Lithia Motors, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the same periods in 2010. Amounts are in U.S. dollars. Lithia operated 86 stores and offered 28 vehicle brands as of October 28, 2011.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $737.9 million | $573.0 million | $2,013.5 million | $1,550.7 million |
| Gross profit | $123.7 million | $103.2 million | $345.4 million | $281.9 million |
| Operating income | $31.9 million | $22.8 million | $81.7 million | $34.3 million |
| Continuing income, after tax | $16.3 million | $9.6 million | $39.4 million | $9.3 million |
| Net income | $16.6 million | $9.8 million | $40.1 million | $9.3 million |
| Diluted continuing EPS | $0.61 | $0.36 | $1.47 | $0.35 |
- Revenue increased approximately 29% in Q3 and 30% for the nine-month period. Growth reflected higher vehicle sales, improved selling prices, acquisitions and higher finance-and-insurance and service revenue.
- Overall gross margin declined to 16.8% from 18.0% in Q3 and to 17.2% from 18.2% year to date. New-vehicle margins fell to 7.7% from 8.3% in both comparisons. Q3 operating margin improved to 4.3% from 4.0%; nine-month operating margin rose to 4.1% from 2.2%.
- SG&A was $87.6 million in Q3 and $250.3 million year to date. SG&A as a share of gross profit improved to 70.8% from 73.9% in Q3 and 72.5% from 77.9% year to date.
- At September 30, cash was $15.9 million; current assets were $604.2 million and current liabilities $436.5 million. Total assets were $1.115 billion and stockholders’ equity $348.4 million.
- Total debt, including floor-plan financing, was $621.9 million: $324.3 million floor-plan debt, $69.0 million drawn on the revolving line, $223.0 million real-estate mortgages and $5.6 million other debt. The company reported $28.8 million of remaining revolver availability, subject to borrowing-base limits and the new facility’s October 7 funding conditions.
- Cash provided by operating activities was $3.4 million for the nine months, versus cash used of $16.0 million in 2010. Including non-trade floor-plan changes as operating cash flow, the company presented a non-GAAP measure of $70.8 million provided, versus $2.2 million used. Investing activities used $64.5 million, principally for acquisitions and $23.0 million of capital expenditures; financing activities provided $67.7 million.
Material changes and business drivers
- Same-store new-vehicle revenue rose 28.4% in Q3 and 30.5% year to date, driven by unit growth and higher average selling prices. Domestic brands grew more strongly; Japanese-brand supply constraints following the March 2011 disaster limited import and luxury-brand sales.
- Same-store used retail revenue increased 14.2% in Q3 and 15.5% year to date. Management said the used-to-new retail sales ratio was 0.9:1, below its 1.0:1 goal.
- Same-store service, body and parts revenue grew 3.0% in Q3 and 5.3% year to date. Warranty revenue declined on a same-store basis, attributed to fewer vehicles in operation and improved vehicle reliability.
- Q3 gross profit increased $20.5 million, but overall margin contracted. Management cited reduced manufacturer incentives and sales mix for lower new-vehicle margins; used-vehicle margins also eased in Q3.
- Acquisitions included three Portland-area dealerships in April, which contributed $35.6 million of Q3 revenue and $71.9 million year to date, and a Ford franchise in Klamath Falls. Goodwill increased to $18.2 million, primarily from acquisitions.
- Nine-month impairment charges were $0.9 million, compared with $14.8 million in 2010. The 2011 charge related to two properties.
Liquidity, outlook, risks and unusual items
- On September 30, Lithia entered into a three-year, $200 million credit facility with U.S. Bank and JPMorgan Chase: $100 million in floor-plan financing and up to $100 million in revolving credit. Funding conditions were met October 7. The revolver rate was one-month LIBOR plus 2.25%; no amounts were outstanding under the new line at September 30.
- The company reported compliance with its financial covenants at quarter-end: current ratio 1.45 against a 1.20 minimum; fixed-charge coverage 1.69 against a 1.20 minimum; liabilities-to-tangible-net-worth ratio 2.87 against a 4.00 maximum; and funded debt of $228.6 million against a $310 million limit.
- Management estimated 2011 capital expenditures of approximately $35 million and a full-year income tax rate of approximately 39.2%. It said it expected SG&A to remain in the low-70% range as a share of gross profit and incremental throughput to return to its approximately 50% target. No full-year revenue or earnings guidance was provided.
- Management expected vehicle production affected by the Japan disaster to improve, but said inventory might not normalize until early 2012. Risks include inadequate new-vehicle supply, constrained late-model used-vehicle availability, manufacturer or financing-provider distress, consumer-credit disruption, and dealership franchise restrictions.
- In October, Lithia reported acquiring Subaru and Mitsubishi brands in Fresno; selling a Volkswagen store in Thornton for approximately $4.8 million of cash and a $0.9 million gain; and selling Vacaville real estate for approximately $3.0 million net cash and a $6.3 million pretax gain. These are subsequent events, not Q3 operating results.
- A text-message class-action settlement for $2.5 million was subject to court approval; the company said the vendor was contractually obligated to reimburse the full amount. A separate Alaska consumer-protection case had a certified class; the company said its outcome could not be predicted and an adverse resolution could materially affect results, financial condition or cash flows.
- The board authorized a new repurchase program of up to 2 million Class A shares. Lithia repurchased 650,809 shares in Q3 for $11.3 million; 1,765,967 shares remained available at September 30. The company also declared a $0.07-per-share dividend payable in November.
Investor verification priorities
- Assess whether revenue and earnings growth are sustained by same-store performance, rather than acquisitions, and whether gross-margin compression continues.
- Track cash generation and working-capital demands, especially inventory growth and the distinction between reported operating cash flow and the company’s non-GAAP floor-plan-adjusted presentation.
- Verify availability and terms of the new credit facility, borrowing-base headroom, lender concentration and continued covenant compliance.
- Monitor Japanese-brand vehicle supply recovery, used-vehicle sourcing and the effect of inventory levels on sales and margins.
- Confirm approval and vendor reimbursement of the text-message settlement and follow developments in the Alaska class action.
- Review the realized proceeds and gains from post-quarter asset and store sales, as well as the returns on acquisitions, capital spending, dividends and share repurchases.