Lithia Motors, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Unless otherwise noted, financial amounts are in millions of dollars. Comparisons are with Q1 2020.
Business context
Lithia operated 216 locations representing 33 brands in 22 states. Its business includes new and used vehicle sales, finance and insurance, and service, body and parts. Management describes an omnichannel strategy combining digital sales capabilities with its physical dealership network, alongside growth through acquisitions.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $4,343.0 | $2,803.8 | +54.9% |
| Gross profit | $715.5 | $460.9 | +55.2% |
| Gross margin | 16.5% | 16.4% | +10 bps |
| Operating income | $238.3 | $92.9 | — |
| Operating margin | 5.5% | 3.3% | +220 bps |
| Net income | $156.2 | $46.2 | — |
| Diluted EPS | $5.81 | $1.97 | — |
| Net cash from operating activities | $496.4 | $121.7 | +$374.7 |
Revenue growth reflected higher vehicle volumes and selling prices, stronger finance and insurance results, and acquisitions. Same-store revenue increased 27.6%; same-store gross profit rose 27.9%. The prior-year comparison was affected by COVID-19 restrictions and a sharp decline in vehicle sales beginning in mid-March 2020.
- Retail new vehicle units increased 50.0% and used vehicle units increased 38.5%. New and used average selling prices rose 6.4% and 11.7%, respectively.
- New vehicle retail gross profit per unit increased 33.6%; used vehicle retail gross profit per unit increased 9.3%. Finance and insurance revenue rose 62.8%.
- SG&A increased 30.2% to $450.4, but fell to 62.9% of gross profit from 75.1%. Management attributed the improvement mainly to gross profit growth outpacing expense growth.
- Floor plan interest expense declined 51.4% to $6.8, while other interest expense increased 38.2% to $23.5, primarily reflecting interest on senior notes issued in 2020. The effective tax rate was 26.1%, versus 28.0%.
Operating cash flow included favorable working-capital movements, including a $244.6 decrease in inventories and higher floor-plan borrowings, partly offset by a $126.7 increase in accounts receivable. Management’s adjusted operating cash flow measure, which adjusts for non-trade floor-plan activity and acquired inventory financing, was $352.3 versus $64.1.
Cash and cash equivalents were $170.3 at March 31, 2021, versus $160.2 at year-end. Management reported $1,200.3 of available credit and total immediately available funds of $1,370.6. Total debt was $4,006.5, including floor-plan debt; balance-sheet long-term debt, including current maturities, was $2,184.3. The company reported compliance with its credit facility covenants: current ratio 1.39, fixed-charge coverage 4.84, and leverage ratio 2.29, against respective limits of at least 1.10, at least 1.20, and no more than 5.75.
Material changes and notable items
- Lithia acquired eight locations in Q1 2021 and paid $383.5 net of cash acquired; the acquisitions contributed $71.3 of revenue and $3.8 of operating income after acquisition. Purchase-price allocations remained preliminary. Q1 2020 included two acquired locations.
- Investing cash outflow was $442.8, primarily from acquisitions, compared with $118.3 in Q1 2020. Capital expenditures were $50.0 versus $41.6.
- Financing cash outflow was $43.5. Lithia repurchased 54,218 shares for $15.9, all for tax withholding on vested awards, and paid $8.2 in dividends.
- At quarter-end, inventory was $2,329.7, down from $2,492.9 at December 31, 2020. Total assets were $8,251.6 and stockholders’ equity was $2,807.6.
- On April 12, 2021, after quarter-end, Lithia entered a real-estate-secured revolving facility of up to $300.0, maturing in April 2023. It carries financial and restrictive covenants aligned with those of its existing syndicated facility.
Outlook, commentary, and risks
The filing provides no specific consolidated revenue or earnings guidance. Management targets an annual after-tax return above 15% on acquisitions and describes a capital allocation objective of 65% for acquisitions, 25% for capital expenditures and modernization, and 10% for shareholder returns. The company-wide used-vehicle goal is an average of 100 retail units per store per month; Q1 performance was 83.
Management expects a 27.5% annual effective tax rate excluding non-core charges. It notes that Q1 is historically a seasonally weaker quarter. Forward-looking factors include COVID-19 effects, market and consumer conditions, inventory availability, acquisition integration and returns, and access to financing. The company stated that there were no material changes to the risk factors in its 2020 Form 10-K. It is party to ordinary-course legal proceedings and said it does not anticipate a material adverse effect, while noting outcomes cannot be predicted with certainty.
Non-GAAP adjusted results exclude specified items, including acquisition expenses, insurance reserves, store-disposal items and investment losses. The company cautions that non-GAAP measures may not be comparable across companies and should be considered alongside GAAP results.
Important facts for investors to verify
- How much of reported growth and profitability reflects the depressed Q1 2020 comparison, acquisitions, and same-store performance.
- Whether elevated vehicle prices and per-unit gross profits are sustainable, and how inventory availability affects sales volumes and margins.
- The sources and repeatability of operating cash flow, particularly the effects of receivables, inventory, and floor-plan financing movements.
- Total debt and borrowing availability, covenant headroom, interest-rate exposure, and the terms and use of the new $300.0 real-estate-backed facility.
- Final purchase-price allocations and the integration and returns of the eight Q1 acquisitions.
- The reconciliation of adjusted non-GAAP measures to GAAP results and the impact of excluded items.