lad20130717_10q.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q

 


(Mark One)

 

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

For the quarterly period ended June 30, 2013

OR

[ ] 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.)

 

 

150 N. Bartlett Street, Medford, Oregon 

97501 

 

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: 541-776-6401 

 


 

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if a smaller reporting company)     Smaller reporting company [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

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 

23,283,345 

Class B common stock without par value 

2,562,231 

(Class)

(Outstanding at July 26, 2013)



 

 

 
 

 

 

LITHIA MOTORS, INC.

FORM 10-Q

INDEX 

 

PART I - FINANCIAL INFORMATION 

Page 

     

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets (Unaudited) – June 30, 2013 and December 31, 2012

2

     
 

Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended June 30, 2013 and 2012

 3

     
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2013 and 2012

 4

     
 

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2013 and 2012

5

     
 

Condensed Notes to Consolidated Financial Statements (Unaudited)

6

     

Item 2.

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

 18

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

     

Item 4.

Controls and Procedures

35

     

PART II - OTHER INFORMATION 

 
     

Item 1.

Legal Proceedings

36

     

Item 1A.

Risk Factors

36

     

Item 6.

Exhibits

38

     

Signatures

39

 

 

 
1

 

 

 LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)

 

   

June 30,

   

December 31,

 
   

2013

   

2012

 

Assets

               

Current Assets:

               

Cash and cash equivalents

  $ 20,257     $ 42,839  

Accounts receivable, net of allowance for doubtful accounts of $152 and $336

    143,833       133,149  

Inventories, net

    783,840       723,326  

Deferred income taxes

    2,824       3,832  

Other current assets

    9,856       17,484  

Assets held for sale

    10,733       12,579  

Total Current Assets

    971,343       933,209  
                 

Property and equipment, net of accumulated depreciation of $100,638 and $97,883

    443,516       425,086  

Goodwill

    40,313       32,047  

Franchise value

    66,465       62,429  

Deferred income taxes

    22,190       17,123  

Other non-current assets

    28,689       22,808  

Total Assets

  $ 1,572,516     $ 1,492,702  
                 
                 

Liabilities and Stockholders' Equity

               

Current Liabilities:

               

Floor plan notes payable

  $ 16,912     $ 13,454  

Floor plan notes payable: non-trade

    570,025       568,130  

Current maturities of long-term debt

    6,951       8,182  

Trade payables

    44,121       41,589  

Accrued liabilities

    90,290       81,602  

Liabilities related to assets held for sale

    6,378       8,347  

Total Current Liabilities

    734,677       721,304  
                 

Long-term debt, less current maturities

    294,073       286,876  

Deferred revenue

    38,557       33,589  

Other long-term liabilities

    29,058       22,832  

Total Liabilities

    1,096,365       1,064,601  
                 

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 23,262 and 22,916

    265,599       268,801  

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 2,562 and 2,762

    319       343  

Additional paid-in capital

    18,577       12,399  

Accumulated other comprehensive loss

    (1,771 )     (2,615 )

Retained earnings

    193,427       149,173  

Total Stockholders' Equity

    476,151       428,101  

Total Liabilities and Stockholders' Equity

  $ 1,572,516     $ 1,492,702  

 

See accompanying notes to consolidated financial statements.

 

 
2

 

 

 LITHIA MOTORS, INC. AND SUBSIDIARIES
 Consolidated Statements of Operations
(In thousands, except  per share amounts)
(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Revenues:

                               

New vehicle

  $ 569,487     $ 455,939     $ 1,062,928     $ 848,885  

Used vehicle retail

    258,465       207,341       497,693       397,960  

Used vehicle wholesale

    37,691       35,106       77,197       68,463  

Finance and insurance

    34,218       27,184       65,881       52,060  

Service, body and parts

    94,462       85,456       184,902       169,000  

Fleet and other

    14,182       11,316       22,984       24,220  

Total revenues

    1,008,505       822,342       1,911,585       1,560,588  

Cost of sales:

                               

New vehicle

    530,699       422,373       989,493       785,067  

Used vehicle retail

    219,572       176,350       423,827       338,692  

Used vehicle wholesale

    36,996       34,810       75,528       67,770  

Service, body and parts

    47,769       43,782       94,430       87,191  

Fleet and other

    13,636       10,931       22,036       23,438  

Total cost of sales

    848,672       688,246       1,605,314       1,302,158  

Gross profit

    159,833       134,096       306,271       258,430  

Asset impairments

    -       -       -       115  

Selling, general and administrative

    109,283       92,990       210,414       181,429  

Depreciation and amortization

    4,899       4,198       9,620       8,336  

Operating income

    45,651       36,908       86,237       68,550  

Floor plan interest expense

    (3,036 )     (3,054 )     (6,485 )     (5,956 )

Other interest expense

    (1,941 )     (2,530 )     (4,302 )     (5,257 )

Other income, net

    584       819       1,385       1,317  

Income from continuing operations before income taxes

    41,258       32,143       76,835       58,654  

Income tax provision

    (15,977 )     (12,138 )     (29,672 )     (22,015 )

Income from continuing operations, net of income tax

    25,281       20,005       47,163       36,639  

Income from discontinued operations, net of income tax

    274       486       447       648  

Net income

  $ 25,555     $ 20,491     $ 47,610     $ 37,287  
                                 

Basic income per share from continuing operations

  $ 0.98     $ 0.78     $ 1.83     $ 1.42  

Basic income per share from discontinued operations

    0.01       0.02       0.02       0.02  

Basic net income per share

  $ 0.99     $ 0.80     $ 1.85     $ 1.44  
                                 

Shares used in basic per share calculations

    25,782       25,730       25,730       25,860  
                                 

Diluted income per share from continuing operations

  $ 0.97     $ 0.76     $ 1.81     $ 1.39  

Diluted income per share from discontinued operations

    0.01       0.02       0.01       0.03  

Diluted net income per share

  $ 0.98     $ 0.78     $ 1.82     $ 1.42  
                                 

Shares used in diluted per share calculations

    26,134       26,185       26,120       26,331  

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES
 Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2013

   

2012

   

2013

   

2012

 

Net income

  $ 25,555     $ 20,491     $ 47,610     $ 37,287  

Other comprehensive income, net of tax:

                               

Gain on cash flow hedges, net of tax expense of $209, $225, $524, and $490, respectively

    338       364       844       790  

Comprehensive income

  $ 25,893     $ 20,855     $ 48,454     $ 38,077  

 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

 

   

Six Months Ended June 30,

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net income

  $ 47,610     $ 37,287  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Asset impairments

    -       115  

Depreciation and amortization

    9,620       8,336  

Depreciation and amortization within discontinued operations

    -       124  

Stock-based compensation

    2,603       1,512  

(Gain) loss on disposal of other assets

    33       (983 )

Deferred income taxes

    825       302  

Excess tax benefit from share-based payment arrangements

    (5,408 )     (1,026 )

(Increase) decrease (net of acquisitions and dispositions):

               

Trade receivables, net

    (10,684 )     (18,305 )

Inventories

    (48,899 )     (109,592 )

Other current assets

    5,980       4,680  

Other non-current assets

    (3,394 )     (1,847 )

Increase (decrease) (net of acquisitions and dispositions):

               

Floor plan notes payable

    3,384       (94,305 )

Trade payables

    2,078       7,289  

Accrued liabilities

    8,812       7,670  

Other long-term liabilities and deferred revenue

    11,889       6,700  

Net cash provided by (used in) operating activities

    24,449       (152,043 )
                 

Cash flows from investing activities:

               

Principal payments received on notes receivable

    61       50  

Capital expenditures

    (22,107 )     (22,693 )

Proceeds from sales of assets

    420       4,940  

Payments for life insurance policies

    (2,566 )     (1,934 )

Cash paid for acquisitions

    (31,786 )     (12,782 )

Proceeds from sales of stores

    -       2,901  

Net cash used in investing activities

    (55,978 )     (29,518 )
                 

Cash flows from financing activities:

               

Borrowings on floor plan notes payable: non-trade

    5,989       251,844  

Borrowings on lines of credit

    358,000       177,623  

Repayments on lines of credit

    (327,318 )     (212,623 )

Principal payments on long-term debt, scheduled

    (3,667 )     (4,000 )

Principal payments on long-term debt and capital leases, other

    (25,770 )     (32,049 )

Proceeds from issuance of long-term debt

    4,721       14,169  

Proceeds from issuance of common stock

    2,843       2,671  

Repurchase of common stock

    (7,903 )     (20,606 )

Excess tax benefit from share-based payment arrangements

    5,408       1,026  

Dividends paid

    (3,356 )     (4,398 )

Change in restricted cash

    -       3,300  

Net cash provided by financing activities

    8,947       176,957  
                 

Decrease in cash and cash equivalents

    (22,582 )     (4,604 )
                 

Cash and cash equivalents at beginning of period

    42,839       20,851  

Cash and cash equivalents at end of period

  $ 20,257     $ 16,247  
                 
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for interest

  $ 10,989     $ 11,690  

Cash paid during the period for income taxes, net

    16,111       14,217  
                 

Supplemental schedule of non-cash activities:

               

Floor plan debt paid in connection with store disposals

    -       6,712  

Acquisition of assets with capital leases

    -       2,470  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Interim Financial Statements

 

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of June 30, 2013 and for the three- and six-month periods ended June 30, 2013 and 2012. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2012 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2012 is derived from our 2012 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 2012 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.

 

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.

 

These reclassifications had no impact on previously reported net income.

 

Note 2. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

 

   

June 30,
2013

   

December 31,

2012

 

Contracts in transit

  $ 72,315     $ 65,597  

Trade receivables

    28,839       25,885  

Vehicle receivables

    21,895       21,298  

Manufacturer receivables

    26,411       25,658  
      149,460       138,438  

Less: Allowance

    (152 )     (336 )

Less: Long-term portion of accounts receivable, net

    (5,475 )     (4,953 )

Total accounts receivable, net

  $ 143,833     $ 133,149  

 

The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.

 

Note 3. Inventories

The components of inventory consisted of the following (in thousands):

 

   

June 30,
2013

   

December 31,

2012

 

New vehicles

  $ 597,740     $ 563,275  

Used vehicles

    153,944       130,529  

Parts and accessories

    32,156       29,522  

Total inventories

  $ 783,840     $ 723,326  

 

 

 
6

 

 

Note 4. Goodwill

The changes in the carrying amounts of goodwill are as follows (in thousands):

 

   

Goodwill

 

Balance as of December, 31, 2011, gross

  $ 318,224  

Accumulated impairment loss

    (299,266 )

Balance as of December 31, 2011, net

    18,958  

Additions through acquisitions

    13,710  

Goodwill allocated to dispositions

    (621 )

Balance as of December 31, 2012, net

    32,047  

Additions through acquisitions

    8,266  

Balance as of June 30, 2013, net

  $ 40,313  

 

Note 5. Commitments and Contingencies

 

Litigation

We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.

 

Alaska Consumer Protection Act Claims

In December 2006, a suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-13341 CI), and in April, 2007, a second case (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) was filed against us, in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. These suits were subsequently consolidated. In the suits, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan. The suit sought statutory damages of $500 for each violation or three times plaintiff’s actual damages, whichever was greater, and attorney fees and costs.

 

In June 2013 the parties agreed to mediate the claims without pre-conditions.  The mediation resulted in a settlement agreement with the plaintiffs under which we estimate we will pay $3.8 million to settle all claims against us and to pay plaintiffs’ legal fees. The estimated payment assumes a participation rate by eligible class members based on historically experienced claim rates. An increased claim rate would result in additional payments. The estimated settlement amount was recorded as a component of selling, general and administrative expense in our Consolidated Statements of Operations and, as of June 30, 2013, was included as components of accrued liabilities and other long term liabilities in our Consolidated Balance Sheets. The settlement is subject to court approval and we cannot assure that the court will approve the settlement.

 

 

 
7

 

 

 

Note 6. Stockholders’ Equity

 

Reclassification From Accumulated Other Comprehensive Loss

The reclassification from accumulated other comprehensive loss was as follows (in thousands):

 

   

Three Months Ended
June 30, 2013

   

Six Months Ended
June 30, 2013

 

Affected Line Item in the Consolidated Statements of Operations

Loss on cash flow hedges

  $ (166 )   $ (472 )

Floor plan interest expense

Taxes

    64       181  

Income tax provision

Loss on cash flow hedges, net

  $ (102 )   $ (291 )  

 

See Note 9 for more details regarding our derivative contracts.

 

Share Repurchases

In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. In the six months ended June 30, 2013, we repurchased 127,900 shares at an average price of $40.76 per share, for a total of $5.2 million. Through June 30, 2013, we have repurchased 1,273,047 shares and 1,726,953 shares remained available for repurchase. This authority to repurchase shares does not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.

 

In addition, 59,721 shares subject to equity awards were repurchased during the first six months of 2013 at an average price of $45.04, for a total of $2.7 million, related to tax withholdings associated with the exercise of stock options or the vesting of restricted stock units.

 

Dividends

We declared and paid dividends on our Class A and Class B common stock during the second quarter of 2013, which related to our first quarter 2013 financial results, of $0.13 per share, for a total of $3.4 million. 

 

See Note 13 for a discussion of a dividend related to our second quarter 2013 financial results.

 

Note 7. Deferred Compensation and Long-term Incentive Plan

We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. We may make discretionary contributions to the LTIP. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement.

 

In March 2013, we made a discretionary contribution of $2.0 million to the LTIP. Participants will receive a guaranteed return of 5.25% in 2013. We recognized compensation expense related to the LTIP of $0.4 million and $0.7 million, respectively, for the three and six months ended June 30, 2013 and $0.3 million and $0.6 million, respectively, for the three and six months ended June 30, 2012. As of June 30, 2013 and December 31, 2012, the balance due to participants was $5.2 million and $3.6 million, respectively, and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.

 

 

 
8

 

 

 

Note 8. Fair Value Measurements

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

 

 

Level 1 – quoted prices in active markets for identical securities;

 

 

Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads and credit risk; and

 

 

Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

 

The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.

 

We use the income approach to determine the fair value of our interest rate swaps using observable Level 2 market expectations at each measurement date and an income approach to convert estimated future cash flows to a single present value amount (discounted) assuming that participants are motivated, but not compelled, to transact. Level 2 inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term borrowings, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future reset rates to discount those future cash flows to present value at the measurement date.

 

Inputs are collected from Bloomberg on the last market day of the period. The same method is used to determine the rate used to discount the future cash flows. The valuation of the interest rate swaps also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.

 

There were no changes to our valuation techniques during the six-month period ended June 30, 2013.

 

Assets and Liabilities Measured at Fair Value

Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):

Fair Value at June 30, 2013 

 

Level 1 

   

Level 2 

   

Level 3 

 

Measured on a recurring basis:

                       

Derivative contracts, net

  $ -     $ (3,356 )   $ -  

 

Fair Value at December 31, 2012 

 

Level 1 

   

Level 2 

   

Level 3 

 

Measured on a recurring basis:

                       

Derivative contracts, net

  $ -     $ (4,679 )   $ -  

 

See Note 9 for more details regarding our derivative contracts.

 

Fair Value Disclosures for Financial Assets and Liabilities

We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the short term nature and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.

 

 
9

 

 

 

We have fixed rate debt and calculate the estimated fair value of our fixed rate debt using a discounted cash flow method. Using estimated current interest rates based on a similar risk profile and duration (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt. As of June 30, 2013, this debt had maturity dates between November 2016 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

 

   

June 30,
2013

   

December 31, 2012

 

Carrying value

  $ 135,261     $ 130,469  

Fair value

    135,137       134,688  

 

Note 9. Derivative Financial Instruments

We enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.

 

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income immediately. The estimated amount that we expect to reclassify from accumulated other comprehensive loss to net income within the next twelve months is $1.1 million at June 30, 2013.

 

As of June 30, 2013, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At June 30, 2013, the one-month LIBOR rate was 0.20% per annum, as reported in the Wall Street Journal.

 

At June 30, 2013 and December 31, 2012, the fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows (in thousands):

 

Balance Sheet Information

 

Fair Value of Liability Derivatives

 

Derivatives Designated as Hedging Instruments

 

Location in Balance Sheet

 

June 30,

2013 

 
             

Interest Rate Swap Contracts

 

Accrued liabilities

  $ 1,211  
   

Other long-term liabilities

    2,145  
        $ 3,356  

 

Balance Sheet Information

  Fair Value of Liability Derivatives  

Derivatives Designated as Hedging Instruments

 

Location in Balance Sheet

 

December 31,

2012

 
             

Interest Rate Swap Contracts

 

Accrued liabilities

  $ 1,839  
   

Other long-term liabilities

    2,840  
        $ 4,679  

 

 
10

 

 

 

The effect of derivative instruments on our Consolidated Statements of Operations for the three- and six-month periods ended June 30, 2013 and 2012 was as follows (in thousands):

 

Derivatives in Cash Flow Hedging Relationships 

 

Amount of Gain Recognized in Accumulated OCI (Effective Portion) 

 

Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) 

 

Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)  

 

Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 

Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 
                             

Three Months Ended

June 30, 2013 

                           

Interest Rate Swap Contracts

  $ 381  

Floor plan

interest expense

  $ (166 )

Floor plan

interest expense

  $ (296 )
                             

Three Months Ended

June 30, 2012 

                           

Interest Rate Swap Contracts

  $ 239  

Floor plan

interest expense

  $ (350 )

Floor plan

interest expense

  $ (730 )

 

 

Derivatives in Cash Flow Hedging Relationships 

 

Amount of Gain Recognized in Accumulated OCI (Effective Portion) 

 

Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) 

 

Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)  

 

Location of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 

Amount of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)

 
                             

Six Months Ended

June 30, 2013 

                           

Interest Rate Swap Contracts

  $ 896  

Floor plan

interest expense

  $ (472 )

Floor plan

interest expense

  $ (890 )
                             

Six Months Ended

June 30, 2012 

                           

Interest Rate Swap Contracts

  $ 522  

Floor plan

interest expense

  $ (758 )

Floor plan

interest expense

  $ (1,384 )

 

See also Note 8.

 

 
11

 

 

 

Note 10. Acquisitions

On June 10, 2013, we acquired the inventory, property, equipment and intangible assets and assumed certain liabilities of OB Salem Auto Group, Inc. in Salem, Oregon from Michael O’Brien.

 

This acquired company contributed revenues of $2.9 million for the six months ended June 30, 2013.

 

The following unaudited pro forma summary presents consolidated information as if the acquisitions in the three- and six-month periods ended June 30, 2012 and 2013 had occurred on January 1, 2012 (in thousands, except for per share amounts):

 

Three Months Ended June 30,

 

2013

   

2012

 

Revenue

  $ 1,026,597     $ 850,733  

Income from continuing operations, net of tax

    25,489       20,199  

Basic income per share from continuing operations, net of tax

    0.99       0.79  

Diluted income per share from continuing operations, net of tax

    0.98       0.77  

 

Six Months Ended June 30,

 

2013

   

2012

 

Revenue

  $ 1,950,436     $ 1,620,574  

Income from continuing operations, net of tax

    47,609       36,995  

Basic income per share from continuing operations, net of tax

    1.85       1.43  

Diluted income per share from continuing operations, net of tax

    1.82       1.40  

 

These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property, plant and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.

 

The acquisition was accounted for using the acquisition method of accounting. No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for the acquisition and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

   

Consideration  

 

Cash paid, net of cash acquired

  $ 31,786  

 

   

Assets Acquired and Liabilities Assumed

 

Inventories

  $ 15,198  

Franchise value

    4,036  

Property, plant and equipment

    4,697  

Other assets

    122  

Other liabilities

    (533 )
      23,520  

Goodwill

    8,266  
    $ 31,786  

 

We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes.

 

 

 
12

 

 

 

Note 11. Discontinued Operations

We classify a store as discontinued operations if the location has been sold, we have ceased operations at that location or the store meets the criteria required by U.S. generally accepted accounting standards:

 

 

our management team, possessing the necessary authority, commits to a plan to sell the store;

 

 

the store is available for immediate sale in its present condition;

 

 

an active program to locate buyers and other actions that are required to sell the store are initiated;

 

 

a market for the store exists and we believe its sale is likely within one year;

 

 

active marketing of the store commences at a price that is reasonable in relation to the estimated fair market value; and

 

 

our management team believes it is unlikely changes will be made to the plan or the plan to dispose of the store will be withdrawn.

 

We reclassify the store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the store’s operations after its disposal.

 

As of June 30, 2013, one of our stores continues to meet the criteria for classification of its assets and related liabilities as held for sale and its associated operating results are classified as discontinued operations.

 

Actual floor plan interest expense for the store classified as discontinued operations is directly related to the store’s new vehicles. Interest expense related to our used vehicle inventory financing and revolving line of credit is allocated based on the working capital level of the store.

 

Certain financial information related to discontinued operations was as follows (in thousands):

 

   

Three Months Ended

June 30, 

   

Six Months Ended

June 30, 

 
   

2013

   

2012

   

2013

   

2012

 

Revenue

  $ 10,078     $ 24,782     $ 18,878     $ 45,429  
                                 

Income from discontinued operations

  $ 409     $ 771     $ 693     $ 1,028  

Income tax expense

    (135 )     (285 )     (246 )     (380 )

Income from discontinued operations, net of income tax expense

  $ 274     $ 486     $ 447     $ 648  

 

Assets held for sale included the following (in thousands):

 

   

June 30, 2013

   

December 31, 2012

 

Inventories

  $ 7,486     $ 9,412  

Property, plant and equipment

    1,176       1,102  

Intangible assets

    2,071       2,065  
    $ 10,733     $ 12,579  

 

Liabilities related to assets held for sale included the following (in thousands):

 

   

June 30, 2013

   

December 31, 2012

 

Floor plan notes payable

  $ 6,378     $ 8,347  

 

 

 
13

 

 

Note 12. Net Income Per Share of Class A and Class B Common Stock

We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding unvested common shares subject to repurchase or cancellation. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.

 

Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Our Articles of Incorporation require that the Class A and Class B common stock share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which would have the effect of adversely altering the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.

 

Following is a reconciliation of the income from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS for the three- and six-month periods ended June 30, 2013 and 2012 (in thousands, except per share amounts):

 

Three Months Ended June 30,

 

2013

   

2012

 

Basic EPS from Continuing Operations

 

Class A 

   

Class B 

   

Class A 

   

Class B 

 

Numerator:

                               

Income from continuing operations applicable to common stockholders

  $ 22,734     $ 2,547     $ 17,261     $ 2,744  

Distributed income applicable to common stockholders

    (3,018 )     (338 )     (2,230 )     (354 )

Basic undistributed income from continuing operations applicable to common stockholders

  $ 19,716     $ 2,209     $ 15,031     $ 2,390  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share

    23,185       2,597       22,201       3,529  
                                 

Basic income per share from continuing operations applicable to common stockholders

  $ 0.98     $ 0.98     $ 0.78     $ 0.78  

Basic distributed income per share from continuing operations applicable to common stockholders

    (0.13 )     (0.13 )     (0.10 )     (0.10 )

Basic undistributed income per share from continuing operations applicable to common stockholders

  $ 0.85     $ 0.85     $ 0.68     $ 0.68  

 

 

 
14

 

 

Three Months Ended June 30,

 

2013

   

2012

 

Diluted EPS from Continuing Operations

 

Class A 

   

Class B 

   

Class A 

   

Class B 

 

Numerator:

                               

Distributed income applicable to common stockholders

  $ 3,018     $ 338     $ 2,230     $ 354  

Reallocation of distributed income as a result of conversion of dilutive stock options

    5       (5 )     6       (6 )

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

    333       -       348       -  

Diluted distributed income applicable to common stockholders

  $ 3,356     $ 333     $ 2,584     $ 348  

Undistributed income from continuing operations applicable to common stockholders

  $ 19,716     $ 2,209     $ 15,031     $ 2,390  

Reallocation of undistributed income as a result of conversion of dilutive stock options

    30       (30 )     42       (42 )

Reallocation of undistributed income due to conversion of Class B to Class A

    2,179       -       2,348       -  

Diluted undistributed income from continuing operations applicable to common stockholders

  $ 21,925     $ 2,179     $ 17,421     $ 2,348  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations

    23,185       2,597       22,201       3,529  

Weighted average number of shares from stock options

    352       -       455       -  

Conversion of Class B to Class A common shares outstanding

    2,597       -       3,529       -  

Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations

    26,134       2,597       26,185       3,529  
                                 

Diluted income per share from continuing operations applicable to common stockholders

  $ 0.97     $ 0.97     $ 0.76     $ 0.76  

Diluted distributed income per share from continuing operations applicable to common stockholders

    (0.13 )     (0.13 )     (0.10 )     (0.10 )

Diluted undistributed income per share from continuing operations applicable to common stockholders

  $ 0.84     $ 0.84     $ 0.66     $ 0.66  

 

Three Months Ended June 30,

 

2013

   

2012

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Antidilutive Securities

                               

Shares issuable pursuant to stock options not included since they were antidilutive

    18       -       45       -  

 

 

 
15

 

 

Six Months Ended June 30,

 

2013

   

2012

 

Basic EPS from Continuing Operations

 

Class A 

   

Class B 

   

Class A 

   

Class B 

 

Numerator:

                               

Income from continuing operations applicable to common stockholders

  $ 42,254     $ 4,909     $ 31,483     $ 5,156  

Distributed income applicable to common stockholders

    (3,007 )     (349 )     (3,779 )     (619 )

Basic undistributed income from continuing operations applicable to common stockholders

  $ 39,247     $ 4,560     $ 27,704     $ 4,537  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share

    23,052       2,678       22,221       3,639  
                                 

Basic income per share from continuing operations applicable to common stockholders

  $ 1.83     $ 1.83     $ 1.42     $ 1.42  

Basic distributed income per share from continuing operations applicable to common stockholders

    (0.13 )     (0.13 )     (0.17 )     (0.17 )

Basic undistributed income per share from continuing operations applicable to common stockholders

  $ 1.70     $ 1.70     $ 1.25     $ 1.25  

 

 

 
16

 

 

Six Months Ended June 30,

 

2013

   

2012

 

Diluted EPS from Continuing Operations

 

Class A 

   

Class B 

   

Class A 

   

Class B 

 

Numerator:

                               

Distributed income applicable to common stockholders

  $ 3,007     $ 349     $ 3,779     $ 619  

Reallocation of distributed income as a result of conversion of dilutive stock options

    5       (5 )     11       (11 )

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

    344       -       608       -  

Diluted distributed income applicable to common stockholders

  $ 3,356     $ 344     $ 4,398     $ 608  

Undistributed income from continuing operations applicable to common stockholders

  $ 39,247     $ 4,560     $ 27,704     $ 4,537  

Reallocation of undistributed income as a result of conversion of dilutive stock options

    69       (69 )     81       (81 )

Reallocation of undistributed income due to conversion of Class B to Class A

    4,491       -       4,456       -  

Diluted undistributed income from continuing operations applicable to common stockholders

  $ 43,807     $ 4,491     $ 32,241     $ 4,456  
                                 

Denominator:

                               

Weighted average number of shares outstanding used to calculate basic income per share from continuing operations

    23,052       2,678       22,221       3,639  

Weighted average number of shares from stock options

    390       -       471       -  

Conversion of Class B to Class A common shares outstanding

    2,678       -       3,639       -  

Weighted average number of shares outstanding used to calculate diluted income per share from continuing operations

    26,120       2,678       26,331       3,639  
                                 

Diluted income per share from continuing operations applicable to common stockholders

  $ 1.81     $ 1.81     $ 1.39     $ 1.39  

Diluted distributed income per share from continuing operations applicable to common stockholders

    (0.13 )     (0.13 )     (0.17 )     (0.17 )

Diluted undistributed income per share from continuing operations applicable to common stockholders

  $ 1.68     $ 1.68     $ 1.22     $ 1.22  

 

Six Months Ended June 30,

 

2013

   

2012

 

Diluted EPS

 

Class A

   

Class B

   

Class A

   

Class B

 

Antidilutive Securities

                               

Shares issuable pursuant to stock options not included since they were antidilutive

    19       -       90       -  

 

 
17

 

 

 

Note 13. Subsequent Events

On July 22, 2013, our Board of Directors approved a dividend of $0.13 per share on our Class A and Class B Common stock related to our second quarter 2013 financial results. The dividend will total approximately $3.4 million and will be paid on August 23, 2013 to shareholders of record on August 9, 2013.

 

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

 

Forward-Looking Statements and Risk Factors

Certain statements under the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” and elsewhere in this Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project,” “target,” “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. Important factors that could cause actual results to differ from our expectations are discussed in Part II - Other Information, Item 1A. in this Form 10-Q and in the Risk Factors section of our Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission.

 

While 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. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statement.

 

Overview

We are a leading operator of automotive franchises and a retailer of new and used vehicles and services. As of July 26, 2013, we offer 27 brands of new vehicles and all brands of used vehicles in 91 stores in the United States and online at Lithia.com. We sell new and used cars and replacement parts; provide vehicle maintenance, warranty, paint and repair services; arrange related financing; and sell service contracts, vehicle protection products and credit insurance.

 

Our mission statement is: “Driven by our employees and preferred by our customers, Lithia is the leading automotive retailer in each of our markets.” We offer our customers personal, convenient, flexible hometown service combined with the large company advantages of selection, competitive pricing, broad access to financing, consistent service, competence and guarantees. We strive for diversification in our products, services, brands and geographic locations to insulate us from market risk and to maintain profitability. We have developed a centralized support structure to reduce store level administrative functions. This allows store personnel to focus on providing a positive customer experience. With our management information systems and centrally-performed administrative functions in Medford, Oregon, we seek to gain economies of scale from our dealership network.

 

Results of Continuing Operations

For the three months ended June 30, 2013 and 2012, we reported income from continuing operations, net of tax, of $25.3 million, or $0.97 per diluted share, and $20.0 million, or $0.76 per diluted share, respectively.

 

 
18

 

 

For the six months ended June 30, 2013 and 2012, we reported income from continuing operations, net of tax, of $47.2 million, or $1.81 per diluted share, and $36.6 million, or $1.39 per diluted share, respectively.

 

Discontinued Operations

Results for stores sold, closed or held for sale, qualifying for reclassification under the applicable accounting guidance, are presented as discontinued operations for all periods in our Consolidated Statements of Operations. As a result, our results from continuing operations are presented on a comparable basis.

 

Income from discontinued operations, net of tax for the three months ended June 30, 2013 and 2012 totaled $274,000 and $486,000, respectively. Income from discontinued operations, net of tax for the six months ended June 30, 2013 and 2012 totaled $447,000 and $648,000, respectively. See Note 11 of the Condensed Notes to Consolidated Financial Statements for additional information.

 

Key Performance Metrics

Key performance metrics for revenue and gross profit were as follows for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 

Three months ended
June 30, 2013
 

 

Revenues

   

Percent of

Total Revenues 

   

Gross Profit

   

Gross Profit

Margin 

   

Percent of Total

Gross Profit 

 

New vehicle

  $ 569,487       56.5 %   $ 38,788       6.8 %     24.3 %

Used vehicle retail

    258,465       25.6       38,893       15.0       24.3  

Used vehicle wholesale

    37,691       3.7       695       1.8       0.4  

Finance and insurance(1) 

    34,218       3.4       34,218       100.0       21.4  

Service, body and parts

    94,462       9.4       46,693       49.4       29.2  

Fleet and other

    14,182       1.4       546       3.8       0.4  
    $ 1,008,505       100.0 %   $ 159,833       15.8 %     100.0 %

 

Three months ended
June 30, 2012
 

 

Revenues

   

Percent of

Total Revenues 

   

Gross Profit

   

Gross Profit

Margin 

   

Percent of Total

Gross Profit 

 

New vehicle

  $ 455,939       55.4 %   $ 33,566       7.4 %     25.0 %

Used vehicle retail

    207,341       25.2       30,991       14.9       23.1  

Used vehicle wholesale

    35,106       4.3       296       0.8       0.2  

Finance and insurance(1) 

    27,184       3.3       27,184       100.0       20.3  

Service, body and parts

    85,456       10.4       41,674       48.8       31.1  

Fleet and other

    11,316       1.4       385       3.4       0.3  
    $ 822,342