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LAD > SEC Filings for LAD > Form 10-Q on 26-Oct-2012All Recent SEC Filings

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Form 10-Q for LITHIA MOTORS INC


26-Oct-2012

Quarterly Report


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 "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 October 26, 2012, we offered 29 brands of new vehicles and all brands of used vehicles in 86 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks and replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing, service contracts, 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, our emphasis on standardized operating practices and administrative functions performed centrally in Medford, Oregon, we seek to gain economies of scale from our dealership network.

Results of Continuing Operations
For the three months ended September 30, 2012 and 2011, we reported income from continuing operations, net of tax, of $23.3 million, or $0.90 per diluted share, and $16.3 million, or $0.61 per diluted share, respectively.

For the nine months ended September 30, 2012 and 2011, we reported income from continuing operations, net of tax, of $60.4 million, or $2.30 per diluted share, and $39.3 million, or $1.47 per diluted share, respectively.

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

The income (loss) from discontinued operations for the three months ended September 30, 2012 and 2011 totaled ($96,000) and $242,000, respectively, and for the nine months ended September 30, 2012 and 2011 totaled $164,000 and $778,000, respectively. See Note 14 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 nine months ended September 30, 2012 and 2011 (dollars in thousands):

                                                                                                          Percent of
                                                                                                             Total
Three months ended                                 Percent of                           Gross Profit         Gross
September 30, 2012                Revenues       Total Revenues       Gross Profit         Margin           Profit
New vehicle                       $ 496,365                 55.9 %   $       35,611               7.2 %          24.7 %
Used vehicle retail                 230,278                 25.9             33,543              14.6            23.3
Used vehicle wholesale               35,419                  4.0                (27 )            (0.1 )          (0.1 )
Finance and insurance(1)             31,088                  3.5             31,088             100.0            21.6
Service, body and parts              90,626                 10.2             43,760              48.3            30.3
Fleet and other                       4,597                  0.5                249               5.4             0.2
                                  $ 888,373                100.0 %   $      144,224              16.2 %         100.0 %



                                                                                                          Percent of
                                                                                                             Total
Three months ended                                 Percent of                           Gross Profit         Gross
September 30, 2011                Revenues       Total Revenues       Gross Profit         Margin           Profit
New vehicle                       $ 377,860                 52.8 %   $       29,365               7.8 %          24.4 %
Used vehicle retail                 184,632                 25.8             26,730              14.5            22.2
Used vehicle wholesale               35,597                  5.1                (66 )            (0.2 )           0.0
Finance and insurance(1)             22,423                  3.1             22,423             100.0            18.6
Service, body and parts              84,592                 11.8             41,114              48.6            34.2
Fleet and other                      10,111                  1.4                669               6.6             0.6
                                  $ 715,215                100.0 %   $      120,235              16.8 %         100.0 %



                                                                                                            Percent of
                                                                                                               Total
Nine months ended                                    Percent of                           Gross Profit         Gross
September 30, 2012                 Revenues        Total Revenues       Gross Profit         Margin           Profit
New vehicle                       $ 1,355,463                 54.9 %   $      100,439               7.4 %          24.7 %
Used vehicle retail                   632,361                 25.6             93,240              14.7            23.0
Used vehicle wholesale                104,663                  4.3                665               0.6             0.1
Finance and insurance(1)               83,440                  3.4             83,440             100.0            20.6
Service, body and parts               262,589                 10.6            127,044              48.4            31.3
Fleet and other                        28,971                  1.2              1,038               3.6             0.3
                                  $ 2,467,487                100.0 %   $      405,866              16.4 %         100.0 %



                                                                                                            Percent of
                                                                                                               Total
Nine months ended                                    Percent of                           Gross Profit         Gross
September 30, 2011                 Revenues        Total Revenues       Gross Profit         Margin           Profit
New vehicle                       $ 1,015,872                 52.1 %   $       79,110               7.8 %          23.6 %
Used vehicle retail                   512,006                 26.3             75,810              14.8            22.6
Used vehicle wholesale                 93,800                  4.7                596               0.6             0.3
Finance and insurance(1)               61,915                  3.2             61,915             100.0            18.5
Service, body and parts               236,216                 12.1            115,043              48.7            34.3
Fleet and other                        30,408                  1.6              2,481               8.2             0.7
                                  $ 1,950,217                100.0 %   $      334,955              17.2 %         100.0 %

(1) Commissions reported net of anticipated cancellations.

Same Store Operating Data
We believe that same store comparisons are a key indicator of our financial performance. Same store metrics demonstrate our ability to profitably grow our revenue in our existing locations. As a result, same store comparisons have been integrated into the discussion below.

A same store metric represents stores that were operating during the three- and nine-month periods ended September 30, 2012, and only includes the months when operations occur in both comparable periods. For example, a store acquired in August 2011 would be included in same store operating data beginning in September 2012, after its first full complete comparable month of operation, and operating results for same store comparisons would include only the period of September for each comparable periods.


New Vehicle Revenues
                                             Three Months Ended
                                                September 30,            Increase        % Increase
(Dollars in thousands, except per unit
amounts)                                     2012          2011         (Decrease)       (Decrease)
Reported
Revenue                                    $ 496,365     $ 377,860     $    118,505             31.4 %
Retail units sold                             14,923        11,262            3,661             32.5
Average selling price per retail unit      $  33,262     $  33,552     $       (290 )           (0.9 )

Same store
Revenue                                    $ 484,527     $ 372,858     $    111,669             29.9 %
Retail units sold                             14,528        11,106            3,422             30.8
Average selling price per retail unit      $  33,351     $  33,573     $       (222 )           (0.7 )



                                                Nine Months Ended
                                                  September 30,                              %
(Dollars in thousands, except per unit
amounts)                                      2012            2011         Increase       Increase
Reported
Revenue                                    $ 1,355,463     $ 1,015,872     $ 339,591           33.4 %
Retail units sold                               41,217          31,097        10,120           32.5
Average selling price per retail unit      $    32,886     $    32,668     $     218            0.7

Same store
Revenue                                    $ 1,294,861     $   998,609     $ 296,252           29.7 %
Retail units sold                               39,517          30,568         8,949           29.3
Average selling price per retail unit      $    32,767     $    32,668     $      99            0.3

New vehicle sales in the third quarter of 2012 improved compared to the third quarter of 2011. Demand for new vehicles continued to be strong as same store sales volume increased 30.8% and 29.3%, respectively, in the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011.

The number of new vehicles sold in the United States during the first nine months of 2012 increased approximately 14.5% over 2011, explaining the increase in new vehicle sales volumes. In addition to the overall market recovery, we have increased our share of vehicle sales in several of our markets. Growth in our domestic and import brand sales have outpaced the growth experienced nationally. Our domestic brand same store sales grew 19.1% and 27.3%, respectively, for the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. Same store sales for import brands grew 51.6% and 36.8%, respectively, for the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. Certain of our markets have seen an increase in local market sales volumes exceeding the national average. We remain focused on increasing our share of overall new vehicle sales within our markets and continue to have an operational objective of increasing market share.


Used Vehicle Retail Revenues
                                             Three Months Ended
                                                September 30,            Increase        % Increase
(Dollars in thousands, except per unit
amounts)                                     2012          2011         (Decrease)       (Decrease)
Reported
Retail revenue                             $ 230,278     $ 184,632     $     45,646             24.7 %
Retail units sold                             13,320        10,567            2,753             26.1
Average selling price per retail unit      $  17,288     $  17,473     $       (185 )           (1.1 )



   Same store
   Retail revenue                          $ 223,890     $ 180,691     $ 43,199       23.9 %
   Retail units sold                          12,926        10,345        2,581       24.9
   Average selling price per retail unit   $  17,321     $  17,467     $   (146 )     (0.8 )



                                              Nine Months Ended
                                                September 30,                            %
(Dollars in thousands, except per unit
amounts)                                     2012          2011        Increase       Increase
Reported
Retail revenue                             $ 632,361     $ 512,006     $ 120,355           23.5 %
Retail units sold                             36,286        29,750         6,536           22.0
Average selling price per retail unit      $  17,427     $  17,210     $     217            1.3



   Same store
   Retail revenue                          $ 606,556     $ 500,671     $ 105,885       21.1 %
   Retail units sold                          34,864        29,134         5,730       19.7
   Average selling price per retail unit   $  17,398     $  17,185     $     213        1.2

Used vehicle retail sales continue to be a strategic focus as we strive for organic growth and respond to potential supply constraints in used vehicles as a result of the lower new vehicle sales in 2008, 2009 and 2010. Our strategy is to offer three categories of used vehicles: manufacturer certified pre-owned used vehicles; late model, lower-mileage vehicles; and value autos, vehicles with over 80,000 miles.

During the three- and nine-month periods ended September 30, 2012, sales increased in all three categories of used vehicles compared to the same periods of 2011.
Same store unit sales for manufacturer certified pre-owned used vehicles increased 33.6% and 24.6%, respectively, for the three- and nine-month periods ended September 30, 2012. This category has higher average sale prices and experiences a lower gross margin than the other categories.

Same store unit sales for the late model, lower mileage vehicle category increased 12.7% and 11.2%, respectively, for the three- and nine-month periods ended September 30, 2012. Our performance in this category is still below management's expectation and we continue to focus on improving our results.

Same store unit sales for the value auto category increased 48.6% and 36.9%, respectively, for the three- and nine-month periods ended September 30, 2012. Value auto vehicles have lower average selling prices and experience a higher gross margin than our other used vehicle categories. Additionally, value autos provide an organic opportunity to convert vehicles acquired via trade-in to retail used vehicle sales.

Our retail used to new vehicle sales ratio was 0.9:1 for the three-month period ended September 30, 2012 and for the same period in 2011. For the nine-month periods ended September 30, 2012 and 2011, our retail used to new vehicle sales ratio was 0.9:1 and 1.0:1, respectively. On average, for the third quarter of 2012, each of our stores currently sells approximately 52 retail used vehicle units per month and we target increasing sales to 60 units per month. Our goal continues to be a retail used to new ratio of 1.0:1.


Used Vehicle Wholesale Revenues
                                              Three Months Ended
                                                September 30,             Increase        % Increase
(Dollars in thousands, except per unit
amounts)                                      2012          2011         (Decrease)       (Decrease)
Reported
Wholesale revenue                          $   35,419     $  35,597     $       (178 )            (0.5 )%
Wholesale units sold                            5,173         4,452              721              16.2
Average selling price per wholesale unit   $    6,847     $   7,996     $     (1,149 )           (14.4 )

Same store
Wholesale revenue                          $   34,566     $  34,269     $        297               0.9 %
Wholesale units sold                            5,054         4,329              725              16.7
Average selling price per wholesale unit   $    6,839     $   7,916     $     (1,077 )           (13.6 )



                                              Nine Months Ended
                                                September 30,            Increase        % Increase
(Dollars in thousands, except per unit
amounts)                                     2012          2011         (Decrease)       (Decrease)
Reported
Wholesale revenue                          $ 104,663     $  93,800     $     10,863             11.6 %
Wholesale units sold                          14,206        11,834            2,372             20.0
Average selling price per wholesale unit   $   7,368     $   7,926     $       (558 )           (7.0 )

Same store
Wholesale revenue                          $ 100,180     $  90,726     $      9,454             10.4 %
Wholesale units sold                          13,682        11,556            2,126             18.4
Average selling price per wholesale unit   $   7,322     $   7,851     $       (529 )           (6.7 )

Wholesale transactions are used vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to inventory age or other factors. Wholesale vehicle sales are typically sold at or near inventory cost and do not comprise a meaningful component of our gross profit.

Finance and Insurance
                                              Three Months Ended
                                                September 30,                              %
(Dollars in thousands, except per unit
amounts)                                      2012          2011         Increase       Increase
Reported
Revenue                                    $   31,088     $  22,423     $    8,665           38.6 %

Revenue per retail unit
Finance reserves                           $      429     $     397     $       32            8.1 %
Maintenance contracts                             549           517             32            6.2
Insurance and other                               123           113             10            8.8
Revenue per retail unit                    $    1,101     $   1,027     $       74            7.2 %



            Same store
            Revenue                   $ 29,430     $ 21,585     $ 7,845       36.3 %

            Revenue per retail unit
            Finance reserves          $    416     $    393     $    23        5.9 %
            Maintenance contracts          540          507          33        6.5
            Insurance and other            116          106          10        9.4
            Revenue per retail unit   $  1,072     $  1,006     $    66        6.6 %


                                              Nine Months Ended
                                                September 30,                              %
(Dollars in thousands, except per unit
amounts)                                      2012          2011         Increase       Increase
Reported
Revenue                                    $   83,440     $  61,915     $   21,525           34.8 %

Revenue per retail unit
Finance reserves                           $      412     $     381     $       31            8.1 %
Maintenance contracts                             545           528             17            3.2
Insurance and other                               120           109             11           10.1
Revenue per retail unit                    $    1,077     $   1,018     $       59            5.8 %



           Same store
           Revenue                   $ 79,316     $ 59,519     $ 19,797       33.3 %

           Revenue per retail unit
           Finance reserves          $    406     $    377     $     29        7.7 %
           Maintenance contracts          546          518           28        5.4
           Insurance and other            114          102           12       11.8
           Revenue per retail unit   $  1,066     $    997     $     69        6.9 %

The increases in finance and insurance sales were driven by increased vehicle sales volume in the three- and nine-month periods ended September 30, 2012 compared to the same periods of 2011. We continue to see the availability of consumer credit expand with lenders increasing the loan-to-value amount available to most customers. These shifts afford us the opportunity to sell additional or more comprehensive products, while remaining within a loan-to-value framework acceptable to our retail customer lenders. Additionally, we continue to diversify our product offerings and seek more accommodating financing terms.

Penetration rates were as follows:

                                                                                           Nine Months Ended
                                             Three Months Ended September 30,                September 30,
                                               2012                    2011             2012                2011
Finance and insurance                                 76 %                    73 %            75 %               72 %
Service contracts                                     41                      41              41                 41
Lifetime oil change and filter                        35                      36              36                 37



Service, Body and Parts Revenue
                                     Three Months Ended
                                        September 30,           Increase       % Increase
   (Dollars in thousands)             2012          2011       (Decrease)      (Decrease)
   Reported
   Customer pay                    $   51,827     $ 48,460     $     3,367             6.9 %
   Warranty                            13,687       13,819            (132 )          (1.0 )
   Wholesale parts                     16,402       14,919           1,483             9.9
   Body shop                            8,710        7,394           1,316            17.8
   Total service, body and parts   $   90,626     $ 84,592     $     6,034             7.1 %

   Same store
   Customer pay                    $   50,402     $ 47,642     $     2,760             5.8 %
   Warranty                            13,295       13,519            (224 )          (1.7 )
   Wholesale parts                     16,035       14,775           1,260             8.5
   Body shop                            8,710        7,394           1,316            17.8
   Total service, body and parts   $   88,442     $ 83,330     $     5,112             6.1 %


                                      Nine Months Ended
                                        September 30,            Increase       % Increase
   (Dollars in thousands)            2012          2011         (Decrease)      (Decrease)
   Reported
   Customer pay                    $ 148,774     $ 132,085     $     16,689            12.6 %
   Warranty                           39,690        40,257             (567 )          (1.4 )
   Wholesale parts                    48,630        41,778            6,852            16.4
   Body shop                          25,495        22,096            3,399            15.4
   Total service, body and parts   $ 262,589     $ 236,216     $     26,373            11.2 %

   Same store
   Customer pay                    $ 138,027     $ 129,115     $      8,912             6.9 %
   Warranty                           36,271        38,952           (2,681 )          (6.9 )
   Wholesale parts                    45,527        41,215            4,312            10.5
   Body shop                          25,490        22,096            3,394            15.4
   Total service, body and parts   $ 245,315     $ 231,378     $     13,937             6.0 %

Our service, body and parts business continued to experience overall growth in the third quarter of 2012. We increased our same store customer pay business 5.8% and 6.9% in the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011 as we focused on retaining customers through competitively-priced routine maintenance offerings and increased marketing efforts.

Warranty work decreased 1.7% and 6.9% on a same store sales basis for the three and nine months ended September 30, 2012 compared to the same periods in 2011. Domestic brand warranty work decreased by 5.2% and 6.2%, respectively, while import/luxury warranty work increased by 1.4% and decreased by 7.4%, respectively, in the three- and nine-month periods ended September 30, 2012 compared to the same periods in 2011. Warranty work continues to be impacted by declining units in operation from 2008, 2009 and 2010, as well as the increased warranty work in 2011 associated with the Toyota recalls.

Our wholesale parts and body shop sales grew 8.5% and 17.8%, respectively, in . . .

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