Lithia Motors, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Lithia operated 188 locations representing 30 brands in 20 states.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2,758.6 | $3,221.7 | $5,562.3 | $6,071.4 |
| Gross profit | $464.4 | $493.6 | $925.3 | $944.3 |
| Operating income | $129.7 | $116.9 | $222.6 | $225.5 |
| Net income | $77.7 | $61.9 | $123.9 | $118.3 |
| Diluted EPS | $3.38 | $2.63 | $5.32 | $5.08 |
| Gross margin | 16.8% | 15.3% | 16.6% | 15.6% |
| Operating margin | 4.7% | 3.6% | 4.0% | 3.7% |
- Q2 revenue declined 14.4%, while net income rose 25.5%; diluted EPS increased to $3.38. Six-month revenue fell 8.4%, while net income increased 4.7%.
- Q2 selling, general and administrative expense fell 14.6% to $304.5 million, and floor plan interest expense fell 58.2% to $8.1 million. Higher gross margins and lower expenses supported operating income growth despite lower sales.
- Six-month operating cash flow was $790.0 million, compared with $244.4 million a year earlier. The filing attributes the increase chiefly to inventory reduction; adjusted operating cash flow, including non-trade floor-plan repayments and acquired inventory effects, was $310.9 million versus $214.0 million.
- Six-month investing cash outflow was $167.1 million, including $78.3 million in capital expenditures and $92.3 million for acquisitions. Financing cash outflow was $586.6 million. Cash ended at $120.3 million, up from $84.0 million at year-end 2019.
- At June 30, total debt was $2,875.2 million net of unamortized issuance costs. The balance included $1,168.6 million of non-trade floor-plan debt, $292.0 million of other floor-plan notes, $700.0 million of senior notes and $636.9 million of real-estate mortgages.
- Available liquidity included $361.4 million under revolving lines of credit and $281.9 million under used and service-loaner vehicle financing commitments. The company reported a 1.37:1 current ratio and compliance with its debt covenants.
Material changes and operating trends
- COVID-19 restrictions materially disrupted sales and service, with the company reporting initial declines of about 50% on average in late March and early April. As restrictions eased, June same-store new-vehicle unit sales were down approximately 17% year over year, while same-store used-vehicle unit sales grew more than 19%.
- Q2 total retail new-vehicle units declined 24.0%; used-vehicle retail units increased 1.5%. Same-store new-vehicle revenue fell 23.5%, while same-store used-vehicle revenue increased 0.5%. Service, body and parts revenue fell 17.9% overall in Q2.
- New-vehicle gross profit per unit and margin improved, which management attributed to pent-up demand, reduced inventory following production shutdowns and increased manufacturer incentives. Cost reductions, including lower personnel and advertising expense, also supported margins.
- Domestic and Import segment income increased in Q2, while Luxury segment income declined 20.6%, reflecting lower gross profit. For the six-month period, Luxury segment income declined 40.6%.
- The company acquired four stores in the first half of 2020 for $92.3 million net cash consideration; those acquisitions contributed $51.6 million revenue and $1.1 million operating income after acquisition. Purchase-price allocations remained preliminary.
Outlook, risks and unusual items
- The filing provides no specific near-term earnings or revenue guidance. Management describes sales, service demand, operating results and liquidity as uncertain and dependent in part on the pandemic’s spread, duration, restrictions and consumer response.
- Management’s stated long-term strategy includes growth through acquisitions and digital/home solutions, with a goal of 5% national market share; it says a 400–500-location physical network would represent 2.5% market share. These are strategic goals, not near-term guidance.
- The company deferred approximately $65 million of planned discretionary capital expenditures and said it would continue evaluating spending and capital deployment. It also cited cost-saving measures and active cash-flow management.
- Q2 included $7.9 million of non-cash goodwill and franchise-value impairment charges. Adoption of the expected-credit-loss standard reduced opening 2020 retained earnings by $4.8 million, net of tax.
- On July 14, 2020, after quarter-end, Lithia entered a five-year real-estate-backed credit facility providing up to $254.7 million for general corporate purposes, including acquisitions and working capital.
- COVID-19 is identified as a material risk to revenue, operations, financial condition and cash flows. The filing also notes covenant and borrowing-condition risks; a covenant breach could lead to acceleration of debt and enforcement against collateral. Routine legal proceedings were disclosed, with no material adverse effect anticipated, though outcomes cannot be assured.
Important facts for investors to verify
- Whether sales and service recovery continued after June, and how demand, government restrictions and vehicle supply affected subsequent results.
- Whether higher vehicle gross profit per unit and lower expenses were sustainable as inventory, incentives and sales volumes normalized.
- The underlying sources and durability of the unusually strong reported operating cash flow, particularly inventory movements and floor-plan financing.
- Debt, borrowing availability and covenant headroom, including the terms and subsequent use of the July 2020 real-estate-backed facility.
- Final purchase-price allocations and realized returns from recent acquisitions, as well as any further impairments or capital requirements.