Lithia Motors, Inc. (LAD) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Dollar amounts are in millions unless otherwise noted. Comparisons are to the corresponding 2020 periods.
Business context
Lithia operated 277 locations representing 39 brands across 25 U.S. states and three Canadian provinces. The company expanded substantially through acquisitions, including its August entry into Canada with Pfaff Automotive Partners. Management’s long-term goal is $50 billion of revenue by 2025; this is a strategic target, not near-term financial guidance.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $6,169.8 | $3,620.2 | $16,522.2 | $9,182.5 |
| Gross profit | $1,189.1 | $651.6 | $3,015.2 | $1,576.9 |
| Operating income | $479.5 | $239.6 | $1,164.2 | $462.1 |
| Net income attributable to Lithia | $307.9 | $158.8 | $769.0 | $282.7 |
| Diluted EPS | $10.11 | $6.86 | $26.91 | $12.18 |
- Revenue increased 70.4% for Q3 and 79.9% year to date. Gross profit rose 82.5% and 91.2%, respectively. Acquisitions were a major growth contributor; 2021 acquisitions contributed $2,385.9 of revenue and $121.9 of operating income after acquisition.
- Q3 gross margin was 19.3%, up 130 basis points; operating margin was 7.8%, up 120 basis points. SG&A was 56.6% of gross profit versus 59.7% a year earlier. For the nine months, gross margin was 18.2% and operating margin 7.0%, compared with 17.2% and 5.0%.
- Same-store Q3 revenue increased 13.4%, while same-store new-vehicle unit sales declined 13.6%. Higher selling prices and gross profit per vehicle helped offset lower new-vehicle volume. Same-store used-vehicle revenue increased 39.9%.
- Q3 diluted EPS includes a $23.2 unrealized loss on the Shift Technologies investment and a $10.3 loss on redemption of senior notes. Management’s adjusted diluted EPS was $11.21 versus $6.89 in Q3 2020; this non-GAAP measure excludes specified items.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $1,989.2, versus $800.6 in 2020. Management’s adjusted operating cash flow, which removes non-trade floor-plan repayments and borrowings related to acquired inventory, was $831.2 versus $349.2.
- Investing cash outflow was $2,563.1, including $2,409.5 for acquisitions and $194.1 for capital expenditures. Financing cash inflow was $550.7. Ending cash was $137.8, down from $160.2 at December 31, 2020.
- Total debt was $3,811.3 at September 30, including $1,750 of senior notes outstanding. Cash plus available credit was $1,703.9, including $1,566.1 of available credit. Current assets were $3,075.5 and current liabilities $2,181.8.
- The company redeemed $300 of 5.250% notes due 2025 in August and issued $800 of 3.875% notes due 2029 in May. Its syndicated credit facility was extended to April 2026. The company reported compliance with its covenants, including a 1.51 leverage ratio against a maximum of 5.75.
Outlook, commentary and risks
- Management reported high vehicle demand but said manufacturer component shortages were constraining new-vehicle supply, supporting unusually high selling prices and per-unit gross profit. It expected reduced new-vehicle availability to continue into 2022; margins and pricing may therefore be sensitive to supply recovery.
- Management targets annual after-tax acquisition returns above 15% and describes a capital allocation target of 65% for acquisitions, 25% for capital expenditures and 10% for shareholder returns. These are stated strategies, not guarantees.
- Other risks include acquisition integration and preliminary purchase accounting, used-vehicle price and residual-value changes, interest rates, COVID-19 impacts, and risks associated with expanding Canadian operations. The company reported no material change in market-risk disclosures and no material control deficiency. Routine legal proceedings were not expected to have a material adverse effect, though outcomes cannot be predicted with certainty.
Key facts for investors to verify
- How much of revenue and earnings growth is attributable to acquisitions versus same-store performance, and whether acquired locations meet return targets.
- Whether elevated new- and used-vehicle gross profits persist as supply constraints and vehicle pricing change.
- The conversion of reported operating cash flow into cash after floor-plan financing, acquisitions and working-capital movements.
- Final purchase-price allocations for recent acquisitions, including goodwill and other non-current assets, and the valuation of the Shift investment.
- Debt maturities, borrowing-base availability, covenant headroom and the effect of interest-rate changes on financing costs.