LITHIA MOTORS INC 10-Q Filing

Ticker: LAD · Form: 10-Q · Filed: 2024-08-08T00:00:00.000Z

Sentiment: neutral

Filing Stats: 4,723 words · 19 min read · ~16 pages · Grade level 6.2 · Accepted 2024-08-08 16:07:16

Filing Documents

FINANCIAL INFORMATION

PART I FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements 1 Consolidated Balance Sheets (Unaudited) - June 30, 2024, and December 31, 2023 1 Consolidated Statements of Operations (Unaudited) - Three and Six Months Ended June 30, 2024 and 2023 2 Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended June 30, 2024 and 2023 3 Consolidated Statements of Equity and Redeemable Non-controlling Interest (Unaudited) - Three and Six Months Ended June 30, 2024 and 2023 4 Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 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 6

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk 26

Controls and Procedures

Item 4. Controls and Procedures 26

OTHER INFORMATION

PART II OTHER INFORMATION

Legal Proceedings 26

Item 1. Legal Proceedings 26

Risk Factors

Item 1A. Risk Factors 27

Unregistered Sales of Equity Securities and Use of Proceeds

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27

Other Information 27

Item 5. Other Information 27

Exhibits

Item 6. Exhibits 27 SIGNATURE 28 CONSOLIDATED BALANCE SHEETS (In millions; Unaudited) June 30, 2024 December 31, 2023 Assets Current assets: Cash, restricted cash, and cash equivalents $ 674.8 $ 941.4 Accounts receivable, net of allowance for doubtful accounts of $ 2.6 and $ 7.1 1,242.9 1,123.1 Inventories, net 6,242.9 4,753.9 Other current assets 194.8 136.8 Total current assets 8,355.4 6,955.2 Property and equipment, net of accumulated depreciation of $ 731.2 and $ 646.7 4,615.2 3,981.4 Operating lease right-of-use assets 724.1 478.8 Finance receivables, net of allowance for estimated losses of $ 115.8 and $ 106.4 3,623.9 3,242.3 Goodwill 2,118.1 1,930.6 Franchise value 2,568.1 2,402.2 Other non-current assets 1,200.4 642.0 Total assets $ 23,205.2 $ 19,632.5 Liabilities and equity Current liabilities: Floor plan notes payable $ 2,590.1 $ 1,347.0 Floor plan notes payable: non-trade 2,697.4 2,288.5 Current maturities of long-term debt 90.9 75.7 Current maturities of non-recourse notes payable 63.4 33.9 Trade payables 380.4 288.0 Accrued liabilities 1,197.7 899.1 Total current liabilities 7,019.9 4,932.2 Long-term debt, less current maturities 6,071.5 5,483.7 Non-recourse notes payable, less current maturities 1,962.4 1,671.7 Deferred revenue 388.7 264.1 Deferred income taxes 409.7 349.3 Non-current operating lease liabilities 626.8 427.9 Other long-term liabilities 287.6 220.7 Total liabilities 16,766.6 13,349.6 Redeemable non-controlling interest 46.2 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 26.8 and 27.4 924.0 1,100.6 Additional paid-in capital 79.5 79.9 Accumulated other comprehensive income 2.6 20.1 Retained earnings 5,361.8 5,013.3 Total stockholders' equity - Lithia Motors, Inc. 6,367.9 6,213.9 Non-controlling interest 24.5 25.0 Total equity 6,392.4 6,238.9 Total liabilities, red

FINANCIAL STATEMENTS 1

FINANCIAL STATEMENTS 1 CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended June 30, Six Months Ended June 30, (In millions, except per share amounts; Unaudited) 2024 2023 2024 2023 Revenues: New vehicle retail $ 4,403.7 $ 4,014.7 $ 8,417.8 $ 7,293.6 Used vehicle retail 2,986.0 2,455.1 5,786.8 4,682.6 Used vehicle wholesale 289.5 403.9 627.2 766.3 Finance and insurance 360.9 337.9 701.5 656.2 Service, body and parts 950.7 804.4 1,863.5 1,540.8 Fleet and other 241.0 95.5 396.8 151.5 Total revenues 9,231.8 8,111.5 17,793.6 15,091.0 Cost of sales: New vehicle retail 4,082.9 3,627.6 7,801.7 6,572.6 Used vehicle retail 2,790.4 2,242.4 5,408.5 4,304.3 Used vehicle wholesale 289.0 404.6 627.7 769.8 Service, body and parts 421.3 360.5 832.1 702.5 Fleet and other 224.3 91.3 364.5 145.5 Total cost of sales 7,807.9 6,726.4 15,034.5 12,494.7 Gross profit 1,423.9 1,385.1 2,759.1 2,596.3 Finance operations income (loss) 7.2 ( 18.7 ) 5.4 ( 39.5 ) Selling, general and administrative 975.2 842.2 1,909.5 1,606.6 Depreciation and amortization 62.3 48.4 120.0 95.6 Operating profit 393.6 475.8 735.0 854.6 Floor plan interest expense ( 76.6 ) ( 34.7 ) ( 137.3 ) ( 62.3 ) Other interest expense, net ( 61.2 ) ( 43.9 ) ( 124.8 ) ( 83.0 ) Other income, net 27.0 9.8 30.4 12.0 Income before income taxes 282.8 407.0 503.3 721.3 Income tax provision ( 66.2 ) ( 105.9 ) ( 121.8 ) ( 190.6 ) Net income 216.6 301.1 381.5 530.7 Net income attributable to non-controlling interest ( 1.0 ) ( 1.8 ) ( 2.5 ) ( 2.5 ) Net income attributable to redeemable non-controlling interest ( 1.4 ) ( 2.1 ) ( 2.3 ) ( 2.3 ) Net income attributable to Lithia Motors, Inc. $ 214.2 $ 297.2 $ 376.7 $ 525.9 Basic earnings per share attributable to Lithia Motors, Inc. $ 7.88 $ 10.79 $ 13.77 $ 19.11 Shares used in basic per share calculations 27.2 27.5 27.4 27.5 Diluted earnings per share attributable to Lithia Motors, Inc. $ 7.87 $ 10.78 $ 13.75 $ 19.08 Shares used in diluted per share

FINANCIAL STATEMENTS 2

FINANCIAL STATEMENTS 2 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended June 30, Six Months Ended June 30, (In millions; Unaudited) 2024 2023 2024 2023 Net income $ 216.6 $ 301.1 $ 381.5 $ 530.7 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustment ( 0.9 ) 16.1 ( 17.1 ) 29.2 Unrealized loss on debt securities, net of tax benefit of $ 0.1 , $ 0.0 , $ 0.1 and $ 0.0 , respectively ( 0.2 ) — ( 0.4 ) — Total other comprehensive (loss) income, net of tax ( 1.1 ) 16.1 ( 17.5 ) 29.2 Comprehensive income 215.5 317.2 364.0 559.9 Comprehensive income attributable to non-controlling interest ( 1.0 ) ( 1.8 ) ( 2.5 ) ( 2.5 ) Comprehensive income attributable to redeemable non-controlling interest ( 1.4 ) ( 2.1 ) ( 2.3 ) ( 2.3 ) Comprehensive income attributable to Lithia Motors, Inc. $ 213.1 $ 313.3 $ 359.2 $ 555.1 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 June 30, Six Months Ended June 30, (In millions; Unaudited) 2024 2023 2024 2023 Total equity, beginning balances $ 6,376.7 $ 5,440.9 $ 6,238.9 $ 5,210.4 Common stock, beginning balances 1,117.8 1,105.5 1,100.6 1,082.1 Stock-based compensation 1.7 1.9 28.3 33.6 Issuance of stock in connection with employee stock purchase plans 8.1 8.7 13.8 14.9 Repurchase of common stock, including excise tax ( 203.6 ) — ( 218.7 ) ( 14.5 ) Common stock, ending balances 924.0 1,116.1 924.0 1,116.1 Additional paid-in capital, beginning balances 67.8 54.2 79.9 76.8 Stock-based compensation 11.7 8.3 ( 0.4 ) ( 14.3 ) Additional paid-in capital, ending balances 79.5 62.5 79.5 62.5 Accumulated other comprehensive income (loss), beginning balances 3.7 ( 4.9 ) 20.1 ( 18.0 ) Foreign currency translation adjustment ( 0.9 ) 16.1 ( 17.1 ) 29.2 Unrealized loss on debt securities, net of tax benefit of $ 0.1 , $ 0.0 , $ 0.1 , and $ 0.0 , respectively ( 0.2 ) — ( 0.4 ) — Accumulated other comprehensive income, ending balances 2.6 11.2 2.6 11.2 Retained earnings, beginning balances 5,162.1 4,282.5 5,013.3 4,065.3 Net income attributable to Lithia Motors, Inc. 214.2 297.2 376.7 525.9 Dividends paid ( 14.5 ) ( 13.9 ) ( 28.2 ) ( 25.4 ) Retained earnings, ending balances 5,361.8 4,565.8 5,361.8 4,565.8 Non-controlling interest, beginning balances 25.3 3.6 25.0 4.2 Distribution of non-controlling interest ( 1.8 ) ( 1.3 ) ( 3.0 ) ( 2.6 ) Net income attributable to non-controlling interest 1.0 1.8 2.5 2.5 Non-controlling interest, ending balances 24.5 4.1 24.5 4.1 Total equity, ending balances $ 6,392.4 $ 5,759.7 $ 6,392.4 $ 5,759.7 Redeemable non-controlling interest, beginning balances $ 44.9 $ 40.9 $ 44.0 $ 40.7 Distribution of redeemable non-controlling interest ( 0.1 ) — ( 0.1 ) — Net income attributable to redeemable non-controlling interest 1

FINANCIAL STATEMENTS 4

FINANCIAL STATEMENTS 4 CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (In millions; Unaudited) 2024 2023 Cash flows from operating activities: Net income $ 381.5 $ 530.7 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 165.4 100.0 Stock-based compensation 27.8 19.3 Net loss on disposal of other assets 1.5 0.1 Net gain on sale of stores ( 0.1 ) ( 8.2 ) Unrealized investment gain, net ( 29.7 ) ( 0.8 ) Deferred income taxes 42.0 32.1 Amortization of operating lease right-of-use assets 46.4 31.8 (Increase) decrease (net of acquisitions and dispositions): Accounts receivable, net ( 2.9 ) ( 2.8 ) Inventories ( 544.1 ) ( 350.2 ) Finance receivables ( 386.9 ) ( 684.6 ) Other assets ( 62.0 ) 8.6 Increase (decrease) (net of acquisitions and dispositions): Floor plan notes payable 384.4 58.4 Trade payables 54.4 ( 36.8 ) Accrued liabilities 69.1 ( 11.0 ) Other long-term liabilities and deferred revenue ( 2.8 ) 14.7 Net cash provided by (used in) operating activities 144.0 ( 298.7 ) Cash flows from investing activities: Capital expenditures ( 209.7 ) ( 97.1 ) Proceeds from sales of assets 4.0 0.8 Cash paid for other investments ( 146.8 ) ( 11.1 ) Cash paid for acquisitions, net of cash acquired ( 1,169.5 ) ( 978.5 ) Proceeds from sales of stores 6.9 85.7 Net cash used in investing activities ( 1,515.1 ) ( 1,000.2 ) Cash flows from financing activities: Borrowings on floor plan notes payable, net: non-trade 444.5 223.5 Borrowings on lines of credit 7,226.6 7,049.2 Repayments on lines of credit ( 6,767.9 ) ( 6,789.1 ) Principal payments on long-term debt and finance lease liabilities, scheduled ( 18.9 ) ( 17.5 ) Principal payments on long-term debt and finance lease liabilities, other ( 15.1 ) ( 3.4 ) Proceeds from issuance of long-term debt 179.8 10.4 Principal payments on non-recourse notes payable ( 418.8 ) ( 211.5 ) Proceeds from issuance of non

FINANCIAL STATEMENTS 5

FINANCIAL STATEMENTS 5 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Six Months Ended June 30, (In millions) 2024 2023 Reconciliation of cash, restricted cash, and cash equivalents to the consolidated balance sheets Cash and cash equivalents $ 516.4 $ 88.7 Restricted cash from collections on auto loans receivable and customer deposits 158.4 111.0 Cash, restricted cash, and cash equivalents 674.8 199.7 Restricted cash on deposit in reserve accounts, included in other non-current assets 40.6 29.5 Total cash, restricted cash, and cash equivalents reported in the Consolidated Statements of Cash Flows $ 715.4 $ 229.2 Supplemental cash flow information: Cash paid during the period for interest $ 357.2 $ 220.3 Cash paid during the period for income taxes, net 113.9 117.9 Debt paid in connection with store disposals 5.9 3.2 Non-cash activities: Contingent consideration in connection with acquisitions $ — $ 7.3 Debt assumed in connection with acquisitions 868.1 453.7 Acquisition of finance leases in connection with acquisitions — 45.0 Right-of-use assets obtained in exchange for lease liabilities 304.0 135.1 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 June 30, 2024, and for the three and six months ended June 30, 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) June 30, 2024 December 31, 2023 Contracts in transit $ 534.9 $ 559.7 Trade receivables 177.3 153.3 Vehicle receivables 272.8 191.4 Manufacturer receivables 248.9 216.5 Other receivables, current 11.6 9.3 1,245.5 1,130.2 Less: Allowance for doubtful accounts ( 2.6 ) ( 7.1 )

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) June 30, 2024 December 31, 2023 Asset-backed term funding $ 2,507.0 $ 2,146.5 Warehouse facilities 890.4 749.3 Other managed receivables 342.3 452.9 Total finance receivables 3,739.7 3,348.7 Less: Allowance for finance receivable losses ( 115.8 ) ( 106.4 ) Finance receivables, net $ 3,623.9 $ 3,242.3 Finance Receivables by FICO Score As of June 30, 2024 Year of Origination ($ in millions) 2024 2023 2022 2021 2020 Total <599 $ 32.5 $ 51.8 $ 30.1 $ 13.4 $ 1.8 $ 129.6 600-699 296.3 500.5 377.5 119.0 11.7 1,305.0 700-774 295.9 487.5 350.8 50.5 4.4 1,189.1 775+ 296.8 402.2 218.2 11.9 2.0 931.1 Total auto loan receivables $ 921.5 $ 1,442.0 $ 976.6 $ 194.8 $ 19.9 3,554.8 Other finance receivables 1 184.9 Total finance receivables $ 3,739.7 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 based

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: Six Months Ended June 30, (in millions) 2024 2023 Allowance at beginning of period $ 106.4 $ 69.3 Charge-offs ( 65.6 ) ( 50.1 ) Recoveries 30.1 23.6 Sold loans ( 0.3 ) — Initial allowance for credit-deteriorated loans — 2.3 Provision expense 45.2 52.0 Allowance at end of period $ 115.8 $ 97.1 Charge-off Activity by Year of Origination Six Months Ended June 30, (in millions) 2024 2023 2024 $ 0.6 $ — 2023 27.4 0.8 2022 26.2 31.0 2021 9.1 15.8 Other finance receivables 1 2.3 2.5 Total charge-offs $ 65.6 $ 50.1 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 3 142.7 — 142.7 Reductions through divestitures ( 0.4 ) — ( 0.4 ) Currency translation ( 1.8 ) ( 0.6 ) ( 2.4 ) Balance as of June 30, 2024 $ 2,101.1 $ 17.0 $ 2,118.1 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 acqu

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 2 172.5 Reductions through divestitures ( 1.3 ) Currency translation ( 5.3 ) Balance as of June 30, 2024 $ 2,568.1 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 is 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 13 – Acquisitions. 2 Our purchase price allocations for a portion of the 2023 acquisitions were finalized in 2024. As a result, we added $ 172.5 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 13 – Acquisitions. NOTE 6. INVESTMENTS Marketable Securities Beginning in January 2024, our captive insurance subsidiary began investing cash in excess of current needs in marketable securities. The marketable securities are recorded within other current assets in the Consolidated Balance Sheets and consist of debt securities accounted for as available-for-sale (AFS) and equity securities measured at fair value. Changes in the fair value of equity securities are recognized as a component of other income, net in the Consolidated Statements o

NOTES TO FINANCIAL STATEMENTS 10

NOTES TO FINANCIAL STATEMENTS 10 Equity Method Investments Our investment in Pinewood Technologies Group PLC (PINE.L) consists of 25.5 % common stock voting interests accounted for as an equity method investment. The investment is measured at fair value based on quoted market prices, and all fair market value changes in the investment are recorded as unrealized gains as a component of other income, net in the Consolidated Statements of Operations. The fair value of our investment was $ 100.0 million as of June 30, 2024. We reported an unrealized gain on investment of $ 29.5 million for the six months ended June 30, 2024. See Note 12 – Fair Value Measurements. NOTE 7. 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 was as follows: (in millions) June 30, 2024 December 31, 2023 Vehicles, at cost 1 $ 308.6 $ 102.7 Accumulated depreciation 1 ( 20.5 ) ( 11.2 ) Net investment in operating leases $ 288.1 $ 91.5 1 Vehicles, at cost and accumulated depreciation are recorded in other non-current assets on the Consolidated Balance Sheets. NOTE 8. COMMITMENTS AND CONTINGENCIES Contract Liabilities We are the obligor on our lifetime oil and at home valet contracts. Revenue is allocated to these performance obligations and is recognized over time as services are provided to the customer. The amount of revenue recognized is calculated, net of cancellations, using an input method, which most closely depicts performance of the contracts. Our contract liability balances were $ 394.4 million and $ 317.0 m

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