Lithia Motors, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2012, compared with the corresponding 2011 periods. Lithia operated 86 U.S. stores as of October 26, 2012, selling new and used vehicles and providing finance, service, body and parts offerings. Unless otherwise noted, amounts below are in millions.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $888.4 | $715.2 | $2,467.5 | $1,950.2 |
| Gross profit | $144.2 | $120.2 | $405.9 | $335.0 |
| Operating income | $43.5 | $31.7 | $112.7 | $81.2 |
| Continuing-operations net income | $23.3 | $16.3 | $60.4 | $39.3 |
| Continuing-operations diluted EPS | $0.90 | $0.61 | $2.30 | $1.47 |
| Net cash from (used in) operating activities | — | $(176.3) | $3.4 |
- Q3 revenue rose 24.2% year over year; gross profit increased 20.0%, operating income 36.9%, and continuing-operations net income 43.0%. Nine-month revenue increased 26.5%, operating income 38.8%, and continuing-operations net income 53.5%.
- Overall gross margin declined to 16.2% in Q3 from 16.8%, and to 16.4% for nine months from 17.2%. New-vehicle margin fell to 7.2% from 7.8% in Q3; management attributed pressure partly to import-brand mix and pricing to gain market share. Service/body/parts margins also eased as lower-margin wholesale parts and body work grew.
- Q3 same-store new-vehicle unit sales increased 30.8%; same-store used retail units increased 24.9%. Finance and insurance revenue per retail unit increased 6.6% on a same-store basis. Same-store service, body and parts revenue rose 6.1%.
- Nine-month operating cash flow was $(176.3) million, primarily reflecting a $158.2 million inventory increase, a $29.2 million increase in trade receivables and changes in floor-plan balances. Investing cash use was $59.2 million; financing provided $234.5 million. Cash ended at $19.8 million versus $20.9 million at year-end 2011.
- At September 30, total debt was $783.3 million, including floor-plan and inventory financing; long-term debt, including current maturities, was $269.2 million. The balance sheet showed $489.9 million of non-trade floor-plan notes, $77.9 million of used-inventory financing, and $17.9 million drawn on the revolver. Available revolver credit was $29.0 million; reported total available funds were $48.8 million, down from $97.2 million at year-end 2011.
- Total assets were $1,366.5 million, total liabilities $957.1 million, and stockholders’ equity $409.5 million. Inventories increased to $658.7 million from $506.5 million at year-end. New-vehicle supply was 75 days, nine days higher year over year; used-vehicle supply was 50 days, three days lower.
Material changes, outlook and commentary
- Performance gains reflected higher vehicle volumes, market-share growth and improved cost leverage. SG&A rose 14.2% in Q3 and 16.5% for nine months, but SG&A as a share of gross profit improved to 66.8% from 70.2% in Q3 and 69.1% from 71.8% year to date.
- The company entered a five-year, $650 million credit facility in April 2012, with stated capacity to expand to $800 million subject to approval. At quarter-end, covenant ratios were 1.35 current ratio (minimum 1.20), 1.95 fixed-charge coverage (minimum 1.20), and 2.11 leverage (maximum 5.00); funded debt was $173.4 million against a $375 million limit. Management expected continued covenant compliance but gave no assurance.
- Management forecast approximately $67 million in full-year 2012 capital expenditures. It anticipated a full-year tax rate of approximately 38.4%. The filing provides no full-year revenue or earnings guidance. Management stated it believed available resources were sufficient for short- and long-term capital needs.
- Three stores were acquired in the first nine months; those acquisitions contributed $12.5 million of revenue. After quarter-end, Lithia acquired Bitterroot Toyota for $13.3 million cash and disposed of two Renton stores for approximately $3.7 million. Two stores were classified as held for sale at September 30.
- During the nine months, Lithia paid $6.9 million in dividends and repurchased 823,092 shares in 2012 at an average $24.17 per share; no shares were repurchased in Q3. The board approved a further $0.10-per-share dividend after quarter-end, totaling approximately $2.6 million.
- Legal matters include a $2.5 million text-message class settlement approved by the court on October 11, 2012; the vendor is contractually obligated to reimburse Lithia. A separate Alaska consumer-protection class action remains in discovery. Lithia said ordinary-course proceedings were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Lithia sold an 80% interest in three Medford stores to its director and Vice Chairman, retaining 20% accounted for under the equity method. The transaction generated stated gains; review the related-party terms and valuation disclosures.
Important facts for investors to verify
- Whether inventory growth and receivables explain the operating cash outflow and how floor-plan financing affects reported operating cash flow and liquidity.
- Whether revenue and earnings growth can continue without further erosion in vehicle and service margins, and whether used-vehicle sales reach management’s stated 1.0-to-1 retail-used/new target.
- Availability and cost of credit, covenant headroom, and the effect of higher inventory or interest rates on liquidity and debt service.
- Execution and financing of planned capital expenditures, and the financial effects of acquisitions, store disposals and assets held for sale.
- Resolution and potential exposure from the Alaska litigation; confirm the text-message settlement reimbursement and related-party transaction disclosures.