Lithia Motors, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Lithia operated 189 stores representing 30 brands in 20 states. Results are unaudited and compared with Q1 2019 unless otherwise noted. Amounts are in millions of dollars except per-share data.
Financial performance
- Revenue: $2,803.8, down 1.6%. New vehicle retail revenue declined 6.0%; used vehicle retail rose 5.6%, finance and insurance rose 3.7%, and service, body and parts rose 3.9%.
- Profit: Gross profit was $460.9, up 2.3%; gross margin increased to 16.4% from 15.8%. Operating income fell to $92.9 from $108.6, and operating margin declined to 3.3% from 3.8%. Net income decreased to $46.2 from $56.4; diluted EPS was $1.97 versus $2.42.
- Costs and interest: SG&A increased 7.5% to $346.0 and reached 75.1% of gross profit, versus 71.4%. Floor-plan interest expense decreased 22.7% to $14.0; other interest expense rose 11.1% to $17.0.
- Cash flow: Operating cash flow was $121.7, compared with $77.2. The company’s adjusted operating cash flow measure, which incorporates non-trade floor-plan financing and acquired inventory adjustments, was $64.1 versus $120.7. Investing cash outflow was $118.3, including $72.3 for acquisitions and $41.6 in capital expenditures. Financing cash outflow was $30.8. Cash declined to $56.6 from $84.0.
- Balance sheet and liquidity: Total assets were $6,014.1 and stockholders’ equity was $1,456.5 at March 31. Total debt was $3,531.8 before $10.4 of unamortized issuance costs; this includes $1,595.9 of non-trade floor-plan notes and $389.9 of other floor-plan notes. The company reported $338.8 available on revolving lines and $162.9 available under used and service-loaner vehicle financing commitments. Management cited approximately $1 billion of potential liquidity, including cash, credit availability and unfinanced real estate. Adjusted leverage, excluding floor-plan financing, was 2.18; the company reported compliance with credit-facility covenants.
Changes and operating trends
- Same-store revenue declined 5.4%, mainly due to a 10.6% decrease in new vehicle revenue and a 14.6% drop in new vehicle unit sales. Same-store used vehicle revenue rose 2.7%.
- Domestic segment income increased 40.4% to $27.8; Import segment income decreased 17.7% to $24.7; Luxury segment income fell 80.0% to $1.6. Management attributed sharper Luxury declines partly to greater exposure to states with tighter restrictions.
- Q1 included the acquisition of Sacramento Lexus and Roseville Lexus for $72.3 cash, net of cash acquired. The stores contributed $12.7 of revenue and no reported operating income after acquisition.
- The company repurchased $48.2 of common stock and paid $7.0 in dividends during the quarter. It subsequently said it had suspended share repurchases in response to the pandemic.
Outlook, risks and unusual items
- Management said the first two months of 2020 and early March had shown growth across business lines, followed by progressive declines as COVID-19 restrictions took effect. About 95% of its markets were affected; in the latter half of March, average new and used vehicle sales declined approximately 50%, and service, parts and collision activity declined approximately 30%. Pennsylvania and Vermont had virtually no sales.
- Most service, parts and collision departments remained open. Where permitted, vehicle sales continued through appointments, digital services and home delivery. Manufacturers and lenders offered additional support, including floor-plan assistance, customer incentives and payment deferrals.
- Lithia reduced staffing by 37%, mainly through furloughs, and introduced cost-control measures. Management expected savings to begin in Q2 but had not realized them by quarter-end. It deferred approximately $65 of planned discretionary capital expenditures and postponed prospective acquisitions until the second half of 2020.
- No numerical full-year earnings or revenue guidance is provided in the filing. Management said recovery depended on changes to shelter-in-place restrictions and consumers returning to work and more normal activity. COVID-19’s duration and effects on demand, store operations, liquidity and financial results remained uncertain.
- No goodwill, franchise-value or long-lived-asset impairment was recorded in Q1 after a qualitative assessment. Adoption of the expected-credit-loss standard reduced retained earnings by $4.8 at January 1, 2020. A $7.9 derivative liability related to an interest-rate collar was recorded at March 31; $2.1 of net losses was expected to be reclassified to interest expense within 12 months.
- The filing identifies ordinary-course legal proceedings but does not expect them to have a material adverse effect; outcomes cannot be predicted with certainty. Management reported effective disclosure controls and no material change in internal control over financial reporting, apart from controls implemented for the new credit-loss standard.
Investor verification priorities
- Track monthly and same-store sales, especially new-vehicle volumes, and the recovery of service and parts activity as restrictions change.
- Check whether furlough-related savings and other cost reductions materialize, and whether SG&A as a share of gross profit improves.
- Reconcile reported cash flow with the company’s adjusted cash-flow presentation, and monitor cash, borrowing availability, leverage and covenant headroom.
- Assess inventory levels, manufacturer production and incentives, and the effects of postponed acquisitions and deferred capital spending.
- Monitor credit losses in the subprime auto-loan portfolio, potential asset impairments, and changes in the fair value or earnings impact of the interest-rate collar.