Lithia Motors, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Dollar amounts are in millions unless stated otherwise. Lithia operated 184 stores across 19 states, representing 30 brands.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $3,332.4 | $3,092.0 | $9,403.8 | $8,848.2 |
| Gross profit | $510.9 | $466.2 | $1,455.2 | $1,335.1 |
| Operating income | $146.8 | $137.6 | $372.3 | $339.9 |
| Net income | $85.2 | $93.1 | $203.5 | $205.8 |
| Diluted EPS | $3.64 | $3.84 | $8.72 | $8.31 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $453.5 | $379.2 |
- Q3 revenue rose 7.8%; gross profit increased 9.6%. Gross margin was 15.3%, up 20 basis points; operating margin was 4.4%, unchanged.
- Q3 net income fell 8.5% despite higher revenue and operating income. The effective tax rate rose to 27.4% from 14.6%, while floor-plan interest expense increased 11.9% to $17.9.
- For the first nine months, revenue increased 6.3% and gross profit increased 9.0%; net income declined slightly. Diluted EPS increased as weighted-average diluted shares fell to 23.3 million from 24.8 million.
- Growth was led by used-vehicle retail, finance and insurance, and service, body and parts. Q3 same-store revenue rose 7.6%; same-store new-vehicle units declined 0.9%, while used-vehicle units rose 11.9%.
- Q3 segment income increased in Domestic ($37.9, up 49.8%), Import ($48.3, up 29.1%) and Luxury ($13.0, up 11.1%). Corporate and other segment income declined $16.2, primarily due to storm insurance reserve charges and higher personnel costs.
Cash, debt and liquidity
- Cash was $27.1 at September 30, 2019, versus $31.6 at year-end 2018. Nine-month operating cash flow was $453.5; investing cash outflow was $199.7 and financing cash outflow was $258.3.
- Management’s adjusted operating cash flow measure, which adjusts for certain floor-plan financing activity and acquired inventory, was $293.5, down from $320.0. The filing attributes the increase in reported operating cash flow mainly to floor-plan payables, partly offset by accrued-liability payments.
- Total debt was $3,316.1, including floor-plan financing; long-term debt, net of current maturities, was $1,287.8. Revolving credit availability was $249.5. Cash and revolver availability totaled $276.6; management cited potential total liquidity above $500, including possible financing of unfinanced real estate, subject to availability and acceptable terms.
- Credit-facility covenant ratios were compliant: current ratio 1.28 versus a 1.10 minimum, fixed-charge coverage 2.36 versus a 1.20 minimum, and covenant leverage ratio 2.51 versus a 5.00 maximum. Management reported adjusted leverage, excluding floor-plan financing, below 2.0.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities. At September 30, operating lease liabilities were $261.0; finance lease liabilities were $30.3. Prior-year balance-sheet comparisons were not restated.
Changes, outlook and notable items
- Four stores were acquired in the first nine months for $169.2 total consideration, including $142.8 cash paid net of acquired cash and $26.4 debt issued. They contributed $100.7 revenue and $1.9 operating income after acquisition. Purchase-price allocations remained preliminary.
- New-vehicle units declined 3.7% for the nine months, while used-vehicle retail units increased 11.1%. Management cited growth in luxury, stronger used-vehicle sales, expanded finance-and-insurance offerings, and higher service revenue. It set a company-wide target of 85 used retail units per store monthly; the period average was 74.
- Management described continued acquisition, modernization and digital initiatives, and a capital allocation target of 65% for acquisitions, 25% for capital expenditures and modernization, and 10% for shareholder returns. The filing provides no specific near-term earnings or revenue guidance.
- Interest-rate exposure remains relevant: floor-plan expense rose with higher rates and inventory financing. Lithia entered a five-year, $300 million zero-cost interest-rate collar to hedge part of its variable-rate debt exposure.
- Unusual or non-core items included $9.4 net gains on store disposals in Q3, $1.1 of Q3 storm insurance reserve charges, and a $0.5 property impairment in the first quarter. A $36.5 net premium for a structured stock repurchase agreement was recorded in equity, not as operating expense.
- Management warned that results depend on market conditions, new-car sales, interest rates, consumer confidence and debt levels, manufacturer incentives, acquisitions and integration. It reported no material change in previously disclosed risk factors; 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
- Whether growth in used vehicles, finance and insurance, and service revenue can continue to offset weaker new-vehicle unit volumes and lower new-vehicle gross margins.
- How higher financing costs, inventory levels and interest rates affect floor-plan expense, cash generation and the interest-rate hedge.
- Whether acquisitions deliver expected returns after integration costs and additional facility investment, particularly while 2019 purchase accounting remains preliminary.
- How the higher 2019 tax rate and storm-related reserve charges affect comparable earnings, and whether covenant compliance and stated liquidity remain intact.