Lithia Motors, Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing; fourth-quarter figures are unaudited. The company operated 85 stores at year-end, selling new and used vehicles and providing financing, service, parts and related products, primarily in Western and Midwestern U.S. markets.
Financial performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $2,699.4 million | $2,072.0 million |
| Gross profit / gross margin | $457.5 million / 16.9% | $369.9 million / 17.9% |
| Operating income / operating margin | $112.0 million / 4.1% | $46.6 million / 2.2% |
| Income from continuing operations | $55.8 million | $13.5 million |
| Diluted continuing-operations EPS | $2.09 | $0.51 |
| Net income, including discontinued operations | $58.9 million | $13.7 million |
| Cash from operating activities, as reported | $(0.8) million | $(21.3) million |
Fourth-quarter 2011 revenue was $717.5 million, versus $538.1 million in fourth-quarter 2010. Fourth-quarter income from continuing operations was $16.4 million, or $0.62 per diluted share; net income including discontinued operations was $18.8 million.
Revenue grew 30.3% year over year, and gross profit rose $87.7 million. Growth reflected higher vehicle volumes, acquisitions and increased finance-and-insurance and service revenue. Overall gross margin declined by 1.0 percentage point: new-vehicle margin fell to 7.7% from 8.2%, while retail used-vehicle margin increased to 14.5% from 14.1%. Service, body and parts generated 34.3% of gross profit; finance and insurance generated 18.8%.
Liquidity, debt and capital
- At year-end, cash was $20.9 million and working capital was $191.6 million. Management reported $97.2 million of total available funds, a measure that also includes $10.4 million of available credit and $65.9 million of unfloored new vehicles.
- Total debt was $630.8 million: $343.9 million of floor-plan financing, $87.0 million drawn on the credit facility, $194.4 million of real-estate mortgages and $5.5 million of other debt. Debt excludes operating lease commitments.
- The September 2011 credit agreement provides a three-year facility with a $100 million floor-plan commitment and up to a $100 million revolving line. The revolving line bears interest at one-month LIBOR plus 2.25%; $10.4 million was available at year-end.
- The company reported compliance with debt covenants at December 31, 2011: current ratio 1.44 (minimum 1.20), fixed-charge coverage 1.39 (minimum 1.20), and liabilities-to-tangible-net-worth ratio 2.72 (maximum 4.00).
- Approximately 74% of total debt was variable rate, including the effect of swaps. The company reported $566.3 million outstanding under variable-rate arrangements and a $7.5 million liability for interest-rate swaps.
- Reported operating cash flow was negative, partly reflecting increased inventory and receivables. On a company-presented non-GAAP basis that treats all floor-plan financing as operating cash flow, operating cash flow was $62.4 million in 2011 versus $2.8 million in 2010.
- Capital expenditures were $31.7 million; cash paid for acquisitions was $60.5 million. The company paid $6.8 million in dividends and repurchased $13.6 million of stock during 2011.
Material changes and unusual items
- New-vehicle revenue increased 37.4%, with retail units sold up 32.5%; retail used-vehicle revenue increased 22.8%. Same-store new and retail used vehicle revenue rose 29.0% and 16.9%, respectively.
- Service, body and parts revenue increased 14.6% overall, but same-store growth was 4.6%. Same-store warranty sales fell 3.7%, which management attributed primarily to fewer vehicles in operation.
- Reported SG&A was 71.6% of gross profit, compared with 78.6% in 2010. The 2011 figure benefited from a $6.3 million California property-sale gain; company-adjusted SG&A was 72.9% of gross profit. Reported operating income also included $1.4 million of asset impairments, versus $15.3 million in 2010.
- 2011 acquisitions included three Portland-area dealerships and Fresno Subaru. Acquired stores contributed $122.0 million of 2011 revenue. The company also opened an awarded Ford franchise in Klamath Falls.
- Discontinued operations contributed $3.1 million of after-tax income in 2011, including gains related to store disposals. The company reported no stores or properties held for sale at year-end.
Outlook, risks and contingencies
Management expects cost leverage to improve as vehicle sales rise, targeting SG&A in the low-70% range of gross profit and incremental throughput of approximately 50%. These are stated operating targets, not a formal earnings or revenue forecast. The company also sees acquisition opportunities and intends to continue selective acquisitions, facility investments, dividends and share repurchases, subject to available capital and other constraints.
- Key business risks include cyclical vehicle demand, local-market concentration, competitive pricing and margin pressure, customer credit availability, fuel prices, manufacturer supply and product quality, and franchise renewal or termination terms. The 2011 Japan earthquake and tsunami disrupted import-brand supply; management said inventory levels had returned to normal in early 2012.
- Debt and liquidity risks include demand features in certain floor-plan lines, variable interest rates, refinancing needs and mortgage maturities. The filing identifies significant mortgage maturities after 2012, including approximately $27.9 million in 2013, $31.9 million in 2014 and $52.6 million in 2015.
- A text-message marketing class-action matter was settled for $2.5 million, subject to court approval; the company said the vendor is contractually obligated to reimburse the amount. Separate Alaska consumer-protection litigation received class certification; the company intends to defend the claims. Management cautioned that an unfavorable outcome could materially affect results, financial condition or cash flows.
- The company disclosed minor contamination at certain properties and ongoing investigations or remediation, but did not expect significant remediation costs based on current information. It cautioned that future material environmental contingencies cannot be ruled out.
- Other sensitive estimates include goodwill and franchise-value impairment, deferred-tax-asset recoverability, service-contract cancellations and self-insurance reserves. A $12.8 million valuation allowance was recorded against deferred tax assets in 2011.
Most important facts for investors to verify
- How much of 2011 earnings growth came from sustainable operating improvement versus property-sale and discontinued-operation gains; compare GAAP results with the company’s non-GAAP adjustments.
- Whether operating cash generation remains adequate after accounting for inventory, receivables and the distinction between operating and non-trade floor-plan financing.
- Refinancing capacity for the revolving facility and real-estate debt maturities, covenant headroom, and exposure to variable rates and floor-plan lenders.
- Whether vehicle margins and service performance can be sustained as supply normalizes, competition continues and warranty work remains pressured.
- Final court approval and vendor reimbursement of the text-message settlement, and developments in the Alaska class-action litigation.