Lithia Motors(LAD) - 2021 Q4 - Annual Report

PART I Business Lithia Motors is a Fortune 500 automotive retailer with an omni-channel strategy and a disciplined acquisition approach - Lithia Motors is a rapidly growing Fortune 500 company (231 in 2021) operating 278 locations with 40 brands across the U.S. and Canada[13] - The company's omni-channel strategy integrates physical stores with e-commerce solutions like Driveway and GreenCars[15][17] - Lithia's acquisition strategy is disciplined, targeting a valuation multiple of 3x to 7x estimated annualized adjusted EBITDA and investing $2.3 billion in 2021[24][25][26] - The company's capital allocation strategy targets deploying free cash flow with 65% to acquisitions, 25% to internal investment, and 10% to shareholders[27] - As of December 31, 2021, the company employed approximately 21,150 people, with a workforce comprised of about 18% female employees and 44% minorities[50] Annual Advertising Expense | Year | Total Advertising Expense (Net) | | :--- | :--- | | 2021 | $162.2 million | | 2020 | $97.4 million | | 2019 | $111.9 million | Risk Factors The company faces significant business, financial, technological, and regulatory risks impacting its operations and growth - The business is highly sensitive to economic conditions, consumer spending, credit availability, and fuel prices[56][57] - Industry changes like ride-sharing, EVs, and driverless technology could adversely affect new vehicle sales and service revenues[68][69][70] - The company depends on manufacturers for vehicle supply and incentives, with approximately 21% of FY2021 service revenue from warranty work[74][80][82] - Significant indebtedness, with 41% of total debt at a variable rate as of December 31, 2021, exposes the company to interest rate risk[88][95] - The growth strategy relies on successfully acquiring and integrating new dealerships[118][119][121] - Cybersecurity breaches or system failures could lead to misuse of customer data, resulting in litigation and reputational damage[103][104][105] Properties The company owns and leases numerous properties, including its headquarters, and engages in sustainability initiatives - The company owns its corporate headquarters and had $592.9 million in outstanding mortgage debt as of December 31, 2021[130] - Lithia is engaged in sustainability initiatives, with a LEED-certified headquarters, solar projects, and various energy-saving practices[131] Legal Proceedings The company is involved in various legal proceedings from normal operations, none expected to be materially adverse - The company is party to numerous legal proceedings from its normal business operations but does not expect their resolution to have a material adverse effect[132] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (NYSE: LAD) outperformed benchmarks, and the board authorized significant share repurchases - On November 30, 2021, the Board authorized an additional $750 million for share repurchases, with $722.8 million remaining available at year-end[136] - Over five years, a $100 investment in LAD grew to $320.87, significantly outpacing the S&P 500 ($233.41) and its auto peer group ($224.47)[138][139] Q4 2021 Share Repurchases | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October | — | $— | | November | 249,648 | $286.94 | | December | 507,269 | $282.18 | | Total | 756,917 | $283.75 | Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved significant revenue and profit growth in 2021, driven by acquisitions and strong market conditions Results of Operations Revenues and gross profit surged in 2021 due to acquisitions, higher vehicle prices, and improved operating leverage - On a same-store basis, total revenues grew 24.4% and total gross profit increased by 38.0% in 2021 compared to 2020[151] - SG&A as a percentage of gross profit improved significantly, decreasing from 64.2% in 2020 to 57.8% in 2021[198] - Operating margin increased to 7.3% in 2021 from 5.3% in 2020, driven by higher gross margins and improved SG&A leverage[205] Consolidated Results of Operations (2021 vs. 2020) | Metric | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $22,831.7M | $13,124.3M | +$9,707.4M | +74.0% | | Total Gross Profit | $4,259.0M | $2,225.6M | +$2,033.4M | +91.4% | | Total Gross Margin | 18.7% | 17.0% | +170 bp | - | | Net Income | $1,100.0M | $470.3M | +$629.7M | +133.9% | | Diluted EPS | $36.54 | $19.53 | +$17.01 | +87.1% | Average Gross Profit Per Retail Unit (2021 vs. 2020) | Vehicle Type | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | New Vehicle | $4,673 | $2,693 | +$1,980 | +73.5% | | Used Vehicle | $3,001 | $2,434 | +$567 | +23.3% | | Finance & Insurance | $1,961 | $1,636 | +$325 | +19.9% | Liquidity and Capital Resources The company maintained strong liquidity of $1.5 billion, funding acquisitions through operations, debt, and equity offerings - In 2021, the company invested $2.7 billion in acquisitions (net of cash acquired) and $260.4 million in capital expenditures[231] - In May 2021, the company raised $1.11 billion (net) through a public offering of 3,571,428 shares of common stock[240] - The company maintains a $3.75 billion syndicated credit facility and was in compliance with all debt covenants as of December 31, 2021[245][246][249] Available Liquidity as of Dec 31 | Source (in millions) | 2021 | 2020 | | :--- | :--- | :--- | | Cash, restricted cash, and cash equivalents | $174.8 | $162.4 | | Unfinanced new vehicles | $0.0 | $113.4 | | Available credit on credit facilities | $1,344.8 | $1,237.1 | | Total current available funds | $1,519.6 | $1,399.5 | Summary of Cash Flows (in millions) | Cash Flow Activity | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,797.2 | $544.6 | $524.5 | | Net cash used in investing activities | $(2,890.4) | $(1,605.8) | $(463.0) | | Net cash provided by (used in) financing activities | $1,106.7 | $1,139.8 | $(9.1) | Critical Accounting Policies and Estimates Key accounting estimates involve the valuation of goodwill, franchise value, and assets from business combinations - Goodwill and franchise value are considered critical accounting estimates and are tested for impairment annually on October 1[269][270] - In 2021, a triggering event during Q3 led to a $1.9 million impairment charge for franchise value at a specific location[272][274] - Accounting for acquisitions requires significant estimates to determine the fair value of assets acquired and liabilities assumed[277][278] Goodwill and Franchise Value Balances | Intangible Asset | Balance as of Dec 31, 2021 | | :--- | :--- | | Goodwill | $977.3 million | | Franchise Value | $799.1 million | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency exchange, and equity prices - The company has significant exposure to interest rate risk on its $2.1 billion in variable-rate debt as of December 31, 2021[282] - Foreign currency exchange risk exists due to Canadian operations; a 10% devaluation of the Canadian dollar would have reduced 2021 revenues by $32.3 million[287] - The company is subject to equity price risk from its investment in Shift Technologies, Inc., which had a fair value of $40.9 million at year-end 2021[289] Financial Statements and Supplementary Data This section refers to the consolidated financial statements and auditor's report located elsewhere in the filing - This item refers to the full consolidated financial statements and the independent auditor's report, which are located starting on page F-1[293] Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[294] - Management concluded that the company's internal control over financial reporting was effective, excluding 77 stores acquired during 2021[298][299] - KPMG LLP issued an unqualified attestation report on the company's internal control over financial reporting as of December 31, 2021[299] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2022 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2022 Proxy Statement[301] Executive Compensation Details on executive compensation are incorporated by reference from the company's 2022 Proxy Statement - Details on executive compensation are incorporated by reference from the forthcoming 2022 Proxy Statement[302] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans and incorporates other ownership details by reference Equity Compensation Plan Information as of December 31, 2021 | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Approved by shareholders | 466,860 | — | 2,292,788 | | Not approved by shareholders | — | — | — | | Total | 466,860 | — | 2,292,788 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2022 Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the forthcoming 2022 Proxy Statement[305] Principal Accounting Fees and Services Details on fees paid to the independent auditor, KPMG LLP, are incorporated by reference from the 2022 Proxy Statement - The company's independent auditor is KPMG LLP; details on accounting fees and services are incorporated by reference from the 2022 Proxy Statement[306] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K - This item provides an index of all financial statements, schedules, and exhibits included in the Form 10-K filing[308][309] - The Consolidated Financial Statements and the report from the independent auditor, KPMG LLP, begin on page F-1 of the filing[308]