Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2004

 

OR

 

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

 

For the transition period from        to        

 

Commission file number: 001-14733

 


 

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-0572810

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

360 E. Jackson Street, Medford, Oregon

 

97501

(Address of principal executive offices)

 

(Zip Code)

 

 

 

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

 

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

Yes   ý        No  o

 

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

 

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

 

Class A common stock without par value

 

15,055,476

Class B common stock without par value

 

3,762,231

(Class)

 

(Outstanding at August 4, 2004)

 

 



 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2004 (unaudited) and December 31, 2003

 

 

 

 

 

Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2004 and 2003 (unaudited)

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2004 and 2003 (unaudited)

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

 

1



 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

June 30,
2004

 

December 31,
2003

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,971

 

$

74,408

 

Contracts in transit

 

40,698

 

44,709

 

Trade receivables, net of allowance for doubtful accounts of $453 and $413

 

43,568

 

42,199

 

Notes receivable, current portion, net of allowance for doubtful accounts of $42 and $49

 

86

 

208

 

Inventories, net

 

604,449

 

445,281

 

Vehicles leased to others, current portion

 

4,968

 

5,747

 

Prepaid expenses and other

 

6,871

 

3,392

 

Assets held for sale

 

16,537

 

20,408

 

Deferred income taxes

 

994

 

585

 

Total Current Assets

 

728,142

 

636,937

 

 

 

 

 

 

 

Land and buildings, net of accumulated depreciation of $6,598 and $5,683

 

195,389

 

164,676

 

Equipment and other, net of accumulated depreciation of $22,427 and $18,315

 

71,476

 

62,637

 

Notes receivable, less current portion

 

645

 

676

 

Vehicles leased to others, less current portion

 

8

 

10

 

Goodwill

 

233,500

 

207,027

 

Other intangible assets, net of accumulated amortization of $51 and $39

 

39,904

 

28,946

 

Other non-current assets

 

4,082

 

1,873

 

Total Assets

 

$

1,273,146

 

$

1,102,782

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Flooring notes payable

 

$

514,750

 

$

378,961

 

Current maturities of long-term debt

 

5,679

 

14,299

 

Trade payables

 

26,661

 

24,402

 

Accrued liabilities

 

50,267

 

46,164

 

Liabilities held for sale

 

3,292

 

13,045

 

Total Current Liabilities

 

600,649

 

476,871

 

 

 

 

 

 

 

Used vehicle flooring facility

 

 

56,267

 

Real estate debt, less current maturities

 

112,364

 

80,159

 

Other long-term debt, less current maturities

 

136,607

 

98,308

 

Deferred revenue

 

726

 

875

 

Other long-term liabilities

 

10,644

 

7,235

 

Deferred income taxes

 

30,058

 

24,141

 

Total Liabilities

 

891,048

 

743,856

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

Preferred stock - no par value; authorized 15,000 shares; none outstanding

 

 

 

Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 14,987 and 14,693

 

212,331

 

208,187

 

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

 

468

 

468

 

Additional paid-in capital

 

1,547

 

1,231

 

Accumulated other comprehensive income (loss)

 

1,542

 

(1,468

)

Retained earnings

 

166,210

 

150,508

 

Total Stockholders’ Equity

 

382,098

 

358,926

 

Total Liabilities and Stockholders’ Equity

 

$

1,273,146

 

$

1,102,782

 

 

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

 

2



 

LITHIA MOTORS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except  per share amounts)

(Unaudited)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicle sales

 

$

400,217

 

$

363,845

 

$

753,818

 

$

672,339

 

Used vehicle sales

 

184,186

 

191,092

 

374,092

 

363,188

 

Service, body and parts

 

71,753

 

61,032

 

141,179

 

117,517

 

Finance and insurance

 

24,744

 

22,478

 

48,129

 

42,888

 

Fleet and other

 

1,367

 

1,865

 

2,898

 

3,940

 

Total revenues

 

682,267

 

640,312

 

1,320,116

 

1,199,872

 

Cost of sales

 

566,328

 

538,573

 

1,097,943

 

1,009,646

 

Gross profit

 

115,939

 

101,739

 

222,173

 

190,226

 

Selling, general and administrative

 

88,565

 

79,585

 

173,752

 

153,814

 

Depreciation - buildings

 

675

 

481

 

1,319

 

940

 

Depreciation and amortization - other

 

2,414

 

1,773

 

4,724

 

3,445

 

Income from operations

 

24,285

 

19,900

 

42,378

 

32,027

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Floorplan interest expense

 

(4,123

)

(3,672

)

(7,739

)

(7,218

)

Other interest expense

 

(2,157

)

(1,564

)

(3,897

)

(2,952

)

Other expense, net

 

(358

)

(255

)

(697

)

(402

)

 

 

(6,638

)

(5,491

)

(12,333

)

(10,572

)

Income from continuing operations before income taxes

 

17,647

 

14,409

 

30,045

 

21,455

 

Income taxes

 

6,882

 

5,808

 

11,718

 

8,539

 

Income before discontinued operations

 

10,765

 

8,601

 

18,327

 

12,916

 

Income (loss) from discontinued operations, net of income tax expense (benefit) of $48, $(59), $(5) and $(154)

 

75

 

(82

)

(8

)

(232

)

Net income

 

$

10,840

 

$

8,519

 

$

18,319

 

$

12,684

 

 

 

 

 

 

 

 

 

 

 

Basic income per share from continuing operations

 

$

0.57

 

$

0.47

 

$

0.98

 

$

0.71

 

Basic income (loss) per share from discontinued operations

 

0.01

 

(0.00

)

(0.00

)

(0.01

)

Basic net income per share

 

$

0.58

 

$

0.47

 

$

0.98

 

$

0.70

 

 

 

 

 

 

 

 

 

 

 

Shares used in basic net income per share

 

18,746

 

18,228

 

18,686

 

18,181

 

 

 

 

 

 

 

 

 

 

 

Diluted income per share from continuing operations

 

$

0.56

 

$

0.47

 

$

0.96

 

$

0.70

 

Diluted income (loss) per share from discontinued operations

 

0.01

 

(0.01

)

(0.00

)

(0.01

)

Diluted net income per share

 

$

0.57

 

$

0.46

 

$

0.96

 

$

0.69

 

 

 

 

 

 

 

 

 

 

 

Shares used in diluted net income per share

 

19,142

 

18,379

 

19,127

 

18,326

 

 

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

 

3



 

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Six months ended June 30,

 

 

 

2004

 

2003

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

18,319

 

$

12,684

 

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

 

 

 

 

 

Depreciation and amortization

 

6,043

 

4,385

 

Depreciation and amortization of discontinued operations

 

14

 

340

 

Compensation expense related to stock option issuances

 

150

 

102

 

(Gain) loss on sale of assets

 

190

 

(874

)

Loss on sale of vehicles leased to others

 

104

 

52

 

Gain on sale of franchise

 

(569

)

(275

)

Deferred income taxes

 

3,785

 

1,750

 

(Increase) decrease, net of effect of acquisitions:

 

 

 

 

 

Trade and installment contract receivables, net

 

(1,077

)

(2,445

)

Contracts in transit

 

4,011

 

(6,791

)

Inventories

 

(110,638

)

9,034

 

Prepaid expenses and other

 

349

 

1,561

 

Other noncurrent assets

 

341

 

375

 

Increase (decrease), net of effect of acquisitions:

 

 

 

 

 

Floorplan notes payable

 

89,905

 

21,404

 

Trade payables

 

2,256

 

4,609

 

Accrued liabilities

 

4,957

 

10,213

 

Other long-term liabilities and deferred revenue

 

3,046

 

(2,856

)

Net cash provided by operating activities

 

21,186

 

53,268

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Notes receivable issued

 

 

(61

)

Principal payments received on notes receivable

 

153

 

240

 

Capital expenditures:

 

 

 

 

 

Non-financeable

 

(5,061

)

(2,997

)

Financeable

 

(19,234

)

(10,873

)

Proceeds from sale of assets

 

320

 

215

 

Expenditures for vehicles leased to others

 

(4,044

)

(3,512

)

Proceeds from sale of vehicles leased to others

 

1,281

 

386

 

Cash paid for acquisitions, net of cash acquired

 

(52,198

)

(29,280

)

Proceeds from sales of franchises

 

643

 

252

 

Net cash used in investing activities

 

(78,140

)

(45,630

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) on lines of credit

 

(111,018

)

25,613

 

Principal payments on long-term debt and capital leases

 

(9,690

)

(1,334

)

Proceeds from issuance of long-term debt

 

114,317

 

5,243

 

Debt issuance costs

 

(2,550

)

 

Repurchase of common stock

 

 

(215

)

Proceeds from issuance of common stock

 

4,075

 

2,133

 

Dividends paid

 

(2,617

)

 

Net cash provided by (used in) financing activities

 

(7,483

)

31,440

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(64,437

)

39,078

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

74,408

 

15,932

 

End of period

 

$

9,971

 

$

55,010

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Cash paid for income taxes

 

$

6,642

 

$

41

 

Cash paid for interest

 

11,367

 

10,191

 

 

 

 

 

 

 

Supplemental Schedule of Non-Cash Transactions:

 

 

 

 

 

Debt issued in connection with acquisitions

 

$

12,000

 

$

 

Assets acquired through real estate exchange

 

 

1,946

 

 

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

 

4



 

LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation

 

The financial information included herein as of June 30, 2004 and for the three and six-month periods ended June 30, 2004 and 2003 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.  The financial information as of December 31, 2003 is derived from our 2003 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 2003 Annual Report on Form 10-K.  The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

Note 2. Inventories

 

Inventories are valued at the lower of market value or cost, using the specific identification method for vehicles and parts.  Detail of inventory is as follows (in thousands):

 

 

 

June 30,
2004

 

December 31,
2003

 

New and program vehicles

 

$

496,712

 

$

355,937

 

Used vehicles

 

85,209

 

68,747

 

Parts and accessories

 

22,528

 

20,597

 

 

 

$

604,449

 

$

445,281

 

 

Note 3. Earnings Per Share

 

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts).

 

 

 

2004

 

2003

 

Three Months Ended June 30,

 

Income

 

Shares

 

Per
Share
Amount

 

Income

 

Shares

 

Per
Share
Amount

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,840

 

18,746

 

$

0.58

 

$

8,519

 

18,228

 

$

0.47

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

396

 

 

 

 

151

 

 

 

Net income

 

$

10,840

 

19,142

 

$

0.57

 

$

8,519

 

18,379

 

$

0.46

 

 

 

 

2004

 

2003

 

Six Months Ended June 30,

 

Income

 

Shares

 

Per Share Amount

 

Income

 

Shares

 

Per Share Amount

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

18,319

 

18,686

 

$

0.98

 

$

12,684

 

18,181

 

$

0.70

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of dilutive stock options

 

 

441

 

 

 

 

 

145

 

 

 

Net income

 

$

18,319

 

19,127

 

$

0.96

 

$

12,684

 

18,326

 

$

0.69

 

 

Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Stock options

 

333,140

 

1,017,863

 

333,140

 

1,021,292

 

 

5



 

Also excluded from the three and six month periods ended June 30, 2004 are 2,255,314 shares of Class A common stock issuable upon conversion of our outstanding convertible debt.  See Note 10.  However, should EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share,” be approved, such shares may be required to be included in our diluted EPS calculation and would require prior period EPS calculations to be restated, as applicable.  We are unable to predict, at this time, if EITF 04-8 will be approved as it is currently written.

 

Note 4.  Comprehensive Income

 

Comprehensive income includes the change in hedging instruments that are reflected in stockholders’ equity instead of net income and unrealized gains and losses on investments.  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,

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income

 

$

10,840

 

$

8,519

 

$

18,319

 

$

12,684

 

Unrealized gain (loss) on investments, net, subsequently realized

 

 

5

 

 

(6

)

Cash flow hedges:

 

 

 

 

 

 

 

 

 

Net derivative gains (losses), net of tax effect of $(2,292), $617, $(1,087) and $998, respectively

 

3,560

 

(927

)

1,651

 

(1,515

)

Reversal of net derivative losses previously disclosed.  This component has been recognized in our statements of operations as incremental interest expense, net of tax effect of $(474), $(378), $(869) and $(693), respectively

 

741

 

549

 

1,359

 

1,048

 

Total comprehensive income

 

$

15,141

 

$

8,146

 

$

21,329

 

$

12,211

 

 

Note 5.  Acquisitions

 

The following acquisitions were made in the first six months of 2004.  For information on the acquisition made in July 2004, see Note 13. Subsequent Events.

                  In January 2004, we acquired one Chrysler and Jeep store in Reno, Nevada, which has anticipated annual revenues of approximately $55.0 million.  The store has been renamed Lithia Chrysler Jeep of Reno.

                  In March 2004, we acquired one Chevrolet store in Helena, Montana, which has anticipated annual revenues of approximately $40.0 million.  The store has been renamed Chevrolet of Helena.

                  In April 2004, we acquired Tony Chevrolet of Anchorage and Tony Chevrolet of Wasilla, Alaska, which have anticipated combined annual revenues of approximately $125 million.  The stores have been renamed Chevrolet of South Anchorage and Chevrolet of Wasilla, respectively.

 

The above acquisitions were accounted for under the purchase method of accounting.  Pro forma results of operations assuming the above acquisitions occurred at the beginning of the respective periods are as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Total revenues

 

$

690,183

 

$

698,638

 

$

1,359,619

 

$

1,311,540

 

Net income

 

10,957

 

9,905

 

18,629

 

14,555

 

Basic earnings per share

 

0.58

 

0.54

 

1.00

 

0.80

 

Diluted earnings per share

 

0.57

 

0.54

 

0.97

 

0.79

 

 

There are no future contingent payouts related to any of the above acquisitions and no portion of the purchase price was paid with our equity securities.

 

6



 

The purchase price for the above acquisitions was allocated as follows (in thousands):

 

Inventories

 

$

41,733

 

Other current assets

 

376

 

Property and equipment

 

21,770

 

Goodwill

 

26,493

 

Other intangible assets - franchise value

 

10,820

 

Total assets acquired

 

101,192

 

 

 

 

 

Flooring notes payable

 

36,437

 

Other current liabilities

 

324

 

Other non-current liabilities

 

288

 

Total liabilities acquired

 

37,049

 

Net assets acquired

 

$

64,143

 

 

Within one year from the purchase date, we may update the value allocated to purchased assets and the resulting goodwill balances based on information received regarding the valuation of such assets.

 

Note 6.  Dividend Payments

 

Cash dividends at the rate of $0.07 per common share, which totaled approximately $1.3 million, were paid on March 19, 2004 to shareholders of record on March 5, 2004 and on May 21, 2004 to shareholders of record on May 7, 2004.

 

Note 7.  U.S. Bank Agreement Amendment

 

In February 2004, our U.S. Bank N.A. agreement was amended to provide for a $50.0 million revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2006. Previously, the amount available under this line of credit was $35.0 million and with expiration on January 31, 2005.

 

Note 8.  DaimlerChrysler Agreement Amendment

 

In June 2004, our DaimlerChrysler Services North America LLC and Toyota Motor Credit revolving credit agreement was amended as follows:

                  The revolving commitment amount was decreased from $200 million to $150 million following our successful convertible debt offering in May 2004; and

                  The termination date of the agreement was extended to May 1, 2007 from February 25, 2006 and has an option to extend the termination date to May 1, 2008.

 

Note 9.  Interest Rate Swaps

 

In March 2004, we entered into the following new interest rate swaps with U.S. Bank Dealer Commercial Services to effectively change the variable rate cash flow exposure on a portion of our flooring debt to fixed rate cash flows:

                  effective March 9, 2004 - a five year, $25 million interest rate swap at a fixed rate of 3.25% per annum, variable rate adjusted on the 1st and 16th of each month;

                  effective March 18, 2004 - a five year, $25 million interest rate swap at a fixed rate of 3.10% per annum, variable rate adjusted on the 1st and 16th of each month.

 

Note 10.  Debt Offering

 

In May 2004, we sold $85 million of 2.875% senior subordinated convertible notes due 2014 through a Rule 144A offering to qualified institutional buyers. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes.  Net proceeds from this offering were approximately $82.5 million and were used to pay down our working capital and used vehicle line and new vehicle flooring notes payable. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

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

 

7



 

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

                  if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

                  if the notes have been called for redemption; or

                  upon certain specified corporate events.

 

Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes.

 

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

 

We filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 26, 2004 covering the resale of the notes and the common stock issuable upon conversion of the notes.

 

Note 11.  Amendments to Stock Plans

 

At our Annual Shareholders Meeting in April 2004, our shareholders approved amendments to our stock plans as follows:

                  the number of shares of our common stock issuable pursuant to our 2003 Stock Incentive Plan were increased to 2.2 million from 1.2 million; and

                  the number of shares of our common stock issuable pursuant to our 1998 Employee Stock Purchase Plan were increased to 1.75 million from 1.5 million.

 

Note 12.  Stock-Based Compensation

 

We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”   Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which we adopted in December 2002, we have computed, for pro forma disclosure purposes, the impact on net income and net income per share as if we had accounted for our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in thousands):

 

Three Months Ended June 30,

 

2004

 

2003

 

Net income, as reported

 

$

10,840

 

$

8,519

 

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

 

25

 

24

 

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

 

(566

)

(520

)

Net income, pro forma

 

$

10,299

 

$

8,023

 

Basic net income per share:

 

 

 

 

 

As reported

 

$

0.58

 

$

0.47

 

Pro forma

 

$

0.55

 

$

0.44

 

Diluted net income per share:

 

 

 

 

 

As reported

 

$

0.57

 

$

0.46

 

Pro forma

 

$

0.55

 

$

0.44

 

 

8



 

Six Months Ended June 30,

 

2004

 

2003

 

Net income, as reported

 

$

18,319

 

$

12,684

 

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

 

50

 

49

 

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

 

(1,184

)

(1,057

)

Net income, pro forma

 

$

17,185

 

$

11,676

 

Basic net income per share:

 

 

 

 

 

As reported

 

$

0.98

 

$

0.70

 

Pro forma

 

$

0.92

 

$

0.64

 

Diluted net income per share:

 

 

 

 

 

As reported

 

$

0.96

 

$

0.69

 

Pro forma

 

$

0.91

 

$

0.64

 

 

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

 

Three and Six Months Ended June 30,

 

2004

 

2003

 

Risk-free interest rate

 

0.93 - 2.80

%

2.5 - 3.0

%

Expected dividend yield

 

1.04 - 1.42

%

0

%

Expected lives  - 2001 Plan

 

5.4 years

 

7.7 - 8 years

 

- Purchase Plan

 

3 months

 

3 months

 

Expected volatility

 

28.11%- 43.32

%

46.24% - 46.79

%

 

Note 13.  Subsequent Events

 

Acquisition

The following acquisition was made subsequent to June 30, 2004:

 

                  In July 2004, we acquired one Toyota store in Odessa, Texas, which has anticipated annual revenues of approximately $20.0 million.  The store has been renamed Lithia Toyota of Odessa.

 

Dividend

In July 2004, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.08 per share for the second quarter of 2004.  The dividend, which will total approximately $1.5 million, will be paid on August 16, 2004 to shareholders of record on August 2, 2004.

 

9



 

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

 

Some of the statements in this Form 10-Q constitute forward-looking statements.  In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99.1 to our 2003 Annual Report on Form 10-K.

 

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

 

General

 

We are a leading operator of automotive franchises and retailer of new and used vehicles and services.  As of August 1, 2004, we offered 25 brands of new vehicles through 152 franchises in 83 stores in the Western United States and over the Internet.  As of August 1, 2004, we operated 16 stores in Oregon, 13 in California, 11 in Washington, 9 in Texas, 7 in Idaho, 7 in Colorado, 6 in Nevada, 6 in Alaska, 3 in Montana, 2 in South Dakota, 2 in Nebraska and 1 in Oklahoma.  We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance for our automotive customers.

 

Historically, new vehicle sales have accounted for over half of our total revenues but less than one-third of total gross profit.  We are continuing with a volume-based strategy for our new vehicle sales that we initiated in 2002. Through an advertising campaign called “Driving America” that is centered on “Promo Pricing,” we have been able to gain new vehicle market share in many of our markets.  This strategy complements the goal of most auto manufacturers, which have continued to offer a high level of cash or other incentives on purchases.

 

For the second half of 2004, we expect that manufacturers will continue to offer incentives on new vehicle sales through a combination of rebates and low interest rate loans to consumers. We plan to continue with our volume-based new vehicle strategy in most of our stores.  As the economy and the incentive environment change, we expect to change our new vehicle sales strategy to adjust to any new conditions.

 

Competition from new vehicles with heavy manufacture incentives in the past two years has had a strong negative impact on the used vehicle market.  This trend continued in the first half of 2004, and is likely to continue throughout the rest of 2004.  We have implemented new procedures in the used vehicle business to help offset this negative impact as follows:

 

                  We have begun conducting our own local used vehicle auctions in select markets and managing the disposal of used vehicles at larger auctions.  We no longer allow stores to dispose of their excess inventories on their own.  The process is centralized and controlled at the management level; and

 

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

 

10



 

Results of Continuing Operations

 

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

 

Three Months Ended June 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
 Gross Profit

 

New vehicles

 

58.7

%

8.1

%

27.9

%

Retail used vehicles(1)

 

22.5

 

14.6

 

19.4

 

Service, body and parts

 

10.5

 

48.7

 

30.1

 

Finance and insurance(2)

 

3.6

 

99.6

 

21.3

 

Fleet and other

 

0.2

 

22.8

 

0.3

 

 

Three Months Ended June 30, 2003

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
 Gross Profit

 

New vehicles

 

56.8

%

7.8

%

28.0

%

Retail used vehicles(1)

 

24.8

 

13.9

 

21.6

 

Service, body and parts

 

9.5

 

46.8

 

28.1

 

Finance and insurance(2)

 

3.5

 

99.6

 

22.0

 

Fleet and other

 

0.3

 

22.4

 

0.4

 

 

Six Months Ended June 30, 2004

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicles

 

57.1

%

7.8

%

26.5

%

Retail used vehicles(1)

 

23.6

 

14.4

 

20.2

 

Service, body and parts

 

10.7

 

48.0

 

30.5

 

Finance and insurance(2)

 

3.6

 

99.5

 

21.6

 

Fleet and other

 

0.2

 

21.4

 

0.3

 

 

Six Months Ended June 30, 2003

 

Percent of
Total Revenues

 

Gross
Margin

 

Percent of Total
Gross Profit

 

New vehicles

 

56.0

%

7.6

%

27.0

%

Retail used vehicles(1)

 

25.0

 

13.5

 

21.2

 

Service, body and parts

 

9.8

 

47.2

 

29.1

 

Finance and insurance(2)

 

3.6

 

99.6

 

22.5

 

Fleet and other

 

0.3

 

17.4

 

0.4

 

 


(1)                                  Excludes wholesale used vehicle sales, representing 4.5%, 5.1%, 4.8% and 5.3% of total revenues, respectively,  and a gross margin contribution of 1.0%, (0.1)%, 0.9% and (0.2)%, respectively, for the three and six month periods ended June 30, 2004 and 2003.

(2)                                  Reported net of estimated cancellations.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Lithia Motors, Inc. (1)

 

2004

 

2003

 

2004

 

2003

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicles

 

58.7

%

56.8

%

57.1

%

56.0

%

Used vehicles

 

27.0

 

29.9

 

28.4

 

30.3

 

Service, body and parts

 

10.5

 

9.5

 

10.7

 

9.8

 

Finance and insurance

 

3.6

 

3.5

 

3.6

 

3.6

 

Fleet and other

 

0.2

 

0.3

 

0.2

 

0.3

 

Total revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Gross profit

 

17.0

 

15.9

 

16.8

 

15.9

 

Selling, general and administrative expenses

 

13.0

 

12.4

 

13.2

 

12.8

 

Depreciation and amortization

 

0.5

 

0.4

 

0.5

 

0.4

 

Income from operations

 

3.6

 

3.1

 

3.2

 

2.7

 

Floorplan interest expense

 

0.6

 

0.6

 

0.6

 

0.6

 

Other interest expense

 

0.3

 

0.2

 

0.3

 

0.2

 

Other expense, net

 

0.1

 

0.0

 

0.1

 

0.0

 

Income from continuing operations before taxes

 

2.6

 

2.3

 

2.3

 

1.8

 

Income tax expense

 

1.0

 

0.9

 

0.9

 

0.7

 

Income from continuing operations

 

1.6

%

1.3

%

1.4

%

1.1

%

 


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

 

11



 

 

The following tables set forth the changes in our operating results from continuing operations in the three and six month periods ended June 30, 2004 compared to the three and six month periods ended June 30, 2003:

 

 

 

Three Months Ended
June 30,

 

Increase
(Decrease)

 

%
Increase
(Decrease)

 

(Dollars in thousands)

 

2004

 

2003

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicle sales

 

$

400,217

 

$

363,845

 

$

36,372

 

10.0

%

Used vehicle sales

 

184,186

 

191,092

 

(6,906

)

(3.6

)

Service, body and parts

 

71,753

 

61,032

 

10,721

 

17.6

 

Finance and insurance

 

24,744

 

22,478

 

2,266

 

10.1

 

Fleet and other

 

1,367

 

1,865

 

(498

)

(26.7

)

Total revenues

 

682,267

 

640,312

 

41,955

 

6.6

 

Cost of sales

 

566,328

 

538,573

 

27,755

 

5.2

 

Gross profit

 

115,939

 

101,739

 

14,200

 

14.0

 

Selling, general and administrative

 

88,565

 

79,585

 

8,980

 

11.3

 

Depreciation and amortization

 

3,089

 

2,254

 

835

 

37.0

 

Income from operations

 

24,285

 

19,900

 

4,385

 

22.0

 

Floorplan interest expense

 

4,123

 

3,672

 

451

 

12.3

 

Other interest expense

 

2,157

 

1,564

 

593

 

37.9

 

Other (income) expense, net

 

358

 

255

 

103

 

40.4

 

Income from continuing operations before taxes

 

17,647

 

14,409

 

3,238

 

22.5

 

Income tax expense

 

6,882

 

5,808

 

1,074

 

18.5

 

Income from continuing operations

 

$

10,765

 

$

8,601

 

$

2,164

 

25.2

%

 

 

 

Three Months Ended
June 30,

 

Increase
(Decrease)

 

%
Increase
(Decrease)

 

 

 

2004

 

2003

 

 

 

New units sold

 

14,398

 

13,720

 

678

 

4.9

%

Average selling price per new vehicle

 

$

27,797

 

$

26,519

 

$

1,278

 

4.8

 

 

 

 

 

 

 

 

 

 

 

Used units sold - retail

 

10,253

 

10,792

 

(539

)

(5.0

)

Average selling price per retail used vehicle

 

$

14,977

 

$

14,699

 

$

278

 

1.9

 

 

 

 

 

 

 

 

 

 

 

Used units sold – wholesale

 

5,720

 

6,794

 

(1,074

)

(15.8

)

Average selling price per wholesale used vehicle

 

$

5,354

 

$

4,778

 

$

576

 

12.1

 

 

 

 

 

 

 

 

 

 

 

Finance and insurance sales per retail unit

 

$

1,004

 

$

917

 

$

87

 

9.5

%

 

 

 

Six Months Ended
June 30,

 

Increase
(Decrease)

 

%
Increase
(Decrease)

 

(Dollars in thousands)

 

2004

 

2003

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

New vehicle sales

 

$

753,818

 

$

672,339

 

$

81,479

 

12.1

%

Used vehicle sales

 

374,092

 

363,188

 

10,904

 

3.0

 

Service, body and parts

 

141,179

 

117,517

 

23,662

 

20.1

 

Finance and insurance

 

48,129

 

42,888

 

5,241

 

12.2

 

Fleet and other

 

2,898

 

3,940

 

(1,042

)

(26.4

)

Total revenues

 

1,320,116

 

1,199,872

 

120,244

 

10.0

 

Cost of sales

 

1,097,943

 

1,009,646

 

88,297

 

8.7

 

Gross profit

 

222,173

 

190,226

 

31,947

 

16.8

 

Selling, general and administrative

 

173,752

 

153,814

 

19,938

 

13.0

 

Depreciation and amortization

 

6,043

 

4,385

 

1,658

 

37.8

 

Income from operations

 

42,378

 

32,027

 

10,351

 

32.3

 

Floorplan interest expense

 

7,739

 

7,218

 

521

 

7.2

 

Other interest expense

 

3,897

 

2,952

 

945

 

32.0

 

Other (income) expense, net

 

697

 

402

 

295

 

73.4

 

Income from continuing operations before taxes

 

30,045

 

21,455

 

8,590

 

40.0

 

Income tax expense

 

11,718

 

8,539

 

3,179

 

37.2

 

Income from continuing operations

 

$

18,327

 

$

12,916

 

$

5,411

 

41.9

%

 

12



 

 

 

Six Months Ended
June 30,

 

Increase
(Decrease)

 

%
Increase
(Decrease)

 

 

 

2004

 

2003

 

 

 

New units sold

 

27,243

 

25,730

 

1,513

 

5.9

%

Average selling price per new vehicle

 

$

27,670

 

$

26,131

 

$

1,539

 

5.9

 

 

 

 

 

 

 

 

 

 

 

Used units sold - retail

 

21,030

 

20,544

 

486

 

2.4

 

Average selling price per retail used vehicle

 

$

14,801

 

$

14,603

 

$

198

 

1.4

 

 

 

 

 

 

 

 

 

 

 

Used units sold – wholesale

 

11,807

 

12,941

 

(1,134

)

(8.8

)

Average selling price per wholesale used vehicle

 

$

5,320

 

$

4,882

 

$

438

 

9.0

 

 

 

 

 

 

 

 

 

 

 

Finance and insurance sales per retail unit

 

$

997

 

$

927

 

$

70

 

7.6

%

 

Revenues

 

Total revenues increased 6.6% and 10.0%, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003, as a result of acquisitions and increases in the average new and used vehicle sales prices. These increases were offset by same-store sales declines of 5.3% and 2.0%, respectively, for the three and six month periods ended June 30, 2004 compared to the same periods of 2003.  Same-store sales percentage increases (decreases) were as follows:

 

 

 

Three months ended June
30, 2004 vs. three months
ended June 30, 2003

 

Six months ended June
30, 2004 vs. six months
ended June 30, 2003

 

New vehicles

 

(3.5

)%

(1.3

)%

Retail used vehicles

 

(13.1

)

(7.1

)

Service, body and parts

 

3.3

 

5.6

 

Finance and insurance

 

(1.2

)

0.6

 

Total retail sales

 

(5.3

)

(2.0

)

 

Same-store sales are calculated by dealership comparing only those months that contain full-month operating data.

 

New vehicle same store sales were down in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to an unusually strong second quarter in 2003, which experienced double digit sales growth.  Used vehicle same store sales have been negatively affected  in the same periods by continued manufacturer incentives on new vehicles.  Although same store sales have declined in the current periods, we have experienced an increase in gross margins in both new and used vehicles compared to the same periods last year.

 

The increases in same-store service, body and parts revenue resulted from increases in the customer retail business with our manufacturer warranty business remaining relatively stable.  Our focus on service advisor training has also contributed to the increases in same-store sales. Improvements in the quality of Chrysler, General Motors, Ford and Toyota vehicles have resulted in declines in warranty work for these brands. Other brands, however, continue to demonstrate increases in same-store warranty sales.

 

Fleet and other sales include both fleet sales and fees received for delivering vehicles on behalf of the manufacturer, the U.S. military, rent-a-car companies or leasing companies.  In 2003 we decided to not focus on fleet sales due to their low margins.  This has resulted in a decrease in total fleet and other sales, but an increase in the gross margin percentage due to a higher percentage of fee income compared to fleet income.

 

13



 

Penetration rates for certain products were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Finance and insurance

 

76

%

75

%

76

%

76

%

Service contracts

 

43

 

41

 

43

 

41

 

Lifetime oil and filter change

 

38

 

34

 

37

 

34

 

 

Gross Profit

 

Gross profit increased $14.2 million and $31.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to increased total revenues as well as increases in our overall gross margin. Gross margins achieved were as follows:

 

 

 

Three Months Ended June 30,

 

Lithia
Margin Change*

 

 

 

2004

 

2003

 

 

New vehicles

 

8.1

%

7.8

%

30bp

 

Retail used vehicles

 

14.6

 

13.9

 

70

 

Service and parts

 

48.7

 

46.8

 

190

 

Finance and insurance

 

99.6

 

99.6

 

 

Overall

 

17.0

 

15.9

 

110

 

 

 

 

Six Months Ended June 30,

 

Lithia
Margin Change*

 

 

 

2004

 

2003

 

 

New vehicles

 

7.8

%

7.6

%

20bp

 

Retail used vehicles

 

14.4

 

13.5

 

90

 

Service and parts

 

48.0

 

47.2

 

80

 

Finance and insurance

 

99.5

 

99.6

 

(10

)

Overall

 

16.8

 

15.9

 

90

 

 


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

 

The increases in the overall gross profit margin in the first half of 2004 compared to the first half of 2003 were primarily a result of improvements in the margins achieved on our used vehicle business as well as an increase in our high margin service and parts revenue as a percentage of total revenue.

 

New vehicle gross margins increased primarily due to internal directives communicated to our stores to attain a sales target closer to the manufacturer suggested retail price.

 

We have been able to improve the margins on our used vehicle sales primarily due to the strategies discussed above regarding the auctioning of our used vehicles and our “Used Vehicle Promo Pricing.” Total same-store gross profit for the second quarter and first half of 2004 increased from the comparable periods of 2003.

 

Our focus on margin improvement in the wholesale parts business was the major contributor to the improved gross margins in the service and parts department.

 

Selling, General and Administrative Expense

 

Selling, general and administrative (“SG&A”) expense includes salaries and related personnel expenses, facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting, professional services and general corporate expenses.  Selling, general and administrative expense increased $9.0 million and $19.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to same periods of 2003, and increased 60 basis points and 40 basis points, respectively, as a percentage of revenue.  The increases in dollars spent are due to increased selling, or variable, expenses related to the increases in revenues and the number of locations.  SG&A as a percentage of sales will increase when the service and parts revenue contribution increases relative to total sales due to its higher SG&A component.  Because of this, a more important gauge is the trend of SG&A as a percentage of gross profit, which has decreased for the same periods.

 

14



 

Depreciation and Amortization

 

Depreciation and amortization increased $0.8 million and $1.7 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 due to the addition of property and equipment related to our acquisitions, as well as leasehold improvements to existing facilities.

 

Income from Operations

 

Operating margins improved by 50 basis points in both the three and six month periods ended June 30, 2004 to 3.6% and 3.2%, respectively, from 3.1% and 2.7%, respectively, in the comparable periods of 2003.  The increases are due to the improved overall gross profit margins as discussed above, partially offset by higher operating expenses as a percentage of revenue.

 

Floorplan Interest Expense

 

Floorplan interest expense increased $0.5 million in both the three and six month periods ended June 30, 2004 compared to the same periods of 2003.  A $612,000 and $825,000 increase, respectively, was the result of increases in the average outstanding balances of our floorplan facilities, mainly due to acquisitions, and increases of $287,000 and $487,000, respectively, resulting from our interest rate swaps were partially offset by decreases in the LIBOR and the prime rates in the three and six month periods ended June 30, 2004 compared to the same periods of 2003.

 

Other Interest Expense

 

Other interest expense includes interest on our convertible notes, debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes. Other interest expense increased $0.6 million and $0.9 million, respectively, in the three and six month periods ended June 30, 2004 compared to the same periods of 2003. Changes in the weighted average interest rate on our debt in the three and six month periods ended June 30, 2004 compared to the same periods of 2003 increased other interest expense by approximately $8,000 and $161,000, respectively, and changes in the average outstanding balances resulted in increases of approximately $585,000 and $784,000, respectively.  Interest expense related to the $85.0 million of convertible notes that were issued in May 2004 totals approximately $748,000 per quarter, which consists of $611,000 of contractual interest and $137,000 of amortization of debt issuance costs.

 

Income Tax Expense

 

Our effective tax rate was 39.0% in the first six months of 2004 compared to 39.8% in the first six months of 2003. Our effective tax rate may be affected in the future by the mix of asset acquisitions compared to corporate acquisitions, as well as by the mix of states where our stores are located.

 

Income from Continuing Operations

 

Income from continuing operations as a percentage of revenue increased in the three and six month periods ended June 30, 2004 compared to same periods of 2003 as a result of improvements in gross margins being offset in part by increased operating expenses as discussed above.

 

Discontinued Operations

 

During 2003, we decided to sell certain stores and related franchises. We did not dispose of any stores during the first six months of 2004. At June 30, 2004, we had $16.5 million of assets classified as assets held for sale on our balance sheet related to one store we intend to sell during 2004. The assets primarily include inventory and property, plant and equipment.  Liabilities held for sale of $3.3 million at June 30, 2004 represent new vehicle flooring notes payable related to the store held for sale.

 

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

 

15



 

Seasonality and Quarterly Fluctuations

 

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

 

Free Cash Flow

 

Our free cash flow, defined as net income from continuing operations plus depreciation minus dividends and non-financeable capital expenditures, was approximately $16.7 million and $14.3 million, respectively, in the first six months of 2004 and 2003.  Management believes that free cash flow is an important metric for evaluating the strength and viability of our business model. The reconciliation of net income to free cash flow is as follows (in thousands):

 

Six Months Ended June 30,

 

2004

 

2003

 

Net income from continuing operations

 

$

18,327

 

$

12,916

 

Depreciation and amortization

 

6,043

 

4,385

 

Dividends

 

(2,617

)

 

Non-financeable capital expenditures

 

(5,061

)

(2,997

)

Free cash flow from continuing operations

 

$

16,692

 

$

14,304

 

 

Liquidity and Capital Resources

 

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity and private debt offerings to finance operations and expansion. In addition, in May 2004, we closed an $85.0 million private debt offering. We believe that our available cash, cash equivalents, available lines of credit, cash received from our debt offering in May 2004 and cash flows from operations will be sufficient to meet our anticipated operating expenses and capital requirements for at least 24 to 36 months from June 30, 2004.

 

Our inventories increased to $604.4 million at June 30, 2004 from $445.3 million at December 31, 2003 due primarily to acquisitions and our decision to purchase a greater stock of 2004 vehicles going into the third quarter in order to take advantage of the anticipated strong incentive environment for the 2004 models as the 2005 models are introduced.  Our new and used flooring notes payable increased to $514.8 million at June 30, 2004 from $435.2 million at December 31, 2003 due to acquisitions.  New vehicles are financed at approximately 100% and used vehicles are financed at approximately 80% of cost. Our days supply of new vehicles increased by approximately 9 days at June 30, 2004 compared to December 31, 2003. Our days supply of used vehicles increased by approximately 5 days at June 30, 2004 compared to December 31, 2003.  We believe that our new and used vehicle inventories are at appropriate levels at this time.

 

Assets of discontinued operations held for sale include inventory and property, plant and equipment related to one store held for sale and are recorded on our balance sheet at the lower of book value or estimated fair market value, less applicable selling costs.

 

As a result of the acquisition of four stores in the first six months of 2004, our goodwill and other intangibles increased $37.4 million to $273.4 million at June 30, 2004, compared to $236.0 million at December 31, 2003.

 

16



 

In January and April 2004, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.07 per share for the fourth quarter of 2003 and the first quarter of 2004, respectively, which totaled approximately $1.3 million each.  In July 2004, our Board of Directors declared a dividend on our Class A and Class B common stock of $0.08 per share for the second quarter of 2004, which will total approximately $1.5 million.  We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

 

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock.  Through July 2004, we have purchased a total of 59,400 shares under this program and may continue to do so from time to time in the future as conditions warrant.  However, the recent change in the tax law tends to equalize the benefits of dividends and share repurchases as a means to return capital or earnings to shareholders. As a result, we believe it is now advantageous to shareholders to have a dividend in place.  With the dividend, we are able to offer an immediate and tangible return to our shareholders without reducing our already limited market float, which occurs when we repurchase shares.

 

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

 

The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor Credit require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels.   At June 30, 2004, we were in compliance with all of the covenants of this agreement.

 

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

 

We also have a revolving credit real estate line with Toyota Motor Credit totaling $40 million, which expires in May 2005. The advances are secured by the real estate financed under this line of credit.

 

We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line of credit for leased vehicles and equipment purchases and expires January 31, 2006.

 

Interest rates on all of the above facilities ranged from 3.11% to 4.12% at June 30, 2004.  Amounts outstanding on the lines at June 30, 2004 together with amounts remaining available under such lines were as follows (in thousands):

 

 

 

Outstanding at
June 30, 2004

 

Remaining Availability as
of June 30, 2004

 

New and program vehicle lines

 

$

514,750

 

$

*

 

Working capital and used vehicle line

 

 

150,000

 

Real estate line

 

 

40,000

 

Equipment/leased vehicle line

 

50,000

 

 

 

 

$

564,750

 

$

190,000*

 

 


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

 

17



 

In May 2004, we sold $85 million of 2.875% senior subordinated convertible notes due 2014 through a Rule 144A offering to qualified institutional buyers. We will also pay contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which the trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes.  Net proceeds from this offering were approximately $82.5 million and were used to pay down our working capital and used vehicle line and new vehicle flooring notes payable. The notes are convertible into shares of our Class A common stock at a price of $37.69 per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:

 

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

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

                  if, during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes;

                  if the notes have been called for redemption; or

                  upon certain specified corporate events.

 

Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an adjustment in the conversion rate for the notes.

 

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

 

We filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 26, 2004 covering the resale of the notes and the common stock issuable upon conversion of the notes.

 

We had capital commitments of $11.2 million at June 30, 2004 for the construction of one new facility, additions to three existing facilities and the remodel of two facilities.  The new facility will be for our Chevrolet dealership in Fairbanks, Alaska. We have already incurred $3.3 million for these projects, with an additional $8.7 million expected to be incurred during the remainder of 2004 and the remaining $2.5 million to be incurred in 2005. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended.

 

Critical Accounting Policies and Use of Estimates

 

We reaffirm our critical accounting policies and use of estimates as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2004, except for the addition of the following that only applies to our quarterly filings.

 

Executive Bonuses

 

We make certain estimates, judgments and assumptions regarding the likelihood of our attainment, and the level thereof, of the annual bonus criteria under our 2004 Discretionary Executive Bonus Program in order to record bonus expense on a quarterly basis. We accrue the estimated year-end expense on an accelerated basis in the first, second and third quarters based on bonus attainment expectations.  These estimates, judgments and assumptions are made quarterly based on available

 

18



 

information and take into consideration the historical seasonality of our business and current trends.  If actual year-end results differ materially from our estimates, the amount of bonus expense recorded in a particular quarter could be significantly over or under estimated.

 

Item 3.           Quantitative and Qualitative Disclosures About Market Risk

 

Other than the addition of $85.0 million of fixed rate debt during the second quarter of 2004, there have been no material changes in our reported market risks or risk management policies since the filing of our 2003 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 15, 2004.

 

Item 4.           Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Internal Control Over Financial Reporting

 

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

 

PART II - OTHER INFORMATION

 

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

 

Our annual meeting of the shareholders was held on April 29, 2004, at which the following actions were approved:

 

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

 

Name

 

 

 

No. of Shares
Voting For

 

No. of Shares
Withheld Voting

 

Sidney B. DeBoer

 

Class A

 

11,833,123

 

966,075

 

 

 

Class B

 

3,762,231

 

 

M. L. Dick Heimann

 

Class A

 

11,879,893

 

919,305

 

 

 

Class B

 

3,762,231

 

 

Thomas Becker

 

Class A

 

11,705,617

 

1,093,581

 

 

 

Class B

 

3,762,231

 

 

R. Bradford Gray

 

Class A

 

11,879,618

 

919,580

 

 

 

Class B

 

3,762,231

 

 

Phillip J. Romero

 

Class A

 

12,001,069

 

798,129

 

 

 

Class B

 

3,762,231

 

 

Gerald F. Taylor

 

Class A

 

11,706,234

 

1,092,964

 

 

 

Class B

 

3,762,231

 

 

William J. Young

 

Class A

 

11,706,048

 

1,093,150

 

 

 

Class B

 

3,762,231

 

 

 

19



 

2.               To approve an amendment to the 2003 Stock Incentive Plan to increase the number of shares issuable under the plan from 1.2 million to 2.2 million:

 

 

 

Number of
Shares Voting
For

 

Number of Shares
Voting Against

 

Number of
Shares
Abstaining

 

Number of
Broker
Non-Votes

 

Class A

 

5,780,853

 

5,007,672

 

10,777

 

1,999,896

 

Class B

 

3,762,231

 

 

 

 

 

3.               To approve an amendment to the Lithia Motors, Inc. 1998 Employee Stock Purchase Plan to increase the number of shares issuable under the plan from 1.5 million to 1.75 million:

 

 

 

Number of
Shares Voting
For

 

Number of Shares
Voting Against

 

Number of
Shares
Abstaining

 

Number of
Broker
Non-Votes

 

Class A

 

10,688,646

 

100,920

 

9,736

 

1,999,896

 

Class B

 

3,762,231

 

 

 

 

 

4.     To approve amendments to the Lithia Motors, Inc. Executive Bonus Plan:

 

 

 

Number of
Shares Voting
For

 

Number of Shares
Voting Against

 

Number of
Shares
Abstaining

 

Number of
Broker
Non-Votes

 

Class A

 

10,523,187

 

259,558

 

14,437

 

2,002,016

 

Class B

 

3,762,231

 

 

 

 

 

Item 6.           Exhibits and Reports on Form 8-K

 

(a) Exhibits

 

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

 

3.1

 

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

3.2

 

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

4.1

 

Indenture dated May 4, 2004, between Lithia motors, Inc. and U.S. Bank National Association, as Trustee, relating to 2.875% Convertible Senior Subordinated Notes due 2014 (filed as Exhibit 4.1 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).

10.1

 

Second Amendment, dated as of December 4, 2003, to Credit Agreement dated February 25, 2003, between DaimlerChrysler Services North America LLC, as Agent and Lithia Motors, Inc. (filed as Exhibit 10.1 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).

10.2

 

Modification No. 2, dated as of November 1, 2003, to Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust (filed as Exhibit 10.2 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).

10.3

 

Modification No. 3, dated as of February 20, 2004, to Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust (filed as Exhibit 10.3 to Form 10-Q filed May 10, 2004 and incorporated herein by reference).

10.4

 

Third Amendment, dated as of June 30, 2004, to Credit Agreement dated February 25, 2003, between DaimlerChrysler Services North America LLC, as Agent and Lithia Motors, Inc.

31.1

 

Certification of Sidney B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of Jeffrey B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of Sidney B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Jeffrey B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b) Reports on Form 8-K

 

The following reports on Form 8-K were filed during the quarter ended June 30, 2004:

 

 

Dated and furnished April 8, 2004 pursuant to Item 9. Regulation FD Disclosure regarding an investor presentation to be made;

 

Dated and furnished April 26, 2004 pursuant to Item 12.  Results of Operations and Financial Condition regarding financial results for the quarter ended March 31, 2004;

 

Dated April 27, 2004 and furnished April 28, 2004 pursuant to Item 9. Regulation FD Disclosure to announce the sale of $85 million of convertible senior subordinated notes due 2014;

 

Dated and filed May 3, 2004 pursuant to Item 5. Other Events and Regulation FD Disclosure and Item 7. Financial Statements and Exhibits regarding the filing of two lawsuits against us; and

 

Dated and furnished May 4, 2004 pursuant to Item 9. Regulation FD Disclosure regarding the completion of the convertible note offering and the purchase of two Chevrolet stores in Alaska.

 

20



 

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 6, 2004

LITHIA MOTORS, INC.

 

 

 

 

 

 

 

 

By

/s/ JEFFREY B. DEBOER

 

 

 

Jeffrey B. DeBoer

 

 

Senior Vice President and
Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

 

 

 

 

By

/s/ LINDA A. GANIM

 

 

 

Linda A. Ganim

 

 

Vice President and Chief Accounting Officer
(Principal Accounting Officer)

 

21