Lithia Motors(LAD) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for the period ended June 30, 2023, show significant growth in total assets to $17.7 billion, driven by increases in inventories and finance receivables Consolidated Balance Sheets As of June 30, 2023, total assets increased to $17.7 billion from $15.0 billion at year-end 2022, primarily driven by a significant rise in inventories to $4.3 billion and finance receivables to $2.9 billion Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $17,682.7 | $15,006.6 | | Inventories, net | $4,278.9 | $3,409.4 | | Finance receivables, net | $2,882.4 | $2,187.6 | | Goodwill | $1,610.2 | $1,460.7 | | Total Liabilities | $11,880.0 | $9,755.5 | | Floor plan notes payable (total) | $2,816.7 | $2,116.6 | | Long-term debt, less current maturities | $5,414.0 | $5,088.3 | | Total Equity | $5,759.7 | $5,210.4 | Consolidated Statements of Operations For the second quarter of 2023, total revenues increased to $8.1 billion from $7.2 billion in Q2 2022, driven by a 23.5% rise in new vehicle retail sales, though net income declined to $297.2 million from $331.3 million due to lower gross profit margins and higher interest expenses Q2 and H1 2023 vs 2022 Performance (in millions, except per share) | Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $8,111.5 | $7,240.1 | $15,091.0 | $13,945.4 | | Gross Profit | $1,385.1 | $1,350.7 | $2,596.3 | $2,628.9 | | Operating Income | $475.8 | $519.1 | $854.6 | $1,025.5 | | Net Income (to Lithia) | $297.2 | $331.3 | $525.9 | $673.5 | | Diluted EPS | $10.78 | $11.60 | $19.08 | $23.15 | - Floor plan interest expense saw a substantial increase, rising to $34.7 million in Q2 2023 from just $3.8 million in Q2 2022, reflecting higher interest rates and inventory levels[9] Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash used in operating activities was $298.7 million, primarily due to growth in inventories and finance receivables, while net cash used in investing activities rose to $1.0 billion driven by acquisitions, and financing activities provided $1.25 billion Six Months Ended June 30 Cash Flow Summary (in millions) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(298.7) | $(263.1) | | Net cash used in investing activities | $(1,000.2) | $(782.7) | | Net cash provided by financing activities | $1,248.5 | $984.6 | | Decrease in cash and restricted cash | $(42.3) | $(61.6) | - Significant investing activities included $978.5 million for acquisitions and $97.1 million in capital expenditures - Financing activities were marked by $1.04 billion in proceeds from non-recourse notes and net borrowings of $260.1 million on lines of credit[15] Condensed Notes to Consolidated Financial Statements The notes detail key accounting policies and financial statement components, including inventory growth to $4.3 billion, finance receivables to $2.9 billion, and goodwill and franchise value increases due to $985.8 million in acquisitions, with the Financing Operations segment reporting a net loss Inventory Breakdown (in millions) | Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | New vehicles | $2,213.0 | $1,679.8 | | Used vehicles | $1,842.2 | $1,529.3 | | Parts and accessories | $223.7 | $200.3 | | Total inventories | $4,278.9 | $3,409.4 | - In the first six months of 2023, the company completed acquisitions for a total consideration of $985.8 million, including cash paid of $978.5 million - These acquisitions contributed $791.8 million in revenue and $28.8 million in operating income post-acquisition[56][57] Segment Performance - Six Months Ended June 30, 2023 (in millions) | Segment | Revenue | Gross Profit | Segment Income (Loss) | | :--- | :--- | :--- | :--- | | Vehicle Operations | $15,091.0 | $2,596.3 | $862.5 | | Financing Operations | N/A | N/A | $(39.5) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses revenue growth driven by acquisitions and organic increases, alongside normalizing gross profit margins and a net loss in the Financing Operations segment due to compressed interest margins and higher provision expenses, while maintaining a strong liquidity position of over $1.0 billion Overview and Strategy Lithia & Driveway (LAD) is a growth company focused on consolidating the automotive retail sector through operational excellence, disciplined acquisitions, and thoughtful capital allocation, aiming to provide a seamless customer experience via its network and captive finance division - The company's long-term strategy focuses on operational excellence, innovation, diversification, and growth through acquisitions and network optimization[76][81] - Capital allocation strategy targets 65% for acquisitions, 25% for internal investments (capital expenditures, innovation), and 10% for shareholder returns (dividends, repurchases)[84] Results of Operations In Q2 2023, total revenues grew 12.0% to $8.1 billion, driven by a 23.5% increase in new vehicle revenue, despite declining gross profit margins for new and used vehicles and a $18.7 million loss in the Financing Operations segment Q2 2023 vs Q2 2022 Key Performance Metrics | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $8,111.5M | $7,240.1M | +12.0% | | Total Gross Profit | $1,385.1M | $1,350.7M | +2.5% | | New Vehicle GPU | $4,635 | $5,970 | -22.4% | | Used Vehicle GPU | $2,640 | $2,942 | -10.3% | | F&I PVRU | $2,059 | $2,206 | -6.7% | Q2 2023 vs Q2 2022 Same Store Performance | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $6,869.4M | $7,077.8M | -2.9% | | Total Gross Profit | $1,193.1M | $1,320.3M | -9.6% | | New Vehicle Units | 69,473 | 67,069 | +3.6% | | Used Vehicle Units | 70,080 | 79,293 | -11.6% | - The Financing Operations segment experienced a loss of $18.7 million in Q2 2023, compared to income of $3.3 million in Q2 2022, as interest expense growth outpaced income and provision expense increased[113][115] - SG&A as a percentage of gross profit rose to 60.8% in Q2 2023 from 59.0% in Q2 2022, driven by network expansion costs[121] Liquidity and Capital Resources As of June 30, 2023, the company had approximately $1.0 billion in available liquidity, with cash used in operations at $298.7 million and investing activities at $1.0 billion primarily for acquisitions, while financing activities provided $1.25 billion Available Liquidity (in millions) | Source | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash | $88.7 | $168.1 | | Available credit on credit facilities | $933.3 | $1,419.4 | | Total current available funds | $1,022.0 | $1,587.5 | - Cash paid for acquisitions in the first six months of 2023 was $978.5 million, a significant increase from $706.0 million in the same period of 2022[159] - The company repurchased 70,560 shares for $14.5 million in H1 2023, all related to tax withholding on vested RSUs - $501.4 million remains available under the share repurchase authorization[47][169] Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its reported market risks or risk management policies since the filing of its 2022 Annual Report on Form 10-K - There were no material changes in market risks or risk management policies since the 2022 Annual Report on Form 10-K[178] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[179] - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter[180] PART II OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings that arise in the normal course of business, which management does not anticipate will have a material adverse effect on the company's business, financial condition, or cash flows - The company is party to numerous legal proceedings arising in the normal course of business, which are not expected to have a material adverse effect[181] Risk Factors The company highlights material changes to its risk factors, specifically those associated with its new U.K. operations following the acquisition of Jardine Motors Group, including navigating different legal and regulatory environments, potential shifts by manufacturers to an agency model, and the absence of U.S.-style automotive dealership franchise laws - A new material risk factor has been identified related to the company's expansion into the United Kingdom following the acquisition of Jardine Motors Group in March 2023[183] - Specific U.K. risks include different regulatory landscapes, such as a proposed 2030 ban on new gasoline car sales, and the lack of automotive dealership franchise laws that provide protections in the U.S.[184][186] - The potential adoption of an "agency model" by manufacturers in the U.K. (as used by Mercedes-Benz) could negatively affect revenues, as the company would only recognize a fee rather than the full vehicle price[185] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2023, the company repurchased 165 shares of its common stock for approximately $39,126, all related to tax withholding upon RSU vesting and not part of the publicly announced share repurchase plan, with $501.4 million remaining available under the authorized plan Share Repurchases in Q2 2023 | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April | 0 | $— | | May | 110 | $220.89 | | June | 55 | $269.62 | | Total | 165 | $237.13 | - All shares repurchased in Q2 2023 were related to tax withholding for vested RSUs and did not reduce the amount available under the publicly announced repurchase plan[188] - The maximum dollar value of shares that may yet be purchased under the plan is $501,368,000[187] Other Information The company reports that no director or officer adopted or terminated any Rule 10b5-1 plan or any non-Rule 10b5-1 trading arrangement during the second quarter of 2023 - No director or officer adopted or terminated a Rule 10b5-1 trading plan during the second quarter of 2023[188] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO pursuant to the Securities Exchange Act of 1934, and the Inline XBRL documents