Lithia Motors, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless stated otherwise. Lithia operated 130 stores representing 30 brands as of May 1, 2015. Reported growth was substantially influenced by the DCH Auto Group acquisition in October 2014 and other 2014 acquisitions.
Financial highlights
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $1.789 billion | $1.078 billion | Up 66.0%; acquisition-driven growth |
| Gross profit / gross margin | $273.4 million / 15.3% | $172.1 million / 16.0% | Gross profit rose; margin contracted |
| Operating income / operating margin | $67.9 million / 3.8% | $44.7 million / 4.1% | Operating margin declined |
| Income from continuing operations | $40.7 million | $24.7 million | Diluted EPS was $1.53 vs. $0.94 |
| Net cash from operating activities | $38.2 million | $(22.4) million | Improved $60.6 million |
| Capital expenditures | $24.9 million | $12.6 million | More than doubled |
| Cash and cash equivalents | $21.0 million | $29.9 million at Dec. 31, 2014 | Quarter-end cash declined $8.9 million |
New vehicle, used retail, finance and insurance, and service/body/parts revenues all grew year over year. Same-store new-vehicle retail units increased 8.5%, while average gross profit per unit fell 4.0%. Same-store used-vehicle retail units rose 6.4%, with gross profit per unit up 3.9%. Same-store service, body and parts revenue grew 10.9%.
Liquidity, debt and capital
- Total debt was $1.821 billion, including $1.113 billion of non-trade floor-plan debt and $372.1 million of real-estate mortgages. The filing reports debt to total capital, excluding floor-plan notes, of 48.3% at March 31, 2015, versus 33.2% a year earlier.
- Available cash and credit totaled $71.0 million: $21.0 million cash and $50.0 million available credit. Management estimated a further $116.0 million could potentially be raised against unfinanced real estate, subject to valuation and financing availability.
- The current ratio was 1.21, above the 1.10 covenant minimum. The company reported compliance with its debt covenants; its fixed-charge coverage ratio was 3.15 against a 1.20 minimum and leverage ratio was 2.19 against a 5.00 maximum.
- Q1 financing included $50.4 million of mortgage debt proceeds, $22.9 million net repayments on lines of credit, $10.3 million in share repurchases and $4.2 million in dividends. A further $0.20-per-share dividend, approximately $5.3 million, was approved after quarter-end for payment in May 2015.
Material changes, outlook and unusual items
- The acquisition-led expansion lifted reported sales and expenses; same-store growth was materially lower than total reported growth. Management cited DCH integration and its lower operating efficiency as pressure on margins.
- Management expected 2015 SG&A as a percentage of gross profit to remain in the lower 70% range and operating margin to remain below 4.0% throughout 2015, while seeking to improve it. Same-store throughput was 45.1%; the target range was 45%–50%. No specific revenue or EPS guidance was provided.
- Management forecast 2015 capital expenditures of approximately $120 million. It forecast an effective tax rate of approximately 32.7%, or 39.5% excluding NMTC-related tax attributes and other non-core items.
- Q1 included a $4.1 million impairment of an equity-method investment in a New Markets Tax Credit (NMTC) structure. Related tax credits reduced the tax provision by $7.3 million; the investment also generated $1.7 million of operating losses and $0.2 million of non-cash interest expense. Future tax benefits depend on program compliance and sufficient taxable income.
- A store sale generated a $3.3 million gain recorded in SG&A. One Import store remained classified as held for sale at quarter-end. The prior-year quarter included $3.9 million of non-core SG&A charges; comparisons of adjusted results should account for these items and the 2015 impairment and sale gain.
- Management said consumer credit availability expanded. Risks include economic and consumer-credit conditions, seasonality, manufacturer incentives, acquisition integration, covenant compliance and the availability of financing. The filing notes that first and fourth quarters have historically been seasonally weaker.
- The company was party to ordinary-course legal proceedings and did not expect them to have a material adverse effect, while noting outcomes cannot be predicted with certainty. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings and sales growth reflects DCH and other acquisitions versus underlying same-store performance.
- Whether gross-margin and operating-margin pressure persists, and progress on DCH integration, throughput and the stated 2015 cost outlook.
- Liquidity and borrowing capacity after planned capital spending, including the assumptions behind potential real-estate financing and covenant headroom.
- The NMTC investment’s ongoing impairment exposure, future contribution obligations of $49.8 million through October 2016, and ability to realize related tax credits.
- Whether management’s expected $120 million of 2015 capital expenditures and dividend and repurchase activity remain consistent with cash generation and leverage.