Lithia Motors, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Lithia operates U.S. automotive dealerships, selling new and used vehicles and providing finance and insurance, service, body and parts. The company reported 166 stores as of November 7, 2017.
Key financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $2,680.3 | $2,270.0 | $7,383.5 | $6,386.2 |
| Gross profit | $403.0 | $337.3 | $1,119.9 | $966.5 |
| Operating income | $106.0 | $93.4 | $296.0 | $256.8 |
| Net income | $51.9 | $54.0 | $155.8 | $145.7 |
| Diluted EPS | $2.07 | $2.14 | $6.19 | $5.69 |
| Gross margin | 15.0% | 14.9% | 15.2% | 15.1% |
| Operating margin | 4.0% | 4.1% | 4.0% | 4.0% |
- Q3 revenue rose 18.1%, but net income declined 4.0% and diluted EPS declined from $2.14 to $2.07. Nine-month net income increased 6.9% and diluted EPS increased from $5.69 to $6.19.
- Revenue growth was substantially acquisition-supported: same-store new-vehicle sales were nearly flat, while same-store used retail revenue rose 3.6% in Q3 and service, body and parts revenue rose 3.2%.
- Q3 same-store new-vehicle gross profit fell 3.5%; reported new-vehicle gross margin slipped to 5.7% from 5.8%. Service, body and parts gross margin improved to 49.9% from 48.1%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $260.5 million, compared with $194.2 million in 2016. Investing cash use was $464.9 million, including $400.6 million for acquisitions; financing provided $192.7 million. Cash declined $11.7 million during the period to $38.6 million.
- At September 30, total debt outstanding was $2.729 billion, including $1.598 billion of non-trade floor-plan financing and $114.8 million of other floor-plan notes. Long-term debt, including current maturities, was $1.016 billion before unamortized issuance costs.
- Available credit was $268.8 million. Management estimated total available funds of $518.8 million including $211.4 million of potential borrowing against unfinanced real estate; availability of real-estate financing on acceptable terms is not assured.
- The company issued $300 million of 5.25% senior notes due 2025 and amended its credit facility to $2.4 billion, extending maturity to August 2022. Approximately 86% of total debt was variable-rate. The company reported compliance with its credit covenants at quarter-end.
- Debt to total capital, excluding floor-plan notes, was 49.5%, versus 46.5% at September 30, 2016. The credit facility’s reported covenant ratios were current ratio 1.32 (minimum 1.10), fixed-charge coverage 2.82 (minimum 1.20), and leverage 2.93 (maximum 5.00).
Material changes, outlook and risks
- Lithia acquired Baierl Auto Group, an eight-store platform, and Downtown LA Auto Group, a seven-store platform. These 2017 acquisitions contributed $281.4 million of revenue and $4.4 million of net income after acquisition. Purchase-price allocations remained preliminary.
- Management cited moderating national new-vehicle sales, with particular softness in luxury brands and local markets. Same-store new-vehicle units decreased 0.3% in Q3; luxury same-store units fell 7.8%, while import units rose 4.5%.
- Higher SG&A and interest costs constrained earnings growth. Q3 floor-plan interest expense increased 71.8%; management attributed the increase to acquisitions, higher inventory at existing stores and rising LIBOR. Reported SG&A was 70.0% of gross profit, versus 67.6% a year earlier.
- Unusual items included $3.5 million of Q3 acquisition expenses and a $1.7 million storm-insurance reserve charge. Nine-month results included a $9.1 million gain from OEM legal settlements; storm-related reserve charges were $5.6 million for the nine months. Prior-year periods included impairment charges on an equity-method investment that Lithia exited in 2016.
- Management expected approximately $93 million of 2017 capital expenditures. Stated operating targets include sales 25% above the national OEM average (Lithia reported 9% above as of September 30), 85 used retail units per store per month (reported average: 67), and $1,450 of finance and insurance revenue per retail unit (Q3 reported average: $1,260). These are targets, not formal earnings guidance; the filing provides no specific consolidated earnings forecast.
- Key risks include rising interest rates and variable-rate debt, leverage and restrictive debt covenants, acquisition integration and execution, vehicle-market and consumer-demand weakness, and the availability and terms of refinancing. A California wage-and-hour matter had an agreed representative-claims settlement in principle, but court approval remained outstanding; the company said an affiliate was required to indemnify Lithia and assessed exposure as immaterial.
- After its earnings release, Lithia recorded eliminations of internal vehicle transactions that reduced reported revenue and cost of sales by $10.0 million in used wholesale, $3.6 million in new vehicles and $0.4 million in used retail for the periods presented; the eliminations did not affect gross profit. The filing does not present a clear alternative set of finalized revenue figures beyond its financial statements.
Important facts for investors to verify
- How much of reported revenue and earnings growth reflects acquired stores versus same-store performance, and whether acquired-store profitability improves as integration proceeds.
- Whether gross-profit pressure, elevated SG&A and sharply higher floor-plan interest costs persist, particularly as interest rates and inventory levels change.
- Debt maturities, variable-rate exposure, covenant headroom and the practical availability of stated credit and real-estate liquidity.
- Final purchase-price allocations and any further acquisition, storm-insurance or auto-loan-receivable reserve adjustments.
- Approval and resolution of the California representative-claims settlement, and whether any subsequent filing clarifies the internal-transaction revenue eliminations.