Lithia Motors, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. The company operated 291 locations across 26 U.S. states and three Canadian provinces. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $7,295.7 | $6,169.8 | $21,241.3 | $16,522.2 |
| Gross profit | $1,314.2 | $1,189.1 | $3,943.3 | $3,015.2 |
| Operating income | $523.1 | $479.5 | $1,564.4 | $1,164.2 |
| Net income attributable to Lithia | $329.6 | $307.9 | $1,003.4 | $769.0 |
| Diluted EPS | $11.92 | $10.11 | $35.10 | $26.91 |
- Q3 revenue rose 18.2% and nine-month revenue rose 28.6%. Growth reflected acquisitions, higher vehicle selling prices, and expansion in service and parts.
- Gross margin was 18.0% in Q3 (down 130 basis points) and 18.6% for nine months (up 40 basis points). Q3 used-retail gross margin fell to 8.2% from 11.2%; service, body and parts margin improved to 54.0% from 52.3%.
- Operating margin was 7.2% in Q3 versus 7.8%; nine-month margin was 7.4% versus 7.0%. SG&A was 57.0% of gross profit in Q3 and 57.2% for nine months.
- Cash from operating activities was negative $517.5 for nine months, compared with positive $2,001.9 in 2021. Management attributed the decline chiefly to increased inventory and other assets as Driveway Finance Corporation expanded its auto-loan portfolio. The company’s non-GAAP adjusted operating cash flow was $259.1, versus $1,125.5.
- Cash and cash equivalents were $172.7 at September 30; total current available funds, including available credit, were $1,572.9. Total debt was $6,998.6, with $1,369.4 of reported remaining credit availability. Credit facility covenants were met: fixed-charge coverage ratio 2.24 against a 1.20 minimum; leverage ratio 1.50 against a 5.75 maximum.
- Cash used in investing was $1,017.3, including $962.6 for acquisitions and $209.8 in capital expenditures. Financing activities provided $1,600.0; the company repurchased $644.4 of stock and paid $33.8 in dividends during the nine months.
Material changes versus the prior period
- Revenue and reported earnings increased, but same-store Q3 revenue grew only 3.7% and same-store gross profit declined 3.8%. Same-store new-vehicle unit sales fell 10.5%; higher prices partly offset lower volume. Same-store used-vehicle gross profit declined 23.5%.
- Acquisitions contributed $812.6 of revenue and $43.2 of operating income after acquisition dates in the first nine months. The company acquired 34 locations, versus 73 in the comparable 2021 period.
- Interest costs increased: Q3 other interest expense rose 77.1% to $49.6, and nine-month other interest expense rose 43.3% to $114.1, reflecting higher borrowings and rates. New-vehicle floor-plan interest also increased.
- Other expense included a $32.6 unrealized loss on the Shift Technologies investment for the nine months and foreign-exchange losses of $18.6. A $49.6 net gain on store disposals benefited reported nine-month results and SG&A.
- The company’s auto loan and lease receivables grew to $1,821.5 from $829.2 at year-end. The related allowance for loan and lease losses was $52.4, compared with $25.0.
Outlook, commentary and risks
- Management said consumer demand continued to exceed new-vehicle supply and expected reduced new-vehicle availability through the remainder of 2022. Short supply had supported higher selling prices and gross profit per unit.
- No specific consolidated earnings or revenue guidance for future periods is provided in the filing. The company describes its capital-allocation target as 65% of free cash flow for acquisitions, 25% for internal investment and 10% for shareholder returns.
- Management cited rising interest rates, inventory availability, consumer demand and confidence, acquisition execution, and compliance with debt covenants among matters that could affect results. The credit facilities are secured by substantial assets; covenant breaches could lead to acceleration of debt and enforcement against collateral.
- The company reported compliance with debt covenants at quarter-end, but cautioned that future compliance and availability of financing cannot be assured. It also reported ordinary-course legal proceedings and said outcomes cannot be predicted with certainty.
- Reported results included unusual or non-core items, including disposal gains, investment valuation changes, foreign-exchange losses, and acquisition costs; the company also presents non-GAAP adjusted measures that should be considered alongside GAAP results.
Key facts for investors to verify
- Whether new-vehicle supply, selling prices and unit volumes evolve as management anticipated, and whether same-store profitability stabilizes.
- Whether used-vehicle gross profit and margins recover from the Q3 decline.
- How Driveway Finance growth affects operating cash flow, receivable quality, credit-loss provisions and funding needs.
- Debt levels, interest expense, available borrowing capacity and covenant headroom as rates and inventory needs change.
- Acquisition returns and integration performance, including final purchase-price allocations, and the effect of store disposals and other non-core items on reported earnings.
- Reconciliation of cash figures: the balance sheet reports $233.0 of cash, restricted cash and equivalents, while the liquidity table reports $172.7 of cash and equivalents; restricted cash accounts for the difference.