Lithia Motors, Inc. — 2019 Form 10-K Summary
Period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. All dollar amounts are U.S. dollars.
Business context and reporting period
Lithia operated 188 stores representing 30 brands in 20 states at year-end, selling new and used vehicles and providing finance and insurance (F&I), service, body and parts. Its growth strategy emphasizes acquisitions, used-vehicle sales, operational improvements and digital retailing. During 2019, it acquired nine stores, de-dualed three and divested five; acquired stores were expected to add more than $825 million in annual revenue.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $12.673 billion | $11.821 billion | +7.2% |
| Gross profit | $1.954 billion | $1.777 billion | +9.9% |
| Operating income | $495.0 million | $447.0 million | +10.7% |
| Net income | $271.5 million | $265.7 million | +2.2% |
| Diluted earnings per share | $11.60 | $10.86 | +6.8% |
| Operating cash flow | $499.5 million | $519.7 million | −$20.2 million |
| Capital expenditures | $124.9 million | $158.0 million | −$33.1 million |
Gross margin rose to 15.4% from 15.0%; operating margin was 3.9% versus 3.8%. SG&A was $1.374 billion, or 70.3% of gross profit, compared with 70.5% in 2018. Adjusted same-store SG&A, excluding non-core charges, was 69.8% of gross profit versus 70.5%.
Growth varied by business line: new-vehicle revenue increased 3.0%, used retail 14.6%, F&I 14.0%, and service, body and parts 8.4%. New-vehicle retail units declined 2.2% company-wide; used-vehicle retail units rose 12.7%. New vehicles generated about 54% of revenue but 20% of gross profit, while service/parts and F&I together generated about 61% of gross profit.
In the fourth quarter, revenue was $3.269 billion versus $2.973 billion a year earlier; gross profit was $498.6 million versus $441.9 million; operating income was $122.8 million versus $107.1 million; net income was $68.0 million versus $59.9 million; and diluted EPS was $2.89 versus $2.54.
Cash and cash equivalents were $84.0 million at year-end, and available credit was $574.5 million, for total available funds of $658.5 million. Working capital was $501.4 million; the current ratio was 1.31. Total debt was $3.538 billion, including $2.068 billion of floor-plan debt and $1.470 billion of long-term debt including current maturities. Debt to total capital excluding floor-plan debt was 50.0%, down from 53.6%. Management reported that 67% of total debt was variable-rate. The company was in compliance with its debt covenants at year-end.
Investing cash outflow was $438.0 million, including $366.6 million of acquisition payments net of cash acquired and $124.9 million of capital expenditures; store-sale proceeds were $46.7 million. Dividends paid were $27.6 million. The company issued $400 million of 4.625% senior notes due 2027 in December.
Material changes versus the prior comparable period
- Revenue and gross profit increased, with acquisitions contributing to growth and same-store strength in used vehicles, F&I and service/parts.
- Same-store new-vehicle units fell 3.3%; new-vehicle gross profit declined 1.3%, despite higher average selling prices. Management cited plateauing national sales and declining manufacturer incentives as headwinds.
- Same-store gross profit increased 8.7%, supported by used retail, F&I and service/parts. Total gross margin improved 40 basis points.
- Interest costs rose: floor-plan interest expense increased to $72.8 million from $62.3 million, and other interest expense rose to $60.6 million from $56.0 million.
- Cash from operations declined modestly, while cash and available credit increased. The amended syndicated credit facility increased total commitment to $2.8 billion and extended its term to January 2025.
- Adoption of lease accounting (ASC 842) added $263.7 million of operating lease liabilities at year-end; prior-year amounts were not recast.
Outlook, management commentary, risks and unusual items
The filing does not provide specific company revenue, earnings or EPS guidance for 2020. It cites industry analysts’ expectation of approximately 17 million U.S. new-vehicle sales in 2020, not a company forecast. Management described acquisition opportunities, continued used-vehicle and digital initiatives, and store-level operational improvement as strategic priorities. Its stated targets include 100 used retail units per store per month (77 achieved in 2019) and average F&I revenue of $1,500 per retail unit.
- Key risks include economic and consumer-demand cyclicality, local-market concentration, intense online and dealership competition, manufacturer supply and incentive changes, and the availability and cost of consumer credit.
- Acquisition execution, manufacturer approvals, integration costs and access to capital affect the company’s growth strategy. A significant portion of debt is variable-rate and secured by assets; a 10% increase in rates was estimated to increase annual interest expense by approximately $5.3 million, net of tax.
- Other risks include cybersecurity and privacy incidents, extensive consumer and environmental regulation, weather-related disruption and self-insurance exposure. Self-insurance reserves were $34.4 million; storm-related insurance charges included in 2019 SG&A were $9.5 million.
- The company held $66.1 million of investments, predominantly in digital retailer Shift Technologies; the filing cautions that the investment and partnership may not succeed. Goodwill and franchise value totaled $761.3 million, with 2019 non-cash impairment charges of $2.1 million; additional impairment could arise if performance or assumptions weaken.
- Other notable items: a $400 million senior-note issuance; $9.7 million of gains on store and asset disposals; and a $27.7 million tax provision increase year over year, with the effective tax rate rising to 27.7% from 21.3%. The filing reports no expectation that ordinary-course litigation will have a material adverse effect, but notes outcomes cannot be predicted with certainty.
Important facts for investors to verify
- How much of 2019’s growth came from acquisitions versus sustainable same-store performance, particularly in used vehicles, F&I and service/parts.
- Whether new-vehicle unit and gross-profit pressure continues, and whether manufacturer incentives and floor-plan costs change.
- Debt, variable-rate exposure, covenant headroom and available credit after acquisition, capital-spending and refinancing needs.
- Whether the 2020 expected credit-loss accounting adoption produces the estimated $5–$8 million increase in loan-loss allowance.
- Shift investment valuation and performance, acquisition integration and final purchase-price allocations, and any further goodwill or franchise-value impairment.
- Quarterly results and store-level trends; the filing notes normal seasonality and that acquired stores were excluded from the 2019 internal-control assessment while being integrated.