UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2000 OR
For the transition period from to
Commission file number: 000-21789
LITHIA MOTORS, INC. (Exact name of registrant as specified in its charter)
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 /x/ No / /
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
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
The accompanying notes are an integral part of these consolidated balance sheets.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
The accompanying notes are an integral part of these consolidated statements.
3
LITHIA MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts or as otherwise indicated)
Note 1. Basis of Presentation
The financial information included herein as of June 30, 2000 and December 31, 1999 and for the three and six-month periods ended June 30, 2000 and 1999 is unaudited; however, such information reflects all adjustments consisting only of normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 1999 is derived from Lithia Motors, Inc.'s (the Company's) 1999 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 1999 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Note 2. Inventories
Inventories are valued at cost, using the specific identification method for vehicles and the first-in first-out (FIFO) method of accounting for parts (collectively, the FIFO method). Detail of inventory is as follows:
Note 3. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is as follows:
Note 4. Earnings Per Share
Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS:
5
Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include 692 and 109 shares, respectively, issuable pursuant to stock options, for the three month periods ended June 30, 2000 and 1999, respectively, and 689 and 133 shares, respectively, for the six month periods ended June 30, 2000 and 1999, respectively.
Note 5. Acquisitions
The following acquisitions were made in 2000. In March, Lithia acquired the Bob Rice Ford/Chrysler dealership in Boise, Idaho. The dealership had estimated 1999 revenues of approximately $73,000. In May, Lithia acquired Shumate Honda in Kennewick, Washington with estimated annual revenues of $27,000.
The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations are not materially different from actual results of operations.
Additionally, in April 2000, Lithia added a Daewoo franchise and store in Twin Falls, Idaho. Two shared franchises in Reno, Nevada have now been split, creating two separate stores; Lithia Reno Subaru and Lithia Reno Hyundai.
Note 6. Purchase of Common Stock
In June 2000, Lithia's Board of Directors authorized the repurchase of up to 1,000,000 shares of Lithia's Class A Common Stock. Lithia has purchased shares under this program and will continue to do so from time to time in the future as market conditions warrant.
Note 7. Subsequent Event
In July 2000, Saturn of Eugene, Oregon was acquired with estimated revenues of $5,000.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
This Form 10-Q contains forward-looking statements. These statements are necessarily subject to risk and uncertainty. Actual results could differ materially from those projected in these forward-looking statements. These risk factors include, but are not limited to, the following:
See Exhibit 99 to Lithia's 1999 Form 10-K for a more complete discussion of risk factors.
General
Lithia is a leading operator of automotive franchises and retailer of new and used vehicles and services through a well developed franchise system with its automotive manufacturer partners. As of June 30, 2000, we offer 25 brands of new vehicles, through 103 franchises in 49 locations in the western United States and over the Internet. We currently operate 15 dealerships in California, 14 in Oregon, 4 in Washington, 6 in Colorado, 5 in Nevada and 5 in Idaho. Lithia sells new and used cars and light trucks, sells replacement parts, provides vehicle maintenance, warranty, paint and repair services, and arranges related financing and insurance for its automotive customers.
The following table shows selected condensed financial data expressed as a percentage of total revenues for the periods indicated for the average automotive dealer in the United States.
Source:NADA Industry Analysis Division
7
The following table sets forth selected condensed financial data for the Company, expressed as a percentage of total sales for the periods indicated below.
Results of Operations
Revenues. Revenues increased $110.1 million, or 35.8%, to $417.9 million for the quarter ended June 30, 2000 from $307.8 million for the comparable period of 1999. Revenues increased $281.6 million, or 52.9%, to $813.5 million for the six months ended June 30, 2000 compared to $531.9 million for the comparable period of 1999. Same store retail sales declined 1.2% in the second quarter of 2000 compared to the second quarter of 1999, primarily as a result of decreased sales of Chrysler products nationwide. Same store sales growth was 1.7% in the first six months of 2000 compared to the first six months of 1999, with all business lines showing strong growth. The increases in units sold and revenue from all sources are a result of acquisitions and internal growth.
New Vehicles. New vehicle sales of $222.0 million and $440.0 million, respectively, constituted 53.1% and 54.1%, respectively, of total revenues for the three and six month periods ended June 30, 2000 compared to $167.2 million and $284.1 million, respectively, or 54.3% and 53.4% of total revenues, respectively, in the comparable periods of 1999. The number of units sold and the average selling prices for the three and six month periods ended June 30, 2000 and 1999 were as follows:
Retail Used Vehicles. Retail used vehicle sales of $101.5 million and $199.9 million, respectively, constituted 24.3% and 24.6%, respectively, of total revenues for the three and six month periods ended June 30, 2000 compared to $78.1 million and $133.1 million, respectively, or 25.4% and 25.0% of total revenues, respectively, in the comparable periods of 1999. The number of units sold and the average selling prices for the three and six month periods ended June 30, 2000 and 1999 were as follows:
8
Service, Body and Parts. Lithia derives additional revenue from the sale of parts and accessories, maintenance and repair services and collision repair work. Revenues from these types of services increased 42.1% in the second quarter of 2000 to $40.5 million, or 9.7% of total revenues, from $28.5 million, or 9.3% of total revenues in the second quarter of 1999. Revenues from these types of services increased 52.1% in the first six months of 2000 to $78.9 million, or 9.7% of total revenues, from $51.9 million, or 9.8% of total revenues in the first six months of 1999.
Other Revenues. Other revenues consist primarily of fleet sales and financing and insurance ("F&I") transactions. Other revenues increased 89.7% in the second quarter of 2000 to $36.1 million, or 8.6% of total revenues, from $19.0 million, or 6.2% of total revenues in the second quarter of 1999. Other revenues increased 88.4% in the first six months of 2000 to $58.5 million, or 7.2% of total revenues, from $31.1 million, or 5.8% of total revenues in the first six months of 1999.
Gross Profit. Gross profit increased 37.7% and 54.8%, respectively, during the three and six months ended June 30, 2000 to $67.2 million and $130.0 million, respectively, from $48.8 million and $84.0 million, respectively, during the three and six month periods ended June 30, 1999, primarily due to increased revenues and increased other revenues as a percentage of total revenues as indicated above. Gross profit margins achieved in 2000 and 1999 were as follows:
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expense increased 34.6% and 52.7%, respectively, to $48.5 million and $95.7 million, respectively (11.6% and 11.8% of total revenues, respectively), for the three and six month periods ended June 30, 2000, compared with $36.1 million and $62.7 million, respectively (11.7% and 11.8% of total revenues, respectively), for the three and six month periods ended June 30, 1999. The increase in SG&A was due primarily to increased selling, or variable, expense related to the increase in revenues and the number of total locations.
Depreciation and Amortization. Depreciation and amortization expense increased 38.3% and 47.9%, respectively, to $1.9 million and $3.6 million, respectively (0.5% and 0.4% of total revenues, respectively), for the three and six month periods ended June 30, 2000, compared with $1.4 million and $2.4 million, respectively (0.4% and 0.5% of total revenues, respectively), for the three and six month periods ended June 30, 1999. The increases are primarily a result of increased property and equipment and goodwill related to acquisitions in 1999 and early 2000.
Income from Operations. Income from operations increased to $16.8 million and $30.7 million, respectively (4.0% and 3.8% of total revenues, respectively), for the three and six month periods ended June 30, 2000 compared to $11.4 million and $18.8 million, respectively (3.7% and 3.5% of total revenues, respectively), for the three and six month periods ended June 30, 1999. In addition to gaining efficiencies related to economies of scale, Lithia has seen improvements in the operating margins at stores that it has acquired and operated for a full year, bringing them more in line with its pre-existing stores.
Floorplan Interest Expense. Floorplan interest expense increased 116.2% and 99.9%, respectively, to $4.7 million and $8.6 million, respectively (1.1% and 1.1% of total revenues, respectively), for the three and six month periods ended June 30, 2000, compared with $2.2 million and $4.3 million, respectively (0.7% and 0.8% of total revenues, respectively), for the three and six month periods ended June 30, 1999.
9
The increases are primarily a result of increased flooring notes payable related to increased inventories as a result of the increase in stores owned and vehicles sold, as well as an overall increase in borrowing rates during 2000.
Other Interest Expense. Other interest expense increased 74.8% and 115.9%, respectively, to $1.9 million and $3.7 million, respectively (0.4% and 0.4% of total revenues, respectively), for the three and six month periods ended June 30, 2000, compared with $1.1 million and $1.7 million, respectively (0.3% and 0.3% of total revenues, respectively), for the three and six month periods ended June 30, 1999. The increases are primarily a result of increased average debt balances as a result of borrowings related to acquisitions, as well as an overall increase in borrowing rates during 2000.
Income Tax Expense. Lithia's effective tax rate for the first six months of 2000 was 41.0% compared to 40.5% in the first six months of 1999. The Company's effective tax rate increased as a result of purchases of new dealerships in jurisdictions with higher tax rates.
Net Income. Net income increased 35.3% and 46.7%, respectively, to $6.2 million and $11.2 million, respectively (1.5% and 1.4% of total revenues, respectively), for the three and six month periods ended June 30, 2000, compared with $4.6 million and $7.6 million, respectively (1.5% and 1.4% of total revenues, respectively), for the three and six month periods ended June 30, 1999, primarily as a result of increased revenues as discussed above.
Liquidity and Capital Resources
Lithia's principal needs for capital resources are to finance acquisitions and capital expenditures and for working capital. Lithia has relied primarily upon internally generated cash flows from operations, borrowings under its credit facilities and the proceeds from public equity offerings to finance its operations and expansion.
Ford Motor Credit Company, Toyota Motor Credit Corporation, Chrysler Financial Corporation and General Motors Acceptance Corporation have agreed to floor all of Lithia's new vehicles for their respective brands with Ford Credit serving as the primary lender for all other brands. There are no formal limits to these commitments for new vehicle wholesale financing.
Ford Credit has also extended an $85 million revolving line of credit for used vehicles and a $115 million acquisition line of credit to purchase dealerships of any brand. These commitments have an expiration date of December 1, 2002, with interest due monthly. Lithia also has the option to convert the acquisition line into a five-year term loan. In addition, U.S. Bank N.A. has extended a $10 million revolving line of credit for leased vehicles and a $15 million line of credit for equipment purchases.
The lines with Ford Credit are cross-collateralized and are secured by inventory, accounts receivable, intangible assets and equipment. The other new vehicle lines are secured by new vehicle inventory of the relevant dealerships.
The Ford Credit lines of credit contain financial covenants requiring Lithia to maintain compliance with, among other things, specified ratios of (i) total debt to tangible base capital; (ii) total adjusted debt to tangible base capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net cash. The Ford Credit lines of credit agreements also preclude the payment of cash dividends without the prior consent of Ford Credit. Lithia was in compliance with all such covenants at June 30, 2000.
10
Interest rates on all of the above facilities ranged from 8.14% to 9.29% at June 30, 2000. Amounts outstanding on the lines at June 30, 2000 were as follows (in thousands):
The $9.0 million related party payable at December 31, 1999 was related to additional purchase price for the Moreland acquisition as a result of contingent payouts that were earned during 1999. In addition to the $9.0 million of cash, the Company accrued for the issuance of $4.5 million of its Class A Common Stock and $4.5 million redemption value of its Series M Preferred Stock to satisfy the contingent payout requirements. The cash was paid and the stock was issued in the first quarter of 2000.
At June 30, 2000, Lithia had capital commitments of approximately $7.0 million for the construction of two new dealership facilities, which are anticipated to be completed in the first quarter of 2001. Approximately $1.6 million of the total $7.0 million has already been paid. Lithia anticipates paying for the construction out of existing cash balances until completion of the projects, at which time, Lithia will secure long-term financing for 90% to 100% of the amounts from third party lenders.
Seasonality and Quarterly Fluctuations
Historically, Lithia's sales have been lower in the first and fourth quarters of each year largely due to consumer purchasing patterns during the holiday season, inclement weather and the reduced number of business days during the holiday season. As a result, financial performance may be lower during the first and fourth quarters than during the other quarters of each fiscal year. Management believes that interest rates, levels of consumer debt, consumer buying patterns and confidence, as well as general economic conditions, also contribute to fluctuations in sales and operating results. The timing of acquisitions may cause substantial fluctuations of operating results from quarter to quarter.
Recent Accounting Pronouncements
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. Lithia does not currently have any derivative instruments and, accordingly, does not expect the adoption of SFAS 137 to have an impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarized certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, SAB 101B was issued which defers the implementation date of SAB 101 until October 1, 2000. The Company does not expect that SAB 101 will have a significant impact on its financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Lithia's only financial instruments with market risk exposure are variable rate floor plan notes payable and other credit line borrowings. At June 30, 2000 Lithia had $333.5 million outstanding under such facilities at interest rates ranging from 8.14% to 9.29%. An increase or decrease in the interest rates would affect interest expense for the period accordingly.
11
PART II—OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 18, 2000, at which the following actions were taken:
12
Item 6. Exhibits and Reports on Form 8-K
The exhibits filed as a part of this report are listed below and this list constitutes the exhibit index.
13
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.
14