UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 | |
[_] | TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ |
Commission File Number 000-21789
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon (State or other jurisdiction of incorporation or organization) | 93-0572810 (I.R.S. Employer Identification No.) |
360 E. Jackson Street, Medford, Oregon (State or other jurisdiction of incorporation or organization) | 97501 (I.R.S. Employer Identification No.) |
(541) 618-6003
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of common stock, as of latest practicable date:
Class A Common stock without par value | 8,800,576 | |
Class B Common stock without par value | 4,087,000 |
LITHIA MOTORS, INC.
FORM 10-Q
INDEX
PART I. - FINANCIAL INFORMATION | Page | |
Item 1. | Financial Statements | |
Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 | 2 | |
Consolidated Statements of Operations - Three and Six Months Ended June 30, 2001 and 2000 (unaudited) | 3 | |
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 (unaudited) | 4 | |
Notes to Consolidated Financial Statements (unaudited) | 5 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operation | 8 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 14 |
PART II - OTHER INFORMATION | ||
Item 4. | Submission of Matters to a Vote of Securities Holders | 16 |
Item 6. | Exhibits and Reports on Form 8-K | 17 |
Signatures | 18 |
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, 2001 | December 31, 2000 | ||
(Unaudited) | |||
Assets Current Assets: Cash and cash equivalents | $ 40,646 | $ 38,789 | |
Trade receivables, net of allowance for doubtful accounts of $322 and $346 | 32,218 | 32,273 | |
Notes receivable, current portion, net of allowance for doubtful accounts of $1,013 and $988 | 1,679 | 1,933 | |
Inventories, net | 315,078 | 314,290 | |
Vehicles leased to others, current portion | 5,626 | 4,961 | |
Prepaid expenses and other | 2,561 | 4,276 | |
Total Current Assets | 397,808 | 396,522 | |
Land and Buildings, net of accumulated depreciation of $1,708 and $1,261 | 66,484 | 60,788 | |
Equipment and other, net of accumulated depreciation of $8,405 and $7,173 | 30,620 | 29,452 | |
Notes Receivable, less current portion | 720 | 1,485 | |
Vehicles Leased to Others, less current portion | 2,935 | 2,962 | |
Goodwill, net of accumulated amortization of $8,047 and $6,219 | 137,776 | 133,871 | |
Other Non-Current Assets, net of accumulated amortization of $229 and $182 | 3,386 | 2,923 | |
Total Assets | $ 639,729 ========= | $ 628,003 ========= | |
Liabilities and Shareholders' Equity Current Liabilities: Flooring notes payable | $ 251,830 | $ 255,137 | |
Current maturities of long-term debt | $ 5,131 | $ 5,257 | |
Current portion of capital leases | 56 | 85 | |
Trade payables | 16,444 | 13,651 | |
Accrued liabilities | 27,335 | 22,086 | |
Deferred income taxes | 322 | 1,389 | |
Accrued Total Current Liabilities | 301,118 | 297,605 | |
Used Vehicle Flooring Facility | 56,000 | 59,000 | |
Real Estate Debt, less current maturities | 28,211 | 28,898 | |
Other Long-Term Debt, less current maturities | 44,101 | 43,566 | |
Long-Term Capital Lease Obligation, less current maturities | 24 | 122 | |
Deferred Revenue | 1,490 | 1,993 | |
Other Long-Term Liabilities | 11,013 | 6,900 | |
Deferred Income Taxes | 8,369 | 8,144 | |
Total Liabilities | 450,326 | 446,228 | |
Shareholders' Equity: Preferred stock - no par value; authorized 15,000 shares; 15 shares designated Series M Preferred; issued and outstanding 9.7 and 14.9 | 5,806 | 8,915 | |
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 8,769 and 8,412 | 112,607 | 108,565 | |
Class B common stock authorized 25,000 shares; issued and outstanding 4,087 | 508 | 508 | |
Additional paid-in capital | 416 | 306 | |
Accumulated other comprehensive income (loss), net | (1,326 | ) | 15 |
Retained earnings | 71,392 | 63,466 | |
Total Shareholders' Equity | 189,403 | 181,775 | |
Total Liabilities and Shareholders' Equity | $ 639,729 ========= | $ 628,003 ========= |
The accompanying notes are an integral part of these consolidated statements.
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LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||
2001 | 2000 | 2001 | 2000 | |||||
Revenues: New vehicle sales | $ 238,651 | $ 222,039 | $�� 453,608 | $ 440,048 | ||||
Used vehicle sales | 142,043 | 119,277 | 278,982 | 235,975 | ||||
Service, body and parts | 45,511 | 40,476 | 90,656 | 78,933 | ||||
Other revenues | 35,845 | 36,059 | 58,955 | 58,498 | ||||
Total revenues | 462,050 | 417,851 | 882,201 | 813,454 | ||||
Cost of sales | 386,840 | 350,667 | 738,094 | 683,406 | ||||
Gross profit | 75,210 | 67,184 | 144,107 | 130,048 | ||||
Selling, general and administrative | 58,783 | 48,528 | 113,821 | 95,729 | ||||
Depreciation - buildings | 240 | 141 | 565 | 268 | ||||
Depreciation - equipment and other | 1,035 | 951 | 2,002 | 1,837 | ||||
Amortization | 951 | 795 | 1,874 | 1,502 | ||||
Income from operations | 14,201 | 16,769 | 25,845 | 30,712 | ||||
Other income (expense) Floorplan interest expense | (3,832 | ) | (4,712 | ) | (8,487 | ) | (8,573 | ) |
Other interest expense | (2,078 | ) | (1,862 | ) | (4,345 | ) | (3,657 | ) |
Other income (expense), net | (45 | ) | 305 | (124 | ) | 433 | ||
(5,955 | ) | (6,269 | ) | (12,956 | ) | (11,797 | ) | |
Income before income taxes | 8,246 | 10,500 | 12,889 | 18,915 | ||||
Income tax expense | 3,175 | 4,306 | 4,963 | 7,757 | ||||
Net income | $ 5,071 ======= | $ 6,194 ======= | $ 7,926 ======= | $ 11,158 ======= | ||||
Basic net income per share | $ 0.38 ======= | $ 0.45 ======= | $ 0.59 ======= | $ 0.82 ======= | ||||
Shares used in basic net income per share | 13,493 ======= | 13,682 ======= | 13,478 ======= | 13,630 ======= | ||||
Diluted net income per share | $ 0.37 ======= | $ 0.45 ======= | $ 0.58 ======= | $ 0.81 ======= | ||||
Shares used in diluted net income per share | 13,762 ======= | 13,819 ======= | 13,710 ======= | 13,801 ======= |
The accompanying notes are an integral part of these consolidated statements.
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LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30, ----------------------- 2001 2000 ---------- ---------- Cash flows from operating activities: Net income $ 7,926 $ 11,158 Adjustments to reconcile net income to net cash flows provided by operating activities: Depreciation and amortization 4,441 3,607 Compensation expense related to stock option issuances 111 39 (Gain) Loss on sale of assets (26) 52 (Gain) Loss on sale of vehicles leased to others (14) 72 Deferred income taxes (12) (337) Equity in income of affiliate 1 (30) Changes in operating assets and liabilities, net of effect of acquisitions: Trade and installment contract receivables, net 55 (5,579) Inventories 6,036 (41,634) Prepaid expenses and other 1,715 2,042 Other noncurrent assets (527) (103) Floorplan notes payable (8,466) 47,435 Trade payables 2,793 1,283 Accrued liabilities 3,090 157 Other long-term liabilities and deferred revenue 3,576 753 ---------- ---------- Net cash provided by operating activities 20,699 18,915 Cash flows from investing activities: Notes receivable issued (404) (431) Principal payments received on notes receivable 1,424 2,185 Capital expenditures: Maintenance (2,813) (3,599) Financeable real estate and other (10,626) (10,956) Proceeds from sale of assets 4,627 1,134 Expenditures for vehicles leased to others (3,234) (6,448) Proceeds from sale of vehicles leased to others 2,062 3,359 Cash paid for acquisitions, net of cash acquired (8,965) (29,914) Cash from sales of franchises 1,541 - Distribution from affiliate - 379 ----------- --------- Net cash used in investing activities (16,388) (44,291) Cash flows from financing activities: Net borrowings (repayments) on lines of credit (1,000) 20,220 Principal payments on long-term debt and capital leases (2,680) (4,090) Proceeds from issuance of long-term debt 293 7,138 Proceeds from issuance of common stock 933 1,406 Repurchase of common stock - (230) ----------- --------- Net cash provided by (used in)
financing activities (2,454) 24,444 ----------- --------- Increase (decrease) in cash and cash equivalents 1,857 (932) Cash and cash equivalents: Beginning of period 38,789 30,364 ----------- --------- End of period $ 40,646 $ 29,432 =========== =========
The accompanying notes are an integral part of these consolidated statements.
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LITHIA MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein as of June 30, 2001 and for the three and six-month periods ended June 30, 2001 and 2000 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2000 is derived from Lithia Motors, Inc.'s (the Company's) 2000 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 2000 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Note 2. Inventories
Inventories are valued at cost, using the specific identification method for vehicles and the first-in first-out (FIFO) method of accounting for parts (collectively, the FIFO method). Detail of inventory is as follows (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- New and program vehicles $241,382 $239,185 Used vehicles 57,620 58,136 Parts and accessories 16,076 16,969 -------- -------- $315,078 $314,290 ======== ========
Note 3. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is as follows (in thousands):
Six Months Ended June 30, ------------------------------ 2001 2000 --------------- ------------- Cash paid during the period for income taxes $2,923 $ 4,646 Cash paid during the period for interest 13,401 11,845
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Note 4. Earnings Per Share
Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands). Based on an April 2001 Financial Accounting Standards Board announcement, the Company has restated its basic EPS for the three and six month periods ended June 30, 2000 to include its Series M Preferred Stock as a common stock equivalent for basic EPS on an as if converted basis.
Three Months Ended June 30, 2001 2000 - --------------------------- ------------------------------ ------------------------- Per Share Per Share Basic EPS Income Shares Amount Income Shares Amount - ---------- ---------- ------------ ---------- ---------- ---------- ---------- Net income available to Common Shareholders $5,071 13,493 $0.38 $6,194 13,682 $0.45 ========= ========== Diluted EPS - ----------- Effect of dilutive stock options - 269 - 137 ------------ ---------- Net income available to Common Shareholders $5,071 13,762 $0.37 $6,194 13,819 $0.45 ========= ========== Six Months Ended June 30, 2001 2000 - --------------------------- ------------------------------ ------------------------- Net income available to Common Shareholders $7,926 13,478 $0.59 $11,158 13,630 $0. 82 ========= ========== Diluted EPS - ----------- Effect of dilutive stock options - 232 - 171 ------------ ---------- Net income available to Common Shareholders $7,926 13,710 $0.58 $11,158 13,801 $0.81 ========= ==========
Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include 126,000 and 692,000 shares, respectively, issuable pursuant to stock options, for the three month periods ended June 30, 2001 and 2000, respectively, and 485,000 and 689,000 shares, respectively, for the six month periods ended June 30, 2001 and 2000, respectively.
Note 5. Acquisitions
The following acquisitions were made in the first six months of 2001:
- In January 2001, Lithia acquired the Johnson Chrysler/Jeep store in Anchorage, Alaska. The store had estimated 2000 revenues of approximately $35.0 million.
- In February 2001, Lithia acquired two stores in Pocatello, Idaho with the Honda, Dodge/Chrysler and Hyundai brands. The stores have estimated 2000 revenues of approximately $48.0 million.
The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations are not materially different from actual results of operations.
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Note 6. Derivative Instruments and Hedging Activities
In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS 138”). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 137”). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (collectively “the standards”). The standards require that all derivative instruments (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivatives fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS 133, 137 and 138 are effective for fiscal years beginning after June 15, 2000. Lithia adopted the standards effective January 1, 2001. On that date, in accordance with the transition provisions of SFAS 133, the Company recorded a liability of $1.5 million and a corresponding net-of-tax cumulative-effect-type adjustment of $948,000 in accumulated other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments.
Note 7. Comprehensive Income
Comprehensive income includes the fair value of cash flow hedging instruments that are reflected in shareholders’ equity instead of net income. The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- ------------------------------- 2001 2000 2001 2000 --------------- -------------- ------------- -------------- Net income $5,071 $6,194 $7,926 $11,158 Unrealized gain on investments, net, subsequently realized (39) -- (15) -- Cash flow hedges: Cumulative effect of adoption of SFAS 133, net of tax effect of $594 - -- (948) -- Net derivative losses, net of tax effect of $(169) and $394, respectively 271 -- (629) -- Reclassification adjustment, net of tax effect of $(109) and $(157), respectively 173 -- 251 -- --------------- -------------- ------------- ----------- Total comprehensive income $5,476 $6,194 $6,585 $11,158 =============== ============== ============= ===========
Note 8. 2001 Stock Option Plan
At the Annual Meeting of Shareholders held on May 17, 2001, the shareholders approved the adoption of the 2001 Stock Option Plan and the reservation of 600,000 shares of the Company’s Common Stock for issuance thereunder.
Note 9. Conversion of Series M 2002 Preferred Stock
Effective June 4, 2001, the Company converted 5,183 shares of Series M 2002 Preferred stock with an aggregate conversion price of $5.2 million into an aggregate of 265,247 shares of Class A Common Stock. Following this conversion, 5,177 shares of Series M 2002 Preferred Stock and 4,499 shares of Series M 2003 Preferred Stock remained outstanding.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
This Form 10-Q contains forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially from those projected in these forward-looking statements. These risk factors include, but are not limited to, the following:
- The cyclical nature of automobile sales;
- Lithia's ability to negotiate profitable, accretive acquisitions;
- Lithia's ability to secure manufacturer approvals for acquisitions; and
- Lithia's ability to retain existing management and successfully manage the stores.
See Exhibit 99 to Lithia's 2000 Form 10-K for a more complete discussion of risk factors.
General
Lithia is a leading operator of automotive franchises and retailer of new and used vehicles and services. As of June 30, 2001, we offered 26 brands of new vehicles through 114 franchises in 56 locations in the western United States and over the Internet. We currently operate 15 stores in Oregon, 14 in California, 7 in Washington, 6 in Colorado, 6 in Idaho, 5 in Nevada, 2 in South Dakota and 1 in Alaska. Lithia sells new and used cars and light trucks; sells replacement parts; provides vehicle maintenance, warranty, paint and repair services; and arranges related financing and insurance for its automotive customers.
The following table shows selected condensed financial data expressed as a percentage of total revenues for the periods indicated for the average automotive dealer in the United States.
Average U.S. Store Year Ended December 31, ---------------------------------------- Statement of Operations Data: 2000 1999 ----------------- ------------- Revenues: New vehicles 60.0 % 59.9 % Used vehicles 28.6 28.9 Parts and service, other 11.4 11.2 ----------------- ------------- 100.0 % 100.0 % Total sales Gross profit 12.7 12.6 Total store expense 11.2 10.8 Income before taxes 1.6 % 1.8 %
Source: NADA Industry Analysis Division
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The following table sets forth selected condensed financial data for the Company, expressed as a percentage of total sales for the periods indicated below.
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ----------------------------- 2001 2000 2001 2000 ------------ ----------- ------------ ---------- Statement of Operations Data: Revenues: New vehicles 51.7 % 53.1 % 51.4 % 54.1 % Used vehicles 30.7 28.6 31.6 29.0 Service, body and parts 9.8 9.7 10.3 9.7 Other 7.8 8.6 6.7 7.2 ------------ ----------- ------------ ---------- Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 16.3 16.1 16.3 16.0 Selling, general and administrative 12.7 11.6 12.9 11.8 Depreciation and amortization 0.5 0.5 0.5 0.4 Income from operations 3.1 4.0 2.9 3.8 Floorplan interest expense 0.8 1.1 1.0 1.1 Other interest expense 0.5 0.4 0.5 0.4 Income before taxes 1.8 2.5 1.5 2.3 Income tax expense 0.7 1.0 0.6 0.9 Net income 1.1 % 1.5 % 0.9 % 1.4 %
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Results of Operations<pre>
(In thousands, except unit data) Three Months Ended June 30, % --------------------------- Increase Increase 2001 2000 (Decrease) (Decrease) ------------ ----------- ------------- ------------- Revenues: New vehicle sales $238,651 $222,039 $16,612 7.5% Used vehicle sales 142,043 119,277 22,766 19.1 Service, body and parts 45,511 40,476 5,035 12.4 Other revenues 35,845 36,059 (214) (0.6) ------------ ----------- ------------- ------------- Total revenues 462,050 417,851 44,199 10.6 Cost of sales 386,840 350,667 36,173 10.3 ------------ ----------- ------------- ------------- Gross profit 75,210 67,184 8,026 11.9 Selling, general and administrative 58,783 48,528 10,255 21.1 Depreciation and amortization 2,226 1,887 339 18.0 ------------ ----------- ------------- ------------- Income from operations 14,201 16,769 (2,568) (15.3) Floorplan interest expense (3,832) (4,712) (880) (18.7) Other interest expense (2,078) (1,862) 216 11.6 Other, net (45) 305 (350) (114.8) ------------ ----------- ------------- ------------- Income before income taxes 8,246 10,500 (2,254) (21.5) Income tax expense 3,175 4,306 (1,131) (26.3) ------------ ----------- ------------- ------------- Net income $ 5,071 $ 6,194 $(1,123) (18.1)% ============ =========== ============= ============= New units sold 9,772 9,303 469 5.0% Average selling price per unit $24,422 $23,867 $555 2.3% Used units sold 9,119 7,660 1,459 19.0% Average selling price per unit $13,270 $13,249 $21 0.2% Used units sold - wholesale 4,723 3,991 732 18.3% Average selling price per unit $4,454 $4,457 $(3) (0.1)% (In thousands, except unit data) Six Months Ended June 30, % --------------------------- Increase Increase 2001 2000 (Decrease) (Decrease) ------------ ----------- ------------- ------------- Revenues: New vehicle sales $453,608 $440,048 $13,560 3.1% Used vehicle sales 278,982 235,975 43,007 18.2 Service, body and parts 90,656 78,933 11,723 14.9 Other revenues 58,955 58,498 457 0.8 ------------ ----------- ------------- ------------- Total revenues 882,201 813,454 68,747 8.5 Cost of sales 738,094 683,406 54,688 8.0 ------------ ----------- ------------- ------------- Gross profit 144,107 130,048 14,059 10.8 Selling, general and administrative 113,821 95,729 18,092 18.9 Depreciation and amortization 4,441 3,607 834 23.1 ------------ ----------- ------------- ------------- Income from operations 25,845 30,712 (4,867) (15.8) Floorplan interest expense (8,487) (8,573) (86) (1.0) Other interest expense (4,345) (3,657) 688 18.8 Other, net (124) 433 (557) (128.6) ------------ ----------- ------------- ------------- Income before income taxes 12,889 18,915 (6,026) (31.9) Income tax expense 4,963 7,757 (2,794) (36.0) ------------ ----------- ------------- ------------- Net income $ 7,926 $11,158 $ (3,232) (29.0)% ============ =========== ============= ============= New units sold 18,504 18,333 171 0.9% Average selling price per unit $24,514 $24,003 $511 2.1% Used units sold 17,973 15,133 2,840 18.8% Average selling price per unit $13,181 $13,213 $(32) (0.2)% Used units sold - wholesale 9,048 8,031 1,017 12.7% Average selling price per unit $4,652 $4,486 $166 3.7%
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Revenues.Same store retail sales remained flat in the three month period ended June 30, 2001 compared to the same quarter of 2000, with the slight decline in new vehicle sales being offset by increases in all other business lines. Same store retail sales decreased 3.6% in the six month period ended June 30, 2001 compared to the same period of 2000 due to a slow down in new vehicle sales. All business lines, other than new vehicle sales, showed positive same-store growth for both the three and six month periods ended June 30, 2001 compared to the same periods of 2000.
Gross Profit.Gross profit increased primarily due to increased total revenues and increased used vehicle and service, body and parts revenues as a percentage of total revenues. Gross margin expansion is common in the auto retailing industry as new vehicle sales slow. Gross profit margins achieved in the three and six month periods ended June 30, 2001 and 2000, respectively, were as follows:
2000 industry Lithia Lithia Lithia average Q2 2001 Q2 2000 Margin Change ----------------- -------------- --------------- -------------------- New vehicles 6.1% 8.8% 9.3% (50) bp* Retail used vehicles 10.9% 12.7% 13.8% (110) bp Service and parts n/a 47.0% 45.6% 140 bp Overall 12.7% 16.3% 16.1% 20 bp 2000 industry Lithia Lithia Lithia average YTD 2001 YTD 2000 Margin Change ----------------- -------------- --------------- -------------------- New vehicles 6.1% 8.8% 9.0% (20) bp Retail used vehicles 10.9% 12.9% 13.7% (80) bp Service and parts n/a 45.8% 45.2% 60 bp Overall 12.7% 16.3% 16.0% 30 bp
*bp stands for basis point (ten basis points equals one-tenth of one percent)
The increases in the overall gross profit margin are primarily a result of a shift in mix to the more profitable used vehicle and service, body and parts business lines.
Selling, General and Administrative Expense. Selling, general and administrative (“SG&A”) expense increased due primarily to increased selling, or variable, expense related to the increase in revenues and the number of locations. As a percentage of revenue, SG&A expense increased in the three and six month periods ended June 30, 2001 compared to the three and six month periods ended June 30, 2000 due to a shift in mix to more parts and service business, which has a higher SG&A expense component, and the addition of resources to the acquisition integration and operational support teams in preparation for continued growth.
Depreciation and Amortization. Depreciation and amortization expense increased primarily as a result of increased property and equipment and goodwill related to acquisitions.
Income from Operations. Operating margins decreased 90 basis points, or nine-tenths of one percent, in the three and six month periods ended June 30, 2001 as compared to the same periods of 2000 due to the increased operating expenses as a percentage of revenue as discussed above, partially offset by higher gross margins as a percentage of revenue.
Floorplan Interest Expense. The slight decrease in floorplan interest expense is primarily due to recent decreases in the effective interest rates on the floating rate credit lines.
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Other Interest Expense. The increase in interest expense is due to higher debt levels as a result of acquisitions, offset in part by lower interest rates due to our successful renegotiation of interest rates with lenders.
Income Tax Expense Lithia’s effective tax rate declined to 38.5 percent in the first six months of 2001 from 41.0 percent in the first six months of 2000 as a result of an increasing mix of asset acquisitions compared to corporate acquisitions, which resulted in an increased weighting of deductible goodwill, as well as an increase in the mix of states with lower or no state income taxes.
Liquidity and Capital Resources
Lithia’s principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. Lithia has relied primarily upon internally generated cash flows from operations, borrowings under its credit facilities and the proceeds from public equity offerings to finance its operations and expansion.
In June 2000, Lithia’s Board of Directors authorized the repurchase of up to 1,000,000 shares of Lithia’s Class A Common Stock. Lithia has purchased 40,000 shares under this program and may continue to do so from time to time in the future as conditions warrant.
Lithia has credit facilities with Ford Motor Credit Company totaling $580 million, which expire November 2003 with interest due monthly. The facilities include $250 million for new and program vehicle flooring, $150 million for used vehicle flooring, $130 million for franchise acquisitions and $50 million for mortgage financing. Lithia also has the option to convert the acquisition line into a five-year term loan.
The lines with Ford Credit are cross-collateralized and are secured by inventory, accounts receivable, intangible assets and equipment. The other new vehicle lines are secured by new vehicle inventory of the relevant stores.
The Ford Credit facilities contain financial covenants requiring Lithia to maintain compliance with, among other things, specified ratios of (i) total debt to tangible base capital; (ii) total adjusted debt to tangible base capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net cash. The Ford Credit facilities also preclude the payment of cash dividends without the prior consent of Ford Credit. Lithia was in compliance with all such covenants at June 30, 2001.
Toyota Motor Credit Corporation, Chrysler Financial Corporation and General Motors Acceptance Corporation have agreed to floor all of Lithia’s new vehicles for their respective brands with Ford Credit serving as the primary lender for all other brands. There are no formal limits to these commitments for new vehicle wholesale financing.
In addition, U.S. Bank N.A. has extended a $27.5 million revolving line of credit for leased vehicles and equipment purchases.
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Interest rates on all of the above facilities ranged from 5.34% to 6.59% at June 30, 2001. Amounts outstanding on the lines at June 30, 2001 were as follows (in thousands):
New and Program Vehicle Lines $251,830 Used Vehicle Line 56,000 Acquisition Line 10,000 Equipment/Leased Vehicle Line 27,500 --------------- $345,330 ===============
At June 30, 2001, Lithia had capital commitments of approximately $19.3 million for the construction of seven new store facilities and two additions to existing facilities, of which $10.3 million is anticipated to be incurred through the end of 2001 and the balance in 2002. Approximately $7.8 million has already been paid for these commitments from available cash balances. Lithia expects to pay for the construction out of existing cash balances until completion of the projects, at which time Lithia anticipates securing long-term financing and general borrowings from third party lenders for 85% to 100% of the amounts expended.
Seasonality and Quarterly Fluctuations
Historically, Lithia’s sales have been lower in the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather and the reduced number of business days during the holiday season. As a result, financial performance may be lower during the first and fourth quarters than during the other quarters of each fiscal year. Management believes that interest rates, levels of consumer debt, consumer confidence and buying patterns, as well as general economic conditions, also contribute to fluctuations in sales and operating results. The timing of acquisitions may cause substantial fluctuations of operating results from quarter to quarter.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited on a prospective basis only. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, recorded in past business combinations will cease upon adoption of that Statement, which, for the Company, will be on January 1, 2002. The Company does not expect that the adoption of SFAS 141 will have a significant impact on the financial condition or results of operations of the Company. The Company is currently evaluating what the effects of adopting of SFAS 142 will be on its financial position and results of operations.
See also Note 6. Derivative Instruments and Hedging Activities in Notes to Consolidated Financial Statements above.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
Lithia has variable rate floor plan notes payable and other credit line borrowings that subject it to market risk exposure. At June 30, 2001, Lithia had $345.3 million outstanding under such facilities at interest rates ranging from 5.34% to 6.59% per annum. A 10% increase in interest rates would increase interest expense by approximately $450,000, net of tax, for the remaining six months of 2001 based on amounts outstanding on the lines of credit at June 30, 2001.
Cash Flow Hedging
Objectives and Context
Lithia uses variable-rate debt to finance its new and program vehicle inventory (“flooring debt”). The interest rate on the hedged flooring debt is tied to the one month LIBOR. These debt obligations therefore expose the Company to variability in interest payments due to changes in the one month LIBOR. The flooring debt is based on open-ended lines of credit from the various manufacturer finance companies and have no defined term, representing permanent to semi-permanent revolving debt obligations tied to each individual store. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases.
Management believes it is prudent to limit the variability of a portion of its interest payments. To achieve this objective, Lithia currently has hedged approximately 16.2% of its flooring debt.
Strategies
Management has entered into interest rate swaps to manage the variability of its interest rate exposure, thus leveling a portion of its interest expense in a rising or falling rate environment.
The interest rate swaps change the variable-rate cash flow exposure on a portion of the flooring debt to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, Lithia receives variable interest rate payments and makes fixed interest rate payments, thereby creating fixed-rate flooring debt.
Lithia has entered into the following interest rate swaps:
- Effective September 1, 2000, Lithia entered into a five year, $25 million interest rate swap with U.S. Bank Dealer Commercial Services at a fixed rate of 6.88% per annum.
- Effective November 1, 2000 Lithia entered into a three year, $25 million interest rate swap with U.S. Bank Dealer Commercial Services at a fixed rate of 6.47% per annum.
Lithia earns interest on both of the $25 million interest rate swaps at the one month LIBOR rate adjusted on the first and sixteenth of every month and is obligated to pay interest at the fixed rate set for each swap (6.88% or 6.47% per annum) on the same amount. The difference between interest earned and the interest obligation accrued is received or paid each month and is recorded in the statement of operations as flooring interest expense. The one month LIBOR rate at June 30, 2001 was 3.8625% per annum.
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Lithia does not enter into derivative instruments for any purpose other than to manage its interest rate exposure. That is, Lithia does not speculate using derivative instruments.
The fair value of interest rate swap agreements and the amount of hedging losses deferred on interest rate swaps was $2.2 million at June 30, 2001. Changes in the fair value of the interest rate swaps are reported, net of related income taxes, in accumulated other comprehensive income. These amounts are subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the flooring debt affects earnings. Because the critical terms of the interest rate swap and the underlying debt obligation are the same, there was no ineffectiveness recorded in interest expense.
Incremental interest expense incurred as a result of the interest rate swaps was $282,000 and $408,000, respectively, for the three and six month periods ended June 30, 2001. Interest expense savings on un-hedged debt as a result of decreasing interest rates from December 31, 2000 through June 30, 2001 was approximately $1.8 million.
At current interest rates, Lithia estimates that it will incur additional interest expense of $681,000 related to its interest rate swaps during the remaining two quarters of 2001. Lithia expects to save approximately $3.1 million on its un-hedged debt during the remaining two quarters of 2001 due to lower interest rates, assuming current debt levels at June 30, 2001 and interest rates as of June 30, 2001 compared to December 31, 2000.
Lithia did not have any hedging contracts at June 30, 2000.
Risk Management Policies
Lithia assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.
Lithia maintains risk management control systems to monitor interest rate cash flow attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.
As of June 30, 2001, approximately 77% of Lithia’s total debt outstanding was subject to un-hedged variable rates of interest. As a result, recent interest rate declines have resulted in a net reduction of Lithia’s interest expense compared to what it would have been at similar debt levels. The Company intends to continue to gradually hedge its interest rate exposure if market rates continue to decline.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 17, 2001, at which the following actions were taken:
1. To elect the following persons to serve as directors of Lithia Motors until the next annual meeting of shareholders and until their successors are duly elected and qualified:
No. of Votes For No. of Votes Withheld Name ---------------------------------- -------------------- ---------------------- Sidney B. DeBoer Class A 4,016,059 137,523 Class B 40,870,000 - Series M 652,686 - M. L. Dick Heimann Class A 4,016,059 137,523 Class B 40,870,000 - Series M 652,686 - Thomas Becker Class A 4,015,858 137,724 Class B 40,870,000 - Series M 652,686 - R. Bradford Gray Class A 4,016,057 137,525 Class B 40,870,000 - Series M 652,686 - W. Douglas Moreland Class A 4,016,057 137,525 Class B 40,870,000 - Series M 652,686 - Gerald F. Taylor Class A 4,016,058 137,524 Class B 40,870,000 - Series M 652,686 - William J. Young Class A 4,016,058 137,524 Class B 40,870,000 - Series M 652,686 -
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2. To approve the Lithia Motors, Inc. 2001 Stock Option Plan:
Number of Number of Number of Number of Votes Votes Broker Votes For Against Abstaining Non-Votes ---------------- ------------------ --------------- ---------------- Class A 1,963,551 899,478 1,286 1,289,267 Class B 40,870,000 - - - Series M 652,686 - - -
3. To approve an amendment to the Lithia Motors, Inc. 1998 Employee Stock Purchase Plan to modify certain eligibility requirements:
Number of Number of Number of Number of Votes Votes Broker Votes For Against Abstaining Non-Votes ---------------- ------------------ --------------- ---------------- Class A 3,735,109 417,107 1,366 - Class B 40,870,000 - - - Series M 652,686 - - -
4. To ratify and approve the May 1999 purchases of certain dealerships from W. Douglas Moreland and other persons and the issuance in connection with those transactions of up to 2,500,000 shares of the Company's Class A Common Stock, including 1,576,461 shares already issued and up to 923,539 shares which may be issued if the Company elects to convert the outstanding shares of Series M Preferred Stock into Class A Common Stock at the then market price as provided by the terms of such Preferred Stock.
Number of Number of Number of Number of Votes Votes Broker Votes For Against Abstaining Non-Votes ---------------- ------------------ --------------- ---------------- Class A 501 - - - Class B 40,870,000 - - - Series M - - - -
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits There are no exhibits required to be filed with this Form 10-Q.
(b) Reports on Form 8-K
- Under Item 5, Other Events, filed on June 11, 2001, and dated May 17, 2001, regarding the results of the voting at the Company's Annual Meeting of Shareholders and its intention to convert 5,183 shares of Series M 2002 Preferred Stock.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 10, 2001 | LITHIA MOTORS, INC. By /s/ M. L. Dick Heimann M. L. Dick Heimann President, Chief Operating Officer and Director By /s/ Jeffrey B. DeBoer Jeffrey B. DeBoer Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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