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 September 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.

 

 

 

LITHIA MOTORS, INC.
FORM 10-Q
INDEX

 

PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets – September 30, 2004 (unaudited) and December 31, 2003
	Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2004 and 2003 (unaudited)
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2004 and 2003 (unaudited)
	Notes to 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 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.	Exhibits
Signatures

 

1

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

 

		September 30, 2004			December 31, 2003
		(Unaudited)
Assets
Current Assets:
Cash and cash equivalents		$	39,129		$	74,408
Contracts in transit		52,014			44,709
Trade receivables, net of allowance for doubtful accounts of $399 and $413		41,099			42,199
Notes receivable, current portion, net of allowance for doubtful accounts of $41 and $49		70			208
Inventories, net		500,273			445,281
Vehicles leased to others, current portion		5,092			5,747
Prepaid expenses and other		5,457			3,392
Assets held for sale		12,163			20,408
Deferred income taxes		1,734			585
Total Current Assets		657,031			636,937
Land and buildings, net of accumulated depreciation of $7,315 and $5,683		208,246			164,676
Equipment and other, net of accumulated depreciation of $23,943 and $18,315		70,382			62,637
Goodwill		238,611			207,027
Other intangible assets, net of accumulated amortization of $57 and $39		42,183			28,946
Other non-current assets		4,315			2,559
Total Assets		$	1,220,768		$	1,102,782
Liabilities and Stockholders' Equity
Current Liabilities:
Flooring notes payable		$	410,116		$	378,961
Current maturities of long-term debt		5,999			14,299
Trade payables		27,623			24,402
Accrued liabilities		55,954			46,164
Liabilities held for sale		3,431			13,045
Total Current Liabilities		503,123			476,871
Used vehicle flooring facility		17,000			56,267
Real estate debt, less current maturities		124,775			80,159
Other long-term debt, less current maturities		136,522			98,308
Deferred revenue		752			875
Other long-term liabilities		11,721			7,235
Deferred income taxes		31,987			24,141
Total Liabilities		825,880			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 15,055 and 14,693		213,765			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		1,588			1,231
Accumulated other comprehensive income (loss)		(108		)	(1,468		)
Retained earnings		179,175			150,508
Total Stockholders' Equity		394,888			358,926
Total Liabilities and Stockholders' Equity		$	1,220,768		$	1,102,782

 

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

 

2

 

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)

 

		Three months ended September 30,						Nine months ended September 30,
		2004			2003			2004			2003
Revenues:
New vehicle sales		$	451,005		$	411,358		$	1,204,823		$	1,083,697
Used vehicle sales		198,534			196,280			572,626			559,468
Service, body and parts		74,617			67,849			215,796			185,366
Finance and insurance		28,029			25,071			76,158			67,959
Fleet and other		3,708			882			6,606			4,822
Total revenues		755,893			701,440			2,076,009			1,901,312
Cost of sales		631,327			588,636			1,729,270			1,598,282
Gross profit		124,566			112,804			346,739			303,030
Selling, general and administrative		90,362			83,904			264,114			237,718
Depreciation - buildings		734			543			2,053			1,483
Depreciation and amortization - other		2,520			1,961			7,244			5,406
Income from continuing operations		30,950			26,396			73,328			58,423
Other income (expense)
Floorplan interest expense		(4,498		)	(3,324		)	(12,237		)	(10,542		)
Other interest expense		(2,464		)	(1,496		)	(6,361		)	(4,448		)
Other expense, net		(502		)	(243		)	(1,199		)	(645		)
		(7,464		)	(5,063		)	(19,797		)	(15,635		)
Income from continuing operations before income taxes		23,486			21,333			53,531			42,788
Income taxes		9,159			8,491			20,877			17,030
Income before discontinued operations		14,327			12,842			32,654			25,758
Income (loss) from discontinued operations, net of income tax expense (benefit) of $91, $26, $86 and $(128)		143			39			135			(193		)
Net income		$	14,470		$	12,881		$	32,789		$	25,565
Basic income per share from continuing operations		$	0.76		$	0.70		$	1.74		$	1.41
Basic income (loss) per share from discontinued operations		0.01			0.00			0.01			(0.01		)
Basic net income per share		$	0.77		$	0.70		$	1.75		$	1.40
Shares used in basic per share calculations		18,818			18,338			18,730			18,234
Diluted income per share from continuing operations		$	0.75		$	0.69		$	1.71		$	1.40
Diluted income (loss) per share from discontinued operations		0.01			0.00			0.00			(0.01		)
Diluted net income per share		$	0.76		$	0.69		$	1.71		$	1.39
Shares used in diluted per share calculations		19,121			18,708			19,127			18,430

 

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

 

3

 

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

 

		Nine months ended September 30,
		2004			2003
Cash flows from operating activities:
Net income		$	32,789		$	25,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,297			6,889
Depreciation and amortization from discontinued operations		—			517
Compensation expense related to stock option issuances		192			144
(Gain) loss on sale of assets		984			(656		)
Loss on sale of vehicles leased to others		109			136
Gain on sale of franchise		(914		)	(275		)
Deferred income taxes		6,029			4,288
Equity in (income) loss of affiliate		—			13
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net		1,394			(2,194		)
Contracts in transit		(7,305		)	(1,139		)
Inventories		(770		)	37,538
Prepaid expenses and other		(968		)	2,244
Other noncurrent assets		171			380
Increase (decrease), net of effect of acquisitions:
Flooring notes payable		(13,817		)	(17,470		)
Trade payables		3,080			4,306
Accrued liabilities		10,655			17,406
Other long-term liabilities and deferred revenue		4,147			(2,578		)
Net cash provided by operating activities		45,073			75,114
Cash flows from investing activities:
Notes receivable issued		(16		)	(58		)
Principal payments received on notes receivable		775			371
Capital expenditures:
Non-financeable		(7,807		)	(3,712		)
Financeable		(31,640		)	(18,598		)
Proceeds from sale of assets		870			441
Expenditures for vehicles leased to others		(5,607		)	(4,626		)
Proceeds from sale of vehicles leased to others		1,425			832
Cash paid for acquisitions, net of cash acquired		(62,662		)	(48,256		)
Cash from sale of franchises		2,226			252
Distribution from affiliate		—			33
Net cash used in investing activities		(102,436		)	(73,321		)
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit		(94,018		)	25,842
Principal payments on long-term debt and capital leases		(11,805		)	(2,983		)
Proceeds from issuance of long-term debt		129,069			7,688
Debt issuance costs		(2,550		)	—
Repurchase of common stock		(13		)	(215		)
Proceeds from issuance of common stock		5,523			3,457
Dividends paid		(4,122		)	(1,283		)
Net cash provided by financing activities		22,084			32,506
Increase (decrease) in cash and cash equivalents		(35,279		)	34,299
Cash and cash equivalents:
Beginning of period		74,408			15,932
End of period		$	39,129		$	50,231
Supplemental Cash Flow Information:
Cash paid for income taxes		$	14,035		$	3,966
Cash paid for interest		17,854			15,391
Supplemental Schedule of Non-Cash Transactions:
Debt issued in connection with acquisitions		$	12,000		$	—
Flooring debt assumed in connection with acquisitions		41,050			30,474
Assets acquired through real estate exchange		—			1,987

 

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

 

4

 

LITHIA MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

Note 1. Basis of Presentation

The financial information included herein as of September 30, 2004 and for the three and nine-month periods ended September 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):

 

		September 30, 2004			December 31, 2003
New and program vehicles		$	389,685		$	355,937
Used vehicles		87,385			68,747
Parts and accessories		23,203			20,597
		$	500,273		$	445,281

 

Note 3. Earnings Per Share

Following is a reconciliation of the shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands).

 

		Three Months Ended September 30,				Nine Months Ended September 30,
		2004		2003		2004		2003
Shares used for basic EPS		18,818		18,338		18,730		18,234
Dilutive effect of stock options calculated using the treasury stock method		303		370		397		196
Shares used for diluted EPS		19,121		18,708		19,127		18,430
Potential common shares excluded from diluted EPS since their effect would be antidilutive:
Stock options		327		20		327		609

 

Also excluded from the three and nine month periods ended September 30, 2004 are 2,255,314 shares of Class A common stock issuable upon conversion of our outstanding convertible debt.  See Note 10.  However, in October 2004, the Financial Accounting Standards Board (“FASB”) ratified a consensus position of the Emerging Issues Task Force, EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share,” which will require the inclusion of the 2,255,314 shares in our diluted per share calculations in the future and the restatement of any prior period in which the contingently convertible debt was outstanding.  This new rule becomes effective for reporting periods ending on or after December 15, 2004. See also Note 13. New Accounting Pronouncements.

 

5

 

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 September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net income		$	14,470		$	12,881		$	32,789		$	25,565
Unrealized gain (loss) on investments, net, subsequently realized		—			14			—			8
Cash flow hedges:
Net derivative gains (losses), net of tax effect of $1,466, $(189), $379 and $809, respectively		(2,292		)	412			(641		)	(1,103		)
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 $(411), $(393), $(1,280) and $(1,086), respectively		642			594			2,001			1,642
Total comprehensive income		$	12,820		$	13,901		$	34,149		$	26,112

 

Note 5.  Acquisitions

The following acquisitions were made in the first nine months of 2004.  For information on the acquisition made in October 2004, see Note 15. 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.

•                  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.

•                  In September 2004, we acquired a Chrysler Dodge Jeep and a Honda store in Great Falls, Montana, which have anticipated combined annual revenue of approximately $40 million.  The stores have been renamed Lithia Chrysler Dodge Jeep of Great Falls and Honda of Great Falls, respectively.

 

The above acquisitions were accounted for under the purchase method of accounting.  Pro forma results of operations assuming the above acquisitions occurred as of January 1, 2003 are as follows (in thousands, except per share amounts):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Total revenues		$	764,151		$	778,067		$	2,126,112		$	2,091,103
Net income		14,710			15,256			33,110			29,567
Basic earnings per share		0.78			0.83			1.77			1.62
Diluted earnings per share		0.77			0.82			1.73			1.60

 

6

 

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.

 

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

 

Inventories		$	47,215
Other current assets		385
Property and equipment		24,151
Goodwill		31,865
Other intangible assets – franchise value		13,105
Total assets acquired		116,721
Flooring notes payable		41,050
Other current liabilities		489
Other non-current liabilities		288
Total liabilities acquired		41,827
Net assets acquired		$	74,894

 

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.  In addition, a cash dividend at the rate of $0.08 per common share, which totaled approximately $1.5 million, was paid on August 16, 2004 to shareholders of record on August 2, 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 with expiration on January 31, 2005.  At September 30, 2004, we had $50.0 million outstanding on this line of credit.

 

Note 8.  DaimlerChrysler and Toyota Motor Credit 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.

 

At September 30, 2004, we had $17.0 million outstanding on this credit agreement.

 

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 1^st and 16^th 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 1^st and 16^th of each month.

 

At September 30, 2004, we had a total of $175.0 million of interest rate swaps outstanding, which are accounted for as cash flow hedges. The fair value of our interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements.  These amounts are recorded as deferred gains or losses in our consolidated balance sheet with the offset recorded in

 

7

 

accumulated other comprehensive income, net of tax.  The amount of deferred gains and (losses) at September 30, 2004 were $1.1 million and $(1.2) million, respectively.  Because the critical terms of the interest rate swaps and the underlying debt obligations are the same, there was no ineffectiveness recorded in interest expense.

 

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;

•                  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. The registration statement was declared effective by the Securities and Exchange Commission in October 2004.

 

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.  Repurchase of Class A Common Stock

On September 14, 2004, we repurchased 600 shares of our Class A common stock at a price of $21.00 per share, for a total purchase price of $12,600.

 

8

 

 

Note 13.  New Accounting Pronouncements

In October 2004, the FASB ratified EITF 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share.”  Upon final approval of EITF 04-8, we will be required to include 2,255,314 shares of common stock issuable upon conversion of our outstanding convertible debt in our diluted earnings per share calculations.  The new accounting rules become effective for periods ending on or after December 15, 2004 and diluted EPS in prior periods in which the convertible debt was outstanding will be restated.  Diluted EPS would have been $0.70 per share and $1.65 per share, respectively, in the three and nine month periods ended September 30, 2004 had the new rules been in effect as of September 30, 2004.  Adoption of this accounting statement change will not affect our net income, cash flows or basic earnings per share.

 

Note 14.  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 September 30,		2004			2003
Net income, as reported		$	14,470		$	12,881
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects		25			25
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(625		)	(547		)
Net income, pro forma		$	13,870		$	12,359
Basic net income per share:
As reported		$	0.77		$	0.70
Pro forma		$	0.74		$	0.67
Diluted net income per share:
As reported		$	0.76		$	0.69
Pro forma		$	0.73		$	0.67

 

Nine Months Ended September 30,		2004			2003
Net income, as reported		$	32,789		$	25,565
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects		75			74
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects		(1,809		)	(1,604		)
Net income, pro forma		$	31,055		$	24,035
Basic net income per share:
As reported		$	1.75		$	1.40
Pro forma		$	1.66		$	1.32
Diluted net income per share:
As reported		$	1.71		$	1.39
Pro forma		$	1.64		$	1.32

 

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 Nine Months Ended September 30,		2004		2003
Risk-free interest rate		0.93 - 3.25	%	2.5 - 3.0	%
Expected dividend yield		1.04 - 1.42	%	0 - 1.7	%
Expected lives - 2001 Plan		5.4 years		7.7 - 8 years
- Purchase Plan		3 months		3 months
Expected volatility		28.11 - 43.32	%	45.63 - 46.79	%

 

9

 

Note 15.  Subsequent Events

 

Acquisition

The following acquisitions were made subsequent to September 30, 2004:

•                  In October 2004, we acquired a Chrysler and a Jeep franchise in Santa Rosa, California, with anticipated annual revenue of approximately $10 million.  These franchises have been combined with our existing Dodge store in Santa Rosa.  The store is now named Lithia Chrysler Dodge Jeep of Santa Rosa.

•                  In October 2004, we acquired a BMW store in Anchorage, Alaska, which has anticipated annual revenue of approximately $15 million.  The store is now named BMW of Anchorage.

•                  In November 2004, we acquired a Chrysler Jeep Dodge franchise in Santa Fe, New Mexico, with anticipated annual revenue of approximately $30 million.  The store is now named Lithia Chrysler Jeep Dodge of Santa Fe.

 

Dividend

In October 2004, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.08 per share for the third quarter of 2004.  The dividend, which will total approximately $1.5 million, will be paid on November 15, 2004 to shareholders of record on November 1, 2004.

 

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

 

Forward-Looking Statements

 

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

 

General

 

We are a leading operator of automotive franchises and retailer of new and used vehicles and services.  As of November 5, 2004, we offered 25 brands of new vehicles through 161 franchises in 85 stores in the Western United States and over the Internet.  As of November 5, 2004, we operated 16 stores in Oregon, 11 in California, 11 in Washington, 9 in Texas, 7 in Idaho, 7 in Colorado, 7 in Alaska, 6 in Nevada, 5 in Montana, 2 in South Dakota, 2 in Nebraska, 1 in Oklahoma and 1 in New Mexico. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, protection products and credit insurance for our automotive customers.

 

Historically, new vehicle sales have accounted for over half of our total revenues but less than one-third of total gross profit.  We utilize a volume-based strategy for new vehicle sales that was 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.

 

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For the remainder 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.

 

Since the beginning of 2002, the used vehicle market has been negatively impacted by strong competition from the new vehicle market, with heavy manufacturer incentives in the form of cash rebates and low interest financing.  This trend continued in the first three quarters of 2004, and is expected 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 individual 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.

 

Results of Continuing Operations

 

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

 

Three Months Ended September 30, 2004		Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles		59.7	%	7.9	%	28.6	%
Retail used vehicles(1)		22.0		14.1		18.8
Service, body and parts		9.9		48.5		29.1
Finance and insurance(2)		3.7		99.8		22.5
Fleet and other.		0.5		7.4		0.2

 

Three Months Ended September 30, 2003		Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles		58.6	%	7.6	%	27.8	%
Retail used vehicles(1)		23.5		14.6		21.4
Service, body and parts		9.7		47.2		28.4
Finance and insurance(2)		3.6		99.9		22.2
Fleet and other.		0.1		17.0		0.1

 

Nine Months Ended September 30, 2004		Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles		58.0	%	7.8	%	27.3	%
Retail used vehicles(1)		23.0		14.3		19.6
Service, body and parts		10.4		48.2		30.0
Finance and insurance(2)		3.7		99.6		21.9
Fleet and other.		0.3		13.5		0.3

 

Nine Months Ended September 30, 2003		Percent of Total Revenues		Gross Margin		Percent of Total Gross Profit
New vehicles		57.0	%	7.6	%	27.3	%
Retail used vehicles(1)		24.5		13.9		21.2
Service, body and parts		9.7		47.2		28.9
Finance and insurance(2)		3.6		99.7		22.4
Fleet and other..		0.3		17.3		0.3

 

(1)        Excludes wholesale used vehicle sales, representing 4.2%, 4.5%, 4.6% and 4.9% of total revenues, respectively, and a gross margin contribution of 0.8%, 0.1%, 0.9% and (0.1)%, respectively, for the three and nine month periods ended September 30, 2004 and 2003.

(2)        Reported net of estimated cancellations.

 

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

 

		Three Months Ended September 30,				Nine Months Ended September 30,
Lithia Motors, Inc. (1)		2004		2003		2004		2003
Revenues:
New vehicles		59.7	%	58.6	%	58.0	%	57.0	%
Used vehicles		26.2		28.0		27.6		29.4
Service, body and parts		9.9		9.7		10.4		9.7
Finance and insurance		3.7		3.6		3.7		3.6
Fleet and other		0.5		0.1		0.3		0.3
Total revenues		100.0	%	100.0	%	100.0	%	100.0	%
Gross profit		16.5		16.1		16.7		15.9
Selling, general and administrative expenses		12.0		12.0		12.7		12.5
Depreciation and amortization		0.4		0.4		0.4		0.4
Income from operations		4.1		3.8		3.5		3.1
Floorplan interest expense		0.6		0.5		0.6		0.6
Other interest expense		0.3		0.2		0.3		0.2
Other expense, net		0.1		—		0.1		—
Income from continuing operations before taxes		3.1		3.0		2.6		2.3
Income tax expense		1.2		1.2		1.0		0.9
Income from continuing operations		1.9	%	1.8	%	1.6	%	1.4	%

 

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

 

The following tables set forth the changes in our operating results from continuing operations in the three and nine-month periods ended September 30, 2004 compared to the three and nine month periods ended September 30, 2003 (dollars in thousands):

 

		Three Months Ended September 30,						Increase (Decrease)			% Increase (Decrease)
		2004			2003
Revenues:
New vehicle sales		$	451,005		$	411,358		$	39,647		9.6	%
Used vehicle sales		198,534			196,280			2,254			1.1
Service, body and parts		74,617			67,849			6,768			10.0
Finance and insurance		28,029			25,071			2,958			11.8
Fleet and other		3,708			882			2,826			320.4
Total revenues		755,893			701,440			54,453			7.8
Cost of sales		631,327			588,636			42,691			7.3
Gross profit		124,566			112,804			11,762			10.4
Selling, general and administrative		90,362			83,904			6,458			7.7
Depreciation and amortization		3,254			2,504			750			30.0
Income from operations		30,950			26,396			4,554			17.3
Floorplan interest expense		(4,498		)	(3,324		)	1,174			35.3
Other interest expense		(2,464		)	(1,496		)	968			64.7
Other, net		(502		)	(243		)	259			106.6
Income from continuing operations before taxes		23,486			21,333			2,153			10.1
Income tax expense		9,159			8,491			668			7.9
Income from continuing operations		$	14,327		$	12,842		$	1,485		11.6	%
New units sold		16,012			15,358			654			4.3	%
Average selling price per new vehicle		$	28,167		$	26,785		$	1,382		5.2
Used units sold - retail		10,845			11,492			(647		)	(5.6	)
Average selling price per retail used vehicle		$	15,330		$	14,361		$	969		6.7
Used units sold – wholesale		6,154			6,980			(826		)	(11.8	)
Average selling price per wholesale used vehicle		$	5,246		$	4,477		$	769		17.2
Finance and insurance income per retail unit		$	1,044		$	934		$	110		11.8	%

 

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