Lithia Motors, Inc. (LAD) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; dollar amounts are in millions unless stated otherwise. Lithia operated 259 locations representing 38 brands in 26 states at quarter-end.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $6,009.4 | $2,758.6 | $10,352.4 | $5,562.3 |
| Gross profit | $1,110.6 | $464.4 | $1,826.1 | $925.3 |
| Operating income | $446.3 | $129.7 | $684.7 | $222.6 |
| Net income | $304.9 | $77.7 | $461.1 | $123.9 |
| Diluted EPS | $10.75 | $3.38 | $16.69 | $5.32 |
| Gross margin | 18.5% | 16.8% | 17.6% | 16.6% |
| Operating margin | 7.4% | 4.7% | 6.6% | 4.0% |
- Q2 revenue increased 117.8% year over year; gross profit increased 139.1%. First-half revenue rose 86.1% and gross profit 97.4%.
- Reported SG&A was $634.0 million in Q2 and $1,084.2 million for the first half, but fell as a share of gross profit to 57.1% and 59.4%, respectively, from 65.6% and 70.3%.
- New-vehicle and used-vehicle retail gross margins were 10.0% and 12.9% in Q2, versus 6.7% and 10.7% a year earlier. Management cited strong demand and lower inventory levels.
- Q2 adjusted diluted EPS, a non-GAAP measure, was $11.12 versus $3.72; first-half adjusted diluted EPS was $17.15 versus $5.70. Adjustments include acquisition expenses, insurance reserves and store disposal losses, among other specified items.
Cash flow, liquidity and debt
- First-half operating cash flow was $1,263.5 million, compared with $790.0 million in 2020. Management’s adjusted operating cash flow measure, which includes specified floor-plan adjustments, was $420.4 million versus $310.9 million.
- Investing cash outflow was $1,821.1 million, including $1,741.9 million of net cash paid for acquisitions and $113.0 million of capital expenditures. Financing provided $1,178.3 million. Cash rose to $780.9 million from $160.2 million at year-end.
- Cash plus available credit facilities totaled $2,633.9 million at June 30, including $1,853.0 million of available credit. The company reported total debt of $4,260.0 million in its debt summary, including floor-plan financing and before considering the separate cash balance.
- The April amendment extended the syndicated credit facility to April 2026. Lithia reported compliance with its covenants at quarter-end: current ratio 1.68 (minimum 1.10), fixed-charge coverage 6.82 (minimum 1.20), and leverage 1.95 (maximum 5.75).
- In May, Lithia issued $800 million of 3.875% senior notes due 2029. It also completed a public offering of 3,571,428 shares, receiving $1.11 billion net of underwriting discount and before offering expenses. The 2025 senior notes had $300 million principal outstanding; Lithia subsequently elected to redeem them in full on August 1, 2021, at 102.625% of principal plus accrued interest.
Material developments, outlook and risks
- Lithia completed 55 location acquisitions in the first half, versus four in the comparable period. Acquired stores contributed $976.3 million of revenue and $45.9 million of operating income after acquisition dates. Purchase-price allocations remained preliminary; acquisition-related costs were $10.4 million in Q2 and $11.6 million for the first half.
- Growth reflects acquisitions as well as higher same-store volumes, selling prices and margins. Comparisons with Q2 2020 are affected by pandemic-related shelter-in-place restrictions and significantly depressed vehicle sales in that period; management also reported inventory availability and selection as operating considerations.
- The company’s five-year strategic plan targets $50 billion in revenue. Management said it had reached approximately 40% of its network-development goal during the plan’s first full year. Its stated free-cash-flow allocation targets are 65% acquisitions, 25% capital expenditures and 10% shareholder returns; these are strategic targets, not quarterly earnings guidance.
- No specific near-term earnings or revenue guidance is provided in the filing. Management expects a 27.5% annual effective tax rate excluding non-core charges and expects to remain within debt covenants, while cautioning that future compliance and financing availability are not assured.
- Key exposures include vehicle demand and inventory conditions, consumer and economic trends, manufacturer incentives, acquisition integration and returns, interest costs, and access to financing. Management reported no material change in risk factors from its 2020 Form 10-K. Ordinary-course legal proceedings were not expected to have a material adverse effect, though outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of the exceptional year-over-year earnings and margin improvement is sustainable as vehicle supply, prices and demand change, and how much reflects an unusually weak Q2 2020 comparison?
- Whether the acquired locations meet management’s return expectations, and how preliminary purchase-price allocations and integration expenses develop.
- How acquisition spending, share issuance and new debt affect leverage, interest expense, dilution and future cash available for shareholder returns.
- The cost and completion of the planned 2025-note redemption, and the impact of near-term debt maturities and facility borrowing-base availability on liquidity.
- Whether covenant compliance and management’s stated strategic and tax-rate expectations remain valid as operating conditions evolve.