Lithia Motors, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the same 2010 periods. Unless stated otherwise, dollar amounts are in millions.
Business context
Lithia operated 86 U.S. stores offering 27 new-vehicle brands, used vehicles, finance and insurance products, and service, body and parts operations. On April 18, 2011, it acquired three Portland-area dealerships; the acquired stores contributed $36.2 million of Q2 revenue.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $689.1 | $530.2 | $1,286.9 | $985.5 |
| Gross profit | $119.7 | $95.0 | $223.8 | $180.1 |
| Operating income | $30.0 | $3.2 | $50.3 | $11.7 |
| Income from continuing operations, net | $14.8 | $(1.6) | $23.4 | $(0.2) |
| Net income (loss) | $14.8 | $(1.7) | $23.5 | $(0.5) |
| Diluted EPS from continuing operations | $0.55 | $(0.06) | $0.87 | $(0.01) |
- Q2 revenue increased 30.0%; six-month revenue increased 30.6%. Gross profit rose 26.1% and 24.2%, respectively.
- Gross margin was 17.4% in Q2 versus 17.9% a year earlier, and 17.4% for the six months versus 18.3%. Management attributed the decline chiefly to a greater mix of lower-margin new vehicles and reduced manufacturer incentives.
- Operating margin improved to 4.4% in Q2 from 0.6%, and to 3.9% for the six months from 1.2%. Lower prior-year impairments also affect comparability: $0.5 million was recorded in Q2 2011 versus $13.3 million in Q2 2010.
- Q2 SG&A increased 14.6% to $85.0 million, but fell to 71.0% of gross profit from 78.1%. Six-month SG&A was 73.4% of gross profit versus 80.3%.
- New-vehicle same-store sales rose 24.3% in Q2; used-vehicle retail same-store sales rose 16.2%. Service, body and parts same-store revenue increased 4.7% in Q2 and 6.5% for the six months. Q2 F&I revenue increased 32.3%.
Cash flow, debt and liquidity
- Reported operating cash flow was a use of $17.2 million for the first six months, compared with a $6.3 million use in 2010. Inventory growth used $60.5 million of cash. Including non-trade floorplan borrowing in operating activities, as management’s non-GAAP presentation does, adjusted operating cash flow was positive $48.6 million, versus $17.6 million in 2010.
- Investing cash flow was a use of $50.3 million, including $53.3 million cash paid for acquisitions and $7.9 million of capital expenditures. Financing provided $70.0 million. Cash increased $2.4 million to $11.7 million.
- Total debt was $622.7 million at June 30, comprising $336.5 million of new and program floorplan debt, $65.0 million drawn on the credit facility, $215.5 million of real-estate mortgages and $5.7 million of other debt. Cash was $11.7 million.
- Available funds, including cash, unused credit-facility capacity and unfloored new vehicles, totaled $60.6 million, down from $98.2 million at year-end 2010. The $75 million credit facility expires June 30, 2013; $7.8 million was available at quarter-end.
- The company reported compliance with its debt covenants at June 30, 2011. Its fixed-charge coverage ratio was 2.04 against a 1.20 minimum; tangible net worth was $264.8 million against a $200 million minimum.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected approximately $28 million of 2011 capital expenditures and an approximately 39.7% full-year tax rate. It targeted SG&A at a low-70% percentage of gross profit and incremental throughput of 50%–55% as volumes grow.
- The March 2011 Japan earthquake, tsunami and nuclear crisis disrupted vehicle and parts supply, affecting Q2 sales, particularly at import and luxury brands. Management expected production to improve in Q3 but said inventory might not normalize until late 2011 or early 2012.
- Management cited potential late-model used-vehicle supply constraints, manufacturer supply and incentive dependence, and the financial condition and availability of floorplan lenders as risks. Ally Bank provided approximately 67% of floorplan financing outstanding.
- Two text-message class-action claims were covered by a settlement agreement for $2.5 million, subject to court approval; the company stated the vendor would reimburse the full amount under contractual indemnification. In an Alaska consumer-protection matter, a court certified a class on June 14, 2011; the merits and class size remained unresolved, and an adverse outcome could be material.
- Q2 2011 included $0.5 million of asset impairment; Q2 2010 included $13.3 million. A $0.6 million liability remained for a related-party purchase option. The company declared a $0.07-per-share dividend payable August 25, 2011.
Important facts for investors to verify
- Whether vehicle supply recovered as expected and how constraints affected sales, inventory, margins and manufacturer incentives.
- Whether reported and floorplan-adjusted operating cash flow trends translated into sustainable cash generation, given inventory growth and lower available funds.
- Acquisition contribution, integration performance and financing needs, including the three-store Portland acquisition.
- Court approval and vendor reimbursement of the text-message settlement, and developments in the Alaska class-action litigation.
- Progress against the stated 2011 capital-spending and tax-rate expectations, and continued compliance with debt covenants.