Lithia Motors, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars. Lithia operated 91 U.S. stores offering 27 new-vehicle brands as of July 26, 2013.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,008.5 | $822.3 | $1,911.6 | $1,560.6 |
| Gross profit | $159.8 | $134.1 | $306.3 | $258.4 |
| Operating income | $45.7 | $36.9 | $86.2 | $68.6 |
| Continuing-operations net income | $25.3 | $20.0 | $47.2 | $36.6 |
| Net income, including discontinued operations | $25.6 | $20.5 | $47.6 | $37.3 |
| Diluted EPS from continuing operations | $0.97 | $0.76 | $1.81 | $1.39 |
- Q2 revenue rose 22.6% and continuing-operations net income rose 26.4%; six-month revenue rose 22.5% and continuing-operations net income rose 28.7%.
- Gross margin declined to 15.8% from 16.3% in Q2 and to 16.0% from 16.6% for the first half. Operating margin was 4.5% in both Q2 periods and 4.5% versus 4.4% for the first half.
- Growth reflected higher vehicle volumes, used-vehicle sales, finance and insurance, and service activity. New-vehicle gross margin fell to 6.8% from 7.4% in Q2, as Lithia prioritized sales volume and market share; used retail gross margin was 15.0% versus 14.9%.
- Q2 SG&A increased 17.5% to $109.3 million, slower than gross-profit growth of 19.2%; it included a $3.8 million legal settlement accrual. Excluding that accrual, management reported SG&A at 66.0% of gross profit for Q2 and 67.5% for the first half.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $24.4 million, compared with cash used of $152.0 million in 2012. Inventory growth used $48.9 million of cash in 2013, versus $109.6 million in 2012. Investing used $56.0 million, including $31.8 million for acquisitions and $22.1 million of capital expenditures; financing provided $8.9 million.
- Cash was $20.3 million at June 30, down from $42.8 million at December 31, 2012. Available revolving credit was $91.0 million, giving reported total available funds of $111.2 million versus $163.4 million at year-end.
- Reported total debt was $894.3 million, including $570.0 million of non-trade new-vehicle floor-plan financing, $80.0 million of used-vehicle inventory financing, $50.0 million drawn on the revolving line, and $168.2 million of real estate mortgages. Long-term debt including current maturities was approximately $301.0 million.
- Credit-facility covenant measures were within stated requirements: current ratio 1.43x versus a 1.20x minimum; fixed-charge coverage 3.23x versus 1.20x minimum; leverage 1.83x versus a 5.00x maximum; and funded debt $171.0 million versus a $375 million limit. Management expected continued compliance but gave no assurance.
- Inventory was $783.8 million, up from $723.3 million at year-end. New-vehicle supply was 76 days and used-vehicle supply 51 days at June 30.
Changes, outlook and risks
- Same-store new-vehicle unit sales increased 16.1% in Q2 and 16.9% for the first half; same-store used retail unit sales increased 16.0% and 17.2%, respectively. Finance-and-insurance revenue per retail unit and service, body and parts revenue also improved.
- Lithia acquired OB Salem Auto Group in June for $31.8 million cash, adding $8.3 million of goodwill. The acquired business contributed $2.9 million of revenue during the six-month period. One store remained classified as held for sale and its results as discontinued operations.
- Management anticipated approximately $55 million of 2013 capital expenditures and an approximately 39.0% full-year effective tax rate. It expected SG&A to remain in the high-60% range as a share of gross profit and targeted same-store throughput of approximately 50%. These are management expectations, not guarantees.
- The company declared a $0.13-per-share dividend, approximately $3.4 million, payable August 23, 2013. It repurchased $5.2 million of shares in the first half under its authorization; no open-market repurchases occurred in Q2.
- An Alaska consumer-protection class-action settlement was estimated at $3.8 million, recorded in Q2 SG&A, and remained subject to court approval. The estimate assumes historical class-member claim rates; higher participation could increase payments.
- Interest-rate exposure included a $25 million swap fixed at 5.587% through June 2016. Management cited potential risks from consumer demand, interest rates, manufacturer incentives, seasonality, regulatory and consumer-protection requirements, and compliance costs. The filing reports no material change in other market risks and no material change in internal financial-reporting controls.
Investor verification priorities
- Confirm whether the Alaska settlement receives court approval and whether actual claims exceed the assumptions underlying the $3.8 million estimate.
- Assess whether sales-volume growth can continue to offset lower new-vehicle gross profit per unit and the decline in overall gross margin.
- Monitor inventory levels, operating cash generation, and the reduction in total available funds alongside acquisition and capital-spending plans.
- Review debt-facility availability and covenant headroom, particularly as borrowing-base limits fluctuate.
- Track delivery of the stated 2013 capital-spending and tax-rate expectations; interim results are not necessarily indicative of full-year performance.