Lithia Motors, Inc. — 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Lithia operated 87 dealerships across 11 states, offering 27 new-vehicle brands, used vehicles, financing products, and service, body and parts operations.
Financial performance
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $3.316 billion | $2.633 billion | +26.0% |
| Gross profit | $539.3 million | $445.3 million | +21.1% |
| Operating income | $148.4 million | $110.8 million | +33.9% |
| Continuing-operations net income | $79.4 million | $55.2 million | +43.8% |
| Net income, including discontinued operations | $80.4 million | $58.9 million | +36.5% |
| Diluted EPS from continuing operations | $3.03 | $2.07 | +$0.96 |
Gross margin declined to 16.3% from 16.9%, mainly because new vehicles—lower-margin than other business lines—made up a larger sales mix and new-vehicle margins eased. New-vehicle gross margin was 7.3% versus 7.7%; retail used-vehicle margin was 14.6% versus 14.5%; service, body and parts margin was 48.3% versus 48.2%. SG&A was $373.7 million, or 69.3% of gross profit, improving from 71.1% in 2011. The prior year included a $6.3 million property-sale gain; management’s adjusted comparison also showed improvement.
Fourth quarter: Revenue was $877.4 million, operating income $36.8 million, net income $19.8 million and diluted EPS $0.76. In fourth-quarter 2011, these were $695.3 million, $29.9 million, $18.8 million and $0.71, respectively. The filing notes typical seasonal softness in the first and fourth quarters.
Cash flow, balance sheet and capital
- Cash and cash equivalents were $42.8 million at year-end, up from $20.9 million. Working capital was $211.9 million, compared with $191.6 million.
- Operating activities used $212.5 million of cash, versus $0.8 million used in 2011. The principal pressure was a $230.4 million increase in inventory, alongside increased receivables; financing activity funded the working-capital build.
- Capital expenditures were $64.6 million, up from $31.7 million. Investing activities used $99.0 million, including $44.7 million for acquisitions.
- Year-end debt was $876.6 million, including $581.6 million of floor-plan debt, $78.3 million of used-vehicle inventory financing, $21.0 million on the revolving line and $192.9 million of real-estate mortgages. The filing separately reports $885.0 million including debt associated with assets held for sale.
- Available funds, as defined by management, totaled $163.4 million: $42.8 million cash and $120.5 million available credit. A new five-year credit facility was expanded in December 2012 to $800 million. The company reported compliance with its financial covenants at year-end.
- Approximately 74% of total debt was variable-rate, including the effect of swaps. Management estimated a 10% increase in rates would add about $1.4 million of annual interest expense, net of tax, based on year-end balances.
- Dividends declared were $0.47 per share for the year. The company repurchased 848,092 shares under its repurchase plans for $20.7 million; 1,854,853 shares remained authorized for repurchase.
Changes and operating drivers
- Revenue growth reflected higher volumes across major lines. Same-store new-vehicle retail units increased 29.5%; same-store used retail units rose 19.5%; finance and insurance revenue increased 32.5%; and same-store service, body and parts revenue grew 6.5%.
- New-vehicle retail units rose 32.1% companywide. Management attributed growth to industry recovery and market-share gains; it also said lower pricing to gain share and normalized supply contributed to weaker new-vehicle margins.
- Finance and insurance penetration increased to 76% from 72%, while financing remained constrained for some sub-prime customers. Service and parts growth was led by customer-pay, wholesale parts and body-shop work; same-store warranty sales declined 2.7%.
- The company acquired four stores in 2012 and opened two new stores. It also sold two Washington dealerships and classified another store as held for sale. Four dealerships were acquired in 2011.
- Inventory rose to $723.3 million from $506.5 million. New-vehicle supply was 76 days, 14 days higher year over year; used-vehicle supply was 56 days, up four days.
Outlook, risks and unusual items
No specific revenue or earnings forecast was provided. Management said it expected further cost leverage if vehicle sales improve, targeting SG&A in the high-60% range of gross profit and approximately 50% same-store throughput on incremental gross profit. It also aims to increase average monthly retail used-vehicle sales per store from 46 to 75 and to continue selective acquisitions and facility investment.
- Key exposures include cyclical vehicle demand, local-market concentration (the top three states represented about 55% of 2012 revenue), competition and internet pricing, manufacturer supply and franchise terms, and consumer credit availability.
- Debt and liquidity risks include variable interest rates, refinancing and real-estate maturities, borrowing-base limits, and financial covenants. Higher inventory and substantial capital spending contributed to negative operating cash flow.
- Management identified minor environmental contamination at certain properties and said it did not expect significant remediation costs, while noting future material contingencies cannot be ruled out.
- An Alaska consumer-protection class action remains in discovery, including claims concerning dealer fees, used-vehicle disclosures and dealer reserve on financing. The company intends to defend the case; the outcome and potential exposure are uncertain.
- Other estimates and contingencies to monitor include $13.5 million of contract charge-back reserves, $12.4 million of self-insurance reserves, $11.6 million valuation allowance against deferred tax assets, and possible future impairment of goodwill or franchise value. No goodwill or franchise-value impairment was recorded in 2012.
- A related-party transaction involved the March 2012 sale of 80% interests in three Medford stores to a director and vice chairman; Lithia retained a 20% equity-method interest.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification points
- Reconcile the large operating cash outflow with inventory growth, floor-plan financing and the reported year-end liquidity.
- Review debt composition, variable-rate exposure, covenant headroom and upcoming real-estate and credit-facility obligations.
- Assess whether volume growth can continue without further erosion in new-vehicle margins, and whether service and used-vehicle targets are achievable.
- Check the assumptions underlying contract charge-back, self-insurance and lifetime oil-service reserves, as well as deferred tax asset recoverability.
- Track the Alaska litigation, environmental matters, manufacturer franchise requirements and any material changes in related-party interests.