Lithia Motors, Inc. — 2013 Form 10-K
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2013; quarterly data includes the three months ended December 31, 2013. Lithia operates automotive dealerships selling new and used vehicles and providing finance and insurance, service, body and parts offerings. It reported 94 stores at year-end and 96 stores as of February 21, 2014, across 12 states.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $4.006 billion | $3.316 billion | +20.8% |
| Gross profit | $631.0 million | $539.3 million | +17.0% |
| Operating income | $183.5 million | $148.4 million | +23.7% |
| Income from continuing operations | $105.2 million | $79.4 million | +32.5% |
| Diluted EPS from continuing operations | $4.02 | $3.03 | +32.7% |
| Gross margin | 15.8% | 16.3% | Down 0.5 percentage point |
Fourth-quarter revenue was $1.025 billion versus $877.4 million a year earlier; net income was $27.4 million versus $19.8 million, and diluted EPS was $1.04 versus $0.76.
- Sales mix and margins: New-vehicle sales generated 56.3% of revenue but 24.0% of gross profit; new-vehicle gross margin fell to 6.7% from 7.3%, with same-store gross profit per unit down 6.6%. Used retail gross profit increased 23.9%, with its margin steady at 14.6%. Service, body and parts gross profit rose 10.4%, with a 48.4% margin.
- Costs: SG&A rose 14.4% to $427.4 million, but declined to 67.7% of gross profit from 69.3%. The company reported same-store throughput of 51.4% after adjustments described in the filing.
- Cash flow: Reported operating cash flow was $32.1 million, compared with cash use of $212.5 million in 2012. Management’s adjusted operating cash flow, which adds non-trade floor-plan borrowings, was $160.7 million versus $136.0 million. Investing used $130.3 million, including $81.1 million for acquisitions and $50.0 million of capital expenditures; financing provided $79.1 million. Cash fell $19.2 million to $23.7 million.
- Liquidity and debt: Working capital was $209.0 million and the current ratio was 1.41. Available credit was $159.6 million; management estimated total available funds of $319.0 million including potential proceeds from unfinanced real estate, which are not assured. Total debt including floor-plan financing was $966.4 million, versus $876.6 million. Long-term debt, including current maturities, was $252.6 million. Debt to total capital excluding floor-plan notes declined to 32.0% from 40.8%. About 84% of total debt was variable-rate, including the effect of swaps.
Material changes versus prior year
- Revenue growth reflected higher vehicle volumes, acquisitions and growth across finance and insurance and service operations. Same-store new-vehicle units sold increased 14.2%; same-store used retail units increased 13.7%.
- New-vehicle gross profit grew more slowly than sales as average gross profit per unit fell, reflecting lower pricing to gain market share and lower manufacturer incentive dollars. Used retail and finance-and-insurance results benefited from higher volumes and improved per-unit results.
- Six stores, one franchise and one stand-alone body shop were acquired during 2013; acquisition cash outlay was $81.1 million. Capital expenditures fell from $64.6 million in 2012 to $50.0 million.
- Reported operating cash flow improved substantially year over year, in part because inventory-related cash use was lower and floor-plan cash-flow classification and activity differed between periods. Cash balances nevertheless declined during 2013.
Outlook, commentary, risks and unusual items
- Targets: Management targeted SG&A in the upper-60% range as a percentage of gross profit and approximately 50% same-store throughput in 2014. The company’s near-term used-vehicle goal was 75 retail units per store per month; it averaged 53 in 2013. These are targets, not earnings guidance; the filing provides no specific 2014 revenue or EPS forecast.
- Acquisition and investment strategy: Management cited dealership-sector consolidation, organic growth in used vehicles and service, and disciplined acquisition returns as growth opportunities. Future purchases, integration outcomes, manufacturer approvals and financing availability remain uncertain.
- Unusual items: A $6.2 million expense was recorded for the approved settlement of long-running Alaska consumer-protection class actions; final costs depend partly on approved claims and voucher redemption. A $2.5 million gain was recorded on a land sale to a director and vice chairman. Management’s non-GAAP adjustments remove these and other specified items; adjusted measures are not substitutes for GAAP results.
- Key risks: Demand is cyclical and locally concentrated, with the top three states producing about 57% of 2013 revenue. The business also depends on vehicle supply, manufacturers and franchise agreements, consumer credit availability, and high-margin finance-and-insurance activity. The filing discusses CFPB scrutiny of dealer-arranged financing, regulatory and litigation exposure, environmental matters, cyber risk, acquisition integration, and potential impairment of goodwill and franchise value.
- Interest-rate exposure: The filing warns that variable-rate borrowings may raise interest expense as rates rise; its sensitivity estimate was about $0.8 million after tax for a 15-basis-point increase, based on year-end balances. Debt covenants and refinancing of real-estate debt are additional considerations.
- The auditor issued an unqualified opinion on the financial statements and internal controls; management’s control assessment excluded 2013 acquisitions, representing approximately 3% of assets and 2% of revenue.
Important facts for investors to verify
- Reconcile reported operating cash flow with management’s adjusted presentation and the treatment of floor-plan financing; assess cash conversion alongside inventory growth.
- Track new-vehicle per-unit gross profit and margin against unit growth, and whether used-vehicle and service growth can offset new-vehicle margin pressure.
- Review the final Alaska settlement claims and costs against the $6.2 million accrual, and assess related-party land-sale terms and valuation.
- Monitor variable-rate debt, covenant headroom, credit availability, and the maturity and refinancing profile of real-estate debt.
- Evaluate acquisition returns and integration, manufacturer approvals, geographic concentration, and progress toward the 75-used-units-per-store monthly target.