Lithia Motors, Inc. — Q1 2012 Form 10-Q
Business context and period: The filing reports unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Lithia operated 83 U.S. stores as of April 27, selling new and used vehicles and providing financing, service, body and parts operations.
Financial performance
- Revenue: $758.9 million, up 30.2% from $582.9 million. New-vehicle revenue rose 34.5%; used retail rose 24.9%; service, body and parts rose 17.2%; finance and insurance (F&I) rose 31.7%.
- Profit: Gross profit was $127.9 million, up 25.9%. Operating income increased to $32.0 million from $20.0 million; operating margin improved to 4.2% from 3.4%. Continuing-operations net income was $16.8 million versus $8.4 million; diluted continuing-operations EPS was $0.63 versus $0.31. Reported net income was $16.8 million versus $8.7 million, which included $0.3 million from discontinued operations in 2011.
- Margins and costs: Overall gross margin declined to 16.8% from 17.4%, principally due to revenue mix. New-vehicle margin was 7.7%, used retail 14.8%, and service/body/parts 48.1%. SG&A was $91.6 million, up 18.7%, but declined to 71.6% of gross profit from 75.9%.
- Cash flow: Operating cash use was $41.0 million versus $11.2 million. Inventory and receivables absorbed cash. Management’s non-GAAP presentation, treating all floor-plan financing as operating, showed operating cash use of $1.6 million versus $28.0 million generated in Q1 2011. Investing cash use was $6.5 million; financing provided $35.6 million.
- Liquidity and debt: Cash was $9.0 million at quarter-end, down from $20.9 million at year-end. Reported available funds were $102.1 million, including $16.9 million available on the revolving line and $76.2 million of unfloored new vehicles. Debt summary, including floor-plan balances, totaled $658.6 million; floor-plan financing was $372.7 million, revolving-line borrowings $80.0 million, and real-estate mortgages $200.6 million. The company reported compliance with its existing debt covenants.
- Balance sheet: Total assets were $1.199 billion and total liabilities $817.0 million at March 31. Inventory rose to $559.2 million from $506.5 million at December 31.
Changes, outlook and notable items
- Same-store new-vehicle sales volume increased 23.9%; same-store used retail volume rose 15.6%. Management cited strong new-vehicle demand and continued improvement in F&I revenue per retail unit. Used retail sales remained below management’s 1.0-to-1 used-to-new sales objective, at 0.9-to-1.
- Same-store customer-pay service sales rose 6.3%, while warranty sales declined 11.8%. Management noted that growth in lower-margin wholesale parts and body-shop business could modestly reduce service-area margins.
- Floor-plan interest expense increased $0.5 million, partly offset by higher manufacturer floor-plan assistance. Other interest expense decreased $0.5 million, mainly due to lower mortgage debt.
- Management anticipated approximately $43 million of 2012 capital expenditures and a full-year 2012 effective tax rate of approximately 38.6%. It targeted SG&A at a low-70% share of gross profit with increased volume and same-store incremental throughput of approximately 50%. No full-year revenue or earnings guidance was provided.
- After quarter-end, Lithia entered into a five-year $650 million credit facility, with new-vehicle floor-plan, used-inventory financing and revolving-credit components; availability may be increased to $800 million. New covenants include minimum current and fixed-charge coverage ratios of 1.20-to-1 and a maximum leverage ratio of 5.00-to-1.
- After quarter-end, the board approved a $0.10-per-share dividend, approximately $2.6 million, payable May 25, 2012. Q1 included $1.8 million of dividends paid and $2.7 million of share repurchases and related transactions.
- A related-party transaction sold an 80% interest in three Medford dealerships to the vice chairman. Lithia received $9.6 million in cash and floor-plan payoff, recognized a $0.7 million gain, and retained a 20% equity-method interest.
- Contingencies: A text-message class-action settlement for $2.5 million was subject to court approval; the company said the vendor would reimburse the full amount under contractual indemnification. An Alaska consumer-protection class action remained unresolved; the filing states an adverse outcome could materially affect results, financial condition or cash flows.
- Other risks and unusual items: Interest-rate swaps had a net fair-value liability of $6.9 million, with $3.9 million expected to be reclassified into earnings within 12 months. Property impairments were $0.1 million. Management warned that future property valuations could lead to further impairments and that covenant breaches, if uncured, could trigger acceleration and cross-default consequences.
Important facts for investors to verify
- Whether improved vehicle volumes and earnings persist, and how inventory growth and lower overall gross margin affect future cash generation.
- Availability, terms and covenant headroom under the new credit facility, including refinancing or acceleration risks associated with existing debt.
- Court approval and vendor reimbursement of the text-message settlement, and developments in the Alaska class action.
- Execution and funding of planned capital expenditures, and progress toward management’s used-vehicle sales and throughput objectives.
- Effects of interest-rate movements and swap accounting on floor-plan interest expense and future earnings.