Lithia Motors, Inc. — Q1 2018 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Lithia operates automotive dealerships across domestic, import and luxury brands. It reported 186 stores representing 28 brands in 18 states as of April 27, 2018. The quarter’s growth was driven substantially by acquisitions.
Key financial results
- Revenue: $2.660 billion, up 18.9% year over year. New-vehicle revenue rose 20.2%, used retail 18.8%, finance and insurance 22.7%, and service, body and parts 22.8%.
- Profit and margins: Gross profit was $408.1 million, up 19.5%; gross margin was 15.3%, unchanged. Operating income was $93.8 million, up 8.8%, while operating margin fell to 3.5% from 3.9%. Net income increased 2.6% to $52.1 million; diluted EPS was $2.07 versus $2.01. Pretax income declined 14.1% to $69.8 million.
- Costs and interest: SG&A increased 22.5% to $297.5 million, or 72.9% of gross profit versus 71.1%. Floor-plan interest expense rose 68.1% to $13.5 million; other interest expense rose 77.0% to $11.8 million. Other income was $1.4 million, compared with $9.8 million in Q1 2017, primarily reflecting a prior-year OEM diesel-emissions legal settlement.
- Cash flow: Operating cash flow was $48.9 million, down from $126.7 million. Management’s adjusted operating cash flow measure, including specified floor-plan financing adjustments, was $129.6 million versus $124.6 million. Investing cash outflow was $373.5 million, including $324.4 million for acquisitions and $42.0 million of capital expenditures. Financing provided $336.4 million; cash increased $11.7 million to $69.0 million.
- Debt and liquidity: Total debt, net of issuance costs, was $3.328 billion. Credit-facility availability was $64.8 million; management reported total estimated available funds of $394.0 million including estimated capacity from unfinanced real estate. The current ratio was 1.21, against a 1.10 minimum covenant; the company reported compliance with all covenants. Debt to total capital, excluding floor-plan notes, was 54.5% at quarter-end versus 41.9% a year earlier.
- Balance sheet: Total assets were $5.087 billion and stockholders’ equity was $1.127 billion at March 31, 2018. Inventories were $2.366 billion, up from $2.133 billion at year-end 2017.
Changes versus the prior comparable period
- Revenue growth reflected acquisitions, including 15 stores acquired during Q1; acquired stores contributed $84.6 million of revenue and a $0.1 million net loss after acquisition.
- Same-store new-vehicle revenue fell 1.6% and units fell 4.3%, despite national market growth of 2.1%. Same-store used retail revenue rose 4.6%, but gross profit fell 3.5% as gross profit per unit declined. Same-store service, body and parts revenue rose 2.8% and gross profit rose 3.9%.
- Domestic, Import and Luxury segment revenue increased 7.9%, 20.5% and 42.0%, respectively; segment income rose 0.7%, 3.8% and 46.1%. Acquisition integration, higher SG&A, inventory levels and rising interest rates constrained profitability growth.
- The effective tax rate fell to 25.4% from 37.6%, benefiting from the lower federal corporate tax rate and excess stock-compensation tax benefits. This helped net income rise despite lower pretax income.
Outlook, commentary and risks
- No specific consolidated earnings or revenue forecast is provided. Management expects approximately $131 million of 2018 capital expenditures, including acquired-store improvements, facility projects and equipment.
- Management’s operating targets include 85 used retail units per store per month (the reported annualized average was 67 at quarter-end) and $1,450 finance-and-insurance revenue per retail unit (Q1 average: $1,372). It cited acquisition integration and continued improvement of store performance as priorities.
- Management noted first-quarter seasonality, with historically lower sales than in later quarters. It identified economic and credit conditions, interest rates, competition, manufacturer conditions and incentives, regulatory changes, cybersecurity, and the ability to acquire and integrate stores among key risks.
- Acquisition purchase-price allocations were preliminary. Q1 SG&A included $0.9 million of acquisition expenses and $1.5 million of storm-insurance reserve charges. The company adopted the new revenue standard in January 2018; management said it had no significant earnings or timing effect. The company reported no material change in previously disclosed risk factors and no material off-balance-sheet arrangements.
- Subsequent events included two April store acquisitions for approximately $38.6 million combined and approval of a $0.29-per-share dividend, payable May 25, 2018.
Important facts for investors to verify
- How much reported growth and future earnings depend on acquired stores, and whether integration improves their operating efficiency and margins.
- Whether same-store vehicle sales, used-vehicle gross profit per unit and SG&A as a share of gross profit stabilize or improve.
- Cash conversion and inventory funding needs, given lower reported operating cash flow, higher inventory and substantial acquisition spending.
- Debt, borrowing availability, covenant headroom and sensitivity to interest rates, especially with rising floor-plan and other interest costs.
- Whether the $131 million capital-spending plan, used-vehicle target and finance-and-insurance target are achieved; also monitor final acquisition accounting and tax-law measurements.