Lithia Motors, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless noted. Lithia operated 88 U.S. stores offering 27 new-vehicle brands as of April 26, 2013.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $903.1 million | $738.2 million | +22.3% |
| Gross profit | $146.4 million | $124.3 million | +17.8% |
| Operating income | $40.6 million | $31.6 million | +28.3% |
| Income from continuing operations, net | $21.9 million | $16.6 million | +31.6% |
| Net income | $22.1 million | $16.8 million | +31.3% |
| Diluted EPS from continuing operations | $0.84 | $0.63 | +$0.21 |
| Net cash from operating activities | $49.8 million | $(41.0) million | Improved |
- Revenue growth reflected higher vehicle volumes and gains across major business lines. New-vehicle revenue rose 25.6%; used retail rose 25.5%; finance and insurance rose 27.3%; and service, body and parts rose 8.3%.
- Gross margin declined to 16.2% from 16.8%. New-vehicle margin fell to 7.0% from 7.7%; used retail was 14.6% versus 14.8%. Management attributed the new-vehicle decline partly to unusually constrained supply in Q1 2012 and higher selling prices outpacing gross profit per vehicle.
- Operating margin improved to 4.5% from 4.3%. SG&A increased 14.4% to $101.1 million, but declined to 69.1% of gross profit from 71.1%, reflecting operating leverage. Personnel and advertising were the main drivers of higher SG&A.
- Cash from operations improved substantially year over year. Inventory changes provided $7.9 million in Q1 2013 versus a $62.1 million use of cash in Q1 2012, an important factor in the comparison. Investing activities used $8.5 million; financing activities used $69.1 million, including $25.8 million of additional long-term debt and capital-lease principal payments and $7.9 million of common-stock repurchases.
Balance sheet, debt and liquidity
- At March 31, cash was $15.0 million, down from $42.8 million at year-end 2012. Total assets were $1.460 billion and stockholders’ equity was $447.8 million.
- Reported total debt was $821.9 million, primarily vehicle inventory financing: $568.0 million of non-trade floor-plan notes, $15.5 million of other floor-plan notes, $61.1 million of used-vehicle inventory financing, $165.2 million of real-estate mortgages, $3.5 million of other debt, and $8.7 million associated with assets held for sale. The company separately reported covenant-defined funded debt of $168.7 million.
- Available credit was $151.3 million; cash plus available credit totaled $166.3 million. The $800 million credit facility includes $575 million for new-vehicle inventory, $80 million for used-vehicle inventory and a $145 million revolving line, subject to borrowing-base limits.
- Credit-facility covenant measures were within stated limits: current ratio 1.42x versus minimum 1.20x; fixed-charge coverage 2.57x versus minimum 1.20x; leverage 1.70x versus maximum 5.00x; and funded debt $168.7 million versus a $375 million limit. Management expected continued compliance but gave no assurance.
- The company paid down $25.8 million of mortgage debt during the quarter. It reported $148.8 million in unfinanced owned real estate and estimated potential additional borrowing capacity of about $111.6 million, subject to availability and acceptable terms.
Material changes and management outlook
- Same-store new-vehicle units rose 17.9%, compared with management’s estimate of 6.4% growth in U.S. new-vehicle sales. Same-store used retail units increased 18.5%. Finance-and-insurance revenue per retail unit rose 5.9% on a same-store basis.
- Same-store service, body and parts revenue increased 6.5%. Management noted that a larger wholesale-parts and body-shop mix could modestly reduce margins because those activities carry lower margins than service work.
- Management anticipated approximately $55 million of 2013 capital expenditures; Q1 spending was $6.6 million. It also expected a full-year effective tax rate of approximately 39.1%, and anticipated maintaining SG&A at a high-60% range of gross profit. These are expectations, not earnings guidance.
- Management cited seasonal patterns that typically make Q1 and Q4 weaker than Q2 and Q3. New-vehicle inventory supply was 71 days, 10 days above the prior-year level, partly due to stocking certain truck models ahead of planned platform changes; used-vehicle supply was 46 days, 2 days lower year over year.
- The board approved a $0.13-per-share dividend after quarter-end, approximately $3.3 million in total, payable May 24, 2013. During Q1, the company repurchased 127,900 Class A shares under its authorization for $5.2 million and repurchased another 59,721 shares for tax withholding.
- One store remained classified as held for sale and its results were reported as discontinued operations. Discontinued-operations income was $173,000, versus $162,000; associated revenue was $8.8 million, versus $20.6 million.
Risks, contingencies and unusual items
- In a consolidated Alaska consumer-protection lawsuit, a class was certified in 2011; discovery was ongoing and Lithia said it intended to defend the claims. The claims concern advertised pricing, used-vehicle disclosures and dealer compensation for arranging financing. Management did not expect normal-course litigation or the described proceedings to have a material adverse effect, but said outcomes cannot be predicted with certainty.
- The company highlighted regulatory exposure in dealership sales, finance and insurance practices. A March 2013 CFPB bulletin concerning dealer-arranged credit and potential discriminatory pricing may affect lender practices and relationships, according to the filing.
- Interest-rate swaps had a net fair-value liability of $3.9 million, down from $4.7 million at year-end. The company expected $1.3 million to be reclassified into earnings within 12 months. Swaps are used to manage interest-rate exposure, not for speculation.
- Other key risks include covenant compliance and potential acceleration or cross-defaults if a breach is not cured or waived; consumer demand and credit availability; vehicle supply, interest rates and seasonality; and legal, regulatory and environmental compliance costs.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether strong same-store unit growth persists and whether lower vehicle margins offset continued revenue growth.
- Whether operating cash flow remains positive as inventory and floor-plan balances fluctuate, and how planned capital spending and debt repayments affect cash.
- Current borrowing-base availability, covenant headroom and the distinction between total debt and covenant-defined funded debt.
- Developments in the Alaska litigation and CFPB-related regulation of dealer-arranged financing.
- Execution and funding of the $55 million capital-expenditure plan, as well as the held-for-sale store disposition and approved dividend.