Lithia Motors, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 2016. Lithia operated 152 stores offering 30 new-vehicle brands as of April 28, 2017. Its business includes new and used vehicle sales, finance and insurance, service, body and parts, and related products.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2.236 billion | $1.983 billion | +12.8% |
| Gross profit / margin | $341.7 million / 15.3% | $307.2 million / 15.5% | Gross profit +11.2%; margin down 20 bps |
| Operating income / margin | $86.1 million / 3.9% | $72.9 million / 3.7% | Operating income +18.1% |
| Net income | $50.7 million | $40.3 million | +26.0% |
| Diluted EPS | $2.01 | $1.55 | +$0.46 |
| Operating cash flow | $126.7 million | $39.0 million | +$87.7 million |
- Q1 2017 net income included $9.1 million of income from legal settlements with two automakers related to diesel-emissions litigation. Excluding that item, the company reported adjusted net income of $45.0 million and adjusted diluted EPS of $1.78; these are non-GAAP measures.
- SG&A was $242.8 million, up 10.8%; it equaled 71.1% of gross profit, versus 71.3% a year earlier. Depreciation and amortization was $12.7 million. Floor-plan interest was $8.1 million, up from $5.9 million.
- Cash and cash equivalents were $31.4 million at March 31, down from $50.3 million at year-end. Current assets were $2.233 billion and current liabilities $1.940 billion.
- Total debt was $2.284 billion, including $1.503 billion of non-trade floor-plan debt and $97.0 million of other floor-plan notes. Long-term debt, including current maturities, totaled approximately $684.1 million. Debt to total capital, excluding floor-plan debt, was 41.9%.
- Available credit on facilities was $254.7 million. Including cash, immediately available funds were $286.2 million; management estimated a further $163.7 million could be raised against unfinanced real estate, subject to availability and acceptable terms.
- Operating cash flow included working-capital movements, notably a $76.1 million reduction in trade receivables and a $42.3 million increase in inventory. The company’s adjusted operating cash flow measure, incorporating specified floor-plan activity, was $124.6 million versus $72.8 million.
Material changes versus Q1 2016
- Reported revenue growth reflected acquisitions as well as higher sales in most business lines. New-vehicle revenue rose 10.4%, used retail revenue 13.0%, finance and insurance revenue 11.8%, and service, body and parts revenue 18.3%.
- Same-store new-vehicle unit sales declined 1.4%, broadly in line with the reported 1.2% decline in national sales, while same-store new-vehicle gross profit fell 4.4%. Same-store used retail revenue increased 5.9%, but gross profit per unit declined.
- Service, body and parts remained a growth area: same-store revenue increased 7.6% and gross profit 7.8%. Finance and insurance revenue per retail unit increased 4.8% on a same-store basis.
- Segment income was mixed: Domestic rose 10.0%, Import declined 8.6%, and Luxury rose 2.8%. Import results were pressured by costs outpacing gross-profit growth; Luxury new-vehicle unit sales fell 11.0% overall and same-store luxury sales were especially weak.
- Higher inventory levels and rising rates increased floor-plan interest expense. Consolidated floor-plan interest rose 36.3%, although manufacturer floor-plan assistance exceeded that expense for the quarter.
- Cash from operations increased substantially, while financing cash outflow rose to $123.0 million from $33.2 million, including $120.4 million of net line-of-credit repayments. Share repurchases were $9.2 million, compared with $57.7 million a year earlier.
Outlook, management commentary, risks, and unusual items
- The filing provides no specific full-year revenue, earnings, or EPS guidance. Management expects Q1 typically to be seasonally weaker than later quarters and identifies interest rates, consumer debt and confidence, manufacturer incentives, economic conditions, and weather as factors affecting results.
- Management expected approximately $117 million of 2017 capital expenditures for acquired-store improvements, facility projects, land, facilities, and equipment. Q1 capital expenditures were $16.0 million.
- Management’s used-vehicle objective was 75 retail units per store per month, versus an annualized average of 66 at March 31, 2017. It described continued focus on organic growth, acquisitions meeting return thresholds, and cost control.
- Risks highlighted by results and disclosures include moderating national new-vehicle sales, reduced vehicle gross profit per unit, weakness in certain luxury markets, higher inventory carrying costs and interest rates, and the potential impact of economic conditions. Credit-facility covenant breach could permit termination, acceleration, and enforcement against collateral. The company was compliant with covenants at March 31.
- A derivative-litigation settlement was approved April 26, 2017. No damages were paid and no fault was ascribed to directors; Lithia agreed to approximately $1 million in plaintiffs’ attorney fees and governance changes lasting at least five years.
- California wage-and-hour representative claims had settlements agreed in principle but awaiting court approval. The company stated that DCH indemnification obligations made its estimated exposure immaterial.
- The board declared a $0.27-per-share dividend on April 17, payable May 26, 2017. Q1 dividends paid were $0.25 per share.
Most important facts for investors to verify
- How much of reported earnings growth is repeatable after removing the $9.1 million automaker settlement and considering the prior-year impairment and tax-credit comparisons.
- Whether same-store vehicle volumes and gross profit per unit stabilize, particularly for Import and Luxury franchises, and whether service and used retail growth continues.
- Whether inventory levels, floor-plan costs, and interest rates pressure margins and cash generation; assess the working-capital contribution to reported operating cash flow.
- Liquidity and leverage, including borrowing-base availability, real-estate financing assumptions, covenant headroom, and the substantial floor-plan debt balance.
- Completion and financial impact of the litigation settlements, including court approval of the California representative-claim agreements and implementation of governance commitments.