Lithia Motors, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; compared with the same 2012 periods. Unless noted, amounts are in millions. Lithia operated 93 stores representing 28 vehicle brands as of October 25, 2013.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,069.3 | $878.5 | $2,980.9 | $2,439.1 |
| Gross profit | $165.4 | $142.5 | $471.7 | $400.9 |
| Operating income | $51.7 | $43.0 | $138.0 | $111.6 |
| Continuing-operations net income | $30.9 | $23.1 | $78.1 | $59.7 |
| Diluted continuing-operations EPS | $1.18 | $0.89 | $2.98 | $2.28 |
- Revenue rose approximately 21.7% in Q3 and 22.2% for the nine months; continuing-operations income increased approximately 33.8% and 30.6%, respectively.
- Gross margin was 15.5% in Q3 versus 16.2% a year earlier, and 15.8% for the nine months versus 16.4%. Operating margin was 4.8% versus 4.9% in Q3 and 4.6% in both nine-month periods.
- Growth reflected higher vehicle sales volumes, acquisitions, and increases in used retail, finance and insurance, and service revenue. Same-store new-vehicle units increased 14.8% in Q3; same-store used retail units rose 11.1%.
- New-vehicle gross profit per retail unit fell 9.9% in Q3 as Lithia pursued market share through lower pricing; used-vehicle retail gross profit per unit rose 6.7%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was positive $112.7, compared with negative $176.3 in 2012. The prior-year result included a much larger inventory cash use ($158.2 versus $18.2 in 2013).
- Investing cash outflow was $67.5, including $33.8 of capital expenditures and $31.8 for acquisitions. Financing cash outflow was $71.9. Cash declined $26.7 to $16.1 at September 30.
- Cash plus available credit was $181.2, including $165.1 of available facility capacity. Inventory was $755.7; current assets were $935.2 and current liabilities $746.0. The reported covenant current ratio was 1.44x, above the 1.20x minimum.
- Total debt in management’s debt summary was $820.9, predominantly vehicle floor-plan financing. Balance-sheet long-term debt, including current maturities, was approximately $225.2, down from approximately $295.1 at December 31, 2012. Covenant leverage was 1.48x versus a 5.00x maximum; fixed-charge coverage was 3.54x versus a 1.20x minimum.
- The $800 facility included $575 for new-vehicle floor plan, $80 for used inventory financing and $145 revolving credit. The revolving line had no balance drawn at quarter-end. Rates were variable; Lithia reported fixed rates on 79% of mortgage debt and had a $25 interest-rate swap at 5.587% maturing in 2016.
Changes, outlook and notable items
- SG&A increased 14.1% in Q3 and 15.3% year to date, mainly from volume-related costs and advertising. A $3.8 legal settlement accrual was recorded in Q2. Management reported SG&A at 67.6% of nine-month gross profit, or 66.8% excluding that accrual; it anticipated a ratio in the upper-60% range as sales grew.
- Management targeted approximately 50% same-store throughput contribution; the nine-month reported figure was 40.0%, or 46.4% adjusted for the legal reserve and other specified items. Same-store throughput adjusted for acquired/opened stores and the reserve was estimated at 41.4% for Q3 and 49.6% year to date.
- Management expected approximately $55 of 2013 capital expenditures; $33.8 had been spent in the first nine months. It anticipated a full-year 2013 tax rate of approximately 37.8%. The filing provides no specific earnings or revenue guidance.
- In June, the company agreed to an estimated $3.8 settlement of Alaska consumer-protection claims, subject to court approval. The estimate depends on eligible class-member participation; higher claims could increase payment.
- After quarter-end, Lithia paid $18.9 for Stockton Nissan Kia and $8.5 for Fresno Lincoln Volvo. It also agreed to sell land for $4.1 to director and Vice Chairman Dick Heimann, a related party; the company estimated a $2.5 gain. The Audit Committee approved the transaction following an independent appraisal.
- The Board approved a $0.13-per-share dividend, approximately $3.4 total, payable November 22, 2013. Seasonality typically makes first- and fourth-quarter results lower than second- and third-quarter results.
- Management cited risks from consumer demand and credit conditions, manufacturer incentives, regulation of vehicle sales and financing, litigation, and environmental and other compliance costs. It said it expected covenant compliance but could not assure continued compliance; a breach could permit acceleration of debt. No material off-balance-sheet arrangements were reported.
Most important facts to verify
- Whether sales-volume growth and the new-vehicle market-share strategy can offset lower new-vehicle gross profit per unit and the decline in overall gross margin.
- Whether operating cash generation, inventory levels and available borrowing capacity remain sufficient to support acquisitions, capital spending, dividends and repurchases.
- The final Alaska settlement amount and court approval, including sensitivity to class-member participation.
- Acquisition accounting and subsequent operating performance for the two post-quarter store purchases.
- Approval, completion, valuation and accounting for the related-party land sale, including the estimated gain.
- Progress toward management’s SG&A and throughput targets, and actual full-year capital spending and tax rate versus stated expectations.