Lithia Motors(LAD) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Lithia Motors, Inc.'s unaudited consolidated financial statements, showing revenue growth but declining net income and EPS due to increased expenses and interest costs, alongside significant balance sheet growth Consolidated Balance Sheets (Unaudited) The balance sheet shows a significant increase in total assets and liabilities from December 31, 2022, to September 30, 2023, driven by growth in inventories, finance receivables, goodwill, and franchise value, alongside increased floor plan and non-recourse notes payable, with total equity also rising Key Asset Changes (Sept 30, 2023 vs. Dec 31, 2022) | Asset Category | Sep 30, 2023 (Millions) | Dec 31, 2022 (Millions) | Change (Millions) | | :------------- | :---------------------- | :-------------------- | :---------------- | | Inventories, net | $4,404.5 | $3,409.4 | +$995.1 | | Finance receivables, net | $3,102.1 | $2,187.6 | +$914.5 | | Goodwill | $1,725.6 | $1,460.7 | +$264.9 | | Franchise value | $2,147.7 | $1,856.2 | +$291.5 | Key Liability Changes (Sept 30, 2023 vs. Dec 31, 2022) | Liability Category | Sep 30, 2023 (Millions) | Dec 31, 2022 (Millions) | Change (Millions) | | :----------------- | :---------------------- | :-------------------- | :---------------- | | Floor plan notes payable | $1,261.2 | $627.2 | +$634.0 | | Floor plan notes payable: non-trade | $1,863.4 | $1,489.4 | +$374.0 | | Non-recourse notes payable, less current maturities | $1,435.9 | $422.2 | +$1,013.7 | Consolidated Statements of Operations (Unaudited) Total revenues increased significantly for Q3 and YTD 2023, driven by new vehicle retail and service, body, and parts, but net income and diluted EPS declined due to higher cost of sales, increased SG&A, and a substantial rise in interest expenses Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :---------------------------------- | :-------------- | :-------------- | :------------- | | Total Revenues | $8,277.0 | $7,295.7 | +13.59% | | Gross Profit | $1,371.3 | $1,314.2 | +4.34% | | Operating Income | $465.3 | $514.9 | -9.63% | | Net Income Attributable to Lithia Motors, Inc. | $261.5 | $329.6 | -20.66% | | Diluted EPS | $9.46 | $11.92 | -20.64% | Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :---------------------------------- | :-------------- | :-------------- | :------------- | | Total Revenues | $23,368.0 | $21,241.3 | +10.01% | | Gross Profit | $3,968.2 | $3,943.3 | +0.63% | | Operating Income | $1,319.9 | $1,540.7 | -14.33% | | Net Income Attributable to Lithia Motors, Inc. | $787.3 | $1,003.4 | -21.53% | | Diluted EPS | $28.54 | $35.10 | -18.70% | - Floor plan interest expense increased significantly: Q3 2023 was $40.2 million (+275.7% YoY) and YTD 2023 was $102.6 million (+428.9% YoY)[10] Consolidated Statements of Comprehensive Income (Unaudited) Comprehensive income for Lithia Motors, Inc. decreased for both the three and nine months ended September 30, 2023, compared to the prior year periods, primarily driven by lower net income and negative foreign currency translation adjustments Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :------------------------------------------ | :-------------- | :-------------- | :------------- | | Net Income | $264.9 | $330.3 | -19.80% | | Foreign currency translation adjustment | $(25.9) | $(16.4) | +57.93% (more negative) | | Comprehensive income attributable to Lithia Motors, Inc. | $235.6 | $313.2 | -24.79% | Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :------------------------------------------ | :-------------- | :-------------- | :------------- | | Net Income | $795.6 | $1,011.8 | -21.37% | | Foreign currency translation adjustment | $3.3 | $(20.3) | Significant positive swing | | Comprehensive income attributable to Lithia Motors, Inc. | $790.6 | $984.9 | -19.62% | Consolidated Statements of Equity and Redeemable Non-controlling Interest (Unaudited) Total equity for Lithia Motors, Inc. increased from $5,210.4 million at the beginning of the nine-month period to $6,022.5 million by September 30, 2023, primarily driven by net income and increases in common stock, partially offset by dividends paid - Total equity increased from $5,210.4 million at the beginning of 2023 to $6,022.5 million by September 30, 2023[14] - Net income attributable to Lithia Motors, Inc. for the nine months ended September 30, 2023, was $787.3 million, down from $1,003.4 million in the prior year[14] - Dividends paid for the nine months ended September 30, 2023, totaled $39.1 million, up from $33.8 million in the prior year[14] - Repurchase of common stock significantly decreased to $14.5 million for YTD 2023 from $653.6 million for YTD 2022[14] Consolidated Statements of Cash Flows (Unaudited) For the nine months ended September 30, 2023, the company experienced a net cash outflow from operating activities, a significant increase in cash used in investing activities primarily due to acquisitions, and a decrease in cash provided by financing activities, with overall cash and restricted cash increasing slightly Nine Months Ended September 30 | Cash Flow Category | 2023 (Millions) | 2022 (Millions) | Change (Millions) | | :-------------------------------- | :-------------- | :-------------- | :---------------- | | Net cash used in operating activities | $(177.2) | $(517.5) | +$340.3 (less cash used) | | Net cash used in investing activities | $(1,240.3) | $(1,017.3) | $(223.0) (more cash used) | | Net cash provided by financing activities | $1,427.0 | $1,600.0 | $(173.0) (less cash provided) | | Increase in cash and restricted cash | $15.2 | $61.9 | $(46.7) | | Cash and restricted cash at end of period | $286.7 | $240.3 | +$46.4 | - Cash paid for acquisitions, net of cash acquired, increased to $1,204.7 million in YTD 2023 from $962.6 million in YTD 2022[16] - Proceeds from issuance of non-recourse notes payable significantly increased to $1,451.7 million in YTD 2023 from $298.2 million in YTD 2022[16] - Cash paid for interest for the nine months ended September 30, 2023, was $359.3 million, a substantial increase from $122.2 million in the prior year[17] Condensed Notes to Consolidated Financial Statements (Unaudited) The condensed notes provide detailed information supporting the financial statements, covering basis of presentation, reclassifications, and specific breakdowns of key financial accounts, debt, equity, fair value measurements, acquisitions, and segment performance NOTE 1. Interim Financial Statements These unaudited interim financial statements are prepared under Form 10-Q rules, include normal recurring adjustments, and should be read with the 2022 audited statements, with reclassifications made for consistency - Unaudited interim financial statements for Q3 2023 and YTD 2023/2022, prepared under Form 10-Q rules[19] - Reclassifications were made to Consolidated Statements of Cash Flows and Operations for Finance Receivables, Non-Recourse Notes Payable, Finance Operations Income, and segment reporting[20] NOTE 2. Accounts Receivable Total accounts receivable, net, increased to $999.3 million as of September 30, 2023, from $813.1 million at December 31, 2022, primarily driven by increases in contracts in transit, trade receivables, vehicle receivables, and manufacturer receivables | (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :------------ | :----------- | :----------- | | Contracts in transit | $458.8 | $432.5 | | Trade receivables | $156.3 | $122.6 | | Vehicle receivables | $170.3 | $105.4 | | Manufacturer receivables | $207.8 | $151.9 | | Total accounts receivable, net | $999.3 | $813.1 | NOTE 3. Inventories and Floor Plan Notes Payable Total inventories, net, increased significantly to $4,404.5 million as of September 30, 2023, mainly due to higher new vehicle inventory, with total floor plan debt also rising to $3,124.6 million Total Inventories | (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :------------ | :----------- | :----------- | | New vehicles | $2,457.3 | $1,679.8 | | Used vehicles | $1,724.2 | $1,529.3 | | Total inventories | $4,404.5 | $3,409.4 | Total Floor Plan Debt | (in millions) | Sep 30, 2023 | Dec 31, 2022 | | :------------ | :----------- | :----------- | | Floor plan notes payable: non-trade | $1,863.4 | $1,489.4 | | Floor plan notes payable | $1,261.2 | $627.2 | | Total floor plan debt | $3,124.6 | $2,116.6 | NOTE 4. Finance Receivables Net finance receivables increased substantially to $3,102.1 million as of September 30, 2023, driven by growth in asset-backed term funding and managed receivables, with the allowance for loan and lease losses also increasing - Finance receivables, net, increased to $3,102.1 million as of September 30, 2023, from $2,187.6 million at December 31, 2022[27] - Allowance for finance receivable losses increased to $103.0 million as of September 30, 2023, from $69.3 million at December 31, 2022[27] Rollforward of Allowance for Loan and Lease Losses (Nine Months Ended Sep 30) | (in millions) | 2023 | 2022 | | :------------ | :--- | :--- | | Allowance at beginning of period | $69.3 | $25.0 | | Charge-offs | $(79.1) | $(36.3) | | Recoveries | $35.5 | $12.2 | | Provision expense | $75.0 | $51.5 | | Allowance at end of period | $103.0 | $52.4 | - More than 99% of the finance receivables portfolio is aged less than 60 days past due[26] NOTE 5. Goodwill and Franchise Value Goodwill increased to $1,725.6 million and franchise value to $2,147.7 million as of September 30, 2023, primarily due to additions from acquisitions and preliminary purchase price allocations - Goodwill balance as of September 30, 2023, was $1,725.6 million, with $315.0 million added through acquisitions YTD 2023[32] - Franchise value balance as of September 30, 2023, was $2,147.7 million, with $305.8 million added through acquisitions YTD 2023[33] - Purchase price allocations for remaining 2022 and 2023 acquisitions are preliminary[32][33] NOTE 6. Net Investment in Operating Leases Net investment in operating leases increased slightly to $89.5 million as of September 30, 2023, primarily involving vehicles for individuals and businesses, with assets depreciated straight-line over the lease term - Net investment in operating leases was $89.5 million as of September 30, 2023, up from $84.6 million at December 31, 2022[35] - Assets subject to operating leases are depreciated using the straight-line method over the lease term to their estimated residual value[34] NOTE 7. Commitments and Contingencies The company has contract liabilities for lifetime oil contracts, with balances increasing to $309.9 million as of September 30, 2023, and is involved in numerous legal proceedings not expected to have a material adverse effect - Contract liability balances for lifetime oil contracts increased to $309.9 million as of September 30, 2023, from $284.3 million at December 31, 2022[35] - Recognized $13.2 million and $42.2 million of revenue in the three and nine months ended September 30, 2023, respectively, related to contract liabilities[35] - The company is party to numerous legal proceedings but does not anticipate a material adverse effect on its business[41] NOTE 8. Debt The company amended its USB syndicated credit facility to $4.5 billion and its JPM and Mizuho warehouse facilities for auto loan portfolios, also issuing approximately $1.5 billion in non-recourse notes payable in 2023, significantly increasing non-recourse debt - Amended USB syndicated credit facility to $4.5 billion, maturing April 29, 2026, with various allocations for floorplan and revolving financing[43] - Amended JPM warehouse facility for up to $1.0 billion and Mizuho warehouse facility for up to $750 million for auto loan portfolios[46][47] - Issued approximately $1.5 billion in non-recourse notes payable in 2023 related to asset-backed term funding transactions, bringing total outstanding non-recourse notes payable to $1,469.9 million as of September 30, 2023[48] NOTE 9. Equity and Redeemable Non-controlling Interests The company repurchased $14.5 million of common stock in the first nine months of 2023, primarily for tax withholding on RSUs, with $501.4 million remaining available under its share repurchase authorization - Repurchased 70,626 shares for $14.5 million in the first nine months of 2023, primarily related to tax withholding on vesting RSUs[50] - As of September 30, 2023, $501.4 million remained available for repurchases under the Board of Directors' authorization[49] NOTE 10. Fair Value Measurements The company uses Level 1, Level 2, and Level 3 inputs to determine fair values of financial assets and liabilities, with investments like Shift Technologies, Inc. valued using Level 1, derivatives and non-recourse notes payable using Level 2, and long-lived assets using Level 3 inputs - Fair value measurements are categorized into Level 1 (quoted prices for identical securities), Level 2 (other significant observable inputs), and Level 3 (significant unobservable inputs)[56] - Investments in Shift Technologies, Inc. are valued using Level 1 inputs, derivatives and non-recourse notes payable using Level 2 inputs, and goodwill/franchise value using Level 3 inputs (discounting expected future cash flows)[53][55][56] - Recognized a $0.1 million unrealized investment gain related to Shift Technologies, Inc. for the nine months ended September 30, 2023, compared to a $32.6 million loss in the prior year[53] NOTE 11. Acquisitions In the first nine months of 2023, Lithia Motors completed several acquisitions, including Jardine Motors Group in the UK, contributing $1,721.2 million in revenue and $54.5 million in operating income, with total consideration transferred for 2023 acquisitions being $1,212.0 million - Completed several acquisitions in the first nine months of 2023, including Thornhill Acura (Canada), Jardine Motors Group (UK), Priority Auto Group (Virginia), Wade Ford (Georgia), Hill Country Honda (Texas), and Arden Auto Group (UK)[60] Revenue and Operating Income Contributed by 2023 Acquisitions (Nine Months Ended Sep 30, 2023) | Metric | Amount (Millions) | | :------------- | :---------------- | | Revenue | $1,721.2 | | Operating income | $54.5 | - Total consideration transferred for 2023 acquisitions was $1,212.0 million, with preliminary purchase price allocations[62] - Acquisition-related expenses were $10.5 million for YTD 2023, compared to $10.1 million for YTD 2022[64] NOTE 12. Earnings Per Share Basic and diluted EPS for Lithia Motors, Inc. decreased for both the three and nine months ended September 30, 2023, compared to the prior year, reflecting lower net income Three Months Ended September 30 | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Basic EPS | $9.49 | $11.97 | | Diluted EPS | $9.46 | $11.92 | Nine Months Ended September 30 | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Basic EPS | $28.60 | $35.23 | | Diluted EPS | $28.54 | $35.10 | NOTE 13. Segments The company operates in two segments: Vehicle Operations and Financing Operations, with Vehicle Operations revenue and gross profit increasing but income decreasing due to higher floor plan interest and SG&A, while Financing Operations saw increased interest margin but a loss due to higher provision expense - The company operates in two reportable segments: Vehicle Operations and Financing Operations[68] Vehicle Operations (Nine Months Ended Sep 30) | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :-------------------------- | :-------------- | :-------------- | :------------- | | Revenue | $23,368.0 | $21,241.3 | +10.01% | | Gross Profit | $3,968.2 | $3,943.3 | +0.63% | | Income | $1,278.1 | $1,451.5 | -11.95% | Financing Operations (Nine Months Ended Sep 30) | Metric | 2023 (Millions) | 2022 (Millions) | YoY Change (%) | | :-------------------------- | :-------------- | :-------------- | :------------- | | Interest, fee, and lease income | $190.3 | $82.2 | +131.51% | | Interest expense | $(125.5) | $(23.3) | +438.63% | | Total interest margin | $64.8 | $58.9 | +10.02% | | Provision expense | $(75.0) | $(25.5) | +194.12% | | (Loss) Income | $(43.8) | $3.7 | Significant swing to loss | NOTE 14. Recent Accounting Pronouncements The company adopted ASU 2022-02 related to troubled debt restructurings (TDRs) and vintage disclosures for financing receivables, which did not materially affect financial statements aside from disclosure changes - Adopted ASU 2022-02 related to troubled debt restructurings (TDRs) and vintage disclosures for financing receivables[71] - The pronouncement did not have a material effect on financial statements, aside from disclosure changes[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Lithia Motors' financial condition and operational results for Q3 and YTD 2023, highlighting revenue growth from acquisitions and organic sales, but profitability was impacted by declining gross profit margins and significantly higher interest expenses Forward-Looking Statements and Risk Factors This section highlights that the report contains forward-looking statements subject to known and unknown risks and uncertainties, which may cause actual results to differ materially, and readers are cautioned not to place undue reliance on these statements - Forward-looking statements are identified by specific terms and involve known and unknown risks and uncertainties[73][74] - Actual results may materially differ from those expressed or implied by forward-looking statements[74] - The company assumes no obligation to update or revise any forward-looking statement[75] Overview Lithia and Driveway (LAD) is a global automotive retailer offering a full vehicle ownership lifecycle through physical locations, e-commerce, and captive finance, emphasizing diversification, operational excellence, and growth through acquisitions, operating 345 locations across 47 brands in three countries - Lithia and Driveway (LAD) is a global automotive retailer with 345 locations, representing 47 brands in three countries as of September 30, 2023[76] - Offers a wide array of products and services across the vehicle ownership lifecycle, including new/used vehicles, financing/insurance, and repair/maintenance[77] - Leverages Driveway (e-commerce), GreenCars (EV marketplace), and Driveway Finance Corporation (DFC) for digital experiences and captive finance solutions[78] - Long-term strategy focuses on operational excellence, innovation, diversification, and growth through accretive acquisitions and network optimization[79][84] Vehicle Operations Vehicle Operations saw revenue growth in Q3 and YTD 2023, driven by acquisitions and organic sales in new vehicles and service, but gross profit margins for new and used vehicles declined due to market normalization Total Vehicle Operations - Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | New vehicle retail revenue | $3,885.8 | $3,306.9 | 17.5% | | Used vehicle retail revenue | $2,620.2 | $2,465.8 | 6.3% | | Finance and insurance revenue | $349.4 | $333.3 | 4.8% | | Service, body and parts revenue | $838.0 | $712.2 | 17.7% | | Total revenues | $8,277.0 | $7,295.7 | 13.5% | | New vehicle retail gross profit margin | 9.2% | 12.2% | (300) bps | | Used vehicle retail gross profit margin | 7.2% | 8.2% | (100) bps | | Service, body and parts gross profit margin | 55.2% | 54.0% | 120 bps | Total Vehicle Operations - Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | New vehicle retail revenue | $11,179.5 | $9,619.4 | 16.2% | | Used vehicle retail revenue | $7,302.8 | $7,197.0 | 1.5% | | Finance and insurance revenue | $1,005.6 | $977.0 | 2.9% | | Service, body and parts revenue | $2,378.8 | $2,022.6 | 17.6% | | Total revenues | $23,368.0 | $21,241.3 | 10.0% | | New vehicle retail gross profit margin | 9.7% | 12.6% | (290) bps | | Used vehicle retail gross profit margin | 7.8% | 9.2% | (140) bps | | Service, body and parts gross profit margin | 54.7% | 53.2% | 150 bps | Same Store Operating Data - Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | New vehicle retail revenue | $3,403.7 | $3,226.2 | 5.5% | | Used vehicle retail revenue | $2,215.6 | $2,410.3 | (8.1)% | | Finance and insurance revenue | $315.0 | $325.9 | (3.3)% | | Service, body and parts revenue | $720.8 | $691.2 | 4.3% | | Total revenues | $7,045.6 | $7,122.8 | (1.1)% | | New vehicle retail gross profit per unit | $4,308 | $5,818 | (26.0)% | | Used vehicle retail gross profit per unit | $2,049 | $2,469 | (17.0)% | | Finance and insurance revenue per retail unit | $2,120 | $2,218 | (4.4)% | Same Store Operating Data - Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (%) | | :-------------------------- | :-------------- | :-------------- | :--------- | | New vehicle retail revenue | $9,672.4 | $9,370.7 | 3.2% | | Used vehicle retail revenue | $6,237.0 | $7,012.3 | (11.1)% | | Finance and insurance revenue | $897.0 | $951.3 | (5.7)% | | Service, body and parts revenue | $2,082.7 | $1,956.9 | 6.4% | | Total revenues | $20,052.1 | $20,679.1 | (3.0)% | | New vehicle retail gross profit per unit | $4,648 | $5,993 | (22.4)% | | Used vehicle retail gross profit per unit | $2,219 | $2,807 | (20.9)% | | Finance and insurance revenue per retail unit | $2,157 | $2,228 | (3.2)% | Financing Operations Financing Operations saw increased interest, fee, and lease income due to portfolio growth, but this was offset by a substantial rise in interest expense and increased provision for loan losses, resulting in a net loss for Q3 and YTD 2023 Selected Financing Operations Financial Information (Nine Months Ended Sep 30) | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | | :-------------------------- | :-------------- | :-------------- | :---------------- | | Interest, fee, and lease income | $190.3 | $82.2 | +$108.1 | | Interest expense | $(125.5) | $(23.3) | $(102.2) | | Total interest margin | $64.8 | $58.9 | +$5.9 | | Provision expense | $(75.0) | $(25.5) | $(49.5) | | Financing operations (loss) income | $(43.8) | $3.7 | $(47.5) | DFC Portfolio Information (Nine Months Ended Sep 30) | Metric | 2023 | 2022 | | :------------------------------------------ | :--- | :--- | | Net loans originated | $1,689.9M | $1,329.2M | | Vehicle units financed | 55,679 | 40,366 | | Total penetration rate | 11.5% | 9.2% | | Weighted average contract rate | 9.5% | 7.4% | | Weighted average credit score | 731 | 713 | | Allowance for loan losses as % of ending managed receivables | 3.2% | 2.8% | | Annualized net credit losses as % of total average managed receivables | 2.2% | 2.7% | | Past due accounts as % of ending managed receivables | 4.1% | 6.0% | - Financing operations loss increased in YTD 2023 primarily due to interest expense increasing faster than loan rates, compressing total interest margin to 3.2%, and significant growth in originations driving higher provision expense[121] - The company targets growing penetration to 15% of retail units sold by 2025 for its Financing Operations[114] Operating Expenses Operating expenses, particularly SG&A, increased for Q3 and YTD 2023 due to network expansion and higher personnel, rent, and facility costs, with floor plan interest expense also surging from rising rates and increased inventory Selling, General and Administrative Expense (SG&A) Total SG&A expenses increased for Q3 and YTD 2023, primarily due to network expansion, leading to an increase in SG&A as a percentage of gross profit, driven by personnel, rent, and facility costs SG&A - Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :---------------- | :--------- | | Total SG&A | $850.8 | $754.2 | $96.6 | 12.8% | | SG&A as a % of gross profit | 62.0% | 57.4% | +460 bps | | | Personnel | $563.9 | $532.4 | $31.5 | 5.9% | | Rent | $23.8 | $18.2 | $5.6 | 30.8% | | Facility costs | $47.4 | $39.4 | $8.0 | 20.3% | SG&A - Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :-------------------------- | :-------------- | :-------------- | :---------------- | :--------- | | Total SG&A | $2,458.1 | $2,291.3 | $166.8 | 7.3% | | SG&A as a % of gross profit | 61.9% | 58.1% | +380 bps | | | Personnel | $1,629.2 | $1,595.8 | $33.4 | 2.1% | | Rent | $64.5 | $53.6 | $10.9 | 20.3% | | Facility costs | $133.9 | $111.0 | $22.9 | 20.6% | - Same store SG&A as a percentage of gross profit (excluding non-core charges) increased to 61.5% for Q3 2023 and 61.6% for YTD 2023, primarily due to the decrease in gross profit exceeding the decrease in same store SG&A costs[125][127] Floor Plan Interest Expense and Floor Plan Assistance Net new vehicle carrying costs shifted from a benefit to a cost for Q3 2023 and significantly reduced the benefit for YTD 2023, primarily due to a substantial increase in floor plan interest expense driven by rising interest rates and higher inventory Net New Vehicle Carrying Costs - Three Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :------------------------------------------ | :-------------- | :-------------- | :---------------- | :--------- | | Floor plan interest expense (new vehicles) | $40.2 | $10.7 | $29.5 | 275.7% | | Floor plan assistance | $(40.8) | $(33.3) | $(7.5) | 22.5% | | Net new vehicle carrying costs | $(0.6) | $(22.6) | $22.0 | (97.3)% | Net New Vehicle Carrying Costs - Nine Months Ended September 30 | Metric | 2023 (Millions) | 2022 (Millions) | Change (Millions) | % Change | | :------------------------------------------ | :-------------- | :-------------- | :---------------- | :--------- | | Floor plan interest expense (new vehicles) | $102.6 | $19.4 | $83.2 | 428.9% | | Floor plan assistance | $(116.5) | $(96.6) | $(19.9) | 20.6% | | Net new vehicle carrying costs | $(13.9) | $(77.2) | $63.3 | (82.0)% | - Floor plan interest expense increased due to rising interest rates and increased inventory levels[135][136] Depreciation and Amortization Depreciation and amortization expenses increased significantly for both Q3 and YTD 2023, primarily due to acquisition activity and capital expenditures on facilities - Depreciation and amortization increased by 25.4% to $50.8 million in Q3 2023 and by 27.3% to $146.4 million in YTD 2023[138][139] - Increases were attributed to acquisition activity (approximately $438 million of depreciable property acquired in the last 12 months) and $163.7 million in capital expenditures YTD 2023[139] Operating Income Operating margin decreased for Q3 and YTD 2023 compared to prior year periods, primarily due to increased SG&A expenses and modest gross profit changes - Operating margin decreased by 150 bps to 5.6% in Q3 2023 and by 170 bps to 5.6% in YTD 2023[141][142] - The decrease was primarily due to increased SG&A expenses (12.8% in Q3, 7.3% in YTD) and a modest gross profit increase (Q3) or decrease (YTD)[141][142] Non-Operating Expenses Non-operating expenses saw a significant increase in other interest expense due to higher borrowings and interest rates, while other income (expense), net, showed a positive swing for YTD 2023, and the effective income tax rate slightly decreased Other Interest Expense Other interest expense increased substantially for Q3 and YTD 2023, driven by increased borrowings and rising interest rates on senior notes, acquisition-related debt, and revolving lines of credit - Other interest expense increased by 61.2% to $58.5 million in Q3 2023 and by 55.8% to $141.5 million in YTD 2023[144][145] - The increase was related to increased borrowings and interest rates[144][146] Other Income (Expense), net Other income (expense), net, shifted from a net expense in Q3 2022 to a smaller net expense in Q3 2023, and from a net expense in YTD 2022 to a net income in YTD 2023, primarily influenced by foreign currency and investment gains/losses - Other expense, net, was $(5.3) million in Q3 2023, an improvement from $(12.2) million in Q3 2022[148] - Other income (expense), net, was $6.8 million in YTD 2023, a significant positive swing from $(36.6) million in YTD 2022[149] - YTD 2023 included a $0.2 million unrealized investment gain from Shift Technologies, Inc., compared to a $32.6 million loss in YTD 2022[149] Income Tax Provision The effective income tax rate decreased slightly for Q3 and YTD 2023, positively affected by a decrease in valuation allowance impact and an increase in tax credits, partially offset by reduced tax benefit from stock awards - Effective income tax rate was 26.7% in Q3 2023 (down from 27.5% in Q3 2022) and 26.5% in YTD 2023 (down from 27.4% in YTD 2022)[150] - The decrease was positively affected by a decrease in valuation allowance impact and an increase in tax credits, partially offset by a reduction in tax benefit from stock awards[150] - Estimated annual effective income tax rate (excluding other non-core items) is 26.6%[150] Non-GAAP Reconciliations This section reconciles non-GAAP financial measures to comparable GAAP measures, excluding items not related to core business operations like disposal gains, storm charges, acquisition expenses, and contract buyouts, to provide a clearer view of underlying performance - Non-GAAP measures are used to improve transparency and comparability by excluding items not related to core business operations and other non-cash items[151] - Adjustments for Q3 2023 included: $23.1 million net disposal gain on store sales, $4.6 million storm insurance reserve charges, $4.8 million acquisition expenses, and $4.2 million one-time contract buyouts[129][153] - Adjustments for YTD 2023 included: $31.4 million net disposal gain on store sales, $7.1 million storm insurance reserve charges, $10.5 million acquisition expenses, and $14.4 million one-time contract buyouts[131][154] Liquidity and Capital Resources The company manages liquidity to support growth through acquisitions and internal investments, targeting 65% for acquisitions, 25% for capital expenditures/innovation, and 10% for shareholder returns, with available funds decreasing and cash used in investing activities increasing significantly due to acquisitions - Capital deployment strategy targets 65% investment in acquisitions, 25% in capital expenditures/innovation/diversification, and 10% in shareholder return[155] - Available liquidity as of September 30, 2023, was approximately $1.4 billion, comprising $146.9 million in unrestricted cash and $1.3 billion availability on credit facilities[87] - Unfinanced real estate could provide an additional $0.4 billion in liquidity[87] Summary of Cash Flows (Nine Months Ended Sep 30) | Cash Flow Category | 2023 (Millions) | 2022 (Millions) | Change (Millions) | | :-------------------------------- | :-------------- | :-------------- | :---------------- | | Net cash used in operating activities | $(177.2) | $(517.5) | +$340.3 | | Net cash used in investing activities | $(1,240.3) | $(1,017.3) | $(223.0) | | Net cash provided by financing activities | $1,427.0 | $1,600.0 | $(173.0) | - Cash paid for acquisitions, net of cash acquired, increased to $1,204.7 million in YTD 2023 from $962.6 million in YTD 2022[162] - Adjusted cash (used in) provided by financing activities (non-GAAP) shifted to $(47.4) million in YTD 2023 from $1,010.9 million in YTD 2022[171] Summary of Outstanding Balances on Credit Facilities and Long-Term Debt As of September 30, 2023, total debt, net, was $9,784.5 million, with $1,254.8 million remaining available on credit facilities, and non-recourse notes payable and floor plan notes payable forming significant portions - Total debt, net, was $9,784.5 million as of September 30, 2023[175] - Remaining available on credit facilities was $1,254.8 million[175] Key Debt Components (Sep 30, 2023) | Debt Type | Outstanding (Millions) | | :------------------------------------------ | :--------------------- | | Floor plan note payable: non-trade | $1,863.4 | | Floor plan notes payable | $1,261.2 | | Revolving lines of credit | $1,281.4 | | Non-recourse notes payable | $1,469.9 | | Senior notes (various maturities) | $1,750.0 | Financial Covenants As of September 30, 2023, the company was in compliance with all financial covenants in its credit facilities, non-recourse notes payable, and senior notes - The company was in compliance with all financial covenants as of September 30, 2023[176] Recent Accounting Pronouncements Refers to Note 14 for discussion on recent accounting pronouncements, specifically ASU 2022-02 - See Note 14 for discussion on recent accounting pronouncements, specifically ASU 2022-02[177] Critical Accounting Policies and Use of Estimates No material changes in critical accounting policies and use of estimates since the 2022 Annual Report on Form 10-K - There have been no material changes in critical accounting policies and use of estimates since the 2022 Annual Report on Form 10-K[178] Seasonality and Quarterly Fluctuations Sales are historically lower in the first quarter due to consumer patterns and weather, with financial performance influenced by interest rates, consumer debt, confidence, manufacturer incentives, and general economic conditions - Sales are typically lower in the first quarter due to consumer purchasing patterns and inclement weather[179] - Financial performance is influenced by interest rates, consumer debt levels, consumer confidence, manufacturer sales incentives, and general economic conditions[179] Off-Balance Sheet Arrangements The company has no off-balance sheet arrangements that are material or reasonably likely to have a material current or future effect on its financial condition or results of operations - The company does not have any material off-balance sheet arrangements[180] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's reported market risks or risk management policies since the filing of its 2022 Annual Report on Form 10-K - No material changes in reported market risks or risk management policies since the 2022 Annual Report on Form 10-K[181] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were effective as of September 30, 2023[182] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[183] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in numerous legal proceedings in the normal course of business, but does not anticipate them having a material adverse effect on its business, results of operations, financial condition, or cash flows - The company is party to numerous legal proceedings arising in the normal course of business[184] - Resolution of these proceedings is not anticipated to have a material adverse effect on the business, results of operations, financial condition, or cash flows[184] Item 1A. Risk Factors This section updates risk factors, highlighting new risks from expanded U.K. operations following the Jardine Motors Group acquisition, including differing laws, potential impacts from agency distribution models, and the absence of specific automotive dealership franchise law protections - New risks are associated with the company's U.K. operations following the acquisition of Jardine Motors Group in March 2023[186] - U.K. operations are subject to different laws and regulations, including data privacy, health and safety, environmental protection, and a proposed ban on gasoline engines (2030) and gasoline hybrid engines (2035)[187] - Changes by manufacturers to an 'agency model' distribution in the U.K. could reduce reported revenues, SG&A expenses, and floor plan interest expense[188] - U.K. dealerships generally do not have automotive dealership franchise laws, unlike in the United States, leading to different protections and regulations[189] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 66 shares of common stock at an average price of $310.53, related to tax withholding on vesting RSUs, with $501.4 million remaining available under its repurchase authorization - Repurchased 66 shares of common stock in Q3 2023 at an average price of $310.53[190] - All repurchases were related to tax withholding upon the vesting of RSUs, not under the publicly announced share repurchase plan[191] - As of September 30, 2023, $501.4 million remained available for repurchases under the share repurchase authorization, which has no expiration date[190][191] Item 5. Other Information No director or officer adopted or terminated any Rule 10b5-1 plan or non-Rule 10b5-1 trading arrangement during the third quarter of 2023 - No director or officer adopted or terminated any Rule 10b5-1 plan or non-Rule 10b5-1 trading arrangement during the third quarter of 2023[191] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, credit facility amendments, certifications, and XBRL documents - Exhibits filed include Restated Articles of Incorporation, Second Amended and Restated Bylaws, Omnibus Amendments to credit facilities (JPMorgan Chase Bank, Mizuho Bank), CEO/CFO certifications, and Inline XBRL documents[193] SIGNATURE The report was signed on October 27, 2023, by Tina Miller, Chief Financial Officer, Senior Vice President, and Principal Accounting Officer of Lithia Motors, Inc. - The report was signed by Tina Miller, Chief Financial Officer, Senior Vice President, and Principal Accounting Officer of Lithia Motors, Inc[194] - Date of signature: October 27, 2023[194]