Lithia Motors, Inc.
2010 10K
Year Ending December 31, 2010
LAD
Listed
NYSE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
___________________
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2010
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Oregon
93-0572810
(I.R.S. Employer Identification No.)
360 E. Jackson Street, Medford, Oregon
(Address of principal executive offices)
97501
(Zip Code)
541-776-6899
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, without par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
__________ _________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: [ ]
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 [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K, or any amendment to this Form 10-K. [X]
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 definition of “accelerated filer,” “large 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 ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately
$137,435,000 computed by reference to the last sales price ($6.18) as reported by the New York Stock Exchange for the
Registrant’s Class A common stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter
(June 30, 2010).
The number of shares outstanding of the Registrant’s common stock as of March 7, 2011 was: Class A: 22,571,272 shares and
Class B: 3,762,231 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2011 Annual Meeting
of Shareholders.
LITHIA MOTORS, INC.
2010 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Reserved
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
1
2
11
25
25
25
25
26
28
29
51
53
53
53
54
55
55
55
55
56
56
60
Item 1. Business
PART I
Forward Looking Statements
Certain statements under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business” and elsewhere in this Form 10-K
constitute forward-looking statements. 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-K involve known and unknown risks, uncertainties
and situations that may cause our actual results, level of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or achievements expressed or
implied by these statements. Some of the important factors that could cause actual results to differ from
our expectations are discussed in Item 1A. to this Form 10-K.
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.
Overview
We are a leading operator of automotive franchises and a retailer of new and used vehicles and services.
As of March 7, 2011, we offered 26(1) brands of new vehicles and all brands of used vehicles in 82(2)
stores in the United States and online at Lithia.com. We sell new and used cars and light trucks,
replacement parts; provide vehicle maintenance, warranty, paint and repair services and arrange related
financing, service contracts, protection products and credit insurance.
Our dealerships are primarily located in mid-size regional markets throughout the Western and
Midwestern regions of the United States. The majority of our franchises are in “single-point” locations,
enabling brand exclusivity with no other dealership with the same franchise in the market.
The following tables set forth information about our stores that were part of operations as of December
31, 2010:
State
Texas .............................
Oregon...........................
California........................
Washington....................
Alaska ............................
Montana………………..
Iowa ...............................
Idaho..............................
Nevada ..........................
North Dakota..................
Colorado ........................
New Mexico ...................
Total..........................
Number of
Stores
14
16
11
7
7
7
7
6
4
3
1
1
84
Percent of
2010 Revenue
25%
15
11
10
10
8
7
6
4
2
1
1
100%
(1)Added a Fiat franchise in March 2011.
(2)Operations were ceased at one store in Idaho in January 2011 and one store in Oregon in March 2011.
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Business Strategy and Operations
Our mission is to be the preferred provider of cars and trucks and related services in North America. We
strive for diversification in our products and 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.
To reduce our dependence on any one manufacturer and our susceptibility to changing consumer
preferences, we offer a variety of luxury, import and domestic new vehicle brands and models.
Encompassing economy and luxury cars, sports utility vehicles, crossovers, minivans and light trucks, we
believe our brand mix is well-suited to what people want in the markets we serve. For example, in the
rural, agricultural markets, as opposed to metropolitan markets, we believe more consumers prefer trucks
or SUVs, and a larger percentage of customers choose domestic vehicles.
We have centralized many administrative functions to streamline store level operations. Accounts
payable, accounts receivable, credit and collections, accounting and taxes, information technology, legal,
human resources, human development, treasury, cash management, advertising and marketing are all
centralized at our corporate headquarters. The reduction of administrative functions at our stores allows
our local managers to focus on customer-facing opportunities to generate increased revenues and gross
profit. Our operations are supported by our dedicated training and personnel development program,
which shares best practices across our dealership network and seeks to develop our store management
talent.
Operations are structured to promote an entrepreneurial environment at the dealership level. Each store’s
general manager, with assistance from regional and corporate management, is ultimately responsible for
dealership operations, personnel, store culture and financial performance.
During 2010, we focused on the following key areas to achieve our mission:
increasing revenues in all business lines;
capturing a greater percentage of overall new vehicle sales in our local markets;
selling lower-priced used vehicles to reach additional customers;
reducing exposure to Chrysler through risk management and acquisition of other franchises;
reducing the amount of non-operating assets by divesting closed facilities and vacant land;
utilizing prudent cash management, including investing capital to produce accretive returns; and
reducing our exposure to pending debt maturities by renewing and extending debt instruments.
We believe our cost structure is aligned with current industry sales levels. Through initiatives started in
the second quarter of 2008, we have successfully established a cost structure which can be leveraged as
vehicle sales levels improve. Our selling, general and administrative expense as a percentage of gross
profit has improved to 78.8% in 2010 compared to 86.2% in 2008. In periods of higher revenue, for
example the third quarter of 2010, our selling, general and administrative expense as a percentage of
gross profit was as low as 73.8%. We believe we are well positioned to improve our selling, general and
administrative expense leverage as vehicle sales levels continue to improve.
We continuously evaluate our portfolio of franchises, divesting stores that are not expected to meet our
financial return requirements while selectively acquiring attractive stores in our target markets. In the past
three years, we generated $72.7 million in cash by divesting stores that did not meet our financial return
expectations. Additionally, in 2010, we spent $23.7 million in cash on acquisitions which increase revenue
and diversify our portfolio.
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New Vehicles
In 2010, we sold 33,701 new vehicles, generating 22.9% of our gross profit for the year. New vehicle
sales also have the potential to create incremental profit opportunities through manufacturer incentives,
resale of trade-in vehicles, sale of third-party financing, vehicle service and insurance contracts, and
future service and repair work.
In 2010, we represented 25 domestic and imported brands ranging from economy to luxury cars, sport
utility vehicles, crossovers, minivans and light trucks.
Manufacturer
Chrysler, Jeep, Dodge ....................................
GMC, Chevrolet, Cadillac, Buick .....................
Toyota, Scion ..................................................
BMW ...............................................................
Honda, Acura ..................................................
Ford, Lincoln ...................................................
Subaru ............................................................
Hyundai ...........................................................
Volkswagen, Audi............................................
Nissan .............................................................
Mercedes ........................................................
Kia...................................................................
Porsche ...........................................................
Mazda .............................................................
Suzuki .............................................................
Saab................................................................
Total ...........................................................
* Less than 0.1%
Percent of
2010 Total
Revenue
15.0%
8.7
5.9
4.5
3.5
3.0
2.2
2.0
1.6
1.3
1.1
0.7
0.4
0.2
*
*
50.1%
Percent of
2010 New
Vehicle
Revenue
29.9%
17.3
11.8
9.0
7.0
6.0
4.4
4.0
3.2
2.7
2.2
1.5
0.7
0.3
*
*
100.0%
Percent of
2010 New
Vehicle Gross
Profit
30.6%
18.0
11.5
7.5
7.5
4.9
3.7
5.5
3.2
2.9
2.1
1.4
0.9
0.3
*
*
100.0%
We purchase our new car inventory directly from manufacturers, who generally allocate new vehicles to
stores based on availability, monthly sales and market area. Accordingly, we rely on the manufacturers to
provide us with vehicles that meet consumer demand at suitable locations, with appropriate quantities
and prices. However, high demand vehicles are often in short supply. We exchange vehicles with other
automotive retailers and between our own stores to accommodate customer demand and to balance
inventory.
Used Vehicles
At each new vehicle store, we also sell used vehicles. We have certain stores that sell only used vehicles.
In 2010, retail used vehicle sales generated 21.5% of our gross profit.
Our used vehicle operations give us an opportunity to:
generate sales to customers financially unable or unwilling to purchase a new vehicle;
increase new and used vehicle sales by aggressively pursuing customer trade-ins; and
increase finance and insurance revenues and service and parts sales.
Our longer-term strategy is to maintain a ratio of one retail used vehicle sale to one retail new vehicle
sale. For the past two years, we have been able to maintain this ratio. We achieve this through offering
three categories of used vehicles: manufacturer certified used vehicles; late model, lower mileage
vehicles; and value autos. We offer manufacturer certified used vehicles at most of our franchised
dealerships. These vehicles undergo additional reconditioning and receive an extended factory-provided
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warranty. Late model, lower mileage vehicles are highly reconditioned and offer a Lithia certified warranty.
Value autos are older, higher mileage vehicles that undergo a safety check and a lesser degree of
reconditioning. Value autos are offered to customers who require a less expensive vehicle with lower
monthly payments.
We acquire our used vehicles through customer trade-ins and at closed auctions. We also purchase
vehicles directly from customers visiting our stores, private parties advertising through local newspapers,
competing dealers and online.
In addition, as a complement to our ongoing used vehicle operation at each store, and in response to
customer demand, we use personnel in our support services group to identify and communicate the
optimal mix of used vehicles that are most attractive to our markets. We conduct our own internal used
vehicle auctions, and often centrally manage the sale of used vehicles at public auctions at the corporate
level.
We wholesale used vehicles that are in poor condition, are aged in our inventory, or are not suitable for
our stocking plan. In 2010, we increased the number of late-model used vehicles we wholesaled based
on our sales experience with similar cars and as we shifted our mix to increase the number of value autos
in inventory.
Vehicle Financing
We believe that arranging financing is an important part of our ability to sell vehicles and related products
and services. Our sales personnel and finance and insurance managers receive training in securing
customer financing and possess extensive knowledge of available financing alternatives. We attempt to
arrange financing for every vehicle we sell and we offer customers financing on a “same day” basis,
giving us an advantage, particularly over smaller competitors who do not generate enough sales to attract
our breadth of finance sources.
We earn a commission on each finance, service and insurance contract we write and subsequently sell to
a third-party. We normally arrange financing for customers by selling the contracts to outside sources on
a non-recourse basis to avoid the risk of default.
We were able to arrange financing on 72% of the vehicles we sold during 2010, compared to 68% in
2009. Our presence in multiple markets and changes in technology surrounding the credit application
process have allowed us to utilize a larger network of lenders across a broader geographic area.
Additionally, credit markets improved throughout 2010, as the asset-backed securities market for
automotive paper improved and banks increased the volume of automotive loans initiated. Sub-prime
customers, who comprised approximately 8% of the financing we completed in 2010, continue to
experience constraints in obtaining automotive financing. While the market for sub-prime customers
improved in 2010, we believe vehicle sales will increase as these customers are able to obtain loans at
more attractive terms.
Service Contracts and Other Products
Our finance and insurance managers also market third-party extended warranty contracts, insurance
contracts and vehicle and theft protection products to our new and used vehicle buyers. These products
and services yield higher profit margins than vehicle sales and contribute significantly to our profitability.
Extended warranty contracts for new vehicles provide additional coverage beyond the duration or scope
of the manufacturer’s warranty. We also sell service contracts to used vehicle buyers, which provide
coverage for certain major repairs. We believe the sale of extended warranties and service contracts
increase our service and parts business as well, linking future repair work to our locations.
5
When customers finance an automobile purchase, we offer them guaranteed auto protection (”gap”)
coverage that provides protection from loss incurred by the difference in the amount owed and the
amount received under a comprehensive insurance claim. We receive a commission on each gap policy
sold.
We offer a lifetime lube, oil and filter (“LOF”) service, which, in 2010, was purchased by 34% of our total
new and used vehicle buyers. This service helps us retain customers by building customer loyalty and it
provides opportunities for selling additional routine maintenance items and generating repeat service and
parts business. In 2010, we sold approximately $51 of additional maintenance on each lifetime LOF
service we performed.
Service, Body and Parts
In 2010, our service, body and parts operations generated 37% of our gross profit. Our service, body and
parts operations are an integral part of establishing customer loyalty and contribute significantly to our
overall revenue and profits. We provide parts and service primarily for the new vehicle brands sold by our
stores, but we also service most makes and models.
The service and parts business provides important repeat revenues to our stores. We market our parts
and service products by notifying owners when their vehicles are due for periodic service. This
encourages preventive maintenance rather than post-breakdown repairs. The number of customers who
purchase our lifetime LOF service helps to improve customer loyalty and provides opportunities for repeat
parts and service business.
Revenues from the service and parts departments are particularly important during economic downturns,
as owners tend to repair their existing vehicles rather than buy new vehicles during such periods. This
partially mitigates the effects of a drop in new vehicle sales that may occur in a recessionary economic
environment.
Our service, body and parts operations provide us an opportunity to build the Lithia Automotive brand
independent of new vehicle franchises. We have branded our service processes as “Assured Service.”
Assured Service provides customer benefits such as same day service, upfront price guarantees and a
three-year/50,000 mile warranty on repairs. We have also launched “Assured Automotive Products” on
various commodity items such as tires, filters and batteries. These store branded parts provide improved
margins as we procure in bulk directly from the manufacturer.
The number of vehicles in operation has been declining over the past several years as the extended
challenging economic environment has curtailed vehicle purchases. We believe that this presents a
challenge to our service, body and parts business in the foreseeable future as there are fewer vehicles
requiring service. We expect this impact to be more severe for domestic brands, as, over time, there will
be fewer domestic vehicles in service due to their decline in overall market share over the past few years
from the levels seen historically.
To counteract the impact of fewer units in operation, we have increased marketing efforts and lowered
prices on routine maintenance items. We have also focused on offering more commodity products, such
as wiper blades and tires, with the goal of being a full service provider for all of our customers’ vehicle
needs. We believe offering ‘one-stop shopping’ will be an important point of differentiation, particularly to
take advantage of additional sales opportunities with customers purchasing a lifetime LOF service. These
return customers provide an opportunity to offer more diversified services, and will help to offset the
impact from the decline in the number of vehicles in operation.
In 2010, the expected decline in service revenues was partially offset as we serviced a greater
percentage of older vehicles than we have historically. We believe this is due to the efforts outlined above
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as well as our customers keeping their vehicles for longer periods of time, providing us with opportunities
to service their vehicles deeper into the ownership cycle.
In 2010, we added collision centers to stores in Iowa and Oregon. We believe body shops provide an
attractive opportunity to grow our business, and we continue to evaluate potential locations to expand.
We currently operate 15 collision repair centers: four in Texas; three in Oregon; two each in Idaho and
Iowa; and one each in Alaska, Washington, Montana and Nevada.
Marketing
We market ourselves as Lithia Auto Stores-Serving our Communities since 1946. In most markets, except
where prohibited by franchise requirements, our stores are identified as Lithia Auto Stores.
We emphasize customer satisfaction and we realize that customer retention is critical to our success. We
want our customers’ experiences to be satisfying so that they refer us to their families and friends. We
utilize an owner marketing strategy, consisting of email, traditional mail and phone contact, to maintain
regular communication and solicit feedback.
To increase awareness and traffic at our stores, we employ a combination of traditional and digital media
to reach potential customers. Total advertising expense, net of manufacturer credits, was $27.1 million in
2010, $18.4 million in 2009 and $17.6 million in 2008. In 2010, approximately 65% of those funds were
spent in traditional media and 35% were spent in digital and owner communications. In all of our
communications, we seek to differentiate ourselves from competitors by conveying price, selection and
finance benefits unique to Lithia.
Certain advertising and marketing expenditures are offset by manufacturer co-op programs. Advertising
credits not tied to specific vehicles are earned as requests for reimbursement are submitted to
manufacturers for qualifying advertising expenditures. These reimbursements are recognized as a
reduction of advertising expense upon manufacturer confirmation of submitted expenditures.
Manufacturer cooperative advertising credits were $2.7 million in 2010, $3.8 million in 2009 and $4.3
million in 2008.
Many people now shop online before visiting our stores. We maintain websites for all of our stores and a
corporate site (Lithia.com) dedicated to generating customer leads for our stores. Today, our websites
enable our customers to:
locate our stores and identify the new vehicle brands sold at each store;
search new and pre-owned vehicle inventory;
view current pricing and specials;
obtain Kelley Blue Book values;
submit credit applications;
shop for and order manufacturers’ vehicle parts;
schedule service appointments;
pay for service; and
provide feedback about their Lithia experience.
We also have mobile versions of our websites in anticipation of greater adoption of mobile technology.
We post our inventory on major new and used vehicle listing services (cars.com, autotrader.com,
kbb.com, ebay, craigslist, etc.) to reach online shoppers. We also employ search engine optimization,
search engine marketing and online display advertising to reach more online prospects.
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Social influence marketing represents a very cost-effective method to enhance our corporate reputation
and increase vehicle sales and service. We are deploying tools and training to our employees in ways
that will help us listen to our customers and create more ambassadors for Lithia.
Franchise Agreements
Each of our stores operate under a separate agreement (“Franchise Agreement”) with the manufacturer
of the new vehicle brand it sells.
Typical automobile Franchise Agreements specify the locations within a designated market area at which
the store may sell vehicles and related products and perform certain approved services. The designation
of such areas and the allocation of new vehicles among stores are at the discretion of the manufacturer.
Franchise Agreements do not, however, guarantee exclusivity within a specified territory.
A Franchise Agreement may impose requirements on the store with respect to:
facilities and equipment;
inventories of vehicles and parts;
minimum working capital;
training of personnel; and
performance standards for market share and customer satisfaction.
Each manufacturer closely monitors compliance with these requirements and requires each store to
submit monthly financial statements. Franchise Agreements also grant a store the right to use and display
manufacturers’ trademarks, service marks and designs in the manner approved by each manufacturer.
We have determined the useful life of a Franchise Agreement is indefinite, even though certain Franchise
Agreements are renewed after one to five years. In our experience, agreements are routinely renewed
without substantial cost and there are legal remedies to help prevent termination. Certain Franchise
Agreements, including those with Ford and Chrysler, have no termination date. In addition, state franchise
laws protect franchised automotive retailers. Under certain laws, a manufacturer may not terminate or fail
to renew a franchise without good cause or prevent any reasonable changes in the capital structure or
financing of a store.
The typical Franchise Agreement provides for early termination or non-renewal by the manufacturer upon:
a change of management or ownership without manufacturer consent;
insolvency or bankruptcy of the dealer;
death or incapacity of the dealer/manager;
conviction of a dealer/manager or owner of certain crimes;
misrepresentation of certain sales or inventory information by the store, dealer/manager or owner
to the manufacturer;
failure to adequately operate the store;
failure to maintain any license, permit or authorization required for the conduct of business;
poor market share; or
low customer satisfaction index scores.
Agreements generally provide for prior written notice before a franchise can be terminated under most
circumstances. We also sign master framework agreements with most manufacturers that impose
additional requirements on our stores. See Item 1A. “Risk Factors.”
Competition
The retail automotive business is highly competitive. Currently, there are approximately 18,000 dealers in
the United States, many of whom are independent operators managed by individuals, families or small
retail groups. We compete primarily with other automotive retailers, both publicly and privately-held.
8
Vehicle manufacturers have designated specific marketing and sales areas within which only one dealer
of a vehicle brand may operate. In addition, our Franchise Agreements typically limit our ability to acquire
multiple dealerships of a given brand within a particular market area. Certain state franchise laws also
restrict us from relocating our dealerships, or establishing new dealerships of a particular brand, within
any area that is served by another dealer with the same brand. Accordingly, to the extent that a market
has multiple dealers of a particular brand, as certain markets we are in do, we are subject to significant
intra-brand competition.
We are larger and have more financial resources than most private automotive retailers with which we
currently compete in the majority of our regional markets. We compete directly with retailers with similar
or greater resources in our metropolitan markets in Seattle, Washington and Concord, California. If we
enter other metropolitan markets, we may face competitors that are larger or have access to greater
financial resources. We do not have any cost advantage in purchasing new vehicles from manufacturers.
We rely on advertising and merchandising, pricing, our customer guarantees and sales model, our sales
expertise, service reputation and the location of our stores to sell new vehicles.
Regulation
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our
business. In every state in which we operate, we must obtain various licenses in order to operate our
businesses, including dealer, sales and finance and insurance licenses issued by state regulatory
authorities. Numerous laws and regulations govern our conduct of business, including those relating to
our sales, operations, financing, insurance, advertising and employment practices. These laws and
regulations include state franchise laws and regulations, consumer protection laws, privacy laws,
escheatment laws, anti-money laundering laws and other extensive laws and regulations applicable to
new and used motor vehicle dealers, as well as a variety of other laws and regulations. These laws also
include federal and state wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to numerous federal, state and local laws and
regulations. Claims arising out of actual or alleged violations of law may be asserted against us or our
stores by individuals, a class of individuals, or governmental entities. These claims may expose us to
significant damages or other penalties, including revocation or suspension of our licenses to conduct
store operations and fines.
Our operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle
Safety Standards promulgated by the United States Department of Transportation, and the rules and
regulations of various state motor vehicle regulatory agencies.
Environmental, Health, and Safety Laws and Regulations
Our operations involve the use, handling, storage and contracting for recycling and/or disposal of
materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is
subject to a complex variety of federal, state and local requirements that regulate the environment and
public health and safety.
Most of our stores utilize aboveground storage tanks, and, to a lesser extent, underground storage tanks,
primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment,
upgrading and removal under the Resource Conservation and Recovery Act and its state law
counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other
discharges from storage tanks or other sources. In addition, water quality protection programs under the
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federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water
Act and comparable state and local programs govern certain discharges from our operations. Similarly,
certain air emissions from operations, such as auto body painting, may be subject to the federal Clean Air
Act and related state and local laws. Certain health and safety standards promulgated by the
Occupational Safety and Health Administration of the United States Department of Labor and related
state agencies also apply.
Certain stores are parties to proceedings under the Comprehensive Environmental Response,
Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to
former recycling, treatment and/or disposal facilities owned and operated by independent businesses.
The remediation or clean-up of facilities where the release of a regulated hazardous substance occurred
is required under CERCLA and other laws.
We incur certain costs to comply with applicable environmental, health and safety laws and regulations in
the ordinary course of our business. We do not anticipate, however, that the costs of such compliance will
have a material adverse effect on our business, results of operations, cash flows or financial condition,
although such outcome is possible given the nature of our operations and the extensive environmental,
public health and safety regulatory framework. We are aware of minor contamination at certain of our
facilities, and we are in the process of conducting investigations and/or remediation at certain properties.
In certain cases, the current or prior property owner is conducting the investigation and/or remediation or
we have been indemnified by either the current or prior property owner for such contamination. The
current level of contamination is such that we do not expect to incur significant costs for the remediation.
However, no assurances can be given that material environmental commitments or contingencies will not
arise in the future, or that they do not already exist but are unknown to us.
Employees
As of December 31, 2010, we employed approximately 4,039 persons on a full-time equivalent basis.
Available Information and NYSE Compliance
We file annual, quarterly and special reports, proxy statements and other information with the Securities
and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as amended (the
“Exchange Act”). You may inspect and copy our reports, proxy statements, and other information filed
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC
maintains an Internet Web site at http://www.sec.gov where you may access copies of our SEC filings.
We also make available, on our website at www.lithia.com, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are
filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You
may also obtain copies of these reports by contacting Investor Relations at 541-776-6591.
As required by the NYSE Corporate Governance Standards, we filed the appropriate certifications with
the NYSE in 2010 confirming that our CEO is not aware of any violations of the NYSE Corporate
Governance Standards and we also filed with the SEC, in 2010, the Chief Executive Officer and Chief
Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act.
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Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks
described below are not the only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations.
Risks related to our business
Adverse conditions affecting one or more key manufacturers may negatively impact our business,
results of operations, financial condition and cash flows.
We are subject to a concentration of risk in the event of financial distress, including potential
reorganization or bankruptcy, of a major vehicle manufacturer. We purchase substantially all of our new
vehicles from various manufacturers or distributors at the prevailing prices available to all franchised
dealers. We finance certain new vehicle inventory with automotive manufacturers’ captive finance
subsidiaries or their affiliated finance companies. Our sales volume could be materially adversely
impacted by the manufacturers’, distributors’ or finance companies’ inability to supply our stores with an
adequate supply of vehicles and related financing. Our Chrysler, GM and Ford (which we refer to as the
Domestic Manufacturers) stores represented approximately 32%, 18% and 6%, respectively, of our sales
in both 2010 and 2009.
Most manufacturers have experienced significant declines in sales due to the recent economic recession.
Many have disclosed substantial operating losses over the recent past. Two of these manufacturers,
Chrysler and GM, filed a petition for Chapter 11 bankruptcy protection in the second quarter of 2009. Both
succeeded in receiving approval for the transfer and sale of key operating assets into new companies
with reduced debt, improved operating efficiencies, new ownership and resized operations.
In connection with these reorganizations, both manufacturers terminated certain franchise agreements
nationwide. Two of our Chrysler store franchises were terminated in the bankruptcy and those
dealerships have ceased operations. One General Motors store franchise was also terminated.
Additionally, in certain markets, we were awarded additional franchises to sell the Chrysler or Jeep
brands. As a result of pending litigation, it is possible that we could lose the recently awarded additional
brands, or have competing points reinstated in our existing markets. Further, significant reinstatement by
Chrysler or GM could add additional costs and burdens on the reorganized manufacturers, reducing their
competitiveness. We are unable to predict the ultimate financial impact on our business, if any.
Resizing operations could negatively impact the volume of vehicles produced and available to dealers. As
such, no assurances can be given that our financial condition, results of operations and cash flows will
not be adversely impacted in the future.
The circumstances surrounding the manufacturers’ continued viability and the success of the reorganized
companies remain fluid and uncertain. There can be no assurance that we will be able to successfully
address the risks described above or those of the current economic circumstances and weak sales
environment.
Our business will be harmed if overall consumer demand continues to suffer from a severe or
sustained downturn.
Our business is heavily dependent on consumer demand and preferences. The downturn in overall levels
of consumer spending has materially and adversely affected our revenues. Retail vehicle sales are
cyclical and historically have experienced periodic downturns characterized by oversupply and weak
demand. These cycles are often dependent on general economic conditions and consumer confidence,
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as well as the level of discretionary personal income and credit availability. Economic conditions may
remain anemic for an extended period of time, or deteriorate in the future. This continuation would have a
material adverse effect on our retail business, particularly sales of new and used automobiles.
Our business may be adversely affected by unfavorable conditions in our local markets, even if
those conditions are not prominent nationally.
Our performance is subject to local economic, competitive and other conditions prevailing in our various
geographic areas. Our dealerships are currently located in limited markets in 12 states, with three states
accounting for approximately 51% of our annualized revenue in 2010. Our results of operations,
therefore, depend substantially on general economic conditions and consumer spending levels in those
markets and could be materially adversely affected to the extent these markets experience sustained
economic downturns regardless of improvements in the U.S. economy overall.
Our success depends in large part upon the overall demand for the particular lines of vehicles
that each of our stores sell and the ability of the manufacturers to continue to deliver high quality,
defect-free vehicles.
Demand for our primary manufacturers’ vehicles as well as the financial condition, management,
marketing, production and distribution capabilities of these manufacturers can significantly affect our
business. Events that adversely affect a manufacturer’s ability to timely deliver new vehicles may
adversely affect us by reducing our supply of popular new vehicles and leading to lower sales in our
stores during those periods than would otherwise occur. In addition, the discontinuance of a particular
brand could negatively impact our revenues and profitability.
Many new competitors are entering the automotive industry. New companies have recently raised capital
to produce fully electric vehicles or to license battery technology to existing manufacturers. Foreign
manufacturers from China and India are producing significant volumes of new vehicles and are entering
the U.S. and selecting partners to distribute their products. As the automotive market in the U.S. is mature
and the overall level of new vehicle sales may not increase in the coming years, the success of new
competitors will likely be at the expense of other, established brands. This could have a material adverse
impact on our success in the future.
Vehicle manufacturers would be adversely impacted by economic downturns or recessions, adverse
fluctuations in currency exchange rates, significant declines in the sales of their new vehicles, increases
in interest rates, declines in their credit ratings, labor strikes or similar disruptions (including within their
major suppliers), supply shortages or rising raw material costs, rising employee benefit costs, adverse
publicity that may reduce consumer demand for their products, product defects, vehicle recall campaigns,
litigation, poor product mix or unappealing vehicle design, or other adverse events. These and other risks
could materially adversely affect any manufacturer and limit its ability to profitably design, market,
produce or distribute new vehicles, which, in turn, could materially adversely affect our business, results
of operations, financial condition and cash flows.
Additionally, federal and certain state laws mandate minimum levels of vehicle fuel economy and
establish emission standards which levels and standards could be increased in the future, including
requiring the use of renewable energy sources. Such laws often increase the costs of new vehicles
generally, which would be expected to reduce demand. Further, changes in these laws could result in
fewer vehicles available for sale by manufacturers unwilling or unable to comply with the higher
standards.
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A decline of available financing in the lending market has, and may continue to, adversely affect
our vehicle sales volume.
A significant portion of vehicle buyers, particularly in the used car market, finance their purchases of
automobiles. Sub-prime lenders have historically provided financing for consumers who, for a variety of
reasons, including poor credit histories and lack of down payment, do not have access to more traditional
finance sources. Lenders have generally tightened their credit standards. In the event lenders maintain or
further tighten their credit standards or there is a further decline in the availability of credit in the lending
market, the ability of these consumers to purchase vehicles could be limited, which could have a material
adverse effect on our business, results of operations, financial condition and cash flows.
We are dependent on manufacturer, manufacturer-affiliated or other financing companies to
provide floorplan sources for our new vehicle inventories. If floorplan sources are eliminated or
reduced, no assurance can be given that we will be able to secure additional borrowing facilities.
Additionally, our floorplan debt is due upon demand, and it may be called at any time.
We secure real estate financing from certain lenders with a commitment that we continue to maintain
associated floorplan lines at the location so long as any mortgage debt remains outstanding. Such a
commitment subjects us to the prevailing floorplan line rate and terms offered by the lender, unless we
are able to refinance our real estate debt placed with them.
We currently have relationships with a number of manufacturers, their affiliated finance companies or
other finance companies, including Ally Bank, Mercedes-Benz Financial Services USA, LLC, Toyota
Financial Services (“TFS”), Ford Motor Credit Company, VW Credit, Inc., American Honda Finance
Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC. These
companies provide new vehicle floorplan financing for their respective brands. Ally Bank (formerly GMAC
LLC) serves as the primary lender for all other brands. At December 31, 2010, Ally Bank was the
floorplan provider on approximately 65% of the amount of floorplan debt outstanding. Certain of these
companies, including Ally Bank, have incurred significant losses and are operating under financial
constraints. Other companies may incur losses in the future or undergo funding limitations. As a result,
credit that has typically been extended to us by the companies may be modified with terms unacceptable
to us or revoked entirely. If these events were to occur, we may not be able to pay our floorplan debts or
borrow sufficient funds to refinance the vehicles. Even if new financing were available, it may not be on
terms acceptable to us.
If manufacturers or distributors discontinue or change sales incentives, warranties and other
promotional programs, our business, results of operations, financial condition and cash flows
may be materially adversely affected.
We depend upon the manufacturers and distributors for sales incentives, warranties and other programs
that are intended to promote new vehicle sales or support dealership profitability. Manufacturers and
distributors routinely make changes to their incentive programs. Key incentive programs include:
customer rebates;
dealer incentives on new vehicles;
below-market financing on new vehicles and special leasing terms; and
sponsorship of used vehicle sales by authorized new vehicle dealers.
special rates on certified, pre-owned cars;
Our financial condition could be materially adversely impacted by a discontinuation or change in our
manufacturers’ or distributors’ incentive programs. In addition, certain manufacturers, including BMW and
Mercedes, use a dealership’s manufacturer-determined customer satisfaction index, or CSI, score as a
factor governing participation in incentive programs. To the extent we cannot meet minimum score
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requirements, we may be precluded from receiving certain incentives, which could materially adversely
affect our business, results of operations, financial condition and cash flows.
Increasing fuel prices change consumer demand. Significant increases in fuel prices can be
expected to reduce vehicle sales.
Historically, in times of rapid increase in crude oil and fuel prices, sales of vehicles have dropped,
particularly in the short term, as the economy slows, consumer confidence wanes and fuel costs become
more prominent to the consumer’s buying decision. Limited supply of, and an increasing demand for,
crude oil over time are expected to result in significant price increases in the future. In sustained periods
of higher fuel costs, consumers who do purchase vehicles tend to prefer smaller, more fuel efficient
vehicles (which typically have lower margins) or hybrid vehicles (which can be in limited supply during
these periods).
Additionally, a significant portion of our new vehicle revenue and gross profit is derived from domestic
manufacturers. These manufacturers have historically sold a higher percentage of trucks and SUVs than
import or luxury brands. As such, they may experience a more significant decline in sales in the event that
fuel prices increase.
The ability of our stores to make new vehicle sales depends in large part upon the manufacturers
and, therefore, any disruption or change in our relationships with manufacturers may materially
and adversely affect our business, results of operations, financial condition and cash flows.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most popular
vehicles usually produce the highest profit margins and are frequently in short supply. If we cannot obtain
sufficient quantities of the most popular models, our profitability may be adversely affected. Sales of less
desirable models may reduce our profit margins.
Each of our stores operates pursuant to a Franchise Agreement with each of the respective
manufacturers for which it serves as franchisee. These agreements are typically renewed after one to five
years, but may also be granted into perpetuity. In our experience, agreements are routinely renewed
without substantial cost and there are legal remedies to help prevent termination.
However, manufacturers exert significant control over our stores through the terms and conditions of their
franchise agreements. Such agreements contain provisions for termination or non-renewal for a variety of
causes, including CSI scores and sales and financial performance. From time to time, certain of our
stores have failed to comply with certain provisions of their franchise agreements, and we cannot assure
you that our stores will be able to comply with these provisions in the future. In addition, actions taken by
a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise
agreements or otherwise could also have a material adverse effect on our revenues and profitability. If a
manufacturer terminates or fails to renew one or more of our significant franchise agreements or a large
number of our franchise agreements, such action could have a material adverse effect on our business,
results of operations, financial condition and cash flows.
Our franchise agreements also specify that, except in certain situations, we cannot operate a franchise by
another manufacturer in the same building as the manufacturer’s franchised store. This may require us to
build new facilities at a significant cost. Moreover, our manufacturers generally require that the store meet
defined image standards. These commitments could require us to make significant capital expenditures.
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If state dealer laws are repealed or weakened, our dealerships will be more susceptible to
termination, non-renewal or renegotiation of their franchise agreements. Additionally, federal
bankruptcy law can override protections afforded under state dealer laws.
State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise
agreement unless it has first provided the dealer with written notice setting forth good cause and stating
the grounds for termination or non-renewal. Certain state dealer laws allow dealers to file protests or
petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the
termination or non-renewal. If dealer laws are repealed in the states in which we operate, manufacturers
may be able to terminate our franchises without providing advance notice, an opportunity to cure or a
showing of good cause. Without the protection of state dealer laws, it may also be more difficult for our
dealers to renew their franchise agreements upon expiration.
In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in
the future. If manufacturers obtain the ability to directly retail vehicles and do so in our markets, such
competition could have a material adverse effect on our business, results of operations, financial
condition and cash flows.
As evidenced by the recent bankruptcy proceedings of both Chrysler and GM, state dealer laws do not
afford continued protection from manufacturer terminations or non-renewal of franchise agreements.
While we do not believe additional bankruptcy filings are probable, no assurances can be given that a
manufacturer will not seek protection under bankruptcy laws, or that, in this event, they will not seek to
terminate franchise rights held by us.
Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise
agreements or issue additional equity.
Certain of our franchise agreements prohibit transfers of ownership interests of a store or, in selected
cases, its parent. The most prohibitive restriction which could be imposed by various manufacturers,
including Honda/Acura, Hyundai, Mazda and Nissan, provides that, under certain circumstances, we may
lose a franchise if a person or entity acquires an ownership interest in us above a specified level (ranging
from 20% to 50% depending on the particular manufacturer’s restrictions and falling as low as 5% if
another vehicle manufacturer is the entity acquiring the ownership interest) without the approval of the
applicable manufacturer. Other restrictions in certain franchise agreements with manufacturers, including
Ford, GM, Honda/Acura and Toyota, provide that a change in control in the Company without prior
consent is a violation of our franchise or dealer framework agreement. Transactions in our stock by our
shareholders or prospective shareholders are generally outside of our control and may result in the
termination or non-renewal of one or more of our franchises or impair our ability to negotiate new
franchise agreements for dealerships we desire to acquire in the future, which may have a material
adverse effect on our business, results of operations, financial condition and cash flows. These
restrictions may also prevent or deter a prospective acquirer from acquiring control of us or otherwise
adversely affect the market price of our Class A common stock or limit our ability to restructure our debt
obligations.
Our overall liquidity and earnings may be materially adversely affected by failures of, or delays by,
manufacturers in remitting payments to us.
We rely on our manufacturer partners to pay amounts owed to us on customary business terms. The
amounts owed to us primarily relate to, but are not limited to, warranty work performed, factory holdback
or other manufacturer incentives. Total receivables from manufacturers were $14.2 million and $11.0
million as of December 31, 2010 and 2009, respectively. In the event manufacturers significantly delay or
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fail to make payments of amounts owed, our overall liquidity and earnings position could be materially
and adversely affected.
Increasing competition among automotive retailers reduces our profit margins on vehicle sales
and related businesses. Further, the use of the Internet in the car purchasing process could
materially adversely affect us.
Automobile retailing is a highly competitive business. Our competitors include publicly and privately-
owned dealerships, of which certain competitors are larger and have greater financial and marketing
resources than we have. Many of our competitors sell the same or similar makes of new and used
vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in
purchasing new vehicles from manufacturers due to economies of scale or otherwise.
Our finance and insurance business and other related businesses, which have higher margins than sales
of new and used vehicles, are subject to strong competition from various financial institutions and other
third parties.
The internet has become a significant part of the sales process in our industry. Customers are using the
internet to compare pricing for vehicles and related finance and insurance services, which may further
reduce margins for new and used vehicles and profits for related finance and insurance services. If
internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our
business could be materially adversely affected. In addition, other franchise groups have aligned
themselves with services offered on the internet or are investing heavily in the development of their own
internet capabilities, which could materially adversely affect our business, results of operations, financial
condition and cash flows.
Our Franchise Agreements do not grant us the exclusive right to sell a manufacturer’s product within a
given geographic area. Our revenues or profitability could be materially adversely affected if any of our
manufacturers award franchises to others in the same markets where we operate or if existing franchised
dealers increase their market share in our markets.
In addition, we may face increasingly significant competition as we strive to gain market share through
acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where
we do not have a leading position.
Import product restrictions and foreign trade risks may impair our ability to sell foreign vehicles
profitably.
A significant portion of the vehicles we sell, as well as certain major components of such vehicles, are
manufactured outside the United States. Accordingly, we are affected by import and export restrictions of
various jurisdictions and are dependent, to a certain extent, on general socio-economic conditions in, and
political relations with, a number of foreign countries. Additionally, fluctuations in currency exchange rates
may increase the price and adversely affect our sales of vehicles produced by foreign manufacturers.
Imports into the United States may also be adversely affected by increased transportation costs and
tariffs, quotas or duties, any of which could have a material adverse effect on our business, results of
operations, financial condition and cash flows.
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Environmental, health or safety regulations could have a material adverse effect on our business,
results of operations, financial condition and cash flows or cause us to incur significant
expenditures.
We are subject to various federal, state and local environmental, health and safety regulations which
govern items such as the generation, storage, handling, use, treatment, recycling, transportation, disposal
and remediation of hazardous material and the emission and discharge of hazardous material into the
environment. Under certain environmental regulations or pursuant to signed private contracts, we could
be held responsible for all of the costs relating to any contamination at our present, or our previously
owned, facilities, and at third party waste disposal sites. We are aware of minor contamination at certain
of our facilities, and we are in the process of conducting investigations and/or remediation at certain
properties. The current level of contamination is such that we do not expect to incur significant costs for
the remediation. In certain cases, the current or prior property owner is conducting the investigation
and/or remediation or we have been indemnified by either the current or prior property owner for such
contamination. There can be no assurance that these owners will remediate, or continue to remediate,
these properties or pay, or continue to pay, pursuant to these indemnities. We are also required to obtain
permits from governmental authorities for certain operations. If we violate or fail to fully comply with these
regulations or permits, we could be fined or otherwise sanctioned by regulators.
Environmental, health and safety regulations are becoming increasingly stringent. There can be no
assurance that the costs of compliance with these regulations will not result in a material adverse effect
on our results of operations or financial condition. Further, no assurances can be given that additional
environmental, health or safety matters will not arise or new conditions or facts will not develop in the
future at our currently or formerly owned or operated facilities, or at sites that we may acquire in the
future, which will require us to incur significant expenditures.
With the breadth of our operations and volume of consumer and financing transactions,
compliance with the many applicable federal and state laws and regulations cannot be assured.
New regulations are enacted on an ongoing basis. These regulations may impact our profitability
and require continuous training and vigilance. Fines, judgments and administrative sanctions can
be severe.
We are subject to federal, state and local laws and regulations in each of the 12 states in which we have
stores. New laws and regulations are enacted on an ongoing basis. With the number of stores we
operate, the number of personnel we employ and the large volume of transactions we handle, it is likely
that technical mistakes will be made. It is also likely that these regulations may impact our profitability and
require ongoing training. Current practices in stores may become prohibited. We are responsible for
ensuring that continued compliance with laws is maintained. If there are unauthorized activities of serious
magnitude, the state and federal authorities have the power to impose civil penalties and sanctions,
suspend or withdraw dealer licenses or take other actions. These actions could materially impair our
activities or our ability to acquire new stores in those states where violations occurred. Further, private
causes of action on behalf of individuals or a class of individuals could result in significant damages or
injunctive relief.
The seasonality of our business magnifies the importance of second and third quarter operating
results.
Our business is subject to seasonal variations in revenues. In our experience, demand for automobiles is
generally lower during the first and fourth quarters of each year and this variance is even more
pronounced in stores located in cold-weather states. We, therefore, generally receive a disproportionate
amount of revenues in the second and third quarters and expect our revenues and operating results to be
generally lower in the first and fourth quarters. Consequently, if conditions surface during the second and
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third quarters that impair vehicle sales, such as higher fuel costs, depressed economic conditions or
similar adverse conditions, our revenues for the full year could be materially adversely affected.
Our ability to increase revenues through acquisitions depends on our ability to acquire and
successfully integrate additional stores.
General
The U.S. automobile industry is considered a mature industry in which minimal growth is expected in unit
sales of new vehicles. Accordingly, a principal component of our growth in sales is to make acquisitions in
our existing markets and in new geographic markets. To complete the acquisition of additional stores, we
need to successfully address each of the following challenges.
Limitations on our capital resources
The acquisition of additional stores will require substantial capital investment. Limitations on our capital
resources would restrict our ability to complete new acquisitions.
We have financed our past acquisitions from a combination of the cash flow from our operations,
borrowings under our credit arrangements, issuances of our common stock and proceeds from private
debt offerings. The use of any of these financing sources could have the effect of reducing our earnings
per share. We may not be able to obtain financing in the future due to the market price of our Class A
common stock and overall market conditions. Furthermore, using cash to complete acquisitions could
substantially limit our operating or financial flexibility.
Substantially all of the assets of our dealerships are pledged to secure the indebtedness under our Credit
Facility and our floorplan financing indebtedness. These pledges may limit our ability to borrow from other
sources in order to fund our acquisitions.
Manufacturers
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a
franchised store. In determining whether to approve an acquisition, a manufacturer considers many
factors, including our financial condition, ownership structure, the number of stores currently owned and
our performance with those stores. Obtaining manufacturer approval of acquisitions also takes a
significant amount of time, typically 60 to 90 days. We cannot assure you that manufacturers will approve
future acquisitions timely, if at all, which could significantly impair the execution of our acquisition
strategy.
Most major manufacturers have now established limitations or guidelines on the:
number of such manufacturers’ stores that may be acquired by a single owner;
number of stores that may be acquired in any market or region;
percentage of market share that may be controlled by one automotive retailer group;
ownership of stores in contiguous markets;
performance requirements for existing stores; and
frequency of acquisitions.
In addition, such manufacturers generally require that no other manufacturers’ brands be sold from the
same store location, and many manufacturers have site control agreements in place that limit our ability
to change the use of the facility without their approval.
A manufacturer also considers our past performance as measured by the Customer Satisfaction Index
(“CSI”) scores and Sales Satisfaction Index (“SSI”) scores at our existing stores. At any point in time,
certain stores may have CSI scores below the manufacturers’ sales zone averages or have achieved
sales below the targets manufacturers have set. Our failure to maintain satisfactory CSI scores and to
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achieve market share performance goals could restrict our ability to complete future acquisitions. We
currently have, and at any point in the future may have, manufacturers that restrict our ability to complete
future acquisitions.
failing to achieve predicted sales levels
incurring significantly higher capital expenditures and operating expenses;
failing to assimilate the operations and personnel of acquired dealerships;
Acquisition risks
We will face risks commonly encountered with growth through acquisitions. These risks include, without
limitation:
entering new markets with which we are unfamiliar;
encountering undiscovered liabilities and operational difficulties at acquired dealerships;
disrupting our ongoing business;
diverting our management resources;
failing to maintain uniform standards, controls and policies;
impairing relationships with employees, manufacturers and customers as a result of changes in
management;
incurring increased expenses for accounting and computer systems, as well as integration
difficulties;
failing to obtain a manufacturer’s consent to the acquisition of one or more of its dealership
franchises or renew the franchise agreement on terms acceptable to us; and
incorrectly valuing entities to be acquired.
In addition, we may not adequately anticipate all of the demands that growth will impose on our systems,
procedures and structures.
Consummation and competition
We may not be able to consummate any future acquisitions at acceptable prices and terms or identify
suitable candidates. In addition, increased competition in the future for acquisition candidates could result
in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and
nature of future acquisitions will depend upon various factors, including:
the availability of suitable acquisition candidates;
competition with other dealer groups for suitable acquisitions;
the negotiation of acceptable terms with the seller and with the manufacturer;
our financial capabilities and ability to obtain financing on acceptable terms;
our stock price;
our ability to maintain required financial covenant levels after the acquisition; and
the availability of skilled employees to manage the acquired businesses.
Financial condition
The operating and financial condition of acquired businesses cannot be determined accurately until we
assume control. Although we conduct what we believe to be a prudent level of investigation regarding the
operating and financial condition of the businesses we purchase, in light of the circumstances of each
transaction, an unavoidable level of risk remains regarding the actual operating condition of these
businesses. Similarly, many of the dealerships we acquire do not have financial statements audited or
prepared in accordance with U.S. generally accepted accounting principles. We may not have an
accurate understanding of the historical financial condition and performance of our acquired businesses.
Until we actually assume control of the business assets and their operations, we may not be able to
ascertain the actual value or understand the potential liabilities of the acquired businesses and their
earnings potential.
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Indefinite-lived intangible assets, which consist of goodwill and franchise value, comprise a
meaningful portion of our total assets ($51.4 million at December 31, 2010). We must test our
indefinite-lived intangible assets for impairment at least annually, which may result in a non-cash
write-down of franchise rights or goodwill and could have a material adverse impact on our
business, results of operations, financial condition and cash flows and impair our ability to
comply with loan covenants.
Indefinite-lived intangible assets are subject to impairment assessments at least annually (or more
frequently when events or circumstances indicate that an impairment may have occurred) by applying a
fair-value based test. Our principal intangible assets are goodwill and our rights under our Franchise
Agreements with vehicle manufacturers. The risk of impairment charges associated with goodwill
increases if there are declines in our market capitalization, profitability or cash flows. The risk of
impairment charges associated with franchise value increases if operating losses are suffered at those
stores, if a manufacturer files for bankruptcy or if the stores are closed. Impairment charges result in non-
cash write-downs of the affected franchise values or goodwill. Furthermore, impairment charges could
have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt
agreements and could have a material adverse impact on our business, results of operations, financial
condition and cash flows.
A net deferred tax asset position comprises a meaningful portion of our total assets
(approximately $42.5 million at December 31, 2010). We are required to assess the recoverability
of this asset on an ongoing basis. Future negative operating performance or other unfavorable
developments may result in a valuation allowance being recorded against part or all of this
amount. This could have a material adverse impact on our business, results of operations,
financial condition and cash flows and impair our ability to comply with loan covenants.
Deferred tax assets are evaluated periodically to determine if they are expected to be recoverable in the
future. This evaluation considers positive and negative evidence in order to assess whether it is more
likely than not that a portion of the asset will not be realized. The risk of a valuation allowance increases if
continuing operating losses are incurred. A valuation allowance on our deferred tax asset could have an
adverse impact on our ability to satisfy financial ratios or other covenants under our debt agreements and
could have a material adverse impact on our business, results of operations, financial condition and cash
flows.
Our indebtedness and lease obligations could materially adversely affect our financial health, limit
our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling
our financial obligations. Much of our debt has a variable interest rate component that may
significantly increase our interest costs in a rising rate environment.
As of December 31, 2010, our total outstanding indebtedness was approximately $532.0 million, including
$251.3 million in floorplan financing, $40.0 million in borrowings under our Credit Facility, $234.8 million in
mortgage debt and $5.9 million in other long-term debt. Mortgage indebtedness consists primarily of real
estate loans on individual properties from thirteen different banks and finance companies at fixed and
variable rates.
Our floorplan financing is provided by eight banks and finance companies which are, or previously were,
associated with automobile manufacturers. For new vehicles and vehicles purchased at dealer auctions,
advances are made at the time such vehicles are purchased and are typically required to be repaid no
later than upon sale or lease of the vehicle.
Most of our floorplan financing may be terminated at any time by the lender and is due on demand.
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Our indebtedness and lease obligations could have important consequences to us, including the
following:
limitations on our ability to make acquisitions;
impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital
or general corporate purposes;
reduced funds available for our operations and other purposes, as a portion of our current cash
flow from operations would be dedicated to the payment of principal and interest on our
indebtedness; and
exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be,
at variable rates of interest.
In addition, our loan agreements contain covenants that limit our discretion with respect to business
matters, including incurring additional debt or disposing of assets. Other covenants are financial in nature,
including tangible net worth, vehicle equity, fixed charge coverage and liabilities to tangible net worth. A
breach of any of these covenants could result in a default under the applicable agreement. In addition, a
default under one agreement could result in a default and acceleration of our repayment obligations under
the other agreements under the cross-default provisions in such other agreements.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself
insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated,
and the lender declares that an event of default has occurred, the outstanding indebtedness would likely
be immediately due and owing.
If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance
them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this
risk, we could be forced to take actions that we otherwise would not take, or not take actions that we
otherwise might take, in order to comply with these agreements.
The global credit and capital markets are undergoing a period of substantial volatility and disruption.
There can be no assurance that this credit environment will not worsen or further impact the availability
and cost of debt financing, including the refinancing of our indebtedness. If we are unable to refinance or
renegotiate our debt, we cannot guarantee that we will be able to generate enough cash flow from
operations or that we will be able to obtain enough capital to service our debt, make acquisitions or fund
our planned capital expenditures. In such an event, we could face substantial liquidity issues and might
be required to issue equity securities or sell assets to meet our debt payments and other obligations.
There can be no assurance that we will be able to effect refinancing of our indebtedness on terms
acceptable to us, if at all.
Additionally, our real estate debt generally has a five-year term, after which the debt needs to be renewed
or replaced. Over the last three years, the appraised value of commercial real estate, generally, and
much of our real estate, specifically, has declined. Further, many lenders are reducing the loan-to-value
lending ratios for new or renewed real estate loans. The effect of these developments could result in our
inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable
to us, requiring us to find replacement lenders or to refinance at lower loan amounts.
We have significant levels of mortgage debt maturing in the coming years. Approximately $46.3 million,
$51.8 million and $61.8 million matures in 2013, 2014 and 2015, respectively. There can be no assurance
that, if requested by us, our current lenders will be willing or able to extend these maturities, or that we
will be able to find other counterparties to provide financing in the future.
As of December 31, 2010, including the effect of interest rate swaps, approximately 59% of our total debt
was variable rate. The majority of our variable rate debt is indexed to the 30 day LIBOR rate. The current
21
interest rate environment is at historically low levels, and interest rates will likely increase in the future. In
the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate
debt that matures may be renewed at interest rates significantly higher than current levels. As a result,
this could have a material adverse impact on our business, results of operations, financial condition and
cash flows.
We have a significant relationship with a third-party warranty insurer and administrator. If the
insurer should be unable to meet claims under our customers’ policies, such events could
negatively impact our business, results of operations, financial condition and cash flows.
We sell service warranty policies to our customers issued by a third-party obligor. We receive additional
fee income if actual claims are less than the amounts reserved for anticipated claims and the costs of
administration and administrator profit. As such, the service contracts must expire before the ultimate
claims experience on the service contracts are known and the profit component can be calculated.
A decline in the financial health of the third-party insurer could jeopardize the claims reserves held by the
administrator, and prevent us from collecting the experience payments anticipated to be earned in future
years. While the amount we receive varies annually, the loss of this income could negatively impact our
business, results of operations, financial condition and cash flows. Further, the inability of the insurer to
honor service warranty claims would likely result in reputational risk to us and might result in claims to
cover any default by the insurer.
The loss of key personnel or the failure to attract additional qualified management personnel
could adversely affect our operations and growth.
Our success depends to a significant degree on the efforts and abilities of our senior management,
particularly Sidney B. DeBoer, our Chairman and Chief Executive Officer, and Bryan B. DeBoer, our
President and Chief Operating Officer. Further, we have identified Sidney B. DeBoer and/or Bryan B.
DeBoer in most of our store franchise agreements as the individuals who control the franchises and upon
whose financial resources and management expertise the manufacturers may rely when awarding or
approving the transfer of any franchise.
In addition, as we expand, we may need to hire additional managers. The market for qualified employees
in the industry and in the regions in which we operate, particularly for general managers and sales and
service personnel, is highly competitive and may subject us to increased labor costs during periods of low
unemployment. The loss of the services of key employees or the inability to attract additional qualified
managers could have a material adverse effect on our business, results of operations, financial condition
and cash flows. In addition, the lack of qualified management or employees employed by potential
acquisition candidates may limit our ability to consummate future acquisitions.
The sole voting control of our company is currently held by Sidney B. DeBoer, who may have
interests different from our other shareholders. Further, 3.8 million shares of our Class B common
stock held by Lithia Holding Company, LLC (“Lithia Holding”) are pledged, with other assets, to
secure personal indebtedness of Mr. DeBoer. The failure to repay the indebtedness could result in
the sale of such shares and the loss of such control, which may violate agreements with certain
manufacturers.
Lithia Holding, of which Sidney B. DeBoer, our Chairman and Chief Executive Officer, is the sole
managing member, holds all of the outstanding shares of our Class B common stock. A holder of Class B
common stock is entitled to ten votes for each share held, while a holder of Class A common stock is
entitled to one vote per share held. On most matters, the Class A and Class B common stock vote
together as a single class. As of March 7, 2011, Lithia Holding controlled approximately 63% of the
22
aggregate number of votes eligible to be cast by shareholders for the election of directors and most other
shareholder actions. In addition, because Mr. DeBoer is the managing member of Lithia Holding, he
currently controls, and will continue to control, all of the outstanding Class B common stock, thereby
allowing him to control the company.
Lithia Holding has pledged 3.8 million shares of our Class B common stock, together with other personal
assets of Mr. DeBoer, to secure a personal loan to Mr. DeBoer from U.S. Bank National Association.
Should he be unable to repay the loan, the bank could foreclose against the Class B common stock,
which would result in the automatic conversion of such shares to Class A common stock. In such event,
Mr. DeBoer would no longer be in control of the company and this loss (change) in control, if not
consented to by the manufacturers, would be a technical violation under most of the dealer sales and
service agreements held by us. While applicable state franchise laws prohibit manufacturers from
unreasonably withholding consent to a change in control or the appointment of a new individual
responsible for the operations of a store should a loss in control result in the removal of both Sidney
DeBoer and Bryan DeBoer, there can be no assurance that such laws will not change. In addition, the
market price of our Class A common stock could decline materially if the bank foreclosed on such
pledged stock and subsequently sold such stock in the open market.
Risks related to investing in our Class A common stock
Future sales of our Class A common stock in the public market could adversely impact the market
price of our Class A common stock.
As of March 7, 2011, we had 3,187,672 shares of Class A common stock reserved for issuance under our
equity plans (including our employee stock purchase plan). As of March 7, 2011, a total of 1,376,262
shares were outstanding related to outstanding restricted stock units and options (with the options having
a weighted average exercise price of $13.24 per share and options to purchase 385,245 shares being
exercisable). In addition, we had 3,762,231 shares of Class B common stock outstanding convertible into
3,762,231 shares of Class A common stock.
In the future, we may issue additional shares of our Class A common stock to raise capital or effect
acquisitions. We cannot predict the size of future sales or issuance or the effect, if any, they may have on
the market price of our Class A common stock. The sale of substantial amounts of Class A common
stock, or the perception that such sales may occur, could adversely affect the market price of our Class A
common stock and impair our ability to raise capital through the sale of additional equity securities, or to
sell equity at a price acceptable to us.
Volatility in the market price and trading volume of our Class A common stock could adversely
impact the value of the shares of our Class A common stock.
The stock market in recent years has experienced significant price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of companies like ours. These
broad market factors may materially reduce the market price of our Class A common stock, regardless of
our operating performance. The market price of our Class A common stock, which has experienced large
price and volume fluctuations over the last five years, could continue to fluctuate significantly for many
reasons, including in response to the risks described herein or for reasons unrelated to our operations,
such as:
reports by industry analysts;
changes in financial estimates by securities analysts or us, or our inability to meet or exceed
securities analysts’, investors’ or our own estimates or expectations;
actual or anticipated sales of common stock by existing shareholders;
capital commitments;
23
additions or departures of key personnel;
developments in our business or in our industry;
a prolonged downturn in our industry;
general market conditions, such as interest or foreign exchange rates, commodity and equity
prices, availability of credit, asset valuations and volatility;
changes in global financial and economic markets;
armed conflict, war or terrorism;
regulatory changes affecting our industry generally or our business and operations in particular;
changes in market valuations of other companies in our industry;
the operating and securities price performance of companies that investors consider to be
comparable to us; and
announcements of strategic developments, acquisitions and other material events by us, our
competitors or our suppliers.
Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover,
which could impair the market price of our Class A common stock.
We are an Oregon corporation, and certain provisions of Oregon law and our Restated Articles of
Incorporation may have anti-takeover effects. These provisions could delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider to be in his or her best interest. These
provisions may also affect attempts that might result in a premium over the market price for the shares
held by shareholders, and may make removal of the incumbent management and directors more difficult,
which, under certain circumstances, could reduce the market price of our Class A common stock.
Our issuance of preferred stock could adversely affect holders of Class A common stock.
Our Board of Directors is authorized to issue a series of preferred stock without any action on the part of
our holders of Class A common stock. Our Board of Directors also has the power, without shareholder
approval, to set the terms of any such series of preferred stock that may be issued, including voting
powers, preferences over our Class A common stock with respect to dividends or if we voluntarily or
involuntarily dissolve or distribute our assets, and other terms. If we issue preferred stock in the future
that has preference over our Class A common stock with respect to the payment of dividends or upon our
liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting
power of our Class A common stock, the rights of holders of our Class A common stock or the price of our
Class A common stock could be adversely affected.
24
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities,
collision repair and paint shops, supply facilities, automobile storage lots, parking lots and offices. We
believe our facilities are currently adequate for our needs and are in good repair. Some of our facilities do
not currently meet manufacturer image or size requirements and we are actively working to find a
mutually acceptable outcome in terms of timing and overall cost. We own certain properties, but also
lease certain properties, providing future flexibility to relocate our retail stores as demographics,
economics, traffic patterns or sales methods change. Most leases provide us the option to renew the lease
for one or more lease extension periods. We also hold certain vacant dealerships and undeveloped land
for future expansion.
Item 3. Legal Proceedings
We are party to numerous legal proceedings arising in the normal course of our business. While we
cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of
legal proceedings arising in the normal course of business or the proceeding described below will have a
material adverse effect on our business, results of operations, financial condition, or cash flows.
Alaska Service and Parts Advisors and Managers Overtime Suit
On March 22, 2006, seven former employees in Alaska brought suit against Lithia (Dunham, et al. v.
Lithia Support Services, et al., 3AN-06-6338 Civil, Superior Court for the State of Alaska) seeking
overtime wages, additional liquidated damages and attorney’s fees. The complaint was later amended to
include a total of 11 named plaintiffs. The court ordered the dispute to arbitration. In February 2008, the
arbitrator granted the plaintiffs’ request to establish a class of plaintiffs consisting of all present and former
service and parts department employees totaling approximately 150 individuals who were paid on a
commission basis. Lithia filed a motion requesting reconsideration of this class certification. The arbitrator
granted our motion in part and removed approximately 30 service and parts managers from the case. A
class action opt-out notice was mailed to the remaining class members in October 2009. Lithia and the
plaintiffs agreed to conduct the arbitration in two parts. The first part of arbitration determined if liability
existed for Lithia. This arbitration was conducted from September 27 to 29, 2010. The arbitrator ruled in
Lithia’s favor and determined that there were no valid claims. The plaintiff has appealed the decision, but
we believe the likelihood of overturning the decision is remote, as the appeal is to the arbitrator who made
the initial ruling. Therefore, Lithia believes the exposure on this case is now immaterial.
Item 4. Reserved
25
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Stock Prices and Dividends
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. The following
table presents the high and low sale prices for our Class A common stock, as reported on the New York
Stock Exchange Composite Tape for each of the quarters in 2009 and 2010:
2009
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2010
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
Low
$
$
3.90
9.58
16.49
15.42
9.55
9.36
9.94
14.45
1.98
1.85
8.43
7.04
5.18
6.09
5.87
9.45
The number of shareholders of record and approximate number of beneficial holders of Class A common
stock at March 7, 2011 was 1,229 and 7,777, respectively. All shares of Lithia’s Class B common stock
are held by Lithia Holding Company, LLC.
Dividends declared on our Class A and Class B common stock during 2010 were as follows:
Quarter declared:
2010
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend
amount per
share
Total amount of
dividend (in
thousands)
$
$
-
0.05
0.05
0.05
-
1,300
1,307
1,312
We did not declare nor pay any dividends on our Class A and Class B common stock in 2009.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in
Item 12.
26
Stock Performance Graph
The following line-graph shows the annual percentage change in the cumulative total returns for the past
five years on an assumed $100 initial investment and reinvestment of dividends, on (a) Lithia Motors,
Inc.’s Class A common stock; (b) the Russell 2000; and (c) a peer group index composed of Penske
Automotive Group, AutoNation, Sonic Automotive, Group 1 Automotive and Asbury Automotive Group,
the only other comparable publicly traded automobile dealerships in the United States as of December
31, 2010. The peer group index utilizes the same methods of presentation and assumptions for the total
return calculation as does Lithia Motors and the Russell 2000. All companies in the peer group index are
weighted in accordance with their market capitalizations.
Base
Period
Indexed Returns for the Year Ended
Company/Index
Lithia Motors, Inc.
Auto Peer Group
Russell 2000
12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010
$ 51.52
110.51
124.45
$100.00
100.00
100.00
$29.15
79.36
98.11
$ 93.10
114.40
118.35
$ 45.57
79.20
116.52
$11.56
38.35
77.14
27
Item 6. Selected Financial Data
You should read the Selected Financial Data in conjunction with Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and Notes
thereto and other financial information contained elsewhere in this Annual Report on Form 10-K. The results of
operations for stores classified as discontinued operations have been presented on a comparable basis for all
periods presented.
(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenues:
New vehicle
Used retail vehicle
Used wholesale vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Gross Profit:
New vehicle
Used retail vehicle
Used wholesale vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total gross profit
Operating income (loss)(1)
Income (loss) from continuing operations before
income taxes(1)
Income (loss) from continuing operations
Basic income (loss) per share from continuing
operations
Basic income (loss) per share from discontinued
operations
Basic net income (loss) per share
Shares used in basic per share
Diluted income (loss) per share from continuing
operations
Diluted income (loss) per share from discontinued
operations
Diluted net income (loss) per share
Shares used in diluted per share
Cash dividends declared per common share
(In thousands)
Consolidated Balance Sheet Data:
Working capital
Inventories
Total assets
Floorplan notes payable
Long-term debt, including current maturities
Total stockholders’ equity
$
$
$
$
$
$
$
$
$
$
$
$
$
2010
1,067,648
581,185
108,113
67,107
295,823
11,722
2,131,598
87,384
82,003
645
67,107
142,584
1,707
381,430
47,940
23,193
14,100
$
$
$
$
$
$
$
Year Ended December 31,
2008
2009
2007
881,329
477,253
72,699
56,397
291,075
2,614
1,781,367
74,417
67,166
411
56,397
138,543
1,331
338,265
35,713
12,078
6,916
$
$
$
$
$
$
$
1,167,532
469,603
96,476
77,503
303,596
4,867
2,119,577
91,791
53,458
(3,136)
77,503
144,795
1,572
365,983
$
$
$
$
1,544,417
555,429
133,862
100,037
303,412
5,185
2,642,342
120,628
78,388
3,073
100,037
144,381
1,357
447,864
(300,753) $
79,438
(333,010)
$
38,606
(225,132) $
21,722
$
$
$
$
$
$
$
2006
1,448,866
537,984
117,868
97,111
257,942
5,174
2,464,945
113,552
80,697
3,554
97,111
124,628
1,454
420,996
89,636
52,481
32,256
0.54
$
0.31
$
(11.15)
$
1.10
$
1.65
(0.01)
0.53
26,062
$
0.11
0.42
22,037
$
(1.36)
(12.51) $
20,195
-
1.10 $
19,675
0.25
1.90
19,583
0.53
$
0.31
$
(11.15)
$
1.06
$
1.53
(0.01)
0.52 $
0.10
0.41 $
26,279
22,176
(1.36)
(12.51) $
20,195
-
1.06 $
22,204
0.23
1.76
22,207
0.15 $
- $
0.47
$
0.56 $
0.54
2010
162,675 $
415,228
971,676
251,257
280,774
320,217
2009
96,886
333,628
895,100
216,082
265,773
307,038
As of December 31,
2008
$
$
99,524
428,032
1,133,459
343,290
338,229
248,343
2007
193,447 $
606,056
1,626,735
456,237
464,175
508,212
2006
149,701
606,567
1,579,357
503,219
405,399
493,393
(1)
Includes $15.3 million, $8.3 million and $338.7 million of non-cash charges related to asset impairments and terminated
construction projects for the years ended 2010, 2009 and 2008, respectively. See Notes 1, 4 and 5 of Notes to Consolidated
Financial Statements for additional information.
28
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Item 1. “Business,” Item 1A. “Risk Factors” and
our Consolidated Financial Statements and Notes thereto.
Overview
As discussed in Overview in Item 1, “Business” above, we are a leading operator of automotive
franchises and retailer of new and used vehicles and services. As of March 7, 2011, we offered 26 brands
of new vehicles and all brands of used vehicles in 82 stores in the United States and online at Lithia.com.
We sell new and used cars and light trucks, replacement parts, provide vehicle maintenance, warranty,
paint and repair services and arrange related financing, service contracts, protection products and credit
insurance.
We continue to believe that the fragmented nature of the automotive dealership sector provides us with
the opportunity to achieve growth through consolidation. We have completed over 100 acquisitions since
our initial public offering in 1996. Our acquisition strategy has been to acquire underperforming
dealerships and, through the application of our centralized operating structure, leverage costs and
improve store profitability. We believe the current economic environment provides us with attractive
acquisition opportunities.
We also believe that we can continue to improve operations at our existing stores. By promoting
entrepreneurial leadership in our general manager position, we anticipate continuing improvement in the
percentage of new vehicle sales we capture in our local markets. While we retail approximately one used
vehicle for every new vehicle sold, we believe we can make additional improvements in our used vehicle
sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle
franchise at each location. Overall, organic growth through improved operations is a goal in 2011.
We believe our cost structure is aligned with current industry sales levels. Through initiatives started in
the second quarter of 2008, we have successfully established a cost structure which can be leveraged as
vehicle sales levels improve. However, no assurances can be given that industry sales will not experience
a further decline, or that our restructuring efforts were sufficient to meet our operating objectives in a
declining market.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles
requires us to make certain estimates, judgments and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenues
and expenses at the date of the financial statements. Certain accounting policies require us to make
difficult and subjective judgments on matters that are inherently uncertain. The following accounting
policies involve critical accounting estimates because they are particularly dependent on assumptions
made by management. While we have made our best estimates based on facts and circumstances
available to us at the time, different estimates could have been used in the current period. Changes in the
accounting estimates we used are reasonably likely to occur from period to period, which may have a
material impact on the presentation of our financial condition and results of operations.
Our most critical accounting estimates include those related to goodwill and franchise value, long-lived
assets, deferred tax assets, service contracts and other insurance contracts, and lifetime oil change and
self insurance programs. We also have other key accounting policies for valuation of accounts receivable,
expense accruals and revenue recognition. However, these policies either do not meet the definition of
critical accounting estimates described above or are not currently material items in our financial
statements. We review our estimates, judgments and assumptions periodically and reflect the effects of
29
revisions in the period that they are deemed to be necessary. We believe that these estimates are
reasonable. However, actual results could differ materially from these estimates.
Goodwill and Franchise Value
We are required to test our goodwill and franchise value for impairment at least annually, or more
frequently if conditions indicate that an impairment may have occurred.
We have determined that we operate as one reporting unit for evaluating goodwill. For the goodwill
impairment testing, we apply a fair-value based test using the Adjusted Present Value method (“APV”) to
indicate the fair value of our reporting unit. Under the APV method, future cash flows are based on
recently prepared budget forecasts and business plans to estimate the future economic benefits that the
reporting unit will generate. An estimate of the appropriate discount rate is utilized to convert the future
economic benefits to their present value equivalent.
The goodwill impairment test is a two step process. The first step identifies potential impairments by
comparing the calculated fair value of a reporting unit with its book value. If the fair value of the reporting
unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the
carrying value exceeds the fair value, the second step includes determining the implied fair value through
further market research. The implied fair value of goodwill is then compared with the carrying amount to
determine if an impairment loss is recorded.
As of December 31, 2010, we had $6.2 million of goodwill on our balance sheet. The first step of our
annual goodwill impairment analysis, which we performed as of October 1, 2010, did not result in an
indication of impairment. The fair value at December 31, 2010, using the APV method, was 54% greater
than the carrying value at December 31, 2010. Our impairment testing of goodwill in 2008 resulted in
impairment charges of $299.3 million to fully write-off our goodwill, primarily due to the adverse change in
the business climate and our reduced earnings and cash flow forecast. We did not have any goodwill on
our balance sheet at December 31, 2009.
We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an
individual store basis. For the franchise value impairment testing, we estimate the fair value of our
franchise rights primarily using the APV model. The forecasted cash flows used in the APV model contain
inherent uncertainties, including significant estimates and assumptions related to growth rates, margins,
general operating expenses, and cost of capital. We use primarily internally-developed forecasts and
business plans to estimate the future cash flows that each franchise will generate. We have determined
that only certain cash flows of the store are directly attributable to the franchise rights. We estimate the
appropriate interest rate to discount future cash flows to their present value equivalent taking into
consideration factors such as a risk-free rate, a beta, an equity risk premium, a small stock risk premium,
and a store-specific risk premium.
We also use third-party brokers’ estimates to assist us in determining the fair value of our franchise rights,
which are developed using marketplace data related to current transactions involving franchise rights.
As of December 31, 2010, we had $45.2 million of franchise value on our balance sheet. Our impairment
testing of franchise value in 2010 did not indicate any impairment. Our impairment testing of franchise
value in 2009 and 2008 resulted in impairment charges of $0.3 million and $16.0 million, respectively,
primarily due to the adverse change in the business climate and our reduced earnings and cash flow
forecast.
We are subject to financial statement risk to the extent that our goodwill or franchise rights become
impaired due to decreases in the fair value. A future decline in performance, decreases in projected
growth rates or margin assumptions or changes in discount rates could result in a potential impairment,
which could have a material adverse impact on our financial position and results of operations.
30
Furthermore, in the event that a manufacturer is unable to remain solvent, we may be required to record a
partial or total impairment on the remaining franchise value related to that manufacturer.
See Notes 1 and 5 of Notes to Consolidated Financial Statements for additional information.
Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and
review them for impairment when events or circumstances indicate that their carrying amounts may not
be recoverable.
A store is evaluated for recoverability if it has an operating loss in the current year and one of the prior
two years. If it meets this criterion, we estimate the projected undiscounted cash flows for each asset
group based on internally developed forecasts. If the undiscounted cash flows are lower than the carrying
value of the asset group, we determine the fair value of the asset group based on additional market data,
including recent experience in selling similar assets.
We hold certain property for future development or investment purposes. If a triggering event is deemed
to have occurred, we evaluate the property for impairment by comparing its estimated fair value based on
listing price less costs to sell and other market data including similar property that is for sale or has been
recently sold, to the current carrying value. If the carrying value is less than the estimated fair value, an
impairment is recorded.
Although we believe our property and equipment and assets held and used are appropriately valued, the
assumptions and estimates used may change and we may be required to record impairment charges to
reduce the value of these assets. A future decline in store performance, decrease in projected growth
rates or changes in other operating assumptions could result in an impairment of long-lived asset groups,
which could have a material adverse impact on our financial position and results of operations. A
continued decline in the commercial real estate market could result in a potential impairment of certain
investment properties not currently used in operations. Currently, $28.9 million of our long-lived assets
are considered held for future development or investment purposes. Of the remaining assets used in
operations, $142.7 million are associated with stores operating domestic franchises and $190.8 million
are associated with corporate operations and stores operating import/luxury franchises.
Due to the adverse change in the business climate and our reduced earnings and cash flow forecast, we
performed impairment testing on long-lived assets during 2010, 2009 and 2008. As a result, we recorded
impairments related to long-lived assets of $15.3 million, $10.4 million and $13.9 million in 2010, 2009
and 2008, respectively.
See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information.
Deferred Tax Assets
As of December 31, 2010, we had deferred tax assets of approximately $59.1 million and deferred tax
liabilities of $16.6 million. The principal components of our deferred tax assets are related to goodwill,
allowances and accruals, deferred revenue and cancellation reserves. The principal components of our
deferred tax liabilities are related to depreciation on property and equipment and inventories.
We consider whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income
during the periods in which those temporary differences become deductible. We consider the scheduled
reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods),
projected future taxable income, and tax-planning strategies in making this assessment.
31
Based upon the scheduled reversal of deferred tax liabilities, and our projections of future taxable income
over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that
we will realize the benefits of these deductible differences.
At December 31, 2010, we have not recorded any valuation allowance on deferred tax assets. If we are
unable to meet the projected taxable income levels utilized in our analysis, and depending on the
availability of feasible tax planning strategies, we might record a valuation allowance on a portion or all of
our deferred tax assets in the future. In the event that a manufacturer is unable to remain solvent, our
operations may be impacted and we might record a valuation allowance on a portion or all of the deferred
tax assets, which could have a material adverse impact on our financial position and results of operations.
Service Contract and Other Insurance Contracts
We receive commissions from the sale of vehicle service contracts and certain other insurance contracts.
The contracts are sold through unrelated third parties, but we may be charged back for a portion of the
commissions in the event of early termination of the contracts by customers. We sell these contracts on a
straight commission basis; in addition, we may also participate in future underwriting profit pursuant to
retrospective commission arrangements, which are recognized as income upon receipt.
We record commissions at the time of sale of the vehicles, net of an estimated liability for future charge-
backs. We have established a reserve for estimated future charge-backs based on an analysis of
historical charge-backs in conjunction with estimated lives of the applicable contracts. If future
cancellations are different than expected, we could have additional expense or income related to the
cancellations in future periods, which could have a material adverse impact on our financial position and
results of operations.
At December 31, 2010 and 2009, the reserve for future cancellations totaled $9.4 million and $10.3
million, respectively, and is included in accrued liabilities and other long-term liabilities on our
consolidated balance sheets. A 10% increase in expected cancellations would result in an additional
reserve of approximately $1.0 million.
Lifetime Oil Change Self-Insurance
In March 2009, we assumed from a third party the obligation to provide future lifetime oil service for a pool
of existing contracts and began to self-insure the majority of the lifetime oil contracts we sell.
Payments we receive upon sale of the lifetime oil contracts are deferred and recognized in revenue over
the expected life of the service agreement to best match the expected timing of the costs to be incurred to
perform the service. We estimate the timing and amount of future costs for claims and cancellations
related to our lifetime oil contracts using historical experience rates and estimated future costs.
If our estimates of future costs to perform under the contracts exceed the existing deferred revenue, we
record a charge in the statement of operations. We perform our loss contingency analysis separately for
the pool of assumed contracts and the pool of self-insured contracts sold starting in March 2009. We
recorded a charge of $1.0 million and $1.4 million in 2010 and 2009, respectively, for expected costs in
excess of revenue deferred related to the pool of assumed contracts. We believe the new vehicle
purchase cycle has been delayed for many buyers. If the ownership cycle does not accelerate towards
pre-recession levels, our estimate of the number of oil changes to be performed over a vehicles life may
require upward revisions, which may adversely affect our financial position and results of operations. In
addition, other changes in assumptions about future costs expected to be incurred to service contracts
could result in the recognition of additional charges, which could have a material adverse impact on our
financial position and results of operations.
32
A 10% change in expected claims costs per contract for the assumed pool of contracts would result in
additional reserves of approximately $1.0 million. A 10% change in expected claims per contract for the
self-insured sold contracts would not require any reserve. At December 31, 2010 and 2009, the remaining
deferred revenue related to the assumed obligation and the self-insured sold contracts was $7.5 million
and $13.9 million, respectively.
Self Insurance Programs
We self-insure a portion of our property and casualty insurance, medical insurance and workers’
compensation insurance. A third-party is engaged to estimate the loss exposure related to the self-
retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss
and claims experience to estimate the loss exposure associated with these programs. Any changes in
assumptions or claim experience could result in the recognition of additional charges, which could have a
material adverse impact on our financial position and results of operations.
At December 31, 2010 and 2009, the total reserve associated with these programs was $7.3 million and
$3.2 million, respectively, and is included in accrued liabilities and other long-term liabilities on our
consolidated balance sheets. A 10% increase in claims experience would result in additional reserves of
approximately $3.3 million.
Results of Continuing Operations
For the year ended December 31, 2010, we reported income from continuing operations, net of tax, of
$14.1 million, or $0.53 per diluted share. For the years ended December 31, 2009 and 2008, we reported
income from continuing operations, net of tax, of $6.9 million, or $0.31 per diluted share, and net loss
from continuing operations, net of tax, of $225.1 million, or $11.15 per diluted share, respectively.
Discontinued Operations
As a result of the restructuring we began in 2008, we have sold or closed certain stores in 2008, 2009
and 2010. Results for sold or closed stores, qualifying for reclassification under the applicable accounting
guidance, have their results 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. Within discontinued operations, we realized a net gain (loss) of $(0.4) million, $2.2 million and
$(27.5) million for the years ended December 31, 2010, 2009 and 2008, respectively. See Notes 1 and 16
of Notes to Consolidated Financial Statements for additional information.
33
Key Performance Metrics
Certain key performance metrics for revenue and gross profit were as follows for 2010, 2009 and 2008
(dollars in thousands):
2010
New vehicle
Used vehicle, retail
Used vehicle, wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
2009
New vehicle
Used vehicle, retail
Used vehicle, wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
2008
New vehicle
Used vehicle, retail
Used vehicle, wholesale
Finance and insurance(1)
Service, body and parts
Fleet and other
Revenues
1,067,648
581,185
108,113
67,107
295,823
11,722
2,131,598
Revenues
881,329
477,253
72,699
56,397
291,075
2,614
1,781,367
Revenues
1,167,532
469,603
96,476
77,503
303,596
4,867
2,119,577
$
$
$
$
$
$
Percent of
Total Revenues
50.1%
27.3
5.1
3.1
13.9
0.5
100.0%
Percent of
Total Revenues
49.5%
26.8
4.1
3.2
16.3
0.1
100.0%
Percent of
Total Revenues
55.1%
22.2
4.5
3.7
14.3
0.2
100.0%
$
$
$
$
$
$
Gross
Profit
87,384
82,003
645
67,107
142,584
1,707
381,430
Gross
Profit
74,417
67,166
411
56,397
138,543
1,331
338,265
Gross
Profit
91,791
53,458
(3,136)
77,503
144,795
1,572
365,983
Gross
Profit
Margin
8.2%
14.1
0.6
100.0
48.2
14.6
17.9%
Gross
Profit
Margin
8.4%
14.1
0.6
100.0
47.6
50.9
19.0%
Gross
Profit
Margin
7.9%
11.4
(3.3)
100.0
47.7
32.3
17.3%
Percent of Total
Gross Profit
22.9%
21.5
0.2
17.6
37.4
0.4
100.0%
Percent of Total
Gross Profit
22.0%
19.8
0.1
16.7
41.0
0.4
100.0%
Percent of Total
Gross Profit
25.1%
14.6
(0.9)
21.2
39.6
0.4
100.0%
(1) Commissions reported net of anticipated cancellations.
Same Store Operating Data
We believe that same store sales are a key indicator of our financial performance. Same store metrics
demonstrate our ability to grow our revenue and profitability in our existing locations. As a result, same
store sales have been integrated into the discussion below.
Same store sales are calculated for stores that were in operation as of December 31, 2010, and only
including the months of operations for both comparable periods. For example, a store acquired in June
2009 would be included in same store operating data beginning in July 2010, after its first full complete
comparable month of operation. Thus, operating results for same store comparisons would include only
the periods of July through December of both comparable years.
34
New Vehicle Revenues
(Dollars in thousands)
Reported
Revenue
Retail units sold
Average selling price per retail unit
Same store
Revenue
Retail units sold
Average selling price per retail unit
(Dollars in thousands)
Reported
Revenue
Retail units
Average se
sold
lling price per retail unit
Same Store
R
evenue
Retail units so
Average se
ld
lling price per retail unit
Year Ended
December 31,
2010
2009
Increase
(Decrease)
%
Increase
(Decrease)
1,067,648
33,701
31,680
1,053,411
33,173
31,755
$
$
$
$
881,329 $
29,316
30,063 $
186,319
4,385
1,617
881,290 $
29,302
30,076 $
172,121
3,871
1,679
21.1%
15.0
5.4
19.5%
13.2
5.6
Year Ended
December 31,
2009
2008
Increase
(Decrease)
%
Increase
(Decrease)
881,329
29,316
30,063
880,845
29,280
30,084
$
$
$
$
1,167,532 $
39,756
29,367 $
(286,203)
(10,440
)
696
$
1,161,162
39,523
29,379 $
)
(280,317
(10,243
)
705
(24.5)%
(26.3)
2.4
(24.1)%
(25.9)
2.4
$
$
$
$
$
$
$
$
ew vehicle sales have improved throughout 2010 c
U.S.
N
e
conomy and our efforts to increase our share of the new vehicles sold within each local market. Credit
availability has continued to improve throughout 2010, although within the sub-prime market, lending
remains constrained. Additionally, domestic brands experienced a recovery of market share due to
improved product, increased consumer confidence as Chrysler and GM emerged from their restructuring,
and as Toyota lost share due to perceived quality issues and recall campaigns.
to a recovery in the
p red to 2009
om a
due
cessionary environment.
2009, new vehicle sales compared to 2008 were impacted severely by the re
Weak consumer confidence and a lack of available credit reduced demand for new vehicles. The third
quarter of 2009 experienced incremental improvement as a result of the CARS program, which provided
government sponsored rebates for consumers who elected to purchase a new vehicle with improved fuel
economy. Throughout 2009, Chrysler experienced declining market share, from approximately 12% at the
beginning of the year to approximately 8.5% at the end of the year. Given our significant exposure to
Chrysler stores, our new vehicle sales levels were further adversely impacted as competing brands
commanded more of the overall market. Also in the fourth quarter of 2009, a shortage of available
Chrysler product negatively impacted new vehicle sales levels.
35
Used Vehicle Retail Revenues
(Dollars in thousands)
Reported
Retail revenue
Retail units
sold
Average selling
price per retail unit
Same store
etail revenue
R
Retail units so
ld
Average selling
price per retail unit
ollars in thousands)
(D
Reported
Retail revenue
Retail units sold
Average selling price per retail unit
Same store
Retail revenue
Retail units sold
A
verage selling price per retail unit
$
$
$
$
$
$
$
$
Year Ended
December 31,
2010
2009
Increase
(Decrease)
%
Increase
(Decrease)
581,185
34,969
16,620
568,532
34,173
16,637
$
$
$
$
$
477,253
29,453
16,204 $
103,932
5,516
416
$
476,395
29,386
16,212 $
92,137
4,787
425
21.8%
18.7
2.6
19.3%
16.3
2.6
Yea
nd
r E ed
December 31,
2009
2008
Increase
(Decrease)
%
Increase
(Decrease)
477,253
29,453
16,204
4
76,076
29,366
16,212
$
$
$
$
$
469,603
28,339
16,57
1 $
4
67,218 $
28,164
16,589
$
7,650
1,114
(367)
8,858
1
,202
(377
)
1.6%
3.9
(2.2)
1.9%
4.3
(2.3
)
ed
les have increas
as
rease the number of l
f
Used vehicle retail unit sa
ll.
new vehicles, and as we inc
W
e have focused our store personnel on maximizing retail used vehicle sales and reducing the number of
used vehicles we wholesale after acquiring them via trade-in. Despite an improving new vehicle sales
market in 2010, we have continued to focus on increasing used vehicles sales, particularly older, less
expensive vehicles. As a result, our used retail to new vehicle sales ratio is up slightly from 1.00:1 in 2009
to 1.04:1 in 2010.
r ase used vehi
g , olde
consum
ower-p e,
ct to pu ch
er-mar in
cle
s ins
vehicles
ers ele
ric
tead o
we se
r used
high
The average price of used vehicles sold decreased in 2009 compared to 2008 as we worked through an
inventory of vehicles that was not in high demand, a shift towards cars and away from trucks and as a
duction in available credit decreased the amount of financing customers could obtain, which resulted in
re
lower average transaction prices.
36
Used Vehicle Wholesale Revenues
(Dollars in thousands)
Reported
Wholesale revenue
Wholesale
units sold
Average selling price
per wholesale unit
holesale revenue
Same store
W
Wholesale uni
ts sold
Average selling price
per wholesale unit
ollars in thousands)
(D
Reported
Wholesale revenue
Wholesale units sold
Average selling price per wholesale unit
Same store
Wholesale revenue
Wholesale units sold
A
verage selling price per wholesale unit
$
$
$
$
$
$
$
$
Year Ended
December 31,
2010
2009
Increase
(Decrease)
%
Increase
(Decrease)
108,113
14,365
7,526
105,701
14,043
7,527
$
$
$
$
9 $
72,69
13,623
5,336 $
$
71,936
13,562
5,304 $
35,414
742
2,190
33,765
481
2,223
48.7%
5.4
41.0
46.9%
3.5
41.9
Yea
nd
r E ed
December 31,
2009
2008
Increase
(Decrease)
%
Increase
(Decrease)
72,699
13,623
5,336
71,905
1
3,545
5,309
$
$
$
$
$
96,476
16,477
5,85
5 $
94,887 $
1
6,288
5,826
$
(23,777)
(2,854)
(519)
(
22,982)
(2
,743)
(517)
(24.6)%
(17.3)
(8.9)
(24.2)%
(
16.8)
(8.9)
ctions are a result of vehicles we
mpted to s l via r
Wholesale transa
m
us, or from vehicles we have atte
ry
r other factors. Throughout 2010, we have concentrated on directing more lower-priced, older vehicles to
o
retail sale rather than wholesale disposal. As a result, we have seen an increase in average wholesale
price, and have increased wholesale revenues by a larger percentage than wholesale units.
stom
ing veh
se of due to time in
d from
pu hase
c
at e ele
rc
tail th w
cu
t to di po
s
fro
icles
invento
have
e
ers buy
el
Wholesale vehicle sales were down in 2009 compared to 2008 mainly due to changes in vehicle mix as
ia wholesale.
we kept more 3 to 7 year old vehicles than in previous years, resulting in fewer units sold v
he units sold via wholesale in 2009 had lower average selling prices as they represented a larger
T
percentage of older, less expensive vehicles not suitable for retail sale.
Wholesale vehicle sales are typically done at or near inventory cost and do not comprise a meaningful
0.6 million, $0.4 million and $(3.1)
component of our gross profit. We generated wholesale profit (loss) of $
m
illion in 2010, 2009 and 2008, respectively.
37
Finance and Insurance
(Dollars in thousands)
Reported
Revenue
Revenue pe
r retail unit
Same store
R
evenue
Revenue per
retail unit
ollars in thousands)
(D
Reported
Revenue
Revenue per retail unit
Same store
Revenue
Revenue per retail unit
Year Ended
December 31,
2010
67,107
977
63,096
937
2009
56,397
960
53,843
917
$
$
$
$
Ye
nd
ar E ed
December 31,
2009
56,397
960
53,808
918
2008
77,503
1,138
72,771
1,075
$
$
$
$
$
$
$
$
$
$
$
$
Increase
(Decrease)
%
Increase
(Decrease)
$
$
$
$
$
$
$
$
10,710
17
9,253
20
Increase
(Decrease)
(21,106)
(178)
(18,963)
(157)
19.0%
1.8
17.2%
2.2
%
Increase
(Decrease)
(27.2)%
(15.6)
(26.1)%
(14.6)
ance and insurance sales incre ed
d more opportunity to p sent
use vehicles
as we
In 2010, fin
ur pr
ks
o
than in 2009 and ha
re
turned to the auto finance market in 2010, providing alternate financing options to customers that we
had primarily shifted to credit unions in 2009. Banks typically pay a higher commission for arranging retail
automotive financing and our revenue per retail unit increased as a result. Lenders also increased the
loan-to-value amount available to most customers, affording us the opportunity to sell additional or more
comprehensive products while still remaining within an acceptable lending framework.
nd
nsumers. Additionally, ban
sold a greater number
ferings
ct
odu of
of new a
as
re
co
to
d
In 2009, the declines in finance and insurance sales were primarily due to fewer vehicles sold in 2009
compared to 2008, as well as a decline in our penetration rate for finance and insurance products and the
pact of restrictions on the overall loan amount to vehicle invoice cost, which can impact the ability of
im
customers to finance the ancillary products we offer. Additionally, customers participating in the CARS
Program elected to pay cash for their vehicle at a higher rate and purchased fewer extended warranties
and other ancillary products than our traditional customers.
Additionally, in the first quarter of 2009, we discontinued the transfer of the obligation related to most of
party. As a result, beginning March 1, 2009,
our lifetime lube, oil and filter insurance contracts to a third
e no longer recognize revenue related to earned commissions at the inception of the contract but,
w
instead, defer the full sale price of the contract and recognize the revenue over the expected life of the
contract as services are provided. This change improves our cash position as we retain 100% of the
contract sales price, but decreased our finance and insurance revenues by approximately $69 per vehicle
in 2009 compared to 2008.
Penetration rates for certain products were as follows:
Finance and insurance
Service contracts
Lifetime oil change and filter
2009
68%
41
35
2008
74%
42
34
2010
72%
41
34
38
Service, Body and Parts Revenue
(Dollars in thousands)
Reported
Customer pay
Warranty
Wholesale part
Body shop
Total service, bod
s
y and parts
ustomer pay
Same store
C
Warranty
Wholesale part
Body shop
Total service, bod
s
y and parts
ollars in thousands)
(D
Reported
Customer pay
Warranty
Wholesale parts
Body shop
Total service, b
ody and parts
Same store
Customer pay
Warranty
W
Body shop
Total service, b
holesale parts
ody and parts
Year Ended
December 31,
2010
2009
Increase
(Decrease)
%
Increase
(Decrease)
166,941
51,432
49,404
28,046
95,823
2
164,597
50,688
48,690
27,574
91,549
2
$
$
$
$
158,018
55,539
49,486
28,032
91,075
2
157,652
55,433
49,267
28,032
90,384
2
nd
Year E ed
December 31,
2009
2008
158,018
55,539
49,486
28,032
291,075
1
57,627
55,431
49,253
28,032
290,343
$
$
$
$
159,405
59,676
54,08
3
30,432
303,596
1
58,329
59,260
53,817
30,432
301,838
$
$
$
$
$
$
$
$
8,923
(4,107)
(82)
14
748
4,
6,945
(4,745)
(577)
(458)
,165
1
5.6%
(7.4)
(0.2)
-
1.6
4.4%
(8.6)
(1.2)
(1.6)
0.4
Increase
(Decrease)
%
Increase
(Decrease)
(1,387)
(4,137)
(4,597)
(2,400)
12,521)
(
(702)
(3,829)
)
(4,564
)
(2,400
,495)
(11
(0.9)%
(6.9)
(8.5)
(7.9)
(4.1)
(0.4)%
(6.5)
(8.5)
(7.9)
(3.8)
$
$
$
$
$
$
$
$
s,
ffected,
to
lining c
efer maintenance work and routine servicing for longer periods of time. Declining units in operation have
Our service, body and parts business was also a
nomic environment. Dec
by the challenging eco
d
impacted the overall available pool of vehicles to service and warranty opportunities.
n
er
t a less mag itude th
e e h
as caus
r confid nc
an vehicle
ed custom
alb it a
e
on me
su
sale
ers
010 compared to 2009. Domestic brand warranty work decreased by 1.6%, while impo
Warranty work accounted for approximately 17.4% of our same store service, body and parts sales in
e warranty sales in
2010 compared to 19.1% in 2009, which resulted in an 8.6% decrease in same stor
rt/luxury warranty
2
work decreased by 4.0% in 2010 compared to 2009. To offset the trends in warranty work, we have
emphasized the customer pay portion of our business through competitively priced routine maintenance
offerings and increased marketing efforts. The customer pay service and parts business, which
represented 56.5% of the total service, body and parts business in 2010 on a same store basis, was up
4.4% compared to 2009.
Warranty work accounted for approximately 19.1% of our same store service, body and parts sales in
2009 and declined 6.5% compared to 2008. The customer pay service and parts business represented
4.3% of the total service, body and parts business in 2009, which was 0.4% lower compared to 2008. As
5
discussed above, these changes in mix resulted from lower consumer confidence, deferred maintenance
on vehicles and fewer warranty opportunities. As a result, overall same store sales declined 3.8%.
Gross Profit
2009
Gross profit increased $43.2 million in 2010 compared to 2009 and decreased $27.7 million in
ompared to 2008. The increase in 2010 was primarily due to increased revenues, partially offset by a
c
39
decline in our overall gross profit margin. The decrease in 2009 compared to 2008 was due to decreased
total revenues, partially offset by an increase in our overall gross profit margin.
Gross profit margins achieved were as follows:
New vehicle ...............................................................
etail used vehicle ...................................................
R
.
Wholesale used vehicles ...........................................
Finance and insurance ..............................................
Service, body and parts.............................................
Overall ......................................................................
New vehicle ...............................................................
etail used vehicle ...................................................
R
.
Wholesale used vehicles ...........................................
Finance and insurance ..............................................
Service, body and parts.............................................
Overall ......................................................................
A basis point is equal to 1/100 of one percent.
th
*
Ye
ar Ended December 31,
2010
8.2%
1
4.1
0.6
100.0
48.2
17.9
2009
8.4%
1
4.1
0.6
100.0
47.6
19.0
Basis Point
Change
(20)bp
-
-
-
60
(110)
ded D
Year En
2009
8.4%
4.1
1
0.6
100.0
47.6
19.0
1,
ecember 3
2008
7.9%
1
1.4
(3.3)
100.0
47.7
17.3
t
Ba
C
sis Poin
hange*
50bp
270
390
-
(10)
170
In 2010, our overall gross profit marg
in decreased primarily due to a mix shift as we sold a greater
umber of new vehicles, which have lower margins than our other businesses. We have worked to
n
maintain our gross profit margin in the face of rising product costs. We believe our “single-point” strategy
of maintaining franchise exclusivity within the market we serve protects profitability and allows us to
maintain margin levels.
ttention on maximizing retail profit opportunities on each transaction in order to
During 2009, we focused a
ffset the decline in overall sales levels. We also continued to adjust our vehicle inventories to respond to
o
shifts in consumer demand driven by fuel prices and macroeconomic conditions. These factors led to
improved gross profit margins in most of our business lines. We also focused on increasing the number of
commodity sales in our service, body and parts business, including batteries, tires and wiper blades.
These sales, although at a lower gross profit margin, present an opportunity to offset declining revenues
in future periods. As discussed above, the decline in revenues is attributable to decreased units in
operation from fewer vehicle sales in 2008 and 2009 and lower market share by our more prevalent
domestic brands.
er Asset Impairment Charges
Goodwill and Oth
e are required to test our goodwill and other indefinite-lived intangible assets for impairment at least
W
t an impairment may have occurred. In addition, long-
annually or more frequently if conditions indicate tha
lived assets held and used by us and intangible assets with determinable lives are reviewed for
impairment whenever events or circumstances indicate that the carrying amount of assets may not be
recoverable.
40
We recorded asset impairment charges in 2010, 2009 and 2008. Asset impairments recorded as a
component of continuing operations consist of the following (in thousands):
December 31,
Goodwill
Asset Impairments
Intangible assets
Long-lived assets
Other assets
Total asset impairments
Selling, general and
administrative
2010
-
-
15,301
-
15,301
-
$
$
$
$
2009
-
250
10,350
(2,328)
8,272
-
$
$
$
$
2008
299,266
16,028
13,876
4,995
34,899
4,527
$
$
$
$
During 2010, we believed events and circumstances indicated the carrying amount of our non-operational
long-lived assets may no longer be recoverable, triggering interim impairment tests. We determined a
triggering event had occurred based on the following factors:
slower industry recovery for retail vehicle sales than originally projected at the end of 2009;
oversupply of vacant dealership properties due to the economic downturn and bankruptcy
proceedings for Chrysler and GM; and
the broader economic recovery, including the availability of credit, remained gradual, limiting the
potential buyers of these types of properties.
Based on the results of those tests, we recorded asset impairment charges of $15.3 million associated
with these properties during 2010.
In 2009, as a result of the reorganization in bankruptcy of both Chrysler and GM, and the decline in
commercial real estate values, we tested our long-lived assets for recoverability. Additionally, operational
results for certain locations have been retrospectively reclassified from discontinued operations to
continuing operations in the consolidated statement of operations, including prior period impairments. As
these assets were no longer expected to be sold, a reversal of estimated costs to sell was recorded in
2009. Total asset impairment charges were $8.3 million in 2009.
As a result of the adverse change in the business climate and our reduced earnings and cash flow
forecast, we tested certain goodwill, franchise value and long-lived assets for recoverability in 2008.
Based on the results of these tests, we recorded asset impairment charges totaling $334.2 million in
2008. In addition, we recorded impairment charges on certain cancelled construction projects of $4.5
million in 2008 as a component of selling, general and administrative expense.
See Notes 1, 4 and 5 of Notes to Consolidated Financial Statements for additional information.
41
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses,
advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general
corporate expenses.
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
(Dollars in thousands)
Personnel
Advertising
Rent
Facility costs
Other
Total SG&A
Year Ended
December 31,
2010
185,557
27,134
14,715
23,860
49,346
300,612
2009
171,289 $
$
18,402
15,464
23,614
47,252
$
276,021 $
Year Ended
December 31,
2009
171,289
18,402
15,464
23,614
47,252
276,021
2008
193,090 $
$
17,577
17,161
24,524
63,160
$
315,512 $
Increase
(Decrease)
14,268
8,732
(749)
246
2,094
24,591
Increase
(Decrease)
(21,801)
825
(1,697)
(910)
(15,908)
(39,491)
$
$
$
$
%
Increase
(Decrease)
8.3%
47.5
(4.8)
1.0
4.4
8.9
%
Increase
(Decrease)
(11.3)%
4.7
(9.9)
(3.7)
(25.2)
(12.5)
SG&A increased $24.6 million in 2010 compared to 2009, primarily due to increased sales volumes and
increased advertising expense to gain market share, offset by savings in other areas as we continued to
focus on reducing costs. SG&A as a percentage of gross profit was 78.8% in 2010 compared to 81.6% in
2009.
SG&A decreased $39.5 million in 2009 compared to 2008, primarily due to reduced sales volumes and
cost cutting efforts. Additionally, SG&A in 2008 included $4.5 million of impairment charges on certain
cancelled construction projects. SG&A as a percentage of gross profit was 81.6% in 2009 compared to
86.2% in 2008.
Depreciation and Amortization
Depreciation is comprised of depreciation expense related to buildings, significant remodels or
betterments, furniture, tools, equipment and signage and amortization of certain intangible assets,
including customer lists and non-compete agreements.
(Dollars in thousands)
Depreciation and amortization
(Dollars in thousands)
Depreciation and amortization
Year Ended
December 31,
2010
17,577
$
2009
18,259 $
Year Ended
December 31,
2009
18,259
$
2008
17,059
$
Increase
(Decrease)
(682)
Increase
(Decrease)
1,200
$
$
%
Increase
(Decrease)
(3.7)%
%
Increase
(Decrease)
7.0%
ased $ 7
d
ation ecre
Depreciation and amortiz
tively, in 2010
0. million and
compared to 2009 and in 2009 compared to 2008. Assets classified as held for sale are not depreciated.
When assets previously classified as held for sale are reclassified to held and used, they are valued at
the lower of their fair value or their net book value assuming depreciation had not been halted.
Depreciation and amortization in 2009 included a $2.2 million charge to record depreciation related to
assets reclassified from held for sale, including approximately $0.7 million that would have been recorded
in 2008 if the assets had not been classified in discontinued operations at that time.
m llion, r
espec
$1.2
ased
incre
i
42
Operating Income (Loss)
O
perating income (loss) was 2.2%, 2.0% and (14.2)% of revenue, respectively, in 2010, 2009 and 2008.
The increase in 2010 comp
ared to 2009 was primarily due to improved sales and continued cost control.
2009 was negatively affected by lower revenues over which to spread our SG&A, partially offset by higher
gross profit margins due to a shift in revenue sources and our improved cost structure. The operating
losses in 2008 were due primarily to the asset impairment charges discussed above.
Floorplan Interest Expense
loorplan interest expense decreased $0.4 million in 2010 compared to 2009. A decrease of $0.1 million
F
erage benchmark interest rates on our floorplan facilities and a decrease
resulted from declines in the av
of $1.1 million resulted from decreases in the average outstanding balances of our floorplan facilities. At
the end of 2009 and throughout 2010, we had paid down our floorplan notes with excess cash.
Ineffectiveness from hedging interest rate swaps resulted in an increase of $0.8 million.
e of $3.0 million
Floorplan interest expense decreased $9.8 million in 2009 compared to 2008. A decreas
sulted from lower average interest rates and a decrease of $6.3 million resulted from lower average
re
balances outstanding. In addition there was a decrease of $0.5 million related to our interest rate swaps.
Floorplan assistance is provided by manufacturers to specifically support store financing of new vehicle
ventory. Under accounting standards, floorplan assistance is recorded as a component of new vehicle
in
gross profit when the specific vehicle is sold. However, as manufacturers provide this assistance to offset
inventory carrying costs, we believe a comparison of floorplan interest expense to floorplan assistance can
be used to evaluate the efficiency of our new vehicle sales relative to stocking levels. The following tables
detail the carrying costs for new vehicles and include new and program vehicle floorplan interest net of
floorplan assistance earned.
ollars in thousands)
(D
Floorplan interest expense (new vehicles)
Floorplan assistance (included in cost of sales)
Net new vehicle carrying costs
ollars in thousands)
(D
Floorplan interest expense (new vehicles)
Floorplan assistance (incl
Net new vehicle carrying
uded in cost of sales)
costs
Year Ended
December 31,
2010
97
10,5
(9,753)
844
$
$
2009
11
,015
)
(9,245
1,770
Year E ed
December 31,
nd
2009
11,0
15
(9,245)
1,770
2008
,808
20
(15,519)
5,289
$
$
Increase
(Decrease)
(418)
(508)
(926)
Increase
(Decrease)
(9,793)
6,274
(3,519)
$
$
$
$
$
$
$
$
%
Increase
(Decrease)
(3.8)%
(5.5)
2.3)%
(5
%
Increase
(Decrease)
(47.1)%
40.4
(66.5)%
Other Interest Expense
Other interest expense in
nd our working capital, a
a
subordinated convertible n
st on ebt
d
i
ncurr
d
cludes intere
cquisition and use vehi
clud
cle line of credit.
d
otes in the first three quarters of 2009 and all of 2008.
q
c
It also in
at
rel ed
to a
e
uisitions, real
est
a
te mo
ed interest o
n our
rtgages
r
senio
In 2009 and 2008, other interest expense contained interest associated with our convertible notes. With the
repurchase of our convertible notes in 2009, other interest expense mainly related to mortgages in 2010.
9 and 2008,
Mortgage interest expense totaled $13.6 million, $11.6 million and $10.0 million in 2010, 200
respectively.
There was no capitalized interest on construction projects in 2010. Capitalized interest on construction
projects totaled $0.9 million and $1.7 million, respectively, in 2009 and 2008.
43
Other Income, net
09 and 2008, respectively. A
Other income, net was $0.4 million, $1.5 million and $6.6 million for 2010, 20
ain in 2009 and 2008 of $0.3 million and $5.3 million, respectively, was due to the early retirement of our
g
convertible notes. Additionally, a gain of approximately $1.0 million in 2009 is related to the result of a
binding arbitration.
Income Tax Provision (Benefit)
Our effective tax rate was 39.2% in 2010, 42.7% in 2009 and (32.4)% in 2008. Our federal income tax rate
is 35% and our state income tax rate is currently 3.4%, which varies with the mix of states where our stores
are located. We also have certain non-deductible expenses and other adjustments that impact our effective
rate. In 2009, the impact of non-deductible expenses was magnified by a decline in income due to the
slower sales environment. In 2008, a large permanent item related to the impairment of goodwill associated
with a prior corporate acquisition reduced the rate.
Pro Forma Reconciliations
Due to the non-core nature of certain non-cash charges related to asset impairments, lease termination,
lifetime oil change and severance reserves (“reserve adjustments”), disposal gains and gains on
extinguishment of debt, we are providing our results of operations excluding these items. We believe that
each of the non-GAAP financial measures provided improves the transparency of our disclosure, by
presenting our results that exclude the impact of these items that affect the period-to-period comparability
of our core operations. These presentations are not intended to provide SG&A, operating income, income
from continuing operations before taxes or net income in accordance with GAAP and should not be
considered an alternative to GAAP measures.
44
The following table
reconciles certain reported GAAP amounts per the Consolidated Statements of
Operations to the comparable non-GAAP income (loss) amounts (dollars in thousands, except per share
amounts):
general and administrative
Selling,
expense
As reported
Impairments and disposal gain
Reserve adjustments
Adjusted
SG&A as a % of gross profit
As reported
Adjusted
tions
Income from opera
As reported
Impairments and disposal gain
Reserve adjustments
Adjusted
Operating profit
As reported
Adjusted
Income (loss) from continuing
operations before income taxes
As reported
Impairments and disposal gain
Reserve adjustments
Gain on extinguishment of debt
Adjusted
Pre-tax margin
As reported
Adjusted
Net income (loss) from continuing
operations
As reported
Impairments and disposal gain
Reserve adjustments
Gain on extinguishment of debt
Adjusted
Diluted net income (loss) per share
from continuing operations
As reported
Impairments and disposal gain
Reserve adjustments
Gain on extinguishment of debt
Adjusted
Year Ended December 31
2010
300,612
413
(1,238)
299,787
78.8%
78.4
47,940
14,954
2,278
65,172
2.2%
3.1
23,193
14,954
2,278
-
40,425
1.1%
1.9
14,100
9,178
1,532
-
24,810
0.53
0.35
0.06
-
0.94
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2009
276,021
-
(454)
275,567
81.6%
81.1
35,713
7,842
1,854
45,409
2.0%
2.5
12,078
7,842
1,854
(1,317)
20,457
0.7%
1.1
6,916
4,967
1,103
(812)
12,174
0.31
0.23
0.05
(0.04)
0.55
$
$
$
$
$
$
$
$
$
$
2008
315,512
(4,527)
-
310,985
86.2%
85.0
(300,753)
338,692
-
37,939
(14.2)%
1.8
(333,010)
338,692
-
(5,248)
434
(15.7)%
-
(225,132)
229,080
-
(3,646)
302
(11.15)
11.34
-
(0.18)
0.01
Liquidity and Capital Resources
We manage our liquidity and capital resources to be able to fund future capital expenditures, working capital
requirements and contractual obligations. Additionally, we use capital resources to fund cash dividend
payments, share repurchases and acquisitions.
Available Sources
We have relied primarily upon internally generated cash flows from operations, borrowings under our credit
agreements, financing of real estate and the proceeds from public equity and private debt offerings to
45
finance operations and expansion. Based on these factors and our normal operational cash flow, we believe
we have sufficient availability to accommodate both our short- and long-term capital needs.
B
elow is a summary and discussion of our available funds:
quivalents
n the
Cash and cash e
Available credit o
Credit Facility
Unfinanced new
Total available funds
vehicles
$
$
9,306
23,332
65,601
98,239
As of De
2010
cember 31,
20
12,776 $
09
$
Increase
(Decr
ease)
(3,470)
,682
25
35,728
74,186
$
$
50)
(2,3
29,873
24,053
%
Increase
(Dec
rease)
(27.2)%
(9.2)
83.6
32.4%
o
n, $
During 2010, 2009 and 2008, we generated $18.3 milli
1
2.9 m
-
term debt, net of d bt repa
long
ets and stores and the issua ce of
through the s
n and $8
e
ale of ass
1 millio
.4
n
illion
,
respectively,
n
t.
yme
share for gross pro
n. We a
lso granted
a public offering at a price
On October 15, 2009, we sold 4,000,000 shares of our
u
commissions,
llion and net proceeds, after nde
of $10.00 per
ay
-d opt
urchase up to
of $37.9 millio
an additional 600,000 shares to cover over-allo
to purchase the shares was
exercised by the underwriters in its entirety, resulting in to l g oss proceeds of $46.0 million and net
proceeds, after underwriting commissions and other expenses, of
o
lic fferi
y. The o
r
$43.2 million.
ceeds of $40.0 mi
to the underwriters of
tmen
the pub
if an
ts,
ta
Class A om n stock
c mo
rwriting
ion to p
ng a 30
ption
in
In addition to
debentures o
options and may select on
of capital, alt
amounts or w
hough no assurances can b
ith terms acceptable to us.
the above sources of liqu
r loans, additional store sales
e or more of them depending
e provide tha
t
idity, po ential sources include the placement of subordinated
or additional other asset sales. We will evaluate all of these
he availability and cost
availab
le in sufficient
l capital needs
al
p
ca ital s
on over
t these
and t
il
w l be
ources
d
Summary of utstanding Balances on Credit Facilities an Long-term Debt
t rme
Below is a su
O
mmary of our outstanding
balances on credit facilities and long-
d
debt:
w and program floorplan notes pa
edit facility
al estate mortgages
Ne
Cr
Re
O
ther debt
Total debt
yable
$
$
Outstand
ing as
of Decem er 31,
b
2010
25
1,2
57
40,000
4,8
50
5,924
31
2,0
23
53
$
$
Re ain
Av lab
ai
Decem
m ing
s of
le a
ber 31,
2010
(1)
(2),(3)
-
23,332
-
-
23,332
(1) There are n
unfloored n
(2) Reduced by
(3) The amoun
o formal limits on the new and p
ew vehicles at
$2.3 million for outstanding letters
t available on the line is li
December 31, 2010.
of credit.
mited based on a bor wing ba
ro
se calc
ulati
on
and fl
uctuat m
es onthly.
rogram vehicle lines with certain lenders, and we had approximately $65.6 million in
and Pro
gram Ve
hicle Lines
lly Bank, Mercedes-Benz Financial Ser
New
A
vices USA, LLC, TFS, Ford Motor Credit Company, VW Credit, Inc.,
American Honda Finance Corporatio
n, Nissan Motor Acceptance Corporation and BMW Financial Services
NA, LLC provide new vehicle floorplan financing for their respective brands. Ally Bank serves as the primary
lenders for all other brands. The new and program vehicle lines are secured by new and program vehicle
he weighted average interest rates associated with our new
inventory of the stores financed by that lender. T
nd program vehicle lines, excluding the effects of our interest rate swaps, was 3.1% at December 31,
a
2010.
46
Vehicles financed by lenders not directly associated with the manufacturer are classified as floorplan notes
flows. Vehicles
payable: non-trade and are included as a financing activity in our statements of cash
nanced by lenders directly associated with the manufacturer are classified as floorplan notes payable and
fi
are included as an operating activity in our statements of ca
sh flows.
o improve the visibility of cas flows
h
easures elow
b
relat
business, the
g
cle fin cin , which is a
e
w a
ash flo s
erating activity. We believe that this non-GAAP financial measure improves the
ou results from core business
c re
o
ll
ming a flo
ed to vehi
te c
rplan notes payable ar
isclosure by pro
o part of our
period c m
demo tra
eriod-to-
viding p
o para
bility of
ssu
an
ns
r
T
non-GAAP financial m
included as an op
transparency of our d
operations.
(In thousands)
As Reported
Cash flow from (used in) operations
Change in floorplan notes payable: non-trade
Adjusted
As Reported
Year Ended December 31,
2010
2009
2008
$
$
(21,330) $
9,939
$
86,108
24,090
31,417
(16,803)
2,760
$
41,356
$
69,305
Cash flow from (used in) financing
$
37,826
$
(29,127) $
(101,185)
Change in floorplan notes payable: non-trade
(24,090)
(31,417)
16,803
Adjusted
$
13,736
$
(60,544) $
(84,382)
Working Capital, Acquisition and Used Vehicle Credit Facility
We have a $75 million Credit Facility with U.S. Bank National Association, which expires June 30, 2013. As
ty. We believe the Credit
of December 31, 2010, approximately $23.3 million was available on the facili
availability of credit
Facility continues to be an attractive source of financing given the current cost and
hich totaled 2.6% at
alternatives. The interest rate on the Credit Facility is the 1-month LIBOR plus 2.35%, w
D
ecember 31, 2010.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real es
related to t
his debt ranged from 2.1% to 7.9% a
installment
s through January 20
18 with no significant maturitie
e
s until 2 1
0 3.
vements. Interest rates
t D cember 31, 2010. The mortgages are payable in various
nd leasehold
tate a
impro
Our other
a
debt includ
es various notes, capital leases and o
bligation a
s ssumed a
s a res lt
u of acquisitions
nd other agreements and have interest rates that ranged from 3.5% to 10.0% at December 31, 2010.
bt C
ovenants
De
We are subject to certain financial and restrictive covenants for all of our debt agreeme
re
granting security interests in our ass
strict us from incurring additional indebtedness, making investments, selling or acquiring
ets.
nts. The covenants
assets and
Debt Covenant Ratios
Requirement
As of December 31, 2010
Minimum tangible net worth
Vehicle equity
Fixed charge coverage ratio
Liabilities to tangible net worth ratio
Not less than $200 million
Not less than $65 million
Not less than 1.20 to 1
Not more than 4.00 to 1
$267.1 million
$187.7 million
1.68 to 1
2.44 to 1
ccordingly, we were in compliance with the Credit Facility financial covenants as of December 31,
A
2010.
47
We expect to remain in compliance with the financial and restrictive covenants in our Credit Facility and
other debt agreements. However, no assurances can be provided that we will continue to remain in
compliance with the financial and restrictive covenants.
In the event that we are unable to meet the financial and restrictive covenants, we would enter into a
discussion with the lender to remediate the condition. If we were unable to remediate or cure the condition,
a breach would give rise to certain remedies under the agreement, the most severe of which is the
termination of the agreement and acceleration of the amounts owed, including the triggering of cross-default
provisions to o
ther debt agreements.
days supply
r days supply with seasonal fluctuat
based on a forward looking projection
of expected sales le
examp , using
n our b siness
le
u
Inventories
vels. We believe this
We calculate
iling days
b
etter aligns ou
overstate inventory in the fourth uarter as we approach the stronger spring selling season,
s
upply would
a
nd understate inventory in the th
proach t e ower fall and winter selling season. Our
d
ays supply of new vehicles at December 31, 2010 is nine days below our historical December 31 balances
and seven days below our December 31, 2009 levels. This decrease c
ed to 2009 is a result of
increased new vehicle sales levels and effor s to reduce the amount of new inventory available.
q
s we ap
ird quarte
ompar
a tra
ions i
. For
h sl
r a
t
Our days supply o
r
December 31 balances and eight days e w
31 2009 balances. We have continue
lo
b
our Decembe
0 es
f
a e compa
r ulting in a decre s
ocus on managing inventory levels in 201
f used vehicles at December 31, 2010 was down ten days compared to our historical
d to
red to histo
rical perio
ds.
,
ontractual Payment Obligations
C
A summary of our contractual commitments and obligations as o
thousands):
f December 31, 2010 was as follows (in
Contractual
Obligation
Floorplan notes
payable(1)
Credit Facility(1)
Real estate debt,
including interest
Other debt, including
interest
Charge-backs on
various contracts
Operating and capital
leases(2)
Fixed rate payments
on interest rate
swaps
Total
2011
Payments Due By Period
2012 and
2013
2014 and
2015
$
251,257
40,000
$
251,257
-
$
-
40,000
$
$
-
-
282,762
23,234
78,808
118,403
7,022
9,365
702
5,273
1,329
3,689
2,916
392
2016 and
beyond
-
-
62,317
2,075
11
148,770
17,184
30,381
25,541
75,664
14,177
753,353
$
4,327
301,977
$
8,666
162,873
590
147,842
$
$
$
594
140,661
(1) Amounts for floorplan notes payable and the Credit Facility do not include estimated interest payments. See Notes 2 and 6 in
the Notes to Consolidated Financial Statements.
(2) Amounts for operating and capital lease commitments do not include sublease income, and certain operating expenses such
as maintenance, insura
al
nce and re estate taxe
s. See Note 7 in
the Notes
to
Con
solidated Financial Statemen
ts.
enditures
Capital Exp
Capital expenditures were $7.6 millio
respectively. The dec
management efforts and ou
anticipate approximately $26.0 million in capital expenditures, mainly related to the improvement of ou
store facilities, replacement of equipment and construction of a new headquarters building.
08,
4 million for 2010, 2009 and 20
e past two years reflected our cash
011, we
le el of debt outstand
r
enditures over th
uce the aggregate v
rease in capital exp
red
million and $57.
n, $21.1
ing. In 2
r desi
re to
48
any manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image
M
standards and requirements. Accordingly, we believe it is an attractive time to invest in certain facility
upgrades and remodels that will generate additional manufacturer incentive payments. Also, recently
capital expenditures have accelerated project
enacted tax law changes that accelerate deductions for
ti
melines to ensure completion before the law expires.
In the event we undertake a significant capital commitment in the future, we expect to pay for the
construction out of existing cash balances, construction financing and borrowings on our Credit Facility.
Upon completion of the projects, we would anticipate securing long-term financing and general borrowings
of the amounts expended, although no assurances can be provided
from third party lenders for 70% to 90%
th
at these financings will be available to us in sufficient amounts or on terms acceptable to us.
Dividends
Our Board of Directors declared dividends of $0.05 per share on our Class A and Class B common stock,
which were paid in April 2010, July 2010 and October 2010 and totaled approximately $1.3 million each
payment period. Management evaluates performance and makes a recommendation to the Board of
Directors on dividend payments on a quarterly basis.
Share Repurchase Plan
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A
common stock. Through December 31, 2010, we have purchased a total of 580,624 shares under this
program, 100,893 of which were purchased during 2010 for an average price of $7.88 per share. We may
, and as
ontinue to repurchase shares from time to time in the future, if permitted by our credit facilities
c
conditions warrant.
49
Selected Consolidated Quarterly Financial Data
The following tables set forth our unaudited quarterly financial data(1) (2).
2010 (in thousands, except per share data )
Three Months Ended,
March 31
June 30
September 30
December 31
Revenues:
New vehicle ......................................................................
Used vehicle retail .............................................................
Used vehicle wholesale .....................................................
Finance and insurance………………………………….....
Service, body and parts .....................................................
Fleet and other...................................................................
s ...............................................................
Total revenue
.
.
Cost of sales ...
....................................................................
Gross profit ..........................................................................
Asset impairments ...............................................................
Selling, general and administrative......................................
Depreciation and amortization .............................................
Operating income ...............................................................
Floorplan interest expense ..................................................
ther interest expense .......................................................
O
.
Other, net..................................
..........................................
.
Income (loss) from continuing operations before income
taxes .................................................................................
Income tax (provision) benefit..............................................
Income (loss) before discontinued operations .....................
Discontinued operations, net of tax .....................................
Net income (loss).................................................................
.
Basic income (lo
ss) per share from continuing operations .
Basic loss per share from discontinued operations .............
Basic net income (loss) per share .......................................
Diluted income (loss) per share from continuing
operations ............................................................................
Diluted loss per share from discontinued operations...........
Diluted net income (loss) per share .....................................
$215,617
135,899
23,465
14,638
68,797
803
459,219
373,314
85,905
1,491
71,039
4,749
8,626
(2,751)
(3,588)
68
2,355
(912)
1,443
(176)
$ 1,267
$ 0.06
(0.01)
$ 0.05
$ 0.06
(0.01)
$ 0.05
$268,721
146,836
25,570
16,274
71,996
4,704
534,101
438,358
95,743
13,260
74,813
4,401
3,269
(2,567)
(3,529)
214
(2,613)
1,099
(1,514)
(205)
$ (1,719)
$ (0.06)
(0.01)
$ (0.07)
$ (0.06)
(0.01)
$ (0.07)
$293,237
158,798
30,869
18,928
77,733
3,122
582,687
477,743
104,944
-
77,468
4,239
23,237
(3,085)
(3,725)
74
16,501
(6,709)
9,792
-
$ 9,792
$ 0.37
-
$ 0.37
$ 0.37
-
$ 0.37
$290,073
139,652
28,209
17,267
77,297
3,093
555,591
460,753
94,838
550
77,292
4,188
12,808
(2,194)
(3,730)
66
6,950
(2,571)
4,379
-
$4,379
$ 0.17
-
$ 0.17
$ 0.16
-
$ 0.16
50
2009 (in thousands, except per share data )
Three Months Ended,
March 31
June 30
September 30
December 31
Revenues:
New vehicle .......................................................................
Used vehicle retail .............................................................
Used
vehicle wholesale ....................................................
.
Finance an
d insurance………………………………….....
Service, body and parts .....................................................
Fleet and other...................................................................
Total revenues ................................................................
Cost of sales ........................................................................
Gross profit ..........................................................................
Asset impairments ...............................................................
Selling, general and administrative......................................
Depreciation and amortization .............................................
Operating income (loss).......................................................
Floorplan interest expense ..................................................
Other interest expense ........................................................
Other, net.............................................................................
Income (loss) from continuing operations before income
taxes ....................................................................................
Income tax (provision) benefit..............................................
Income (loss) before discontinued operations .....................
Discontinued operations, net of tax .....................................
Net income (loss).................................................................
Basic income (loss) per share from continuing operations ..
Basic loss per share from discontinued operations .............
Basic net loss per share ......................................................
Diluted income (loss) per share from continuing
operations ............................................................................
Diluted loss per share from discontinued operations...........
Diluted net loss per share ....................................................
(1) Quarterly data may not add to yearly totals due to rounding.
$192,306
109,089
16,513
13,537
72,957
570
404,972
325,691
79,281
2,080
68,655
4,091
4,455
(2,911)
(3,981)
1,164
(1,273)
489
(784)
2,113
$ 1,329
$ (0.04)
0.10
$ 0.06
$ (0.04
)
0.10
$ 0.06
$
211,760
126,256
17,751
14,857
72,312
625
443,561
357,272
86,289
3,680
68,694
3,969
9,946
(2,664)
(3,367)
258
4,173
(1,634)
2,539
1,124
$ 3,663
$ 0.12
0.05
$ 0.17
$ 0.12
0.05
$ 0.17
$266,76
129,85
9
7
20,223
15,704
74,538
895
507,986
412,493
95,493
2,359
71,165
3,883
18,086
(3,053)
(3,29
1)
25
11,767
(4,792)
6,975
(1,262)
$ 5,713
$
0.33
(0.06)
$ 0.27
$210,494
112,051
18,212
12,299
71,268
524
424,848
347,646
77,202
153
67,507
6,316
3,226
(2,387)
(3
,476)
48
(2,589)
775
(1,814)
260
$ (1,554)
$
(0.07)
0.01
$ (0.06)
$
0.33
(0.06)
$ 0.27
$ (0.07
)
0.01
$ (0.06)
(2) Certain reclassifications of amounts previously
reported have been ma e to the accompanying consolida d financial statem ts to
en
te
d
maintain consistency and comparability between periods p
rese
nted.
Seasonality and Quarterly Fluctuations
Historically, our sales have been lower in the first and fourth quarters of each year due to consumer
purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced
number of business days during the holiday season. As a result, financial performance is expected to be
lower during the first and fourth quarters than during the second and third quarters of each fiscal year. We
believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales
incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating
results.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material
current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
We use variable-rate debt to finance our new and program vehicle inventory and certain real estate
holdings. The interest rates on our variable rate debt are tied to either the one or three-month LIBOR or
the prime rate. These debt obligations, therefore, expose us to variability in interest payments due to
51
hanges in these rates. The floorplan debt is based on open-ended lines of credit tied to each individual
c
store from the various manufacturer fin
ance companies.
Our variable-rate floorplan notes payable, vari
borrowings subject us to market risk exposure. A ecembe
terest r
under such agreements at a weighted averag
interest rates would increase annual interest ex
e by a
amounts outstanding at December 31, 2010.
le rate m tgage no
or
, 2010,
r 31
of 3.1%
ate
imately
pprox
ab
t D
e in
pens
yable an
$413.6
num. A
line
tes pa
ding
we had
per an
n
$0.1 million, net of tax, based on
er credit
outstan
increase i
d oth
million
10%
Fixed Rate Debt
The fair value of our long-term fixed interest ra
value of fixed interest rate debt will increase a
refinance for a lower rate. Conversely, the fair
rates rise. The interest rate changes affect the fa
te d
s in
value
ir va
ebt is s
terest ra
of fix
lue but
terest rat
t to in
ubjec
tes fall because w
erest rate
deb
ed int
ot impa
do n
e would
t will de
e risk. Generally, the fair
ct to be
expe
able
crease as interest
ws.
gs or ca
sh flo
ct earnin
At December 31, 2010, we had $118.5 millio
recorded on the balance sheet, with maturity da s of bet
on discounted cash flows using current interest
fair value of this long-term fixed interest rate d
2010.
n of
te
rates for compar
eb
long-te
w
t was a
rm fixe
een
ppro
d interest rate debt o
and Octobe
utstandin and
sed
r 2011
r 2
029. Ba
ebt, we have determined that the
r 31,
at D
$127
Octobe
able d
ximately
.4 million
ecembe
g
Hedging Strategies
We believe it is prudent to limit the variability of a
entered into interest rate swaps to manage the variability of our intere
portion of our interest expense in a rising or fallin
portion of our interest paym
st rate
ate envi
ronm
ent.
g r
ents. Accordingly, we hav
exposure, thus levelin
e
g a
sh flow exposure on a portion of our flooring debt to
We have effectively changed the variable-rate ca
fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest
at
nd make fixed interest rate payments, thereby
r
creating fixed rate flooring debt.
e swaps, we receive variable interest rate payments a
We do not enter into derivative instruments for any purpose other than to manage interest rate exposure.
That is, we do not engage in interest rate speculation using derivative instruments. Typically, we
designate all interest rate swaps as cash flow hedges.
As of December 31, 2010, we had outstanding the following interest rate swaps with U.S. Bank Dealer
Commercial Services:
effective June 16, 2006 – a ten year, $25 million interest rate swap at a fixed rate of 5.587%
per annum, variable rate adjusted on the 1st and 16th of each month;
effective January 26, 20
4.495% per annum, varia
08 – a five year, $25 million interest rate swap at a fixed rate of
ble rate adjusted on the 26th of each month;
effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each month; and
effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each mo
nth.
W
rate at December 31, 201
e receive interest on all of the interest rate swaps at the one-month LIBOR
rate. The one-month LIBOR
0 was 0.3% per annum as reported in the Wall Street Journal.
The fair value of our interest rate swap agreements represents the estimated receipts or payments that
would be made to terminate the agreements. These amounts related to our cash flow hedges are
recorded as deferred gains or losses in our consolidated balance sheet with the offset recorded in
52
accumulated other comprehensive income, net of tax. Changes to the fair value of discontinued cash flow
f floorplan interest expense. At December 31,
hedges are recognized into earnings as a component o
010, the fair value of all of our agreements was a liability of $8.7 million. The estimated amount expected
2
to be reclassified into earnings within the next twelve months was $3.2 million at December 31, 2010.
In 2009, we determined that the original forecasted transaction for certain of the de-designated cash flow
hedges became probable of not occurring. Therefore, we reclassified into earnings a gain of
flooring interest expense at that time. Additionally, we de-
approximately $0.5 million as a reduction of
esignated and re-designated all of our outstanding interest rate swaps when significant changes in our
d
n debt occurred with the Chrysler and GM restructuring. This de-designation and re-
underlying floorpla
designation did not have an impact on earnings at the time, but may increase ineffectiveness in the
future.
Risk Management Policies
e assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate
W
exposures that may adversely impact expected future cash flows and by evaluating hedging
opportunities.
We maintain risk management control systems to monitor interest rate cash flow attributable to both our
ding and forecasted debt obligations, as well as our offsetting hedge positions. The risk
outstan
anagement control systems involve the use of analytical techniques, including cash flow sensitivity
m
analysis, to estimate t
he expected impact of changes in interest rates on our future cash flows.
Item 8. Financial Statements and Supplementary Financial Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15 of
Part IV of this document. Quarterly financial data for each of the eight quarters in the two-year period
ended December 31, 2010 is included in Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
d of the period covered by this Annual Report on Form 10-K. Based on thi
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the
en
s evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures
we file or submit under
are
the Securities Exchange Act of 1934 is accumulated and communicated to our management, including
our
w timely decisions
regarding required disclosure and that such information is recorded, processed, summarized and
repo
Chief Executive Officer and our Chief Financial Officer, as appropriate to allo
rted within the time periods specified in Securities and Exchange Commission rule
effective to ensure that information we are required to disclose in reports that
s and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred dur
q
financial reporting.
ing our last fiscal
uarter that has materially affected or is reasonably likely to materially affect our internal control over
53
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting.
ur management assessed the effectiveness of our internal control over financial reporting as of
O
December 31, 2010. In making this assessment, we used the criteria set forth in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment using those criteria, our management concluded that, as of
December 31, 2010, our internal control over financial reporting was effective.
KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our
control over financial reporting as of December 31, 2010, which is included in Item 8 of this Form
internal
0-K.
1
Item 9B. Other Information
None.
54
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item will be included under the captions Election of Directors, Meetings and
Committees of the Board of Directors, Audit Committee Independence and Financial Expert, Code of
Business Conduct and Ethics, Executive Officers and Section 16(a) Beneficial Ownership Reporting
Compliance in our Proxy Statement for our 2011 Annual Meeting of Shareholders and, upon filing, is
incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be included under the captions Compensation of Directors,
ompensation Committee Report, Compensation Discussion and Analysis, Executive Compensation,
C
rmination or Change-in-Control, and Compensation Committee Interlocks
Potential Payments Upon Te
nd Insider Participation in our Proxy Statement for our 2011 Annual Meeting of Shareholders and, upon
a
filing, is
incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
The following table summarizes equity securities authorized for issuance as of December 31, 2010.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
Weighted average
exercise price of
outstanding options,
warrants and rights (b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a) (c)
1,185,241
$13.56
1,752,708(1)
-
1,185,241
-
$13.56
-
1,752,708
Plan Category
Equity compensation
plans approved by
shareholders
Equity compensation
plans not approved by
shareholders
Total
(1)
Includes 756,730 shares available pursuant to our 2003 Stock Incentive Plan and 995,978 shares available pursuant to our
Employee Stock Purchase Plan.
The additional information required by this item will be included under the caption Security Ownership of
Certain Beneficial Owners and Management in our Proxy Statement for our 2011 Annual Meeting of
Shareholders and, upon filing, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included under the captions Certain Relationships and
Related Transactions and Director Independence in our Proxy Statement for our 2011 Annual Meeting of
Shareholders and, upon filing, is incorporated herein by reference.
55
Item 14. Principal Accountant Fees and Services
Information required by this item will be included under the caption Fees Paid to KPMG LLP Related to
Y
ears 2010 and 2009 and Pre-approval Policies in our Proxy Statement for our 2011 Annual Meeting of
Shareholders and, upon filing, is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
Financial Statements and Schedule
T
Registered Public Accounting Firm, are included on the pages indicated below:
he Consolidated Financial Statements, together with the report thereon of KPMG LLP, Independent
s
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for
the years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for th
Notes to Consolidated Financial Statements
e years ended December 31, 2010, 2009 and 2008
Page
F-1, F-2
F-3
F-4
F-5
F-6
F-7
Th
ere are no schedule required to be filed herewith.
s
Exhibits
The following exhibits are
a
ide the ex
sterisk (*) bes
rr
r
c
ompensatory plan o
a
filed herewith and th
hibit number indicates
angement, whic are r
is list i
the
q
e ui
s intended to consti
exhibits containing a
red to be ident fied in t
tute th
man
is
h re
e exhibit index. An
agement contract,
port.
h
i
xhibit
E
3.1
3
.2
4
.1
10.1*
1
0.2*
(a)
(l)
(b)
(i)
(d)
Description
Restated Articles of Incorpor
ation o
f Lithia Motors, Inc., as amended May 13, 999
1
Amended
and Restated Bylaws o
f L
ithia Motors, Inc. (Corrected)
Co
Specimen mmon St
ock certificat
e
2009 Employee Stock Purchase Plan
Lithia Motors, Inc. 2001 Stock Option Plan
10.2.1*
(e) Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
1
0.2.2*
(e) Form of Non-Qualified Stock Option Agreement for 2001 Stock Opt
ion Plan
1
0.3
10.4*
(q)
Lithia Motors, Inc. Amended and Restated 2003 Stock Incentive Plan
Form of Restricted Stock Unit Agreement for Senior Executives
10.4.1*
Form of Restricted Stock Unit Agreement for Non-Executive Officers
10.4.2*
Form of Restricted Stock Unit Agreement for Non
-Executive Directors
10.5*
(k) Summary 2008 Discretionary Support Services Bonus Program
56
xhibit
E
10.6
10.6.1
(a)
Description
Chrysler Corporation Sales and Service Agreement General Provisions
(f) Chrysler Corporation Chrysler Sales and Service Agreement, dated September 28, 1999, between Chrysler
d Provisions to the Sales and
Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (Additional Terms an
Service Agreements are in Exhibit 10.9) (1)
10.7
(b) Mercury Sales and Service Agreement Gen
eral Provisio
ns
10.7.1
(c) Supplemental Terms and Conditions agreement betwee
n Ford Motor Company and Lithia Motors, Inc. dated June
12, 1997
10.7.2
(c) Mercury Sales and Service Agreem
ent, dated June 1, 1997, between Ford Motor Company and Lithia TLM, LLC
dba Lithia Lincoln Mercury (general provisions are in Exhibit 10.10) (2)
1
0.8
(c) Volkswagen Dealer Agreement Standard Provisions
10.8.1
(a) Volkswagen Dealer Agreement dated September 17, 1998, between Volkswagen of America, Inc. and Lithia HPI,
Inc. dba Lithia Volkswagen. (standard provisions are
in Exhibit 10.11) (3)
1
0.9
(b)
General Motors Dealer Sales and Service Agreement Standard Provisions
1
0.9.1
(a) Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement da
ted Januar 16,
y
1998
1
0.9.2
(g) Chevrolet Dealer Sales and Servic
e Agreement dated October 13, 1998 between General Motors Co
rporati
on,
Chevrolet Motor Division and Camp Automotive, Inc. (4)
10.10
(b) Toyota Dealer Agreement Standard Provisions
10.10.1
(a
) Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and Lithia Motors, Inc., dba Lithia Toyota,
dated February 15, 1996 (5)
10.11
(c) Nissan Standard Provisions
1
0.11.1
(a) Nissan Public Ownership Addendum dated August 30, 1999 (identical documents executed by each Nissan store)
10.1
1.2
(c) Nissan Dealer Term Sales and Service Agreement between Lithia Motors, Inc., Lithia NF, Inc.,
and the Nissan
D
ivision of Nissan Motor Corporation In USA dated January 2, 1998. (standard provisions are in Exhibit 10.14) (6)
1
0.12
1
0.13*
1
0.14*
1
0.15*
1
0.16
1
0.16.1
10.16.2
10.16.3
1
0.16.
4
(a
)
(p
)
(h
)
(o)
(m
)
(p
)
(p
)
(r)
(s)
L
ease Agreement between CAR LIT, LLC and Lithia Real Estate, Inc. relating to properties in Medford, Oregon (7)
N
on Employee Director Compensation Plan 2009/2010 Service Year.
F
orm of Outside Director Nonqualified Deferred Compensation Agreement
F
orm of Executive Nonqualified Deferred Compensation Plan
oan Agreement with First through Seventh Amendments dated as of August 31, 2006 between Lithia Motors, Inc.,
the Loan Agreement, and U.S. Bank
L
an Oregon corporation; the lenders, which are from time to time parties to
N
ational Association, as agent for the Lenders
ighth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated January 14,
E
2010
Ninth Amendment to revolving credit facility with U.S. Bank Nationa
2
010
l Association, as Agent, dated February 17,
Tenth Amendment to revolving credit facility with U.S. Bank National A
ssociation, as Agent, dated June 29, 2010
E
leventh Amendment to revolving credit facility with U.S. Bank Na
tional Association, as Agent, dated July 16, 2010
57
Exhibit
10.16.5
10.17*
10.18
*
1
0.19*
(j)
(j)
(l)
Description
Twelfth Amendment to revolving credit facility with U.S. Bank National A
2
010
Split Dollar Agreement dated November 7, 2006 with Sidney B. DeBoer
ssociation, as Agent, dated December 21,
Split Dollar Insurance Agreement dated December 20, 2007
with Sidney B. DeBoer
T
erms of Amended Employment and Change in Control Agreement between Lithia Motors, Inc. and Sidney B.
DeBoer dated January 15, 2009. Substantially similar agreements exist between Lithia Motors, Inc. and each of
M.L. Dick
Heimann, Bryan B. DeBoer, Christopher S. Holzshu and John F. North III
10.20*
(n) Form of Indemnity Agreement for each Named Executive Officer.
10.21
*
(q) Form of Indemnity Agreement for each non-managem
ent Director
10.22*
Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan
10.22.1*
1
0.22.2*
Form of Executive Management Non-Qualified Deferred Compensation an
D
iscretionary Contribution Award for Sidney DeBoer
d Long-Term Incentive Plan – Notice of
orm of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of
F
Discretionary Contribution Award
1
2
21
23
31.1
31.2
3
2.1
32.2
(a
)
(
b)
(c)
(d)
(e)
(f
)
(g)
(h
)
(i
)
(j)
(k)
R
atio of Earnings to Combined Fixed Charges
Subsidiaries of Lithia Motors, Inc.
Consent of KPMG LLP, Independent Registered
Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934.
Certification of Chief Financial
o
f 1934.
Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act
o
f 1934 and 18 U.S.C. Section 1350.
e
orp
corp
er 31, 1997 as filed with the Securities
1, Registration Statement No. 333-14031, as
by reference from the Company's Registration Statement on Form S-
ge Commission on February 22, 2002.
d by reference from the Company’s Form 10
y reference from the Company’s Form 10-K for the year ended December 31, 1999 as filed with the Securities
orated by reference from the Company’s Form 10-K for the year ended December 31, 2001 as filed with the Securities
d by reference from the Company’s Form 10-K for the year ended Decemb
g
d by reference from Appendix B to the Company’s Proxy Stat
Incorporate
d b
n
cha ge Commission on March 30, 2000.
and
Ex
or
Inc
d
orp ate
ed e fective by the Securities Exchange Commission on December 18, 1996.
dec
lar
f
or
Inc
orp ate
and Ex an e Commission on March 31, 1998.
ch
Inc
orat
Securities and Exchange Commission on May 8, 2001.
In
and Exchan
Incorporate
Securities and Exchange Commission on November 14, 2001.
rp
e
Inco
Exchan
ge Commission on March 31, 1999.
and
Incorporate
d b
n
Ex
and
rporate
d by reference from the Company’s Proxy Statement for its 2009 Annual Meeting as filed with the Securities and
Inco
Excha
e C
ng
o
rp
te
ora d by reference from the Company’s Form 10-K for the year ended December 31, 2007 as filed with the Securitie
Inco
Ex han
and
c
Incorporate
C
han
Exc
orat d by reference from the Company’s Form 10-K for the year ended December 31, 1998 as filed with the Securities
y reference from the Company’s Proxy Statement for its 2008 Annual Meeting as filed with the Securities and
g
d b
ommission on April 29, 2008.
rom the Company’s Form 10-K for the year ended December 31, 2005 as filed with the Securities
-Q for the quarter ended September 30, 2001 as filed with the
ement for its 2001 Annual Meeting as filed with the
cha ge Commission on March 8, 2006.
e Commission on April 11, 2008.
mmission on March 20, 2009.
y reference f
ge
s
58
(l
)
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2008 as filed with the Securities
and
(m) Inco
nge Commissi
d by reference from the Company’s Form 10-Q for the quarter ended September 30, 2009 as filed with the
on on March 16, 2009.
Excha
or
rp ate
(n
)
(o
)
(p)
(q)
(r
)
(s)
d by reference from the Company’s Form 8-K as filed with the Securities
ommission on October 30, 2009.
rom the Company’s Form 8-K as filed with the Securities and Exchange Commission on May 28,
Securities and Exchange C
Incorporate
d b
y reference f
9.
200
Incorporate
0.
201
orporate
d by reference from the Company’s Form 10-K for the year ended December 31, 2009
Inc
d Ex an
ge Commission on March 3, 2010.
ch
an
orporate
d by reference from the Company’s Form 10-Q for the quarter ended March 31, 2010 as filed with the Securities
Inc
and Exchan
ge Commission on April 30, 2010.
Incorporate
d
by reference from the Company’s Form 8-K as filed with the Securities and Excha
2010.
Inc
Exchange Commission on August 5, 2010.
ra d by reference from the Company’s Form 10-Q for the quarter end
ed June 30, 2010 as filed with the Securities and
and Exchange Commission on January 5,
nge Commission on June 30,
as filed with the Securities
orpo te
(1) Su
Do
(2) Subs
subs
bstantia
dge, Ch
tantia
idiaries
lly identical agreements exist between DaimlerChrysler Motor Company, LLC and those other su
ry
lly identical agreements exist for its Ford and Lincoln-Mercury lines between Ford Motor Company and those other
sler, Plymouth or Jeep dealerships.
bsidiaries operating
operating Ford or Lincoln-Mercury dealerships.
ntical agreements exist between Volkswagen of
America, Inc. and those subsidiaries operating Volkswagen
(3
deal
(4) Subs
lly ide
) Substantia
s.
ership
tantiall
operating G
Substa tiall
other subsidiaries operating To
Substa tiall
dealerships
(6)
(5)
n
n
yota dealerships.
y identical agreements exist between
.
y identical agreements exist between Chevrolet Motor Division, GM Corporation and those other subsidiaries
e
y identical agreements exist (except the terms a
re all 2 years) between Toyota Motor Sales, USA, Inc. and those
neral Motors dealerships.
Nissan Motor Corporation and those other subsidiaries operating Nissan
(7
) Lithia Real Estate, Inc. leases all the property in Medford, Oregon sold to CAR LIT, LLC under substantially identical leases
covering six
separate blocks of property.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
aut
horized
.
Date: March 7, 2011
LITHIA MOTORS, INC.
By /s/ Sidney B. DeBoer
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities indicated on March 7, 2011:
Signature
Title
ney B. DeBoer
Sid
/s/
Sidney B. DeBoer
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
/s/ Christopher S. Holzshu
Christopher S. Holzshu
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ John F. North III
John F. North III
/s/ Bryan B. DeBoer
Bryan B. DeBoer
/s/ Thomas Becker
Thomas Becker
/s/ Susan O. Cain
Susan O. Cain
/s/ William J. Young
William J. Young
Vice President and Corporate Controller
(Principal Accounting Officer)
Director, President and Chief Operating Officer
Director
Director
Director
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lithia Motors, Inc.:
We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries
as of December 31, 2010 and 2009, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2010. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Lithia Motors, Inc. and subsidiaries as of December 31, 2010 and 2009,
and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Lithia Motors, Inc.’s internal control over financial reporting as of December 31,
2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 7, 2011
expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
/s/ KPMG LLP
Portland, Oregon
March 7, 2011
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lithia Motors, Inc.:
We have audited Lithia Motors, Inc.’s internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Lithia Motors, Inc.’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Lithia Motors, Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Lithia Motors, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-
year period ended December 31, 2010, and our report dated March 7, 2011 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Portland, Oregon
March 7, 2011
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
Assets
Current Assets:
Cash and cash equivalents
Accounts receivables, net of allowance for doubtful
accounts of $190 and $218
Inventories, net
Deferred income taxes
Assets held for sale
Other current assets
Total Current Assets
Property and Equipment, net of accumulated
depreciation of $93,745 and $83,474
Goodwill
Franchise value
Deferred income taxes
Other non-current assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities:
Floorplan notes payable
Floorplan notes payable: non-trade
Current maturities of long-term debt
Trade payables
Accrued liabilities
Deferred income taxes
Liabilities related to assets held for sale
Total Current Liabilities
Long-term debt, less current maturities
Deferred revenue
Other long-term liabilities
Total Liabilities
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 22,523 and 22,036
Class B common stock - no par value;
authorized 25,000 shares; issued and
outstanding 3,762 and 3,762
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
December 31,
2010
2009
$
9,306
$
12,776
75,011
415,228
2,937
-
6,062
508,544
362,433
6,186
45,193
39,524
9,796
971,676
84,775
166,482
12,081
23,747
58,784
-
-
345,869
268,693
20,158
16,739
651,459
$
$
52,097
333,628
-
11,693
7,869
418,063
386,054
-
42,428
40,735
7,820
895,100
74,501
141,581
32,708
18,782
47,519
1,036
5,050
321,177
233,065
17,981
15,839
588,062
-
-
284,807
280,880
468
10,972
(4,869)
28,839
320,217
971,676
$
468
10,501
(3,850)
19,039
307,038
895,100
$
$
$
See accompanying notes to consolidated financial statements.
F-3
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle
Used vehicle retail
Used vehicle wholesale
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Goodwill impairment
Other asset impairment
Selling, general and administrative
Depreciation and amortization
Operating income (loss)
Floorplan interest expense
Other interest expense
Other income, net
Income (loss) from continuing operations before income taxes
Income tax (provision) benefit
Income (loss) from continuing operations, net of income tax
Income (loss) from discontinued operations, net of income tax
Net income (loss)
Basic income (loss) per share from continuing operations
Basic income (loss) per share from discontinued operations
Basic net income (loss) per share
Shares used in basic per share calculations
Diluted income (loss) per share from continuing operations
Diluted income (loss) per share from discontinued operations
Diluted net income (loss) per share
Year Ended December 31,
2009
2008
2010
1,067,648
581,185
108,113
67,107
295,823
11,722
2,131,598
980,264
499,182
107,468
153,239
10,015
1,750,168
381,430
-
15,301
300,612
17,577
47,940
(10,597)
(14,572)
422
23,193
(9,093)
14,100
(381)
13,719
0.54
(0.01)
0.53
26,062
0.53
(0.01)
0.52
$
$
$
$
$
$
881,329
477,253
72,699
56,397
291,075
2,614
1,781,367
806,912
410,087
72,288
152,532
1,283
1,443,102
338,265
-
8,272
276,021
18,259
35,713
(11,015)
(14,115)
1,495
12,078
(5,162)
6,916
2,235
9,151
0.31
0.11
0.42
22,037
0.31
0.10
0.41
$
$
$
$
$
$
1,167,532
469,603
96,476
77,503
303,596
4,867
2,119,577
1,075,741
416,145
99,612
158,801
3,295
1,753,594
365,983
299,266
34,899
315,512
17,059
(300,753)
(20,808)
(18,075)
6,626
(333,010)
107,878
(225,132)
(27,454)
(252,586)
(11.15)
(1.36)
(12.51)
20,195
(11.15)
(1.36)
(12.51)
$
$
$
$
$
$
Shares used in diluted per share calculations
26,279
22,176
20,195
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss)
For the years ended December 31, 2008, 2009 and 2010
(In thousands)
Balance at December 31, 2007
Net loss
Fair value of interest rate swap agreements, net of
tax benefit of $2,662
Comprehensive loss
Issuance of stock in connection with employee
stock plans
Issuance of restricted stock to employees and directo
Shares forfeited by employees
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Dividends paid
Balance at December 31, 2008
Net income
Fair value of interest rate swap agreements, net of
tax expense of $1,177
Comprehensive income
Issuance of stock in connection with employee
stock plans
Issuance of restricted stock to employees and directo
Shares forfeited by employees
Issuance of Class A common stock
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Balance at December 31, 2009
Net income
Fair value of interest rate swap agreements, net of
tax benefit of $626
Comprehensive income
Issuance of stock in connection with employee
stock plans
Shares forfeited by employees
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Dividends paid
Balance at December 31, 2010
Shares
15,960
-
-
739
84
(66)
-
-
-
16,717
-
-
635
110
(26)
4,600
-
-
22,036
-
-
658
(9)
(162)
-
-
22,523
Amount
229,151
$
-
-
4,441
-
-
(2)
932
-
234,522
-
-
2,426
-
-
43,150
(1)
783
280,880
-
-
4,192
-
(1,626)
1,361
-
$
284,807
Common Stock
Class A
Class B
Shares
3,762
-
$
Amount
468
-
$
Accumulated
Other
Compre-
hensive
Income
(Loss)
Retained
Earnings
$
(1,437)
-
271,918
(252,586)
$
Additional
Paid In
Capital
8,112
-
$
Total
Stock-
holders'
Equity
508,212
(252,586)
(4,373)
(256,959)
4,441
-
-
(2)
2,095
(9,444)
248,343
9,151
1,960
11,111
2,426
-
-
43,150
(1)
2,009
307,038
13,719
(1,019)
12,700
4,192
-
(1,626)
-
-
-
-
-
-
-
3,762
-
-
-
-
-
-
-
-
3,762
-
-
-
-
-
-
-
-
-
-
-
-
468
-
-
-
-
-
-
-
-
468
-
-
-
-
-
-
-
-
-
-
1,163
-
9,275
-
-
-
-
-
-
-
1,226
10,501
-
-
-
-
-
(4,373)
-
-
-
-
-
-
(5,810)
-
1,960
-
-
-
-
-
-
(3,850)
-
(1,019)
-
-
-
-
-
-
-
-
-
(9,444)
9,888
9,151
-
-
-
-
-
-
-
19,039
13,719
-
-
-
-
-
-
3,762
$
-
-
468
$
471
-
10,972
$
-
-
(4,869)
$
-
(3,919)
28,839
$
1,832
(3,919)
320,217
See accompanying notes to consolidated financial statements.
F-5
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Goodwill impairment
Asset impairments
Depreciation and amortization
Depreciation and amortization within discontinued operations
Amortization of debt discount
Stock-based compensation
Gain on early extinguishment of debt
Gain on disposal of other assets
(Gain) loss from disposal activities within discontinued operations
Deferred income taxes
Excess tax deficit (benefit) from share-based payment arrangements
(Increase) decrease, net of effect of acquisitions:
Trade receivables, net
Inventories
Other current assets
Other non-current assets
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable
Trade payables
Accrued liabilities
Other long-term liabilities and deferred revenue
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Principal payments received on notes receivable
Capital expenditures
Proceeds from sales of assets
Cash paid for acquisitions, net of cash acquired
Proceeds from sales of stores
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings (repayments) on floorplan notes payable: non-trade
Borrowings on lines of credit
Repayments on lines of credit
Principal payments on long-term debt, scheduled
Principal payments on long-term debt and capital leases, other
Proceeds from issuance of long-term debt
Proceeds from issuance of common stock
Repurchase of common stock
Excess tax (deficit) benefit from share-based payment arrangements
Dividends paid
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid (refunded) during the period for income taxes, net
Supplemental schedule of non-cash investing and financing
activities:
Debt issued in connection with acquisitions
Floorplan debt acquired in connection with acquisitions
Acquisition of assets with capital leases
Floorplan debt paid in connection with store disposals
Common stock received for the exercise price of stock options
2010
Year Ended December 31,
2009
2008
$
13,719
$
9,151
$
(252,586)
-
15,301
17,577
9
-
2,419
-
(100)
294
(2,131)
(264)
(22,881)
(68,305)
(1,633)
(2,029)
10,550
4,960
10,029
1,155
(21,330)
85
(7,589)
10,288
(23,691)
941
(19,966)
24,090
40,000
(24,000)
(8,248)
(40,146)
47,219
4,192
(1,626)
264
(3,919)
37,826
(3,470)
-
8,272
18,259
562
48
2,054
(1,317)
(476)
(10,210)
5,627
45
17,780
120,785
15,992
(4,347)
(179,893)
(2,789)
(4,318)
14,714
9,939
-
(21,131)
14,524
-
27,697
21,090
31,417
48,000
(110,000)
(13,260)
(78,652)
47,838
45,576
(1)
(45)
-
(29,127)
299,266
34,899
17,059
3,659
197
1,725
(5,248)
(4,114)
32,372
(105,033)
(368)
39,771
81,208
(11,189)
(3,453)
(15,945)
(18,915)
(12,654)
5,457
86,108
-
(57,423)
18,229
(605)
44,085
4,286
(16,803)
402,000
(500,000)
(2,337)
(62,597)
83,189
4,441
(2)
368
(9,444)
(101,185)
1,902
(10,791)
$
$
$
12,776
9,306
$
10,874
12,776
$
21,665
10,874
$
$
25,357
8,000
63
1,856
77
2,134
-
$
$
29,741
(14,996)
-
-
6
26,597
-
50,498
(4,199)
-
566
3,198
23,565
2
See accompanying notes to consolidated financial statements.
F-6
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Organization and Business
We are a leading operator of automotive franchises and a retailer of new and used vehicles and
services. As of December 31, 2010, we offered 25 brands of new vehicles and all brands of used vehicles
in 84 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks,
replacement parts, provide vehicle maintenance, warranty, paint and repair services and arrange related
financing, service contracts, protection products and credit insurance.
Our dealerships are primarily located in small and mid-size regional markets throughout the
Western and Midwestern regions of the United States. The majority of our franchises are in “single-point”
locations, enabling brand exclusivity with no other dealership with the same franchise in the market.
Basis of Presentation
The accompanying consolidated financial statements reflect the results of operations, the
financial position and the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The
results of operations of stores classified as discontinued operations have been presented on a
comparable basis for all periods presented in the accompanying consolidated statements of operations.
See also Note 16.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying
consolidated financial statements to maintain consistency and comparability between periods presented.
Revenues and cost of sales associated with used vehicles, previously disclosed on a combined
basis, have been reclassified and are disclosed separately as used vehicle retail and used vehicle
wholesale in the accompanying consolidated statements of operations for all periods presented. These
reclassifications had no impact on previously reported net income.
Contracts in transit, previously disclosed separately, has been reclassified and is included as a
component of accounts receivables in the accompanying consolidated balance sheet for all periods
presented. Land and buildings, and equipment and other, previously disclosed separately, have been
disclosed on a combined basis as property and equipment in the accompanying consolidated balance
sheets for all periods presented.
Vehicles leased to others, previously disclosed on a combined basis, has been reclassified and
allocated to (i) inventory for vehicles that are available for immediate sale under present conditions and;
(ii) other current assets for vehicles leased to customers and employees, in the accompanying
consolidated balance sheets for all periods presented. In addition, the associated financing on loaner
vehicles has been reclassified from current maturities of long-term debt to floorplan notes payable in the
accompanying consolidated balance sheets for all periods presented.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts without
restrictions.
Accounts Receivables
Accounts receivables include amounts due from the following:
from various lenders for the financing of vehicles sold,
from customers for vehicles sold and service and parts sales,
from manufacturers for factory rebates, dealer incentives and warranty reimbursement, and
from insurance companies, finance companies, and other miscellaneous receivables.
F-7
Receivables are recorded at invoice and do not bear interest until such time as they are 60 days
past due. The allowance for doubtful accounts is estimated based on our historical write-off experience
and is reviewed on a monthly basis. Account balances are charged off against the allowance after all
appropriate means of collection have been exhausted and the potential for recovery is considered
remote. We do not have any off-balance sheet credit exposure related to our customers. See Note 2.
Inventories
Inventories are valued at the lower of market value or cost, using a pooled approach for vehicles
and the specific identification method for parts. The cost of new and used vehicle inventories includes the
cost of any equipment added, reconditioning and transportation.
Manufacturers reimburse us for holdbacks, floorplan interest and advertising credits, which are
reflected as a reduction in the carrying value of each vehicle purchased by us. We recognize advertising
credits, floorplan interest credits, holdbacks, cash incentives and other rebates received from
manufacturers that are tied to specific vehicles as a reduction to cost of sales as the related vehicles are
sold.
Parts purchase discounts that we receive from the manufacturer are reflected as a reduction in
the carrying value of the parts purchased from the manufacturer and are recognized as a reduction to
cost of goods sold as the related inventory is sold. See Note 3.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their estimated useful lives,
on the straight-line basis. Leasehold improvements made at the inception of the lease or during the term
of the lease are amortized on a straight-line basis over the shorter of the life of the improvement or the
remaining term of the lease.
The range of estimated useful lives is as follows:
Buildings and improvements
Service equipment
Furniture, signs and fixtures
5 to 40 years
5 to 15 years
5 to 10 years
The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant
remodels and betterments are capitalized. In addition, interest on borrowings for major capital projects,
significant remodels and betterments are capitalized. Capitalized interest becomes a part of the cost of
the depreciable asset and is depreciated according to the estimated useful lives as previously stated. We
recorded no capitalized interest in 2010. For the years ended December 31, 2009 and 2008, we recorded
capitalized interest of $0.9 million and $1.7 million, respectively.
When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and any gain or loss is credited or charged to income from continuing
operations.
Leased property meeting certain criteria is capitalized and the present value of the related lease
payments is recorded as a liability. Amortization of capitalized leased assets is computed on a straight-
line basis over the term of the lease, unless the lease transfers title or it contains a bargain purchase
option, in which case, it is amortized over the asset’s useful life, and is included in depreciation expense.
Long-lived assets held and used by us are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of assets may not be recoverable. We consider several
factors when evaluating whether there are indications of potential impairment related to our long-lived
assets, including store profitability, overall macroeconomic factors and impact of our strategic
management decisions. If recoverability testing is performed, we evaluate assets to be held and used by
comparing the carrying amount of an asset to future net undiscounted cash flows associated with the
asset, including its disposition. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value
of the assets. See Note 4.
F-8
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired which is
not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as
franchise value, are separately recognized if the intangible asset is obtained through contractual or other
legal right or if the intangible asset can be sold, transferred, licensed or exchanged.
Goodwill is not amortized but tested for impairment at least annually, and more frequently if
events or circumstances indicate its carrying value may exceed fair value. We have determined that we
operate as one reporting unit for the goodwill impairment test.
We review our goodwill on October 1 of each year by applying a fair-value based test using the
Adjusted Present Value method (“APV”) to indicate the fair value of our reporting unit. Under the APV
method, future cash flows are based on recently prepared operating forecasts and business plans to
estimate the future economic benefits that the reporting unit will generate. Operating forecasts and cash
flows include, among other things, revenue growth rates that are based on management’s forecasted
sales projections and on U.S. Department of Labor, Bureau of Labor Statistics for historical consumer
price index data. A discount rate is utilized to convert the forecasted cash flows to their present value
equivalent representing the indicated fair value of our reporting unit. The discount rate applied to the
future cash flows factors in a subject-Company risk premium, an equity risk premium, small stock risk
premium, a beta and a risk-free rate. We compare the indicated fair value of our reporting unit to our
market capitalization, including consideration of a control premium. The control premium represents the
estimated amount an investor would pay to obtain a controlling interest. We believe this reconciliation is
consistent with a market participant perspective.
The impairment test of goodwill is a two step process. The first step identifies potential
impairments by comparing the calculated fair value of a reporting unit with its book value. If the fair value
of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not
necessary. If the carrying value exceeds the fair value, the second step includes determining the implied
fair value through further market research. The implied fair value of goodwill is then compared with the
carrying amount of goodwill to determine if an impairment loss is necessary. See Note 5.
Franchise Value
We enter into agreements (“Franchise Agreements”) with the manufacturers. Franchise value
represents a right received under Franchise Agreements with manufacturers and is identified on an
individual store basis.
We evaluated the useful lives of our Franchise Agreements based on the following factors:
certain of our Franchise Agreements continue indefinitely by their terms;
certain of our Franchise Agreements have limited terms, but are routinely renewed without
substantial cost to us;
other than franchise terminations related to the unprecedented reorganizations of Chrysler
and General Motors, and allowed by bankruptcy law, we are not aware of manufacturers
terminating Franchise Agreements against the wishes of the franchise owners under the
ordinary course of business. A manufacturer may pressure a franchise owner to sell a
franchise when they are in breach of the franchise agreement over an extended period of
time;
state dealership franchise laws typically limit the rights of the manufacturer to terminate or not
renew a franchise;
we are not aware of any legislation or other factors that would materially change the retail
automotive franchise system; and
as evidenced by our acquisition and disposition history, there is an active market for most
automotive dealership franchises within the United States. We attribute value to the
the
Franchise Agreements acquired with
understanding and industry practice that the Franchise Agreements will be renewed
indefinitely by the manufacturer.
the dealerships we purchase based on
F-9
Accordingly, we have determined that our Franchise Agreements will continue to contribute to our
cash flows indefinitely and, therefore, have indefinite lives.
As an indefinite lived intangible asset, franchise value is tested for impairment at least annually,
and more frequently if events or circumstances indicate the carrying value may exceed fair value. The
impairment test for indefinite lived intangible assets requires the comparison of estimated fair value to
carrying value, and an impairment charge is recorded to the extent the fair value is less than the carrying
value. We have determined the appropriate unit of accounting for testing franchise value for impairment is
on an individual store basis.
We perform our impairment tests on October 1 of each year using an APV method to estimate the
fair value of our franchises by calculating the present value of future cash flows associated with each
franchise. We have determined that only certain cash flows of the store are directly attributable to
franchise rights. Future cash flows are based on recently prepared operating forecasts and business
plans to estimate the future economic benefits that the store will generate. Operating forecasts and cash
flows include, among other things, revenue growth rates that are calculated based on management’s
forecasted sales projections and on the U.S. Department of Labor, Bureau of Labor Statistics for historical
consumer price index data. A discount rate is utilized to convert the forecasted cash flows to their present
value equivalent. The discount rate applied to the future cash flows factors in an equity risk premium,
small stock risk premium, a beta and a risk-free rate. In addition, the discount rate used is further refined
for a franchise-specific risk adjustment. This adjustment considers the desirability of each franchise based
on qualitative factors such as brand recognition, strength of product lineup and financial condition, and
exclusivity of dealer network. See Note 5.
Advertising
We expense production and other costs of advertising as incurred as a component of selling,
general and administrative expense. Additionally, advertising credits that are not tied to specific vehicles
are earned from the manufacturer when we submit for reimbursement of qualifying advertising
expenditures and are recognized as a reduction of advertising expense upon manufacturer confirmation
that our submitted expenditures qualify for such credits.
Advertising expense, net of manufacturer cooperative advertising credits, was $27.1 million,
$18.4 million and $17.6 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Manufacturer cooperative advertising credits were $2.7 million in 2010, $3.8 million in 2009 and $4.3
million in 2008.
Income and Other Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. A valuation allowance, if needed,
reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will
not be realized.
When there are situations with uncertainty as to the timing of the deduction, the amount of the
deduction, or the validity of the deduction, we adjust our financial statements to reflect only those tax
positions that are more-likely-than-not to be sustained. Positions that meet this criterion are measured
using the largest benefit that is more than 50% likely to be realized. Interest and penalties are recorded
as tax expense in the period incurred. See Note 14.
We account for all taxes assessed by a governmental authority that are directly imposed on a
revenue-producing transaction (i.e., sales, use, value-added) on a net (excluded from revenues) basis.
F-10
Concentrations of Risk and Uncertainties
We purchase substantially all of our new vehicles and inventory from various manufacturers at
the prevailing prices charged by auto makers to all franchised dealers. Our overall sales could be
impacted by the auto manufacturers’ inability or unwillingness to supply the dealership with an adequate
supply of popular models.
We enter into Franchise Agreements with the manufacturers. The Franchise Agreements
generally limit the location of the dealership and provide the auto manufacturer approval rights over
changes in dealership management and ownership. The auto manufacturers are also entitled to terminate
the Franchise Agreements if the dealership is in material breach of the terms. Our ability to expand
operations depends, in part, on obtaining consents of the manufacturers for the acquisition of additional
dealerships. See also “Goodwill” and “Franchise Value” above.
We are subject to a concentration of risk in the event of financial distress, including potential
reorganization or bankruptcy, of a major vehicle manufacturer. We purchase substantially all of our new
vehicles from various manufacturers or distributors at the prevailing prices available to all franchised
dealers. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’,
inability to supply the stores with an adequate supply of vehicles. Our Chrysler, General Motors (“GM”)
and Ford (collectively, the “Domestic Manufacturers”) stores represented approximately 30%, 17% and
6% of our new vehicle sales for 2010, respectively, and approximately 30%, 18% and 5% for 2009,
respectively.
We currently have relationships with a number of manufacturers, their affiliated finance
companies or other finance companies, including Ally Bank (formerly GMAC LLC), Mercedes-Benz
Financial Services USA, LLC, Toyota Financial Services (“TFS”), Ford Motor Credit Company, VW Credit,
Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial
Services NA, LLC. These companies provide new vehicle floorplan financing for their respective brands.
Ally Bank serves as the primary lender for all other brands. At December 31, 2010, Ally Bank was the
floorplan provider on approximately 65% of our total amount outstanding. Certain of these companies
have incurred significant losses and are operating under financial constraints. Other companies may incur
losses in the future or undergo funding limitations. As a result, credit that has typically been extended to
us by these companies may be modified with terms unacceptable to us or revoked entirely. If these
events were to occur, we may not be able to pay our floorplan debts or borrow sufficient funds to
refinance the vehicles. Even if new financing were available, it may not be on terms acceptable to us.
As evidenced by the bankruptcy proceedings of both Chrysler and GM in the second quarter of
2009, state dealer laws do not afford continued protection from manufacturer terminations or non-renewal
of franchise agreement under federal bankruptcy laws. While we do not believe additional bankruptcy
filings are probably, no assurances can be given that a manufacturer will not seek protection under
bankruptcy laws, nor that, in this event, they will not seek to terminate franchise rights held by us.
We receive incentives and rebates from our manufacturers, including cash allowances, financing
programs, discounts, holdbacks and other incentives. These incentives are recorded as receivables on
our consolidated balance sheet until payment is received. Our financial condition could be materially
adversely impacted by the manufacturers’ or distributors’ inability to continue to offer these incentives and
rebates at substantially similar terms, or to pay our outstanding receivables. Total receivables from
Domestic Manufacturers were $8.4 million and $7.2 million as of December 31, 2010 and 2009,
respectively.
The announcement by Toyota in February 2010, of not only its recall of approximately 8.5 million
vehicles for possible accelerator pedal sticking issues, but to cease selling eight models of vehicles until
potentially defective parts have been replaced, reduced sales at our Toyota stores and adversely affected
the manufacturer’s reputation for quality. Toyota has continued to announce recalls related to accelerator
issues, including another approximately 2.0 million vehicles in February 2011. The long-term affects these
recalls and safety issues will have on the Toyota brands is uncertain. We depend on our manufacturers to
deliver high-quality, defect-free vehicles. In the event that manufacturers experience quality issues, our
financial performance may be adversely impacted.
F-11
In the fourth quarter of 2009, we experienced shortages in inventory related to Chrysler products,
particularly related to higher demand vehicles such as Ram pickup trucks and Jeep Wranglers. Also, at
that time, Chrysler reduced the amount of consumer incentives and marketing related to its products.
These factors led to lower sales and decreased market share in the fourth quarter of 2009, and negatively
impacted our results. It is uncertain whether product shortages could occur in the future. Events that
affect a manufacturer’s ability to timely deliver new vehicles may adversely impact our financial
performance.
Financial Instruments, Fair Value and Market Risks
The carrying amounts of cash equivalents, accounts receivables, trade payables, accrued
liabilities and short-term borrowings approximate fair value because of the short-term nature and current
market rates of these instruments.
Fair value estimates are made at a specific point in time, based on relevant market information
about the financial instrument. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. See Note 13.
We have variable rate floorplan notes payable, mortgages and other credit line borrowings that
subject us to market risk exposure. At December 31, 2010, we had $413.6 million outstanding under such
facilities, at interest rates ranging from 1.8% to 4.9% per annum; $251.3 million of which was outstanding
under our floorplan facilities. An increase or decrease in the interest rates would affect interest expense
for the period accordingly.
The fair value of long-term, fixed interest rate debt is subject to interest rate risk. Generally, the
fair value of fixed interest rate debt will increase as interest rates fall because we could refinance for a
lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The
interest rate changes affect the fair value, but do not impact earnings or cash flows. We monitor our fixed
interest rate debt regularly, refinancing debt that is materially above market rates if permitted. See Note
13.
We are also subject to credit risk and market risk by entering into interest rate swaps. See below
and Note 12. We are generally exposed to credit or repayment risk based on our relationship with the
counterparty to the transaction. We minimize the credit or repayment risk on our derivative instruments by
entering into transactions with institutions whose credit rating is Aa or higher.
Derivative Financial Instruments
We enter into interest rate swap agreements to reduce our exposure to market risks from
changing interest rates on our new vehicle floorplan lines of credit. All derivative instruments are recorded
on the consolidated balance sheet as an asset or liability at fair value. The related gains and losses on
these instruments are deferred as a component of stockholders’ equity, provided specific hedge
accounting criteria are met. Recognition of the deferred gains and losses occur in the period the related
item hedged is recognized as a component of floorplan interest expense. To the extent the derivative
contract is determined to be ineffective, the ineffective portion is immediately recognized in earnings. See
Note 12.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and related notes to financial statements. Changes in such
estimates may affect amounts reported in future periods.
F-12
Estimates are used in the calculation of certain reserves maintained for charge-backs on
estimated cancellations of service contracts; life, accident and disability insurance policies; and finance
fees from customer financing contracts. We also use estimates in the calculation of various expenses,
accruals and reserves, including anticipated workers compensation premium expenses related to a
retrospective cost policy, anticipated losses related to self-insurance components of our property and
casualty and medical insurance, self-insured lifetime lube, oil and filter service contracts, discretionary
employee bonuses, warranty and stock-based compensation. We also make certain estimates regarding
the assessment of the recoverability of long-lived assets, indefinite lived intangible assets and deferred
tax assets.
Revenue Recognition
Revenue from the sale of a vehicle is recognized when a contract is signed by the customer,
financing has been arranged or collectability is reasonably assured, and the delivery of the vehicle to the
customer is made. We do not allow the return of new or used vehicles, except where mandated by state
law.
Revenue from parts and service is recognized upon delivery of the parts or service to the
customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale.
Most parts returns generally occur within one to two weeks from the time of sale, and are not significant.
Finance fees earned for notes placed with financial institutions in connection with customer
vehicle financing are recognized, net of estimated charge-backs, as finance and insurance revenue upon
acceptance of the credit by the financial institution.
Insurance income from third party insurance companies for commissions earned on credit life,
accident and disability insurance policies sold in connection with the sale of a vehicle are recognized, net
of anticipated cancellations, as finance and insurance revenue upon execution of the insurance contract.
Commissions from third party service contracts are recognized, net of anticipated cancellations,
as finance and insurance revenue upon sale of the contracts. We also participate in future underwriting
profit, pursuant to retrospective commission arrangements, which is recognized in income as earned.
Revenue related to self-insured lifetime lube, oil and filter service contracts is deferred and
recognized based on expected future claims for service. The expected future claims experience is
evaluated periodically to ensure it remains appropriate given actual claims history.
Asset Impairments
We perform periodic impairment tests for goodwill and franchise value and recoverability tests for
long-lived assets.
As a result of these tests, we recorded asset impairments totaling $15.3 million, $8.3 million and
$334.2 million, respectively, in 2010, 2009 and 2008, as detailed below. Operational results for certain
locations have been retrospectively reclassified from discontinued operations to continuing operations for
2009 and 2008 in the consolidated statements of operations, including prior period impairments.
Asset impairments recorded in the consolidated statements of operations consist of the following
(in thousands):
December 31,
Goodwill
Other:
Intangible assets
Long-lived assets
Other assets
Total asset impairments
2010
-
-
15,301
-
15,301
$
$
$
2009
-
250
10,350
(2,328)
8,272
$
$
$
2008
299,266
16,028
13,876
4,995
34,899
$
$
$
F-13
In addition, we recorded impairment charges on certain cancelled construction projects of $4.5
million in 2008 as a component of selling, general and administrative expense.
See Notes 4, 5 and 16.
Stock-Based Compensation
Compensation costs associated with equity instruments exchanged for employee and director
services are measured at the grant date, based on the fair value of the award, and recognized as an
expense over the individual’s requisite service period (generally the vesting period of the equity award).
See Note 11.
Legal Costs
We are a party to numerous legal proceedings arising in the normal course of business. We
accrue for certain legal costs, including attorney fees, and potential settlement claims related to various
legal proceedings that are estimable and probable.
Contract Origination Costs
Contract origination commissions paid to our employees directly related to the sale of our self-
insured lifetime lube, oil and filter service contracts are deferred and charged to expense in proportion to
the associated revenue to be recognized.
Segment Reporting
We define an operating segment as a component of an enterprise that meets the following
criteria:
engages in business activities from which it may earn revenues and incur expenses;
operating results are regularly reviewed by the enterprise’s chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance;
and
discrete financial information is available.
We define the term ‘chief operating decision maker’ to be our executive management group.
Currently, all operations are reviewed on a consolidated basis for budget and business plan performance
by our executive management group. Additionally, operational performance at the end of each reporting
period is viewed in the aggregate by our executive management group. Any decisions related to changes
in personnel, dispatching corporate employees to assist in operational improvement or training, or to
allocate other company resources are made based on the combined results.
Based on the aforementioned criteria, we operate in a single operating and reporting segment,
automotive retailing. We sell new and used vehicles, vehicle maintenance and repair services, vehicle
parts and financing and insurance products.
Warranty
We offer a 60-day, 3,000 mile limited warranty on the sale of most retail used vehicles. We also
offer a 3-year, 50,000 mile warranty on parts used in our service repair work and a 2-year warranty on tire
purchases. The cost that may be incurred for these warranties is estimated at the time the related
revenue is recorded. A reserve for these warranty liabilities is estimated based on current sales levels,
warranty experience rates and estimated costs per claim. As of December 31, 2010 and 2009, the
accrued warranty balance was $0.1 million and $0.1 million, respectively.
F-14
(2)
Accounts Receivables
Accounts receivables consisted of the following (in thousands):
December 31,
Contracts in transit
Trade receivables
Vehicle receivables
Manufacturer receivables
Less: Allowance
Total accounts receivables, net
2010
34,365
13,166
13,439
14,231
75,201
(190)
75,011
$
$
2009
21,940
10,995
8,331
11,049
52,315
(218)
52,097
$
$
Contracts in transit are receivables from various lenders for the financing of vehicles that we have
arranged on behalf of the customer and are typically received within five days of selling a vehicle. Trade
receivables are comprised of amounts due from customers, lenders for the commissions earned on
financing and third parties for commissions earned on service contracts and insurance products. Vehicle
receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
Manufacturer receivables include amounts due from manufacturers including holdbacks, rebates,
incentives and warranty claims.
(3)
Inventories and Related Floorplan Notes Payable
The new and used vehicle inventory, collateralizing related floorplan notes payable, and other
inventory were as follows (in thousands):
December 31,
New and program vehicles
Used vehicles
Parts and accessories
Inventory
Cost
312,219
80,851
22,158
415,228
$
$
2010
Floorplan
Notes
Payable
251,257
$
2009
Floorplan
Notes
Payable
216,082
$
Inventory
Cost
243,716
70,819
19,093
333,628
$
$
In addition to the amounts discussed above, we had $8.1 million of inventory included as a
component of assets held for sale and $2.9 million of floorplan notes payable included as liabilities related
to assets held for sale at December 31, 2009. See Note 16.
The new vehicle inventory cost is generally reduced by manufacturer holdbacks and incentives,
while the related floorplan notes payable are reflective of the gross cost of the vehicle. The floorplan
notes payable, as shown in the above table, generally are higher than the inventory cost due to the timing
of the sale of a vehicle and payment of the related liability; however, in 2010 and 2009, floorplan notes
payable is lower than inventory cost as we have paid down floorplan notes with excess cash.
As of December 31, 2010 and 2009, the carrying value of inventory had been reduced by $2.9
million and $3.0 million, respectively, for assistance received from manufacturers as discussed in Note 1.
We maintain deposit relationships with certain floorplan providers. As of December 31, 2010 and
2009, $7.7 million and $6.9 million, respectively, was recorded as a reduction to floorplan notes payable
related to these amounts, reflecting the legal right of offset held by the floorplan provider.
We evaluate our vehicles at the lower of market value or cost under the pooled approach. In
2008, due to a shift in consumer demand, we determined certain used vehicle aging categories were in
unbalanced quantities. Based on this determination, we recorded a used vehicle impairment of $0.5
million at December 31, 2008. We did not record any impairment charges on used vehicle inventories in
2010 or 2009. If the book value of our used vehicles is more than fair value, we could experience losses
on our used vehicles in future periods.
F-15
All new vehicles are pledged to collateralize floorplan notes payable. The floorplan notes payable
bear interest, payable monthly on the outstanding balance, at a rate of interest that varies by provider.
The new vehicle floorplan notes are payable on demand and are typically paid upon the sale of the
related vehicle. As such, these floorplan notes payable are shown as current liabilities in the
accompanying consolidated balance sheets. Vehicles financed by lenders not directly associated with
the manufacturer are classified as floorplan notes payable: non-trade and are included as a financing
activity in our consolidated statements of cash flows. Vehicles financed by lenders directly associated
with the manufacturer are classified as floorplan notes payable and are included as an operating activity
in our consolidated statements of cash flows.
The weighted average interest rate on our floorplan facilities was 3.1% at December 31, 2010.
(4)
Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31,
Land
Building and improvements
Service equipment
Furniture, signs and fixtures
Less accumulated depreciation
Construction in progress
2010
117,083
225,331
36,905
73,925
453,244
(93,745)
359,499
2,934
362,433
$
$
2009
120,003
229,728
36,922
80,476
467,129
(83,474)
383,655
2,399
386,054
$
$
2010 Long-lived Asset Impairment Charges
Our portfolio of land, building and improvements includes properties held for future development,
comprised of undeveloped land and vacant facilities. The undeveloped land was purchased in connection
with our planned development of stand-alone used vehicle stores or to relocate existing new vehicle
stores in certain markets. In 2008, our plans to develop the land were placed on hold until economic
conditions improved. The vacant facilities are a result of the bankruptcy reorganization of Chrysler and
GM, which
to close certain
underperforming locations. We believe many of these locations are best utilized for retail automotive
purposes reflective of our intended use and construction specifications.
terminated certain stores we operated, or
through our election
In the fourth quarter of 2009, we completed an equity offering. One of the intended uses of the
proceeds was, and remains, to fund potential acquisitions. Following the equity offering, we considered
various strategies to convert our properties held for future development into operational assets. We
ultimately concluded the best alternative was to seek new vehicle franchises that could be acquired and
located in our properties. We began an exhaustive search to identify and ultimately acquire franchises in
these markets.
By the end of the second quarter of 2010, we evaluated the results of our comprehensive search
and we determined that we would be unable to acquire franchises at reasonable prices to mitigate the
continued holding costs of the facilities. We also determined that development opportunities for our
undeveloped land would not be realizable within a short to medium-term time period. In addition, through
the first half of 2010, we experienced various macroeconomic and industry specific factors which
influenced our decision to modify our disposition strategy.
At the end of 2009, the projected rate of annualized new vehicle sales in the United States was
forecasted to recover from the extremely low levels experienced in 2009 to a more robust level in 2010,
with some analysts projecting as many as 13 million new vehicles sold in the year. However, by the
F-16
middle of 2010, the annualized new vehicle sales levels were revised down to approximately an 11.5
million unit range, and projections available at that time for the year 2011 and beyond were more
uncertain with respect to the pace at which a return to the higher sales levels experienced through 2007
would occur.
The closure of a number of automotive retail locations, due both to the economic downturn and
as a result of the termination of franchises by major domestic manufacturers in connection with their
bankruptcy proceedings, created an oversupply of vacant dealership properties across the United States.
At current sales levels, the existing automotive dealership network retains a significant idle capacity,
which reduces the need for additional retail space provided by vacant dealership sites or by developing
new sites. In 2010, it became apparent that this oversupply of dealer capacity may take a significantly
longer period to be absorbed than previously thought.
Additionally, much of the improvement in demand for properties held for future development is
tied to a broader economic recovery. Retailers and other commercial users who are willing and able to
make the often significant capital investment these properties require must feel more optimistic about the
outlook for the future. While the economy has improved from the unprecedented depressed levels
experienced in 2009, the longer-term outlook remains cautious. Anemic growth of economic activity out of
the recession, a reduction in outlook for GDP growth by economists, persistently high unemployment
rates, and the European credit crisis are impacting consumer confidence and delaying the expected
rebound of the U.S. economy.
Also, the relative financial condition of regional banks, many of which carry significant quantities
of non-performing assets or other owned real estate, remains tenuous. As a result, their inability or
unwillingness to finance the purchase of commercial properties for potential buyers significantly reduces
the demand and opportunities for us to sell our holdings at reasonable prices. Overall, availability of credit
for prospective buyers remains tight compared to historical levels, reducing the potential pool of buyers to
only the most creditworthy market participants.
In the markets where our undeveloped or vacant properties are located, we have experienced a
large supply of vacant dealership sites, commercial real estate in general and available land for
commercial and retail development, which allows prospective buyers a number of choices and increases
price pressure. In evaluating broader commercial real estate trends, the supply of commercial real estate
failed to decrease in the first half of the year and continues to significantly outstrip current demand. Sales
activity remains limited given diverging price expectations by buyers and sellers. When sales do occur,
the realized prices are often lower than in prior periods, reflecting the financially distressed nature of the
seller and/or the leveraged negotiating position of the buyer.
As a result of these various considerations, we changed our strategy in the second quarter of
2010 regarding our real estate held for development. Previously, we contemplated disposition in the
normal course of business under a highest and best use scenario allowing for a “market reasonable”
marketing period. In the second quarter of 2010, we adopted a strategy focused on a more immediate
disposition to potential buyers meeting broader needs and characteristics, including a different
commercial retail use, allowing for the redeployment of the invested capital to higher-growth potential
opportunities within our business.
In the second quarter of 2010, we experienced an increase in sales interest by prospective
buyers; although offers were made at prices significantly lower than we anticipated. In certain cases,
these offers were made at amounts that we consider to be significantly lower than the value of these
properties from a long-term income approach at their highest and best use. Also in some cases, the offers
represented amounts less than current replacement cost. However, given the prospect of accepting these
offers and effecting a quick sale, or alternatively continuing the capital investment in these non-
operational properties for a longer period until we or other market participants can find a suitable
operational use for these properties, we decided to accept certain offers and redeploy the capital
elsewhere.
F-17
As a result of the above factors, we believed events and circumstances indicated the carrying
amount of our non-operational real estate assets may no longer be recoverable at June 30, 2010,
triggering an interim impairment test on the totality of our portfolio of such assets. In connection with the
impairment test, we recorded an impairment of $13.3 million in the second quarter of 2010.
During the first quarter of 2010, reflecting changes in specific facts and circumstances on three
properties held for future development, we tested certain long-lived assets for recoverability. As a result of
the testing, we recorded an impairment of $1.5 million as a component of income from continuing
operations mainly related to a property for which a preliminary agreement to sell was entered into in
March 2010.
In addition, through the fourth quarter of 2010, we continued to negotiate on the sale of several
additional non-operating properties. As a result of these negotiations, and additional market data, we
recorded impairment charges of $0.5 million.
For the year ended December 31, 2010, we recorded a total impairment of $15.3 million
associated with the aforementioned properties.
We continue to focus on mitigating our exposure to vacant dealerships and undeveloped land,
and have made progress towards the disposal of these non-operating assets. Throughout 2010, we
closed on the sale of three non-operating properties at or above the then current carrying value. A
number of locations are currently under contract, or advanced negotiations, to be sold. We place the
highest priority on disposing of vacant dealerships, due to their significantly higher carrying costs and
more restrictive commercial use. As additional market information becomes available and negotiations
with prospective buyers continue, estimated fair market values of our properties may change. These
changes may result in recognition of additional impairment charges in future periods.
2009 and 2008 Long-Lived Asset Impairment Charges
In 2009, as a result of the reorganization in bankruptcy of both Chrysler and GM, and the decline
in commercial real estate values, we tested our long-lived assets for recoverability in the second quarter
of 2009. Additional tests were performed in the third and fourth quarters of 2009. Total long-lived asset
impairment charges were $10.4 million in 2009.
As a result of the adverse change in the business climate and our reduced earnings and cash
flow forecast, we tested certain long-lived assets for recoverability in the second quarter of 2008. This
impairment test was performed just prior to performing the first step of the goodwill impairment test. We
also performed the test on certain long-lived assets in the fourth quarter of 2008. Based on the results of
these tests, we recorded asset impairment charges totaling $13.9 million against our long-lived assets.
We also recorded $4.5 million of impairment charges on certain cancelled construction projects as a
component of selling, general and administrative, for total long-lived asset impairment charges of $18.4
million in 2008.
(5)
Goodwill and Franchise Value
The following is a roll-forward of goodwill and franchise value (in thousands):
Balance as of December, 31, 2007
Transfers to discontinued operations
Impairments
Balance as of December, 31, 2008
Transfers from discontinued operations
Impairments
Balance as of December 31, 2009
Additions through acquisitions
Transfers from discontinued operations
Balance as of December 31, 2010
F-18
Goodwill
311,527
(12,261)
(299,266)
-
-
-
-
6,186
-
6,186
$
$
Franchise
Value
68,841
(10,895)
(16,028)
41,918
760
(250)
42,428
2,615
150
45,193
$
$
During 2010, we concluded that there were no impairments to the carrying value of goodwill. In
the second quarter of 2008, based on our decision to dispose of approximately 10% of our stores, an
adverse change in the business climate, our reduced earnings and cash flow forecast and a significant
continuing decline in our market capitalization, we performed a goodwill impairment test and determined
our goodwill was fully impaired. This resulted in the $299.3 million impairment charge in 2008 and no
goodwill recorded as of December 31, 2009 and 2008.
We concluded that there were no impairments to the carrying value of franchise value in 2010. In
2009, as a result of the reorganization in bankruptcy of both Chrysler and GM, we evaluated our franchise
value for impairment in the second quarter of 2009. Based on our evaluation, we concluded there were no
impairments in the carrying value of our intangible assets in the second quarter of 2009. In the third
quarter of 2009, we recorded an impairment charge of $0.3 million on the franchise value associated with
one of our stores. Additionally, we performed our annual impairment test in the fourth quarter of 2009.
Based on this analysis, there was no additional indicated impairment of our indefinite-lived intangible
assets.
Based on the same triggering events discussed above for goodwill, we determined that an
impairment test for franchise values was required in the second quarter of 2008. We also performed an
impairment test in the fourth quarter of 2008. In cases where the estimated fair value of the franchise was
less than its carrying value, an impairment charge was recorded. A partial or full impairment of the
franchise value, totaling $16.0 million, was recorded in 2008 on 16 franchises, including eight Chrysler,
five General Motors, one Ford, one Hyundai and one Mercedes. These charges are recorded as asset
impairments in the consolidated statements of operations.
The impairments recorded in 2009 and 2008 are related to impairments associated with certain
locations that have been retrospectively reclassified from discontinued operations to continuing
operations in the consolidated statements of operations.
(6)
Long-Term Debt
Our long-term debt consists of the following (in thousands):
December 31,
Working capital, acquisition and used vehicle credit facility
Real estate mortgages
Other debt
Total long-term debt
Less current maturities
Long-term debt
2010
40,000 $
234,850
5,924
280,774
(12,081)
268,693 $
2009
24,000
238,821
2,952
265,773
(32,708)
233,065
$
$
In addition to the amounts discussed above, we had $2.2 million of mortgages payable included
as a component of liabilities related to assets held for sale at December 31, 2009. See Note 16.
Working Capital, Acquisition and Used Vehicle Credit Facility
We have a $75 million Credit Facility with U.S. Bank National Association (the “Credit Facility”),
which expires June 30, 2013. The interest rate on the Credit Facility is the 1-month LIBOR plus 2.35% per
annum.
In January 2010, we executed the eighth amendment to our Credit Facility, which increased the
amount allowable for letters of credit to $2.0 million. In February 2010, we executed the ninth amendment
to our Credit Facility, which altered the definition of vehicle equity in the agreement to allow more vehicles
to be included in the borrowing base calculation. In June 2010, we executed the tenth amendment to our
Credit Facility, which increased our borrowing capacity by $25 million in available credit for a total amount
up to $75 million, extended the maturity date to June 30, 2013 and decreased the interest rate on the
credit facility to the 1-month LIBOR plus 2.75% per annum from an interest rate of 1-month LIBOR plus
3.25% per annum. Additionally, this amendment increased the amount of total funded debt we may carry
F-19
from $260 million to $310 million. Our financial covenant related to vehicle equity was increased from a
minimum of $45 million to a minimum of $65 million. In July 2010, we executed the eleventh amendment
to our Credit Facility, which lowered the interest rate on the Credit Facility to the 1-month LIBOR plus
2.35% per annum. In December 2010, we executed the twelfth amendment to our Credit Facility, which
increased the amount allowable for letters of credit to $3.0 million.
We had $40.0 million and $24.0 million outstanding on our Credit Facility as of December 31,
2010 and December 31, 2009, respectively, and the interest rate at December 31, 2010 was 2.6%.
Loans are guaranteed by all of our subsidiaries and are secured by new vehicle inventory, used
vehicle and parts inventory, equipment other than fixtures, deposit accounts, accounts receivable,
investment property and other intangible personal property. Capital stock and other equity interests of our
subsidiary stores and certain other subsidiaries are excluded. The lenders’ security interest in new vehicle
inventory is subordinated to the interests of floorplan financing lenders, including Ally Bank, Mercedes-
Benz Financial Services USA, LLC, TFS, Ford Motor Credit Company, VW Credit, Inc., American Honda
Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC. The
Credit Facility agreement provides for events of default that include nonpayment, breach of covenants, a
change of control and certain cross-defaults with other indebtedness. In the event of a default, the
agreement provides that the lenders may declare the entire principal balance immediately due, foreclose
on collateral and increase the applicable interest rate to the revolving loan rate plus 3% per annum,
among other remedies.
Real Estate Mortgages
Associated with our owned real estate and leaseholds, we have mortgages with interest rates
ranging from 2.1% to 7.9% per annum. These mortgages are payable in various installments through
October 2029 and are secured by the associated real estate.
Other Debt
Other long-term debt includes various notes, capital leases and obligations assumed as a result
of acquisitions and other agreements. The interest rates associated with this debt range from 3.5% to
10.0% per annum and are payable in various installments through October 2018.
Future Principal Payments
The schedule of future principal payments on long-term debt as of December 31, 2010 was as
follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total principal payments
$
$
12,081
9,182
90,676
52,582
58,090
58,163
280,774
F-20
2.875% Senior Subordinated Convertible Notes Repurchase
We repurchased or redeemed all of our senior subordinated convertible notes. The following table
summarizes our repurchases, all of which were made on the open market:
Purchase
Date
August 2008
October 2008
October 2008
December 2008
March 2009
April 2009
April 2009
April 2009
April 2009
May 2009
Face
Amount
Purchased
16.0 million
17.4 million
4.6 million
4.5 million
3.2 million
4.0 million
16.8 million
0.9 million
10.7 million
6.9 million
85.0 million
$
$
Purchase
Price
per $100
$89.0
$86.5
$81.0
$89.0
$95.8
$99.2
$99.3
$99.3
$99.2
$100.0
Total
Purchase
Price
14.4 million
15.1 million
3.7 million
4.0 million
3.1 million
4.0 million
16.7 million
0.9 million
10.6 million
6.9 million
79.4 million
$
$
Gain on Early
Retirement of
Debt
1.6 million
2.3 million
0.9 million
0.5 million
0.1 million
-
0.1 million
-
0.1 million
-
5.6 million
$
$
The gains of $0.3 million and $5.3 million on the retirement of the convertible notes for 2009 and
2008, respectively, were recorded as a component of other income, net on the consolidated statements of
operations.
During 2008, we wrote off $0.2 million of debt issuance costs as a component of other interest
expense in connection with the early retirement of our convertible notes.
(7)
Commitments and Contingencies
Leases
We lease certain of our facilities under non-cancelable operating and capital leases. These
leases expire at various dates through 2066. Certain lease commitments contain fixed payment increases
at predetermined intervals over the life of the lease, while other lease commitments are subject to
escalation clauses of an amount equal to the increase in the cost of living based on the “Consumer Price
Index - U.S. Cities Average - All Items for all Urban Consumers” published by the U.S. Department of
Labor, or a substantially equivalent regional index. Lease expense is recognized on a straight-line basis
over the life of the lease.
The minimum lease payments under our operating and capital leases after December 31, 2010
are as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total minimum lease payments
Less: sublease rentals
$
17,184
15,784
14,597
13,315
12,226
75,664
148,770
(20,280)
$ 128,490
Rental expense, net of sublease income, for all operating leases was $14.7 million, $15.5 million
and $17.2 million for the years ended December 31, 2010, 2009 and 2008, respectively. These amounts
are included as a component of selling, general and administrative expenses in our consolidated
statements of operations.
F-21
In connection with dispositions of dealerships, we occasionally assign or sublet our interests in
any real property leases associated with such dealerships to the purchaser. We often retain responsibility
for the performance of certain obligations under such leases to the extent that the assignee or sublessee
does not perform. Additionally, we may remain subject to the terms of any guarantees and have
correlating indemnification rights against the assignee or sublessee in the event of non-performance, as
well as certain other defenses. We may also be called upon to perform other obligations under these
leases, such as environmental remediation of the premises or repairs upon termination of the lease. We
currently have no reason to believe that we will be called upon to perform any such services; however,
there can be no assurance that any future performance required by us under these leases will not have a
material adverse effect on our financial condition or results of operations.
Certain of our facilities where a lease obligation still exists have been vacated for business
reasons. In these instances, we make efforts to find qualified tenants to sublease the facilities and
assume financial responsibility. However, due to the specific nature and size of the facilities used in our
dealerships, tenants are not always available. Reserves have been accrued to offset our potential future
lease obligations. These amounts were not material to our consolidated statements of operations during
2010, 2009 or 2008 and the amount accrued at December 31, 2010 and 2009 was not material.
In the second quarter of 2008, we entered into two sale-leaseback transactions involving
dealership facilities. Each transaction called for an initial term of 15 years with eight successive five year
renewal options. Rents are subject to increases based on year-over-year CPI changes with a maximum
percentage rate cap. As of December 31, 2008, one of these transactions did not qualify for sale
recognition due to continuing involvement by us related to certain environmental remediation. As a result,
it was accounted for as a financing lease. During 2009, the transaction met the qualifications for sale
recognition.
In the third quarter of 2009, we entered into one sale-leaseback transaction involving a dealership
facility. This transaction called for an initial term of one year with four successive one year extensions.
Rents are subject to increases based on year-over-year CPI changes. This transaction qualified for sale
recognition at inception.
Capital Commitments
Capital expenditures were $7.6 million, $21.1 million and $57.4 million for 2010, 2009 and 2008,
respectively. The decrease in capital expenditures over the past two years reflected our cash
management efforts and our desire to reduce the aggregate level of debt outstanding. In 2011, we
anticipate approximately $26.0 million in capital expenditures, mainly related to the improvement of our
store facilities, replacement of equipment and construction of a new headquarters building. We believe it
is an attractive time to invest in certain internal initiatives that will generate additional manufacturer
incentive payments, particularly from our domestic partners. Also, recently enacted tax law changes that
accelerate deductions for capital expenditures have accelerated project timelines to ensure completion
before the law expires.
Charge-Backs for Various Contracts
We have recorded a reserve of $9.4 million for our estimated contractual obligations related to
potential charge-backs for vehicle service contracts, lifetime oil change contracts and other various
insurance contracts that are terminated early by the customer. We estimate that the charge-backs will be
paid out as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total
$
$
5,273
2,597
1,092
328
64
11
9,365
F-22
Lifetime Lube, Oil and Filter Contracts
In March 2009, we entered into a transaction related to existing lifetime lube, oil and filter
contracts, in which we assumed the obligation to provide future services under the purchased contracts.
The assets acquired and liabilities assumed in this transaction consisted of cash of approximately $16.1
million and deferred revenue in the same amount. Costs to perform the future service under the contracts
were originally estimated to be approximately $16.1 million. As of December 31, 2010, we had a
remaining balance of $7.5 million. We estimate the deferred revenue associated with this assumed
obligation will be recognized as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total
$
$
2,025
1,551
1,187
884
636
1,218
7,501
We periodically evaluate the estimated future costs of these contracts and record a charge if
future expected claim and cancellation costs exceed the deferred revenue to be recognized. In 2010, our
analysis indicated expected costs had increased as customers retained their cars for longer periods of
time than our historical experience indicated. As a result, we recorded a reserve of $1.0 million as a
charge to cost of sales in our consolidated statements of operations. In the fourth quarter of 2009, our
analysis indicated expected costs had increased due to a change in experience rates. As a result, a $1.4
million reserve was recorded as a charge to cost of sales in 2009.
We also self-insure lifetime lube, oil and filter service contracts sold to our customers and record
deferred revenues related to these contracts. At the time of sale, we defer the full sale price and
recognize the revenue based on the rate we expect future costs to be incurred. As of December 31, 2010,
we had a deferred revenue balance of $13.9 million associated with these contracts and estimate the
deferred revenue will be recognized as follows (in thousands):
Year Ending December 31,
2011
2012
2013
2014
2015
Thereafter
Total
$
$
3,721
2,684
1,889
1,431
1,145
3,056
13,926
Regulatory Compliance
We are subject to numerous state and federal regulations common in the automotive sector that
cover retail transactions with customers and employment and trade practices. We do not anticipate that
compliance with these regulations will have an adverse effect on our business, consolidated results of
operations, financial condition or cash flows, although such outcome is possible given the nature of our
operations and the legal and regulatory environment affecting our business.
Severance Agreement
In the second quarter of 2010, we entered into an agreement with Jeffrey DeBoer, Senior Vice
President and Chief Financial Officer, stipulating a one-time cash payment associated with the
acceptance of his resignation no later than October 31, 2010. Under the terms of the agreement, we
would also provide out-placement consulting services for a maximum of two years, the option to purchase
two vehicles leased from us and a pro-rated portion of his variable compensation. Mr. DeBoer will also
provide his services as a consultant for up to two years.
F-23
As a result of this agreement, we recorded a reserve totaling $0.7 million in the second
quarter of 2010 as a component of selling, general and administrative expense in our consolidated
statements of operations. As of December 31, 2010, we have paid out all of this reserve.
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. While
we cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of
legal proceedings arising in the normal course of business or the proceeding described below will have a
material adverse effect on our business, results of operations, financial condition, or cash flows.
Alaska Service and Parts Advisors and Managers Overtime Suit
On March 22, 2006, seven former employees in Alaska brought suit against Lithia (Dunham, et al.
v. Lithia Support Services, et al., 3AN-06-6338 Civil, Superior Court for the State of Alaska) seeking
overtime wages, additional liquidated damages and attorney’s fees. The complaint was later amended to
include a total of 11 named plaintiffs. The court ordered the dispute to arbitration. In February 2008, the
arbitrator granted the plaintiffs’ request to establish a class of plaintiffs consisting of all present and former
service and parts department employees totaling approximately 150 individuals who were paid on a
commission basis. Lithia filed a motion requesting reconsideration of this class certification. The arbitrator
granted our motion in part and removed approximately 30 service and parts managers from the case. A
class action opt-out notice was mailed to the remaining class members in October 2009. Lithia and the
plaintiffs agreed to conduct the arbitration in two parts. The first part of arbitration determined if liability
exists for Lithia. This arbitration was conducted from September 27 to 29, 2010. The arbitrator ruled in
Lithia’s favor and determined that there were no valid claims. The plaintiff has appealed the decision;
however, we believe the likelihood of overturning the decision is remote, as the appeal is to the arbitrator
who made the initial ruling. Accordingly, we do not expect the ultimate resolution of this matter to have a
material impact on our consolidated financial position or results of operations.
(8) Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A common stock are not convertible into any other series or class of our
securities. Each share of Class B common stock, however, is freely convertible into one share of Class A
common stock at the option of the holder of the Class B common stock. All shares of Class B common
stock shall automatically convert to shares of Class A common stock (on a share-for-share basis, subject
to the adjustments) on the earliest record date for an annual meeting of our stockholders on which the
number of shares of Class B common stock outstanding is less than 1% of the total number of shares of
common stock outstanding. Shares of Class B common stock may not be transferred to third parties,
except for transfers to certain family members and in other limited circumstances.
Holders of Class A common stock are entitled to one vote for each share held of record and
holders of Class B common stock are entitled to ten votes for each share held of record. The Class A
common stock and Class B common stock vote together as a single class on all matters submitted to a
vote of stockholders.
Sale of Class A Common Stock
On October 15, 2009, we sold 4,000,000 shares of our Class A common stock in a public offering
at a price of $10.00 per share for gross proceeds of $40.0 million and net proceeds, after underwriting
commissions, of $37.9 million. We also granted to the underwriters of the public offering a 30-day option
to purchase up to an additional 600,000 shares to cover over-allotments, if any. The option to purchase
the shares was exercised by the underwriters in its entirety, resulting in total gross proceeds of $46.0
million and net proceeds, after underwriting commissions and other expenses, of $43.2 million.
F-24
Repurchases of Class A Common Stock
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our
Class A common stock. Through December 31, 2010, we have purchased a total of 580,624 shares
under the repurchase program, 100,893 of which were purchased during 2010 for an average price of
$7.88 per share. We may continue to repurchase shares from time to time in the future as conditions
warrant. No shares were repurchased during 2009 or 2008.
Dividends
For the period January 1, 2008 through December 31, 2010, we declared and paid dividends on
our Class A and Class B Common Stock as follows:
Quarter declared:
2008
First quarter
Second quarter
Third quarter
Fourth quarter
2009
First quarter
Second quarter
Third quarter
Fourth quarter
2010
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend
amount per
Class A
share
Dividend
amount per
Class B
share
Total
amount of
dividend (in
thousands)
$0.14
0.14
0.14
0.05
$ --
--
--
--
$ --
0.05
0.05
0.05
$0.14
0.14
0.14
0.05
$ --
--
--
--
$ --
0.05
0.05
0.05
$2,776
2,806
2,837
1,025
$ --
--
--
--
$ --
1,300
1,307
1,312
(9)
Net Income Per Share of Class A and Class B Common Stock
We compute net income (loss) 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 rights, the rights of the holders of our Class A and Class B common
stock are identical. Our Restated Articles of Incorporation require that the Class A and Class B common
stock must 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 contractual participation rights of the Class A and
Class B common shares as if the earnings for the year had been distributed. As the liquidation and
dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as
we assume the conversion of Class B common stock in the computation of the diluted net income per
share of Class A common stock, the undistributed earnings are equal to net income for that computation.
F-25
Following is a reconciliation of the income (loss) from continuing operations and weighted
average shares used for our basic earnings per share (“EPS”) and diluted EPS for the year ended
December 31, 2010, 2009 and 2008 (in thousands, except per share amounts):
Year Ended December 31,
Basic EPS
Numerator:
Income (loss) from
continuing operations
applicable to common
stockholders
Distributed income
applicable to common
stockholders
Basic undistributed
income (loss) from
continuing operations
applicable to common
stockholders
Denominator:
Weighted average
number of shares out-
standing used to calculate
basic income (loss) per
share
Basic income (loss) per
share applicable to
common stockholders
Basic distributed income
per share applicable to
common stockholders
Basic undistributed
income (loss) per share
applicable to common
stockholders
2010
2009
2008
Class A
Class B
Class A
Class B
Class A
Class B
$12,065
$2,035
$5,735
$1,181
$(183,193)
$(41,939)
(3,353)
(566)
-
-
(7,685)
(1,759)
$8,712
$1,469
$5,735
$1,181
$(190,878)
$(43,698)
22,300
3,762
18,275
3,762
16,433
3,762
$ 0.54
$0.54
$0.31
$0.31
$(11.15)
$(11.15)
(0.15)
(0.15)
-
-
(0.47)
(0.47)
$0.39
$0.39
$0.31
$0.31
$(11.62)
$(11.62)
F-26
Year Ended December 31,
Diluted EPS
Numerator:
Distributed income
applicable to common
stockholders
Reallocation of distributed
income as a result of
conversion of dilutive
stock options
Reallocation of distributed
income due to conversion
of Class B to Class A
common shares
outstanding
Diluted distributed income
applicable to common
stockholders
Undistributed income
(loss) from continuing
operations applicable to
common stockholders
Reallocation of
undistributed income as a
result of conversion of
convertible senior
subordinated notes
Reallocation of
undistributed income as a
result of conversion of
dilutive stock options
Reallocation of
undistributed income
(loss) due to conversion of
Class B to Class A
Diluted undistributed
income (loss) from
continuing operations
applicable to common
stockholders
Denominator:
Weighted average
number of shares
outstanding used to
calculate basic income
per share
Weighted average number
of shares from stock
options
Conversion of Class B to
Class A common shares
outstanding
Weighted average
number of shares
outstanding used to
calculate diluted income
per share
2010
2009
2008
Class A
Class B
Class A
Class B
Class A
Class B
$ 3,353
$ 566
$ -
$ -
$7,685
$1,759
5
561
(5)
-
-
-
-
-
-
1,759
-
-
$ 3,919
$ 561
$ -
$ -
$9,444
$1,759
$8,712
$1,469
$5,735
$1,181
$(190,878)
$(43,698)
-
12
-
(12)
-
8
-
(8)
-
-
1,457
-
1,173
-
(43,698)
-
-
-
$10,181
$1,457
$6,916
$1,173
$(234,576)
$(43,698)
22,300
3,762
18,275
3,762
16,433
3,762
217
3,762
-
-
139
3,762
-
-
-
3,762
-
-
26,279
3,762
22,176
3,762
20,195
3,762
F-27
Year Ended December 31,
Diluted EPS
Diluted income (loss) per
share available to
common stockholders
Diluted distributed income
(loss) per share applicable
to common stockholders
Diluted undistributed
income (loss) per share
applicable to common
stockholders
Antidilutive Securities:
2 7/8% convertible senior
subordinated notes
Shares issuable pursuant to
stock options not included
since they were antidilutive
2010
2009
2008
Class A
Class B
Class A
Class B
Class A
Class B
$ 0.53
$ 0.53
$ 0.31
$ 0.31
$(11.15)
$(11.15)
(0.15)
(0.15)
-
-
(0.47)
(0.47)
$ 0.38
$ 0.38
$ 0.31
$ 0.31
$(11.62)
$(11.62)
2010
2009
2008
Class A
Class B
Class A
Class B
Class A
Class B
-
661
-
-
321
1,338
-
-
2,037
1,623
-
-
(10)
401(k) Profit Sharing Plan
We have a defined contribution 401(k) plan and trust covering substantially all full-time
employees. The annual contribution to the plan is at the discretion of our Board of Directors. Contributions
of $0.6 million, $0.4 million and $0.2 million were recognized for the years ended December 31, 2010,
2009 and 2008, respectively. Employees may contribute to the plan if they meet certain eligibility
requirements.
(11)
Stock Incentive Plans
2003 Stock Incentive Plan
Our 2003 Stock Incentive Plan, as amended, (the “2003 Plan”) allows for the granting of up to a
total of 2.8 million nonqualified stock options and shares of restricted stock to our officers, key employees,
directors and consultants. We also have grants outstanding and options exercisable pursuant to prior
plans. Grants canceled under prior plans do not return to the pool available for grant under the 2003 Plan.
All of our plans are administered by the Compensation Committee of the Board of Directors and permit
accelerated vesting of outstanding awards upon the occurrence of certain changes in control. Options
become exercisable over a period of up to five years from the date of grant with expiration dates up to ten
years from the date of grant and at exercise prices of not less than market value, as determined by the
Board of Directors. Restricted stock grants vest over a period up to five years from the date of grant.
Beginning in 2004, the expiration date of options granted was reduced to six years. At December 31,
2010, 756,730 shares of Class A common stock were available for future grants.
Activity under our stock incentive plans was as follows:
Balance, December 31, 2009
Granted
Forfeited
Expired
Exercised
Balance, December 31, 2010
Balance, December 31, 2009
Granted
Vested
Forfeited
Balance, December 31, 2010
Weighted Average
Exercise Price
$13.89
7.87
6.87
21.60
7.11
$13.56
Weighted Average
Grant Date Fair Value
$13.22
6.02
15.30
11.38
$ 8.12
Shares Subject
to Options
1,864,255
6,000
(89,679)
(346,437)
(248,898)
1,185,241
Non-Vested
Stock Grants
221,291
319,998
(47,747)
(35,013)
458,529
F-28
Certain information regarding options outstanding as of December 31, 2010 was as follows:
Number
Weighted average per share
exercise price
Aggregate intrinsic value
Weighted average remaining
contractual term
Options
Outstanding
1,185,241
$13.56
$5.4 million
2.6 years
Options
Exercisable
488,382
$14.44
$1.7 million
2.1 years
As of December 31, 2010, unrecognized stock-based compensation related to outstanding, but
unvested stock option and stock awards was $2.1 million, which will be recognized over the remaining
weighted average vesting period of 3.2 years.
2009 Employee Stock Purchase Plan
In May 2009, our shareholders approved the 2009 Employee Stock Purchase Plan (the “2009
ESPP”) and the reservation of 1,500,000 shares of our Class A common stock thereunder. The 2009
ESPP replaced the 1998 Employee Stock Purchase Plan, which was terminated. The 2009 ESPP is
intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue
Code of 1986, as amended, and is administered by the Compensation Committee of the Board of
Directors.
Eligible employees are entitled to defer up to 10% of their base pay for the purchase of stock, up
to $25,000 of fair market value of our Class A common stock annually. The purchase price is equal to
85% of the fair market value at the end of the purchase period. During 2010, a total of 385,597 shares
were purchased under the 2009 ESPP at a weighted average price of $6.33 per share, which represented
a weighted average discount from the fair market value of $1.11 per share. As of December 31, 2010,
995,978 shares remained available for purchase under the 2009 ESPP.
Stock-Based Compensation
Compensation expense related to our 2009 ESPP is calculated based on the 15% discount from
the per share market price on the date of grant. Compensation expense related to non-vested stock is
based on the intrinsic value on the date of grant as if the stock is vested.
We estimate the fair value of stock options using the Black-Scholes valuation model. This
valuation model takes into account the exercise price of the award, as well as a variety of significant
assumptions. We believe that the valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are
not intended to predict actual future events or the value ultimately realized by persons who receive equity
awards.
Compensation expense related to stock options is valued using the Black-Scholes valuation
model with following assumptions:
Year Ended December 31,
Risk-free interest rates(1)
Dividend yield(2)
Expected term(3)
Volatility(4)
Discount for post-vesting restrictions
2010
2.53%
2.54%
4.2 years
81.22%
0.0%
2009
2.03% - 2.93%
0.0%
5.9 years
87.41%
0.0%
2008
2.37% - 3.27%
3.21% - 7.43%
4.6 - 5.8 years
42.41% - 47.93%
0.0%
(1) The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period
equal to the expected term of the stock option.
(2) The dividend yield is calculated as a ratio of annualized expected dividends per share to the market value of our common stock
on the date of grant.
(3) The expected term is calculated based on the observed and expected time to post-vesting exercise behavior of identifiable
employee groups.
(4) The expected volatility is estimated based on a weighted average of historical volatility of our common stock.
F-29
We amortize stock-based compensation on a straight-line basis over the vesting period of the
individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock
options will come from newly issued shares.
Certain information regarding our stock-based compensation was as follows:
Year Ended December 31,
Weighted average grant-date fair value per share of stock options granted
Per share intrinsic value of non-vested stock granted
Weighted average per share discount
for compensation expense
$
recognized under the 2009 ESPP
Total intrinsic value of stock options exercised
Fair value of non-vested stock that vested during the period
Stock-based compensation recognized in results of operations (all as a
component of selling, general and administrative expense)(1)
Tax benefit recognized in statement of operations
Cash received from options exercised and shares purchased under all
share-based arrangements
Tax deduction realized related to stock options exercised
2010
2009
2008
4.19 $
6.02
3.10 $
2.91
1.11
1,066,000
357,000
1.8 million
529,000
4.2 million
541,000
0.85
28,000
267,000
2.1 million
583,000
2.4 million
112,000
1.56
8.98
0.82
73,000
63,000
1.7 million
378,000
4.4 million
208,000
(1) An additional $0.6 million in stock-based compensation expense was recorded in 2010 associated with a purchase option held
by one of our executives. See Note 17.
(12)
Derivative Financial Instruments
We enter into interest rate swaps to manage the variability of our interest rate exposure, thus
fixing a portion of our interest expense in a rising or falling rate environment. We do not enter into
derivative instruments for any purpose other than to manage interest rate exposure of the 1-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 of these interest rate swaps in other comprehensive income (loss) rather than net
income (loss) until the underlying hedged transaction affects net income. If a swap is no longer accounted
for 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 income (loss) is recognized in
income as the forecasted transaction occurs. If the forecasted transaction is not probable of occurring, the
gain or loss recorded in accumulated other comprehensive income (loss) is recognized in income
immediately. See Note 13.
At December 31, 2010 and 2009, the net fair value of all of our agreements totaled a loss of $8.7
million and $6.9 million, respectively, which was recorded on our consolidated balance sheet as a
component of accrued liabilities and other long-term liabilities. The estimated amount expected to be
reclassified into earnings within the next twelve months was $3.2 million at December 31, 2010.
As of December 31, 2010, we had outstanding the following interest rate swaps with U.S. Bank
Dealer Commercial Services:
effective June 16, 2006 – a ten year, $25 million interest rate swap at a fixed rate of 5.587%
per annum, variable rate adjusted on the 1st and 16th of each month;
effective January 26, 2008 – a five year, $25 million interest rate swap at a fixed rate of
4.495% per annum, variable rate adjusted on the 26th of each month;
effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each month; and
effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each month.
We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month
LIBOR rate at December 31, 2010 was 0.3% per annum, as reported in the Wall Street Journal.
F-30
At December 31, 2010 and 2009, the fair value of our derivative instruments was included in our
consolidated balance sheets as follows:
Balance Sheet Information
(in thousands)
Derivatives Designated as
Hedging Instruments
Interest Rate Swap Contracts
Balance Sheet Information
(in thousands)
Derivatives Designated as
Hedging Instruments
Interest Rate Swap Contracts
Fair Value of Asset Derivatives
Location in
Balance Sheet
December 31,
2010
Fair Value of Liability Derivatives
Location in
Balance Sheet
December 31,
2010
Prepaid expenses
and other
Other non-current
assets
$
$
-
-
-
Accrued
liabilities
Other long-term
liabilities
$
2,862
$
5,830
8,692
Fair Value of Asset Derivatives
Location in
Balance Sheet
December 31,
2009
Fair Value of Liability Derivatives
Location in
Balance Sheet
December 31,
2009
Prepaid expenses
and other
Other non-current
assets
$
$
-
-
-
Accrued
liabilities
Other long-term
liabilities
$
1,668
$
5,212
6,880
The effect of derivative instruments on our consolidated statements of operations for the years ended
December 31, 2010 and 2009 was as follows (in thousands):
Location of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Amount of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
Amount of
Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
Derivatives in Cash
Flow Hedging
Relationships
For the Year Ended
December 31, 2010
Interest Rate Swap
Contracts
$
(4,459)
For the Year Ended
December 31, 2009
Interest Rate Swap
Contracts
$
(649)
Floorplan
Interest
expense
Floorplan
Interest
expense
$
$
(2,814)
(3,786)
Floorplan
Interest
expense
Floorplan
Interest
expense
$
(1,483)
$
420
F-31
Derivatives Not Designated
as Hedging Instruments
For the Year Ended
December 31, 2010
Interest Rate Swap Contracts
For the Year Ended
December 31, 2009
Interest Rate Swap Contracts
Location of
Gain/(Loss)
Recognized in Income
on Derivative
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
Floorplan
interest
expense
Floorplan
interest
expense
$
$
-
(6)
In 2009, we determined that the original forecasted transactions for certain of the de-designated cash
flow hedges became probable of not occurring. Therefore, we reclassified into earnings a gain of
approximately $0.5 million as a reduction of floorplan interest expense at that time. Additionally, we de-
designated and re-designated all of our outstanding interest rate swaps when significant changes in our
underlying floorplan debt occurred with the Chrysler and GM restructuring. This de-designation and re-
designation did not have an impact on earnings at the time, but may increase ineffectiveness in the future.
(13)
Fair Value Measurements
We adopted the provisions of Fair Value Measurements and Disclosures: Improving Disclosures
about Fair Value Measurements on January 1, 2010. The adoption requires disclosures about recurring
and non-recurring fair value measurements, including transfers into and out of Level 1 and Level 2 fair
value measurement categories. Clarification was also provided on the amount of disaggregation, inputs
and valuation techniques required.
Additionally, information about purchases, sales, issuances and settlements on a gross basis will
be required for recurring Level 3 fair value measurements in interim and year-end periods ending after
December 15, 2010. Since this pertains only to footnote disclosure for recurring Level 3 fair value
measurements, it did not have an impact on our financial position or results of operations.
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 speeds, credit risk, etc.; 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 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,
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 measurement date.
F-32
Inputs are collected from Bloomberg on the last market day of the period. The same methodology 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. See Note 12.
We estimate the fair value of our assets held for sale and liabilities related to assets held for sale
based on a market valuation approach, which uses prices and other relevant information generated
primarily by recent market transactions involving similar or comparable assets or liabilities, as well as our
historical experience in divestitures, acquisitions and real estate transactions. When available, we use
inputs from independent valuation experts, such as brokers and real estate appraisers, to corroborate our
internal estimates. As these valuations contain unobservable inputs, we classified the assets held for sale
and liabilities related to assets held for sale as Level 3.
We estimate the fair value of long-lived assets that are recorded at fair value based on a market
valuation approach. We use prices and other relevant information generated primarily by recent market
transactions involving similar or comparable assets or liabilities, as well as our historical experience in
divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach
to value long-lived assets when a market valuation approach is unavailable. Under this approach, we
determine the cost to replace the service capacity of an asset, adjusted for physical and economic
obsolescence. When available, we use valuation inputs from independent valuation experts, such as real
estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers’ and
brokers’ valuations are typically developed using one or more valuation techniques including market,
income and replacement cost approaches. As these valuations contain unobservable inputs, we classified
the long-lived assets as Level 3.
There were no changes to our valuation techniques during the year ended December 31, 2010.
The following tables summarize our assets and liabilities measured at fair value (in thousands):
Long-lived assets
Assets held for sale
Liabilities related to assets held for sale
Franchise value
Long-lived assets
$
$
December 31, 2010
Fair Value
29,157
Input Level
Level 3
December 31, 2009
Fair Value
11,693
5,050
1,691
52,419
Input Level
Level 3
Level 3
Level 3
Level 3
In the fourth quarter of 2009, we reclassified franchise value previously classified as held for sale
to held and used. Under U.S. generally accepted accounting standards, the franchise value was valued
and recorded at the lower of carrying value or current fair value. We estimated the fair value of franchise
value by calculating the present value of future cash flows associated with such franchises using an APV
model. We have determined that only certain cash flows of the store are directly attributable to franchise
rights. Future cash flows are based on recently prepared operating forecasts and business plans to
estimate the future economic benefits that the store will generate. Operating forecasts and cash flows
include, among other things, revenue growth rates that are calculated based on management’s
forecasted sales projections and on the U.S. Department of Labor, Bureau of Labor Statistics for historical
consumer price index data. A discount rate is utilized to convert the forecasted cash flows to their present
value equivalent. The discount rate applied to the future cash flows factors in an equity risk premium,
small stock risk premium, a beta and a risk-free rate. In addition, the discount rate used is further refined
for a franchise-specific risk adjustment based on the financial performance of each franchise. In addition,
F-33
when available, we used valuation inputs from independent valuation experts, such as brokers, to
corroborate our internal estimates. Brokers’ inputs are typically developed using marketplace data related
to current actual transactions involving similar franchises. As these valuations contain unobservable
inputs, we classified the franchise value as Level 3.
Also in the fourth quarter of 2009, long-lived assets, including real estate property and equipment
previously classified as held for sale, were reclassified to held and used at the lower of their depreciated
carrying value, assuming depreciation had not ceased while classified as held for sale, or their current fair
value. Based on this evaluation, certain long-lived assets were measured at their fair value at the time of
reclassification. We estimated the fair value of long-lived assets based on a “market” valuation approach.
We used prices and other relevant information generated primarily by recent market transactions
involving similar or comparable assets or liabilities, as well as our historical experience in divestitures,
acquisitions and real estate transactions. Additionally, we used a cost valuation approach to value long-
lived assets when a market valuation approach was unavailable. Under this approach, we determined the
cost to replace the service capacity of an asset adjusted for physical and economic obsolescence. When
available, we used valuation inputs from independent valuation experts, such as real estate appraisers
and brokers, to corroborate our estimates of fair value. Real estate appraisers and brokers’ valuations
were typically developed using one or more valuation techniques including market, income and
replacement cost approaches. As these valuations contained unobservable inputs, we classified the long-
lived assets as Level 3.
The following table indicates valuation adjustments recorded in 2010 and 2009 on our assets and
liabilities that are measured at fair value on a non-recurring basis (in thousands):
Year Ended
Fair Value Measurement Using
December 31, 2010
Long-lived assets held and used:
Building and improvements
Land
$
$
Level 1
Level 2
Level 3
Loss
-
-
$
$
-
-
$
$
23,400
13,511
$
$
(9,048)
(6,253)
Year Ended
Fair Value Measurement Using
December 31, 2009
Level 1
Level 2
Level 3
Assets held for sale
Franchise value
Long-lived assets
$
$
$
-
-
-
$
$
$
-
-
-
$
$
$
11,693
1,691
52,419
$
$
$
Loss
(1,213)
(250)
(8,726)
Valuation adjustments recorded in the year ended December 31, 2009 for assets held for sale
totaled $1.2 million. Of this amount, a $0.3 million gain was included as an offset to asset impairment
charges and a $1.5 million loss was included as a component of income (loss) from discontinued
operations, net of tax, in our consolidated statements of operations. See also Note 16.
At December 31, 2010, we had $118.5 million of long-term fixed interest rate debt recorded and
outstanding with maturity dates of between October 2011 and October 2029. We calculate the estimated
fair value of our fixed rate debt using a discounted cash flow methodology. Using estimated current
interest rates based on a similar risk profile and duration, the fixed cash flows are discounted and
summed to compute the fair value of the debt. Based on this analysis, we have determined that the fair
value of this long-term fixed interest rate debt was approximately $127.4 million at December 31, 2010.
We believe the carrying value of our variable rate debt approximates fair value.
F-34
(14)
Income Taxes
Income tax provision (benefit) from continuing operations was as follows (in thousands):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2010
2009
2008
$
$
9,585
1,708
11,293
(1,760)
(440)
(2,200)
9,093
$
$
(5,237) $
(82)
(5,319)
8,246
1,131
9,377
8,910
1,571
10,481
5,162
(102,748)
(14,507)
(117,255)
(107,878)
$
At December 31, 2010, we had income taxes payable totaling $0.3 million included as a
component of accrued liabilities on the consolidated balance sheets and, at December 31, 2009, we had
income taxes receivable totaling $2.7 million included as a component of other current assets.
Individually significant components of the deferred tax assets and liabilities are presented below
(in thousands):
December 31,
Deferred tax assets:
Deferred revenue and cancellation reserves
Allowances and accruals
Interest on derivatives and convertible notes
Goodwill
Total deferred tax assets
Deferred tax liabilities:
Inventories
Property and equipment, principally due to
differences in depreciation
Prepaids and property taxes
Total deferred tax liabilities
Total
2010
6,047
16,324
3,337
33,380
59,088
(3,503)
(11,653)
(1,471)
(16,627)
42,461
$
$
2009
6,558
9,418
2,615
51,254
69,845
(5,393)
(22,782)
(1,971)
(30,146)
39,699
$
$
The ultimate realization of deferred tax assets is dependent upon future taxable income during
the periods in which those temporary differences become deductible. We consider the scheduled reversal
of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected
future taxable income and tax-planning strategies in making this assessment. Based on these factors, we
believe it is more likely than not that we will realize the benefits of these deductible differences. At
December 31, 2010, we had not recorded any valuation allowance on deferred tax assets. However, a
valuation allowance could be recorded in the future if estimates of taxable income during the carryforward
period are reduced.
At December 31, 2010, we had a number of state tax carryforward amounts totaling
approximately $1.2 million, tax effected, with expiration dates through 2029.
F-35
The reconciliation between amounts computed using the federal income tax rate of 35% and our
income tax provision (benefit) from continuing operations for 2010, 2009 and 2008 is shown in the
following tabulation (in thousands):
Year Ended December 31,
Federal tax provision (benefit) at statutory rate
State taxes, net of federal income tax benefit
Permanent difference related to impairment of
goodwill
Non-deductible expenses
Permanent differences related to the employee
stock purchase program
Other
Income tax provision (benefit)
$
$
2010
8,118
579
$
2009
4,227
641
$
2008
(116,553)
(9,670)
-
223
18
155
9,093
-
320
18,939
376
17
(43)
5,162
127
(1,097)
(107,878)
$
$
We did not have any unrecognized tax benefits at December 31, 2010 or 2009. No interest or
penalties were included in our results of operations during 2010, 2009 or 2008, and we had no accrued
interest or penalties at December 31, 2010 or 2009.
Open tax years at December 31, 2010 included the following:
Federal
13 states
2006-2009
2005-2009
(15)
Acquisitions
On July 19, 2010, we acquired the inventory, equipment and intangible assets and assumed
certain liabilities related to Honda of Bend and agreed to the transfer of Chevrolet and Cadillac brands
from Bob Thomas Chevrolet Cadillac, both located in Bend, Oregon. On August 9, 2010, we acquired the
inventory, equipment, real estate and intangible assets and assumed certain liabilities related to Toyota of
Billings from Prestige Toyota, located in Billings, Montana. Consideration paid for acquisitions totaled
$25.6 million, of which $23.7 million was paid in cash and $1.9 million was financed through a floorplan
credit facility. We subsequently financed the real estate purchased for $8.1 million, for which we had paid
cash in connection with the acquisition transactions. The fair values of assets acquired and liabilities
assumed are not material to our consolidated balance sheets. The results of operations of the acquired
stores are included in our consolidated financial statements from the date of acquisition and pro forma
results of operations are not materially different from actual results of operations.
(16)
Discontinued Operations
We perform an internal evaluation of our store performance, on a store-by-store basis, in the last
month of each quarter. If a store does not meet certain return on investment criteria established by our
management team, the location is included on a “watch list” and is considered for potential disposition.
Factors we consider in reaching the conclusion to dispose of a store include: (i) actual operating results of
the store over a predetermined period of time subsequent to placing the store on the “watch list” including
prospects for improved financial performance; (ii) extent of capital improvements and commitments
thereto necessary to optimize operational efficiencies and marketability of the associated franchise; (iii)
outlook as to the economic prospects for the local market and viability of the franchise within that market;
and (iv) geographic location and franchise mix of our portfolio.
Once we have reached a decision to dispose of a store, we evaluate the following criteria as
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;
F-36
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. We also expect to record the
transfer of the store as a completed sale 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 that changes will be made to the plan or will
withdraw the plan to dispose of the store.
If we determine the above criteria have been met, we classify the store assets to be disposed of,
and liabilities directly associated with those assets, as held for sale in our consolidated balance sheet.
We reclassify the store’s operations to discontinued operations in our consolidated statement 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.
During the three-year period ended December 31, 2010, we experienced significant changes in
our business dynamics along with other factors leading to a decision by our executive management team
to dispose of a number of our stores. The following summarizes the chronology of our store dispositions.
As of January 1, 2008, we had three stores classified as held for sale. In the second quarter of
2008, as part of the restructuring plan announced on June 3, 2008, we performed an evaluation of our
portfolio of stores. After this evaluation, 12 underperforming stores, mostly consisting of domestic
franchises, were selected for disposal. We also elected to close a facility at that time. During the third
quarter of 2008, 15 additional stores were identified for disposal, for a total of 31 stores classified as held
for sale. Given the significant number of stores classified as held for sale, and the fact that the sale of
certain stores was not prompt, we considered additional factors prior to classifying the additional 15
stores as held for sale including:
the inherent difficulty in selling three of the worst-performing stores in our portfolio, and the
fact that the other stores targeted for disposal in 2008 would be more desirable to potential
buyers. For example, we closed on the sale of two locations in the third quarter of 2008 that
were initially classified as held for sale in the second quarter of 2008;
one of the locations classified as held for sale for a period exceeding one year had been sold
in the third quarter of 2008, and another location had been closed;
three stores classified as held for sale in the second quarter of 2008 were under preliminary
contract to be sold; and
9 of the 15 stores classified in the third quarter of 2008 had been sold or were under
preliminary contract to be sold.
In summary, during the two-year period ended December 31, 2008, our management team
identified 32 stores for disposal, sold 12 stores and closed 4 stores, leaving 18 stores classified as held
for sale at December 31, 2008.
During 2009, we disposed of five stores and ceased operations at three stores that had been held
for sale at December 31, 2008. We identified for disposal, and subsequently sold, an additional five stores
during 2009. As a result of the Chrysler and GM bankruptcies, we reclassified four additional stores to
discontinued operations. Two of these locations were Chrysler franchises that ceased operations in July
2009. The other two locations were GM stores that GM agreed to repurchase through a signed
commitment.
F-37
Adverse economic conditions had a profound effect on the automotive industry over the past few
years. Some of the factors impacting the industry included:
double-digit percentage declines in year-over-year automobile sales;
unprecedented operational losses by the Detroit three automakers, culminating in Chrysler
and GM filing for Chapter 11 bankruptcy protection;
termination of over 2,000 franchise agreements by Chrysler and GM; and
reductions in available commercial credit, reducing available financing and requiring
increased capital investment for potential dealership purchasers.
Persistent industry challenges present throughout 2008 and 2009 continued to hamper our ability
to sell stores identified for disposition and classified as held for sale.
As stores remained classified as held for sale beyond one year, we continually evaluated
whether (i) we had taken all necessary actions to respond to the poor market conditions during the initial
one year period; (ii) we were actively marketing the store at a price that is reasonable in view of the
market conditions; and (iii) we continued to meet all of the criteria discussed above to continue to classify
the stores as held for sale.
In marketing our stores for sale, we enlisted the services of brokers who specialize in dealership
purchase and sale transactions. We also utilized a network of contacts and dealers in the market areas to
ensure parties were aware of the stores available for purchase. Although not required, we also notified
the respective manufacturers and alerted them to direct any prospective buyers to us. Over the period the
stores were available for sale, we continually lowered the price of the stores in an effort to attract a buyer.
We also considered combining less desirable stores with more desirable stores to facilitate the sale of
both locations, including selling a store not classified as held for sale to affect the sale of a location
targeted for disposal.
Based on these factors, we believed our response demonstrated that we (i) took necessary
actions to respond to the poor market conditions; (ii) actively marketed the store at a reasonable price
and (iii) continued to meet the remaining criteria stipulated above. Therefore, our decision to continue to
classify certain stores as held for sale beyond the one year period was appropriate.
It is not uncommon for us to enter into preliminary asset sale agreements which do not close. We
consider preliminary asset sale agreements a validation of the marketability of our stores held for sale.
These preliminary asset sale agreements sometimes remain active for a period exceeding one year.
Some preliminary asset sale agreements we enter into do not result in a final sale. These agreements
terminate for a variety of reasons, including prospective buyers being unable to obtain the required
floorplan or real estate financing. The termination of these agreements accelerated throughout 2009, and
no new agreements were entered into in the second half of that year.
In the fourth quarter of 2009, our management team re-evaluated the decision to continue to
classify certain stores as held for sale in light of the then current market conditions, prospects for
economic recovery, improved company-wide and individual store operating performance, and overall
capital needs. Specific factors taken into consideration were as follows:
a lack of available credit continued to prove challenging to prospective purchasers of our
stores. One of the primary problems was the lack of vehicle inventory floorplan financing,
which is a basic requirement of the franchise agreement. Even for prospective purchasers
with existing floorplan financing, obtaining mortgage financing on dealership real estate or
committing to other significant capital investment proved exceedingly difficult.
continued economic uncertainty, including increasing unemployment, resulting in low
consumer confidence and a prolonged reluctance to purchase big ticket items such as
automobiles.
the dramatically decreased pool of potential purchasers further extended our store disposition
time line. The absence of qualified buyers reduced expected proceeds to levels significantly
below the range of what we considered to be reasonable.
F-38
a restructuring of store operations that began in 2008 and accelerated in 2009 aligned our
costs with current industry vehicle sales levels, and enhanced our liquidity position. This
restructuring improved operational performance at all locations, including those slated for
divestiture. Improved operating performance at the stores held for sale, even on a constant
valuation multiple, increased expected selling prices, which proved unobtainable given
market conditions.
the reorganization of Chrysler and GM resulted in the closure of four domestic stores that we
had not selected for divestiture. One of the original considerations for the restructuring we
initiated in 2008 involved diversifying our portfolio to reduce dependence on domestic
manufacturers, particularly Chrysler and GM. The unexpected closure of locations not
selected for disposition accelerated this portfolio diversification and made some divestitures
less critical.
throughout 2008 and 2009, we generated cash through asset sales, mortgage financing and
operational cash flows. In 2009, we retired our outstanding convertible notes as they
matured. Also, in late 2009, we completed a follow-on equity offering raising approximately
$43 million. We also extended the maturity on our Credit Facility. These actions reduced the
immediate need for additional liquidity to ensure our ongoing operations and eliminated the
need to dispose of assets to raise cash.
Based on these factors, in the fourth quarter of 2009, circumstances previously considered
unlikely were deemed to have occurred, and our management team concluded that we no longer were
committed to sell certain stores. Therefore, we no longer met the criteria necessary to continue to classify
the stores as held for sale. Assets and related liabilities associated with 10 stores were subsequently
reclassified out of assets held for sale. Their associated results of operations were retrospectively
reclassified from discontinued operations to continuing operations for all periods presented.
Certain locations we had closed in 2008 and 2009 continued to have assets, primarily real estate,
classified as held for sale. Throughout 2009, the commercial real estate market continued to deteriorate
as more properties became available and asking prices declined. Particularly in the automotive retail
industry, with the closure of almost 2,000 GM and Chrysler stores, as well as the wind down of Pontiac,
Saturn and Hummer, numerous vacant dealerships were placed on the market. Given the slow recovery
forecasted for automotive dealers in 2010 and beyond, these properties had become more difficult to sell
on a timely basis. These challenging conditions accelerated midway through 2009 during the bankruptcy
filings of GM and Chrysler. In addition, available commercial credit became tighter in 2009.
Therefore, by the middle of the fourth quarter of 2009, we began to consider a significant increase
in the expected time required to sell these properties, and realized it could take a prolonged period for
market demand to return to a point of converting these locations to operational automotive retail outlets.
After considering these facts, we reclassified seven properties where operations had ceased to held and
used in the fourth quarter of 2009, as we did not believe all the criteria for a classification as held for sale
were met.
In connection with the reclassification, we valued the assets of the 10 operating stores and seven
properties at the lower of (i) carrying amount before classification as held for sale, adjusted for any
depreciation or amortization expense that would have been recognized had the store been continuously
classified as held and used; and (ii) fair value at the date of reclassification. As a result, in the fourth
quarter of 2009, we recorded impairment charges totaling $2.9 million related to certain real estate
holdings. Where fair value exceeded adjusted carrying amount, we recorded depreciation expense of
$2.2 million. We also reversed certain costs to sell that had been recorded in prior periods totaling $2.3
million.
At December 31, 2009, two operating stores and three properties were classified as held for sale.
The two operating stores were under contract to sell at that time.
F-39
Based on subsequent negotiations with the buyer in the first quarter of 2010, management
concluded that it was no longer probable that the sale of the remaining two stores would be effected,
resulting in the determination that these two operating stores no longer met all of the criteria for
classification as held for sale at March 31, 2010. Therefore, in the first quarter of 2010, assets and related
liabilities associated with two stores were reclassified from assets held for sale to assets held and used.
Their associated results of operations were retrospectively reclassified from discontinued operations to
continuing operations for all periods presented.
In the second quarter of 2010, we classified the operating results of Fresno Dodge, which was
sold during the quarter, as discontinued operations. Additionally, one of the properties classified as held
for sale as of December 31, 2009 was sold. Management evaluated the remaining two properties to
determine if classification remained appropriate. Based on new facts and circumstances previously
considered unlikely, management no longer believes the sales are probable. As a result the properties
were reclassified to assets held and used in June 2010.
As of December 31, 2010 and 2009, we had no stores and no properties, and two stores and
three properties, respectively, classified as held for sale. Assets held for sale included the following (in
thousands):
December 31,
Inventories
Property, plant and equipment
Intangible assets
2010
- $
-
-
- $
2009
8,098
3,572
23
11,693
$
$
Liabilities related to assets held for sale included the following (in thousands):
December 31,
Floorplan notes payable
Real estate debt
2010
- $
-
- $
2009
2,888
2,162
5,050
$
$
Assets and liabilities held for sale are valued at the lower of cost or fair value less costs to sell.
Estimates of fair value are based on the proceeds we expect to realize on the sale of the disposal groups.
Inventory losses primarily related to prior model year new vehicles that had carrying values in excess of
estimated proceeds to be generated through wholesale distribution.
Certain financial information related to discontinued operations was as follows (in thousands):
Year Ended December 31,
Revenue
Loss from discontinued operations
Net gain (loss) on disposal activities
Income tax benefit (expense)
Income (loss) from discontinued operations, net of income
taxes
Goodwill and other intangible assets disposed of
Cash generated from disposal activities
2010
6,002 $
(340) $
(294)
(634)
253
2009
95,943 $
(7,024) $
10,210
3,186
(951)
2008
452,955
(10,904)
(32,372)
(43,276)
15,822
(381)
$
- $
941 $
2,235
$
1,037 $
27,697 $
(27,454)
19,117
44,085
$
$
$
$
$
The gain (loss) on disposal activities included the following impairment charges (in thousands):
Year Ended December 31,
Goodwill and other intangible assets
Property, plant and equipment
Inventory
Other
2010
- $
(210)
-
(84)
(294) $
2009
12,146 $
(1,672)
1,212
(1,476)
10,210 $
2008
(11,695)
(14,389)
(2,435)
(3,853)
(32,372)
$
$
F-40
Interest expense is allocated to stores classified as discontinued operations for actual floorplan
interest expense directly related to the new vehicles in the store. Interest expense related to our Credit
Facility is allocated based on the amount of assets pledged towards the total borrowing base. Interest
expense included as a component of discontinued operations was as follows (in thousands):
December 31,
Flooring interest
Other interest
Total interest
(17)
Purchase Option
2010
2009
51 $
69
120 $
438 $
2,296
2,734 $
2008
3,872
5,152
9,024
$
$
On December 31, 2009, we entered into an option agreement with our Vice Chairman, Dick
Heimann, who is a related party. Under the terms of the option agreement, Mr. Heimann may purchase
our Volkswagen and Nissan franchises in Medford, Oregon, and acquire their operations, including
inventories and equipment, at valuations set forth in our standard form of agreement, which we believe
approximate fair value at the time of exercise. Any purchased real estate will be priced at the then fair
market value. Existing leases, if any, will be assumed at the time of exercise of the option. The purchase
price for the intangible assets (manufacturers’ franchise rights) is set at $10 in the agreement. The option
can be exercised by Mr. Heimann at any time prior to December 31, 2012. No consideration was received
in exchange for this option.
For the year ended December 31, 2009, we estimated the fair value of the option using a
discounted cash flow analysis and by considering valuation inputs from independent third parties. Based
on these inputs, we determined the value of the option to be insignificant as of December 31, 2009. For
the year ended December 31, 2010, we estimated the fair value of the option by considering, among
other things, an independent third party valuation which included the use of the Black-Scholes option
valuation model with the following assumptions:
Year Ended December 31,
Risk-free interest rate(1)
Expected term(2)
Volatility(3)
2010
0.34%
2.17 years
50%
(1) The risk-free interest rate for the option is based on the U.S. Treasury 2-year constant maturities rate effective on the date of
valuation.
(2) The expected term is calculated based on the remaining term of the option.
(3) The expected volatility is estimated based on the historical volatilities of our and comparable public companies’ common stock
as well as implied volatilities based on the prices of currently traded options on the parent company and the comparable public
companies.
Based on our valuation analysis, we recorded an expense of $591,000 in 2010 as a component
of selling, general and administrative expenses in our consolidated statements of operations and the
corresponding liability in other long-term liabilities in our consolidated balance sheets. We will continue to
assess the value of the option prospectively over the term of the option, and will record any changes in its
estimated fair value in our consolidated statements of operations and corresponding liability in the period
of change.
F-41
(18)
Subsequent Events
On February 22, 2011, our Board of Directors approved the implementation of a non-qualified
deferred compensation and long-term incentive plan for a select group of management or highly
compensated employees, which includes our senior management team. In conjunction, a contribution of
$1.3 million for 2011 was made and will be included as a component of selling, general and administrative
expenses in our consolidated statements of operations in the first quarter of 2011.
On February 23, 2011, we announced that our Board of Directors approved a dividend of $0.05
per share on our Class A and Class B common stock for the fourth quarter of 2010. The dividend will total
approximately $1.3 million and will be paid on March 25, 2011 to shareholders of record on March 11,
2011.
F-42
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
The following table shows the ratio of earnings to combined fixed charges for us and our
EXHIBIT 12
consolidated subsidiaries for the date
s in icated
d
(D
ollars in Thousands)
Earnings
Income (loss) from continuing operations before
income taxes
Fixed charges
Amortization of capitalized interest
Capitalized interest
Total earnings
Fixed Charges
Floorplan interest expense
Other interest expense
Capitalized interest costs
Interest componen
Total fixed charges
(1)
t of rent expense
.
2010
Year Ended December 31,
2009
2008
2007
2006
$
$
$
$
23,193 $ 12,078 $
30,698
268
-
546
256
(916)
32,
54,159 $ 43,964 $
(333,010) $
47,757
224
(1,661)
(286,690) $
38,606 $
51,732
164
(3,153)
87,349 $
52,481
45,382
106
(1,473)
96,496
10,597 $
14,572
-
5,529
11,015 $
14,115
916
6,500
30,698 $ 32,546 $
20,808 $
18,075
1,661
7,213
47,757 $
24,964 $
16,478
3,153
7,137
51,732
25,677
12,242
1,4
73
5,990
45,382
Ratio of earnings to fixed c
ha
rges
1.8x
1.4x
$(334,447)(2)
1.7x
2.1x
(1) Other interest expense includes am
(2) Reflects deficiency of e
arnings avai ble to co r fixed c
ortization of debt issuance costs
la
ve
harges. Because of the deficiency, ratio information
is not provided.
For purposes of these ratios, “earnings” consist of income from continuing operations before
income taxes and fixed charge
interest componen
es” consist of interest expense on indebtedness
t of rental expense, and amortization of debt discount and issuance expenses.
s, and “fixed charg
and the
We did not have any preferred stock outstanding for the p
the ratios of earnings to combined fixed charges and preferred sto
ra
tios of earnings to combined fixed charges presented above.
eriods presented above, and therefore
ck dividends would be the same as the
EX
HIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Lithia Motors, Inc.:
. of our rep
5553, 333-
25,
16839, 333-11
egistration stateme
eference in the registration statement (Nos. 333-
We consent to the incorporation by r
9092, 33 -61802, 333-
92
3-3
4
43593, 333-69169, 333-6
d
333-
50, 3
0 an
21673, 333-106686, 333-1
S-3 o Lithia
61593
f
168737) on Form
s S-8 and r
the conso ated ba ance
Motors, Inc
to
l
sheets of Lithia Motors, Inc. and subsidiaries as of December 31, 2010 and 2009, and the
lders’ equit
related consolidated st
y and
comprehensive incom
ears in he thre -year
e
n
control over fina cial
period ended Decem
010
Dece
reporting as of December 3
mber 31, 2
annual report o
333-15 410, 33
6
3-1353
6840,
33
No.
333-1
nt (
11, w th respect
i
ber 31, 2010, and the effect enes
ts a
1, 2010, which
n Form 10-K of Lithia Mo rs,
ws fo each of
s of
ppea
atements of operations, changes in stockho
r
iv
repor
Inc.
the y
internal
r in the
orts dated March , 20
e (loss), and cas flo
33-161
) on Fo
3
59
rm
lid
to
7
t
h
/s/ KPMG LLP
Portland, Oregon
March 7, 2011
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT
31.1
I, Sidney B. DeBoer, certify that:
I have reviewed this an
1.
2. Based on my kno
nual report on Form 10-K of Lithia Motors, Inc.;
wledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
4.
3. Based on my knowledge, the financial statements, and other financial information included i
report, fairly present in all material respects the financial condition, results of operations and
flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and mainta
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) an
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
procedures to be designed under our supervision, to ensure that material information relati
the registrant, including its consolidated subsidiaries, is made known to us by others within t
entities, particularly during the period in which this report is being prepared;
ining
d
f)) for
and
ng to
hose
n this
cash
(b) Designed such internal control over financial
reporting, or caused such internal control over
reporting to be designed under our supervision, to provide reasonable assurance
financial
regarding the reliability of financial reporting and the preparation of financial statements for
external pur
poses in accordance with generally accepted accounting principles;
(c) Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to ma rially
affect, the registrant’s internal control over financial reporting; and
te
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 7, 2011
/s/ Sidney B. DeBoer
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.
PU
CERTIFICATION OF CHIEF FINANCIAL OFFICER
RSUANT TO RULE 13a-14(a) OR RULE 15d-14(a
OF THE SECURITIES EXCHANGE ACT OF 1934
)
EXHIBIT 31.2
I
, Christopher S. Holzshu, certify t
hat:
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this report;
4.
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
D
ate: March 7, 2011
u
/s/ Christopher S. Holzsh
Christopher S. Holz
shu
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
C
PU
ERTIFICATION OF CHIEF EXECUTIVE OFFICER
RSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
EX
HIBIT 32.1
OF THE SECURIT
IES EXCHANGE ACT OF 1934 AND 18 U.S.C. SEC
TION 1350
connection with the Annual Report of Lithia Moto
In
rs, Inc. (the “Company”) on Form 10-K for the year
ion on the date hereof (the
ended December 31, 2010 as filed with the Securities and Exchange Commiss
“Report”), I, Sidney B. DeBoer, Chairman of the Board, Chief Executive Officer and Secretary of the
Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
/s/ Sidney B. DeBoer
Sidney B. DeBoer
Chairm
Chief E
Lithia Moto
March 7, 2
rs, Inc.
011
an of the Board,
xecutive Officer and Secretary
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
In connection with the Annual Report of Lithia Motors, Inc. (the “Company”) on Form 10-K for the year
ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), I, Christopher S. Holzshu, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and result of operations of the Company.
shu
/s/ Christopher S. Holzshu
Christopher S. Holz
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
March 7, 2011
CORPORATE INFORMATION
Annual Meeting
The Company’s Annual Meeting of Shareholders will be held at 8:30 A.M., Wednesday, April 27,
2011 at Lithia Motors’ Headquarters, 360 East Jackson, Apple Street Conference Room, Medford,
Oregon 97501. Notice and Access of the meeting and proxy statement materials are being sent to all
shareholders. The Company’s Annual Report on Form 10-K for the year ended December 31, 2010,
includes all information as filed with the Securities and Exchange Commission, except exhibits.
Shareholder Communications
The Company welcomes your comments about its operations or any aspect of its business. Please
contact John North, VP Finance and Corporate Controller, at 1-541-618-5748.
Description of Business:
Automobile sales and service
Corporate Headquarters:
360 East Jackson Street, Medford, Oregon 97501
Trading Information
(As of March 7, 2011):
(NYSE - LAD)
26,333,503 shares issued and outstanding
Class A
Class B
22,571,272
3,762,231
Auditors:
KPMG LLP, Portland, Oregon
Legal Counsel:
Lane Powell PC, Portland, Oregon
Transfer Agent:
Executive Officers:
StockTrans, a Broadridge Company
44 W. Lancaster Ave.
Ardmore, PA 19003
Sidney B. DeBoer, Chairman and Chief Executive Officer
M.L. Dick Heimann, Vice-Chairman
Bryan DeBoer, President and Chief Operating Officer
R. Bradford Gray, Executive Vice President
Christopher S. Holzshu, Senior Vice President and Chief
Financial Officer
Lithia Board of Directors:
Sidney B. DeBoer
Bryan B. DeBoer
Thomas R. Becker
Susan O. Cain
William J. Young