Lithia Motors, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative figures are for Q1 2015 unless noted. Amounts are in U.S. dollars. Lithia operated 138 stores offering 31 new-vehicle brands as of April 29, 2016.
Financial performance and liquidity
- Revenue: $1.983 billion, up 10.8%. Growth included new vehicles (+8.8%), used retail vehicles (+15.1%), finance and insurance (+20.2%), and service, body and parts (+13.4%).
- Profit and margins: Gross profit was $307.2 million, up 12.4%; gross margin was 15.5%, versus 15.3%. Operating income rose 7.4% to $72.9 million; operating margin was 3.7%, versus 3.8%. Net income was $40.3 million, down 0.9%; diluted EPS was $1.55, versus $1.53.
- Costs and interest: SG&A increased 14.3% to $219.1 million and rose to 71.3% of gross profit from 70.1%. Floor-plan interest expense increased 27.1% to $5.9 million; other interest expense increased 13.1% to $5.5 million.
- Cash flow: Operating cash flow was $34.6 million, versus $38.2 million. Investing used $29.2 million and financing used $28.8 million; cash declined $23.4 million to $21.6 million. Inventory growth used $73.7 million of cash. Management’s adjusted operating cash flow, including non-trade floor-plan activity, was $73.2 million, versus $16.2 million; this is a non-GAAP measure.
- Debt and liquidity: Total debt, including floor-plan balances, was $2.0 billion. Cash plus available credit was $170.5 million; management estimated a further $150.1 million could potentially be raised against unfinanced real estate, subject to valuation and financing availability. The current ratio was 1.25 against a 1.10 covenant minimum; the company reported compliance with all covenants.
- Balance sheet: At March 31, inventory was $1.541 billion, up $70.1 million from year-end; total liabilities were $2.453 billion and stockholders’ equity was $814.7 million.
Material changes and management commentary
- Same-store new-vehicle sales increased 6.2%, ahead of the cited national increase of about 3.1%. Same-store used-retail revenue grew 12.4%, but gross margin fell 80 basis points to 12.1% as gross profit per unit declined.
- Service, body and parts revenue increased 13.4%, with management citing increased warranty work, including manufacturer recalls, and growth in the vehicle population. Finance and insurance revenue rose 20.2%, with average revenue per retail unit up 9.5%.
- Performance diverged by segment: Import segment income increased 32.6%; Domestic segment income decreased 20.4% amid slower gross-profit growth and higher personnel and advertising costs; Luxury segment income decreased 36.3%, with higher SG&A and floor-plan interest.
- Management reported same-store throughput of 37% and continues to target 45%–50%. Average used retail sales were 64 units per store per month; the stated target is 75. These are operating targets, not earnings guidance.
Outlook, risks and unusual items
- No specific full-year revenue or EPS guidance is provided in the filing. Management expected approximately $100 million of 2016 capital expenditures and described acquisition growth, store performance and liquidity from unfinanced real estate as forward-looking opportunities, subject to risks and availability.
- Management notes first-quarter seasonality: results historically tend to be lower than in the second through fourth quarters. Consumer confidence, interest rates, consumer debt, incentives and general economic conditions may also affect results.
- A $3.5 million impairment was recorded on an equity-method investment associated with the New Markets Tax Credit program; the investment also generated $5.9 million of tax benefits and credits in the quarter. The company had committed to total contributions of $49.8 million through October 2016, with $32.6 million contributed by quarter-end.
- Reported results included a $1.9 million legal reserve charge and a $1.1 million gain on a store sale. The filing’s company-adjusted figures are non-GAAP and should be considered alongside GAAP results.
- Share repurchases totaled $57.7 million in Q1. The Board authorized up to $250 million of repurchases; about $248.2 million remained available at March 31. A $0.25-per-share dividend was subsequently declared, payable May 27, 2016.
- Shareholder derivative litigation concerning a transition agreement with the chairman was consolidated in April 2016; the company and directors were defending the claims. California wage-and-hour matters were also disclosed; the company described exposure, considering contractual indemnification, as immaterial. Litigation outcomes cannot be predicted with certainty.
Key facts for investors to verify
- Whether sales growth can translate into improved segment profitability, particularly in Domestic and Luxury, and whether used-vehicle gross profit per unit stabilizes.
- Inventory levels, floor-plan financing costs and cash conversion, given the quarter’s inventory-related cash use and lower ending cash.
- Progress toward the 45%–50% throughput target and the 75-used-units-per-store monthly target.
- Availability and terms of credit and real-estate financing, covenant headroom, and the impact of planned capital expenditures, acquisitions, dividends and buybacks on liquidity.
- Developments in the derivative and wage-and-hour matters, and the remaining contribution obligations and performance of the NMTC-related investment.