LITHIA MOTORS INC 10-Q Filing

Ticker: LAD · Form: 10-Q · Filed: 2024-04-26T00:00:00.000Z

Sentiment: neutral

Filing Stats: 4,612 words · 18 min read · ~15 pages · Grade level 7.3 · Accepted 2024-04-26 16:33:20

Filing Documents

FINANCIAL INFORMATION

PART I FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements 1 Consolidated Balance Sheets (Unaudited) - March 31, 2024, and December 31, 2023 1 Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2024 and 2023 2 Consolidated Statements of Comprehensive Income (Unaudited) – Three Months Ended March 31, 2024 and 2023 3 Consolidated Statements of Equity and Redeemable Non-controlling Interest (Unaudited) - Three Months Ended March 31, 2024 and 2023 4 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2024 and 2023 5 Condensed Notes to Consolidated Financial Statements (Unaudited) 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 19

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk 35

Controls and Procedures

Item 4. Controls and Procedures 35

OTHER INFORMATION

PART II OTHER INFORMATION

Legal Proceedings 35

Item 1. Legal Proceedings 35

Risk Factors

Item 1A. Risk Factors 35

Unregistered Sales of Equity Securities and Use of Proceeds

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36

Other Information 36

Item 5. Other Information 36

Exhibits

Item 6. Exhibits 36 SIGNATURE 37 CONSOLIDATED BALANCE SHEETS (In millions; Unaudited) March 31, 2024 December 31, 2023 Assets Current assets: Cash, restricted cash, and cash equivalents $ 404.6 $ 941.4 Accounts receivable, net of allowance for doubtful accounts of $ 3.3 and $ 7.1 1,249.3 1,123.1 Inventories, net 5,861.9 4,753.9 Other current assets 217.4 136.8 Total current assets 7,733.2 6,955.2 Property and equipment, net of accumulated depreciation of $ 688.1 and $ 646.7 4,502.0 3,981.4 Operating lease right-of-use assets 753.2 478.8 Finance receivables, net of allowance for estimated losses of $ 111.8 and $ 106.4 3,412.5 3,242.3 Goodwill 2,081.7 1,930.6 Franchise value 2,538.0 2,402.2 Other non-current assets 1,159.4 642.0 Total assets $ 22,180.0 $ 19,632.5 Liabilities and equity Current liabilities: Floor plan notes payable $ 2,533.3 $ 1,347.0 Floor plan notes payable: non-trade 2,428.7 2,288.5 Current maturities of long-term debt 97.2 75.7 Current maturities of non-recourse notes payable 27.6 33.9 Trade payables 327.6 288.0 Accrued liabilities 1,177.1 899.1 Total current liabilities 6,591.5 4,932.2 Long-term debt, less current maturities 5,662.4 5,483.7 Non-recourse notes payable, less current maturities 1,803.9 1,671.7 Deferred revenue 389.2 264.1 Deferred income taxes 378.9 349.3 Non-current operating lease liabilities 655.1 427.9 Other long-term liabilities 277.4 220.7 Total liabilities 15,758.4 13,349.6 Redeemable non-controlling interest 44.9 44.0 Equity: Preferred stock - no par value; authorized 15.0 shares; none outstanding — — Common stock - no par value; authorized 125.0 shares; issued and outstanding 27.5 and 27.4 1,117.8 1,100.6 Additional paid-in capital 67.8 79.9 Accumulated other comprehensive income 3.7 20.1 Retained earnings 5,162.1 5,013.3 Total stockholders' equity - Lithia Motors, Inc. 6,351.4 6,213.9 Non-controlling interest 25.3 25.0 Total equity 6,376.7 6,238.9 Total liabilitie

FINANCIAL STATEMENTS 1

FINANCIAL STATEMENTS 1 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, (In millions, except per share amounts; Unaudited) 2024 2023 Revenues: New vehicle retail $ 4,014.1 $ 3,278.9 Used vehicle retail 2,800.8 2,227.5 Used vehicle wholesale 337.7 356.7 Finance and insurance 340.6 318.3 Service, body and parts 912.8 736.3 Fleet and other 155.8 56.1 Total revenues 8,561.8 6,973.8 Cost of sales: New vehicle retail 3,718.8 2,945.1 Used vehicle retail 2,618.1 2,061.8 Used vehicle wholesale 338.7 359.5 Service, body and parts 410.8 341.9 Fleet and other 140.2 54.0 Total cost of sales 7,226.6 5,762.3 Gross profit 1,335.2 1,211.5 Financing operations loss ( 1.7 ) ( 20.8 ) Selling, general and administrative 934.3 764.4 Depreciation and amortization 57.8 47.3 Operating income 341.4 379.0 Floor plan interest expense ( 60.7 ) ( 27.7 ) Other interest expense, net ( 63.6 ) ( 39.0 ) Other income, net 3.5 2.0 Income before income taxes 220.6 314.3 Income tax provision ( 55.6 ) ( 84.7 ) Net income 165.0 229.6 Net income attributable to non-controlling interest ( 1.5 ) ( 0.7 ) Net income attributable to redeemable non-controlling interest ( 0.9 ) ( 0.2 ) Net income attributable to Lithia Motors, Inc. $ 162.6 $ 228.7 Basic earnings per share attributable to Lithia Motors, Inc. $ 5.90 $ 8.32 Shares used in basic per share calculations 27.5 27.5 Diluted earnings per share attributable to Lithia Motors, Inc. $ 5.89 $ 8.30 Shares used in diluted per share calculations 27.6 27.5 Cash dividends paid per share $ 0.50 $ 0.42 See accompanying condensed notes to consolidated financial statements.

FINANCIAL STATEMENTS 2

FINANCIAL STATEMENTS 2 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 31, (In millions; Unaudited) 2024 2023 Net income $ 165.0 $ 229.6 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment ( 16.2 ) 13.1 Unrealized loss on debt securities, net of tax benefit of $ 0.1 and $ 0.0 ( 0.2 ) — Total other comprehensive (loss) income, net of tax ( 16.4 ) 13.1 Comprehensive income 148.6 242.7 Comprehensive income attributable to non-controlling interest ( 1.5 ) ( 0.7 ) Comprehensive income attributable to redeemable non-controlling interest ( 0.9 ) ( 0.2 ) Comprehensive income attributable to Lithia Motors, Inc. $ 146.2 $ 241.8 See accompanying condensed notes to consolidated financial statements.

FINANCIAL STATEMENTS 3

FINANCIAL STATEMENTS 3 CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST Three Months Ended March 31, (In millions; Unaudited) 2024 2023 Total equity, beginning balances $ 6,238.9 $ 5,210.4 Common stock, beginning balances 1,100.6 1,082.1 Stock-based compensation 26.5 31.7 Issuance of stock in connection with employee stock purchase plans 5.7 6.1 Repurchase of common stock ( 15.0 ) ( 14.4 ) Common stock, ending balances 1,117.8 1,105.5 Additional paid-in capital, beginning balances 79.9 76.8 Stock-based compensation ( 12.1 ) ( 22.6 ) Additional paid-in capital, ending balances 67.8 54.2 Accumulated other comprehensive income (loss), beginning balances 20.1 ( 18.0 ) Foreign currency translation adjustment ( 16.2 ) 13.1 Unrealized loss on debt securities, net of tax benefit of $ 0.1 and $ 0.0 ( 0.2 ) — Accumulated other comprehensive income (loss), ending balances 3.7 ( 4.9 ) Retained earnings, beginning balances 5,013.3 4,065.3 Net income attributable to Lithia Motors, Inc. 162.6 228.7 Dividends paid ( 13.8 ) ( 11.5 ) Retained earnings, ending balances 5,162.1 4,282.5 Non-controlling interest, beginning balances 25.0 4.2 Distribution of non-controlling interest ( 1.2 ) ( 1.3 ) Net income attributable to non-controlling interest 1.5 0.7 Non-controlling interest, ending balances 25.3 3.6 Total equity, ending balances $ 6,376.7 $ 5,440.9 Redeemable non-controlling interest, beginning balances $ 44.0 $ 40.7 Net income attributable to redeemable non-controlling interest 0.9 0.2 Redeemable non-controlling interest, ending balances $ 44.9 $ 40.9 See accompanying condensed notes to consolidated financial statements.

FINANCIAL STATEMENTS 4

FINANCIAL STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, (In millions; Unaudited) 2024 2023 Cash flows from operating activities: Net income $ 165.0 $ 229.6 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 75.9 49.6 Stock-based compensation 14.4 9.1 (Gain) loss on disposal of other assets ( 0.5 ) 0.1 Loss (gain) on sales of stores 0.1 ( 7.2 ) Unrealized investment (gain) loss ( 0.1 ) 0.5 Deferred income taxes 14.8 14.5 Amortization of operating lease right-of-use assets 22.4 15.7 (Increase) decrease (net of acquisitions and dispositions): Accounts receivable, net ( 8.9 ) 23.9 Inventories ( 183.3 ) ( 56.9 ) Finance receivables ( 173.8 ) ( 397.0 ) Other assets ( 19.2 ) 14.1 Increase (decrease) (net of acquisitions and dispositions): Floor plan notes payable 327.7 38.9 Trade payables 0.2 ( 10.0 ) Accrued liabilities 57.5 31.7 Other long-term liabilities and deferred revenue 0.2 ( 5.6 ) Net cash provided by (used in) operating activities 292.4 ( 49.0 ) Cash flows from investing activities: Capital expenditures ( 79.6 ) ( 38.9 ) Proceeds from sales of assets 3.7 0.8 Cash paid for other investments ( 122.0 ) ( 11.1 ) Cash paid for acquisitions, net of cash acquired ( 1,074.4 ) ( 387.4 ) Proceeds from sales of stores 6.4 22.7 Net cash used in investing activities ( 1,265.9 ) ( 413.9 ) Cash flows from financing activities: Borrowings on floor plan notes payable, net: non-trade 156.1 187.6 Borrowings on lines of credit 3,658.8 3,462.9 Repayments on lines of credit ( 3,606.9 ) ( 3,503.3 ) Principal payments on long-term debt and finance lease liabilities, scheduled ( 9.0 ) ( 8.7 ) Principal payments on long-term debt and finance lease liabilities, other — ( 3.4 ) Proceeds from issuance of long-term debt 158.9 10.4 Principal payments on non-recourse notes payable ( 203.5 ) ( 76.5 ) Proceeds from issuance of non-recourse notes pa

FINANCIAL STATEMENTS 5

FINANCIAL STATEMENTS 5 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Three Months Ended March 31, (In millions) 2024 2023 Reconciliation of cash, restricted cash, and cash equivalents to the consolidated balance sheets Cash and cash equivalents $ 264.4 $ 184.9 Restricted cash from collections on auto loans receivable and customer deposits 140.2 114.5 Cash, restricted cash, and cash equivalents 404.6 299.4 Restricted cash on deposit in reserve accounts, included in other non-current assets 35.9 25.3 Total cash, restricted cash, and cash equivalents reported in the Consolidated Statements of Cash Flows $ 440.5 $ 324.7 Supplemental cash flow information: Cash paid during the period for interest $ 165.8 $ 95.7 Cash paid during the period for income taxes, net 6.0 5.2 Debt paid in connection with store disposals 1.6 1.6 Non-cash activities: Debt assumed in connection with acquisitions $ 868.1 $ 365.4 Right-of-use assets obtained in exchange for lease liabilities 297.5 103.8 See accompanying condensed notes to consolidated financial statements.

FINANCIAL STATEMENTS 6

FINANCIAL STATEMENTS 6 CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. INTERIM FINANCIAL STATEMENTS Basis of Presentation These condensed Consolidated Financial Statements contain unaudited information as of March 31, 2024, and for the three months ended March 31, 2024 and 2023. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management's opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2023 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2023, is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 23, 2024. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. Reclassifications Certain reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements to maintain consistency and comparability between periods presented. Within our financing operations income, we disaggregated our "lease income" out of our previously reported "interest, fee, and lease income", to be its own separately presented line item. NOTE 2. ACCOUNTS RECEIVABLE Accounts receivable consisted of the following: (in millions) March 31, 2024 December 31, 2023 Contracts in transit $ 520.3 $ 559.7 Trade receivables 201.9 153.3 Vehicle receivables 252.7 191.4 Manufacturer receivables 262.7 216.5 Other receivables, current 15.0 9.3 1,252.6 1,130.2 Less: Allowance for doubtful accounts ( 3.3 ) ( 7.1 ) Tot

NOTES TO FINANCIAL STATEMENTS 7

NOTES TO FINANCIAL STATEMENTS 7 NOTE 4. FINANCE RECEIVABLES Interest income on finance receivables is recognized based on the contractual terms of each loan and is accrued until repayment, reaching non-accrual status, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. The balances of finance receivables are made up of loans and leases secured by the related vehicles. More than 99 % of the portfolio is aged less than 60 days past due with less than 1 % on non-accrual status. Finance Receivables, net (in millions) March 31, 2024 December 31, 2023 Asset-backed term funding $ 2,298.0 $ 2,146.5 Warehouse facilities 808.3 749.3 Other managed receivables 418.0 452.9 Total finance receivables 3,524.3 3,348.7 Less: Allowance for finance receivable losses ( 111.8 ) ( 106.4 ) Finance receivables, net $ 3,412.5 $ 3,242.3 Finance Receivables by FICO Score As of March 31, 2024 Year of Origination ($ in millions) 2024 2023 2022 2021 2020 Total <599 $ 16.8 $ 57.3 $ 34.0 $ 15.6 $ 2.1 $ 125.8 600-699 140.3 549.1 418.8 135.3 13.9 1,257.4 700-774 135.4 532.7 386.5 57.0 5.1 1,116.7 775+ 141.7 445.8 240.4 13.1 2.3 843.3 Total auto loan receivables $ 434.2 $ 1,584.9 $ 1,079.7 $ 221.0 $ 23.4 3,343.2 Other finance receivables 1 181.1 Total finance receivables $ 3,524.3 As of December 31, 2023 Year of Origination ($ in millions) 2023 2022 2021 2020 Total <599 $ 62.2 $ 39.0 $ 17.6 $ 2.4 $ 121.2 600-699 586.6 463.6 152.7 16.1 1,219.0 700-774 568.1 422.5 63.9 5.9 1,060.4 775+ 490.3 263.5 14.7 2.7 771.2 Total auto loan receivables $ 1,707.2 $ 1,188.6 $ 248.9 $ 27.1 3,171.8 Other finance receivables 1 176.9 Total finance receivables $ 3,348.7 1 Includes legacy portfolio, loans that are originated with no FICO score available, and lease receivables. In accordance with ASC Topic 326, the allowance for loan and lease losses is estimated b

NOTES TO FINANCIAL STATEMENTS 8

NOTES TO FINANCIAL STATEMENTS 8 Rollforward of Allowance for Loan and Lease Losses Our allowance for loan and lease losses represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowances for credit losses related to finance receivables consisted of the following changes during the period: Three Months Ended March 31, (in millions) 2024 2023 Allowance at beginning of period $ 106.4 $ 69.3 Charge-offs ( 34.1 ) ( 24.8 ) Recoveries 14.8 11.4 Sold loans ( 0.3 ) — Provision expense 25.0 26.3 Allowance at end of period $ 111.8 $ 82.2 Charge-off Activity by Year of Origination Three Months Ended March 31, (in millions) 2024 2023 2024 $ — $ — 2023 13.4 0.1 2022 15.1 14.2 2021 4.9 8.9 Other finance receivables 1 0.7 1.6 Total charge-offs $ 34.1 $ 24.8 1 Includes legacy portfolio, loans that are originated with no FICO score available, and lease receivables. NOTE 5. GOODWILL AND FRANCHISE VALUE The changes in the carrying amounts of goodwill are as follows: (in millions) Vehicle Operations Financing Operations Consolidated Balance as of December 31, 2022 $ 1,443.5 $ 17.2 $ 1,460.7 Additions through acquisitions 1 519.1 — 519.1 Reductions through divestitures ( 51.1 ) — ( 51.1 ) Currency translation 1.5 0.4 1.9 Balance as of December 31, 2023 1,913.0 17.6 1,930.6 Adjustments to purchase price allocations 2 47.6 — 47.6 Additions through acquisitions 3 105.5 — 105.5 Reductions through divestitures ( 0.2 ) — ( 0.2 ) Currency translation ( 1.8 ) — ( 1.8 ) Balance as of March 31, 2024 $ 2,064.1 $ 17.6 $ 2,081.7 1 Our purchase price allocation for the 2022 acquisitions were finalized in 2023. As a result, we added $ 285.9 million of goodwill. Preliminary purchase price allocation for a portion of our 2023 acquisitions resulted in adding $ 233.2 million of goodwill. Our purchase price allocation for the remaining 2023 acquisitions are preliminary and goodwill is not yet allocate

NOTES TO FINANCIAL STATEMENTS 9

NOTES TO FINANCIAL STATEMENTS 9 The changes in the carrying amounts of franchise value are as follows: (in millions) Franchise Value Balance as of December 31, 2022 $ 1,856.2 Additions through acquisitions 1 556.5 Reductions through divestitures ( 14.5 ) Currency translation 4.0 Balance as of December 31, 2023 2,402.2 Additions through acquisitions 2 140.8 Reductions through divestitures ( 1.2 ) Currency translation ( 3.8 ) Balance as of March 31, 2024 $ 2,538.0 1 Our purchase price allocation for the 2022 acquisitions were finalized in 2023. As a result, we added $ 363.1 million of franchise value. Preliminary purchase price allocation for a portion of our 2023 acquisitions resulted in adding $ 193.4 million of franchise value. Our purchase price allocation for the remaining 2023 acquisitions are preliminary and franchise value is not yet allocated to our reporting units. These amounts are included in other non-current assets until we finalize our purchase accounting. See Note 12 – Acquisitions. 2 Our purchase price allocations for a portion of the 2023 acquisitions were finalized in 2024. As a result, we added $ 140.8 million of franchise value. Our purchase price allocation for the remaining 2023 and 2024 acquisitions are preliminary and franchise value is not yet allocated to our reporting units. These amounts are included in other non-current assets until we finalize our purchase accounting. See Note 12 – Acquisitions. NOTE 6. NET INVESTMENT IN OPERATING LEASES Net investment in operating leases consists primarily of lease contracts for vehicles with individuals and business entities. Assets subject to operating leases are depreciated using the straight-line method over the term of the lease to reduce the asset to its estimated residual value. Estimated residual values are based on assumptions for used vehicle prices at lease termination and the number of vehicles that are expected to be returned. Net investment in operating leases w

NOTES TO FINANCIAL STATEMENTS 10

NOTES TO FINANCIAL STATEMENTS 10 Certain of our lease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Our finance lease liabilities are included in long-term debt, with the current portion included in current maturities of long-term debt. The related assets are included in property, plant and equipment, net of accumulated amortization. We rent or sublease certain real estate to third parties. Litigation We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty. NOTE 8. DEBT Credit Facilities US Bank Syndicated Credit Facility On February 23, 2024, we amended our existing syndicated credit facility (USB credit facility), comprised of 21 financial institutions, including eight manufacturer-affiliated finance companies, maturing February 23, 2029. The amendment increased the total financing commitment and the amount to which the commitment could be further expanded. This USB credit facility provides for a total financing commitment of $ 6.0 billion, which may be further expanded, subject to lender approval and the satisfaction of other conditions, up to a total of $ 6.5 billion. The allocation of the financing commitment is for up to $ 2.9 billion in new vehicle inventory floorplan financing, up to $ 800 million in used vehicle inventory floorplan financing, up to $ 100 million in service loaner vehicle floorplan financing, and up to $ 2.2 billion in revolving financing for general corporate purposes, including acquisitions and working ca

NOTES TO FINANCIAL STATEMENTS 11

NOTES TO FINANCIAL STATEMENTS 11 warehouse facility

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