Lithia Motors, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited results compared with Q1 2022. Lithia operated 332 locations across 50 brands in the U.S., Canada and, following its March acquisition of Jardine Motors Group, the U.K.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $6,973.8 million | $6,705.3 million | +4.0% |
| Gross profit | $1,211.5 million | $1,278.1 million | −5.2% |
| Operating income | $379.0 million | $506.7 million | −25.2% |
| Net income attributable to Lithia | $228.7 million | $342.2 million | −33.2% |
| Diluted EPS | $8.30 | $11.55 | −28.1% |
| Operating margin | 5.4% | 7.6% | −220 bps |
Revenue growth reflected acquisitions and higher service, body and parts sales. Service, body and parts revenue rose 17.3%; new vehicle retail revenue rose 7.1%. Used vehicle retail revenue was approximately flat. Total gross profit declined as new and used vehicle retail gross profit per unit and margins fell. New vehicle retail margin decreased 290 bps to 10.2%, and used vehicle retail margin decreased 260 bps to 7.4%. Same-store revenue fell 5.1% and same-store gross profit fell 13.3%.
SG&A increased 3.3% to $764.4 million, reaching 63.1% of gross profit versus 57.9%. Floor plan interest expense rose to $27.7 million from $4.9 million, driven by higher rates and inventory. Other interest expense increased 48.9% to $39.0 million, reflecting higher borrowing and rates. The effective tax rate was 26.9%.
Cash flow, debt and liquidity
- Operating cash flow was an outflow of $49.0 million, versus $26.3 million provided in Q1 2022. Management cited growth in finance receivables and lower net income. The company’s adjusted operating cash flow measure was $531.9 million; this non-GAAP measure adjusts for financing-receivable activity and specified floor-plan items.
- Investing cash outflow was $413.9 million, including $387.4 million net cash paid for acquisitions and $38.9 million of capital expenditures. Financing cash inflow was $509.9 million. Cash and restricted cash at quarter-end was $324.7 million in the cash flow statement; the company reported $184.9 million of cash for liquidity purposes.
- Total debt, net, as presented in the MD&A, was $8.59 billion. This includes floor-plan financing and non-recourse notes; the balance sheet separately reported $5.10 billion of long-term debt including current maturities, and $825.4 million of non-recourse notes payable.
- Immediately available funds were $1.354 billion: $184.9 million cash and $1.169 billion of available credit. Lithia also estimated approximately $0.5 billion of potential liquidity from unfinanced real estate. The company said it expected sufficient funding for the next 12 months and longer term; all financial covenants were met at quarter-end.
- Floor-plan notes payable totaled $2.664 billion, up from $2.117 billion at December 31, 2022. In February, Lithia issued approximately $480 million of non-recourse notes in an asset-backed funding transaction.
Material changes, outlook and risks
- Q1 acquisitions included Thornhill Acura in Canada and Jardine Motors Group in the U.K.; Lithia reported acquiring 37 locations during the quarter. Acquired operations contributed $127.7 million of revenue and $10.5 million of operating income after acquisition. Purchase price allocations remain preliminary.
- Financing Operations recorded a $20.8 million loss, compared with $5.0 million of income a year earlier. The provision for finance-receivable losses rose to $26.3 million from $3.7 million. Managed finance receivables expanded substantially; the filing reported more than 99% of the portfolio less than 60 days past due and less than 1% on non-accrual status.
- Management targets average used-vehicle sales of 100 units per store per month; the trailing-twelve-month average was 90. It also targets 15% financing penetration by 2025; Q1 DFC penetration was 14.3%. The filing provides no specific near-term earnings or revenue guidance.
- Management described Q1 as seasonally weaker than later quarters. It identified interest rates, consumer debt and confidence, manufacturer incentives, inventory availability and economic conditions as factors affecting results.
- The U.K. expansion adds exposure to different regulatory and operating environments, including potential changes to vehicle-emissions rules, dealership protections and manufacturer distribution models such as agency sales. The filing also describes customary-course litigation; management does not expect it to have a material adverse effect but cannot assure the outcome.
- Reported results included a $7.2 million net gain on store disposals, $10.1 million in one-time vendor contract buyouts, $1.3 million of acquisition expenses and a $0.5 million unrealized investment loss. Adjusted results excluding specified items are non-GAAP and should be considered alongside GAAP results.
Investor verification priorities
- Track vehicle retail gross profit per unit and same-store trends as acquisition-driven revenue growth contrasts with weaker same-store sales and margins.
- Monitor finance-receivable growth, loss provisions, charge-offs, delinquency and recovery rates as the captive portfolio expands.
- Reconcile cash flow and liquidity disclosures, including restricted cash, financing-receivable investment, floor-plan balances and credit availability.
- Assess acquisition performance and integration, particularly Jardine’s U.K. operations, preliminary purchase accounting and the evolving U.K. regulatory and agency-model risks.
- Compare GAAP performance with management’s adjusted measures, including the nature and recurrence of excluded items; review the filing’s seasonality and interest-rate sensitivities.