UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

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

For the quarterly period ended September 30, 2005

OR

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

For the quarterly period ended June 30, 2005

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from          to          

 

Commission file number: 001-14733

 


 

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-0572810

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

360 E. Jackson Street, Medford, Oregon

 

97501

(Address of principal executive offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code: 541-776-6899

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý   No   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes   ý   No   o

 

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

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

 

Class A common stock without par value

 

15,502,09615,585,799

Class B common stock without par value

 

3,762,231

(Class)

 

(Outstanding at August 4,November 3, 2005)

 

 



 

LITHIA MOTORS, INC.


FORM 10-Q


INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets (Unaudited)(unaudited)JuneSeptember 30, 2005 and December 31, 2004

 

 

 

 

 

Consolidated Statements of Operations (Unaudited)  -(unaudited) – Three and SixNine Months Ended JuneSeptember 30, 2005 and 2004

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) - Six(unaudited) – Nine Months Ended JuneSeptember 30, 2005 and 2004

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)(unaudited)

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

1



 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

LITHIA MOTORS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

(in thousands)

(Unaudited)

 

 

June 30,

 

December 31,

 

 

September 30,

 

December 31,

 

 

2005

 

2004

 

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,842

 

$

29,264

 

 

$

41,687

 

$

29,264

 

Contracts in transit

 

54,658

 

42,913

 

 

45,285

 

42,913

 

Trade receivables, net of allowance for doubtful accounts of $508 and $436

 

51,612

 

41,576

 

Trade receivables, net of allowance for doubtful accounts of $463 and $436

 

47,801

 

41,576

 

Inventories, net

 

659,060

 

536,653

 

 

516,068

 

536,653

 

Vehicles leased to others, current portion

 

5,492

 

5,494

 

 

5,479

 

5,494

 

Prepaid expenses and other

 

6,004

 

6,840

 

 

9,678

 

6,840

 

Deferred income taxes

 

363

 

 

 

1,945

 

 

Assets held for sale

 

 

135

 

 

 

135

 

Total Current Assets

 

807,031

 

662,875

 

 

667,943

 

662,875

 

 

 

 

 

 

 

 

 

 

 

Land and buildings, net of accumulated depreciation of $9,703 and $8,110

 

242,998

 

226,356

 

Equipment and other, net of accumulated depreciation of $29,419 and $25,922

 

76,405

 

73,275

 

Land and buildings, net of accumulated depreciation of $10,674 and $8,110

 

257,221

 

226,356

 

Equipment and other, net of accumulated depreciation of $31,242 and $25,922

 

76,470

 

73,275

 

Goodwill

 

251,377

 

244,532

 

 

252,325

 

244,532

 

Other intangible assets, net of accumulated amortization of $75 and $63

 

47,039

 

44,649

 

Other intangible assets, net of accumulated amortization of $81 and $63

 

47,415

 

44,649

 

Other non-current assets

 

4,505

 

5,217

 

 

4,417

 

5,217

 

Total Assets

 

$

1,429,355

 

$

1,256,904

 

 

$

1,305,791

 

$

1,256,904

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

Flooring notes payable

 

$

554,994

 

$

450,859

 

 

$

370,028

 

$

400,084

 

Flooring notes payable: non-trade

 

45,106

 

50,776

 

Current maturities of long-term debt

 

6,449

 

6,565

 

 

6,546

 

6,565

 

Trade payables

 

29,861

 

26,821

 

 

25,590

 

26,821

 

Accrued liabilities

 

57,139

 

52,043

 

 

64,582

 

52,042

 

Deferred income taxes

 

 

410

 

 

 

410

 

Total Current Liabilities

 

648,443

 

536,698

 

 

511,852

 

536,698

 

 

 

 

 

 

 

 

 

 

 

Used vehicle flooring facility

 

20,000

 

 

 

11,000

 

 

Real estate debt, less current maturities

 

143,050

 

139,702

 

 

144,568

 

139,702

 

Other long-term debt, less current maturities

 

136,717

 

127,608

 

 

136,612

 

127,608

 

Other long-term liabilities

 

10,900

 

10,611

 

 

10,127

 

10,611

 

Deferred income taxes

 

38,910

 

36,339

 

 

41,708

 

36,339

 

Total Liabilities

 

998,020

 

850,958

 

 

855,867

 

850,958

 

 

 

 

 

 

 

 

 

 

 

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 15,439 and 15,142

 

221,187

 

215,333

 

Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 15,521 and 15,142

 

222,962

 

215,333

 

Class B common stock - no par value authorized 25,000 shares; issued and outstanding 3,762 and 3,762

 

468

 

468

 

 

468

 

468

 

Additional paid-in capital

 

2,190

 

1,811

 

 

2,349

 

1,811

 

Unearned compensation

 

(1,346

)

 

 

(1,253

)

 

Accumulated other comprehensive income

 

1,690

 

789

 

 

2,932

 

789

 

Retained earnings

 

207,146

 

187,545

 

 

222,466

 

187,545

 

Total Stockholders’ Equity

 

431,335

 

405,946

 

 

449,924

 

405,946

 

Total Liabilities and Stockholders’ Equity

 

$

1,429,355

 

$

1,256,904

 

 

$

1,305,791

 

$

1,256,904

 

 

The accompanying notes are an integral part of these condensed consolidated balance sheets.statements.

 

2



 

LITHIA MOTORS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands, except  per share amounts)


(Unaudited)

 

 

Three months ended September 30,

 

Nine months ended September 30,

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicle sales

 

$

444,777

 

$

397,600

 

$

810,424

 

$

749,005

 

 

$

517,536

 

$

448,805

 

$

1,327,960

 

$

1,197,810

 

Used vehicle sales

 

203,257

 

182,251

 

403,791

 

370,107

 

 

227,959

 

196,784

 

631,728

 

566,869

 

Finance and insurance

 

28,195

 

24,560

 

53,828

 

47,787

 

 

32,979

 

27,660

 

85,868

 

74,963

 

Service, body and parts

 

77,207

 

71,228

 

153,234

 

139,999

 

 

82,456

 

74,147

 

235,690

 

214,146

 

Fleet and other

 

9,001

 

1,365

 

11,965

 

2,896

 

 

8,380

 

3,631

 

20,163

 

6,378

 

Total revenues

 

762,437

 

677,004

 

1,433,242

 

1,309,794

 

 

869,310

 

751,027

 

2,301,409

 

2,060,166

 

Cost of sales

 

633,130

 

561,794

 

1,184,663

 

1,089,096

 

 

726,555

 

627,242

 

1,910,788

 

1,715,938

 

Gross profit

 

129,307

 

115,210

 

248,579

 

220,698

 

 

142,755

 

123,785

 

390,621

 

344,228

 

Selling, general and administrative

 

95,778

 

88,409

 

187,459

 

173,262

 

 

100,594

 

90,260

 

287,279

 

263,239

 

Depreciation - buildings

 

886

 

650

 

1,714

 

1,254

 

 

962

 

701

 

2,676

 

1,955

 

Depreciation and amortization - other

 

2,575

 

2,400

 

5,188

 

4,696

 

 

2,716

 

2,507

 

7,904

 

7,203

 

Income from operations

 

30,068

 

23,751

 

54,218

 

41,486

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

38,483

 

30,317

 

92,762

 

71,831

 

Other income (expense)

 

 

 

 

 

 

 

 

 

Floorplan interest expense

 

(6,144

)

(4,086

)

(11,392

)

(7,668

)

 

(5,628

)

(4,472

)

(17,020

)

(12,140

)

Other interest expense

 

(3,041

)

(2,155

)

(5,850

)

(3,889

)

 

(3,043

)

(2,305

)

(8,893

)

(6,194

)

Other income, net

 

282

 

281

 

599

 

502

 

Other expense, net

 

189

 

203

 

727

 

677

 

 

(8,903

)

(5,960

)

(16,643

)

(11,055

)

 

(8,482

)

(6,574

)

(25,186

)

(17,657

)

Income from continuing operations before income taxes

 

21,165

 

17,791

 

37,575

 

30,431

 

 

30,001

 

23,743

 

67,576

 

54,174

 

Income taxes

 

(8,398

)

(6,938

)

(14,748

)

(11,868

)

 

(12,276

)

(9,260

)

(27,024

)

(21,128

)

Income before discontinued operations

 

12,767

 

10,853

 

22,827

 

18,563

 

 

17,725

 

14,483

 

40,552

 

33,046

 

Loss from discontinued operations, net of income tax benefit of $(61), $(8), $(105) and $(156)

 

(92

)

(13

)

(162

)

(244

)

Loss from discontinued operations, net of income tax benefit of $65, $8, $170 and $164

 

(93

)

(13

)

(255

)

(257

)

Net income

 

$

12,675

 

$

10,840

 

$

22,665

 

$

18,319

 

 

$

17,632

 

$

14,470

 

$

40,297

 

$

32,789

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share from continuing operations

 

$

0.67

 

$

0.58

 

$

1.20

 

$

0.99

 

 

$

0.92

 

$

0.77

 

$

2.12

 

$

1.76

 

Basic loss per share from discontinued operations

 

(0.01

)

0.00

 

(0.01

)

(0.01

)

 

0.00

 

0.00

 

(0.01

)

(0.01

)

Basic net income per share

 

$

0.66

 

$

0.58

 

$

1.19

 

$

0.98

 

 

$

0.92

 

$

0.77

 

$

2.11

 

$

1.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in basic per share calculations

 

19,142

 

18,746

 

19,085

 

18,686

 

 

19,221

 

18,818

 

19,131

 

18,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share from continuing operations

 

$

0.61

 

$

0.54

 

$

1.09

 

$

0.95

 

 

$

0.83

 

$

0.70

 

$

1.93

 

$

1.66

 

Diluted loss per share from discontinued operations

 

(0.01

)

0.00

 

0.00

 

(0.01

)

 

0.00

 

0.00

 

(0.02

)

(0.01

)

Diluted net income per share

 

$

0.60

 

$

0.54

 

$

1.09

 

$

0.94

 

 

$

0.83

 

$

0.70

 

$

1.91

 

$

1.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in diluted per share calculations

 

21,749

 

20,549

 

21,710

 

19,828

 

 

21,882

 

21,376

 

21,765

 

20,353

 

 

The accompanying notes are an integral part of these condensed consolidated statements.

 

3



 

LITHIA MOTORS, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

(in thousands)

(Unaudited)

 

 

Six months ended June 30,

 

 

Nine months ended September 30,

 

 

2005

 

2004

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net income

 

$

22,665

 

$

18,319

 

 

$

40,297

 

$

32,789

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

6,902

 

5,950

 

 

10,580

 

9,158

 

Depreciation and amortization of discontinued operations

 

47

 

107

 

 

47

 

139

 

Compensation expense related to stock issuances

 

278

 

150

 

Compensation expense related to stock option issuances

 

389

 

192

 

(Gain) loss on sale of assets

 

224

 

190

 

 

427

 

984

 

Gain on sale of franchise

 

(44

)

(569

)

 

(28

)

(914

)

Deferred income taxes

 

1,527

 

3,785

 

 

1,974

 

6,029

 

(Increase) decrease, net of effect of acquisitions:

 

 

 

 

 

 

 

 

 

 

Trade and installment contract receivables, net

 

(10,020

)

(955

)

 

(6,201

)

1,532

 

Contracts in transit

 

(11,745

)

4,011

 

 

(2,372

)

(7,305

)

Inventories

 

(103,841

)

(113,609

)

 

38,102

 

(4,800

)

Vehicles leased to others

 

(498

)

312

 

 

(736

)

(43

)

Prepaid expenses and other

 

1,987

 

349

 

 

332

 

(968

)

Other noncurrent assets

 

745

 

372

 

 

833

 

207

 

Increase (decrease), net of effect of acquisitions:

 

 

 

 

 

 

 

 

 

 

Floorplan notes payable

 

89,267

 

89,905

 

Flooring notes payable

 

(43,128

)

(1,497

)

Trade payables

 

3,040

 

2,256

 

 

(1,231

)

3,080

 

Accrued liabilities

 

5,593

 

4,957

 

 

13,145

 

10,655

 

Other long-term liabilities and deferred revenue

 

49

 

3,046

 

 

(724

)

4,147

 

Net cash provided by operating activities

 

6,176

 

18,576

 

 

51,706

 

53,385

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Principal payments received on notes receivable

 

 

585

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

Non-financeable

 

(12,769

)

(5,061

)

 

(20,230

)

(7,807

)

Financeable

 

(13,797

)

(19,234

)

 

(24,453

)

(31,640

)

Proceeds from sale of assets

 

258

 

320

 

 

188

 

870

 

Cash paid for acquisitions, net of cash acquired

 

(26,007

)

(52,198

)

 

(27,950

)

(62,662

)

Proceeds from sales of franchises

 

6,577

 

643

 

Proceeds from sale of dealerships

 

6,696

 

2,226

 

Net cash used in investing activities

 

(45,738

)

(75,530

)

 

(65,749

)

(98,428

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Flooring notes payable: non-trade

 

(5,670

)

(12,320

)

Net borrowings (repayments) on lines of credit

 

29,314

 

(111,018

)

 

20,314

 

(94,018

)

Principal payments on long-term debt and capital leases

 

(3,757

)

(9,690

)

 

(5,451

)

(11,805

)

Proceeds from issuance of long-term debt

 

13,334

 

114,317

 

 

16,539

 

129,069

 

Debt issuance costs

 

 

(2,550

)

 

 

(2,550

)

Repurchase of common stock

 

(9

)

 

 

(9

)

(13

)

Proceeds from issuance of common stock

 

4,322

 

4,075

 

 

6,119

 

5,523

 

Dividends paid

 

(3,064

)

(2,617

)

 

(5,376

)

(4,122

)

Net cash provided by (used in) financing activities

 

40,140

 

(7,483

)

Net cash provided by financing activities

 

26,466

 

9,764

 

 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

578

 

(64,437

)

 

12,423

 

(35,279

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

Beginning of period

 

29,264

 

74,408

 

 

29,264

 

74,408

 

End of period

 

$

29,842

 

$

9,971

 

 

$

41,687

 

$

39,129

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

6,207

 

$

6,642

 

 

$

17,608

 

$

14,035

 

Cash paid for interest

 

17,253

 

11,367

 

 

26,090

 

17,854

 

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Non-Cash Transactions:

 

 

 

 

 

 

 

 

 

 

Debt issued in connection with acquisitions

 

$

 

$

12,000

 

 

$

 

$

12,000

 

Flooring debt assumed in connection with acquisitions

 

23,352

 

36,437

 

 

23,352

 

41,050

 

Debt paid by purchaser in connection with dealership disposals

 

6,550

 

 

Flooring debt paid in connection with dealership disposals

 

3,166

 

717

 

 

The accompanying notes are an integral part of these condensed consolidated statements.

 

4



 

LITHIA MOTORS, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)

 

Note 1. Basis of Presentation

The financial information included herein as of JuneSeptember 30, 2005 and December 31, 2004 and for the three and six-monthnine-month periods ended JuneSeptember 30, 2005 and 2004 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2004 is derived from our 2004 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and the notes thereto included in our 2004 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.

 

Note 2. Inventories

Inventories are valued at the lower of market value or cost, using the specific identification method for vehicles and parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and transportation (in thousands).

 

 

June 30,
2005

 

December 31,
2004

 

 

September 30,
2005

 

December 31,
2004

 

New and program vehicles

 

$

529,013

 

$

427,134

 

 

$

387,023

 

$

427,134

 

Used vehicles

 

103,952

 

84,739

 

 

102,008

 

84,739

 

Parts and accessories

 

26,095

 

24,780

 

 

27,037

 

24,780

 

 

$

659,060

 

$

536,653

 

 

$

516,068

 

$

536,653

 

 

Note 3. Earnings Per Share

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

 

 

2005

 

2004(1)

 

 

2005

 

2004(1)

 

Three Months Ended June 30,

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Three Months Ended
September 30,

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

$

12,767

 

19,142

 

$

0.67

 

$

10,853

 

18,746

 

$

0.58

 

 

$

17,725

 

19,221

 

$

0.92

 

$

14,483

 

18,818

 

$

0.77

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2 7/8% convertible senior subordinated notes

 

459

 

2,255

 

(0.04

)

293

 

1,413

 

(0.03

)

 

447

 

2,255

 

(0.07

)

452

 

2,255

 

(0.06

)

Stock options and restricted stock

 

 

352

 

(0.02

)

 

390

 

(0.01

)

Stock options and unvested restricted stock

 

 

406

 

(0.02

)

 

303

 

(0.01

)

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

$

13,226

 

21,749

 

$

0.61

 

$

11,146

 

20,549

 

$

0.54

 

 

$

18,172

 

21,882

 

$

0.83

 

$

14,935

 

21,376

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

392

 

 

 

 

 

333

 

 

 

 

 

 

 

 

 

 

 

327

 

 

 

 

5



 

 

2005

 

2004(1)

 

 

2005

 

2004(1)

 

Six Months Ended June 30,

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Nine Months Ended
September 30,

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Income from
Continuing
Operations

 

Shares

 

Per Share
Amount

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

$

22,827

 

19,085

 

$

1.20

 

$

18,563

 

18,686

 

$

0.99

 

 

$

40,552

 

19,131

 

$

2.12

 

$

33,046

 

18,730

 

$

1.76

 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2 7/8% convertible senior subordinated notes

 

927

 

2,255

 

(0.08

)

293

 

706

 

(0.02

)

 

1,374

 

2,255

 

(0.15

)

745

 

1,226

 

(0.07

)

Stock options and restricted stock

 

 

370

 

(0.03

)

 

436

 

(0.02

)

Stock options and unvested restricted stock

 

 

379

 

(0.04

)

 

397

 

(0.03

)

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations available to common stockholders

 

$

23,754

 

21,710

 

$

1.09

 

$

18,856

 

19,828

 

$

0.95

 

 

$

41,926

 

21,765

 

$

1.93

 

$

33,791

 

20,353

 

$

1.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

392

 

 

 

 

 

333

 

 

 

 

 

 

334

 

 

 

 

 

327

 

 

 

 


(1)   The 2004 amounts have been restated for the effects of applying EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share.”

 

Note 4.  Comprehensive Income

Comprehensive income includes the change in hedging instruments that are reflected in shareholders’stockholders’ equity instead of net income and unrealized gains and losses on investments.income.  The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Net income

 

$

12,675

 

$

10,840

 

$

22,665

 

$

18,319

 

 

$

17,632

 

$

14,470

 

$

40,297

 

$

32,789

 

Cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivative gains (losses), net of tax effect of $869, $(2,277), $(201) and $(1,087), respectively

 

(1,363

)

3,560

 

334

 

1,651

 

Reversal of net derivative losses previously recorded due to their recognition in our statements of operations as incremental interest expense, net of tax effect of $(148), $(474), $(367) and $(869), respectively

 

220

 

741

 

567

 

1,359

 

Net derivative gains (losses), net of tax effect of $(843), $1,466, $(1,044) and $379, respectively

 

1,194

 

(2,292

)

1,527

 

(641

)

Reversal of net derivative losses previously recorded due to their recognition in our statements of operations as incremental interest expense, net of tax effect of $(44), $(411), $(411) and $(1,280), respectively

 

48

 

642

 

616

 

2,001

 

Total comprehensive income

 

$

11,532

 

$

15,141

 

$

23,566

 

$

21,329

 

 

$

18,874

 

$

12,820

 

$

42,440

 

$

34,149

 

 

6



 

Note 5.  Acquisitions

The following acquisitions were made in the first sixnine months of 2005.

                  In January 2005, we acquired a Chrysler and Jeep franchise in Concord, California.  The franchises were added to our Dodge store in that market.  The store is now named Lithia Chrysler Jeep Dodge of Concord.

                  In January 2005, we acquired a Chrysler franchise in Eugene, Oregon.  The franchise was added to our Dodge store in that market.  The stores name is now Lithia Chrysler Dodge of Eugene.

                  In February 2005, we acquired a Chrysler, Jeep, Dodge, Dodge Truck store in Omaha, Nebraska.  The store has anticipated annualized revenues of $110 million.  The store was renamed Lithia Chrysler Jeep Dodge of Omaha.

                  In April 2005, we acquired a Chrysler, Dodge, Dodge Truck store in Eureka, California.  The store has anticipated annualized revenues of $28 million.  The store was renamed Lithia Chrysler Dodge of Eureka.

                  In May 2005, we acquired a Chrysler, Jeep, Dodge, Dodge Truck store in Butte, Montana.  The store has anticipated annualized revenues of $26 million.  The store was renamed Lithia Chrysler Dodge Jeep of Butte.

In August 2005, we acquired a Chrysler, Dodge, Dodge Truck store in Wenatchee, Washington.  The store had annualized revenues of approximately $8 million.  The store was renamed Lithia Chrysler Dodge of Wenatchee.

 

The above acquisitions were accounted for under the purchase method of accounting.  Pro forma results of operations assuming all of the 2005 and the previously disclosed 2004 acquisitions occurred as of January 1, 2004 are as follows (in thousands, except per share amounts):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Total revenues

 

$

765,788

 

$

759,242

 

$

1,451,835

 

$

1,494,960

 

 

$

870,328

 

$

826,701

 

$

2,322,652

 

$

2,324,056

 

Net income

 

12,709

 

12,017

 

22,732

 

20,210

 

 

17,634

 

15,852

 

40,354

 

36,058

 

Basic earnings per share

 

0.66

 

0.64

 

1.19

 

1.08

 

 

0.92

 

0.84

 

2.11

 

1.93

 

Diluted earnings per share

 

0.61

 

0.60

 

1.09

 

1.03

 

 

0.83

 

0.76

 

1.92

 

1.81

 

 

There are no future contingent payouts related to any of the above2004 or 2005 acquisitions and no portion of the purchase price was paid with our equity securities. During the first sixnine months of 2005 we acquired the fourteenfour stores and seventeen franchises and three stores discussed above for $26.0$28.0 million, which included $10.0$10.9 million of goodwill and $3.7$4.1 million of other intangible assets. Within one year from the purchase date, we may update the value allocated to purchased assets and the resulting goodwill balances based on pending information received regarding the valuation of such assets.  All of the goodwill from the above acquisitions is expected to be deductible for tax purposes.

 

Note 6.  Dividend Payments

Cash dividends at the rate of $0.08 per common share, which totaled approximately $1.5 million, were paid on March 14, 2005 related to the fourth quarter of 2004 and on May 20, 2005 related to the first quarter of 2005.  In addition, in July 2005, our Board of Directors approved a 50% increase in the dividend on our Class A and Class B common stock to $0.12 per share.  The dividend, which totaled approximately $2.3 million, was paid on August 19, 2005.

7



 

Note 7.  Stock-Based Compensation

We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”  Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which we adopted in December 2002, we have computed, for pro forma disclosure purposes, the impact on net income and net income per share as if we had accounted for

7



our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in thousands):

 

Three Months Ended June 30,

 

2005

 

2004

 

Three Months Ended September 30,

 

2005

 

2004

 

Net income, as reported

 

$

12,675

 

$

10,840

 

 

$

17,632

 

$

14,470

 

Add – Stock-based employee compensation expense included in reported net income, net of related tax effects

 

25

 

25

 

 

64

 

25

 

Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(683

)

(900

)

 

(629

)

(949

)

Net income, pro forma

 

$

12,017

 

$

9,965

 

 

$

17,067

 

$

13,546

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.66

 

$

0.58

 

 

$

0.92

 

$

0.77

 

Pro forma

 

$

0.63

 

$

0.53

 

 

$

0.89

 

$

0.72

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

As reported

 

$

0.60

 

$

0.54

 

 

$

0.83

 

$

0.70

 

Pro forma

 

$

0.57

 

$

0.50

 

 

$

0.80

 

$

0.66

 

 

Six Months Ended June 30,

 

2005

 

2004

 

Nine Months Ended September 30,

 

2005

 

2004

 

Net income, as reported

 

$

22,665

 

$

18,319

 

 

$

40,297

 

$

32,789

 

Add – Stock-based employee compensation expense included in reported net income, net of related tax effects

 

49

 

50

 

Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(1,383

)

(1,589

)

Add — Stock-based employee compensation expense included in reported net income, net of related tax effects

 

233

 

117

 

Deduct — total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(2,132

)

(2,580

)

Net income, pro forma

 

$

21,331

 

$

16,780

 

 

$

38,398

 

$

30,326

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

As reported

 

$

1.19

 

$

0.98

 

 

$

2.11

 

$

1.75

 

Pro forma

 

$

1.12

 

$

0.90

 

 

$

2.01

 

$

1.62

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

As reported

 

$

1.09

 

$

0.94

 

 

$

1.91

 

$

1.65

 

Pro forma

 

$

1.02

 

$

0.87

 

 

$

1.83

 

$

1.54

 

 

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

 

Three and Six Months Ended June 30,

 

2005

 

2004

 

Three and Nine Months Ended September 30,

 

2005

 

2004

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

2.32

%

0.93% - 0.95

%

 

2.32

%

0.93 - 1.22

%

Dividend yield

 

1.23

%

0.99% - 1.12

%

 

1.23

%

0.99 - 1.19

%

Expected lives

 

3 months

 

3 months

 

 

3 months

 

3 months

 

Volatility

 

28.18

%

33.85% - 47.31

%

 

28.18

%

28.11 - 47.31

%

 

 

 

 

 

 

 

 

 

 

Option Plans

 

 

 

 

 

 

 

 

 

 

Risk-free interest rates

 

3.58% - 3.71

%

2.80

%

 

3.58 - 3.71

%

2.80

%

Dividend yield

 

1.16% - 1.20

%

1.04

%

 

1.16 - 1.20

%

1.04

%

Expected lives

 

5.4 years

 

5.4 years

 

 

5.4 years

 

5.4 years

 

Volatility

 

41.92% - 42.04

%

43.32

%

 

41.92 - 42.04

%

43.32

%

 

During the second quarter of 2005, we modified our employee stock purchase plan to eliminate the look-back feature and, accordingly, the fair value of such grants is equal to the 15% purchase discount on the date of grant.

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment,” which requires companies to recognize in their income statement the grant-date fair value of stock options and other equity-based compensation issued to employees.  Originally, the FASB had determined that the new rules would be effective for the first interim or annual period beginning after June 15, 2005. However, in April 2005, the Securities and Exchange Commission amended SFAS 123R

8



to be effective for the first annual period beginning after June 15, 2005.  Accordingly, we will adopt SFAS No. 123R in our first quarter of 2006. We do not expect the results of SFAS No. 123R to be significantly different than those of applying SFAS No. 123.  SFAS No. 123R will not have any effect on our cash flows.

8



 

Note 8.  Unearned Compensation

Unearned compensation includes the value of restricted stock issued to employees for which vesting provisions have not yet been met. The unearned compensation will be recognized over the vesting periods of up to five years.

 

Note 9.  Discontinued Operations

During the first sixnine months of 2005, we classified one dealership as a discontinued operation.  We had additional discontinued operations during 2004. As of JuneSeptember 30, 2005, the amount of goodwill and other intangible assets disposed of related to the 2005 discontinued operation was $4.4 million. Certain other financial information related to discontinued operations was as follows (in thousands):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Revenue

 

$

1,441

 

$

17,371

 

$

6,019

 

$

35,562

 

 

$

10

 

$

14,221

 

$

6,029

 

$

49,783

 

Pre-tax income (loss)

 

(153

)

(17

)

(303

)

(388

)

 

(149

)

(368

)

(452

)

(756

)

Gain (loss) on disposal of discontinued operations

 

 

(4

)

36

 

(12

)

 

(9

)

347

 

27

 

335

 

 

We continually monitor the performance of each of our stores and make determinations to sell based primarily on return on capital criteria.

 

Interest expense is allocated to stores classified as discontinued operations for actual flooring interest expense directly related to the new vehicles in the store.  Interest expense related to the used vehicle line of credit is allocated based on total used vehicle inventory of the store, and interest expense related to the equipment line of credit is allocated based on the amount of fixed assets.

 

Note 10. Reclassifications

During the first quarter of 2005, we reclassified bank fees and bank card charges, net of cash discounts earned, from other income (expense) to selling, general and administrative expense.  The effect on the three and sixnine months ended JuneSeptember 30, 2004 was to decrease other expense by $637,000$0.7 million and $1.2$1.9 million, respectively, and increase selling, general and administrative by like amounts.

During the third quarter of 2005, we separated our flooring notes payable into two classifications on our balance sheet; flooring notes payable and flooring notes payable: non-trade in order to distinguish between affiliated and unaffiliated manufacturer financing of new vehicles. Unaffiliated manufacturer financing is considered flooring notes payable: non-trade.  In connection with this separation, we also reclassified our statement of cash flows to report flooring notes payable: non-trade as a financing activity in accordance SFAS No. 95 “Statement of Cash Flows.”  Flooring notes payable to affiliated manufacturers continues to be reported as an operating cash flow.

Certain other reclassifications were also made to conform prior period presentation with current period presentation.

Note 11.  New Accounting Pronouncement

SFAS No. 154

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections: a replacement of APB Opinion No. 20 and FASB Statement No. 3,” which requires companies to apply most voluntary accounting changes retrospectively to prior financial statements. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Any future voluntary accounting changes made by us will be accounted for under SFAS No. 154 and will be applied retrospectively.

9



 

Note 11.12.  Subsequent EventEvents

 

Dividend

In JulyOctober 2005, our Board of Directors approved a 50% increase in the dividend on our Class A and Class B common stock toof $0.12 per share. The dividend, which will total approximately $2.3 million, will be paid on August 19,November 18, 2005 to shareholders of record on August 5,November 4, 2005.

Acquisitions

In October 2005, we acquired a Honda store and Chrysler and Jeep franchises that were added to our existing Dodge store in Midland, Texas. The combined stores and franchises have anticipated annualized revenues of $24 million.  The Honda store was renamed Lithia Honda of Midland.

In November 2005, we acquired a Toyota and a Honda store in Abilene, Texas.  The stores have anticipated annualized revenues of $60 million.  The stores were renamed Lithia Toyota of Abilene and Honda of Abilene.

 

Item 2.                       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward LookingForward-Looking Statements and Risk Factors

Some of the statements in this Form 10-Q constitute forward-looking statements.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements.

9



Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99.1 to thisour Quarterly Report on Form 10-Q.10-Q for the quarter ended June 30, 2005, as filed with the Securities and Exchange Commission on August 9, 2005.  These factors have not significantly changed since the filing of our Form 10-Q for the quarter ended June 30, 2005.

 

Although we believe that the assumptions underlying the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

 

Overview

We are a leading operator of automotive franchises and retailer of new and used vehicles and services.  As of August 5,November 7, 2005, we offered 25 brands of new vehicles through 176182 franchises in 8891 stores in the Western United States and over the Internet.  As of August 5,November 7, 2005, we operated 16 stores in Oregon, 12 in California, 1112 in Washington, 911 in Texas, 7 in Idaho, 7 in Colorado, 7 in Alaska, 7 in Montana, 6 in Nevada, 3 in Nebraska, 2 in South Dakota and 1 in New Mexico. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance for our automotive customers.

 

Our auto-retailacquisition model is focused on acquiring average performing new vehicle franchised stores and then integrating and improving them.  Our goal is to maximize the operations of all four departments of every store we acquire.  We have had success with this strategy since our initial public offering in late 1996.  While our strategy has not changed over the last eight years, our ability to integrate and improve the stores that we acquire has increased dramatically. We have also developed a better process for identifying acquisition targets that fit our operating model.  Our cash position, substantial lines of credit,

10



plus an experienced and well-trained staff are all available to facilitate our continued growth as the opportunities develop.

 

In keeping with this model, we acquired a total of threeseven stores and fourteentwenty-two additional franchises from January 1, 2005 through August 5,November 7, 2005 with total estimated annual revenues of approximately $200nearly $300 million.

 

Historically, new vehicle sales have accounted for over half of our total revenues but less than one-third of total gross profit.  We use a volume-based strategy for new vehicle sales called “Promo Pricing,” that was initiated in 2002. This strategy complements the goal of most auto manufacturers, which have continued to offer a high level of cash or other incentives to automotive customers.

 

For the remainder of 2005 and into 2006, we expect that manufacturers will continue to offer incentives on new vehicle sales through a combination of employee pricing,repricing strategies, rebates, early lease cancellation programs and low interest rate loans to consumers or repricing strategies.consumers.

 

Since the beginning of 2002, the used vehicle market has been negatively impacted by strong competition from the new vehicle market, with heavy manufacturer incentives in the form of cash rebates and low interest financing. In the first quarter of 2005, the used vehicle market showed positive signs as a result of constrained industry supply, which led to improvements in retail pricing and margins.  In the second quarterand third quarters of 2005, we experienced an increase in trade-ins of quality used vehicles in connection with the General Motorsdomestic manufacturers “employee pricing” program.programs. We have implemented new procedures in the used vehicle business, which have also demonstrated positive results for our used vehicle business:

                  We have begun conducting our own local used vehicle auctions in select markets and managing the disposal of used vehicles at larger auctions.  The process is centralized and controlled at the management level.

                  We utilize a “Used Vehicle Promo Pricing” strategy, which markets vehicles with a $99 down payment and then groups vehicles by payment level. Vehicles are marked with clear and understandable pricing, which reduces haggling and speeds up the sale process. This strategy resolvesclearly addresses the three biggest issues of price, down payment and monthly payment for our customers and our sales personnel in a simple way.personnel.

10



 

In addition, as a complement to our ongoing used vehicle operation at each store, we use specialists in our support services group to increase the acquisition of used vehicles.  We believe that this will help bolster sales volumes in the 3 to 7 year old vehicle range.

 

11



Results of Continuing Operations

 

Certain revenue, gross margin and gross profit information by product line was as follows:

 

Three Months Ended June 30, 2005

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

Three Months Ended September 30, 2005

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicle

 

58.3

%

7.9

%

27.1

%

 

59.5

%

7.7

%

27.9

%

Used vehicle(1)

 

26.7

 

13.7

 

21.4

 

 

26.2

 

13.3

 

21.2

 

Finance and insurance(2)

 

3.7

 

99.8

 

21.8

 

 

3.8

 

99.9

 

23.1

 

Service, body and parts

 

10.1

 

49.2

 

29.4

 

 

9.5

 

47.9

 

27.7

 

Fleet and other.

 

1.2

 

4.4

 

0.3

 

Fleet and other

 

1.0

 

2.3

 

0.1

 

 

Three Months Ended June 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

Three Months Ended September 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicle

 

58.7

%

8.1

%

27.9

%

 

59.8

%

7.9

%

28.7

%

Used vehicle(1)

 

27.0

 

12.9

 

20.5

 

 

26.1

 

12.4

 

19.7

 

Finance and insurance(2)

 

3.6

 

99.6

 

21.2

 

 

3.7

 

99.9

 

22.3

 

Service, body and parts

 

10.5

 

48.7

 

30.1

 

 

9.9

 

48.6

 

29.1

 

Fleet and other.

 

0.2

 

22.7

 

0.3

 

Fleet and other

 

0.5

 

5.4

 

0.2

 

 

Six Months Ended June 30, 2005

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

Nine Months Ended September 30, 2005

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicle

 

56.5

%

8.0

%

26.0

%

 

57.7

%

7.9

%

26.7

%

Used vehicle(1)

 

28.2

 

13.5

 

22.0

 

 

27.5

 

13.5

 

21.8

 

Finance and insurance(2)

 

3.8

 

99.8

 

21.6

 

 

3.7

 

99.9

 

22.0

 

Service, body and parts

 

10.7

 

48.9

 

30.1

 

 

10.2

 

48.5

 

29.3

 

Fleet and other.

 

0.8

 

5.5

 

0.3

 

Fleet and other

 

0.9

 

3.3

 

0.2

 

 

Six Months Ended June 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

Nine Months Ended September 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicle

 

57.2

%

7.8

%

26.5

%

 

58.1

%

7.8

%

27.3

%

Used vehicle(1)

 

28.3

 

12.6

 

21.2

 

 

27.6

 

12.6

 

20.8

 

Finance and insurance(2)

 

3.6

 

99.5

 

21.5

 

Finance and insurance(2)

 

3.6

 

99.7

 

21.7

 

Service, body and parts

 

10.7

 

48.1

 

30.5

 

 

10.4

 

48.3

 

30.0

 

Fleet and other.

 

0.2

 

21.3

 

0.3

 

Fleet and other

 

0.3

 

10.4

 

0.2

 

 


(1)          Includes retail and wholesale used vehicles.

(2)          Reported net of anticipated cancellations.

 

The following table sets forth selected condensed financial data, expressed as a percentage of total revenues for the periods indicated.

 

Lithia Motors, Inc. (1)

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Lithia Motors, Inc.(1)

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicle

 

58.3

%

58.7

%

56.5

%

57.2

%

 

59.5

%

59.8

%

57.7

%

58.1

%

Used vehicle

 

26.7

 

27.0

 

28.2

 

28.3

 

 

26.2

 

26.1

 

27.5

 

27.6

 

Finance and insurance

 

3.7

 

3.6

 

3.8

 

3.6

 

 

3.8

 

3.7

 

3.7

 

3.6

 

Service, body and parts

 

10.1

 

10.5

 

10.7

 

10.7

 

 

9.5

 

9.9

 

10.2

 

10.4

 

Fleet and other

 

1.2

 

0.2

 

0.8

 

0.2

 

 

1.0

 

0.5

 

0.9

 

0.3

 

Total revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

100.0

%

100.0

%

100.0

%

100.0

%

Gross profit

 

17.0

 

17.0

 

17.3

 

16.8

 

 

16.4

 

16.5

 

17.0

 

16.7

 

Selling, general and administrative expenses

 

12.6

 

13.1

 

13.1

 

13.2

 

 

11.6

 

12.0

 

12.5

 

12.8

 

Depreciation and amortization

 

0.4

 

0.5

 

0.5

 

0.5

 

 

0.4

 

0.4

 

0.4

 

0.4

 

Income from operations

 

3.9

 

3.5

 

3.8

 

3.2

 

 

4.4

 

4.0

 

4.0

 

3.5

 

Floorplan interest expense

 

0.8

 

0.6

 

0.8

 

0.6

 

 

0.6

 

0.6

 

0.7

 

0.6

 

Other interest expense

 

0.4

 

0.3

 

0.4

 

0.3

 

 

0.4

 

0.3

 

0.4

 

0.3

 

Other income, net

 

0.0

 

0.0

 

0.0

 

0.0

 

Other expense, net

 

 

 

 

 

Income from continuing operations before taxes

 

2.8

 

2.6

 

2.6

 

2.3

 

 

3.5

 

3.2

 

2.9

 

2.6

 

Income tax expense

 

1.1

 

1.0

 

1.0

 

0.9

 

 

1.4

 

1.2

 

1.2

 

1.0

 

Income from continuing operations

 

1.7

%

1.6

%

1.6

%

1.4

%

 

2.0

%

1.9

%

1.8

%

1.6

%

 


(1) The percentages may not add due to rounding.

 

1112



 

The following tables set forth the changes in our operating results from continuing operations in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the three and six monthnine-month periods ended JuneSeptember 30, 2004:2004 (dollars in thousands, except per vehicle and per unit amounts):

 

 

Three Months Ended
June 30,

 

Increase

 

%
Increase

 

 

Three Months Ended
September 30,

 

Increase

 

%
Increase

 

(Dollars in thousands)

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicle sales

 

$

444,777

 

$

397,600

 

$

47,177

 

11.9

%

Used vehicle sales

 

203,257

 

182,251

 

21,006

 

11.5

 

New vehicle

 

$

517,536

 

$

448,805

 

$

68,731

 

15.3

%

Used vehicle

 

227,959

 

196,784

 

31,175

 

15.8

 

Finance and insurance

 

28,195

 

24,560

 

3,635

 

14.8

 

 

32,979

 

27,660

 

5,319

 

19.2

 

Service, body and parts

 

77,207

 

71,228

 

5,979

 

8.4

 

 

82,456

 

74,147

 

8,309

 

11.2

 

Fleet and other

 

9,001

 

1,365

 

7,636

 

559.4

 

 

8,380

 

3,631

 

4,749

 

130.8

 

Total revenues

 

762,437

 

677,004

 

85,433

 

12.6

 

 

869,310

 

751,027

 

118,283

 

15.7

 

Cost of sales

 

633,130

 

561,794

 

71,336

 

12.7

 

 

726,555

 

627,242

 

99,313

 

15.8

 

Gross profit

 

129,307

 

115,210

 

14,097

 

12.2

 

 

142,755

 

123,785

 

18,970

 

15.3

 

Selling, general and administrative

 

95,778

 

88,409

 

7,369

 

8.3

 

 

100,594

 

90,260

 

10,334

 

11.4

 

Depreciation and amortization

 

3,461

 

3,050

 

411

 

13.5

 

 

3,678

 

3,208

 

470

 

14.7

 

Income from operations

 

30,068

 

23,751

 

6,317

 

26.6

 

 

38,483

 

30,317

 

8,166

 

26.9

 

Floorplan interest expense

 

(6,144

)

(4,086

)

2,058

 

50.4

 

 

(5,628

)

(4,472

)

1,156

 

25.8

 

Other interest expense

 

(3,041

)

(2,155

)

886

 

41.1

 

 

(3,043

)

(2,305

)

738

 

32.0

 

Other income, net

 

282

 

281

 

1

 

0.4

 

Other, net

 

189

 

203

 

(14

)

(6.9

)

Income from continuing operations before taxes

 

21,165

 

17,791

 

3,374

 

19.0

 

 

30,001

 

23,743

 

6,258

 

26.4

 

Income tax expense

 

8,398

 

6,938

 

1,460

 

21.0

 

 

12,276

 

9,260

 

3,016

 

32.6

 

Income from continuing operations

 

$

12,767

 

$

10,853

 

$

1,914

 

17.6

%

 

$

17,725

 

$

14,483

 

$

3,242

 

22.4

%

 

 

 

 

 

 

 

 

 

New units sold

 

18,926

 

15,928

 

2,998

 

18.8

%

Average selling price per new vehicle

 

$

27,345

 

$

28,177

 

$

(832

)

(3.0

)

 

 

 

 

 

 

 

 

 

Used units sold

 

19,285

 

16,836

 

2,449

 

14.5

 

Average selling price per used vehicle

 

$

11,821

 

$

11,688

 

$

132

 

1.1

 

 

 

 

 

 

 

 

 

 

Finance and insurance income per retail unit

 

$

1,062

 

$

1,037

 

$

25

 

2.4

%

 

 

 

Three Months Ended
June 30,

 

Increase

 

%
Increase

 

 

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

New units sold

 

15,817

 

14,301

 

1,516

 

10.6

%

Average selling price per new vehicle

 

$

28,120

 

$

27,802

 

$

318

 

1.1

 

 

 

 

 

 

 

 

 

 

 

Used units sold

 

16,510

 

15,796

 

714

 

4.5

 

Average selling price per used vehicle

 

$

12,311

 

$

11,538

 

$

773

 

6.7

 

 

 

 

 

 

 

 

 

 

 

Finance and insurance sales per retail unit

 

$

1,063

 

$

1,004

 

$

59

 

5.9

 

 

Six Months Ended
June 30,

 

Increase

 

%
Increase

 

 

Nine Months Ended
September 30,

 

Increase

 

%
Increase

 

(Dollars in thousands)

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New vehicle

 

$

810,424

 

$

749,005

 

$

61,419

 

8.2

%

 

$

1,327,960

 

$

1,197,810

 

$

130,150

 

10.9

%

Used vehicle

 

403,791

 

370,107

 

33,684

 

9.1

 

 

631,728

 

566,869

 

64,859

 

11.4

 

Finance and insurance

 

53,828

 

47,787

 

6,041

 

12.6

 

 

85,868

 

74,963

 

10,905

 

14.5

 

Service, body and parts

 

153,234

 

139,999

 

13,235

 

9.5

 

 

235,690

 

214,146

 

21,544

 

10.1

 

Fleet and other

 

11,965

 

2,896

 

9,069

 

313.2

 

 

20,163

 

6,378

 

13,785

 

216.1

 

Total revenues

 

1,433,242

 

1,309,794

 

123,448

 

9.4

 

 

2,301,409

 

2,060,166

 

241,243

 

11.7

 

Cost of sales

 

1,184,663

 

1,089,096

 

95,567

 

8.8

 

 

1,910,788

 

1,715,938

 

194,850

 

11.4

 

Gross profit

 

248,579

 

220,698

 

27,881

 

12.6

 

 

390,621

 

344,228

 

46,393

 

13.5

 

Selling, general and administrative

 

187,459

 

173,262

 

14,197

 

8.2

 

 

287,279

 

263,239

 

24,040

 

9.1

 

Depreciation and amortization

 

6,902

 

5,950

 

952

 

16.0

 

 

10,580

 

9,158

 

1,422

 

15.5

 

Income from operations

 

54,218

 

41,486

 

12,732

 

30.7

 

 

92,762

 

71,831

 

20,931

 

29.1

 

Floorplan interest expense

 

(11,392

)

(7,668

)

3,724

 

48.6

 

 

(17,020

)

(12,140

)

4,880

 

40.2

 

Other interest expense

 

(5,850

)

(3,889

)

1,961

 

50.4

 

 

(8,893

)

(6,194

)

2,699

 

43.6

 

Other income, net

 

599

 

502

 

97

 

19.3

 

Other, net

 

727

 

677

 

50

 

7.4

 

Income from continuing operations before taxes

 

37,575

 

30,431

 

7,144

 

23.5

 

 

67,576

 

54,174

 

13,402

 

24.7

 

Income tax expense

 

14,748

 

11,868

 

2,880

 

24.3

 

 

27,024

 

21,128

 

5,896

 

27.9

 

Income from continuing operations

 

$

22,827

 

$

18,563

 

$

4,264

 

23.0

%

 

$

40,552

 

$

33,046

 

$

7,506

 

22.7

%

 

 

 

 

 

 

 

 

 

New units sold

 

47,808

 

42,985

 

4,823

 

11.2

%

Average selling price per new vehicle

 

$

27,777

 

$

27,866

 

$

(89

)

(0.3

)

 

 

 

 

 

 

 

 

 

Used units sold

 

52,451

 

49,297

 

3,154

 

6.4

 

Average selling price per used vehicle

 

$

12,044

 

$

11,499

 

$

545

 

4.7

 

 

 

 

 

 

 

 

 

 

Finance and insurance income per retail unit

 

$

1,052

 

$

1,006

 

$

46

 

4.6

%

 

1213



 

 

Six Months Ended
June 30,

 

Increase

 

%
Increase

 

 

 

2005

 

2004

 

(Decrease)

 

(Decrease)

 

New units sold

 

28,882

 

27,057

 

1,825

 

6.7

%

Average selling price per new vehicle

 

$

28,060

 

$

27,682

 

$

378

 

1.4

 

 

 

 

 

 

 

 

 

 

 

Used units sold

 

33,166

 

32,461

 

705

 

2.2

 

Average selling price per used vehicle

 

$

12,175

 

$

11,402

 

$

773

 

6.8

 

 

 

 

 

 

 

 

 

 

 

Finance and insurance sales per retail unit

 

$

1,065

 

$

998

 

$

67

 

6.7

 

 

Revenues

Total revenues increased 12.6%15.7% and 9.4%11.7%, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004, as a result of acquisitions and improvements in same-store sales, which were driven by increases in the average newunits sold.  Same-store sales increased 7.9% and used vehicle sales prices.  A 3.4% increase in same store sales also contributed to the increase2.7%, respectively, in the three month periodand nine-month periods ended JuneSeptember 30, 2005 compared to the three month period ended June 30, 2004, while the six month period increase was partially offset by a 0.3% decrease in same-store sales.same periods of 2004.  The increaseincreases in total same store sales in the second quarter of 2005 waswere driven by same-store sales increases across all business lines. The “employee pricing” programs offered by the domestic manufacturers during the second and third quarters of 2005 resulted in a decrease in average selling prices which led to increases in new units sold, the combination of which resulted in higher same-store new vehicle sales. The same programs also contributed to improvements in same-store used vehicle sales due to the large number of good quality used vehicle trade-ins associated with the new vehicle purchases. Same-store sales percentage increases (decreases) were as follows:

 

 

Three months ended June
30, 2005 vs. three months
ended June 30, 2004

 

Six months ended June
30, 2005 vs. six months
ended June 30, 2004

 

 

Three months ended
September 30, 2005 vs.
three months ended
September 30, 2004

 

Nine months ended
September 30, 2005
vs. nine months ended
September 30, 2004

 

New vehicle retail (excludes fleet)

 

3.8

%

(1.0

)%

 

7.8

%

2.3

%

Used vehicle, including wholesale

 

3.7

 

0.9

 

 

9.3

 

3.8

 

Finance and insurance

 

2.1

 

0.2

 

 

7.0

 

2.7

 

Service, body and parts

 

1.0

 

0.5

 

 

4.7

 

1.9

 

Total sales (excludes fleet)

 

3.4

 

(0.3

)

 

7.9

 

2.7

 

 

Same-store sales are calculated by dealership comparing only those dealerships with operations in both comparative periods.

 

Penetration rates for certain products were as follows:

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Finance and insurance

 

77

%

76

%

78

%

76

%

 

73

%

79

%

76

%

77

%

Service contracts

 

42

 

43

 

43

 

43

 

 

42

 

43

 

43

 

43

 

Lifetime oil change and filter

 

39

 

38

 

39

 

37

 

 

39

 

34

 

39

 

36

 

The decrease in the finance and insurance penetration rate in the third quarter of 2005 compared to the third quarter of 2004 was due to less availability of manufacturer subsidized low-interest rate loans during the third quarter of 2005 when the manufacturers offered their employee pricing programs.

 

Gross Profit

Gross profit increased $14.1$19.0 million and $27.9$46.4 million, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004 due to increased total revenues as well as an increase in our overall gross margin for the six monthnine-month period. Our gross margins by business lines are detailed in the tables below:

 

 

Three Months Ended June 30,

 

Lithia

 

 

Three Months Ended September 30,

 

Lithia

 

 

2005

 

2004

 

Margin Change*

 

 

2005

 

2004

 

Margin Change*

 

New vehicle

 

7.9

%

8.1

%

(20

)bp

 

7.7

%

7.9

%

(20

)bp

Retail used vehicle

 

15.7

 

14.7

 

100

 

 

15.7

 

14.2

 

150

 

Wholesale used vehicle

 

3.8

 

4.2

 

(40

)

 

1.6

 

3.2

 

(160

)

Finance and insurance

 

99.8

 

99.6

 

20

 

 

99.9

 

99.9

 

 

Service and parts

 

49.2

 

48.7

 

50

 

 

47.9

 

48.6

 

(70

)

Overall

 

17.0

 

17.0

 

 

 

16.4

 

16.5

 

(10

)

 

13



 

Six Months Ended June 30,

 

Lithia

 

 

Nine Months Ended September 30,

 

Lithia

 

 

2005

 

2004

 

Margin Change*

 

 

2005

 

2004

 

Margin Change*

 

New vehicle

 

8.0

%

7.8

%

20

bp

 

7.9

%

7.8

%

10

bp

Retail used vehicle

 

15.5

 

14.4

 

110

 

 

15.6

 

14.4

 

120

 

Wholesale used vehicle

 

4.1

 

3.6

 

50

 

 

3.2

 

3.4

 

(20

)

Finance and insurance

 

99.8

 

99.5

 

30

 

 

99.9

 

99.7

 

20

 

Service and parts

 

48.9

 

48.1

 

80

 

 

48.5

 

48.3

 

20

 

Overall

 

17.3

 

16.8

 

50

 

 

17.0

 

16.7

 

30

 

 


* “bp” stands for basis points (one hundred basis points equals one percent).

 

14



In the new vehicle business, margins improved for the six-monthnine-month period as a result of strategic initiatives designed to increasein the first quarter of the year that increased gross profit per vehicle sold.  These increasesinitiatives were partially offset somewhat by lower margins which resulted from a volume based strategy for all brands and GM’smanufacturers’ “employee pricing” program,programs, which took effect in June 2005created a higher volume, lower margin environment during the second and are scheduled to continue through mostthird quarters of the third quarter of 2005.

Retail used vehicle margins improved as a result of a stronger pricing and retail environment for used vehicles.  vehicles in combination with a large quantity of good quality used vehicle trade-ins in recent quarters.

Margins in our wholesale used vehicle business improveddeclined in the six month period duethree and nine-month periods of 2005 compared to our continued strategythe same periods of holding2004, as a result of aggressive wholesaling in the third quarter of 2005 designed to clear inventories going into the seasonally slower winter months.  Gross profits per unit in both periods remained positive.  We continue to hold our own local used vehicle auctions and managingmanage the disposal of our units at larger auctions. auctions, which has contributed to the improvements in gross profit per vehicle.

The service and parts business has benefited from our focus on service advisor training, which has led to gains in the sale of higher margin service items.items in the first nine months of 2005. In addition, we have also instituted a number of pricing and cost saving initiatives across the entire service and parts business. High penetration rates for our lifetime oil change and filter service have also contributed to our gross profit margin increases.increases in the first nine months of 2005.  In the third quarter of 2005, the service and parts business continued to grow steadily, however, a relative shift in mix to lower margin parts business from the higher margin service business contributed to the decrease in the gross margin compared to the third quarter of 2004.

 

The improvedincreases in same store revenues combined with the gross margins achieved led to increases in total same-store gross profit of 1.9%6.1% and 3.5%, respectively, in the six monthsthree and nine-month periods ended June 30, 2005 despite a 0.3% decrease in total same-store sales in the six month period ended JuneSeptember 30, 2005 compared to the same period of 2004.

 

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses, facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting, professional services and general corporate expenses.

 

Selling, general and administrative expenseSG&A increased $7.4$10.3 million and $14.2$24.0 million, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to same periods of 2004 and improved 50by 40 basis points and 1030 basis points, respectively, as a percentage of revenue. The increases in dollars spent were due to increased selling, or variable, expenses related to the increases in revenues and the number of locations.  More importantly, however, SG&A as a percentage of gross profit is an industry standard and better gauge for measuring performance relative to SG&A expense. SG&A as a percentage of gross profit improved by 260240 basis points and 310300 basis points, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004.2004 as we continue to realize the positive results of multiple cost saving initiatives.

 

Depreciation and Amortization

Depreciation and amortization increased $0.4$0.5 million and $1.0$1.4 million, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004 due to the addition of property and equipment primarily related to our acquisitions, as well as leasehold improvements to existing facilities.

 

Income from Operations

Operating margins improved by 40 basis points and 6050 basis points, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 to 3.9%4.4% and 3.8%4.0%, respectively, from 3.5%4.0% and 3.2%3.5%, respectively, in the comparable periods of 2004.  The increases were due the improved overall gross profit margins as discussed above, as well asprimarily to lower operating expenses as a percentage of revenue.revenue and of gross profit in both the three and nine-month periods, and the improved overall gross profit margins in the nine-month period as discussed above.

 

1415



 

Floorplan Interest Expense

Floorplan interest expense increased $2.1$1.2 million and $3.7$4.9 million, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004. A $424,000 and $962,000 increase, respectively, was the result of increasesChanges in the average outstanding balances resulted in a decrease of our floorplan facilities, mainly due to acquisitions,$24,000 and increasesan increase of $2.5 million$938,000, respectively, and $4.1 million, respectively, resulted from increases in the average interest rates on our floorplan facilities.facilities resulted in increases of $2.1 million and $6.2 million, respectively.  These increases were partially offset by decreases of $847,000$1.0 million and $1.3$2.3 million, respectively, related to our interest rate swaps.

 

Other Interest Expense

Other interest expense includes interest on our convertible notes, debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes.

 

Other interest expense increased $0.9$0.7 million and $2.0$2.7 million, respectively, in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004. Changes in the weighted average interest rate on our debt in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to the same periods of 2004 increased other interest expense by approximately $265,000$0.8 million and $589,000,$1.4 million, respectively, and changes in the average outstanding balances resulted in increasesa decrease of $68,000 and an increase of approximately $665,000 and $1.4 million, respectively. Our average interest rate increased at only about half the pace of market interest rates due to our hedging strategies. Interest expense related to the $85.0 million of convertible notes that were issued in May 2004 totals approximately $764,000 per quarter, which consists of $611,000 of contractual interest and $153,000 of amortization of debt issuance costs.

 

Income Tax Expense

Our effective tax rate was 39.3%40.0% in the first sixnine months of 2005 compared to 39.0% in the first sixnine months of 2004. Our effective tax rate may be affected in the future by the mix of asset acquisitions compared to corporate acquisitions, as well as by the mix of states where our stores are located. The increase in our effective tax rate in the first nine months of 2005 compared to the first nine months of 2004 was due primarily to an increase in revenue in some of our higher tax rate states.

 

Income from Continuing Operations

Income from continuing operations as a percentage of revenue increased in the three and six monthnine-month periods ended JuneSeptember 30, 2005 compared to same periods of 2004 as a result of improvements in gross margins and operating expenses as discussed above.

 

Discontinued Operations

 

During the first sixnine months of 2005, we classified one dealership as a discontinued operation.  We had additional discontinued operations during 2004. As of JuneSeptember 30, 2005, the amount of goodwill and other intangible assets disposed of related to the 2005 discontinued operation was $4.4 million.  Certain financial information related to discontinued operations was as follows (in thousands):

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2005

 

2004

 

2005

 

2004

 

 

2005

 

2004

 

2005

 

2004

 

Revenue

 

$

1,441

 

$

17,371

 

$

6,019

 

$

35,562

 

 

$

10

 

$

14,221

 

$

6,029

 

$

49,783

 

Pre-tax income (loss)

 

(153

)

(17

)

(303

)

(388

)

 

(149

)

(368

)

(452

)

(756

)

Gain (loss) on disposal of discontinued operations

 

 

(4

)

36

 

(12

)

 

(9

)

347

 

27

 

335

 

 

We continually monitor the performance of each of our stores and make determinations to sell based primarily on return on capital criteria.

 

Interest expense is allocated to stores classified as discontinued operations for actual flooring interest expense directly related to the new vehicles in the store.  Interest expense related to the used vehicle line of credit is allocated based on total used vehicle inventory of the store, and interest expense related to the equipment line of credit is allocated based on the amount of fixed assets.

 

1516



 

Seasonality and Quarterly Fluctuations

 

Historically, our sales have been lower in the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced number of business days during the holiday season. As a result, financial performance is expected to be lower during the first and fourth quarters than during the other quarters of each fiscal year. We believe that interest rates, levels of consumer debt and consumer confidence, as well as general economic conditions, also contribute to fluctuations in sales and operating results. Acquisitions have also been a contributor to fluctuations in our operating results from quarter to quarter.

 

Liquidity and Capital Resources

 

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity and private debt offerings to finance operations and expansion. We believe that our available cash, cash equivalents, available lines of credit and cash flows from operationoperations will be sufficient to meet our anticipated operating expenses and capital requirements for at least 24 tothe next 36 months from JuneSeptember 30, 2005.

 

Our inventories increaseddecreased to $659.1$516.1 million at JuneSeptember 30, 2005 from $536.7 million at December 31, 2004 due primarily to acquisitionsstrong sales in the second and our decision to purchase a greater stockthird quarters of vehicles going into the seasonally strongest selling period of the year.  This was a strategic decision designed to ensure a good allocation of popular models and good inventories at our stores going into the summer selling season2005, offset in order to take advantage of what we believe will be a strong period supportedpart by manufacturer incentives.acquisitions. As a result, our new and used flooring notes payable increaseddecreased to $575.0$426.1 million at JuneSeptember 30, 2005 from $450.9 million at December 31, 2004.  New vehicles are financed at approximately 100% and used vehicles are financed at approximately 80% of cost. Our days supply of new vehicles decreased by approximately 1427 days at JuneSeptember 30, 2005 compared to December 31, 2004. Our new vehicle inventories are 4 days below our average September 30 balances and we believe that they are at good levels going into the seasonally slower fourth quarter.  Our days supply of used vehicles increased by approximately 1110 days at JuneSeptember 30, 2005 compared to December 31, 2004. This increase was due to aour low level of inventory at the beginning of 2005 and the large number of trade-ins received as a result or our volume strategy andvia the GMdomestic manufacturers’ “employee pricing” programprograms that occurred in the second quarterand third quarters of 2005. WeUsed vehicle inventories at September 30, 2005 were 4 days above average levels for September 30 and we believe that our new and used vehicle inventoriesthey are at appropriate levels at this time.

 

As a result of the store and franchise acquisitions in the first sixnine months of 2005, our goodwill and other intangibles increased $9.2$10.5 million to $298.4$299.7 million at JuneSeptember 30, 2005, compared to $289.2 million at December 31, 2004. This increase was partially offset by a $4.4 million decrease in goodwill and other intangibles related to dealership disposals. Cash paid for acquisitions, net of cash received, in the first sixnine months of 2005 was $26.0$28.0 million.

 

Our Board of Directors declared a dividend of $0.08 per share on our Class A and Class B common stock for the fourth quarter of 2004 and for the first quarter of 2005, which were paid in the first six monthstwo quarters of 2005 and totaled approximately $1.5 million each. For the second quarterand third quarters of 2005, our Board of Directors also declared a 50% increase in the$0.12 per share dividend on our Class A and Class B common stock that totaled approximately $2.3 million each. The dividend related to $0.12 per share, which will bethe second quarter of 2005 was paid induring the third quarter of 2005 and total approximately $2.3 million.the dividend for the third quarter of 2005 will be paid in November 2005. We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

 

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through JuneSeptember 30, 2005, we have purchased a total of 60,23060,231 shares under this program and may continue to do so from time to time in the future as conditions warrant.  However, the recent change in the tax law tends to equalize the benefits of dividends and share repurchases as a means to return capital or earnings to shareholders. As a result, we believe it is now advantageous to shareholders to have a dividend in place.  With the dividend, we are able to offer an

17



immediate and tangible return to our shareholders without reducing our already limited market float, which occurs when we repurchase shares.

16



 

We have a working capital and used vehicle flooring credit facility with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation, as amended in June 2004, totaling up to $150 million, which expires May 1, 2007 with an option for the lenders to extend to May 1, 2008, with interest due monthly.2008.  This credit facility is cross-collateralized and secured by cash and cash equivalents, new and used vehicles on a subordinated basis to the extent not specifically financed by other lenders, parts inventories, accounts receivable, intangible assets and equipment. We pledged to DaimlerChrysler Services and Toyota Motor Credit the stock of all of our dealership subsidiaries except entities operating BMW, Honda, Nissan or Toyota stores.

 

The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor Credit require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels.  At JuneSeptember 30, 2005, we were in compliance with all of the covenants of this agreement.

 

Ford Motor Credit, General Motors Acceptance Corporation and Volkswagen Credit have agreed to floor all of our new vehicles for their respective brands with DaimlerChrysler Services North America LLC and Toyota Motor Credit Corporation serving as the primary lenders for substantially all other brands.  These new vehicle lines are secured by new vehicle inventory of the relevant brands.

We also had  Vehicles financed by lenders not directly associated with the manufacturer are included as a revolving credit real estate linefinancing activity in our statements of cash flows, while vehicles financed by lenders directly associated with Toyota Motor Credit totaling $40 million, which expired in May 2005.the manufacturer are included as an operating activity.

 

We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line of credit for leased vehicles and equipment purchases and expires May 1, 2007. The financial covenants in our agreement with U.S. Bank N.A. require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a minimum total net worth; and (iv) a minimum tangible net worth. At JuneSeptember 30, 2005, we were in compliance with all of the covenants of this agreement.

 

Interest rates on all of the above facilities ranged from 4.95%5.36% to 6.09%6.61% at JuneSeptember 30, 2005.  Amounts outstanding on the lines at JuneSeptember 30, 2005, together with amounts remaining available under such lines were as follows (in thousands):

 

 

Outstanding at
June 30, 2005

 

Remaining Availability
as of June 30, 2005

 

 

Outstanding at
September 30, 2005

 

Remaining Availability
as of
September 30, 2005

 

New and program vehicle lines

 

$

554,994

 

$

 

*

 

$

415,134

 

$

 

*

Working capital and used vehicle line

 

20,000

 

130,000

 

 

11,000

 

139,000

 

Equipment/leased vehicle line

 

50,000

 

 

 

50,000

 

 

 

$

624,994

 

$

130,000

 

 

$

476,134

 

$

139,000

 

 


*  There are no formal limits on the new and program vehicle lines with certain lenders.

 

We also have outstanding $85.0 million of 2.875% senior subordinated convertible notes due 2014. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

                  if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter;

                  if, after May 1, 2009, the closing  sale price of our common stock exceeds 120% of the conversion price;

18



                  if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than

17



98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

                  if the notes have been called for redemption; or

                  upon certain specified corporate events.

 

A declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes if such adjustment exceeds 1%. of the current conversion rate. We declared a dividend of $0.12 per share in July 2005 and again in October 2005.  The affect of such dividenddividends does not yet reach the 1% threshold amount and no adjustment in the conversion rate is currently required.

 

The notes are redeemable at our option beginning May 6, 2009 at the redemption price of 100% of the principal amount plus any accrued interest. The holders of the notes can require us to repurchase all or some of the notes on May 1, 2009 and upon certain events constituting a fundamental change or a termination of trading. A fundamental change is any transaction or event in which all or substantially all of our common stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive, consideration that is not all, or substantially all, common stock that is listed on, or immediately after the transaction or event, will be listed on, a United States national securities exchange. A termination of trading will have occurred if our common stock is not listed for trading on a national securities exchange or the NASDAQ stock market.

 

Our earnings to fixed charge coverage ratio, as defined in the senior subordinated convertible notes, was 2.753.12 for the sixnine months ended JuneSeptember 30, 2005.

 

We had capital commitments of $7.5$12.1 million at JuneSeptember 30, 2005 for the construction of fourthree new facilities, additions to fourthree existing facilities and the remodel of one facility.two facilities.  The new facilities will be for our Toyota dealershipdealerships in Springfield, Oregon our Chevrolet and Hyundai dealerships in Odessa, Texas and a body shopour Dodge dealership in Odessa, Texas.Sioux Falls, South Dakota.  We have already incurred $8.9$3.9 million for these projects with an additional $7.0$5.5 million expected to be incurred during the remainder of 2005 and the remaining $0.5$6.6 million to be incurred in 2006. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended.

 

Critical Accounting Policies and Use of Estimates

 

We reaffirm our critical accounting policies and use of estimates as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2005.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

There have been no material changes in our reported market risks and risk management policies or risk factors since the filing of our 2004 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2005.

19



 

Item 4.  Controls and Procedures

 

Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that

18



evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer, our Chief Financial Officer and our Chief Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

 

PART II - - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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

 

On April 28, 2004,November 25, 2003, Aimee Phillips filed a lawsuit was filed against us in the United StatesU.S. District Court for the District of Oregon:  Robert Allen, et al., vs.Oregon (Case No. 03-3109-HO) against Lithia Motors, Inc., et al., Civil Case No. 04-03032-CO.  The complaint seeks money damages from us for alleged and two of its wholly-owned subsidiaries alleging violations of state and federal and state RICO violations, violation of Oregon’s Unlawfullaws, the Oregon Unfair Trade Practices Act (“UTPA”) and common law fraud.  Ms. Phillips seeks damages, attorney’s fees and injunctive relief. Ms. Phillips’ complaint stems from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002.  On May 14, 2004, we filed an answer to Ms. Phillips’ Complaint.  This case was consolidated with the Allen case described below and has a similar current procedural status.

On April 28, 2004, Robert Allen and 29 other plaintiffs (“Allen Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 04-3032-HO) against Lithia Motors, Inc. and three of its wholly-owned subsidiaries alleging violations of state and federal RICO laws, the Oregon UTPA and common law fraud.  The Allen Plaintiffs seek damages, attorney’s fees and injunctive relief.  The Allen Plaintiffs’ Complaint stems from vehicle purchases made at Lithia dealerships between July 2000 and April 2001.  On August 27, 2004, we filed a Motion to Dismiss the Complaint.  On May 26, 2005, the Court entered an Order granting Defendants’ Motion to Dismiss plaintiffs’ state and federal RICO claims with prejudice.  The Court declined to exercise supplemental jurisdiction over plaintiffs’ UTPA and fraud claims.  Plaintiffs filed a Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted Plaintiffs’ Motion for Reconsideration and permitted the filing of a Second Amended Complaint (“SAC”).  On September 21, 2005, the Allen Plaintiffs, along with respect to arrangingMs. Phillips, filed the financing of vehicles. Each of the 23 Allen plaintiffs seeks stated actual damages ranging from $733 to $20,859, damages for mental distress ranging from $10,000 to $250,000, and punitive damages of $1,500,000. With statutory penalties,SAC.  In this complaint, the Allen plaintiffs seek actual damages that total less than $250,000,$500,000, trebled, approximately $3.0 million in mental distress claims, andtrebled, punitive damages of $34.5 million. Management believes that if$15.0 million, attorney’s fees and injunctive relief. The SAC added as defendants certain officers and employees of Lithia.  In addition, the SAC added a claim for relief based on the Truth in Lending Act (“TILA”).

On September 23, 2005, Maria Anabel Aripe and 19 other plaintiffs (“Aripe Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 05-3083-HO) against Lithia Motors, Inc., 12

20



of its wholly-owned subsidiaries and certain officers and employees of the Company, alleging violations of state and federal RICO laws, the Oregon UTPA, common law fraud and TILA.  The Aripe Plaintiffs seek actual damages were assessed, most would be covered by insurance.of less than $600,000, trebled, approximately $3.7 million in mental distress claims, trebled, punitive damages of $12.6 million, attorney’s fees and injunctive relief.  The case has been dismissedAripe Plaintiffs’ Complaint stems from vehicle purchases made at Lithia dealerships between May 2001 and August 2005 and is substantially similar to the Plaintiffs are appealing that dismissal.  allegations made in the Allen case.

We intend to vigorously defend this matterboth matters and management believes that the likelihood of a judgment for the amount of damages sought in either case is remote.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

We repurchased the following shares of our Class A common stock during the firstthird quarter of 2005:

 

 

 

Total number
of shares
purchased

 

Average
price paid
per
share
(1)

 

Total number of
shares purchased
as part of publicly
announced plan

 

Maximum number
of shares that may
yet be purchased
under the plan

 

April 1 to April 30

 

12

 

$

40.00

 

60,228

 

939,772

 

May 1, to May 31

 

1

 

$

40.00

 

60,229

 

939,771

 

June 1 to June 30

 

1

 

$

40.00

 

60,230

 

939,770

 

Total

 

14

 

$

40.00

 

60,230

 

939,770

 

 

 

Total number
of shares
purchased

 

Average
price paid
per
share
(1)

 

Total number of
shares purchased
as part of publicly
announced plan

 

Maximum number
of shares that may
yet be purchased
under the plan

 

July 1 to July 31

 

1

 

$

40

 

60,231

 

939,769

 

August 1 to August 31

 

 

 

 

 

September 1 to September 30

 

 

 

 

 

Total

 

1

 

$

40

 

60,231

 

939,769

 

 


(1) In December 1998, in connection with our listing on the NYSE, we issued a single share of our Class A common stock to approximately 1,750 employees in order to meet the NYSE requirements for the minimum number of shareholders of record.  We no longer require these single share shareholders to meet this requirement and have initiated a buyback plan for those single shares at a set price of $40 per share in order to eliminate future mailing and other costs related to these shareholders.  The offer to buy back these shares at $40 per share expired March 28, 2005, although requests for buyback from employees who filed a lost certificate claim prior to that date are still being settled.

 

The plan to repurchase up to a total of 1.0 million shares of our Class A common stock was approved by our Board of Directors in June 2000 and renewed in August 2005 and does not have an expiration date.

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Item 4.Submission of Matters to a Vote of Security Holders

Our annual meeting of the shareholders was held on May 5, 2005.  Class A shares carry 1 vote per share on all matters voted upon and Class B shares carry 10 votes per share on all matters voted upon.  The following actions were approved:

1.               To elect the following persons to serve as directors of Lithia Motors, Inc. until the next annual meeting of shareholders and until their successors are duly elected and qualified:

Name

 

 

 

No. of Shares
Voting For

 

No. of Shares
Withheld Voting

 

Sidney B. DeBoer

 

Class A

 

8,092,073

 

87,140

 

 

 

Class B

 

3,762,231

 

 

M. L. Dick Heimann

 

Class A

 

8,104,012

 

75,201

 

 

 

Class B

 

3,762,231

 

 

Thomas Becker

 

Class A

 

8,068,529

 

110,684

 

 

 

Class B

 

3,762,231

 

 

Maryann N. Keller

 

Class A

 

8,102,269

 

76,944

 

 

 

Class B

 

3,762,231

 

 

Gerald F. Taylor

 

Class A

 

8,098,254

 

80,959

 

 

 

Class B

 

3,762,231

 

 

William J. Young

 

Class A

 

8,097,904

 

81,309

 

 

 

Class B

 

3,762,231

 

 

2.               To approve the amendment and restatement of the 2003 Stock Incentive Plan:

 

 

Number of
Shares Voting
For

 

Number of
Shares Voting
Against

 

Number of
Shares
Abstaining

 

Number of
Broker
Non-Votes

 

Class A

 

2,018,056

 

3,746,263

 

13,811

 

2,401,083

 

Class B

 

3,762,231

 

 

 

 

3.               To approve the 2005 Discretionary Executive Bonus Plan:

 

 

Number of
Shares Voting For

 

Number of
Shares Voting
Against

 

Number of
Shares
Abstaining

 

Number of
Broker
Non-Votes

 

Class A

 

5,622,172

 

141,230

 

14,727

 

2,401,084

 

Class B

 

3,762,231

 

 

 

 

 

Item 6.  Exhibits

 

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

 

3.1

Restated Articles of Incorporation (filed as Exhibit 3.1 to Form 10-K filed March 30, 2000 and incorporated herein by reference).

3.2

Bylaws (filed as Exhibit 3.2 to Form S-1, Registration Statement No. 333-14031, as declared effective by the Securities and Exchange Commission on December 18, 1996 and incorporated herein by reference).

10.1

Fifth Amendment to Amended and Restated Loan Agreement and Amendment to Promissory Notes.Notes (filed as Exhibit 10.1 to Form 10-Q filed August 9, 2005 and incorporated herein by reference).

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

99.1

Risk Factors

 

2021



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date:   August

November 9, 2005

LITHIA MOTORS, INC.

 

 

 

 

 

 

 

 

By

/s/ JEFFREY B. DEBOER

 

 

 

Jeffrey B. DeBoer

 

 

Senior Vice President and

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

By

/s/ LINDA A. GANIM

 

 

 

Linda A. Ganim

 

 

Vice President and Chief Accounting Officer

 

 

(Principal Accounting Officer)

 

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