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