Lithia Motors, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; balance sheet compared with December 31, 2014. Unaudited consolidated results. Lithia operated 129 stores and offered 31 vehicle brands as of July 31, 2015.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Revenue | $1,996.9 | $1,221.8 | $3,786.1 | $2,299.9 |
| Gross profit | $297.6 | $192.3 | $571.0 | $364.4 |
| Operating income | $85.6 | $61.0 | $153.5 | $105.7 |
| Income from continuing operations | $51.2 | $35.2 | $91.9 | $59.9 |
| Diluted EPS from continuing operations | $1.93 | $1.34 | $3.47 | $2.27 |
- Q2 revenue increased 63.4% and continuing-operations income increased 45.6%; H1 revenue rose 64.6% and continuing-operations income rose 53.5%.
- Acquisitions were a major contributor: Lithia acquired 36 stores in 2014, including 27 DCH Auto Group stores in the fourth quarter. Same-store Q2 new-vehicle revenue rose 7.7%; used retail revenue rose 16.3%.
- Gross margin declined to 14.9% from 15.7% in Q2 and to 15.1% from 15.8% for H1. New-vehicle margins and gross profit per unit declined; used retail gross margin also fell, although same-store used retail gross profit increased.
- Q2 operating margin was 4.3% versus 5.0%; H1 was 4.1% versus 4.6%. SG&A was 65.7% of gross profit in Q2, compared with 65.2%; H1 was 67.8% versus 67.9%.
Cash flow, debt and liquidity
- H1 operating cash flow was $29.3 million, versus cash used of $4.2 million a year earlier. The improvement reflected higher earnings and better receivables collections, partly offset by inventory investment. Inventory increased $122.7 million in the cash-flow statement.
- H1 investing cash outflow was $50.2 million, including $48.0 million of capital expenditures; financing cash inflow was $14.4 million. Cash ended the period at $23.4 million, down from $29.9 million at year-end.
- Total debt was $1.853 billion, including $1.170 billion of non-trade floor-plan debt and $45.5 million of other floor-plan notes. Long-term debt, including current maturities, was approximately $637.4 million. Debt to total capital excluding floor-plan notes was 45.9%, compared with 31.2% at June 30, 2014.
- Available revolving credit was $164.1 million. Cash plus available credit was $187.5 million. Management estimated a further $115.5 million could be raised against unfinanced real estate, subject to financing availability and terms; including this estimate, total estimated available funds were $303.0 million.
- At June 30, the company reported compliance with its credit-facility covenants: current ratio 1.24 against a 1.10 minimum; fixed-charge coverage 3.21 against a 1.20 minimum; and leverage ratio 1.97 against a 5.00 maximum.
Outlook, risks and unusual items
- Management expected 2015 operating margin to remain in the low-4% range, citing DCH integration and lower operating efficiency at acquired stores. It continued to target same-store throughput of 45%–50%; reported same-store throughput was 25.9% for Q2 and 35.8% for H1.
- Management forecast 2015 capital expenditures of approximately $110 million and an income tax rate of approximately 32.5%. Excluding NMTC-related tax attributes and other non-core items, it forecast a 39.3% rate.
- H1 included $10.3 million of asset impairments: $8.3 million related to the New Markets Tax Credit equity-method investment and $2.0 million related to properties. The investment generated $14.9 million of tax benefits and credits in H1; its operating losses require ongoing impairment assessment. The company cautioned that its ability to use NMTC benefits depends on program compliance and future taxable income.
- Sales of two stores generated a $5.9 million gain in H1. There were no stores classified as held for sale at June 30. Q2 2014 results included $3.1 million of after-tax discontinued-operations income, so reported net income comparisons include a prior-period disposal item.
- Management identified seasonality, consumer confidence and debt, interest rates, manufacturer incentives, and general economic conditions as factors affecting results. It also noted continued expansion in consumer credit availability. The company had a $25 million interest-rate swap maturing in June 2016; it stated derivatives are used to manage rate exposure, not for speculation.
- The board approved a $0.20-per-share dividend after quarter-end, payable August 21, 2015. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and profit improvement reflects acquired stores versus same-store performance, and how DCH integration is progressing.
- Whether vehicle gross margins, per-unit profitability and SG&A leverage stabilize while the company pursues volume growth.
- Inventory levels, floor-plan financing costs, cash conversion and the funding required for planned capital expenditures.
- The ongoing impairment exposure and realization of tax credits and other benefits associated with the NMTC investment.
- Debt levels, revolving-credit availability, covenant headroom and the practical availability and cost of financing against unencumbered real estate.
- Whether management’s operating-margin, throughput, tax-rate and capital-spending expectations are achieved; interim results are not necessarily indicative of full-year results.