Lithia Motors(LAD) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section provides a comprehensive overview of the company's unaudited consolidated financial statements, management's discussion and analysis, market risks, and internal controls Item 1. Financial Statements This section presents the unaudited consolidated financial statements for Lithia Motors, Inc., including the balance sheets, statements of operations, comprehensive income, equity, and cash flows, along with condensed notes, providing a detailed financial overview for the periods ended September 30, 2021, and December 31, 2020 Consolidated Balance Sheets (Unaudited) This section presents the unaudited consolidated balance sheets, detailing assets, liabilities, and equity as of September 30, 2021, and December 31, 2020 Consolidated Balance Sheets (Unaudited) | (In millions) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Total current assets | $3,075.5 | $3,337.6 | | Total assets | $10,204.6 | $7,902.1 | | Liabilities and Equity | | | | Total current liabilities | $2,181.8 | $2,479.7 | | Total liabilities | $5,626.7 | $5,240.6 | | Total equity | $4,544.6 | $2,661.5 | - Total assets increased by $2,302.5 million (29.1%) from December 31, 2020, to September 30, 2021, primarily driven by increases in property and equipment, operating lease right-of-use assets, goodwill, franchise value, and other non-current assets[8] - Total equity increased by $1,883.1 million (70.7%) from December 31, 2020, to September 30, 2021, largely due to an increase in common stock and retained earnings[8] Consolidated Statements of Operations (Unaudited) This section provides the unaudited consolidated statements of operations, detailing revenues, gross profit, operating income, and net income for the three and nine months ended September 30, 2021 and 2020 Consolidated Statements of Operations (Unaudited) | (In millions, except per share amounts) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $6,169.8 | $3,620.2 | $16,522.2 | $9,182.5 | | Gross profit | $1,189.1 | $651.6 | $3,015.2 | $1,576.9 | | Operating income | $479.5 | $239.6 | $1,164.2 | $462.1 | | Net income attributable to Lithia Motors, Inc. | $307.9 | $158.8 | $769.0 | $282.7 | | Basic earnings per share | $10.18 | $6.95 | $27.12 | $12.30 | | Diluted earnings per share | $10.11 | $6.86 | $26.91 | $12.18 | | Cash dividends paid per share | $0.35 | $0.31 | $1.01 | $0.91 | - Total revenues increased by 70.4% for the three months and 79.9% for the nine months ended September 30, 2021, compared to the same periods in 2020[10] - Diluted EPS increased by 47.4% to $10.11 for the three months and 120.9% to $26.91 for the nine months ended September 30, 2021, compared to the same periods in 2020[10] Consolidated Statements of Comprehensive Income (Unaudited) This section presents the unaudited consolidated statements of comprehensive income, including net income and other comprehensive income, for the three and nine months ended September 30, 2021 and 2020 Consolidated Statements of Comprehensive Income (Unaudited) | (In millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income | $309.0 | $158.8 | $770.1 | $282.7 | | Total other comprehensive income (loss), net of tax | $0.7 | $0.4 | $2.7 | $(6.1) | | Comprehensive income attributable to Lithia Motors, Inc. | $308.6 | $159.2 | $771.7 | $276.6 | - Comprehensive income attributable to Lithia Motors, Inc. increased by 93.8% for the three months and 179.0% for the nine months ended September 30, 2021, compared to the same periods in 2020[12] Consolidated Statements of Equity and Redeemable Non-controlling Interest (Unaudited) This section details the unaudited consolidated statements of equity and redeemable non-controlling interest, showing changes in equity and non-controlling interests for the periods ended September 30, 2021 and 2020 Consolidated Statements of Equity and Redeemable Non-controlling Interest (Unaudited) | (In millions) | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :--- | :--- | :--- | :--- | :--- | | Total equity, beginning balances | $4,228.4 | $1,532.2 | $2,661.5 | $1,467.7 | | Net income attributable to Lithia Motors, Inc. | $307.9 | $158.8 | $769.0 | $282.7 | | Dividends paid | $(10.6) | $(7.1) | $(28.2) | $(20.9) | | Total equity, ending balances | $4,544.6 | $1,694.4 | $4,544.6 | $1,694.4 | | Redeemable non-controlling interest, ending balances | $33.3 | $— | $33.3 | $— | - Total equity significantly increased from $1,694.4 million at September 30, 2020, to $4,544.6 million at September 30, 2021, reflecting strong net income and equity issuances[14] - Redeemable non-controlling interest of $33.3 million was recorded as of September 30, 2021, due to the partnership with Pfaff Automotive Partners in Canada[14][37] Consolidated Statements of Cash Flows (Unaudited) This section presents the unaudited consolidated statements of cash flows, outlining cash movements from operating, investing, and financing activities for the nine months ended September 30, 2021 and 2020 Consolidated Statements of Cash Flows (Unaudited) | (In millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,989.2 | $800.6 | | Net cash used in investing activities | $(2,563.1) | $(728.3) | | Net cash provided by (used in) financing activities | $550.7 | $(99.2) | | Decrease in cash and cash equivalents | $(22.3) | $(26.9) | | Cash and cash equivalents at end of period | $137.8 | $57.1 | - Net cash provided by operating activities increased by $1,188.6 million, from $800.6 million in 2020 to $1,989.2 million in 2021, primarily due to increased net income and inventory management[16][171] - Net cash used in investing activities significantly increased to $2,563.1 million in 2021 from $728.3 million in 2020, largely driven by cash paid for acquisitions[16][174] Condensed Notes to Consolidated Financial Statements (Unaudited) This section provides condensed notes to the unaudited consolidated financial statements, offering additional details and context for the reported financial figures Note 1. Interim Financial Statements This note clarifies the basis of preparation for the unaudited interim financial statements and their indicative nature - The unaudited interim financial statements are prepared in accordance with Form 10-Q rules, reflecting all necessary normal recurring adjustments for a fair presentation[18] - Results for interim periods are not necessarily indicative of full-year expectations[18] Note 2. Contract Liabilities and Assets This note details the company's contract liability and asset balances, including revenue recognition from these contracts Note 2. Contract Liabilities and Assets | (in millions) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Contract liability balances | $226.9 | $194.1 | | Revenue recognized from contract liabilities (3 months ended Sep 30, 2021) | $8.3 | N/A | | Revenue recognized from contract liabilities (9 months ended Sep 30, 2021) | $26.8 | N/A | | Contract asset balances | $9.0 | $8.2 | - Contract liabilities, primarily from lifetime oil contracts, increased to $226.9 million as of September 30, 2021, from $194.1 million at December 31, 2020[20] - Revenue from finance and insurance sales is recognized at the time of vehicle sale, with contract asset balances increasing to $9.0 million[21] Note 3. Accounts Receivable and Contract Assets This note outlines the composition and changes in accounts receivable and contract assets, including auto loan and sales-type lease receivables Note 3. Accounts Receivable and Contract Assets | (in millions) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total accounts receivable, net | $812.6 | $614.0 | | Auto loan receivables | $535.1 | $175.6 | | Sales-type lease receivables | $102.6 | $— | | Allowance for doubtful accounts | $(14.3) | $(5.9) | - Total accounts receivable, net, increased by $198.6 million (32.3%) to $812.6 million as of September 30, 2021, primarily due to a significant rise in auto loan receivables[23] - Sales-type lease receivables emerged as a new category with $102.6 million as of September 30, 2021[23] Note 4. Inventories This note details the composition of inventories, including new and used vehicles, and parts and accessories, as of September 30, 2021, and December 31, 2020 Note 4. Inventories | (in millions) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | New vehicles | $696.8 | $1,556.6 | | Used vehicles | $1,172.6 | $835.9 | | Parts and accessories | $143.2 | $100.4 | | Total inventories | $2,012.6 | $2,492.9 | - Total inventories decreased by $480.3 million (19.3%) to $2,012.6 million as of September 30, 2021, primarily driven by a substantial reduction in new vehicle inventory[29] - Used vehicle inventory increased by $336.7 million (40.3%) while new vehicle inventory decreased by $859.8 million (55.2%), reflecting market conditions and acquisition activity[29] Note 5. Goodwill and Franchise Value This note provides an overview of goodwill and franchise value by segment, highlighting changes due to acquisitions Note 5. Goodwill and Franchise Value | (in millions) | Goodwill (Sep 30, 2021) | Goodwill (Dec 31, 2020) | | :--- | :--- | :--- | | Domestic | $256.5 | $204.5 | | Import | $349.0 | $287.9 | | Luxury | $134.8 | $100.6 | | Consolidated Goodwill | $740.3 | $593.0 | | Franchise Value (Sep 30, 2021) | $608.4 | N/A | | Franchise Value (Dec 31, 2020) | $350.2 | N/A | - Consolidated goodwill increased by $147.3 million (24.8%) to $740.3 million as of September 30, 2021, primarily due to additions through acquisitions[30] - Franchise value increased by $258.2 million (73.7%) to $608.4 million, also driven by acquisitions[30] Note 6. Credit Facilities and Long-term Debt This note details new credit agreements and the redemption of senior notes, impacting the company's debt structure - On August 30, 2021, the company entered into a new credit agreement with The Bank of Nova Scotia, providing up to $50 million CAD working capital, $300 million CAD floor plan financing, and $350 million CAD wholesale lease financing[31] - On August 1, 2021, the company fully redeemed its $300 million principal amount of 5.250% senior notes due 2025 at a redemption price of 102.625%[32] Note 7. Equity and Redeemable Non-controlling Interest This note describes share repurchases, a public offering, and the recording of redeemable non-controlling interest - The company repurchased 54,284 shares for $15.9 million in 2021, related to tax withholding on RSU vesting, with $187.5 million remaining available under the share repurchase authorization[33][34] - A public offering of 3,571,428 common shares on May 24, 2021, generated $1.11 billion in net proceeds[35] - Redeemable non-controlling interest of $33.0 million was recorded due to a partnership with Pfaff Automotive Partners in Canada, with a call/put option after three years[37] Note 8. Fair Value Measurements This note explains the categorization of fair value measurements and reports on investment values and derivative instruments - The company categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[45] Note 8. Fair Value Measurements | (in millions) | Fair Value at Sep 30, 2021 (Level 1) | Fair Value at Dec 31, 2020 (Level 1) | | :--- | :--- | :--- | | Investments | $82.2 | $97.9 | | Derivative asset | $— | $— | | Derivative liability | $— | $— | - An unrealized investment loss of $22.3 million was recognized for the nine months ended September 30, 2021, related to the investment in Shift Technologies, Inc.[39] Note 9. Net Income Per Share This note details the computation of net income per share using the two-class method and reports basic and diluted EPS - Net income per share is computed using the two-class method, allocating undistributed earnings based on contractual participation rights[47][49] Note 9. Net Income Per Share | (in millions, except per share amounts) | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :--- | :--- | :--- | :--- | :--- | | Basic earnings per share attributable to Lithia Motors, Inc. | $10.18 | $6.95 | $27.12 | $12.29 | | Diluted earnings per share attributable to Lithia Motors, Inc. | $10.11 | $6.86 | $26.91 | $12.18 | - The company reclassified Class A common stock as common stock on June 7, 2021, following the conversion of all Class B common stock[48] Note 10. Segments This note describes the company's three reportable segments: Domestic, Import, and Luxury, and their respective revenue and income contributions - The company operates in three reportable segments: Domestic (Chrysler, GM, Ford), Import (Honda, Toyota, Subaru, Nissan, Volkswagen), and Luxury (BMW, Mercedes, Lexus)[53][54] Note 10. Segments | (in millions) | Sep 30, 2021 (3 Months) | Sep 30, 2020 (3 Months) | Sep 30, 2021 (9 Months) | Sep 30, 2020 (9 Months) | | :--- | :--- | :--- | :--- | :--- | | Domestic Revenues | $1,819.2 | $1,214.7 | $5,018.5 | $3,286.9 | | Import Revenues | $2,727.4 | $1,551.7 | $7,149.6 | $3,833.5 | | Luxury Revenues | $1,595.1 | $849.7 | $4,325.8 | $2,049.5 | | Total segment income for reportable segments | $487.5 | $222.9 | $1,158.6 | $397.6 | - Corporate and other revenue includes stand-alone body shops and unallocated corporate overhead, with internal allocations used to increase dealership comparability[55] Note 11. Leases This note details the company's lease arrangements for dealerships, office space, land, and equipment, including recognition policies - The company leases dealerships, office space, land, and equipment, with most leases including renewal options extending from one to 23 years or more[60][61] - Leases with initial terms of 12 months or less are not recorded on the balance sheet, with lease expense recognized straight-line[60] Note 12. Derivative Financial Instruments This note describes the company's use of derivative financial instruments, primarily interest rate collars, to hedge interest rate exposure - The company uses derivative financial instruments, primarily interest rate collars, to hedge exposure to rising interest rates on variable rate debt, with fair values recorded as assets or liabilities[64][65] Note 12. Derivative Financial Instruments | (Dollars in millions) | Balance as of Sep 30, 2021 | | :--- | :--- | | Accrued Liabilities (interest rate collar) | $(2.5) | | Other Long-Term Liabilities (interest rate collar) | $(2.7) | | Total (interest rate collar) | $(5.2) | - Net losses of $2.7 million are expected to be reclassified from AOCI into interest expense within the next twelve months[66] Note 13. Acquisitions This note details significant acquisitions completed in the first nine months of 2021, including their revenue and operating income contributions - In the first nine months of 2021, the company completed numerous acquisitions, including Fields Chrysler Jeep Dodge Ram, Fink Auto Group, The Suburban Collection, and Pfaff Automotive Partners in Canada[71][73] Note 13. Acquisitions | (in millions) | Nine Months Ended Sep 30, 2021 | | :--- | :--- | | Revenue contributed by 2021 acquisitions | $2,385.9 | | Operating income contributed by 2021 acquisitions | $121.9 | | Total consideration transferred for 2021 acquisitions | $2,764.8 | | Cash paid for acquisitions, net of cash acquired | $2,376.4 | - Acquisition-related expenses totaled $17.9 million for the nine months ended September 30, 2021, compared to $1.6 million in the same period of 2020[76] Note 14. Recent Accounting Pronouncements This note outlines the adoption of new accounting standards, ASU 2019-12 and ASU 2020-10, and their impact - The company adopted ASU 2019-12 (Income Taxes) and ASU 2020-10 (Codification Improvements) in the first quarter of 2021, with no material impact on consolidated financial statements[78][79] Note 15. Net Investment in Operating Leases This note reports the net investment in operating leases following the purchase of a leasing entity in Q3 2021 - In Q3 2021, the company purchased a leasing entity, resulting in a net investment in operating leases of $52.0 million as of September 30, 2021[80][82] - Assets subject to operating leases are depreciated using the straight-line method over the lease term to their estimated residual value[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the periods ended September 30, 2021, highlighting significant revenue and gross profit growth, strategic initiatives, and liquidity management Forward-Looking Statements and Risk Factors This section cautions readers about forward-looking statements, which involve inherent risks and uncertainties, and advises against undue reliance - The report contains forward-looking statements identifiable by terms like 'project,' 'outlook,' and 'expect,' which involve known and unknown risks and uncertainties[83][84] - Readers are cautioned not to place undue reliance on these statements, and the company assumes no obligation to update or revise them[85] Overview This section outlines Lithia & Driveway's strategic goal of reaching $50 billion in revenue by 2025 through profitable consolidation and its omni-channel strategy - Lithia & Driveway (LAD) aims to reach $50 billion in revenue by 2025 through profitable consolidation of the retail sector, operating 277 locations across 39 brands in 25 states and 3 Canadian provinces as of September 30, 2021[86] - The company's omni-channel strategy leverages experienced teams, owned inventory, technology, and a nationwide network to provide frictionless online and physical customer experiences[88] - Driveway, launched in June 2020, offers digital shopping, contactless test drives, and home delivery, complementing in-store experiences where over 19% of Q3 units retailed incorporated a digital experience[90][91] Key Revenue and Gross Profit Metrics This section presents key revenue and gross profit metrics, highlighting significant growth across all segments for the three months ended September 30, 2021 Key Revenue and Gross Profit Metrics | ($ in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | New vehicle retail revenue | $2,898.2 | $1,883.3 | 53.9% | | Used vehicle retail revenue | $2,079.5 | $1,093.2 | 90.2% | | Finance and insurance revenue | $297.0 | $160.5 | 85.0% | | Service, body and parts revenue | $578.3 | $359.5 | 60.9% | | Total Revenues | $6,169.8 | $3,620.2 | 70.4% | | Total Gross Profit | $1,189.1 | $651.6 | 82.5% | | New vehicle retail gross profit margin | 12.1% | 7.4% | 470 bps | | Used vehicle retail gross profit margin | 11.2% | 13.2% | (200) bps | | Service, body and parts gross profit margin | 52.3% | 54.5% | (220) bps | - Total revenues increased by 70.4% and total gross profit by 82.5% for the three months ended September 30, 2021, compared to the same period in 2020, driven by strong growth across all segments[96] - New vehicle retail gross profit margin significantly increased by 470 basis points to 12.1%, while used vehicle retail gross profit margin decreased by 200 basis points to 11.2%[96] Same Store Operating Data This section provides same store operating data, showing revenue, gross profit, unit sales, and average selling prices for the three months ended September 30, 2021 Same Store Operating Data | ($ in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Same store total revenues | $3,978.2 | $3,509.1 | 13.4% | | Same store total gross profit | $779.3 | $632.5 | 23.2% | | Same store new vehicle retail units sold | 39,886 | 46,161 | (13.6)% | | Same store used vehicle retail units sold | 54,300 | 47,863 | 13.4% | | Same store new vehicle average selling price | $44,251 | $39,484 | 12.1% | | Same store used vehicle average selling price | $27,362 | $22,196 | 23.3% | - Same store total revenues increased by 13.4% and total gross profit by 23.2% for the three months ended September 30, 2021, compared to the same period in 2020[99] - Same store new vehicle retail unit sales decreased by 13.6%, while average selling prices increased by 12.1%, reflecting supply shortages and high demand[99][100] New Vehicles This section analyzes new vehicle performance, noting decreased unit volume offset by increased average selling prices and gross profit per unit due to supply shortages - Same store new vehicle revenue decreased 3.2% for the three months ended September 30, 2021, due to a 13.6% decrease in unit volume, partially offset by a 12.1% increase in average selling prices[100] - New vehicle supply shortages are expected to continue into 2022, leading to higher average selling prices and gross profits per unit[101] - Same store new vehicle gross profit per unit increased 81.4% for the three months ended September 30, 2021, significantly boosting gross profit margins by 460 basis points[102] Used Vehicles This section highlights the strategic focus on used vehicle retail sales, noting significant revenue growth driven by strong demand and acquisitions - Used vehicle retail sales are a strategic focus for organic growth, with a target of 100 used retail units per store per month; the company achieved an average of 92 units per store per month in the last twelve months[104] - Used vehicle revenue increased 90.2% for the three months ended September 30, 2021, driven by strong same store performance (39.9% increase) and acquisition activity[106] - Demand for used vehicles remains high due to new vehicle inventory shortages, resulting in higher average selling prices and gross profits per unit[105] Finance and Insurance This section reports substantial growth in finance and insurance income, driven by increased service contract revenue and higher revenue per retail unit - Total finance and insurance income increased 85.0% for the three months ended September 30, 2021, compared to the same period in 2020[111] - Same store finance and insurance revenues increased 22.1%, driven by an 18.6% increase in service contract revenue[111] - On a same store basis, finance and insurance revenue per retail unit increased by $362 to $2,009 for the three months ended September 30, 2021[111] Service, body and parts This section details the growth in service, body, and parts revenue, primarily due to acquisitions and increased customer pay transactions - Service, body and parts revenue increased 60.9% for the three months ended September 30, 2021, driven by acquisitions and increased customer pay revenues[113] - Same store service, body and parts gross profit increased 6.3%, primarily due to higher volumes of customer pay transactions[115] - Overall same store gross margins for service, body, and parts decreased 50 basis points, as the mix shifted towards higher-margin customer pay work[115] Segments This section provides a detailed analysis of the financial performance of the company's Domestic, Import, Luxury, and Corporate and Other segments Domestic Segment This section analyzes the Domestic segment's revenue and income growth, driven by acquisitions and improved SG&A efficiency Domestic Segment | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Domestic Segment Revenue | $1,819.2 | $1,214.7 | 49.8% | | Domestic Segment Income | $123.6 | $81.1 | 52.4% | | Retail new vehicle unit sales | 15,171 | 13,319 | 13.9% | | SG&A as a % of gross profit | 59.4% | 60.1% | (70) bps | - Domestic segment revenue increased 49.8% for the three months ended September 30, 2021, primarily due to the acquisition of 14 stores in 2021[124] - Segment income increased 52.4%, driven by 46.3% gross profit growth and a decrease in SG&A as a percentage of gross profit to 59.4%[125] Import Segment This section details the Import segment's substantial revenue and income growth, largely attributed to acquisitions and improved SG&A efficiency Import Segment | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Import Segment Revenue | $2,727.4 | $1,551.7 | 75.8% | | Import Segment Income | $255.4 | $102.6 | 148.9% | | Retail new vehicle unit sales | 39,645 | 26,633 | 48.9% | | SG&A as a % of gross profit | 55.6% | 62.8% | (720) bps | - Import segment revenue increased 75.8% for the three months ended September 30, 2021, largely due to the acquisition of 30 stores in 2021[126] - Segment income surged by 148.9%, supported by 101.6% gross profit growth and a significant reduction in SG&A as a percentage of gross profit to 55.6%[127] Luxury Segment This section highlights the Luxury segment's dramatic revenue and income increase, primarily driven by acquisitions and enhanced SG&A efficiency Luxury Segment | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Luxury Segment Revenue | $1,595.1 | $849.7 | 87.7% | | Luxury Segment Income | $108.5 | $39.2 | 176.8% | | Retail new vehicle unit sales | 12,096 | 8,139 | 48.6% | | SG&A as a % of gross profit | 59.6% | 68.5% | (890) bps | - Luxury segment revenue increased 87.7% for the three months ended September 30, 2021, primarily driven by the acquisition of 27 stores in 2021[129] - Segment income dramatically increased by 176.8%, supported by 103.7% gross profit growth and a substantial decrease in SG&A as a percentage of gross profit to 59.6%[130] Corporate and Other This section explains the changes in corporate and other revenue and income, influenced by unallocated reserves and internal financing adjustments Corporate and Other | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Revenue, net | $28.1 | $4.1 | NM | | Segment income | $22.8 | $33.5 | (31.9)% | - Corporate and other revenue increased significantly due to changes in certain unallocated reserves, such as those for revenue reversals associated with unwound vehicle sales[134] - Corporate and other income decreased by $10.7 million for the three months ended September 30, 2021, primarily due to decreases in internal floor plan financing charges received and increases in internal finance reserve paid to dealerships[136] Asset Impairments This section reports the recognition of asset impairments related to franchise value during the third quarter of 2021 Asset Impairments | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Franchise value impairment | $1.9 | $— | | Goodwill impairment | $— | $— | | Total asset impairments | $1.9 | $— | - The company recognized $1.9 million in asset impairments related to franchise value for certain dealership locations during the third quarter of 2021[137] Selling, General and Administrative Expense (SG&A) This section analyzes the increase in SG&A expenses due to network expansion and the improvement in SG&A as a percentage of gross profit Selling, General and Administrative Expense (SG&A) | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total SG&A | $673.3 | $389.1 | 73.0% | | Personnel | $475.4 | $271.1 | 75.4% | | Advertising | $46.4 | $24.0 | 93.3% | | Total SG&A as a % of gross profit | 56.6% | 59.7% | (310) bps | - Total SG&A expense increased by 73.0% for the three months ended September 30, 2021, primarily due to network expansion[140] - SG&A as a percentage of gross profit improved by 310 basis points to 56.6%, driven by increased gross profits and cost structure focus[140][141] Depreciation and Amortization This section reports the increase in depreciation and amortization expenses, primarily attributable to acquisition activity Depreciation and Amortization | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Depreciation and amortization | $34.4 | $22.9 | 50.2% | - Depreciation and amortization increased by 50.2% for the three months ended September 30, 2021, primarily due to acquisition activity, which added approximately $800 million of depreciable property[148] Operating Margin This section highlights the improvement in operating margins, driven by gross profit growth outpacing SG&A increases Operating Margin | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Operating margin | 7.8% | 6.6% | | Operating margin adjusted for non-core charges | 8.0% | 6.6% | - Operating margins increased by 120 basis points to 7.8% for the three months ended September 30, 2021, driven by higher gross profit growth outpacing SG&A increases[150] Floor Plan Interest Expense and Floor Plan Assistance This section analyzes the decrease in floor plan interest expense and the increased benefit from net new vehicle carrying costs Floor Plan Interest Expense and Floor Plan Assistance | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Floor plan interest expense (new vehicles) | $3.6 | $6.1 | (41.0)% | | Floor plan assistance | $(30.4) | $(19.8) | 53.5% | | Net new vehicle carrying costs | $(26.8) | $(13.7) | NM | - Floor plan interest expense decreased by 41.0% for the three months ended September 30, 2021, primarily due to lower new vehicle inventory levels[151] - Net new vehicle carrying costs became more negative (a larger benefit) at $(26.8) million, compared to $(13.7) million in the prior year, indicating increased efficiency in managing inventory costs relative to sales[154] Other Interest Expense This section reports the increase in other interest expense, mainly due to additional interest from senior notes issued in 2020 and 2021 Other Interest Expense | (in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total other interest expense | $28.0 | $16.6 | 68.7% | | Other interest | $22.5 | $10.7 | 110.3% | - Other interest expense increased by 68.7% for the three months ended September 30, 2021, primarily due to additional interest expense from senior notes issued in October 2020 and May 2021[159] Other Income, Net This section explains the shift from other income to an expense, primarily due to an unrealized investment loss and a loss on debt extinguishment Other Income, Net | (Dollars in millions) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Other Income (Expense), net | $(25.7) | $2.2 | (1,268.2)% | - Other income, net, shifted from a gain of $2.2 million in Q3 2020 to an expense of $(25.7) million in Q3 2021, primarily due to a $25.2 million unrealized investment loss related to Shift Technologies, Inc. and a $10.3 million loss on extinguishment of debt[160] Income Tax Provision This section reports the effective income tax rate and factors influencing it, including tax benefits on stock awards Income Tax Provision | | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Effective income tax rate | 26.8% | 27.5% | | Effective income tax rate excluding other non-core items | 26.7% | 27.5% | - The effective income tax rate for the nine months ended September 30, 2021, was 26.9%, positively affected by excess tax benefits on stock awards and a reduction in the current state effective tax rate[161] Non-GAAP Reconciliations This section provides non-GAAP reconciliations to enhance transparency by adjusting for non-recurring and non-cash items - Non-GAAP measures are used to improve transparency and provide a meaningful presentation of core business operations by excluding non-recurring and non-cash items[162] Non-GAAP Reconciliations | (in millions, except per share amounts) | As reported (3 Months Sep 30, 2021) | Adjusted (3 Months Sep 30, 2021) | | :--- | :--- | :--- | | Income before income taxes | $422.2 | $467.3 | | Net income attributable to Lithia Motors, Inc. | $307.9 | $341.3 | | Diluted earnings per share attributable to Lithia Motors, Inc. | $10.11 | $11.21 | - Adjusted diluted EPS for the three months ended September 30, 2021, was $11.21, compared to $10.11 as reported, after adjusting for asset impairment, investment loss, insurance reserves, acquisition expenses, and loss on redemption of senior notes[164] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, including available funds, cash flow activities, and debt structure Available Sources This section details the company's available cash and credit facilities, showing an increase in total current available funds Available Sources | (in millions) | September 30, 2021 | December 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $137.8 | $160.2 | (14.0)% | | Available credit on credit facilities | $1,566.1 | $1,237.1 | 26.6% | | Total current available funds | $1,703.9 | $1,397.3 | 21.9% | - Total current available funds increased by 21.9% to $1,703.9 million as of September 30, 2021, primarily due to a 26.6% increase in available credit on credit facilities[170] Operating Activities This section reports a significant increase in net cash provided by operating activities, driven by higher net income and inventory management Operating Activities | (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Increase in Cash Flow | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,989.2 | $800.6 | $1,188.6 | | Net cash provided by operating activities – adjusted | $831.2 | $349.2 | $482.0 | - Cash provided by operating activities increased by $1,188.6 million for the nine months ended September 30, 2021, driven by increased net income, decreased inventories, and higher floor plan notes payable borrowings[171] Investing Activities This section details the substantial increase in net cash used in investing activities, primarily due to significant cash outlays for acquisitions Investing Activities | (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Increase (Decrease) in Cash Flow | | :--- | :--- | :--- | :--- | | Net cash used in investing activities | $(2,563.1) | $(728.3) | $(1,834.8) | | Cash paid for acquisitions, net of cash acquired | $(2,409.5) | $(609.5) | $(1,800.0) | | Capital expenditures | $(194.1) | $(125.6) | $(68.5) | - Net cash used in investing activities increased significantly by $1,834.8 million, primarily due to a substantial increase in cash paid for acquisitions[174][176] Capital Expenditures This section reports an increase in total capital expenditures, mainly driven by investments in existing facility improvements Capital Expenditures | (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Total capital expenditures | $194.1 | $125.6 | | Existing facility improvements | $79.1 | $30.5 | | Maintenance | $62.6 | $39.1 | - Total capital expenditures increased by $68.5 million to $194.1 million for the nine months ended September 30, 2021, mainly due to higher existing facility capital improvements[177][178] Acquisitions This section highlights the company's aggressive expansion strategy, with a significant increase in the number of acquired locations and cash paid for acquisitions Acquisitions | | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Number of locations acquired | 73 | 17 | | Cash paid for acquisitions, net of cash acquired | $(2,409.5) | $(609.5) | | Cash paid for acquisitions, net of cash acquired – adjusted | $(2,092.4) | $(475.9) | - The company acquired 73 locations in the first nine months of 2021, a significant increase from 17 in the same period of 2020, reflecting its growth strategy[182] - Adjusted net cash paid for acquisitions increased substantially to $(2,092.4) million, indicating aggressive expansion[182] Financing Activities This section details the significant increase in net cash provided by financing activities, primarily from common stock and long-term debt issuances Financing Activities | (in millions) | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | Increase in Cash Flow | | :--- | :--- | :--- | :--- | | Cash provided by (used in) financing activities, as reported | $550.7 | $(99.2) | $649.9 | | Cash provided by (used in) financing activities – adjusted | $1,391.6 | $218.6 | $1,173.0 | | Proceeds from issuance of common stock | $1,127.9 | $9.2 | $1,118.7 | | Proceeds from issuance of long-term debt | $817.5 | $56.5 | $761.0 | - Net cash provided by financing activities significantly increased to $550.7 million for the nine months ended September 30, 2021, compared to a use of $(99.2) million in 2020[184] - This increase was primarily driven by substantial proceeds from the issuance of common stock ($1,127.9 million) and long-term debt ($817.5 million)[184] Equity Transactions This section outlines share repurchases for tax withholding, proceeds from a public offering, and cash dividends paid - The company repurchased 54,284 shares for $15.9 million in the first nine months of 2021, solely for tax withholding on RSU vesting, with $187.5 million remaining under the share repurchase authorization[185] - A public offering on May 24, 2021, generated $1.11 billion in net proceeds from the sale of 3,571,428 common shares[186] Equity Transactions | Dividend paid: | per share | Total amount of dividend (in millions) | | :--- | :--- | :--- | | March 2021 | $0.31 | $8.2 | | May 2021 | $0.35 | $9.3 | | August 2021 | $0.35 | $10.6 | Summary of Outstanding Balances on Credit Facilities and Long-Term Debt This section provides a summary of outstanding debt balances and available credit on various facilities as of September 30, 2021 Summary of Outstanding Balances on Credit Facilities and Long-Term Debt | (in millions) | Outstanding (Sep 30, 2021) | Remaining Available (Sep 30, 2021) | | :--- | :--- | :--- | | Floor plan note payable: non-trade | $688.9 | $24.8 | | Revolving lines of credit | $404.8 | $834.2 | | Real estate mortgages | $606.0 | $— | | 3.875% Senior notes due 2029 | $800.0 | $— | | Total debt | $3,811.3 | $1,566.1 | - Total debt outstanding was $3,811.3 million as of September 30, 2021, with $1,566.1 million remaining available on credit facilities[189] Credit Facility This section details the amended syndicated credit facility, its maturity, commitment, and compliance with financial covenants - The existing syndicated credit facility was amended on April 29, 2021, extending its maturity to April 2026 and providing a total financing commitment of $3.75 billion, expandable to $4.25 billion[190][191] Credit Facility | Commitment | Annual Interest Rate at Sep 30, 2021 | | :--- | :--- | | New vehicle floor plan | 1.18% | | Used vehicle floor plan | 1.48% | | Service loaner floor plan | 1.28% | | Revolving line of credit | 1.08% | - As of September 30, 2021, the company was in compliance with all financial covenants, including current ratio (1.91 to 1), fixed charge coverage ratio (6.91 to 1), and leverage ratio (1.51 to 1)[195] Floor Plan Notes Payable This section reports outstanding balances on floor plan agreements with manufacturer-affiliated finance companies and their classification in cash flows - As of September 30, 2021, $329.4 million was outstanding on floor plan agreements with manufacturer-affiliated finance companies for new and service loaner vehicles[198] - Borrowings and repayments related to these floor plan notes are classified as operating activities in the Consolidated Statements of Cash Flows[198] Other Credit Facilities and Lines of Credit This section details various other lines of credit, including commitments secured by assets and a new securitization facility - The company has various other lines of credit, including a $20.0 million commitment secured by Chrysler assets, a $60.0 million commitment with Ford Motor Credit Company, and a $245.1 million real-estate backed facility[199][200] - A securitization facility provides initial commitments of up to $300 million, with $275.0 million drawn as of September 30, 2021[201] - A new Ally credit facility of up to $300.0 million, secured by real estate, was entered into on April 12, 2021, with no amounts outstanding as of September 30, 2021[202][203] Senior Notes This section describes the issuance of new senior notes and the redemption of existing notes, impacting the company's long-term debt profile - On May 27, 2021, the company issued $800 million in 3.875% senior notes due 2029 in a private placement[206] Senior Notes | Description | Maturity Date | Principal Amount | | :--- | :--- | :--- | | 4.625% Senior notes due 2027 | December 15, 2027 | $400 million | | 4.375% Senior notes due 2031 | January 15, 2031 | $550 million | | 3.875% Senior notes due 2029 | June 1, 2029 | $800 million | - The $300 million principal amount of 5.250% senior notes due 2025 was fully redeemed on August 1, 2021[207] Real Estate Mortgages, Finance Lease Obligations, and Other Debt This section details the interest rates and maturities of real estate mortgages, finance lease obligations, and other debt - As of September 30, 2021, 70.4% of outstanding mortgage debt had fixed interest rates ranging from 1.8% to 5.3%, with maturities through July 1, 2038[208] - Finance lease obligations had interest rates from 1.9% to 8.5% and terms extending through August 2037[209] - Other debt, including sellers' notes, had interest rates from 3.9% to 5.0% and maturities through January 2031[210] Recent Accounting Pronouncements This section refers to Note 14 for details on recently adopted accounting pronouncements - Refer to Note 14 for details on recent accounting pronouncements[211] Critical Accounting Policies and Use of Estimates This section confirms no material changes to critical accounting policies and estimates since the 2020 Annual Report on Form 10-K - There have been no material changes to critical accounting policies and estimates since the 2020 Annual Report on Form 10-K[212] Seasonality and Quarterly Fluctuations This section discusses the historical seasonality of sales and external factors influencing financial performance - Sales are historically lower in the first quarter due to consumer purchasing patterns and inclement weather[213] - Financial performance is influenced by interest rates, consumer debt levels, confidence, manufacturer incentives, and general economic conditions[213] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet arrangements likely to materially affect the company's financial condition - The company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on its financial condition or results of operations[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the company's reported market risks or risk management policies since the filing of its 2020 Annual Report on Form 10-K - No material changes in market risks or risk management policies have occurred since the 2020 Annual Report on Form 10-K filing[215] Item 4. Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the most recent fiscal quarter Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as assessed by the CEO and CFO - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of September 30, 2021[216] Changes in Internal Control Over Financial Reporting This section reports no material changes in internal control over financial reporting during the most recent fiscal quarter - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[217] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings This section states that the company is involved in numerous legal proceedings in the normal course of business but does not anticipate a material adverse effect on its financial condition or operations from their resolution - The company is party to numerous legal proceedings arising in the normal course of business[219] - Management does not anticipate that the resolution of these proceedings will have a material adverse effect on the business, results of operations, financial condition, or cash flows[219] Item 1A. Risk Factors This section updates the risk factors, specifically highlighting new risks associated with the company's expanding international operations in Canada, including foreign currency fluctuations, regulatory compliance, and economic conditions - The company's international operations, particularly in Canada following Q3 2021 acquisitions, introduce new regulatory, operational, political, and economic risks[221] - Key international risks include foreign currency translation adjustments, challenges in obtaining/preserving franchise rights, compliance with changing laws, wage inflation, and uncertainties from tariffs and trade barriers[223] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchases during the third quarter of 2021, which were solely for tax withholding on RSU vesting, and the remaining authorization for future repurchases Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | Total number of shares purchased (Q3 2021) | Average price paid per share (Q3 2021) | | :--- | :--- | :--- | | July | — | $— | | August | 33 | $377.22 | | September | — | $— | | Total | 33 | $377.22 | - During Q3 2021, 33 shares were repurchased at an average price of $377.22 per share, exclusively for tax withholding upon the vesting of restricted stock units (RSUs)[224] - As of September 30, 2021, $187.5 million remained available under the $500 million share repurchase authorization, which has no expiration date[224] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, certifications, and XBRL-related documents - Exhibits include Restated Articles of Incorporation, Second Amended and Restated Bylaws, and a Commitment Letter by The Bank of Nova Scotia[225] - Certifications from the CEO and CFO pursuant to SEC rules (31.1, 31.2, 32.1, 32.2) are filed[225] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase) are included for electronic data submission[225] SIGNATURE This section contains the signature of Tina Miller, Chief Financial Officer, Senior Vice President, and Principal Accounting Officer, certifying the filing of the report on behalf of Lithia Motors, Inc - The report was signed by Tina Miller, Chief Financial Officer, Senior Vice President, and Principal Accounting Officer, on October 27, 2021[226]