costs

  

The combined company expects to incur approximately $1.3 million in transaction costs in connection with the acquisition. Of the charges, $1.1 million are expected to be incurred in the third and fourth quarters of 2014. The combined company may incur charges to operations that Lithia cannot reasonably estimate in the fourth quarter of 2014 or the following quarters to reflect costs associated with integrating the two businesses. In addition, the combined company may incur additional charges relating to the transaction in subsequent periods, which could have a material impact on the combined company's financial position or results of operations.