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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-14733
Lithia Motors, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Oregon | | 93-0572810 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 150 N. Bartlett Street | Medford, | Oregon | 97501 |
| (Address of principal executive offices) | (Zip Code) |
(541) 776-6401
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
| Common stock without par value | | LAD | | The New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” "accelerated filer” and "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | Non-accelerated filer | Accelerated filer | Smaller reporting company | Emerging growth company |
| X | ☐ | ☐ | ☐ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X
As of April 28, 2022, there were 28,933,642 shares of the registrant’s common stock outstanding.
LITHIA MOTORS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
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| Item Number | Item | Page |
| PART I | FINANCIAL INFORMATION | |
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| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | OTHER INFORMATION | |
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| Item 1. | Legal Proceedings | |
| Item 1A. | | |
| Item 2. | | |
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| Item 6. | | |
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| SIGNATURE | | |
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| CONSOLIDATED BALANCE SHEETS |
| (In millions; Unaudited) | March 31, 2022 | | December 31, 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash, restricted cash, and cash equivalents | $ | 161.4 | | | $ | 174.8 | |
Accounts receivable, net of allowance for doubtful accounts of $18.7 and $17.3 | 923.8 | | | 910.0 | |
| Inventories, net | 2,697.3 | | | 2,385.5 | |
| | | |
| Other current assets | 102.1 | | | 63.0 | |
| | | |
| Total current assets | 3,884.6 | | | 3,533.3 | |
| | | |
Property and equipment, net of accumulated depreciation of $445.6 and $422.6 | 3,244.5 | | | 3,052.6 | |
| Operating lease right-of-use assets | 393.1 | | | 395.9 | |
| Goodwill | 1,019.3 | | | 977.3 | |
| Franchise value | 956.7 | | | 799.1 | |
| | | |
| Other non-current assets | 2,582.6 | | | 2,388.7 | |
| Total assets | $ | 12,080.8 | | | $ | 11,146.9 | |
| | | |
| Liabilities and equity | | | |
| Current liabilities: | | | |
| Floor plan notes payable | $ | 388.2 | | | $ | 354.2 | |
| Floor plan notes payable: non-trade | 1,002.8 | | | 835.9 | |
| Current maturities of long-term debt | 282.7 | | | 223.7 | |
| Trade payables | 260.5 | | | 235.4 | |
| Accrued liabilities | 890.9 | | | 753.6 | |
| | | |
| | | |
| Total current liabilities | 2,825.1 | | | 2,402.8 | |
| | | |
| Long-term debt, less current maturities | 3,395.2 | | | 3,185.7 | |
| Deferred revenue | 200.2 | | | 191.2 | |
| Deferred income taxes | 203.7 | | | 191.0 | |
| Non-current operating lease liabilities | 357.2 | | | 361.7 | |
| Other long-term liabilities | 156.8 | | | 151.3 | |
| Total liabilities | 7,138.2 | | | 6,483.7 | |
| | | |
| Redeemable non-controlling interest | 34.9 | | | 34.0 | |
| | | |
| Equity: | | | |
Preferred stock - no par value; authorized 15.0 shares; none outstanding | — | | | — | |
Common stock - no par value; authorized 125.0 shares; issued and outstanding 29.4 and 29.5 | 1,656.3 | | | 1,711.6 | |
| | | |
| Additional paid-in capital | 51.8 | | | 58.3 | |
| Accumulated other comprehensive income (loss) | 4.9 | | | (3.0) | |
| Retained earnings | 3,191.4 | | | 2,859.5 | |
| Total stockholders’ equity - Lithia Motors, Inc. | 4,904.4 | | | 4,626.4 | |
| Non-controlling interest | 3.3 | | | 2.8 | |
| Total equity | 4,907.7 | | | 4,629.2 | |
| Total liabilities, redeemable non-controlling interest and equity | $ | 12,080.8 | | | $ | 11,146.9 | |
See accompanying condensed notes to consolidated financial statements.
| | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | | | Three Months Ended March 31, |
| (In millions, except per share amounts; Unaudited) | | | | | 2022 | | 2021 |
| Revenues: | | | | | | | |
| New vehicle retail | | | | | $ | 3,061.8 | | | $ | 2,193.2 | |
| Used vehicle retail | | | | | 2,234.5 | | | 1,352.2 | |
| Used vehicle wholesale | | | | | 385.8 | | | 135.2 | |
| Finance and insurance | | | | | 313.2 | | | 198.4 | |
| Service, body and parts | | | | | 627.8 | | | 404.0 | |
| Fleet and other | | | | | 82.2 | | | 60.0 | |
| Total revenues | | | | | 6,705.3 | | | 4,343.0 | |
| Cost of sales: | | | | | | | |
| New vehicle retail | | | | | 2,660.5 | | | 2,036.5 | |
| Used vehicle retail | | | | | 2,010.7 | | | 1,216.0 | |
| Used vehicle wholesale | | | | | 378.1 | | | 130.6 | |
| Service, body and parts | | | | | 298.8 | | | 185.8 | |
| Fleet and other | | | | | 79.1 | | | 58.6 | |
| Total cost of sales | | | | | 5,427.2 | | | 3,627.5 | |
| Gross profit | | | | | 1,278.1 | | | 715.5 | |
| | | | | | | |
| Selling, general and administrative | | | | | 726.1 | | | 450.4 | |
| Depreciation and amortization | | | | | 39.2 | | | 26.8 | |
| Operating income | | | | | 512.8 | | | 238.3 | |
| Floor plan interest expense | | | | | (4.9) | | | (6.8) | |
| Other interest expense, net | | | | | (30.1) | | | (23.5) | |
| Other income (expense), net | | | | | (8.0) | | | 3.4 | |
| Income before income taxes | | | | | 469.8 | | | 211.4 | |
| Income tax provision | | | | | (126.2) | | | (55.2) | |
| Net income | | | | | 343.6 | | | 156.2 | |
| Net income attributable to non-controlling interest | | | | | (0.5) | | | — | |
| Net income attributable to redeemable non-controlling interest | | | | | (0.9) | | | — | |
| Net income attributable to Lithia Motors, Inc. | | | | | $ | 342.2 | | | $ | 156.2 | |
| | | | | | | |
| Basic earnings per share attributable to Lithia Motors, Inc. | | | | | $ | 11.59 | | | $ | 5.86 | |
| Shares used in basic per share calculations | | | | | 29.5 | | | 26.6 | |
| | | | | | | |
| Diluted earnings per share attributable to Lithia Motors, Inc. | | | | | $ | 11.55 | | | $ | 5.81 | |
| Shares used in diluted per share calculations | | | | | 29.6 | | | 26.9 | |
| | | | | | | |
| Cash dividends paid per share | | | | | $ | 0.35 | | | $ | 0.31 | |
See accompanying condensed notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| | | | Three Months Ended March 31, |
| (In millions; Unaudited) | | | | | 2022 | | 2021 |
| Net income | | | | | $ | 343.6 | | | $ | 156.2 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Foreign currency translation adjustment | | | | | 4.0 | | | — | |
Gain on cash flow hedges, net of tax expense of $1.4, and $0.6, respectively | | | | | 3.9 | | | 1.8 | |
| Total other comprehensive income, net of tax | | | | | 7.9 | | | 1.8 | |
| Comprehensive income | | | | | 351.5 | | | 158.0 | |
| | | | | | | |
| Comprehensive income attributable to non-controlling interest | | | | | (0.5) | | | — | |
| Comprehensive income attributable to redeemable non-controlling interest | | | | | (0.9) | | | — | |
| Comprehensive income attributable to Lithia Motors, Inc. | | | | | $ | 350.1 | | | $ | 158.0 | |
See accompanying condensed notes to consolidated financial statements.
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| CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST |
| | | Three Months Ended March 31, |
| (In millions; Unaudited) | | | | | 2022 | | 2021 |
| Total equity, beginning balances | | | | | $ | 4,629.2 | | | $ | 2,661.5 | |
| | | | | | | |
Common stock1, beginning balances | | | | | 1,711.6 | | | 788.2 | |
| Compensation for stock and stock option issuances and excess tax benefits from option exercises | | | | | 17.0 | | | 13.4 | |
| Issuance of stock in connection with employee stock plans | | | | | 7.8 | | | 4.2 | |
| | | | | | | |
| | | | | | | |
| Repurchase of common stock | | | | | (80.1) | | | (15.9) | |
| | | | | | | |
Common stock1, ending balances | | | | | 1,656.3 | | | 789.9 | |
| | | | | | | |
Class B common stock1, beginning balances | | | | | — | | | — | |
Class B common stock converted to class A common stock1 | | | | | — | | | — | |
Class B common stock1, ending balances | | | | | — | | | — | |
| | | | | | | |
| Additional paid-in capital, beginning balances | | | | | 58.3 | | | 41.4 | |
| Compensation for stock and stock option issuances and excess tax benefits from option exercises | | | | | (6.5) | | | (5.4) | |
| | | | | | | |
| | | | | | | |
| Additional paid-in capital, ending balances | | | | | 51.8 | | | 36.0 | |
| | | | | | | |
| Accumulated other comprehensive loss, beginning balances | | | | | (3.0) | | | (6.3) | |
| Foreign currency translation adjustment | | | | | 4.0 | | | — | |
Gain on cash flow hedges, net of tax expense of $1.4, and $0.6, respectively | | | | | 3.9 | | | 1.8 | |
| Accumulated other comprehensive income (loss), ending balances | | | | | 4.9 | | | (4.5) | |
| | | | | | | |
| Retained earnings, beginning balances | | | | | 2,859.5 | | | 1,838.2 | |
| | | | | | | |
| Net income attributable to Lithia Motors, Inc. | | | | | 342.2 | | | 156.2 | |
| Dividends paid | | | | | (10.3) | | | (8.2) | |
| | | | | | | |
| Retained earnings, ending balances | | | | | 3,191.4 | | | 1,986.2 | |
| | | | | | | |
| Non-controlling interest, beginning balances | | | | | 2.8 | | | — | |
| | | | | | | |
| Net income attributable to non-controlling interest | | | | | 0.5 | | | — | |
| Non-controlling interest, ending balances | | | | | 3.3 | | | — | |
| | | | | | | |
| Total equity, ending balances | | | | | $ | 4,907.7 | | | $ | 2,807.6 | |
| | | | | | | |
| Redeemable non-controlling interest, beginning balances | | | | | $ | 34.0 | | | $ | — | |
| | | | | | | |
| Net income attributable to redeemable non-controlling interest | | | | | 0.9 | | | — | |
| Redeemable non-controlling interest, ending balances | | | | | $ | 34.9 | | | $ | — | |
1 Prior to June 7, 2021, common stock was classified as Class A common stock. The Class A common stock reclassification as common stock occurred in connection with the elimination of our classified common stock structure following the conversion of all Class B common stock to Class A common stock.
See accompanying condensed notes to consolidated financial statements.
| | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | Three Months Ended March 31, |
| (In millions; Unaudited) | 2022 | | 2021 |
| Cash flows from operating activities: | | | |
| Net income | $ | 343.6 | | | $ | 156.2 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Asset impairments | — | | | — | |
| Depreciation and amortization | 39.2 | | | 26.8 | |
| Stock-based compensation | 10.5 | | | 8.0 | |
| | | |
| Loss on disposal of other assets | 0.9 | | | 0.3 | |
| (Gain) loss on disposal of franchise | (10.0) | | | 0.7 | |
| Unrealized investment loss | 14.9 | | | 0.3 | |
| Deferred income taxes | 11.3 | | | 10.4 | |
| | | |
| Amortization of operating lease right-of-use assets | 3.6 | | | 8.2 | |
| (Increase) decrease (net of acquisitions and dispositions): | | | |
| Accounts receivable, net | (80.4) | | | (126.7) | |
| Inventories | (244.9) | | | 244.6 | |
| Other assets | (256.6) | | | (59.0) | |
| Increase (decrease) (net of acquisitions and dispositions): | | | |
| Floor plan notes payable | 33.7 | | | 107.3 | |
| Trade payables | 26.0 | | | 47.8 | |
| Accrued liabilities | 111.6 | | | 76.7 | |
| Other long-term liabilities and deferred revenue | 22.9 | | | (2.1) | |
| Net cash provided by operating activities | 26.3 | | | 499.5 | |
| Cash flows from investing activities: | | | |
| | | |
| | | |
| Capital expenditures | (60.7) | | | (50.0) | |
| Proceeds from sales of assets | 6.8 | | | — | |
| Cash paid for other investments | (9.8) | | | (9.6) | |
| Cash paid for acquisitions, net of cash acquired | (326.5) | | | (383.5) | |
| Proceeds from sales of stores | 32.9 | | | 0.3 | |
| Net cash used in investing activities | (357.3) | | | (442.8) | |
| Cash flows from financing activities: | | | |
| Repayments on floor plan notes payable, net: non-trade | 177.1 | | | (74.8) | |
| Borrowings on lines of credit | 2,295.0 | | | 79.3 | |
| Repayments on lines of credit | (2,029.8) | | | (18.3) | |
| Principal payments on long-term debt and finance lease liabilities, scheduled | (62.9) | | | (8.3) | |
| Principal payments on long-term debt and finance lease liabilities, other | (12.5) | | | — | |
| Proceeds from issuance of long-term debt | 16.2 | | | — | |
| Payment of debt issuance costs | — | | | (0.1) | |
| Proceeds from issuance of common stock | 7.8 | | | 4.2 | |
| Repurchase of common stock | (60.9) | | | (15.9) | |
| | | |
| Dividends paid | (10.3) | | | (8.2) | |
| Payment of contingent consideration related to acquisitions | (3.7) | | | (1.4) | |
| | | |
| | | |
| Net cash provided by (used in) financing activities | 316.0 | | | (43.5) | |
| Effect of exchange rate changes on cash and cash equivalents | 1.7 | | | — | |
| Increase in cash, restricted cash, and cash equivalents | (13.3) | | | 13.4 | |
| Cash, restricted cash, and cash equivalents at beginning of year | 178.5 | | | 162.4 | |
| Cash, restricted cash, and cash equivalents at end of period | $ | 165.2 | | | $ | 175.8 | |
See accompanying condensed notes to consolidated financial statements.
| | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| Three Months Ended March 31, |
| (In millions) | 2022 | | 2021 |
| Reconciliation of cash, restricted cash, and cash equivalents to the consolidated balance sheets |
| Cash and cash equivalents | $ | 131.6 | | | $ | 170.3 | |
| Restricted cash from collections on auto loans receivable | 29.8 | | | 5.5 | |
| Cash, restricted cash, and cash equivalents | $ | 161.4 | | | $ | 175.8 | |
| Restricted cash on deposit in reserve accounts, included in other non-current assets | 3.8 | | | — | |
| Total cash, restricted cash, and cash equivalents reported in the Consolidated Statements of Cash Flows | $ | 165.2 | | | $ | 175.8 | |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid during the period for interest | $ | 29.3 | | | $ | 30.0 | |
| Cash paid during the period for income taxes, net | 5.1 | | | 2.5 | |
| Floor plan debt paid in connection with store disposals | — | | | 1.4 | |
| | | |
| Non-cash activities: | | | |
| | | |
| | | |
| | | |
| | | |
| Acquisition of finance leases in connection with acquisitions | 59.0 | | | — | |
| | | |
| Right-of-use assets obtained in exchange for lease liabilities | 8.5 | | | 3.4 | |
| Unsettled repurchases of common stock | 19.1 | | | — | |
See accompanying condensed notes to consolidated financial statements.
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, 2022, and for the three months ended March 31, 2022 and 2021. 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 2021 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2021, is derived from our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 18, 2022. 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 immaterial reclassifications of amounts previously reported have been made to the accompanying condensed Consolidated Financial Statements to maintain consistency and comparability between periods presented.
Note 2. Contract Liabilities and Assets
Contract Liabilities
We are the obligor on our lifetime oil 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 $249.9 million and $239.0 million as of March 31, 2022, and December 31, 2021, respectively; and we recognized $11.1 million of revenue in the three months ended March 31, 2022 related to our contract liability balance at December 31, 2021. Our contract liability balance is included in accrued liabilities and deferred revenue.
Contract Assets
Revenue from finance and insurance sales is recognized, net of estimated charge-backs, at the time of the sale of the related vehicle. We act as an agent in the sale of these contracts as the pricing is set by the third-party provider, and our commission is preset. A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and is estimated and recognized upon the sale of the contract. Our contract asset balances associated with future estimated variable consideration were $9.8 million and $9.6 million as of March 31, 2022 and December 31, 2021, respectively; and are included in trade receivables and other non-current assets.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 7 |
Note 3. Accounts Receivable
Accounts receivable consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | March 31, 2022 | | December 31, 2021 |
| Contracts in transit | | $ | 367.3 | | | $ | 304.9 | |
| Trade receivables | | 128.5 | | | 125.5 | |
| Vehicle receivables | | 126.5 | | | 106.6 | |
| Manufacturer receivables | | 140.5 | | | 120.5 | |
| Auto loan and lease receivables | | 1,036.4 | | | 829.2 | |
| Other receivables | | 18.5 | | | 43.2 | |
| | | 1,817.7 | | | 1,529.9 | |
| Less: Allowance for doubtful accounts | | (18.7) | | | (17.3) | |
Less: Long-term portion of accounts receivable, net1 | | (875.2) | | | (602.6) | |
| Total accounts receivable, net | | $ | 923.8 | | | $ | 910.0 | |
1The long-term portions of accounts receivable and allowance for doubtful accounts were included as a component of other non-current assets in the Consolidated Balance Sheets.
Accounts receivable classifications include the following:
•Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received approximately ten days after selling a vehicle.
•Trade receivables are comprised of amounts due from customers for open charge accounts, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.
•Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
•Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.
•Auto loan receivables include amounts due from customers related to vehicle sales financed through Driveway Finance Corporation.
•Lease receivables include amounts related to vehicles leased to customers through Pfaff Leasing.
Interest income on auto loan 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. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The balances of auto loan and lease receivables are made up of loans 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.
| | | | | | | | | | | |
| (Dollars in millions) | March 31, 2022 | | December 31, 2021 |
| Total Auto loan and lease receivables | $ | 1,036.4 | | | $ | 829.2 | |
| Less: Allowance for loan and lease losses | (29.4) | | | (25.0) | |
| Auto loan and lease receivables, net | $ | 1,007.0 | | | $ | 804.2 | |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 8 |
Below is a breakdown of the current and long term portions of our auto loan and lease receivables:
| | | | | | | | | | | |
| (Dollars in millions) | March 31, 2022 | | December 31, 2021 |
Current portion of auto loan and lease receivables, net of allowance of $15.5 and $13.6 | $ | 157.2 | | | $ | 224.5 | |
Long term portion of auto loan and lease receivables, net of allowance of $13.9 and $11.4 | 849.8 | | | 579.7 | |
| Auto loan and lease receivables, net | $ | 1,007.0 | | | $ | 804.2 | |
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 auto loan and lease receivables consisted of the following changes during the period:
| | | | | | | | | | | |
| Three Months Ended March 31, |
| (Dollars in millions) | 2022 | | 2021 |
| Allowance for loan losses at beginning of period | $ | 22.5 | | | $ | 12.4 | |
| Charge-offs | (10.3) | | | (3.4) | |
| Recoveries | 4.2 | | | 1.9 | |
| Provision expense | 9.8 | | | 1.1 | |
| Allowance for loan losses at end of period | 26.2 | | | 12.0 | |
| Allowance for lease losses | 3.2 | | | — | |
| Total allowance for loan and lease losses balance at end of period | $ | 29.4 | | | $ | 12.0 | |
Ending auto loan receivables (principal balances) by FICO score:
| | | | | | | | | | | |
| (Dollars in millions) | March 31, 2022 | | December 31, 2021 |
<5991 | $ | 85.8 | | | $ | 83.2 | |
| 600-699 | 547.4 | | | 437.6 | |
| 700-774 | 238.3 | | | 166.8 | |
| 775+ | 56.7 | | | 37.4 | |
| Total auto loan receivables | 928.2 | | | 725.0 | |
| Lease portfolio and accrued interest | 108.2 | | | 104.2 | |
| Total auto loan and lease receivables | $ | 1,036.4 | | | $ | 829.2 | |
1Includes loans that are originated with no FICO score available.
In accordance with Topic 326, the allowance for loan and lease losses is estimated based on our historical write-off experience, current conditions and forecasts, as well as the value of any underlying assets securing these loans. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance upon reaching 120 days past due status. The annual activity for charges and subsequent recoveries is immaterial. The remainder of our receivables are due primarily from manufacturer partners and various third-party lenders. The historical losses related to these balances are immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.
Note 4. Inventories
The components of inventories, net, consisted of the following:
| | | | | | | | | | | | | | |
| (in millions) | | March 31, 2022 | | December 31, 2021 |
| New vehicles | | $ | 950.5 | | | $ | 812.9 | |
| Used vehicles | | 1,580.2 | | | 1,418.3 | |
| Parts and accessories | | 166.6 | | | 154.3 | |
| Total inventories | | $ | 2,697.3 | | | $ | 2,385.5 | |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 9 |
Note 5. Goodwill and Franchise Value
The changes in the carrying amounts of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | Domestic | | Import | | Luxury | | Consolidated |
| Balance as of December 31, 2020 ¹ | | $ | 204.5 | | | $ | 287.9 | | | $ | 100.6 | | | $ | 593.0 | |
| | | | | | | | |
Additions through acquisitions 2 | | 101.0 | | | 188.7 | | | 105.8 | | | 395.5 | |
| Reductions through divestitures | | (1.5) | | | (8.4) | | | (1.3) | | | (11.2) | |
| | | | | | | | |
| Balance as of December 31, 2021 ¹ | | 304.0 | | | 468.2 | | | 205.1 | | | 977.3 | |
| | | | | | | | |
Additions through acquisitions 3 | | 11.2 | | | 21.2 | | | 13.3 | | | 45.7 | |
| Reductions through divestitures | | (3.7) | | | — | | | — | | | (3.7) | |
| | | | | | | | |
| Balance as of March 31, 2022 ¹ | | $ | 311.5 | | | $ | 489.4 | | | $ | 218.4 | | | $ | 1,019.3 | |
1 Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
2 Our purchase price allocation for the 2020 acquisitions were finalized in 2021. As a result, we added $395.5 million of goodwill.
3 Our purchase price allocation for a portion of the 2021 acquisitions was finalized in 2022. As a result, we added $45.7 million of goodwill. Our purchase price allocation for the remaining 2021 and 2022 acquisitions are preliminary and goodwill 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.
The changes in the carrying amounts of franchise value are as follows:
| | | | | |
| (in millions) | Franchise Value |
| Balance as of December 31, 2020 | $ | 350.2 | |
| |
Additions through acquisitions 1 | 459.7 | |
| Reductions through divestitures | (8.9) | |
| Reductions from impairments | (1.9) | |
| Balance as of December 31, 2021 | 799.1 | |
| |
Additions through acquisitions 2 | 158.3 | |
| Reductions through divestitures | (0.7) | |
| |
| Balance as of March 31, 2022 | $ | 956.7 | |
1 Our purchase price allocation for the 2020 acquisitions were finalized in 2021. As a result, we added $459.7 million of franchise value.
2 Our purchase price allocation for a portion of the 2021 acquisitions was finalized in 2022. As a result, we added $158.3 million of franchise value. Our purchase price allocation for the remaining 2021 and 2022 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.
Note 6. Equity and Redeemable Non-Controlling Interest
Repurchases of Common Stock
Repurchases of our common stock occurred under a repurchase authorization granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units (RSUs). On November 30, 2021, our Board of Directors approved an additional $750 million repurchase authorization of our common stock, increasing our total repurchase authorization to $1.25 billion combined with the amount previously authorized by the Board for repurchase. Share repurchases under this authorization were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Repurchases Occurring in 2022 | | Cumulative Repurchases as of March 31, 2022 |
| | | Shares | | Average Price | | Shares | | Average Price |
| Share Repurchase Authorization | | 218,245 | | | $ | 289.66 | | | 4,694,176 | | | $ | 125.79 | |
As of March 31, 2022, we had $659.5 million available for repurchases pursuant to our share repurchase authorization.
In addition, during 2022, we repurchased 56,779 shares at an average price of $296.97 per share, for a total of $16.9 million, related to tax withholding associated with the vesting of RSUs. The repurchase of shares related to
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 10 |
tax withholding associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.
ATM Equity Offering
On July 24, 2020, we entered into an ATM Equity Offering Sales Agreement, which allows us to offer and sell, from time to time, shares of our common stock, no par value, having an aggregate gross sales price of up to $400 million. The shares will be issued pursuant to a registration statement on Form S-3 (File No. 333-239969), which became effective upon its filing on July 21, 2020. Under this agreement, we may enter into forward share purchase transactions. As of March 31, 2022, no amounts have been issued in relation to the ATM Equity Offering Sales Agreement.
Redeemable Non-Controlling Interest
On August 30, 2021, we expanded into Canada through a partnership with Toronto-based Pfaff Automotive Partners. As part of the acquisition, we were granted the right to purchase (Call Option), and granted Pfaff Automotive a right to sell (Put Option), the remaining interest after a three-year period, with a purchase price based on Pfaff’s pro rata share of assets at the date of exercise of the Call or Put Option, as applicable. As a result of this redemption feature, we recorded redeemable non-controlling interest, at its preliminary estimate of acquisition-date fair value, that is classified as mezzanine equity in the accompanying Consolidated Balance Sheets. The non-controlling interest is adjusted each reporting period for income (loss) attributable to the non-controlling interest and adjustments in fair value.
Note 7. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•Level 1 - quoted prices in active markets for identical securities;
•Level 2 - other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads, credit risk; and
•Level 3 - significant unobservable inputs, including our own assumptions in determining fair value.
We determined that the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.
We have investments primarily consisting of our investment in Shift Technologies, Inc. (Shift), a San Francisco-based digital retail company. Shift has a readily determinable fair value following Shift going public in a reverse-merger deal with Insurance Acquisition, a special purpose acquisition company, in the fourth quarter of 2020. We calculated the fair value of this investment using quoted prices for the identical security (Level 1) and recorded the fair value as part of other non-current assets. An additional component of our investment in Shift consists of shares in escrow subject to release upon certain market conditions being met. The fair value of this component of our investment in Shift is measured using observable Level 2 market expectations at each measurement date and is recorded as part of other non-current assets. For the three months ended March 31, 2022 and March 31, 2021, we recognized a $14.9 million and a $0.3 million unrealized investment loss related to Shift, respectively. These amounts were recorded as a component of Other income (expense), net.
We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt. As of March 31, 2022, our real estate mortgages and other debt, which includes capital leases, had maturity dates between April 1, 2022, and July 1, 2038.
We have derivative instruments consisting of interest rate collars. The fair value of derivative assets and liabilities are measured using observable Level 2 market expectations at each measurement date and is recorded as current
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 11 |
liabilities and other long-term liabilities in the Consolidated Balance Sheets. See Note 11 for more details regarding our derivative contracts.
We estimate the value of other long-lived assets that are recorded at fair value on a non-recurring basis on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers’ and brokers’ valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. Because these valuations contain unobservable inputs, we classified the measurement of fair value of long-lived assets as Level 3.
There were no changes to our valuation techniques during the three-month period ended March 31, 2022.
Below are our investments that are measured at fair value (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at March 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Investments | | $ | 26.1 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Investments | | $ | 40.4 | | | $ | 0.5 | | | $ | — | |
Below are our derivative assets and liabilities that are measured at fair value (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at March 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Derivative asset | | $ | — | | | $ | 18.6 | | | $ | — | |
| Derivative liability | | — | | | 15.9 | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Derivative asset | | $ | — | | | $ | 6.4 | | | $ | — | |
| Derivative liability | | — | | | 8.9 | | | — | |
A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term fixed interest rate debt is as follows:
| | | | | | | | | | | | | | |
| (in millions) | | March 31, 2022 | | December 31, 2021 |
| Carrying value | | | | |
4.625% Senior notes due 2027 | | $ | 400.0 | | | $ | 400.0 | |
4.375% Senior notes due 2031 | | 550.0 | | | 550.0 | |
3.875% Senior notes due 2029 | | 800.0 | | | 800.0 | |
| Non-recourse notes payable | | 278.3 | | | 317.6 | |
| Real estate mortgages and other debt | | 515.2 | | | 477.6 | |
| | $ | 2,543.5 | | | $ | 2,545.2 | |
| Fair value | | | | |
4.625% Senior notes due 2027 | | $ | 396.0 | | | $ | 420.0 | |
4.375% Senior notes due 2031 | | 528.0 | | | 583.0 | |
3.875% Senior notes due 2029 | | 760.3 | | | 815.0 | |
| Non-recourse notes payable | | 271.8 | | | 316.8 | |
| Real estate mortgages and other debt | | 474.5 | | | 488.7 | |
| | $ | 2,430.6 | | | $ | 2,623.5 | |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | | 12 |
Note 8. Net Income Per Share
We compute net income per share using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding common shares underlying equity awards that are unvested or subject to forfeiture. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the common shares issuable upon the net exercise of stock options and unvested RSUs and is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
Prior to June 7, 2021, our common stock was classified as Class A common stock. The Class A common stock reclassification as common stock occurred pursuant to an amendment and restatement of our Articles of Incorporation in connection with the elimination of the Company’s classified common stock structure following the conversion of all Class B common stock to Class A common stock. Prior to the reclassification, except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock were identical. Under our Articles of Incorporation, the Class A and Class B common stock shared equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights were identical, the undistributed earnings are allocated on a proportionate basis.
The following is a reconciliation of net income and weighted average shares used for our basic earnings per share (EPS) and diluted EPS:
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | 2022 | | 2021 |
| (in millions, except per share amounts) | | Common Stock | | | | Class A | | Class B |
| Net income attributable to Lithia Motors, Inc. and applicable to common stockholders - basic | | $ | 342.2 | | | | | $ | 155.8 | | | $ | 0.4 | |
| | | | | | | | |
| | | | | | | | |
| Conversion of class B common shares into class A common shares | | — | | | | | 0.4 | | | — | |
| | | | | | | | |
| Net income attributable to Lithia Motors, Inc. and applicable to common stockholders - diluted | | $ | 342.2 | | | | | $ | 156.2 | | | $ | 0.4 | |
| | | | | | | | |
| Weighted average common shares outstanding – basic | | 29.5 | | | | | 26.6 | | | 0.1 | |
| Conversion of class B common shares into class A common shares | | — | | | | | 0.1 | | | — | |
| Effect of employee stock purchases and restricted stock units on weighted average common shares | | 0.1 | | | | | 0.2 | | | — | |
| Weighted average common shares outstanding – diluted | | 29.6 | | | | | 26.9 | | | 0.1 | |
| | | | | | | | |
| Basic earnings per share attributable to Lithia Motors, Inc. | | $ | 11.59 | | | | | $ | 5.86 | | | $ | 5.86 | |
| Diluted earnings per share attributable to Lithia Motors, Inc. | | $ | 11.55 | | | | | $ | 5.81 | | | $ | 5.81 | |
The effect of antidilutive securities on Class A and Class B common stock was evaluated for the three-month periods ended March 31, 2022, and 2021 and was determined to be immaterial.
Note 9. Segments
While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three reportable segments based on their economic similarities: Domestic, Import and Luxury.
Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Stellantis, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, Hyundai, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes and
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| | NOTES TO FINANCIAL STATEMENTS | | 13 |
Lexus. The franchises in each segment also sell used vehicles, parts and automotive services, as well as automotive finance and insurance products.
Corporate and other revenue and income includes the results of operations of our stand-alone body shops offset by unallocated corporate overhead expenses, such as corporate personnel costs, and certain unallocated reserve and elimination adjustments. Additionally, certain internal corporate expense allocations increase income for Corporate and other while decreasing segment income for the reportable segments. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.
We define our chief operating decision maker (CODM) to be certain members of our executive management group. Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, excepted for the internal allocation within Corporate and other discussed above. Our CODM does not regularly review capital expenditures on a reporting unit level. Performance measurement of each reportable segment by the CODM are based on several metrics, including earnings from operations. The CODM uses these results, in part, to evaluate the performance of and to allocate resources, mainly associated with expected inventory and working capital requirements, to each of the reportable segments.
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| | NOTES TO FINANCIAL STATEMENTS | | 14 |
Certain financial information on a segment basis is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended
March 31, |
| (in millions) | | | | | | 2022 | | 2021 |
| Revenues: | | | | | | | | |
| Domestic | | | | | | | | |
| New vehicle retail | | | | | | $ | 935.6 | | | $ | 614.6 | |
| Used vehicle retail | | | | | | 746.4 | | | 462.2 | |
| Used vehicle wholesale | | | | | | 128.1 | | | 36.2 | |
| Finance and insurance | | | | | | 89.4 | | | 58.6 | |
| Service, body and parts | | | | | | 187.6 | | | 120.8 | |
| Fleet and other | | | | | | 54.0 | | | 17.6 | |
| | | | | | 2,141.1 | | | 1,310.0 | |
| Import | | | | | | | | |
| New vehicle retail | | | | | | 1,288.4 | | | 968.1 | |
| Used vehicle retail | | | | | | 895.9 | | | 562.1 | |
| Used vehicle wholesale | | | | | | 131.8 | | | 58.3 | |
| Finance and insurance | | | | | | 170.4 | | | 105.5 | |
| Service, body and parts | | | | | | 243.1 | | | 156.7 | |
| Fleet and other | | | | | | 10.0 | | | 14.1 | |
| | | | | | 2,739.6 | | | 1,864.8 | |
| Luxury | | | | | | | | |
| New vehicle retail | | | | | | 836.5 | | | 614.1 | |
| Used vehicle retail | | | | | | 596.6 | | | 331.2 | |
| Used vehicle wholesale | | | | | | 107.1 | | | 39.8 | |
| Finance and insurance | | | | | | 62.4 | | | 36.9 | |
| Service, body and parts | | | | | | 183.1 | | | 121.7 | |
| Fleet and other | | | | | | 17.3 | | | 27.8 | |
| | | | | | 1,803.0 | | | 1,171.5 | |
| | | | | | | 6,683.7 | | | 4,346.3 | |
| Corporate and other | | | | | | 21.6 | | | (3.3) | |
| | | | | | | $ | 6,705.3 | | | $ | 4,343.0 | |
Segment income1: | | | | | | | | |
| Domestic | | | | | | $ | 130.5 | | | $ | 73.9 | |
| Import | | | | | | 245.8 | | | 101.5 | |
| Luxury | | | | | | 130.3 | | | 44.1 | |
| Total segment income for reportable segments | | | | | | $ | 506.6 | | | $ | 219.5 | |
1Segment income for each of the segments is a Non-GAAP measure defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other income, net.
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| | NOTES TO FINANCIAL STATEMENTS | | 15 |
Reconciliation of total segment income for reportable segments to our consolidated income before income taxes:
| | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended
March 31, |
| (in millions) | | | | | | 2022 | | 2021 |
| Total segment income for reportable segments | | | | | | $ | 506.6 | | | $ | 219.5 | |
| Corporate and other | | | | | | 40.5 | | | 38.8 | |
| Depreciation and amortization | | | | | | (39.2) | | | (26.8) | |
| Other interest expense | | | | | | (30.1) | | | (23.5) | |
| Other income (expense), net | | | | | | (8.0) | | | 3.4 | |
| Income before income taxes | | | | | | $ | 469.8 | | | $ | 211.4 | |
Total assets by reportable segments is as follows:
| | | | | | | | | | | | | | |
| (in millions) | | March 31, 2022 | | December 31, 2021 |
| Total assets: | | | | |
| Domestic | | $ | 1,831.9 | | | $ | 1,574.7 | |
| Import | | 2,106.3 | | | 1,858.1 | |
| Luxury | | 1,494.4 | | | 1,407.1 | |
| Corporate and other | | 6,648.2 |
