UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 20132014
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:001-14733
LITHIA MOTORS, INC. | |
(Exact name of registrant as specified in its charter)
Oregon | 93-0572810 | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
150 N. Bartlett Street, Medford, Oregon | 97501 | |||
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:541-776-6401 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ][X] Accelerated filer [X][ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class A common stock without par value |
| |
Class B common stock without par value | 2,562,231 | |
(Class) | (Outstanding at | |
LITHIA MOTORS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | |
Consolidated Balance Sheets (Unaudited) – June 30, | 2 | |
Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, | 3 | |
Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, | 4 | |
Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, | 5 | |
Condensed Notes to Consolidated Financial Statements (Unaudited) | 6 | |
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 1A. | Risk Factors |
|
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 41 |
Item 6. | Exhibits |
|
Signatures |
|
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
June 30, | December 31, | June 30, | December 31, | |||||||||||||
2013 | 2012 | 2014 | 2013 | |||||||||||||
Assets | ||||||||||||||||
Current Assets: | ||||||||||||||||
Cash and cash equivalents | $ | 20,257 | $ | 42,839 | $ | 28,203 | $ | 23,686 | ||||||||
Accounts receivable, net of allowance for doubtfulaccounts of $152 and $336 | 143,833 | 133,149 | ||||||||||||||
Accounts receivable, net | 191,228 | 170,519 | ||||||||||||||
Inventories, net | 783,840 | 723,326 | 981,223 | 859,019 | ||||||||||||
Deferred income taxes | 2,824 | 3,832 | 222 | 1,548 | ||||||||||||
Other current assets | 9,856 | 17,484 | 12,028 | 15,251 | ||||||||||||
Assets held for sale | 10,733 | 12,579 | - | 11,526 | ||||||||||||
Total Current Assets | 971,343 | 933,209 | 1,212,904 | 1,081,549 | ||||||||||||
Property and equipment, net of accumulateddepreciation of $100,638 and $97,883 | 443,516 | 425,086 | ||||||||||||||
Property and equipment, net of accumulateddepreciation of $113,594 and $106,871 | 528,254 | 481,212 | ||||||||||||||
Goodwill | 40,313 | 32,047 | 65,004 | 49,511 | ||||||||||||
Franchise value | 66,465 | 62,429 | 77,728 | 71,199 | ||||||||||||
Deferred income taxes | 22,190 | 17,123 | 14,624 | 10,256 | ||||||||||||
Other non-current assets | 28,689 | 22,808 | 41,613 | 31,394 | ||||||||||||
Total Assets | $ | 1,572,516 | $ | 1,492,702 | $ | 1,940,127 | $ | 1,725,121 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current Liabilities: | ||||||||||||||||
Floor plan notes payable | $ | 16,912 | $ | 13,454 | $ | 20,598 | $ | 18,789 | ||||||||
Floor plan notes payable: non-trade | 570,025 | 568,130 | 806,684 | 695,066 | ||||||||||||
Current maturities of long-term debt | 6,951 | 8,182 | 7,578 | 7,083 | ||||||||||||
Trade payables | 44,121 | 41,589 | 56,384 | 51,159 | ||||||||||||
Accrued liabilities | 90,290 | 81,602 | 112,742 | 94,143 | ||||||||||||
Liabilities related to assets held for sale | 6,378 | 8,347 | - | 6,271 | ||||||||||||
Total Current Liabilities | 734,677 | 721,304 | 1,003,986 | 872,511 | ||||||||||||
Long-term debt, less current maturities | 294,073 | 286,876 | 260,835 | 245,471 | ||||||||||||
Deferred revenue | 38,557 | 33,589 | 48,918 | 44,005 | ||||||||||||
Other long-term liabilities | 29,058 | 22,832 | 34,537 | 28,412 | ||||||||||||
Total Liabilities | 1,096,365 | 1,064,601 | 1,348,276 | 1,190,399 | ||||||||||||
Stockholders' Equity: | ||||||||||||||||
Preferred stock - no par value; authorized15,000 shares; none outstanding | - | - | - | - | ||||||||||||
Class A common stock - no par value;authorized 100,000 shares; issued andoutstanding 23,262 and 22,916 | 265,599 | 268,801 | ||||||||||||||
Class B common stock - no par value;authorized 25,000 shares; issued andoutstanding 2,562 and 2,762 | 319 | 343 | ||||||||||||||
Class A common stock - no par value;authorized 100,000 shares; issued andoutstanding 23,544 and 23,329 | 266,172 | 268,255 | ||||||||||||||
Class B common stock - no par value;authorized 25,000 shares; issued andoutstanding 2,562 and 2,562 | 319 | 319 | ||||||||||||||
Additional paid-in capital | 18,577 | 12,399 | 26,045 | 22,598 | ||||||||||||
Accumulated other comprehensive loss | (1,771 | ) | (2,615 | ) | (1,259 | ) | (1,538 | ) | ||||||||
Retained earnings | 193,427 | 149,173 | 300,574 | 245,088 | ||||||||||||
Total Stockholders' Equity | 476,151 | 428,101 | 591,851 | 534,722 | ||||||||||||
Total Liabilities and Stockholders' Equity | $ | 1,572,516 | $ | 1,492,702 | $ | 1,940,127 | $ | 1,725,121 |
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||||||
New vehicle | $ | 569,487 | $ | 455,939 | $ | 1,062,928 | $ | 848,885 | $ | 694,484 | $ | 569,487 | $ | 1,274,006 | $ | 1,062,928 | ||||||||||||||||
Used vehicle retail | 258,465 | 207,341 | 497,693 | 397,960 | 310,475 | 258,465 | 612,368 | 497,693 | ||||||||||||||||||||||||
Used vehicle wholesale | 37,691 | 35,106 | 77,197 | 68,463 | 44,286 | 37,691 | 86,979 | 77,197 | ||||||||||||||||||||||||
Finance and insurance | 34,218 | 27,184 | 65,881 | 52,060 | 43,838 | 34,218 | 83,469 | 65,881 | ||||||||||||||||||||||||
Service, body and parts | 94,462 | 85,456 | 184,902 | 169,000 | 114,337 | 94,462 | 218,954 | 184,902 | ||||||||||||||||||||||||
Fleet and other | 14,182 | 11,316 | 22,984 | 24,220 | 14,382 | 14,182 | 24,132 | 22,984 | ||||||||||||||||||||||||
Total revenues | 1,008,505 | 822,342 | 1,911,585 | 1,560,588 | 1,221,802 | 1,008,505 | 2,299,908 | 1,911,585 | ||||||||||||||||||||||||
Cost of sales: | ||||||||||||||||||||||||||||||||
New vehicle | 530,699 | 422,373 | 989,493 | 785,067 | 648,490 | 530,699 | 1,188,988 | 989,493 | ||||||||||||||||||||||||
Used vehicle retail | 219,572 | 176,350 | 423,827 | 338,692 | 266,408 | 219,572 | 527,505 | 423,827 | ||||||||||||||||||||||||
Used vehicle wholesale | 36,996 | 34,810 | 75,528 | 67,770 | 42,782 | 36,996 | 84,144 | 75,528 | ||||||||||||||||||||||||
Service, body and parts | 47,769 | 43,782 | 94,430 | 87,191 | 58,155 | 47,769 | 111,940 | 94,430 | ||||||||||||||||||||||||
Fleet and other | 13,636 | 10,931 | 22,036 | 23,438 | 13,667 | 13,636 | 22,970 | 22,036 | ||||||||||||||||||||||||
Total cost of sales | 848,672 | 688,246 | 1,605,314 | 1,302,158 | 1,029,502 | 848,672 | 1,935,547 | 1,605,314 | ||||||||||||||||||||||||
Gross profit | 159,833 | 134,096 | 306,271 | 258,430 | 192,300 | 159,833 | 364,361 | 306,271 | ||||||||||||||||||||||||
Asset impairments | - | - | - | 115 | ||||||||||||||||||||||||||||
Selling, general and administrative | 109,283 | 92,990 | 210,414 | 181,429 | 125,463 | 109,283 | 247,292 | 210,414 | ||||||||||||||||||||||||
Depreciation and amortization | 4,899 | 4,198 | 9,620 | 8,336 | 5,825 | 4,899 | 11,332 | 9,620 | ||||||||||||||||||||||||
Operating income | 45,651 | 36,908 | 86,237 | 68,550 | 61,012 | 45,651 | 105,737 | 86,237 | ||||||||||||||||||||||||
Floor plan interest expense | (3,036 | ) | (3,054 | ) | (6,485 | ) | (5,956 | ) | (3,215 | ) | (3,036 | ) | (6,199 | ) | (6,485 | ) | ||||||||||||||||
Other interest expense | (1,941 | ) | (2,530 | ) | (4,302 | ) | (5,257 | ) | (1,869 | ) | (1,941 | ) | (3,843 | ) | (4,302 | ) | ||||||||||||||||
Other income, net | 584 | 819 | 1,385 | 1,317 | 1,146 | 584 | 2,083 | 1,385 | ||||||||||||||||||||||||
Income from continuing operations before income taxes | 41,258 | 32,143 | 76,835 | 58,654 | 57,074 | 41,258 | 97,778 | 76,835 | ||||||||||||||||||||||||
Income tax provision | (15,977 | ) | (12,138 | ) | (29,672 | ) | (22,015 | ) | (21,904 | ) | (15,977 | ) | (37,914 | ) | (29,672 | ) | ||||||||||||||||
Income from continuing operations, net of income tax | 25,281 | 20,005 | 47,163 | 36,639 | 35,170 | 25,281 | 59,864 | 47,163 | ||||||||||||||||||||||||
Income from discontinued operations, net of income tax | 274 | 486 | 447 | 648 | 3,139 | 274 | 3,179 | 447 | ||||||||||||||||||||||||
Net income | $ | 25,555 | $ | 20,491 | $ | 47,610 | $ | 37,287 | $ | 38,309 | $ | 25,555 | $ | 63,043 | $ | 47,610 | ||||||||||||||||
Basic income per share from continuing operations | $ | 0.98 | $ | 0.78 | $ | 1.83 | $ | 1.42 | $ | 1.35 | $ | 0.98 | $ | 2.30 | $ | 1.83 | ||||||||||||||||
Basic income per share from discontinued operations | 0.01 | 0.02 | 0.02 | 0.02 | 0.12 | 0.01 | 0.12 | 0.02 | ||||||||||||||||||||||||
Basic net income per share | $ | 0.99 | $ | 0.80 | $ | 1.85 | $ | 1.44 | $ | 1.47 | $ | 0.99 | $ | 2.42 | $ | 1.85 | ||||||||||||||||
Shares used in basic per share calculations | 25,782 | 25,730 | 25,730 | 25,860 | 26,119 | 25,782 | 26,047 | 25,730 | ||||||||||||||||||||||||
Diluted income per share from continuing operations | $ | 0.97 | $ | 0.76 | $ | 1.81 | $ | 1.39 | $ | 1.34 | $ | 0.97 | $ | 2.27 | $ | 1.81 | ||||||||||||||||
Diluted income per share from discontinued operations | 0.01 | 0.02 | 0.01 | 0.03 | 0.11 | 0.01 | 0.12 | 0.01 | ||||||||||||||||||||||||
Diluted net income per share | $ | 0.98 | $ | 0.78 | $ | 1.82 | $ | 1.42 | $ | 1.45 | $ | 0.98 | $ | 2.39 | $ | 1.82 | ||||||||||||||||
Shares used in diluted per share calculations | 26,134 | 26,185 | 26,120 | 26,331 | 26,331 | 26,134 | 26,326 | 26,120 |
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Net income | $ | 25,555 | $ | 20,491 | $ | 47,610 | $ | 37,287 | $ | 38,309 | $ | 25,555 | $ | 63,043 | $ | 47,610 | ||||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||||||||||||
Gain on cash flow hedges, net of tax expenseof $209, $225, $524, and $490, respectively | 338 | 364 | 844 | 790 | ||||||||||||||||||||||||||||
Gain on cash flow hedges, net of tax expenseof $81, $209, $174, and $524 respectively | 130 | 338 | 279 | 844 | ||||||||||||||||||||||||||||
Comprehensive income | $ | 25,893 | $ | 20,855 | $ | 48,454 | $ | 38,077 | $ | 38,439 | $ | 25,893 | $ | 63,322 | $ | 48,454 |
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2014 | 2013 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 47,610 | $ | 37,287 | $ | 63,043 | $ | 47,610 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||||
Asset impairments | - | 115 | ||||||||||||||
Depreciation and amortization | 9,620 | 8,336 | 11,332 | 9,620 | ||||||||||||
Depreciation and amortization within discontinued operations | - | 124 | ||||||||||||||
Stock-based compensation | 2,603 | 1,512 | 3,259 | 2,603 | ||||||||||||
(Gain) loss on disposal of other assets | 33 | (983 | ) | |||||||||||||
Loss on disposal of other assets | 62 | 33 | ||||||||||||||
Gain on sale of franchise | (5,744 | ) | - | |||||||||||||
Deferred income taxes | 825 | 302 | 2,840 | 825 | ||||||||||||
Excess tax benefit from share-based payment arrangements | (5,408 | ) | (1,026 | ) | (6,058 | ) | (5,408 | ) | ||||||||
(Increase) decrease (net of acquisitions and dispositions): | ||||||||||||||||
Trade receivables, net | (10,684 | ) | (18,305 | ) | (20,709 | ) | (10,684 | ) | ||||||||
Inventories | (48,899 | ) | (109,592 | ) | (77,300 | ) | (48,899 | ) | ||||||||
Other current assets | 5,980 | 4,680 | 1,360 | 5,980 | ||||||||||||
Other non-current assets | (3,394 | ) | (1,847 | ) | (7,311 | ) | (3,394 | ) | ||||||||
Increase (decrease) (net of acquisitions and dispositions): | ||||||||||||||||
Floor plan notes payable | 3,384 | (94,305 | ) | |||||||||||||
Floor plan notes payable, net | 368 | 3,384 | ||||||||||||||
Trade payables | 2,078 | 7,289 | 1,411 | 2,078 | ||||||||||||
Accrued liabilities | 8,812 | 7,670 | 17,594 | 8,812 | ||||||||||||
Other long-term liabilities and deferred revenue | 11,889 | 6,700 | 11,659 | 11,889 | ||||||||||||
Net cash provided by (used in) operating activities | 24,449 | (152,043 | ) | (4,194 | ) | 24,449 | ||||||||||
Cash flows from investing activities: | ||||||||||||||||
Principal payments received on notes receivable | 61 | 50 | - | 61 | ||||||||||||
Capital expenditures | (22,107 | ) | (22,693 | ) | (35,230 | ) | (22,107 | ) | ||||||||
Proceeds from sales of assets | 420 | 4,940 | 103 | 420 | ||||||||||||
Payments for life insurance policies | (2,566 | ) | (1,934 | ) | (3,454 | ) | (2,566 | ) | ||||||||
Cash paid for acquisitions | (31,786 | ) | (12,782 | ) | (79,482 | ) | (31,786 | ) | ||||||||
Proceeds from sales of stores | - | 2,901 | ||||||||||||||
Cash from dispositions | 10,617 | - | ||||||||||||||
Net cash used in investing activities | (55,978 | ) | (29,518 | ) | (107,446 | ) | (55,978 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Borrowings on floor plan notes payable: non-trade | 5,989 | 251,844 | ||||||||||||||
Borrowings on floor plan notes payable: non-trade, net | 112,910 | 5,989 | ||||||||||||||
Borrowings on lines of credit | 358,000 | 177,623 | 578,000 | 358,000 | ||||||||||||
Repayments on lines of credit | (327,318 | ) | (212,623 | ) | (567,000 | ) | (327,318 | ) | ||||||||
Principal payments on long-term debt, scheduled | (3,667 | ) | (4,000 | ) | (3,693 | ) | (3,667 | ) | ||||||||
Principal payments on long-term debt and capital leases, other | (25,770 | ) | (32,049 | ) | - | (25,770 | ) | |||||||||
Proceeds from issuance of long-term debt | 4,721 | 14,169 | 5,392 | 4,721 | ||||||||||||
Proceeds from issuance of common stock | 2,843 | 2,671 | 2,253 | 2,843 | ||||||||||||
Repurchase of common stock | (7,903 | ) | (20,606 | ) | (10,206 | ) | (7,903 | ) | ||||||||
Excess tax benefit from share-based payment arrangements | 5,408 | 1,026 | 6,058 | 5,408 | ||||||||||||
Dividends paid | (3,356 | ) | (4,398 | ) | (7,557 | ) | (3,356 | ) | ||||||||
Change in restricted cash | - | 3,300 | ||||||||||||||
Net cash provided by financing activities | 8,947 | 176,957 | 116,157 | 8,947 | ||||||||||||
Decrease in cash and cash equivalents | (22,582 | ) | (4,604 | ) | 4,517 | (22,582 | ) | |||||||||
Cash and cash equivalents at beginning of period | 42,839 | 20,851 | 23,686 | 42,839 | ||||||||||||
Cash and cash equivalents at end of period | $ | 20,257 | $ | 16,247 | $ | 28,203 | $ | 20,257 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period for interest | $ | 10,989 | $ | 11,690 | $ | 10,218 | $ | 10,989 | ||||||||
Cash paid during the period for income taxes, net | 16,111 | 14,217 | 23,444 | 16,111 | ||||||||||||
Supplemental schedule of non-cash activities: | ||||||||||||||||
Floor plan debt paid in connection with store disposals | - | 6,712 | ||||||||||||||
Acquisition of assets with capital leases | - | 2,470 | ||||||||||||||
Debt issued in connection with acquisitions | 3,161 | - | ||||||||||||||
Floorplan debt paid in connection with dealership disposals | 3,311 | - |
See accompanying condensed notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Statements
Basis of Presentation
These condensed Consolidated Financial Statements contain unaudited information as of June 30, 20132014 and for the three- and six-month periods ended June 30, 20132014 and 2012.2013. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 20122013 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 20122013 is derived from our 20122013 Annual Report on Form 10-K. The interim condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in our 20122013 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.
These reclassifications had no impact on previously reported net income.
Note 2. Accounts Receivable
Accounts receivable consisted of the following (in thousands):
June 30, | December 31, 2012 | June 30, | December 31, 2013 | |||||||||||||
Contracts in transit | $ | 72,315 | $ | 65,597 | $ | 99,390 | $ | 85,272 | ||||||||
Trade receivables | 28,839 | 25,885 | 24,960 | 23,154 | ||||||||||||
Vehicle receivables | 21,895 | 21,298 | 25,728 | 23,606 | ||||||||||||
Manufacturer receivables | 26,411 | 25,658 | 33,852 | 31,662 | ||||||||||||
Auto loan receivables | 17,828 | $ | 11,438 | |||||||||||||
Other receivables | 5,573 | 5,622 | ||||||||||||||
149,460 | 138,438 | 207,331 | 180,754 | |||||||||||||
Less: Allowance | (152 | ) | (336 | ) | (805 | ) | (546 | ) | ||||||||
Less: Long-term portion of accounts receivable, net | (5,475 | ) | (4,953 | ) | (15,298 | ) | (9,689 | ) | ||||||||
Total accounts receivable, net | $ | 143,833 | $ | 133,149 | $ | 191,228 | $ | 170,519 |
Accounts receivable classifications include the following:
● | Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received within five to ten days of selling a vehicle. |
● | Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and third parties for commissions earned on service contracts and insurance products. |
● | Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer. |
● | Manufacturer receivables represent amounts due from manufacturers including holdbacks, rebates, incentives and warranty claims. |
● | Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products. |
Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off or repossession. Direct costs associated with loan originations are capitalized and expensed as interest income is recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.
Note 3. Inventories
The components of inventory consisted of the following (in thousands):
June 30, | December 31, 2012 | |||||||
New vehicles | $ | 597,740 | $ | 563,275 | ||||
Used vehicles | 153,944 | 130,529 | ||||||
Parts and accessories | 32,156 | 29,522 | ||||||
Total inventories | $ | 783,840 | $ | 723,326 |
June 30, | December 31, 2013 | |||||||
New vehicles | $ | 741,220 | $ | 657,043 | ||||
Used vehicles | 203,645 | 167,814 | ||||||
Parts and accessories | 36,358 | 34,162 | ||||||
Total inventories | $ | 981,223 | $ | 859,019 |
Note 4. Goodwill
The changes in the carrying amounts of goodwill are as follows (in thousands):
Goodwill | Goodwill | |||||||
Balance as of December, 31, 2011, gross | $ | 318,224 | ||||||
Balance as of December, 31, 2012, gross | $ | 331,313 | ||||||
Accumulated impairment loss | (299,266 | ) | (299,266 | ) | ||||
Balance as of December 31, 2011, net | 18,958 | |||||||
Additions through acquisitions | 13,710 | |||||||
Goodwill allocated to dispositions | (621 | ) | ||||||
Balance as of December 31, 2012, net | 32,047 | 32,047 | ||||||
Additions through acquisitions | 8,266 | 17,464 | ||||||
Balance as of June 30, 2013, net | $ | 40,313 | ||||||
Balance as of December 31, 2013, net | 49,511 | |||||||
Additions through acquisition | 15,493 | |||||||
Balance as of June 30, 2014, net | $ | 65,004 |
NoteNote 5.5. Commitments and Contingencies
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
Alaska Consumer Protection Act Claims
In December 2006, a class action suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc,Inc., et al, Case No. 3AN-06-13341 CI), and in April 2007, a second caseclass action suit (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) was filed against us, in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. These suits were subsequently consolidated. In the suits,consolidated suit, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan. The suit sought statutory damages of $500 for each violation or three times plaintiff’s actual damages, whichever was greater, and attorney fees and costs.
In June 2013June2013, the parties agreed to mediate the claims without pre-conditions.claims. The mediation resulted in a settlement agreement withthat received the plaintiffs under whichfinal approval of the Court on December 11, 2013. Under the settlement agreement, we estimate we willagreed to reimburse plaintiffs’ legal fees and to pay $3.8(i) $450 in the form of cash and vouchers to valid claimants and (ii) $3,000 for each claim representative. The majority of cash and vouchers have been mailed.
We have recorded expenses of $6.7 million to settle all claims against us and to pay plaintiffs’ legal fees. The estimated payment assumes a participation rate by eligible class members based on historically experienced claim rates. An increased claim rate would resultfees.Of this amount, $0.7 million in additional payments. The estimated settlement amountexpense was recorded in the six months ended June 30, 2014, as a component of selling, general and administrative expense in our Consolidated Statements of Operations and, asOperations. As of June 30, 2013,2014, the liability for unused vouchers, assuming an expected redemption rate, was included$1.3 million and is recorded as componentsa component of accrued liabilities and other long term liabilities in ouron the Consolidated Balance Sheets. The settlement is subject to court approval and we cannot assureSheet. We believe that the court will approve the settlement.these estimates are reasonable; however, actual cost could differ materially.
Note 6. Stockholders’ Equity
Reclassification From Accumulated Other Comprehensive Loss
The reclassification from accumulated other comprehensive loss was as follows (in thousands):
Three Months Ended | Six Months Ended | Affected Line Item in the Consolidated Statements of Operations | Three Months Ended | Six Months Ended | AffectedLine Item in the Consolidated Statements of Operations | |||||||||||||
Loss on cash flow hedges | $ | (166 | ) | $ | (472 | ) | Floor plan interest expense | $ | (118 | ) | $ | (252 | ) | Floor plan interest expense | ||||
Taxes | 64 | 181 | Income tax provision | 45 | 96 | Income tax provision | ||||||||||||
Loss on cash flow hedges, net | $ | (102 | ) | $ | (291 | ) | $ | (73 | ) | $ | (156 | ) |
See Note 9 for more details regarding our derivative contracts.
Share Repurchases
In August 2011 and 2012, our Board of Directors authorized the repurchase of up to 2,000,000a total of 3,000,000 shares of our Class A common stock.On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. Instock.In the six months ended June 30, 2013,2014, we repurchased 127,90045,000 shares at an average price of $40.76$71.73 per share, for a total of $5.2$3.2 million. Through June 30, 2013,2014, we have repurchased 1,273,0471,318,047 shares and 1,726,9531,681,953 shares remained available for repurchase. This authority to repurchase shares does not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.
In addition, 59,721we repurchased 106,772 shares subject to equity awards were repurchased during the first six months of 20132014 at an average price of $45.04,$65.36, for a total of $2.7$7.0 million, related to tax withholdings associated with the exercise of stock options or the vesting of restricted stock units.
Dividends
We declared andDividends
Dividends paid dividends on our Class A and Class B common stock duringin the second quarter of 2013, which related to our first quarter 2013 financial results, of $0.13 per share, for a total of $3.4 million. six months ended June 30, 2014 were as follows:
Quarter paid: | Dividend amount per share | Total amount of dividend (in thousands) | ||||||
First quarter | $ | 0.13 | $ | 3,378 | ||||
Second quarter | 0.16 | 4,179 |
See Note 1314 for a discussion of a dividend related to our second quarter 20132014 financial results.
Note 7. Deferred Compensation and Long-termLong-Term Incentive Plan
We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. We may make discretionary contributions to the LTIP. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement.
In March 2013,2014, we made a discretionary contributioncontributions of $2.0$2.1 million to the LTIP. Participants will receive a guaranteed return of 5.25% in 2013.2014. We recognized compensation expense related to the LTIP of $0.4 million and $0.7 million, respectively, for the three and six months ended June 30, 2013 and $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2012. as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Compensation expense | $ | 377 | $ | 352 | $ | 1,077 | $ | 686 |
As of June 30, 20132014 and December 31, 2012,2013, the balance due to participants was $5.2$9.4 million and $3.6$7.1 million, respectively, and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.
Note 8. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
● | Level 1 – quoted prices in active markets for identical securities; |
● | Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads and credit risk; and |
● | Level 3 – significant unobservable inputs, including our own assumptions in determining fair value. |
The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.
We use the income approach to determine the fair value of our interest rate swapsswap using observable Level 2 market expectations at each measurement date and an income approach to convert estimated future cash flows to a single present value amount (discounted) assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the swap valuationsvaluation are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short termshort-term borrowings, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future reset rates to discount those future cash flows to present value at the measurement date.
Inputs are collected from Bloomberg on the last market day of the period. The same method isperiod and used to determine the rate used to discount the future cash flows. The valuation of the interest rate swapsswap also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.
There were no changes to our valuation techniques during the six-month period ended June 30, 2013.2014.
Assets and Liabilities Measured at Fair Value
Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):
Fair Value at June 30, 2013 | Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: | ||||||||||||
Derivative contracts, net | $ | - | $ | (3,356 | ) | $ | - |
Fair Value at December 31, 2012 | Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: | ||||||||||||
Derivative contracts, net | $ | - | $ | (4,679 | ) | $ | - |
Fair Value at June 30, 2014 | Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: | ||||||||||||
Derivative contract, net | $ | - | $ | (2,375 | ) | $ | - |
Fair Value at December 31, 2013 | Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: | ||||||||||||
Derivative contract, net | $ | - | $ | (2,900 | ) | $ | - |
See Note 9 for more details regarding our derivative contracts.
Fair Value Disclosures for Financial Assets and Liabilities
We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the short term nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.
We have fixed ratefixed-rate debt and calculate the estimated fair value of our fixed ratefixed-rate debt using a discounted cash flow method.methodology. Using estimated current interest rates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt. As of June 30, 2013,2014, this debt had maturity dates between November 2016 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed interestfixed-interest rate debt is as follows (in thousands):
June 30, | December 31, 2012 | June 30, | December 31, 2013 | |||||||||||||
Carrying value | $ | 135,261 | $ | 130,469 | $ | 138,283 | $ | 132,616 | ||||||||
Fair value | 135,137 | 134,688 | 135,762 | 126,786 |
Note 9. Derivative Financial InstrumentsInstrument
WeFrom time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.
As of June 30, 2014, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At June 30, 2014, the one-month LIBOR rate was 0.15% per annum, as reported in the Wall Street Journal.
Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income immediately. The estimated amount that we expect to reclassify from accumulated other comprehensive loss to net income within the next twelve months is $1.1$1.2 million at June 30, 2013.2014.
As of June 30, 2013, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At June 30, 2013, the one-month LIBOR rate was 0.20% per annum, as reported in the Wall Street Journal.
At June 30, 20132014 and December 31, 2012,2013, the fair value of our derivative instrumentsinstrument was included in our Consolidated Balance Sheets as follows (in thousands):
Balance Sheet Information | Fair Value of Liability Derivatives | |||||
Derivatives Designated as Hedging Instruments | Location in Balance Sheet | June 30, 2013 | ||||
Interest Rate Swap Contracts | Accrued liabilities | $ | 1,211 | |||
Other long-term liabilities | 2,145 | |||||
$ | 3,356 |
Balance Sheet Information | Fair Value of Liability Derivatives | |||||
Derivatives Designated as Hedging Instruments | Location in Balance Sheet | June 30, 2014 | ||||
Interest Rate Swap Contract | Accrued liabilities | $ | 1,228 | |||
Other long-term liabilities | 1,147 | |||||
$ | 2,375 |
Balance Sheet Information | Fair Value of Liability Derivatives | |||||
Derivatives Designated as Hedging Instruments | Location in Balance Sheet | December 31, 2012 | ||||
Interest Rate Swap Contracts | Accrued liabilities | $ | 1,839 | |||
Other long-term liabilities | 2,840 | |||||
$ | 4,679 |
Balance Sheet Information | Fair Value of Liability Derivatives | |||||
Derivatives Designated as Hedging Instruments | Location in Balance Sheet | December 31, 2013 | ||||
Interest Rate Swap Contract | Accrued liabilities | $ | 1,215 | |||
Other long-term liabilities | 1,685 | |||||
$ | 2,900 |
The effect of derivative instruments on our Consolidated Statements of Operations for the three- and six-month periods ended June 30, 20132014 and 20122013 was as follows (in thousands):
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Accumulated OCI (Effective Portion) | Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||
Three Months Ended June 30, 2013 | ||||||||||||||
Interest Rate Swap Contracts | $ | 381 | Floor plan interest expense | $ | (166 | ) | Floor plan interest expense | $ | (296 | ) | ||||
Three Months Ended June 30, 2012 | ||||||||||||||
Interest Rate Swap Contracts | $ | 239 | Floor plan interest expense | $ | (350 | ) | Floor plan interest expense | $ | (730 | ) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Accumulated OCI (Effective Portion) | Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||
Six Months Ended June 30, 2013 | ||||||||||||||
Interest Rate Swap Contracts | $ | 896 | Floor plan interest expense | $ | (472 | ) | Floor plan interest expense | $ | (890 | ) | ||||
Six Months Ended June 30, 2012 | ||||||||||||||
Interest Rate Swap Contracts | $ | 522 | Floor plan interest expense | $ | (758 | ) | Floor plan interest expense | $ | (1,384 | ) |
See also Note 8.
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Accumulated OCI (Effective Portion) | Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Loss Recognizedin Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||
Three Months Ended June 30, 2014 |
|
| ||||||||||||
Interest Rate Swap Contract | $ | 93 | Floor plan interest expense | $ | (118 | ) | Floor plan | $ | (188 | ) | ||||
Three Months Ended June 30, 2013 |
|
| ||||||||||||
Interest Rate Swap Contracts | $ | 381 | Floor plan | $ | (166 | ) | Floor plan interest expense | $ | (296 | ) |
Derivatives in Cash Flow Hedging Relationships | Amount of Gain Recognized in Accumulated OCI (Effective Portion) | Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | Location of Loss Recognizedin Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |||||||||
Six Months Ended June 30, 2014 |
|
| ||||||||||||
Interest Rate Swap Contract | $ | 201 | Floor plan interest expense | $ | (252 | ) | Floor plan interest expense | $ | (359 | ) | ||||
Six Months Ended June 30, 2013 |
|
| ||||||||||||
Interest Rate Swap Contracts | $ | 896 | Floor plan interest expense | $ | (472 | ) | Floor plan interest expense | $ | (890 | ) |
See also Note 8.
Note 10. Acquisitions
On June 10, 2013,In the first six months of 2014, we acquiredcompleted the inventory, property, equipment and intangible assets and assumed certain liabilities of OB Salem Auto Group, Inc. in Salem, Oregon from Michael O’Brien.
This acquired companyfollowing acquisitions, which contributed revenues of $2.9$53.3 million for the six months ended June 30, 2014:
● | On January 31, 2014, we acquired Island Honda in Kahului, Hawaii. |
● | On February 3, 2014, we acquired Stockton Volkswagen in Stockton, California. |
● | On March 5, 2014, we acquired Honolulu Buick GMC Cadillac and Honolulu Volkswagen in Honolulu, Hawaii. |
● | On April 1, 2014, we acquired Corpus Christi Ford in Corpus Christi, Texas. |
● | On June 11, 2014, we acquired Portland GMC Buick and Portland Cadillac in Portland, Oregon. |
All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.
No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):
Consideration | ||||
Cash paid, net of cash acquired | $ | 79,482 | ||
Debt issued | 3,161 | |||
$ | 82,643 |
Assets Acquired and Liabilities Assumed | ||||
Inventories | $ | 42,997 | ||
Franchise value | 6,529 | |||
Property, plant and equipment | 17,302 | |||
Other assets | 430 | |||
Other liabilities | (108 | ) | ||
67,150 | ||||
Goodwill | 15,493 | |||
$ | 82,643 |
In the first quarter of 2014, we assumed a contract associated with an acquisition and determined the remaining term would not provide economic benefit. As a result, we recorded costs of $1.4 million associated with the contract. For the three and six month periods ended June 30, 2014, we recorded acquisition expense of $0.2 million. This amount is included as a component of selling, general and administrative expense in our Consolidated Statements of Operations. We did not have any material acquisition-related expenses in 2013.
We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes.
The following unaudited pro forma summary presents consolidated information as if theall acquisitions in the three- and six-month periods ended June 30, 20122013 and 20132014 had occurred on January 1, 20122013 (in thousands, except for per share amounts):
Three Months Ended June 30, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Revenue | $ | 1,026,597 | $ | 850,733 | $ | 1,232,950 | $ | 1,113,612 | ||||||||
Income from continuing operations, net of tax | 25,489 | 20,199 | 35,504 | 26,447 | ||||||||||||
Basic income per share from continuing operations, net of tax | 0.99 | 0.79 | 1.36 | 1.03 | ||||||||||||
Diluted income per share from continuing operations, net of tax | 0.98 | 0.77 | 1.35 | 1.01 |
Six Months Ended June 30, | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Revenue | $ | 1,950,436 | $ | 1,620,574 | $ | 2,353,299 | $ | 2,115,438 | ||||||||
Income from continuing operations, net of tax | 47,609 | 36,995 | 60,732 | 49,405 | ||||||||||||
Basic income per share from continuing operations, net of tax | 1.85 | 1.43 | 2.33 | 1.92 | ||||||||||||
Diluted income per share from continuing operations, net of tax | 1.82 | 1.40 | 2.31 | 1.89 |
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property, plant and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
The acquisition was accounted for using the acquisition method of accounting. No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the acquisition and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):
Consideration | ||||
Cash paid, net of cash acquired | $ | 31,786 |
Assets Acquired and Liabilities Assumed | ||||
Inventories | $ | 15,198 | ||
Franchise value | 4,036 | |||
Property, plant and equipment | 4,697 | |||
Other assets | 122 | |||
Other liabilities | (533 | ) | ||
23,520 | ||||
Goodwill | 8,266 | |||
$ | 31,786 |
We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes.
Note 11.11. Discontinued Operations
We classify a store as discontinued operations if the location has been sold, we have ceased operations at that location or the store meets the criteria required by U.S. generally accepted accounting standards:
● | our management team, possessing the necessary authority, commits to a plan to sell the store; |
● | the store is available for immediate sale in its present condition; |
● | an active program to locate buyers and other actions that are required to sell the store are initiated; |
● | a market for the store exists and we believe its sale is likely within one year; |
● | active marketing of the store commences at a price that is reasonable in relation to the estimated fair market value; and |
● | our management team believes it is unlikely changes will be made to the plan or the plan to dispose of the store will be withdrawn. |
We reclassify the store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the store’s operations after its disposal.
On May 1, 2014, we completed the sale of our one store which had been classified as held for sale since October 2012. As of June 30, 2013, one of our2014, we have no stores continues to meet the criteria for classification of its assets and related liabilitiesor properties classified as held for sale and its associated operating results are classified as discontinued operations.sale.
Actual floor plan interest expense for the store classified as discontinued operations is directly related to the store’s new vehicles. Interest expense related to our used vehicle inventory financing and revolving line of credit is allocated based on the working capital level of the store. For the six months ended June 30, 2014 and 2013, interest expense included as a component of discontinued operations was immaterial.
Certain financial information related to discontinued operations was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenue | $ | 10,078 | $ | 24,782 | $ | 18,878 | $ | 45,429 | ||||||||
Income from discontinued operations | $ | 409 | $ | 771 | $ | 693 | $ | 1,028 | ||||||||
Income tax expense | (135 | ) | (285 | ) | (246 | ) | (380 | ) | ||||||||
Income from discontinued operations, net of income tax expense | $ | 274 | $ | 486 | $ | 447 | $ | 648 |
Assets held for sale included the following (in thousands):
June 30, 2013 | December 31, 2012 | |||||||
Inventories | $ | 7,486 | $ | 9,412 | ||||
Property, plant and equipment | 1,176 | 1,102 | ||||||
Intangible assets | 2,071 | 2,065 | ||||||
$ | 10,733 | $ | 12,579 |
Liabilities related to assets held for sale included the following (in thousands):
June 30, 2013 | December 31, 2012 | |||||||
Floor plan notes payable | $ | 6,378 | $ | 8,347 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue | $ | 3,920 | $ | 10,078 | $ | 12,569 | $ | 18,878 | ||||||||
Pre-tax income (loss) from discontinued operations | $ | (532 | ) | $ | 409 | $ | (467 | ) | $ | 693 | ||||||
Net gain on disposal activities | 5,744 | - | 5,744 | - | ||||||||||||
5,212 | 409 | 5,277 | 693 | |||||||||||||
Income tax expense | (2,073 | ) | (135 | ) | (2,098 | ) | (246 | ) | ||||||||
Income from discontinued operations, net of income tax expense | $ | 3,139 | $ | 274 | $ | 3,179 | $ | 447 | ||||||||
Goodwill and other intangible assets disposed of | 221 | - | 221 | - | ||||||||||||
Cash generated from disposal activities | 10,617 | - | 10,617 | - | ||||||||||||
Floor plan debt paid in connection with disposal activities | 3,311 | - | 3,311 | - |
Note 12. Net Income Per Share of Class A and Class B Common Stock
We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding unvested common shares subject to repurchase or cancellation. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Our Restated Articles of Incorporation require that the Class A and Class B common stock share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which would have the effect of adversely altering the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.
Following is a reconciliation of the income from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS for the three- and six-monththree-month periods ended June 30, 20132014 and 20122013 (in thousands, except per share amounts):
Three Months Ended June 30, | 2013 | 2012 | ||||||||||||||||||||||||||||||
Three Months Ended June 30, | 2014 | 2013 | ||||||||||||||||||||||||||||||
Basic EPS from Continuing Operations | Class A | Class B | Class A | Class B | Class A | Class B | Class A | Class B | ||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Income from continuing operations applicable to common stockholders | $ | 22,734 | $ | 2,547 | $ | 17,261 | $ | 2,744 | $ | 31,720 | $ | 3,450 | $ | 22,734 | $ | 2,547 | ||||||||||||||||
Distributed income applicable to common stockholders | (3,018 | ) | (338 | ) | (2,230 | ) | (354 | ) | (3,769 | ) | (410 | ) | (3,018 | ) | (338 | ) | ||||||||||||||||
Basic undistributed income from continuing operations applicable to common stockholders | $ | 19,716 | $ | 2,209 | $ | 15,031 | $ | 2,390 | $ | 27,951 | $ | 3,040 | $ | 19,716 | $ | 2,209 | ||||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share | 23,185 | 2,597 | 22,201 | 3,529 | 23,557 | 2,562 | 23,185 | 2,597 | ||||||||||||||||||||||||
Basic income per share from continuing operations applicable to common stockholders | $ | 0.98 | $ | 0.98 | $ | 0.78 | $ | 0.78 | $ | 1.35 | $ | 1.35 | $ | 0.98 | $ | 0.98 | ||||||||||||||||
Basic distributed income per share from continuing operations applicable to common stockholders | (0.13 | ) | (0.13 | ) | (0.10 | ) | (0.10 | ) | (0.16 | ) | (0.16 | ) | (0.13 | ) | (0.13 | ) | ||||||||||||||||
Basic undistributed income per share from continuing operations applicable to common stockholders | $ | 0.85 | $ | 0.85 | $ | 0.68 | $ | 0.68 | $ | 1.19 | $ | 1.19 | $ | 0.85 | $ | 0.85 |
Three Months EndedJune 30, | 2014 | 2013 | ||||||||||||||
Diluted EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Distributed income applicable to common stockholders | $ | 3,769 | $ | 410 | $ | 3,018 | $ | 338 | ||||||||
Reallocation of distributed income as a result of conversion of dilutive stock options | 3 | (3 | ) | 5 | (5 | ) | ||||||||||
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding | 407 | - | 333 | - | ||||||||||||
Diluted distributed income applicable to common stockholders | $ | 4,179 | $ | 407 | $ | 3,356 | $ | 333 | ||||||||
Undistributed income from continuing operations applicable to common stockholders | $ | 27,951 | $ | 3,040 | $ | 19,716 | $ | 2,209 | ||||||||
Reallocation of undistributed income as a result of conversion of dilutive stock options | 25 | (25 | ) | 30 | (30 | ) | ||||||||||
Reallocation of undistributed income due to conversion of Class B to Class A | 3,015 | - | 2,179 | - | ||||||||||||
Diluted undistributed income from continuing operations applicable to common stockholders | $ | 30,991 | $ | 3,015 | $ | 21,925 | $ | 2,179 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations | 23,557 | 2,562 | 23,185 | 2,597 | ||||||||||||
Weighted average number of shares from stock options | 212 | - | 352 | - | ||||||||||||
Conversion of Class B to Class A common shares outstanding | 2,562 | - | 2,597 | - | ||||||||||||
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations | 26,331 | 2,562 | 26,134 | 2,597 | ||||||||||||
Diluted income per share from continuing operations applicable to common stockholders | $ | 1.34 | $ | 1.34 | $ | 0.97 | $ | 0.97 | ||||||||
Diluted distributed income per share from continuing operations applicable to common stockholders | (0.16 | ) | (0.16 | ) | (0.13 | ) | (0.13 | ) | ||||||||
Diluted undistributed income per share from continuing operations applicable to common stockholders | $ | 1.18 | $ | 1.18 | $ | 0.84 | $ | 0.84 |
Three Months Ended June 30, | 2013 | 2012 | ||||||||||||||
Diluted EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Distributed income applicable to common stockholders | $ | 3,018 | $ | 338 | $ | 2,230 | $ | 354 | ||||||||
Reallocation of distributed income as a result of conversion of dilutive stock options | 5 | (5 | ) | 6 | (6 | ) | ||||||||||
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding | 333 | - | 348 | - | ||||||||||||
Diluted distributed income applicable to common stockholders | $ | 3,356 | $ | 333 | $ | 2,584 | $ | 348 | ||||||||
Undistributed income from continuing operations applicable to common stockholders | $ | 19,716 | $ | 2,209 | $ | 15,031 | $ | 2,390 | ||||||||
Reallocation of undistributed income as a result of conversion of dilutive stock options | 30 | (30 | ) | 42 | (42 | ) | ||||||||||
Reallocation of undistributed income due to conversion of Class B to Class A | 2,179 | - | 2,348 | - | ||||||||||||
Diluted undistributed income from continuing operations applicable to common stockholders | $ | 21,925 | $ | 2,179 | $ | 17,421 | $ | 2,348 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations | 23,185 | 2,597 | 22,201 | 3,529 | ||||||||||||
Weighted average number of shares from stock options | 352 | - | 455 | - | ||||||||||||
Conversion of Class B to Class A common shares outstanding | 2,597 | - | 3,529 | - | ||||||||||||
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations | 26,134 | 2,597 | 26,185 | 3,529 | ||||||||||||
Diluted income per share from continuing operations applicable to common stockholders | $ | 0.97 | $ | 0.97 | $ | 0.76 | $ | 0.76 | ||||||||
Diluted distributed income per share from continuing operations applicable to common stockholders | (0.13 | ) | (0.13 | ) | (0.10 | ) | (0.10 | ) | ||||||||
Diluted undistributed income per share from continuing operations applicable to common stockholders | $ | 0.84 | $ | 0.84 | $ | 0.66 | $ | 0.66 |
Three Months Ended June 30, | 2014 | 2013 | ||||||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||||||
Antidilutive Securities | ||||||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 12 | - | 18 | - |
Three Months Ended June 30, | 2013 | 2012 | ||||||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||||||
Antidilutive Securities | ||||||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 18 | - | 45 | - |
Six Months Ended June 30, | 2014 | 2013 | ||||||||||||||
Basic EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Income from continuing operations applicable to common stockholders | $ | 53,976 | $ | 5,888 | $ | 42,254 | $ | 4,909 | ||||||||
Distributed income applicable to common stockholders | (6,814 | ) | (743 | ) | (3,007 | ) | (349 | ) | ||||||||
Basic undistributed income from continuing operations applicable to common stockholders | $ | 47,162 | $ | 5,145 | $ | 39,247 | $ | 4,560 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share | 23,485 | 2,562 | 23,052 | 2,678 | ||||||||||||
Basic income per share from continuing operations applicable to common stockholders | $ | 2.30 | $ | 2.30 | $ | 1.83 | $ | 1.83 | ||||||||
Basic distributed income per share from continuing operations applicable to common stockholders | (0.29 | ) | (0.29 | ) | (0.13 | ) | (0.13 | ) | ||||||||
Basic undistributed income per share from continuing operations applicable to common stockholders | $ | 2.01 | $ | 2.01 | $ | 1.70 | $ | 1.70 |
Six Months Ended June 30, | 2013 | 2012 | ||||||||||||||
Basic EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Income from continuing operations applicable to common stockholders | $ | 42,254 | $ | 4,909 | $ | 31,483 | $ | 5,156 | ||||||||
Distributed income applicable to common stockholders | (3,007 | ) | (349 | ) | (3,779 | ) | (619 | ) | ||||||||
Basic undistributed income from continuing operations applicable to common stockholders | $ | 39,247 | $ | 4,560 | $ | 27,704 | $ | 4,537 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share | 23,052 | 2,678 | 22,221 | 3,639 | ||||||||||||
Basic income per share from continuing operations applicable to common stockholders | $ | 1.83 | $ | 1.83 | $ | 1.42 | $ | 1.42 | ||||||||
Basic distributed income per share from continuing operations applicable to common stockholders | (0.13 | ) | (0.13 | ) | (0.17 | ) | (0.17 | ) | ||||||||
Basic undistributed income per share from continuing operations applicable to common stockholders | $ | 1.70 | $ | 1.70 | $ | 1.25 | $ | 1.25 |
Six Months EndedJune 30, | 2014 | 2013 | ||||||||||||||
Diluted EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Distributed income applicable to common stockholders | $ | 6,814 | $ | 743 | $ | 3,007 | $ | 349 | ||||||||
Reallocation of distributed income as a result of conversion of dilutive stock options | 8 | (8 | ) | 5 | (5 | ) | ||||||||||
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding | 735 | - | 344 | - | ||||||||||||
Diluted distributed income applicable to common stockholders | $ | 7,557 | $ | 735 | $ | 3,356 | $ | 344 | ||||||||
Undistributed income from continuing operations applicable to common stockholders | $ | 47,162 | $ | 5,145 | $ | 39,247 | $ | 4,560 | ||||||||
Reallocation of undistributed income as a result of conversion of dilutive stock options | 55 | (55 | ) | 69 | (69 | ) | ||||||||||
Reallocation of undistributed income due to conversion of Class B to Class A | 5,090 | - | 4,491 | - | ||||||||||||
Diluted undistributed income from continuing operations applicable to common stockholders | $ | 52,307 | $ | 5,090 | $ | 43,807 | $ | 4,491 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations | 23,485 | 2,562 | 23,052 | 2,678 | ||||||||||||
Weighted average number of shares from stock options | 279 | - | 390 | - | ||||||||||||
Conversion of Class B to Class A common shares outstanding | 2,562 | - | 2,678 | - | ||||||||||||
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations | 26,326 | 2,562 | 26,120 | 2,678 | ||||||||||||
Diluted income per share from continuing operations applicable to common stockholders | $ | 2.27 | $ | 2.27 | $ | 1.81 | $ | 1.81 | ||||||||
Diluted distributed income per share from continuing operations applicable to common stockholders | (0.29 | ) | (0.29 | ) | (0.13 | ) | (0.13 | ) | ||||||||
Diluted undistributed income per share from continuing operations applicable to common stockholders | $ | 1.98 | $ | 1.98 | $ | 1.68 | $ | 1.68 |
Six Months Ended June 30, | 2014 | 2013 | ||||||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||||||
Antidilutive Securities | ||||||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 14 | - | 19 | - |
Six Months Ended June 30, | 2013 | 2012 | ||||||||||||||
Diluted EPS from Continuing Operations | Class A | Class B | Class A | Class B | ||||||||||||
Numerator: | ||||||||||||||||
Distributed income applicable to common stockholders | $ | 3,007 | $ | 349 | $ | 3,779 | $ | 619 | ||||||||
Reallocation of distributed income as a result of conversion of dilutive stock options | 5 | (5 | ) | 11 | (11 | ) | ||||||||||
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding | 344 | - | 608 | - | ||||||||||||
Diluted distributed income applicable to common stockholders | $ | 3,356 | $ | 344 | $ | 4,398 | $ | 608 | ||||||||
Undistributed income from continuing operations applicable to common stockholders | $ | 39,247 | $ | 4,560 | $ | 27,704 | $ | 4,537 | ||||||||
Reallocation of undistributed income as a result of conversion of dilutive stock options | 69 | (69 | ) | 81 | (81 | ) | ||||||||||
Reallocation of undistributed income due to conversion of Class B to Class A | 4,491 | - | 4,456 | - | ||||||||||||
Diluted undistributed income from continuing operations applicable to common stockholders | $ | 43,807 | $ | 4,491 | $ | 32,241 | $ | 4,456 | ||||||||
Denominator: | ||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations | 23,052 | 2,678 | 22,221 | 3,639 | ||||||||||||
Weighted average number of shares from stock options | 390 | - | 471 | - | ||||||||||||
Conversion of Class B to Class A common shares outstanding | 2,678 | - | 3,639 | - | ||||||||||||
Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations | 26,120 | 2,678 | 26,331 | 3,639 | ||||||||||||
Diluted income per share from continuing operations applicable to common stockholders | $ | 1.81 | $ | 1.81 | $ | 1.39 | $ | 1.39 | ||||||||
Diluted distributed income per share from continuing operations applicable to common stockholders | (0.13 | ) | (0.13 | ) | (0.17 | ) | (0.17 | ) | ||||||||
Diluted undistributed income per share from continuing operations applicable to common stockholders | $ | 1.68 | $ | 1.68 | $ | 1.22 | $ | 1.22 |
Note 13.Recent Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued an accounting standard update that amends the accounting guidance related to discontinued operations. This amendment defines discontinued operations as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This amendment also introduces new disclosures for disposals. The amendments in this accounting standard update are effective for fiscal years beginning after December 15, 2014 and applies to new disposals and new classifications of disposal groups as held for sale after the effective date. The accounting standard update is expected to result in fewer disposals being presented as discontinued operations and, because the guidance relates to presentation and disclosure requirements, will not affect our consolidated financial position, results of operations, or cash flows.
Six Months Ended June 30, | 2013 | 2012 | ||||||||||||||
Diluted EPS | Class A | Class B | Class A | Class B | ||||||||||||
Antidilutive Securities | ||||||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive | 19 | - | 90 | - |
On May 28, 2014, the FASB issued an accounting standard update which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard is effective for fiscal years beginning after December 15, 2016. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect this amendment will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
Note 13.14. Subsequent Events
Acquisition
On July 22, 2013,28, 2014, we acquired the inventory, equipment and intangible assets of Bellingham Buick GMC in Bellingham, Washington. We paid $1.7 million in cash for this acquisition.
Common Stock Dividend
On July 21, 2014, our Board of Directors approved a dividend of $0.13$0.16 per share on our Class A and Class B Commoncommon stock related to our second quarter 20132014 financial results. The dividend will total approximately $3.4$4.2 million and will be paid on August 23, 201322, 2014 to shareholders of record on August 9, 2013.8, 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors
Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project,” “outlook,” “target,” “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terminology. Examples of forward-looking statements in this Form 10-Q include, among others, statements we make regarding:
● | Future market conditions. |
● | Expected operating results, such as maintaining SG&A as a percentage of gross profit in the mid to upper 60% range and targeting incremental throughput of 50% on a same store basis. |
● | The increase in our annual revenues and earnings per share that we estimate will result from the dealerships that we acquired and from the DCH Auto Group transaction. |
● | Our belief that the DCH Auto Group transaction will close early in the fourth quarter. |
● | Anticipated availability of liquidity from our unfinanced operating real estate. |
● | Anticipated levels of capital expenditures in the future. |
● | Our strategies for customer retention, growth, market position, financial results and risk management. |
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. ImportantCertain important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A.1A in this Form 10-Q and in the Risk Factors section of our Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events that depend on circumstances that may or may not occur in the future. While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.achievements, and our actual results of operations, financial condition and liquidity and development of the industries in which we operate may differ materially from those made in or suggested by the forward-looking statements in this Form 10-Q. You should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statement.
Overview
We are a leading operator of automotive franchises and a retailer of new and used vehicles and related services. As of July 26, 2013,August 8, 2014, we offer 2729 brands of new vehicles and all brands of used vehicles in 91101 stores in the United States and online at Lithia.com. We sell new and used cars and replacement parts; provide vehicle maintenance, warranty, paint and repair services; arrange related financing; and sell service contracts, vehicle protection products and credit insurance.
Our mission statement is: “Driven by our employees and preferred by our customers, Lithia is the leading automotive retailer in each of our markets.” We offer our customers personal, convenient, flexible, hometownpersonalized service combined with the large company advantages of selection, competitive pricing, broad access to financing, consistent service, competence and guarantees.warranties. We strive for diversification in our products, services, brands and geographic locations to insulate us from market risk and to maintain profitability. We have developed a centralized support structure to reduce store level administrative functions. This allows store personnel to focus on providing a positive customer experience. With our management information systems and centrally-performed administrative functions in Medford, Oregon, we seek to gain economies of scale from our dealership network.
Results of Continuing Operations
For the three months ended June 30, 20132014 and 2012,2013, we reported income from continuing operations, net of tax, of $35.2 million, or $1.34 per diluted share, and $25.3 million, or $0.97 per diluted share, and $20.0 million, or $0.76 per diluted share, respectively.
For the six months ended June 30, 20132014 and 2012,2013, we reported income from continuing operations, net of tax, of $59.9 million, or $2.27 per diluted share, and $47.2 million, or $1.81 per diluted share, and $36.6 million, or $1.39 per diluted share, respectively.
Discontinued Operations
ResultsThe results of operations for stores sold, closed or held for sale qualifying for reclassification under the applicable accounting guidance, are presented as discontinued operations for all periods in our Consolidated Statements of Operations.Operations if they qualify for reclassification under the applicable accounting guidance. As a result, our results from continuing operations are presented on a comparable basis.basis for all periods.
IncomeWe realized income from discontinued operations, net of tax, for the three months ended June 30, 2014 and 2013, of $3.1 million and 2012 totaled $274,000, and $486,000, respectively. Income from discontinued operations, net of tax, for the six months ended June 30, 2014 and 2013 totaled $3.2 million and 2012 totaled $447,000, and $648,000, respectively. See Note 11 of the Condensed Notes to Consolidated Financial Statements for additional information.
Key PerformanceRevenue and Gross Profit Metrics
Key performance metrics for revenue and gross profit were as follows for the three and six months ended June 30, 20132014 and 20122013 (dollars in thousands):
Three months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
Three months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
New vehicle | $ | 569,487 | 56.5 | % | $ | 38,788 | 6.8 | % | 24.3 | % | $ | 694,484 | 56.8 | % | $ | 45,994 | 6.6 | % | 23.9 | % | ||||||||||||||||||||
Used vehicle retail | 258,465 | 25.6 | 38,893 | 15.0 | 24.3 | 310,475 | 25.4 | 44,067 | 14.2 | 22.9 | ||||||||||||||||||||||||||||||
Used vehicle wholesale | 37,691 | 3.7 | 695 | 1.8 | 0.4 | 44,286 | 3.6 | 1,504 | 3.4 | 0.8 | ||||||||||||||||||||||||||||||
Finance and insurance(1) | 34,218 | 3.4 | 34,218 | 100.0 | 21.4 | 43,838 | 3.6 | 43,838 | 100.0 | 22.8 | ||||||||||||||||||||||||||||||
Service, body and parts | 94,462 | 9.4 | 46,693 | 49.4 | 29.2 | 114,337 | 9.4 | 56,182 | 49.1 | 29.2 | ||||||||||||||||||||||||||||||
Fleet and other | 14,182 | 1.4 | 546 | 3.8 | 0.4 | 14,382 | 1.2 | 715 | 5.0 | 0.4 | ||||||||||||||||||||||||||||||
$ | 1,008,505 | 100.0 | % | $ | 159,833 | 15.8 | % | 100.0 | % | $ | 1,221,802 | 100.0 | % | $ | 192,300 | 15.7 | % | 100.0 | % |
Three months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
Three months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
New vehicle | $ | 455,939 | 55.4 | % | $ | 33,566 | 7.4 | % | 25.0 | % | $ | 569,487 | 56.5 | % | $ | 38,788 | 6.8 | % | 24.3 | % | ||||||||||||||||||||
Used vehicle retail | 207,341 | 25.2 | 30,991 | 14.9 | 23.1 | 258,465 | 25.6 | 38,893 | 15.0 | 24.3 | ||||||||||||||||||||||||||||||
Used vehicle wholesale | 35,106 | 4.3 | 296 | 0.8 | 0.2 | 37,691 | 3.7 | 695 | 1.8 | 0.4 | ||||||||||||||||||||||||||||||
Finance and insurance(1) | 27,184 | 3.3 | 27,184 | 100.0 | 20.3 | 34,218 | 3.4 | 34,218 | 100.0 | 21.4 | ||||||||||||||||||||||||||||||
Service, body and parts | 85,456 | 10.4 | 41,674 | 48.8 | 31.1 | 94,462 | 9.4 | 46,693 | 49.4 | 29.2 | ||||||||||||||||||||||||||||||
Fleet and other | 11,316 | 1.4 | 385 | 3.4 | 0.3 | 14,182 | 1.4 | 546 | 3.8 | 0.4 | ||||||||||||||||||||||||||||||
$ | 822,342 | 100.0 | % | $ | 134,096 | 16.3 | % | 100.0 | % | $ | 1,008,505 | 100.0 | % | $ | 159,833 | 15.8 | % | 100.0 | % |
Six months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
Six months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
New vehicle | $ | 1,062,928 | 55.6 | % | $ | 73,435 | 6.9 | % | 24.0 | % | $ | 1,274,006 | 55.4 | % | $ | 85,018 | 6.7 | % | 23.3 | % | ||||||||||||||||||||
Used vehicle retail | 497,693 | 26.0 | 73,866 | 14.8 | 24.1 | 612,368 | 26.6 | 84,863 | 13.9 | 23.3 | ||||||||||||||||||||||||||||||
Used vehicle wholesale | 77,197 | 4.0 | 1,669 | 2.2 | 0.6 | 86,979 | 3.8 | 2,835 | 3.3 | 0.8 | ||||||||||||||||||||||||||||||
Finance and insurance(1) | 65,881 | 3.5 | 65,881 | 100.0 | 21.5 | 83,469 | 3.6 | 83,469 | 100.0 | 22.9 | ||||||||||||||||||||||||||||||
Service, body and parts | 184,902 | 9.7 | 90,472 | 48.9 | 29.5 | 218,954 | 9.5 | 107,014 | 48.9 | 29.4 | ||||||||||||||||||||||||||||||
Fleet and other | 22,984 | 1.2 | 948 | 4.1 | 0.3 | 24,132 | 1.1 | 1,162 | 4.8 | 0.3 | ||||||||||||||||||||||||||||||
$ | 1,911,585 | 100.0 | % | $ | 306,271 | 16.0 | % | 100.0 | % | $ | 2,299,908 | 100.0 | % | $ | 364,361 | 15.8 | % | 100.0 | % |
Six months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
Six months ended | Revenues | Percent of Total Revenues | Gross Profit | Gross Profit Margin | Percent of Total Gross Profit | |||||||||||||||||||||||||||||||||||
New vehicle | $ | 848,885 | 54.4 | % | $ | 63,818 | 7.5 | % | 24.7 | % | $ | 1,062,928 | 55.6 | % | $ | 73,435 | 6.9 | % | 24.0 | % | ||||||||||||||||||||
Used vehicle retail | 397,960 | 25.5 | 59,268 | 14.9 | 22.9 | 497,693 | 26.0 | 73,866 | 14.8 | 24.1 | ||||||||||||||||||||||||||||||
Used vehicle wholesale | 68,463 | 4.4 | 693 | 1.0 | 0.3 | 77,197 | 4.0 | 1,669 | 2.2 | 0.6 | ||||||||||||||||||||||||||||||
Finance and insurance(1) | 52,060 | 3.3 | 52,060 | 100.0 | 20.1 | 65,881 | 3.5 | 65,881 | 100.0 | 21.5 | ||||||||||||||||||||||||||||||
Service, body and parts | 169,000 | 10.8 | 81,809 | 48.4 | 31.7 | 184,902 | 9.7 | 90,472 | 48.9 | 29.5 | ||||||||||||||||||||||||||||||
Fleet and other | 24,220 | 1.6 | 782 | 3.2 | 0.3 | 22,984 | 1.2 | 948 | 4.1 | 0.3 | ||||||||||||||||||||||||||||||
$ | 1,560,588 | 100.0 | % | $ | 258,430 | 16.6 | % | 100.0 | % | $ | 1,911,585 | 100.0 | % | $ | 306,271 | 16.0 | % | 100.0 | % |
|
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(1)Commissions reported net of anticipated cancellations.
Same Store Operating Data
We believe that same store comparisons are a keyan important indicator of our financial performance. Same store metricsmeasures demonstrate our ability to profitably grow our revenue in ourbusiness at existing locations. As a result, same store comparisonsmeasures have been integrated into the discussion below.
A sameSame store metric representsmeasures reflect results for stores that were operating during the three- and six-month periods ended June 30, 2013,in each comparison period and only includesinclude the months when operations occuroccurred in both comparable periods. For example, a store acquired in May 20122013 would be included in same store operating data beginning in June 2013,2014, after its first full complete comparable month of operation, andoperation. The second quarter operating results for the same store comparisons would include results for that store in only the period of June for both comparable periods.
New Vehicle RevenuesRevenue and Gross Profit
Three Months Ended June 30, | Increase | % Increase | ||||||||||||||
(Dollars in thousands, except per unit amounts) | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 694,484 | $ | 569,487 | $ | 124,997 | 21.9 | % | ||||||||
Gross profit | $ | 45,994 | $ | 38,788 | $ | 7,206 | 18.6 | |||||||||
Gross margin | 6.6 | % | 6.8 | % | (20)bp(1) | |||||||||||
Retail units sold | 20,446 | 17,024 | 3,422 | 20.1 | ||||||||||||
Average selling price per retail unit | $ | 33,967 | $ | 33,452 | $ | 515 | 1.5 | |||||||||
Average gross profit per retail unit | $ | 2,250 | $ | 2,278 | $ | (28 | ) | (1.2 | ) | |||||||
Same store | ||||||||||||||||
Revenue | $ | 632,785 | $ | 566,862 | $ | 65,923 | 11.6 | % | ||||||||
Gross profit | $ | 41,711 | $ | 38,588 | $ | 3,123 | 8.1 | |||||||||
Gross margin | 6.6 | % | 6.8 | % | (20)bp | |||||||||||
Retail units sold | 18,379 | 16,937 | 1,442 | 8.5 | ||||||||||||
Average selling price per retail unit | $ | 34,430 | $ | 33,469 | $ | 961 | 2.9 | |||||||||
Average gross profit per retail unit | $ | 2,269 | $ | 2,278 | $ | (9 | ) | (0.4 | ) |
Three Months Ended June 30, | Increase | % Increase | ||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | (Decrease) | (Decrease) | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 569,487 | $ | 455,939 | $ | 113,548 | 24.9 | % | ||||||||
Gross profit | $ | 38,788 | $ | 33,566 | $ | 5,222 | 15.6 | |||||||||
Gross margin | 6.8 | % | 7.4 | % | (60 | )bp(1) | ||||||||||
Retail units sold | 17,024 | 13,974 | 3,050 | 21.8 | ||||||||||||
Average selling price per retail unit | $ | 33,452 | $ | 32,628 | $ | 824 | 2.5 | |||||||||
Average gross profit per retail unit | $ | 2,278 | $ | 2,402 | $ | (124 | ) | (5.2 | ) | |||||||
Same store | ||||||||||||||||
Revenue | $ | 541,740 | $ | 455,658 | $ | 86,082 | 18.9 | % | ||||||||
Gross profit | $ | 36,597 | $ | 33,556 | $ | 3,041 | 9.1 | |||||||||
Gross margin | 6.8 | % | 7.4 | % | (60 | )bp | ||||||||||
Retail units sold | 16,212 | 13,966 | 2,246 | 16.1 | ||||||||||||
Average selling price per retail unit | $ | 33,416 | $ | 32,626 | $ | 790 | 2.4 | |||||||||
Average gross profit per retail unit | $ | 2,257 | $ | 2,403 | $ | (146 | ) | (6.1 | ) |
(1)A basis point is equal to 1/100th100th of one percent.
Six Months Ended June 30, | Increase | % Increase | ||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | (Decrease) | (Decrease) | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 1,062,928 | $ | 848,885 | $ | 214,043 | 25.2 | % | ||||||||
Gross profit | $ | 73,435 | $ | 63,818 | $ | 9,617 | 15.1 | |||||||||
Gross margin | 6.9 | % | 7.5 | % | (60 | )bp | ||||||||||
Retail units sold | 31,744 | 26,112 | 5,632 | 21.6 | ||||||||||||
Average selling price per retail unit | $ | 33,484 | $ | 32,509 | $ | 975 | 3.0 | |||||||||
Average gross profit per retail unit | $ | 2,313 | $ | 2,444 | $ | (131 | ) | (5.4 | ) | |||||||
Same store | ||||||||||||||||
Revenue | $ | 1,015,760 | $ | 844,125 | $ | 171,635 | 20.3 | % | ||||||||
Gross profit | $ | 69,503 | $ | 63,351 | $ | 6,152 | 9.7 | |||||||||
Gross margin | 6.8 | % | 7.5 | % | (70 | )bp | ||||||||||
Retail units sold | 30,363 | 25,970 | 4,393 | 16.9 | ||||||||||||
Average selling price per retail unit | $ | 33,454 | $ | 32,504 | $ | 950 | 2.9 | |||||||||
Average gross profit per retail unit | $ | 2,289 | $ | 2,439 | $ | (150 | ) | (6.2 | ) |
Six Months Ended June 30, | Increase | % Increase | ||||||||||||||
(Dollars in thousands, except per unit amounts) | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 1,274,006 | $ | 1,062,928 | $ | 211,078 | 19.9 | % | ||||||||
Gross profit | $ | 85,018 | $ | 73,435 | $ | 11,583 | 15.8 | |||||||||
Gross margin | 6.7 | % | 6.9 | % | (20)bp(1) | |||||||||||
Retail units sold | 37,720 | 31,744 | 5,976 | 18.8 | ||||||||||||
Average selling price per retail unit | $ | 33,775 | $ | 33,484 | $ | 291 | 0.9 | |||||||||
Average gross profit per retail unit | $ | 2,254 | $ | 2,313 | $ | (59 | ) | (2.6 | ) | |||||||
Same store | ||||||||||||||||
Revenue | $ | 1,175,760 | $ | 1,060,303 | $ | 115,457 | 10.9 | % | ||||||||
Gross profit | $ | 78,404 | $ | 73,235 | $ | 5,169 | 7.1 | |||||||||
Gross margin | 6.7 | % | 6.9 | % | (20)bp | |||||||||||
Retail units sold | 34,323 | 31,657 | 2,666 | 8.4 | ||||||||||||
Average selling price per retail unit | $ | 34,256 | $ | 33,493 | $ | 763 | 2.3 | |||||||||
Average gross profit per retail unit | $ | 2,284 | $ | 2,313 | $ | (29 | ) | (1.3 | ) |
New vehicle sales in the first half of 2013 improved compared to the first half of 2012 primarily due to volume growth as same store unit sales increased 16.1%8.5% and 16.9%8.4%, respectively, in the three- and six-month periods ended June 30, 20132014 compared to the same periods in 2012.
2013. The number of new vehicles sold in the U.S. during the first six months of 20132014 grew approximately 7.5% over4.2% compared to the first six monthssame period of 2012. Growth in our domestic, import2013.
During the three- and luxury brand sales has outpaced the growth experienced nationally. Our domestic brandsix-month periods ended June 30, 2014, same store unit sales grew 13.7%increased in all three categories of new vehicles compared to the same periods of 2013:
● | Our domestic brand same store unit sales grew 7.2% and 8.1%, respectively, compared to national domestic unit sales growth of 5.6% and 3.4%, respectively. |
● | Our import brand same store unit sales grew 9.6% and 8.7%, respectively. National import brand unit sales grew 7.4% and 4.6%, respectively. |
● | Our luxury brand same store unit sales grew 11.2% and 9.3%, respectively, compared to national luxury brand unit sales of 10.6% and 6.8%, respectively. |
Recovery from the recession in our specific markets is different than the national average. Certain of our markets saw an increase in sales volumes that exceeded the national average, while others continued to lag behind the national average. As of the most recent data available, six of the twelve states we operate in, representing approximately 53% of our revenues for the six month period ended June 30, 2014, continue to be below the pre-recessionary vehicle registration levels experienced in 2006.
New vehicle gross profit dollars increased 18.6% and 15.7%15.8%, respectively, for the three- and six-month periods ended June 30, 20132014 compared to the same periods in 2012. Same store unit sales for import brands grew 19.5% and 19.2%, respectively, whileof 2013. On a same store unit sales for luxury brands grew 16.2%basis, gross profit increased 8.1% and 14.9%7.1%, respectively, for the three- and six-month periods ended June 30, 2013 compared to the same periods in 2012. We continue to focus on increasing our share of overall new vehicle sales within our markets. Additionally, certain of our markets have seen an increase in local market sales volumes exceeding the national average.
New vehicle gross profit dollars increased 15.6% and 15.1%, respectively, for the three- and six-month periods ended June 30, 2013 compared to the same periods of 2012.2014. These increases were due to a greater number of vehicles sold, partiallyslightly offset by lower gross profit per unit and lower gross margin.margins.
We focus on gross profit dollars earned per unit, not aon gross margin percentage. On a same store basis, the average gross profit per new retail unit decreased $146$9 and $150,$29, respectively, for the three- and six-month periods ended June 30, 20132014 compared to the same periods of 2012. These decreases were2013. This decrease was primarily due to the strategic decision to increase our market share in certain markets through lower retail pricing. Additionally, certain manufacturer incentives are tied to increases in units sold per store, and, given consecutive years of significant unit sales increases, these objectives have been more difficult to achieve in 2013 than in prior years, resulting in lower total incentive dollars earned.
We believe increasingIncreasing new unit sales creates additional used vehicle trade-in opportunities, finance and insurance sales and future service work. We believe the incremental business generated in future periods will more than offset the slightly lower new vehicle gross profit per unit that has occurred with the pursuit of our volume-based strategy.
Used Vehicle Retail RevenuesRevenue and Gross Profit
Three Months Ended June 30, | Three Months Ended June 30, | Increase | % Increase | |||||||||||||||||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | Increase | % Increase | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Reported | ||||||||||||||||||||||||||||||||
Retail revenue | $ | 258,465 | $ | 207,341 | $ | 51,124 | 24.7 | % | $ | 310,475 | $ | 258,465 | $ | 52,010 | 20.1 | % | ||||||||||||||||
Retail gross profit | $ | 38,893 | $ | 30,991 | $ | 7,902 | 25.5 | $ | 44,067 | $ | 38,893 | $ | 5,174 | 13.3 | ||||||||||||||||||
Retail gross margin | 15.0 | % | 14.9 | % | 10 | bp | 14.2 | % | 15.0 | % | (80)bp | |||||||||||||||||||||
Retail units sold | 14,074 | 11,604 | 2,470 | 21.3 | 16,086 | 14,074 | 2,012 | 14.3 | ||||||||||||||||||||||||
Average selling price per retail unit | $ | 18,365 | $ | 17,868 | $ | 497 | 2.8 | $ | 19,301 | $ | 18,365 | $ | 936 | 5.1 | ||||||||||||||||||
Average gross profit per retail unit | $ | 2,763 | $ | 2,671 | $ | 92 | 3.4 | $ | 2,739 | $ | 2,763 | $ | (24 | ) | (0.9 | ) | ||||||||||||||||
Same store | ||||||||||||||||||||||||||||||||
Retail revenue | $ | 246,004 | $ | 207,269 | $ | 38,735 | 18.7 | % | $ | 285,555 | $ | 257,754 | $ | 27,801 | 10.8 | % | ||||||||||||||||
Retail gross profit | $ | 37,102 | $ | 30,971 | $ | 6,131 | 19.8 | $ | 41,011 | $ | 38,799 | $ | 2,212 | 5.7 | ||||||||||||||||||
Retail gross margin | 15.1 | % | 14.9 | % | 20 | bp | 14.4 | % | 15.1 | % | (70)bp | |||||||||||||||||||||
Retail units sold | 13,457 | 11,603 | 1,854 | 16.0 | 14,709 | 14,033 | 676 | 4.8 | ||||||||||||||||||||||||
Average selling price per retail unit | $ | 18,281 | $ | 17,863 | $ | 418 | 2.3 | $ | 19,414 | $ | 18,368 | $ | 1,046 | 5.7 | ||||||||||||||||||
Average gross profit per retail unit | $ | 2,757 | $ | 2,669 | $ | 88 | 3.3 | $ | 2,788 | $ | 2,765 | $ | 23 | 0.8 |
Six Months Ended June 30, | Increase | % Increase | Six Months Ended June 30, | Increase | % Increase | |||||||||||||||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | (Decrease) | (Decrease) | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Reported | ||||||||||||||||||||||||||||||||
Retail revenue | $ | 497,693 | $ | 397,960 | $ | 99,733 | 25.1 | % | $ | 612,368 | $ | 497,693 | $ | 114,675 | 23.0 | % | ||||||||||||||||
Retail gross profit | $ | 73,866 | $ | 59,268 | $ | 14,598 | 24.6 | $ | 84,863 | $ | 73,866 | $ | 10,997 | 14.9 | ||||||||||||||||||
Retail gross margin | 14.8 | % | 14.9 | % | (10 | )bp | 13.9 | % | 14.8 | % | (90)bp | |||||||||||||||||||||
Retail units sold | 27,735 | 22,811 | 4,924 | 21.6 | 32,402 | 27,735 | 4,667 | 16.8 | ||||||||||||||||||||||||
Average selling price per retail unit | $ | 17,945 | $ | 17,446 | $ | 499 | 2.9 | $ | 18,899 | $ | 17,945 | $ | 954 | 5.3 | ||||||||||||||||||
Average gross profit per retail unit | $ | 2,663 | $ | 2,598 | $ | 65 | 2.5 | $ | 2,619 | $ | 2,663 | $ | (44 | ) | (1.7 | ) | ||||||||||||||||
Same store | ||||||||||||||||||||||||||||||||
Retail revenue | $ | 473,753 | $ | 394,769 | $ | 78,984 | 20.0 | % | $ | 570,759 | $ | 496,982 | $ | 73,777 | 14.8 | % | ||||||||||||||||
Retail gross profit | $ | 70,850 | $ | 58,939 | $ | 11,911 | 20.2 | $ | 79,820 | $ | 73,765 | $ | 6,055 | 8.2 | ||||||||||||||||||
Retail gross margin | 15.0 | % | 14.9 | % | 10 | bp | 14.0 | % | 14.8 | % | (80)bp | |||||||||||||||||||||
Retail units sold | 26,507 | 22,618 | 3,889 | 17.2 | 29,964 | 27,694 | 2,270 | 8.2 | ||||||||||||||||||||||||
Average selling price per retail unit | $ | 17,873 | $ | 17,454 | $ | 419 | 2.4 | $ | 19,048 | $ | 17,945 | $ | 1,103 | 6.1 | ||||||||||||||||||
Average gross profit per retail unit | $ | 2,673 | $ | 2,606 | $ | 67 | 2.6 | $ | 2,664 | $ | 2,664 | $ | - | - |
Used vehicle retail sales are a strategic focus for organic growth. Our strategy is toWe offer three categories of used vehicles: manufacturer certified pre-owned vehicles; core vehicles, or late modelthree-to-seven-year-old vehicles with lower-mileage;below certain mileage limitations; and value autos, or older vehicles with over 80,000 miles.higher mileage. Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade to retail used vehicle sales.
During the three- and six-month periods ended June 30, 2013,2014, sales increased in all three categories of used vehicles compared to the same periods of 2012.2013:
● | Same store unit sales for manufacturer certified pre-owned vehicles increased |
● | Same store unit sales for the |
● | Same store unit sales for the value auto category increased |
OurSame store used vehicle retail used-to-new vehicle sales ratio was 0.8:1revenue grew 10.8% and 14.8%, respectively, for the three-month periods ended June 30, 2013three- and 2012. For the six-month periods ended June 30, 2013 and 2012,2014 compared to the same periods of 2013. An increasing supply of late model vehicles caused our retail used-to-new vehicle sales ratio was 0.9:1. certified pre-owned segment to grow more quickly than the other categories, resulting in revenue outpacing unit growth.
On average, each of our stores currently sells approximately 5455 retail used vehicle units per month, and wecompared to 51 in the same period of 2013. We target increasing average sales to 75 units per month.
Used retail vehicle gross profit dollars increased 25.5%13.3% and 24.6%14.9%, respectively, for the three- and six-month periods ended June 30, 20132014 compared to the same periods of 2012.2013. On a same store basis, gross profit increased 5.7% and 8.2%, respectively, for the three- and six-month periods ended June 30, 2014 compared to the same periods of 2013. These increases were mainly related to volume growth althoughoffset by a decrease in gross profit per unit sold was also higher.margins as growth in certified pre-owned vehicles, which have a lower gross margin percentage, outpaced growth in our other used vehicle categories. Similar to new vehicle sales, we focus on gross profit dollars earned per unit, not on gross margin percentage, in evaluating our sales performance.
Used Vehicle Wholesale RevenuesRevenue and Gross Profit
Three Months Ended June 30, | Increase | % Increase | ||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | (Decrease) | (Decrease) | ||||||||||||
Reported | ||||||||||||||||
Wholesale revenue | $ | 37,691 | $ | 35,106 | $ | 2,585 | 7.4 | % | ||||||||
Wholesale gross profit | $ | 695 | $ | 296 | $ | 399 | 134.8 | |||||||||
Wholesale gross margin | 1.8 | % | 0.8 | % | 100 | bp | ||||||||||
Wholesale units sold | 5,241 | 4,512 | 729 | 16.2 | ||||||||||||
Average selling price per wholesale unit | $ | 7,192 | $ | 7,781 | $ | (589 | ) | (7.6 | ) | |||||||
Average gross profit per retail unit | $ | 133 | $ | 66 | $ | 67 | 101.5 | |||||||||
�� | ||||||||||||||||
Same store | ||||||||||||||||
Wholesale revenue | $ | 35,609 | $ | 35,065 | $ | 544 | 1.6 | % | ||||||||
Wholesale gross profit | $ | 861 | $ | 298 | $ | 563 | 188.9 | |||||||||
Wholesale gross margin | 2.4 | % | 0.8 | % | 160 | bp | ||||||||||
Wholesale units sold | 4,979 | 4,511 | 468 | 10.4 | ||||||||||||
Average selling price per wholesale unit | $ | 7,152 | $ | 7,773 | $ | (621 | ) | (8.0 | ) | |||||||
Average gross profit per retail unit | $ | 173 | $ | 66 | $ | 107 | 162.1 |
Three Months Ended June 30, | ||||||||||||||||
(Dollars in thousands, except per unit amounts) | 2014 | 2013 | Increase | % Increase | ||||||||||||
Reported | ||||||||||||||||
Wholesale revenue | $ | 44,286 | $ | 37,691 | $ | 6,595 | 17.5 | % | ||||||||
Wholesale gross profit | $ | 1,504 | $ | 695 | $ | 809 | 116.4 | |||||||||
Wholesale gross margin | 3.4 | % | 1.8 | % | 160bp | |||||||||||
Wholesale units sold | 6,047 | 5,241 | 806 | 15.4 | ||||||||||||
Average selling price per wholesale unit | $ | 7,324 | $ | 7,192 | $ | 132 | 1.8 | |||||||||
Average gross profit per retail unit | $ | 249 | $ | 133 | $ | 116 | 87.2 | |||||||||
Same store | ||||||||||||||||
Wholesale revenue | $ | 41,937 | $ | 37,692 | $ | 4,245 | 11.3 | % | ||||||||
Wholesale gross profit | $ | 1,444 | $ | 748 | $ | 696 | 93.0 | |||||||||
Wholesale gross margin | 3.4 | % | 2.0 | % | 140bp | |||||||||||
Wholesale units sold | 5,649 | 5,241 | 408 | 7.8 | ||||||||||||
Average selling price per wholesale unit | $ | 7,424 | $ | 7,192 | $ | 232 | 3.2 | |||||||||
Average gross profit per retail unit | $ | 256 | $ | 143 | $ | 113 | 79.0 |
Six Months Ended June 30, | Increase | % Increase | Six Months Ended June 30, | |||||||||||||||||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | (Decrease) | (Decrease) | 2014 | 2013 | Increase | % Increase | ||||||||||||||||||||||||
Reported | ||||||||||||||||||||||||||||||||
Wholesale revenue | $ | 77,197 | $ | 68,463 | $ | 8,734 | 12.8 | % | $ | 86,979 | $ | 77,197 | $ | 9,782 | 12.7 | % | ||||||||||||||||
Wholesale gross profit | $ | 1,669 | $ | 693 | $ | 976 | 140.8 | $ | 2,835 | $ | 1,669 | $ | 1,166 | 69.9 | ||||||||||||||||||
Wholesale gross margin | 2.2 | % | 1.0 | % | 120 | bp | 3.3 | % | 2.2 | % | 110bp | |||||||||||||||||||||
Wholesale units sold | 10,565 | 8,993 | 1,572 | 17.5 | 11,900 | 10,565 | 1,335 | 12.6 | ||||||||||||||||||||||||
Average selling price per wholesale unit | $ | 7,307 | $ | 7,613 | $ | (306 | ) | (4.0 | ) | $ | 7,309 | $ | 7,307 | $ | 2 | - | ||||||||||||||||
Average gross profit per retail unit | $ | 158 | $ | 77 | $ | 81 | 105.2 | $ | 238 | $ | 158 | $ | 80 | 50.6 | ||||||||||||||||||
Same store | ||||||||||||||||||||||||||||||||
Wholesale revenue | $ | 72,045 | $ | 67,808 | $ | 4,237 | 6.2 | % | $ | 83,060 | $ | 77,172 | $ | 5,888 | 7.6 | % | ||||||||||||||||
Wholesale gross profit | $ | 1,760 | $ | 744 | $ | 1,016 | 136.6 | $ | 2,758 | $ | 1,781 | $ | 977 | 54.9 | ||||||||||||||||||
Wholesale gross margin | 2.4 | % | 1.1 | % | 130 | bp | 3.3 | % | 2.3 | % | 100bp | |||||||||||||||||||||
Wholesale units sold | 9,969 | 8,898 | 1,071 | 12.0 | 11,200 | 10,564 | 636 | 6.0 | ||||||||||||||||||||||||
Average selling price per wholesale unit | $ | 7,227 | $ | 7,621 | $ | (394 | ) | (5.2 | ) | $ | 7,416 | $ | 7,305 | $ | 111 | 1.5 | ||||||||||||||||
Average gross profit per retail unit | $ | 177 | $ | 84 | $ | 93 | 110.7 | $ | 246 | $ | 169 | $ | 77 | 45.6 |
Wholesale transactions are vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to inventory age or other factors. Wholesale vehicles are typically sold at or near inventory cost and do not comprise a meaningful component of our gross profit.
Finance and Insurance
Three Months Ended June 30, | % | |||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | Increase | Increase | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 34,218 | $ | 27,184 | $ | 7,034 | 25.9 | % | ||||||||
Average finance and insurance per retail unit | $ | 1,100 | $ | 1,063 | $ | 37 | 3.5 | % | ||||||||
Same store | ||||||||||||||||
Revenue | $ | 32,582 | $ | 27,011 | $ | 5,571 | 20.6 | % | ||||||||
Average finance and insurance per retail unit | $ | 1,098 | $ | 1,056 | $ | 42 | 4.0 | % |
Three Months Ended June 30, | % | |||||||||||||||
(Dollars in thousands, except per unit amounts) | 2014 | 2013 | Increase | Increase | ||||||||||||
Reported | ||||||||||||||||
Revenue | $ | 43,838 | $ | 34,218 | $ | 9,620 | 28.1 | % | ||||||||
Average finance and insurance per retail unit | $ | 1,200 | $ | 1,100 | $ | 100 | 9.1 | % | ||||||||
Same store | ||||||||||||||||
Revenue | $ | 39,892 | $ | 34,139 | $ | 5,753 | 16.9 | % | ||||||||
Average finance and insurance per retail unit | $ | 1,206 | $ | 1,102 | $ | 104 | 9.4 | % |
Six Months Ended June 30, | % | Six Months Ended June 30, | % | |||||||||||||||||||||||||||||
(Dollars in thousands, except per unit amounts) | 2013 | 2012 | Increase | Increase | 2014 | 2013 | Increase | Increase | ||||||||||||||||||||||||
Reported | ||||||||||||||||||||||||||||||||
Revenue | $ | 65,881 | $ | 52,060 | $ | 13,821 | 26.5 | % | $ | 83,469 | $ | 65,881 | $ | 17,588 | 26.7 | % | ||||||||||||||||
Average finance and insurance per retail unit | $ | 1,108 | $ | 1,064 | $ | 44 | 4.1 | % | $ | 1,190 | $ | 1,108 | $ | 82 | 7.4 | % | ||||||||||||||||
Same store | ||||||||||||||||||||||||||||||||
Revenue | $ | 62,560 | $ | 50,980 | $ | 11,580 | 22.7 | % | $ | 77,322 | $ | 65,810 | $ | 11,512 | 17.5 | % | ||||||||||||||||
Average finance and insurance per retail unit | $ | 1,100 | $ | 1,049 | $ | 51 | 4.9 | % | $ | 1,203 | $ | 1,109 | $ | 94 | 8.5 | % |
The increases in finance and insurance sales were driven by increased vehicle sales volume and higher retail prices in the three- and six-month periods ended June 30, 20132014 compared to the same periods of 2012. The availability of consumer credit continued to expand through the first six months of 2013 with lenders increasing the average loan-to-value amount available to most customers. Additionally, we increased our penetration rate2013. Penetration rates on arranging financing for our customers and the sale of extended service contracts.contracts also increased. As a result, our average finance and insurance revenue per retail unit increased. We continue to see the availability of consumer credit expand in 2014 with lenders increasing the average loan-to-value amount available to most customers.
Penetration rates for specific categories of products were as follows:
Three Months Ended June 30, | Six Months Ended | Three Months Ended June 30, | Six Months Ended | |||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||
Finance and insurance | 78% | 76% | 77% | 76% | 80 | % | 78 | % | 79 | % | 77 | % | ||||||||||||||||||||
Service contracts | 42 | 41 | 42 | 41 | 43 | 42 | 43 | 42 | ||||||||||||||||||||||||
Lifetime oil change and filter | 37 | 36 | 36 | 37 | ||||||||||||||||||||||||||||
Lifetime lube, oil and filter contracts | 36 | 37 | 37 | 36 |
Service, Body and Parts Revenue and Gross Profit
Three Months Ended June 30, | ||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Increase | % Increase | ||||||||||||
Reported | ||||||||||||||||
Customer pay | $ | 53,243 | $ | 48,884 | $ | 4,359 | 8.9 | % | ||||||||
Warranty | 15,707 | 12,666 | 3,041 | 24.0 | ||||||||||||
Wholesale parts | 16,916 | 15,550 | 1,366 | 8.8 | ||||||||||||
Body shop | 8,596 | 8,356 | 240 | 2.9 | ||||||||||||
Total service, body and parts | $ | 94,462 | $ | 85,456 | $ | 9,006 | 10.5 | % | ||||||||
Service, body and parts gross profit | $ | 46,693 | $ | 41,674 | $ | 5,019 | 12.0 | % | ||||||||
Service, body and parts gross margin | 49.4 | % | 48.8 | % | 60 | bp | ||||||||||
Same store | ||||||||||||||||
Customer pay | $ | 51,281 | $ | 48,877 | $ | 2,404 | 4.9 | % | ||||||||
Warranty | 15,126 | 12,666 | 2,460 | 19.4 | ||||||||||||
Wholesale parts | 16,442 | 15,529 | 913 | 5.9 | ||||||||||||
Body shop | 8,596 | 8,355 | 241 | 2.9 | ||||||||||||
Total service, body and parts | $ | 91,445 | $ | 85,427 | $ | 6,018 | 7.0 | % | ||||||||
Service, body and parts gross profit | $ | 44,100 | $ | 40,775 | $ | 3,325 | 8.2 | % | ||||||||
Service, body and parts gross margin | 48.2 | % | 47.7 | % | 50 | bp |
Three Months Ended June 30, | Increase | |||||||||||||||
(Dollars in thousands) | 2014 | 2013 | (Decrease) | % Increase | ||||||||||||
Reported | ||||||||||||||||
Customer pay | $ | 64,331 | $ | 53,243 | $ | 11,088 | 20.8 | % | ||||||||
Warranty | 19,908 | 15,707 | 4,201 | 26.7 | ||||||||||||
Wholesale parts | 19,950 | 16,916 | 3,034 | 17.9 | ||||||||||||
Body shop | 10,148 | 8,596 | 1,552 | 18.1 | ||||||||||||
Total service, body and parts | $ | 114,337 | $ | 94,462 | $ | 19,875 | 21.0 | % | ||||||||
Service, body and parts gross profit | $ | 56,182 | $ | 46,693 | $ | 9,489 | 20.3 | % | ||||||||
Service, body and parts gross margin | 49.1 | % | 49.4 | % | (30)bp | |||||||||||
Same store | ||||||||||||||||
Customer pay | $ | 58,109 | $ | 52,932 | $ | 5,177 | 9.8 | % | ||||||||
Warranty | 17,980 | 15,627 | 2,353 | 15.1 | ||||||||||||
Wholesale parts | 18,257 | 16,879 | 1,378 | 8.2 | ||||||||||||
Body shop | 9,424 | 8,596 | 828 | 9.6 | ||||||||||||
Total service, body and parts | $ | 103,770 | $ | 94,034 | $ | 9,736 | 10.4 | % | ||||||||
Service, body and parts gross profit | $ | 50,988 | $ | 46,452 | $ | 4,536 | 9.8 | % | ||||||||
Service, body and parts gross margin | 49.1 | % | 49.4 | % | (30)bp |
Six Months Ended June 30, | Six Months Ended June 30, | Increase | ||||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Increase | % Increase | 2014 | 2013 | (Decrease) | % Increase | ||||||||||||||||||||||||
Reported | ||||||||||||||||||||||||||||||||
Customer pay | $ | 102,561 | $ | 94,833 | $ | 7,728 | 8.1 | % | $ | 121,160 | $ | 102,561 | $ | 18,599 | 18.1 | % | ||||||||||||||||
Warranty | 30,047 | 25,561 | 4,486 | 17.6 | 37,826 | 30,047 | 7,779 | 25.9 | ||||||||||||||||||||||||
Wholesale parts | 34,266 | 31,821 | 2,445 | 7.7 | 39,744 | 34,266 | 5,478 | 16.0 | ||||||||||||||||||||||||
Body shop | 18,028 | 16,785 | 1,243 | 7.4 | 20,224 | 18,028 | 2,196 | 12.2 | ||||||||||||||||||||||||
Total service, body and parts | $ | 184,902 | $ | 169,000 | $ | 15,902 | 9.4 | % | $ | 218,954 | $ | 184,902 | $ | 34,052 | 18.4 | % | ||||||||||||||||
Service, body and parts gross profit | $ | 90,472 | $ | 81,809 | $ | 8,663 | 10.6 | % | $ | 107,014 | $ | 90,472 | $ | 16,542 | 18.3 | % | ||||||||||||||||
Service, body and parts gross margin | 48.9 | % | 48.4 | % | 50 | bp | 48.9 | % | 48.9 | % | - | |||||||||||||||||||||
Same store | ||||||||||||||||||||||||||||||||
Customer pay | $ | 98,876 | $ | 94,059 | $ | 4,817 | 5.1 | % | $ | 111,382 | $ | 102,252 | $ | 9,130 | 8.9 | % | ||||||||||||||||
Warranty | 28,925 | 25,291 | 3,634 | 14.4 | 34,793 | 29,967 | 4,826 | 16.1 | ||||||||||||||||||||||||
Wholesale parts | 33,363 | 31,663 | 1,700 | 5.4 | 37,023 | 34,230 | 2,793 | 8.2 | ||||||||||||||||||||||||
Body shop | 18,028 | 16,780 | 1,248 | 7.4 | 19,501 | 18,028 | 1,473 | 8.2 | ||||||||||||||||||||||||
Total service, body and parts | $ | 179,192 | $ | 167,793 | $ | 11,399 | 6.8 | % | $ | 202,699 | $ | 184,477 | $ | 18,222 | 9.9 | % | ||||||||||||||||
Service, body and parts gross profit | $ | 85,926 | $ | 79,503 | $ | 6,423 | 8.1 | % | $ | 98,906 | $ | 90,277 | $ | 8,629 | 9.6 | % | ||||||||||||||||
Service, body and parts gross margin | 48.0 | % | 47.4 | % | 60 | bp | 48.8 | % | 48.9 | % | (10)bp |
Our service, body and parts sales grew in all areas in the three- and six-month periods ended June 30, 20132014 compared to the prior year periods. same periods of 2013. There are more late model vehicles in operation as new vehicle sales volumes have been increasing since 2010. We believe our sales in this area may increase in the coming years as more late model vehicles require repairs and maintenance.
We focus on retaining customers by offering competitively-pricedcompetitively priced routine maintenance and increasing our marketing efforts. We increased our same store customer pay business 4.9%9.8% and 5.1%8.9%, respectively, in the three- and six-month periods ended June 30, 20132014 compared to the same periods in 2012.2013.
In the three- and six-month periods ended June 30, 20132014 compared to the same periods of 2012,2013, same store warranty sales increased 19.4%15.1% and 14.4%16.1%, respectively. Domestic brandIn 2014, several franchises, including General Motors, Chrysler and Toyota, have announced significant vehicle recalls. These recalls have increased warranty work increased 0.7% and 1.0%, import warranty work increased 31.6% and 24.6%, and luxury warranty work increased 38.5% and 26.1%, respectively. Import and luxury warranty work increased primarilysales. Additionally, we continue to see increases due to recent recalls on certain modelsthe growing numbers of vehicles in 2013. Additionally, certain import and luxury franchises include routineoperation. Routine maintenance, such as oil changes, offered by certain franchises including BMW, Toyota and General Motors for two to four years after a new vehicle is sold, which is included asprovides for future work. Domestic brand warranty work. As a result, increasing new vehicle unit saleswork increased 37.6% and 33.1%, respectively, and import warranty work increased 6.7% and 7.0%, respectively, in these franchises also contributedthe three- and six-month periods ended June 30, 2014 compared to the period-over-period increases insame periods of 2013. Luxury warranty revenue.work decreased 4.2% for the three-month period ended June 30, 2014 compared to the same period of 2013, and increased 2.4% for the six-month period ended June 30, 2014 compared to the same period of 2013.
Wholesale parts represented 18.0%17.6% and 18.6%18.3% of our same store service, body and parts revenue mix in the first three and six months of 2013,2014 and 18.2%17.9% and 18.9%18.6% in the first three and six months of 2012, respectively.2013. Wholesale parts grew 5.9% and 5.4%, respectively,8.2% in the first three and six months of 20132014 compared to the same periods of 2012.2013. We believe this increase is a function of targeting fleet and mechanical wholesale accounts.
Body shop represented 9.4%9.1% and 10.1%9.6% of our same store service, body and parts revenue mix in the first three and six months of 2013,2014, and 9.8%9.1% and 10.0%9.8% in the first three and six months of 2012, respectively.2013. Body shop grew 2.9%9.6% and 7.4%, respectively,8.2% in the first three and six months of 20132014 compared to the same periods of 2012.2013. This increase is a result of obtaining additional direct repair relationships with insurance companies and certain personnel changes we made in 2014 that increased productivity and volume.
Service, body and parts gross profit increased 12.0%20.3% and 10.6%, respectively,18.3% for the three- and six-month periods ended June 30, 20132014 compared to the same periods of 2012, mainly due to sales growth2013, which is in all service, body and parts areas.
Gross Profit
Gross profit increased $25.7 million and $47.8 million, respectively,line with our revenue growth. Our gross margins were consistent in the three-first three and six-month periods ended June 30, 2013six months of 2014 compared to the same periods in 2012. These increases of 19.2% and 18.5%, respectively, were due to increased revenues, partially offset by declines in our overall gross profit margin.
Our overall gross profit margin was 15.8% and 16.3%, respectively, for the three months ended June 30, 2013 and 2012. For the six months ended June 30, 2013 and 2012, our overall gross profit margin was 16.0% and 16.6%, respectively.
We focus on growing overall gross profit dollars. This growth allows us to leverage our cost structure in our general and administrative expenses resulting in increased operating margin. We believe our “single-point” strategy of maintaining franchise exclusivity within the markets we serve protects profitability and supports higher margin levels within each business line.2013.
Selling, General and Administrative Expense (“SG&A”)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
Three Months Ended June 30, | Increase | % Increase | Three Months Ended June 30, | Increase | % Increase | |||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | (Decrease) | (Decrease) | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Personnel | $ | 70,692 | $ | 60,969 | $ | 9,723 | 15.9 | % | $ | 85,332 | $ | 70,692 | $ | 14,640 | 20.7 | % | ||||||||||||||||
Advertising | 9,700 | 7,825 | 1,875 | 24.0 | 10,374 | 9,700 | 674 | 6.9 | ||||||||||||||||||||||||
Rent | 3,324 | 3,905 | (581 | ) | (14.9 | ) | 3,757 | 3,324 | 433 | 13.0 | ||||||||||||||||||||||
Facility costs | 6,658 | 5,863 | 795 | 13.6 | 7,301 | 6,658 | 643 | 9.7 | ||||||||||||||||||||||||
Other | 18,909 | 14,428 | 4,481 | 31.1 | 18,699 | 18,909 | (210 | ) | (1.1 | ) | ||||||||||||||||||||||
Total SG&A | $ | 109,283 | $ | 92,990 | $ | 16,293 | 17.5 | % | $ | 125,463 | $ | 109,283 | $ | 16,180 | 14.8 | % |
Three Months Ended June 30, | Increase | Three Months Ended June 30, | Increase | |||||||||||||||||||||||||
As a % of gross profit | 2013 | 2012 | (Decrease) | 2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Personnel | 44.2 | % | 45.5 | % | (130 | ) bp | 44.4 | % | 44.2 | % | 20 bp | |||||||||||||||||
Advertising | 6.1 | 5.8 | 30 | 5.4 | 6.1 | (70 | ) | |||||||||||||||||||||
Rent | 2.1 | 2.9 | (80 | ) | 2.0 | 2.1 | (10 | ) | ||||||||||||||||||||
Facility costs | 4.2 | 4.4 | (20 | ) | 3.8 | 4.2 | (40 | ) | ||||||||||||||||||||
Other | 11.8 | 10.7 | 110 | 9.6 | 11.8 | (220 | ) | |||||||||||||||||||||
Total SG&A | 68.4 | % | 69.3 | % | (90 | ) bp | 65.2 | % | 68.4 | % | (320) bp |
Six Months Ended June 30, | Increase | % Increase | Six Months Ended June 30, | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | (Decrease) | (Decrease) | 2014 | 2013 | Increase | % Increase | ||||||||||||||||||||||||
Personnel | $ | 137,824 | $ | 119,492 | $ | 18,332 | 15.3 | % | $ | 166,008 | $ | 137,824 | $ | 28,184 | 20.4 | % | ||||||||||||||||
Advertising | 18,602 | 14,089 | 4,513 | 32.0 | 20,059 | 18,602 | 1,457 | 7.8 | ||||||||||||||||||||||||
Rent | 7,053 | 7,735 | (682 | ) | (8.8 | ) | 7,318 | 7,053 | 265 | 3.8 | ||||||||||||||||||||||
Facility costs | 13,327 | 11,882 | 1,445 | 12.2 | 14,885 | 13,327 | 1,558 | 11.7 | ||||||||||||||||||||||||
Other | 33,608 | 28,231 | 5,377 | 19.0 | 39,022 | 33,608 | 5,414 | 16.1 | ||||||||||||||||||||||||
Total SG&A | $ | 210,414 | $ | 181,429 | $ | 28,985 | 16.0 | % | $ | 247,292 | $ | 210,414 | $ | 36,878 | 17.5 | % |
Six Months Ended June 30, | Increase | Six Months Ended June 30, | Increase | |||||||||||||||||||||||||
As a % of gross profit | 2013 | 2012 | (Decrease) | 2014 | 2013 | (Decrease) | ||||||||||||||||||||||
Personnel | 45.0 | % | 46.2 | % | (120 | ) bp | 45.6 | % | 45.0 | % | 60 bp | |||||||||||||||||
Advertising | 6.1 | 5.5 | 60 | 5.5 | 6.1 | (60 | ) | |||||||||||||||||||||
Rent | 2.3 | 3.0 | (70 | ) | 2.0 | 2.3 | (30 | ) | ||||||||||||||||||||
Facility costs | 4.3 | 4.6 | (30 | ) | 4.1 | 4.3 | (20 | ) | ||||||||||||||||||||
Other | 11.0 | 10.9 | 10 | 10.7 | 11.0 | (30 | ) | |||||||||||||||||||||
Total SG&A | 68.7 | % | 70.2 | % | (150 | ) bp | 67.9 | % | 68.7 | % | (80) bp |
SG&A expense increased $16.3$16.2 and $36.9 million and $29.0 million, respectively, in the three- and six-month periods ended June 30, 20132014 compared to the same periods in 2012. These increases were2013. SG&A as a percentage of gross profit was 65.2% and 68.4%, respectively, for the three months ended June 30, 2014 and 2013, and 67.9% and 68.7%, respectively, for the six months ended June 30, 2014 and 2013.
The increase in SG&A expense was primarily driven by increased variable costs associated with improved sales and increasesan increase in advertising asstore count. Additionally, during the first quarter of 2014, we focused on gaining market share. Additionally, duringrecorded non-core charges of $3.9 million related to a reserve associated with a lawsuit filed in 2006 and settled in 2013, a charge for a hailstorm and a reserve for a contract assumed in an acquisition. In the second quarter of 2013,2014, we recorded a $3.8non-core charges of $0.2 million expense associated with a non-core legal reserve related to acquisition expenses for the settlement of a claim filed in 2006.
pending combination with DCH Auto Group.
SG&A expense adjusted for non-core charges was as a percentage of gross profit was 68.4% and 69.3%, respectively, for the three months ended June 30, 2013 and 2012, and 68.7% and 70.2%, respectively, for the six months ended June 30, 2013 and 2012. follows (in thousands):
Three Months Ended June 30, | ||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | Increase | % Increase | ||||||||||||
Personnel | $ | 85,332 | $ | 70,692 | $ | 14,640 | 20.7 | % | ||||||||
Advertising | 10,374 | 9,700 | 674 | 6.9 | ||||||||||||
Rent | 3,757 | 3,324 | 433 | 13.0 | ||||||||||||
Facility costs | 7,301 | 6,658 | 643 | 9.7 | ||||||||||||
Adjusted other | 18,536 | 15,096 | 3,440 | 22.8 | ||||||||||||
Adjusted total SG&A | $ | 125,300 | $ | 105,470 | $ | 19,830 | 18.8 | % |
Three Months Ended June 30, | Increase | |||||||||||
As a % of gross profit | 2014 | 2013 | (Decrease) | |||||||||
Personnel | 44.4 | % | 44.2 | % | 20 bp | |||||||
Advertising | 5.4 | 6.1 | (70 | ) | ||||||||
Rent | 2.0 | 2.1 | (10 | ) | ||||||||
Facility costs | 3.8 | 4.2 | (40 | ) | ||||||||
Adjusted other | 9.6 | 9.4 | 20 | |||||||||
Adjusted total SG&A | 65.2 | % | 66.0 | % | (80) bp |
Six Months Ended June 30, | ||||||||||||||||
(Dollars in thousands) | 2014 | 2013 | Increase | % Increase | ||||||||||||
Personnel | $ | 166,008 | $ | 137,824 | $ | 28,184 | 20.4 | % | ||||||||
Advertising | 20,059 | 18,602 | 1,457 | 7.8 | ||||||||||||
Rent | 7,318 | 7,053 | 265 | 3.8 | ||||||||||||
Facility costs | 14,885 | 13,326 | 1,559 | 11.7 | ||||||||||||
Adjusted other | 34,928 | 29,796 | 5,132 | 17.2 | ||||||||||||
Adjusted total SG&A | $ | 243,198 | $ | 206,601 | $ | 36,597 | 17.7 | % |
Six Months Ended June 30, | Increase | |||||||||||
As a % of gross profit | 2014 | 2013 | (Decrease) | |||||||||
Personnel | 45.6 | % | 45.0 | % | 60 bp | |||||||
Advertising | 5.5 | 6.1 | (60 | ) | ||||||||
Rent | 2.0 | 2.3 | (30 | ) | ||||||||
Facility costs | 4.1 | 4.4 | (30 | ) | ||||||||
Adjusted other | 9.5 | 9.7 | (20 | ) | ||||||||
Adjusted total SG&A | 66.7 | % | 67.5 | % | (80) bp |
Excluding the non-core legal reserve,charges of $0.2 million and $4.1 million, adjusted SG&A as a percentage of gross profit was 66.0%65.2% and 67.5%66.7%, respectively, for the three and six months ended June 30, 2013.2014. See “Non-GAAP Reconciliations” for more details. As sales volume increases and we gainfurther leverage in our cost structure, we anticipate maintaining SG&A as a percentage of gross profit in the highmid to upper 60% range.
We also measure the leverage of our cost structure by evaluating throughput, which is the incremental percentage of gross profit retained after deducting SG&A expense.
Three Months Ended June 30, | % of Change in | Three Months Ended June 30, | % of Change in | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Gross Profit | 2014 | 2013 | Change | Gross Profit | ||||||||||||||||||||||||
Gross profit | $ | 159,833 | $ | 134,096 | $ | 25,737 | 100.0 | % | $ | 192,300 | $ | 159,833 | $ | 32,467 | 100.0 | % | ||||||||||||||||
SG&A expense | (109,283 | ) | (92,990 | ) | (16,293 | ) | (63.3 | ) | (125,463 | ) | (109,283 | ) | (16,180 | ) | (49.8 | ) | ||||||||||||||||
Throughput contribution | $ | 9,444 | 36.7 | % | $ | 16,287 | 50.2 | % |
Three Months Ended June 30, | % of Change in | |||||||||||||||
(Dollars in thousands) | 2012 | 2011 | Change | Gross Profit | ||||||||||||
Gross profit | $ | 134,096 | $ | 113,976 | $ | 20,120 | 100.0 | % | ||||||||
SG&A expense | (92,990 | ) | (79,903 | ) | (13,087 | ) | (65.0 | ) | ||||||||
Throughput contribution | $ | 7,033 | 35.0 | % |
Six Months Ended June 30, | % of Change in | |||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Gross Profit | ||||||||||||
Gross profit | $ | 306,271 | $ | 258,430 | $ | 47,841 | 100.0 | % | ||||||||
SG&A expense | (210,414 | ) | (181,429 | ) | (28,985 | ) | (60.6 | ) | ||||||||
Throughput contribution | $ | 18,856 | 39.4 | % |
Six Months Ended June 30, | % of Change in | Six Months Ended June 30, | % of Change in | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2012 | 2011 | Change | Gross Profit | 2014 | 2013 | Change | Gross Profit | ||||||||||||||||||||||||
Gross profit | $ | 258,430 | $ | 213,634 | $ | 44,796 | 100.0 | % | $ | 364,361 | $ | 306,271 | $ | 58,090 | 100.0 | % | ||||||||||||||||
SG&A expense | (181,429 | ) | (155,196 | ) | (26,233 | ) | (58.6 | ) | (247,292 | ) | (210,414 | ) | (36,878 | ) | (63.5 | ) | ||||||||||||||||
Throughput contribution | $ | 18,563 | 41.4 | % | $ | 21,212 | 36.5 | % |
Throughput, adjusted to excludeexcluding non-core charges, was 38.9% and 37.0% for the three- and six-month periods ended June 30, 2014. These non-core charges were $0.2 million and $4.1 million, respectively, for the three- and six-month periods ended June 30, 2014 and $3.8 million non-core legal reserve recorded in the second quarter of 2013, was 51.5% and 48.9%, respectively, for the three- and six-month periods ended June 30, 2013. See “Non-GAAP Reconciliations” for more details.
Three Months Ended June 30, | % of Change in | |||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Gross Profit | ||||||||||||
Gross profit | $ | 159,833 | $ | 134,096 | $ | 25,737 | 100.0 | % | ||||||||
Adjusted SG&A expense | (105,470 | ) | (92,990 | ) | (12,480 | ) | (48.5 | ) | ||||||||
Adjusted throughput contribution | $ | 13,257 | 51.5 | % |
Six Months Ended June 30, | % of Change in | |||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Gross Profit | ||||||||||||
Gross profit | $ | 306,271 | $ | 258,430 | $ | 47,841 | 100.0 | % | ||||||||
Adjusted SG&A expense | (206,601 | ) | (182,168 | ) | (24,433 | ) | (51.1 | ) | ||||||||
Adjusted throughput contribution | $ | 23,408 | 48.9 | % |
Throughput contributions for newly opened or acquired stores are on a “first dollar” basis forreduce overall throughput as in the first twelve monthsyear of operations. operation, a store’s throughput is equal to the inverse of its SG&A as a percentage of gross profit. For example, a store which achieves SG&A as a percentage of gross profit of 70% will have throughput of 30% in the first year of operation.
We acquired twothirteen stores and opened fourtwo new stores since the secondfirst quarter of 2012.2013. Adjusting for these locations and the non-core legal reserve,adjustments discussed above, our throughput contribution on a same store basis was estimated at 56.5%50.5% and 52.9%, respectively,45.7% for the three- and six-month periods ended June 30, 2013.2014. We continue to target a same store throughput contribution of approximately 50%.
Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization of certain intangible assets, including customer lists and non-compete agreements.
Three Months Ended June 30, | % | Three Months Ended June 30, | % | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Increase | Increase | 2014 | 2013 | Increase | Increase | ||||||||||||||||||||||||
Depreciation and amortization | $ | 4,899 | $ | 4,198 | $ | 701 | 16.7 | % | $ | 5,825 | $ | 4,899 | $ | 926 | 18.9 | % |
Six Months Ended June 30, | % | Six Months Ended June 30, | % | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Increase | Increase | 2014 | 2013 | Increase | Increase | ||||||||||||||||||||||||
Depreciation and amortization | $ | 9,620 | $ | 8,336 | $ | 1,284 | 15.4 | % | $ | 11,332 | $ | 9,620 | $ | 1,712 | 17.8 | % |
Depreciation and amortization for the three and six months ended June 30, 20132014, increased compared to the same periods of 20122013 as we purchased previously leased facilities, built new facilities subsequent to the acquisition of stores and invested in improvements at our facilities and replacement of equipment. These investments increase the amount of depreciable assets and amortizable expenses. In the first halffull year of 2013 and the first six months of 2014, we had capital expenditures of $22.1$50.0 million and in the full year of 2012 we had capital expenditures of $64.6 million.$35.2 million, respectively.
Operating Income
Operating income was 5.0% and 4.5% of revenue for the three-month periods ended June 30, 2014 and 2013, and 2012.respectively. Operating income as a percentage of revenue was 4.5%4.6% and 4.4%, respectively,4.5% for the six-month periods ended June 30, 20132014 and 2012.2013. Operating margin adjusted for non-core charges was 5.0% and 4.8% for the three- and six-month periods ended June 30, 2014. See “Non-GAAP Reconciliations” for more details. We continue to focus on cost control, which allows us to leverage our cost structure in an environment of improving sales.
Floor Plan Interest Expense and Floor Plan Assistance
Floor plan interest expense remained flatincreased $0.2 million in the three months ended June 30, 20132014 compared to the same period of 2012.2013. Changes in the average outstanding balances on our floor plan facilities increased the expense $0.6 million and the maturity of three interest rate swaps decreased the expense $0.6 million during the three months ended June 30, 2013 compared to the same period of 2012. Interest rates on our floor plan facilities were consistent between periods.
Floor plan interest expense increased $0.5 million in the six months ended June 30, 2013 compared to the same period of 2012. Changes in the average outstanding balances on our floor plan facilities increased the expense $1.9$0.9 million, changes in the interest rates on our floor plan facilities decreased the expense $0.6 million and interest rate swap activity decreased the expense $0.1 million during the three months ended June 30, 2014 compared to the same period of 2013.
Floor plan interest expense decreased $0.3 million in the six months ended June 30, 2014 compared to the same period of 2013. Changes in the average outstanding balances on our floor plan facilities increased the expense $1.5 million, changes in the interest rates on our floor plan facilities decreased the expense $1.1 million and the maturity of three interest rate swaps further decreased the expense $0.8$0.7 million during the six months ended June 30, 20132014 compared to the same period of 2012.2013.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. FloorUnder accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when athe specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.
The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned.
Three Months Ended June 30, | % | Three Months Ended June 30, | % | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Change | 2014 | 2013 | Change | Change | ||||||||||||||||||||||||
Floor plan interest expense (new vehicles) | $ | 3,036 | $ | 3,054 | $ | (18 | ) | (0.6 | )% | $ | 3,215 | $ | 3,036 | $ | 179 | 5.9 | % | |||||||||||||||
Floor plan assistance (included as an offset to cost of sales) | (5,354 | ) | (4,187 | ) | 1,167 | 27.9 | (6,806 | ) | (5,354 | ) | 1,452 | 27.1 | ||||||||||||||||||||
Net new vehicle carrying costs | $ | (2,318 | ) | $ | (1,133 | ) | $ | 1,185 | 104.6 | % | $ | (3,591 | ) | $ | (2,318 | ) | $ | 1,273 | (54.9 | )% |
Six Months Ended June 30, | % | Six Months Ended June 30, | % | |||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Change | Change | 2014 | 2013 | Change | Change | ||||||||||||||||||||||||
Floor plan interest expense (new vehicles) | $ | 6,485 | $ | 5,956 | $ | 529 | 8.9 | % | $ | 6,199 | $ | 6,485 | $ | (286 | ) | (4.4 | )% | |||||||||||||||
Floor plan assistance (included as an offset to cost of sales) | (9,765 | ) | (7,830 | ) | 1,935 | 24.7 | (12,424 | ) | (9,765 | ) | 2,659 | 27.2 | ||||||||||||||||||||
Net new vehicle carrying costs | $ | (3,280 | ) | $ | (1,874 | ) | $ | 1,406 | 75.0 | % | $ | (6,225 | ) | $ | (3,280 | ) | $ | 2,945 | (89.8 | )% |
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, and our used vehicle inventory financing facility and our revolving line of credit.
Three Months Ended June 30, | Increase | % Increase | Three Months Ended June 30, | Increase | % Increase | |||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | (Decrease) | (Decrease) | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Mortgage interest | $ | 1,505 | $ | 2,245 | $ | (740 | ) | (33.0 | )% | $ | 1,446 | $ | 1,505 | $ | (59 | ) | (3.9 | )% | ||||||||||||||
Other interest | 451 | 384 | 67 | 17.4 | 523 | 451 | 72 | 16.0 | ||||||||||||||||||||||||
Capitalized interest | (15 | ) | (99 | ) | (84 | ) | (84.8 | ) | (100 | ) | (15 | ) | 85 | 566.7 | ||||||||||||||||||
Total other interest expense | $ | 1,941 | $ | 2,530 | $ | (589 | ) | (23.3 | )% | $ | 1,869 | $ | 1,941 | $ | (72 | ) | (3.7 | )% |
Six Months Ended June 30, | % | Six Months Ended June 30, | Increase | % Increase | ||||||||||||||||||||||||||||
(Dollars in thousands) | 2013 | 2012 | Decrease | Decrease | 2014 | 2013 | (Decrease) | (Decrease) | ||||||||||||||||||||||||
Mortgage interest | $ | 3,491 | $ | 4,463 | $ | (972 | ) | (21.8 | )% | $ | 3,004 | $ | 3,491 | $ | (487 | ) | (14.0 | )% | ||||||||||||||
Other interest | 846 | 986 | (140 | ) | (14.2 | ) | 969 | 846 | 123 | 14.5 | ||||||||||||||||||||||
Capitalized interest | (35 | ) | (192 | ) | (157 | ) | (81.8 | ) | (130 | ) | (35 | ) | 95 | 271.4 | ||||||||||||||||||
Total other interest expense | $ | 4,302 | $ | 5,257 | $ | (955 | ) | (18.2 | )% | $ | 3,843 | $ | 4,302 | $ | (459 | ) | (10.7 | )% |
Total otherOther interest expense decreased $0.6 million$0.1 and $1.0$0.5 million, respectively, in the first three and six months of 20132014 compared to the same periods of 2012.2013. In the full year of 2012 and first half of 2013, we had net mortgage reductions of $1.5used excess cash to pay off $25.8 million and $24.7 million, respectively,in mortgages, which contributed to the decrease. In addition, we refinanced mortgages at lower interest rates, which lowered interest expense. Total otherOther interest expense also decreasedincreased due to lowerhigher volumes of borrowing on our credit facility.facility, offset by an increase in capitalized interest.
Other Income, Net
Other income, net primarily includes interest income and the gains related to an equity investment. Other income, net was $0.6$1.1 million and $0.8$0.6 million for the three-month periods ended June 30, 2014 and 2013, and 2012,$2.1 million and $1.4 million and $1.3 million for the six-month periods ended June 30, 20132014 and 2012,2013, respectively.
Income Tax Expense
Our effective income tax rate was 38.7%38.4% and 38.6%, respectively,38.8% for the three- and six-month periods ended June 30, 20132014 compared to 37.8%38.7% and 37.5%38.6%, respectively, in the comparable periods of 2012. Our effective income tax rate in the three- and six-month period ended June 30, 2013 benefitted from the recognition of a non-core tax attribute as well as tax benefits associated with the American Taxpayer Relief Act of 2012 enacted at the beginning of 2013. For the full year of 2013,2014, we anticipateforecast our income tax rate willto be approximately 39.0%.
Non-GAAP Reconciliations
We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from core business operations because they exclude adjustments for items not related to our ongoing core business operations and other non-cash adjustments, and improves the period-to-period comparability of our results from the core business operations. Our management uses these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facility and in communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.
The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measuresmeasure from our Consolidated Statements of Operations (dollars in thousands, except per share amounts): for the three and six months ended June 30, 2014 and June 30, 2013:
Three Months Ended June 30, 2013 | ||||||||||||||||
As reported | Legal accrual adjustments | Tax attribute | Adjusted | |||||||||||||
Selling, general and administrative | $ | 109,283 | $ | (3,813 | ) | $ | - | $ | 105,470 | |||||||
Operating income | $ | 45,651 | $ | 3,813 | $ | - | $ | 49,464 | ||||||||
Income from continuing operations before income taxes | $ | 41,258 | $ | 3,813 | $ | - | $ | 45,071 | ||||||||
Income tax provision | (15,977 | ) | (1,484 | ) | (228 | ) | (17,689 | ) | ||||||||
Income from continuing operations, net of income tax | $ | 25,281 | $ | 2,329 | $ | (228 | ) | $ | 27,382 | |||||||
Diluted income per share from continuing operations | $ | 0.97 | $ | 0.09 | $ | (0.01 | ) | $ | 1.05 | |||||||
Diluted share count | 26,134 |
Three Months Ended June 30, 2014 | ||||||||||||||||
As reported | Acquisition expenses | Tax attributes | Adjusted | |||||||||||||
Selling, general and administrative | $ | 125,463 | $ | (163 | ) | $ | - | $ | 125,300 | |||||||
Income from operations | 61,012 | 163 | - | 61,175 | ||||||||||||
Income from continuing operations before income taxes | $ | 57,074 | $ | 163 | $ | - | $ | 57,237 | ||||||||
Income tax expense | (21,904 | ) | (63 | ) | (73 | ) | (22,040 | ) | ||||||||
Net income from continuing operations | $ | 35,170 | $ | 100 | $ | (73 | ) | $ | 35,197 | |||||||
Diluted earnings per share from continuing operations | $ | 1.34 | $ | - | $ | - | $ | 1.34 | ||||||||
Diluted share count | 26,331 |
Six Months Ended June 30, 2013 | ||||||||||||||||
As reported | Legal accrual adjustments | Tax attribute | Adjusted | |||||||||||||
Selling, general and administrative | $ | 210,414 | $ | (3,813 | ) | $ | - | $ | 206,601 | |||||||
Operating income | $ | 86,237 | $ | 3,813 | $ | - | $ | 90,050 | ||||||||
Income from continuing operations before income taxes | $ | 76,835 | $ | 3,813 | $ | - | $ | 80,648 | ||||||||
Income tax provision | (29,672 | ) | (1,484 | ) | (228 | ) | (31,384 | ) | ||||||||
Income from continuing operations, net of income tax | $ | 47,163 | $ | 2,329 | $ | (228 | ) | $ | 49,264 | |||||||
Diluted income per share from continuing operations | $ | 1.81 | $ | 0.09 | $ | (0.01 | ) | $ | 1.89 | |||||||
Diluted share count | 26,120 |
Three Months Ended June 30, 2013 | ||||||||||||||||
As reported | Legal accrual adjustment | Tax attribute | Adjusted | |||||||||||||
Selling, general and administrative | $ | 109,283 | $ | (3,813 | ) | $ | - | $ | 105,470 | |||||||
Income from operations | $ | 45,651 | $ | 3,813 | $ | - | $ | 49,464 | ||||||||
Income from continuing operations before income taxes | $ | 41,258 | $ | 3,813 | $ | - | $ | 45,071 | ||||||||
Income tax expense | (15,977 | ) | (1,484 | ) | (228 | ) | (17,689 | ) | ||||||||
Net income from continuing operations | $ | 25,281 | $ | 2,329 | $ | (228 | ) | $ | 27,382 | |||||||
Diluted earnings per share from continuing operations | $ | 0.97 | $ | 0.09 | $ | (0.01 | ) | $ | 1.05 | |||||||
Diluted share count | 26,134 |
Three Months Ended June 30, 2012 | Six Months Ended June 30, 2014 | |||||||||||||||||||||||||||||||
As reported | Reserve adjustments | Acquisition expenses | Tax attribute | Adjusted | ||||||||||||||||||||||||||||
Selling, general and administrative | $ | 247,292 | $ | (3,931 | ) | $ | (163 | ) | $ | - | $ | 243,198 | ||||||||||||||||||||
Income from operations | 105,737 | 3,931 | 163 | - | 109,831 | |||||||||||||||||||||||||||
As reported | Tax attribute | Adjusted | ||||||||||||||||||||||||||||||
Income from continuing operations before income taxes | $ | 32,143 | $ | - | $ | 32,143 | $ | 97,778 | $ | 3,931 | $ | 163 | $ | - | $ | 101,872 | ||||||||||||||||
Income tax expense | (12,138 | ) | (573 | ) | (12,711 | ) | (37,914 | ) | (1,545 | ) | (63 | ) | (73 | ) | (39,595 | ) | ||||||||||||||||
Net income from continuing operations | $ | 20,005 | $ | (573 | ) | $ | 19,432 | $ | 59,864 | $ | 2,386 | $ | 100 | $ | (73 | ) | $ | 62,277 | ||||||||||||||
Diluted earnings (loss) per share from continuing operations | $ | 0.76 | $ | (0.02 | ) | $ | 0.74 | |||||||||||||||||||||||||
Diluted earnings per share from continuing operations | $ | 2.27 | $ | 0.09 | $ | - | $ | - | $ | 2.36 | ||||||||||||||||||||||
Diluted share count | 26,185 | 26,326 |
Six Months Ended June 30, 2012 | ||||||||||||||||||||
As reported | Asset impairment and disposal gain | Equity investment | Tax attribute | Adjusted | ||||||||||||||||
Asset impairments | $ | 115 | $ | (115 | ) | $ | - | $ | - | $ | - | |||||||||
Selling, general and administrative | $ | 181,429 | $ | 739 | $ | - | $ | - | $ | 182,168 | ||||||||||
Operating income | $ | 68,550 | $ | (624 | ) | $ | - | $ | - | $ | 67,926 | |||||||||
Other income, net | $ | 1,317 | $ | - | $ | (244 | ) | $ | - | $ | 1,073 | |||||||||
Income from continuing operations before income taxes | $ | 58,654 | $ | (624 | ) | $ | (244 | ) | $ | - | $ | 57,786 | ||||||||
Income tax provision | (22,015 | ) | 244 | 95 | (1,066 | ) | (22,742 | ) | ||||||||||||
Income from continuing operations, net of income tax | $ | 36,639 | $ | (380 | ) | $ | (149 | ) | $ | (1,066 | ) | $ | 35,044 | |||||||
Diluted income per share from continuing operations | $ | 1.39 | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | 1.33 | |||||||
Diluted share count | 26,331 |
Six months ended June 30, 2013 | ||||||||||||||||
As reported | Legal accrual adjustment | Tax attribute | Adjusted | |||||||||||||
Selling, general and administrative | $ | 210,414 | $ | (3,813 | ) | $ | - | $ | 206,601 | |||||||
Income from operations | $ | 86,237 | $ | 3,813 | $ | - | $ | 90,050 | ||||||||
Income from continuing operations before income taxes | $ | 76,835 | $ | 3,813 | $ | - | $ | 80,648 | ||||||||
Income tax expense | (29,672 | ) | (1,484 | ) | (228 | ) | (31,384 | ) | ||||||||
Net income from continuing operations | $ | 47,163 | $ | 2,329 | $ | (228 | ) | $ | 49,264 | |||||||
Diluted earnings per share from continuing operations | $ | 1.81 | $ | 0.09 | $ | (0.01 | ) | $ | 1.89 | |||||||
Diluted share count | 26,120 |
Liquidity and Capital Resources
We manage our liquidity and capital resources to fund future capital expenditures, working capital requirementsour operating, investing and contractual obligations. Additionally, we use capital resources to fund cash dividend payments, share repurchases and acquisitions.
Available Sources
financing activities. We have reliedrely primarily on cash flows from operations and borrowings under our credit agreements financing of real estateas the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and the proceeds from equityfulfill contractual obligations. Funds remaining after these uses are used for acquisitions, debt retirement, cash dividends and debt offerings to finance operations and expansion. Based on these factors and our normal operational cash flow, we believe we have sufficient availability to accommodate both our short- and long-term capital needs.share repurchases.
Available Sources
Below is a summary and discussion of our available funds (in thousands):
As of | As of December 31, | |||||||||||||||
2013 | 2012 | Decrease | % Decrease | |||||||||||||
Cash and cash equivalents | $ | 20,257 | $ | 42,839 | $ | (22,582 | ) | (52.7 | )% | |||||||
Available credit on the credit facility | 90,983 | 120,536 | (29,553 | ) | (24.5 | ) | ||||||||||
Total available funds | $ | 111,240 | $ | 163,375 | $ | (52,135 | ) | (31.9 | )% |
As of June 30, | Increase | % Increase | ||||||||||||||
2014 | 2013 | (Decrease) | (Decrease) | |||||||||||||
Cash and cash equivalents | $ | 28,203 | $ | 20,257 | $ | 7,946 | 39.2 | % | ||||||||
Available credit on the Credit Facility | 83,980 | 90,983 | (7,003 | ) | (7.7 | ) | ||||||||||
Total current available funds | $ | 112,183 | $ | 111,240 | $ | 943 | 0.8 | % | ||||||||
Estimated funds from unfinanced real estate | 161,842 | 122,808 | 39,034 | 31.8 | ||||||||||||
Total estimated available funds | $ | 274,025 | $ | 234,048 | $ | 39,977 | 17.1 | % |
Historically, weOur cash flows generated by operating activities and our credit facility are our most significant sources of liquidity. We have raised capital through the salea $1.0 billion revolving syndicated credit facility that matures in December 2018. This facility provides new vehicle inventory floor plan financing, used vehicle inventory financing and a revolving line of assets, sale of stores, issuance of stock and the issuance of debt. We may strategically use excess cash to reduce the amount of debt outstanding when appropriate. During the first six months of 2013, we retired $25.8 million of outstanding mortgage debt.credit for general corporate purposes.
We also have the ability to raise funds through the financing of owned operatingmortgaging real estate. As of June 30, 2013,2014, our unfinancedunencumbered owned operating real estate had a book value of $163.7$215.8 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained additional funds of approximately $122.8$161.8 million at June 30, 2013;2014; however, no assurances can be provided thatprovidedthat the appraised value of this property will match or exceed its book value or that this capital source will be available on terms acceptable to us.
We have an effective shelf registration statement with the SEC that allows us to offer for sale, from time to time and as the capital markets permit, up to $100 million in various forms of debt or equity securities. We have no immediate plans to access such funds, and no assurances can be provided that this capital source will be available on terms acceptable to us.
In addition to the above sources of liquidity, potential sources include the placement of subordinated debentures or loans, additional store salesthe sale of equity securities and the sale of stores or additional other asset sales.assets. We will evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or onwith terms acceptable to us.
Information about our cash flows, by category, is presented in our Consolidated Statement of Cash Flows. The following table summarizes our cash flows for the six months ended June 30, 2014 and 2013:
Six Months Ended June 30, | Increase | |||||||||||
2014 | 2013 | (Decrease) | ||||||||||
Net cash provided by (used in) operating activities | $ | (4,194 | ) | $ | 24,449 | $ | (28,643 | ) | ||||
Net cash used in investing activities | (107,446 | ) | (55,978 | ) | (51,468 | ) | ||||||
Net cash provided by financing activities | 116,157 | 8,947 | 107,210 |
Operating Activities
Compared to the same period of 2013, cash provided by operating activities for the six months ended June 30, 2014 decreased $28.6 million.
Borrowings from and repayments to our syndicated lending group related to our new vehicle inventory floor plan financing are presented as financing activities. To better understand the impact of changes in inventory and the associated financing, we also consider our net cash provided by operating activities adjusted to include cash activity associated with our new vehicle credit facility.
Six Months Ended June 30, | Increase | |||||||||||
(Dollars in thousands) | 2014 | 2013 | (Decrease) | |||||||||
Net cash provided by (used in) operating activities – as reported | $ | (4,194 | ) | $ | 24,449 | $ | (28,643 | ) | ||||
Add: Net borrowings on floor plan notes payable, non-trade | 112,910 | 5,989 | 106,921 | |||||||||
Net cash provided by operating activities – adjusted | $ | 108,716 | $ | 30,438 | $ | 78,278 |
Adjusted net cash provided by operating activities increased $78.3 million in the first six months of 2014 compared to the same periods of 2013, primarily driven by increased net borrowings on floor plan notes payable.
Investing Activities
Net cash used in investing activities totaled $107.4 million and $56.0 million for the six-month periods ended June 30, 2014 and 2013. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.
Below are highlights of significant activity related to our cash flows from investing activities:
Six Months Ended June 30, | ||||||||||||
(Dollars in thousands) | 2014 | 2013 | Increase | |||||||||
Capital expenditures | $ | (35,230 | ) | $ | (22,107 | ) | $ | 13,123 | ||||
Cash paid for acquisitions, net of cash acquired | (79,482 | ) | (31,786 | ) | 47,696 |
Capital expenditures
Below is a summary of our capital expenditure activities:
Six Months Ended June 30, | ||||||||
(Dollars in thousands) |
2014 |
2013 | ||||||
Post-acquisition capital improvements | $ | 4,201 | $ | 2,695 | ||||
Facilities for open points | 3,031 | 2,949 | ||||||
Purchases of previously leased facilities | 17,124 | 6,774 | ||||||
Existing facility improvements | 6,134 | 4,322 | ||||||
Maintenance | 4,740 | 5,367 | ||||||
Total capital expenditures | $ | 35,230 | $ | 22,107 |
We expect to make capital expenditures in 2014 of approximately $110 million for a combined Lithia/DCH organization related to capital improvements at recently acquired stores, purchases of land for expansion of existing stores, facility image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. Certain facility upgrades and remodels will generate additional manufacturer incentive payments.
We expect to make a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer image standards and requirements.
Acquisitions
We focus on acquiring stores at opportunistic purchase prices that meet our return thresholds and strategic objectives. Additionally, we have a pending combination with a partner to expand our footprint and future growth opportunities.
We acquired seven stores in the first six months of 2014. These acquisitions diversify our brand and geographic mix as we continue to evaluate our portfolio to minimize exposure to any one manufacturer and achieve financial returns. We acquired three stores in the first six months of 2013.
In June 2014, we also entered into a definitive agreement with DCH Auto Group Limited to acquire 100 percent of the outstanding shares of DCH Auto Group Inc., one of the 10 largest dealer groups in the country. The purchase price is equal to a fixed payment for goodwill and the tangible net work of DCH as of the closing date, which we estimate will be approximately $362.5 million, to be paid with approximately $340 million in cash and $22.5 million payable in shares of our Class A Common Stock. In 2013, DCH sold approximately 50,000 new vehicle units and 23,400 used vehicle retail units. We estimate the DCH stores will generate approximately $2.3 billion in annualized revenue with a projected full year earnings impact of $0.65 to $0.75 per share.
The transaction is expected to be funded through the expansion of Lithia's existing credit facility by $600 million, mortgage financing of $200 million, and available cash flows from operations. After financing the DCH combination, we expect our year-end leverage ratio to be approximately 1.8 times net debt to EBITDA, excluding floorplan debt. The acquisition of DCH is targeted to close in the fourth quarter of 2014, and is subject to customary closing conditions, including our receipt of adequate financing to complete the purchase, regulatory approvals and required auto manufacturer approvals. See our Form 8-K dated June 15, 2014 and filed with the Securities and Exchange Commission on June 16, 2014 for more information.
We follow disciplined capital investment metrics in evaluating all potential transactions.
Financing Activities
Net cash provided by financing activities totaled $116.2 million and $8.9 million for six-month periods ended June 30, 2014 and 2013, respectively. Cash flows from financing activities relate to debt issuances, repayments and recurring monthly payments as well as equity transactions.
Below are highlights of significant activity related to our cash flows from financing activities, excluding net borrowings on floor plan notes payable, non-trade, which are discussed above:
Six Months Ended June 30, | Increase | |||||||||||
(Dollars in thousands) | 2014 | 2013 | (Decrease) | |||||||||
Net borrowings (repayments) on lines of credit | $ | 11,000 | $ | 30,682 | $ | (19,682 | ) | |||||
Principal payments on long-term debt, unscheduled | - | (25,770 | ) | (25,770 | ) | |||||||
Repurchases of common stock | (10,206 | ) | (7,903 | ) | 2,303 | |||||||
Dividends paid | (7,557 | ) | (3,356 | ) | 4,201 |
Borrowing and Repayment Activity
During the six-months ended June 30, 2014, we had net borrowings of $11.0 million associated with our used vehicle financing facility and our revolving line of credit. These borrowings primarily related to the funding of our acquisition activity. In the first six months of 2013, we strategically paid off $25.8 million in outstanding mortgages.
We continue to deleverage our balance sheet, which provides us with liquidity that can be deployed in future periods if accretive opportunities arise. As of June 30, 2014 our debt to total capital ratio, excluding floor plan notes payable, was 31.2% compared to 38.7% as of June 30, 2013.
Equity Transactions
Under the share repurchase program authorized by our Board of Directors and repurchases associated with stock compensation activity, we repurchased 151,772 shares of our Class A common stock at an average price of $67.24 per share in the first six months of 2014.
In the first six months of 2014, we declared and paid dividends on our Class A and Class B common stock as follows:
Dividend paid: | Dividend amount per share | Total amount of dividend (in thousands) | ||||||
March 2014 | $ | 0.13 | $ | 3,378 | ||||
May 2014 | 0.16 | 4,179 |
Management evaluates performance and makes a recommendation to the Board of Directors on dividend payments on a quarterly basis.
Inventories
As of June 30, 2014, our new vehicle days supply was 71, or five days lower than our days supply as of June 30, 2013. Our days supply of used vehicles was 60 days as of June 30, 2014, or nine days higher than our days supply as of June 30, 2013. We calculate days supply of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt (in thousands):
Outstanding as of June 30, 2013 | Remaining Available as of June 30, 2013 | Outstanding as ofJune 30, 2014 | Remaining Available as of June 30, 2014 | ||||||||||||||||||||
New vehicle floor plan commitment | $ | 570,025 | $ | - | (1),(4) | $ | 806,684 | $ | 8,316 | (1) | |||||||||||||
Floor plan notes payable | 16,912 | - | (4) | 20,598 | - | ||||||||||||||||||
Used vehicle inventory financing facility | 80,000 | - | (3) | 96,000 | 4,000 | (3) | |||||||||||||||||
Revolving line of credit | 50,036 | 90,983 | (2),(3) | - | 79,980 | (2),(3) | |||||||||||||||||
Real estate mortgages | 168,236 | - | 166,718 | - | |||||||||||||||||||
Other debt | 2,752 | - | 5,695 | - | |||||||||||||||||||
Liabilities associated with assets held for sale | 6,378 | - | (4) | ||||||||||||||||||||
Total debt | $ | 894,339 | $ | 90,983 | $ | 1,095,695 | $ | 92,890 |
(1) |
|
(2) | Available credit is based on the borrowing base amount effective as of June 30, |
(3) | The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly. |
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Credit Facility
We have an $800 milliona $1.0 billion revolving credit facility, maturing December 2018, with a syndicate of 1013 financial institutions, including fourseven manufacturer-affiliated finance companies. This financing commitment is comprised of $575 million inOur credit facility provides a new vehicle inventory floor plan financing, $80 million incommitment, a used vehicle inventory financing facility and $145 million on a revolving line of credit for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $1.25 billion total availability, subject to lender approval.
We may request a reallocation of up to $250 million of any unused portion of our credit facility as long as no event of default has occurred. A reallocation may be requested monthly and cannot result in a change in either our used vehicle inventory financing facility or the revolving line of credit exceeding the lesser of 20% of the aggregate commitment or $200 million. All borrowings from, and repayments to, our syndicated lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
The new vehicle floor plan financing commitment is collateralized by our new vehicle inventory. Our used vehicle inventory financing facility is collateralized by our used vehicle inventory that ishas been in stock for less than 180 days old.days. Our revolving line of credit is secured by our outstanding receivables related to vehicle sales, unencumbered vehicle inventory, other eligible receivables, parts and accessories and equipment.
We have the ability to deposit up to $50 million in cash in Principal Reduction “PR” accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of June 30, 2014, we had no amounts deposited in our PR accounts.
If the outstanding principal balance on our new vehicle inventory floor plan facility,commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving loan commitmentline of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving loanline of credit commitment less the outstanding balance on the loanline less outstanding letters of credit. The reserve amount will decrease the revolving loanline of credit availability and may be used to repay the new vehicle floor plan commitment balance.
The interest rate on the credit facility varies based on the type of debt and the calculated leverage ratio, with the rate ranging from the one-month LIBOR plus 1.5%1.25% to the one-month LIBOR plus 2.5%. The annual interest rate associated with our new vehicle floor plan commitment, excluding the effects of our interest rate swaps, was 1.7%1.4% at June 30, 2013.2014. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 1.95%1.7% and 1.4%, respectively, at June 30, 2013.2014.
Our financial covenants related to this credit facility include maintaining a current ratio of not less than 1.20x, a fixed charge coverage ratio of not less than 1.20x, a leverage ratio of not more than 5.0x and funded debt of not more than $375 million.
Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. The interest rates on the floor plan notes payable commitments vary by manufacturer and are variable rates. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of Cash Flows.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.8% to 4.4% at June 30, 2013. The mortgages are payable in various installments through May 2031. As of June 30, 2013, we had fixed interest rates on 79% of our outstanding mortgages.
Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and had interest rates that ranged from 2.0% to 9.0% at June 30, 2013. This debt, which totaled $2.8 million at June 30, 2013, is due in various installments through May 2019.
Debt Covenants
Under the terms of our credit facility and other debt agreements, we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Under our credit facility, we are required to maintain the ratios detailed in the following table:
Debt Covenant Ratio | Requirement | As of June 30, | ||
Current ratio | Not less than 1.20 to 1 |
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Fixed charge coverage ratio | Not less than 1.20 to 1 |
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Leverage ratio | Not more than 5.00 to 1 |
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Funded debt restriction (in millions) | Not to exceed $375 | $ |
We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.
If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. WeA breach would also would trigger cross-defaults under other debt agreements.
InventoriesFloor Plan Notes Payable
We calculate days supplyhave floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. The variable interest rates on these floor plan notes payable commitments vary by manufacturer. At June 30, 2014, $20.6 million was outstanding on these arrangements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of inventory based on current inventory levels, excluding in-transit vehicles,Cash Flows.
Real Estate Mortgages and a 30-day historical cost of sales level.Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.7% to 4.4% at June 30, 2014. The mortgages are payable in various installments through May 2031. As of June 30, 2013,2014, we had fixed interest rates on 80% of our new vehicle days supply was 76, or two days higher than our days supply as ofoutstanding mortgage debt.
Our other debt includes capital leases and had interest rates that ranged from 2.0% to 9.4% at June 30, 2012. The increase in our current new vehicle inventory levels is partly related to increasing the inventory of certain truck models prior to manufacturer-planned platform changes, when production is halted and additional vehicles are not available for several months. Our days supply of used vehicles was 51 days as of2014. This debt, which totaled $5.7 million at June 30, 2013, or one day lower than our days supply level as of June 30, 2012. We have continued to focus on managing our mix and maintaining an appropriate level of used vehicle inventory.2014, is due in various installments through January 2024.
Capital ExpendituresRecent Accounting Pronouncements
Capital expenditures were $22.1 million and $22.7 million for the six months ended June 30, 2013 and 2012, respectively.We anticipate approximately $55 million in capital expenditures for 2013. This amount is associated with image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. We believe it is an attractive time to invest in facility upgrades and remodels that will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.
If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completionSee Note 13 of the projects, we would anticipate securing long-term financing and general borrowings from third party lenders for 70%Condensed Notes to 90% of the amounts expended, although no assurances can be provided that these financings will be available to usConsolidated Financial Statements in sufficient amounts orthis Quarterly Report on terms acceptable to us.
Dividends
Management evaluates performance and makes a recommendation to the Board of Directors on dividend payments on a quarterly basis. A dividend payment was paid in December 2012 in lieu of the dividend typically declared and paid in March of the following year. Accordingly, we did not pay dividends on our Class A and Class B common stock during the first quarter of 2013. In the second quarter of 2013, we paid dividends on our Class A and Class B common stock of $3.4 million.
Form 10-Q.
Our Board of Directors approved a dividend of $0.13 per share on our Class A and Class B common stock related to our second quarter 2013 financial results. The dividend will total approximately $3.4 million and will be paid on August 23, 2013 to shareholders of record on August 9, 2013.
Common Stock Repurchases
In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. We did not repurchase any shares of our Class A common stock during the second quarter of 2013. In the six months ended June 30, 2013, we repurchased 127,900 shares at an average price of $40.76 per share, for a total of $5.2 million. Through June 30, 2013, we have repurchased 1,273,047 shares and 1,726,953 shares remained available for repurchase. This authority to repurchase shares does not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.
In addition, 59,721 shares were repurchased during the first quarter of 2013 at an average price of $45.04, for a total of $2.7 million, related to the payment of taxes associated with the exercise of stock options or the vesting of restricted stock units.
Critical Accounting Policies and Use of Estimates
There have been no material changes in ourthe critical accounting policies and use of estimates as described in our 20122013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 22, 2013.21, 2014.
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 second and third quarters of each fiscal year. However, more recently, our franchise diversification and cost control efforts have moderated the significance of our seasonality. We believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our reported market risks or risk management policies since the filingend of our 2012preceding fiscal year, as discussed in our 2013 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 22, 2013.21, 2014.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was 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.
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
Except as disclosed in Note 5 of the Condensed Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q, there have been no new proceedings or material changes to proceedings previously disclosed in our 2013 Annual Report on Form 10-K for the year ended December 31, 2012.10-K. The information in this Form 10-Q should be read in conjunction with the legal proceedings disclosed in that report, which was filed with the Securities and Exchange Commission on February 22, 2013.21, 2014.
Item 1A.Risk Factors
Except for the risk factor set forth below, thereThere have been no material changes from the risk factors previously disclosed in our 2013 Annual Report on Form 10-K for the year ended December 31, 2012.10-K. The information belowin this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012,that report, which was filed with the Securities and Exchange Commission on February 22, 2013.21, 2014.
Item 2.
Government regulationsUnregistered Sales of Equity Securities and compliance costs may adversely affect our business, and the failure to comply could have a material adverse effect on our resultsUse of operations.Proceeds
We are, and expect to continue to be, subject to a wide range of federal, state and local laws and regulations, including local licensing requirements. These laws regulaterepurchased the conductfollowing shares of our business, including:Class A common stock during the second quarter of 2014:
Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plan(1) | Maximum number of shares that may yet be purchased under the plans | |||||||||||||
April 1 to April 30 | 11,000 | $ | 68.55 | 11,000 | 1,700,953 | |||||||||||
May 1 to May 31 | 10,500 | 75.12 | 10,500 | 1,690,453 | ||||||||||||
June 1 to June 30 | 8,553 | 84.45 | 8,500 | 1,681,953 | ||||||||||||
Total | 30,053 | 75.37 | 30,000 | 1,681,953 |
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In every state in which we operate, we must obtain certain licenses issued by state authorities to operate our businesses, including dealer, sales, finance and insurance-related licenses. State laws also regulate our advertising, operating, financing, employment and sales practices. Other laws and regulations include state franchise laws and regulations and other extensive laws and regulations applicable to new and used automobile dealers. In some states, some of our practices must be approved by regulatory agencies which have broad discretion. The enactment of new laws and regulations that materially impair or restrict our sales, finance and insurance or other operations could have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.
Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines. In recent years, private plaintiffs and state attorneys general in the United States have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.
The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (CFPB), which has broad regulatory powers. Although the CFPB may not exercise its authority over an automotive dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, the Dodd-Frank Act and future regulatory actions by this bureau could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions, and it could affect our arrangements with lending sources.
In March 2013, the CFPB issued a bulletin suggesting that auto dealers who arrange credit through outside parties may be participating in a credit decision such that they are subject to the Equal Credit Opportunity Act, including its anti-discrimination provisions. In particular, the CFPB highlighted that the payment to a dealer of the excess of the interest rate the dealer negotiates with the customer over the rate at which the lender is willing to provide financing may encourage pricing disparities on the basis of race, national origin, or potentially other prohibited bases. This bulletin may affect the willingness of outsider lenders to continue these lending practices, and heightened focus on these arrangements may affect our relationships and agreements, including our indemnification obligations, with lenders, which could adversely affect our business.
Our operations are also subject to the National Traffic and Motor Vehicle Safety Act, the Magnusson-Moss Warranty Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to U.S. customs duties and, in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages or other charges.
If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.
Likewise, employees and former employees are protected by a variety of employment-related laws and regulations relating to, among other things, wages and discrimination. Allegations of a violation could subject us to individual claims or consumer class actions, administrative investigations or adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and civil fines and penalties, and damage our reputation and sales.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities under federal and state statutes. These federal and state statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and state statutes. In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.
A significant judgment against us, the loss of a significant license or permit or the imposition of a significant fine could have a material adverse effect on our business, financial condition and future prospects. We further expect that, from time to time, new laws and regulations, particularly in the labor, employment, environmental and consumer protection areas will be enacted, and compliance with such laws, or penalties for failure to comply, could significantly increase our costs.
Item 6.Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
2.1* | Stock Purchase Agreement, dated June 14, 2014, between Lithia Motors, Inc. and DCH Auto Group (USA) Limited. | |
2.2 | First Amendment to Stock Purchase Agreement, effective July 15, 2014, between Lithia Motors, Inc. and DCH Auto Group (USA) Limited. | |
3.1 | Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to exhibit 3.1 to our Form 10-K for the year ended December 31, 1999). | |
3.2 | 2013 Amended and Restated Bylaws of Lithia Motors, Inc. | |
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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. | |
101.INS | XBRL Instance Document. | |
101.SCH | XBRL Taxonomy Extension Schema Document. | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |
*Indicates Portion of this exhibit were omitted pursuant to a management contract, compensatory plan or arrangement.request for confidential treatment that has been filed separately with the Securities and Exchange Commission.
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: | LITHIA MOTORS, INC. |
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| By:/s/ Christopher S. Holzshu |
| Christopher S. Holzshu |
| Senior Vice President, |
| Chief Financial Officer and Secretary |
| (Principal Financial Officer) |
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| By: /s/ John F. North III |
| John F. North III |
| Vice President and |
| Corporate Controller |
| (Principal Accounting Officer) |
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