Lithia Motors, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The filing covers the three and six months ended June 30, 2018. Lithia operated 188 U.S. dealership locations. Results reflect substantial acquisition activity: 17 stores were acquired in the first half of 2018.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $3.097 billion | $2.467 billion | $5.756 billion | $4.703 billion |
| Gross profit | $460.7 million | $375.3 million | $868.8 million | $716.9 million |
| Operating income | $108.6 million | $104.0 million | $202.3 million | $190.1 million |
| Net income | $60.7 million | $53.2 million | $112.7 million | $103.9 million |
| Diluted EPS | $2.44 | $2.12 | $4.50 | $4.13 |
| Gross margin | 14.9% | 15.2% | 15.1% | 15.2% |
| Operating margin | 3.5% | 4.2% | 3.5% | 4.0% |
- Q2 revenue grew 25.5%, while gross profit grew 22.8%. Net income increased despite lower pretax income, aided by a lower effective tax rate (24.9% versus 39.4%).
- For the first half, net cash from operations was $236.3 million, investing cash flow was negative $451.5 million, and financing cash flow was positive $187.9 million. Cash declined $27.3 million to $30.0 million.
- At June 30, total debt was approximately $3.344 billion, including $2.018 billion of floor-plan debt; long-term debt outstanding was $1.326 billion. Cash was $30.0 million and available credit was $204.3 million. Management estimated a further $222.4 million could potentially be raised against unfinanced real estate, subject to availability and acceptable terms.
Changes versus comparable periods
- Reported growth was driven substantially by acquisitions. Same-store Q2 new-vehicle revenue rose 0.4% while units fell 2.5%; used retail revenue rose 7.1%, and service, body and parts revenue rose 3.2%.
- Used retail gross margin declined to 10.8% from 11.8% in Q2; average gross profit per used retail unit fell 3.8%. Consolidated gross margin and operating margin also declined.
- SG&A increased 29.6% in Q2 and rose to 72.4% of gross profit from 68.6%. Management cited acquisition integration costs and lower acquired-store efficiency, higher personnel and rent costs, storm-related insurance reserve charges, and increased auto-loan allowance losses.
- Interest costs rose materially: Q2 floor-plan interest increased 67.5%, and other interest expense increased 92.9%. The company attributed the increases to acquisitions, higher borrowing balances, rising LIBOR and the $300 million senior notes issued in 2017.
- Import segment income declined 6.2% in Q2 despite revenue growth of 20.8%; Domestic segment income grew 2.5% on 14.7% revenue growth. Luxury segment income rose 15.7% on 61.6% revenue growth, with acquisitions contributing to both growth and higher expenses.
Outlook, commentary and risks
- Management emphasized integrating acquired stores and improving their operating efficiency. It cited opportunities in used vehicles and service, body and parts, while noting that newly acquired stores can pressure margins during integration.
- Company targets include 85 used retail units per store per month and $1,450 of finance-and-insurance revenue per retail unit. The first-half new-vehicle sales level was 7% above the national OEM average, versus a company target of 25% above.
- Management expected approximately $131 million of 2018 capital expenditures. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- The June 2018 amendment increased the syndicated credit facility commitment from $2.4 billion to $2.6 billion and extended maturity to July 2023. The company reported compliance with financial covenants at quarter-end: current ratio 1.25 (minimum 1.10), fixed-charge coverage 2.59 (minimum 1.20), and leverage ratio 3.52 (maximum 5.00).
- Key risks identified include economic and consumer-demand changes, credit availability and interest rates, manufacturer conditions and incentives, competition, cybersecurity, and the ability to acquire and integrate stores. The company noted legal proceedings in the ordinary course and said it could not predict their outcomes with certainty; it reported no material change to previously disclosed risk factors.
- Unusual items include Q2 acquisition expenses of $3.3 million and storm insurance reserve charges of $1.5 million; first-half amounts were $4.2 million and $3.2 million, respectively. First-half 2017 other income included a $9.1 million OEM legal settlement. Adoption of the new revenue standard produced a $9.2 million contract asset and a net-of-tax $1.4 million increase to retained earnings from the stated adoption adjustments; management said the adoption did not significantly affect earnings or timing of major transactions.
Important facts for investors to verify
- How much future revenue and profit growth is attributable to acquisitions versus same-store performance, and whether acquired stores improve margins as integration proceeds.
- Whether used-vehicle gross profit per unit and consolidated gross and operating margins stabilize or continue to weaken.
- Interest-rate sensitivity, debt levels, floor-plan financing costs, credit availability and continued covenant compliance.
- Whether operating cash generation can support acquisition spending, planned capital expenditures, dividends and share repurchases; first-half investing outflows were substantially above operating cash flow.
- Progress against management’s used-unit, finance-and-insurance, and sales-versus-national-market targets, as well as the final accounting for acquisitions and the Tax Act.