Lithia Motors, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unless otherwise noted, dollar figures below are in millions. Comparisons are with the corresponding 2016 period.
Business context and results
Lithia operated 160 U.S. stores selling new and used vehicles and providing finance, service, body and parts offerings. The company completed the acquisition of Baierl Auto Group, an eight-store Pennsylvania platform, on May 1, 2017; acquired stores contributed to reported growth.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2,467.0 | $2,133.3 | $4,703.1 | $4,116.2 |
| Gross profit | $375.3 | $322.0 | $716.9 | $629.2 |
| Operating income | $104.0 | $90.5 | $190.1 | $163.4 |
| Net income | $53.2 | $51.4 | $103.9 | $91.7 |
| Diluted EPS | $2.12 | $2.01 | $4.13 | $3.56 |
| Gross margin | 15.2% | 15.1% | 15.2% | 15.3% |
| Operating margin | 4.2% | 4.2% | 4.0% | 4.0% |
- Q2 revenue increased 15.6%; six-month revenue increased 14.3%. New-vehicle, used retail, finance and insurance, and service/body/parts revenue all rose, with acquisitions an important growth contributor.
- Same-store new-vehicle units declined 0.4% in Q2 and 0.9% in the first half; same-store used retail revenue rose 4.1% and 5.0%, respectively. Same-store service/body/parts revenue grew 7.1% in Q2 and 7.3% in the first half.
- Q2 gross profit growth was 16.5%, while SG&A increased 19.4%; SG&A rose to 68.6% of gross profit from 66.9%. For the first half, SG&A increased 15.1% and reached 69.8% of gross profit, up from 69.1%.
Cash flow, debt and liquidity
- First-half operating cash flow was $178.6 million, versus $70.8 million in 2016. Management’s adjusted operating cash flow measure, including non-trade floor-plan activity, was $146.4 million versus $122.3 million.
- Investing cash outflow was $125.2 million, including $88.1 million for acquisitions and $32.3 million of capital expenditures. Financing cash outflow was $72.4 million. Cash declined $19.1 million from year-end to $31.2 million.
- At June 30, total debt was $2.433 billion, including $1.535 billion of non-trade floor-plan debt. Long-term debt, including current maturities, was approximately $798.7 million. Debt to total capital excluding floor-plan notes was 44.7%.
- Cash plus available credit was $216.4 million; the company estimated another $192.1 million of potential financing from unencumbered real estate, subject to valuation and availability. Credit-facility covenant tests were satisfied at quarter-end.
- After quarter-end, Lithia issued $300 million of 5.25% senior notes due 2025, with approximately $295 million net proceeds intended for general corporate purposes, potentially including debt reduction. On August 1, it amended its credit facility, increasing commitments to $2.4 billion and extending maturity to August 2022.
Outlook, management commentary and risks
- No formal consolidated earnings guidance is provided in the supplied filing text. Company operating targets include sales 25% above the national OEM average (actual performance was 9% above as of June 30), $1,450 average finance-and-insurance revenue per retail unit, and 85 used retail units per store per month (actual annualized average was 67).
- Management expected 2017 capital expenditures of approximately $113 million. It cited moderating national new-vehicle sales, weaker luxury-brand performance in certain local markets, and rising interest rates. Floor-plan interest expense increased 50.3% in Q2 and 43.5% for the first half, primarily due to higher rates and average balances.
- Approximately 80% of total debt was variable-rate at June 30, largely indexed to one-month LIBOR. Management warned that higher rates could materially raise borrowing costs; debt covenants, collateral pledges, refinancing needs and potential cross-defaults also create financial risk.
- Unusual items included a $9.1 million first-half gain from OEM legal settlements, a $3.9 million hail-storm insurance reserve charge, and $2.1 million of acquisition expense. 2016 included equity-method investment impairments and related items. The company’s adjusted/non-GAAP results exclude specified items and should not be treated as GAAP measures.
- California wage-and-hour claims include a representative settlement awaiting court approval; Lithia stated its exposure was immaterial considering contractual indemnification. The filing says ordinary-course litigation outcomes cannot be predicted with certainty.
- Seasonality typically makes first-quarter results lower than later quarters. The company also identified consumer confidence, consumer debt, manufacturer incentives and general economic conditions as factors affecting results.
Important facts for investors to verify
- How much of reported revenue and earnings growth came from acquisitions versus same-store performance, particularly given soft new-vehicle comps and weaker luxury sales.
- Whether margin pressure from SG&A, inventory levels and rising floor-plan costs persists, and whether management advances toward its stated sales and F&I targets.
- Use of the senior-note proceeds, the effect of the expanded credit facility, and the company’s capacity to meet covenants and refinancing needs if rates rise.
- Final Baierl purchase-price allocations, achievement of expected acquisition returns, and the outcome of the pending California representative-claim settlement.
- Delivery of the approximately $113 million 2017 capital-spending plan and the resulting impact on cash, leverage and liquidity.