Lithia Motors, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are against December 31, 2018. Lithia operated 182 stores representing 28 brands in 18 states. Results reflect dealership sales and service, finance and insurance, and prior-period acquisitions.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Revenue | $2,849.7 million | $2,659.7 million; up 7.1% |
| Gross profit / margin | $450.7 million / 15.8% | $408.1 million / 15.3% |
| Operating income / margin | $108.6 million / 3.8% | $93.8 million / 3.5% |
| Net income | $56.4 million | $52.1 million |
| Diluted EPS | $2.42 | $2.07 |
| Operating cash flow | $77.2 million | $48.9 million |
| Capital expenditures | $29.1 million | $42.0 million |
- Revenue growth was led by used retail vehicles (+15.7%), service/body/parts (+11.1%) and finance and insurance (+10.3%). New vehicle revenue was nearly flat (+0.4%).
- Retail new-vehicle units fell 4.3%, while used-vehicle units rose 12.6%. Same-store revenue increased 3.2%; same-store new-vehicle revenue fell 3.3%, while used retail revenue increased 11.3%.
- SG&A rose 8.2% to $321.8 million, but declined to 71.4% of gross profit from 72.9%. Floor-plan interest expense increased 34.1% to $18.1 million; other interest expense increased 29.7% to $15.3 million.
- Cash and equivalents were $45.0 million, up from $31.6 million at year-end. Inventory was $2,441.0 million. Total liabilities were $4,441.5 million and stockholders’ equity was $1,250.5 million.
- Reported total debt, net of unamortized issuance costs, was $3,446.5 million. The company reported $234.5 million of available credit and estimated another $247.5 million could be raised against unfinanced real estate; total estimated available funds were $527.0 million.
- Q1 investing cash use was $35.3 million; financing cash use was $28.5 million. No acquisition cash payments were made in the quarter, versus $324.4 million in Q1 2018.
Material changes and unusual items
- Growth benefited from stores acquired in 2018, particularly in Luxury, where revenue rose 26.8%. Domestic segment income declined 22.7%; Import segment income rose 30.4% and Luxury segment income rose 15.9%.
- Management attributed stronger gross profit to used-vehicle, finance-and-insurance, and service performance. New-vehicle same-store unit volume remained weaker, and higher interest rates and inventory levels increased floor-plan carrying costs.
- Lithia adopted lease accounting Topic 842 on January 1, 2019 without restating prior periods. At March 31, operating lease right-of-use assets were $250.0 million and operating lease liabilities were $260.7 million. Q1 operating lease cost was $12.0 million.
- The company recorded a $0.5 million property impairment. It reported a 27.5% effective tax rate, compared with 25.4% a year earlier, citing stock-award tax deficiencies and state tax changes.
Outlook, risks and contingencies
- No specific revenue, earnings or unit-sales guidance was provided. Management described first-quarter results as seasonally lower than later quarters and cited economic conditions, consumer confidence and debt, interest rates, weather, and manufacturer incentives as factors affecting results.
- Management set a company-wide used-vehicle sales target of 85 units per store per month; the Q1 average was 70, compared with 67 in Q1 2018. It expects acquired-store integration and a larger late-model vehicle base to support operations and service revenues.
- Management expected continued compliance with debt covenants. At quarter-end, the current ratio was 1.26 versus a 1.10 minimum, fixed-charge coverage was 1.96 versus a 1.20 minimum, and leverage was 2.66 versus a 5.00 maximum. The filing cautions that future compliance and access to additional financing are not assured.
- The syndicated credit facility matures in July 2023 and is secured by substantial assets. Variable-rate debt exposes the company to rising rates. Routine-course legal proceedings were disclosed; management did not expect them to materially affect the company, but said outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of reported growth and earnings improvement reflects acquired stores versus same-store performance, particularly amid declining new-vehicle units.
- Whether used-vehicle growth, service margins and lower same-store SG&A as a share of gross profit can continue.
- The sensitivity of interest costs and covenant headroom to rates, inventory financing needs and operating performance.
- The assumptions behind the estimated $247.5 million of potential real-estate financing, which is not committed liquidity.
- The effect of Topic 842 and acquisition-related purchase-price adjustments on comparisons; prior-year lease balances were not restated.
- Whether management’s 85-used-units-per-store monthly target is achievable; Q1 performance was 70.