Lithia Motors, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2012; financial amounts below are in millions of dollars unless stated otherwise. Lithia operated 85 U.S. stores offering 27 new-vehicle brands as of July 27, 2012. Results are unaudited, and interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
- Q2 revenue: $847.1, up 26% from $672.5 in Q2 2011. New-vehicle revenue rose 35%, used retail 21%, finance and insurance 33%, and service, body and parts 9%.
- Q2 earnings: Gross profit was $138.2 versus $117.1; operating income was $37.8 versus $29.7; continuing-operations net income was $20.5 versus $14.7. Diluted continuing-operations EPS was $0.78 versus $0.55.
- Six-month results: Revenue was $1,606.0, up 28%; gross profit was $266.1, up 22%; operating income was $69.7, up 40%; continuing-operations net income was $37.3 versus $23.1. Diluted continuing-operations EPS was $1.42 versus $0.86.
- Margins: Overall gross margin declined to 16.3% from 17.4% in Q2 and to 16.6% from 17.4% for the six-month period. Operating margin improved to 4.5% from 4.4% in Q2 and to 4.3% from 4.0% year to date. Management attributed lower gross margins principally to normalized new-car margins, used-car cost pressure, and a greater mix of lower-margin wholesale parts and body work.
- Cash flow: Operating activities used $152.0 in the first half, compared with $17.2 used in 2011, reflecting, among other items, a $109.6 inventory increase and a $94.3 decrease in floor-plan notes payable. Investing activities used $29.5, including $22.7 of capital expenditures and $12.8 for acquisitions. Financing activities provided $177.0. Cash ended at $16.2, down from $20.9 at year-end 2011.
- Debt and liquidity: Total debt was $728.6 at June 30, including $482.4 of new-vehicle floor-plan financing, $52.0 of used-vehicle inventory financing, $175.2 of real-estate mortgages, and other debt. The company reported $91.979 of total available funds, including cash and available used-vehicle and revolving credit. Its new five-year $650 million facility expires in 2017; the revolving line was undrawn. Covenant ratios were 1.30 current, 1.49 fixed-charge coverage, and 2.19 leverage, against minimums of 1.20, 1.20, and a maximum of 5.00, respectively.
- Balance sheet: Total assets were $1,283.6 and stockholders’ equity was $385.0, compared with $1,146.1 and $367.1 at December 31, 2011. Inventory rose to $617.6 from $506.5.
Material changes versus the prior comparable period
- Growth was supported by higher vehicle volumes: same-store new-vehicle sales revenue rose 33% in Q2 and 30% in the first half; same-store used retail revenue rose 20% and 19%, respectively.
- Finance and insurance revenue per retail unit increased to $1,059 in both Q2 and the first half, up 5.5% and 5.0%, respectively. Same-store customer-pay service revenue grew, while warranty work declined.
- Q2 new-vehicle gross margin fell to 7.4% from 8.1%; used retail margin fell to 14.9% from 15.3%. SG&A increased 16% in Q2 and 17% year to date, but SG&A as a share of gross profit improved to 69.6% from 70.7% in Q2 and to 70.6% from 73.1% year to date.
- Other interest expense declined, largely because the company paid down approximately $23 million of mortgage debt. The company acquired two dealerships for $12.8 million and sold an 80% interest in three Medford stores to its vice chairman, retaining a 20% equity-method investment.
Outlook, management commentary, risks and unusual items
- Management expected a full-year 2012 effective tax rate of approximately 38.4% and capital expenditures of approximately $48 million. The filing provides no full-year revenue or earnings guidance.
- Management described new-vehicle demand as strong and targeted a 1.0:1 used-retail-to-new-vehicle sales ratio; the ratio was 0.8:1 in Q2 and 0.9:1 for the first half. It also cited a target of approximately 50% same-store throughput; reported Q2 same-store throughput was 42.9%, or approximately 52% excluding $1.7 million of insurance items.
- Key risks include covenant compliance and access to financing, used-vehicle supply and margin pressure, potential further property impairments, and the performance of vehicle retail and service markets. Management said it expected covenant compliance but gave no assurance.
- A proposed $2.5 million settlement of text-message class claims had preliminary court approval, with final approval hearing scheduled for October 11, 2012. The vendor is contractually obligated to reimburse the settlement, but final approval and recovery are not assured. A related case remained pending. An Alaska consumer-protection class was certified; the company said it would defend the claims, and outcomes cannot be predicted with certainty.
- Unusual items include the related-party store transaction and gains associated with that sale and retained investment; Q2 and first-half 2012 income also benefited from tax attributes. The company repurchased 823,092 shares in the first half at an average $24.17 per share and paid $4.4 million in dividends. After quarter-end, the board approved a $0.10-per-share dividend and added 1 million shares to the repurchase authorization.
Important facts for investors to verify
- Whether inventory growth, floor-plan financing, and operating cash use normalize as sales and vehicle stocking levels evolve.
- Whether gross-margin pressure persists, especially in new and used vehicles, and whether service growth offsets lower warranty sales and changing business mix.
- Remaining borrowing availability, borrowing-base limits, covenant headroom, and compliance with all debt agreements.
- Final court approval of the text-message settlement, vendor reimbursement, and the outcome of the related and Alaska litigation.
- Execution and funding of the stated $48 million capital-spending plan, alongside dividends and continued share repurchases.