Lithia Motors, Inc. (LAD) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; the supplied text does not provide standalone fourth-quarter results. Unless noted, amounts are in U.S. dollars.
Business context
Lithia operates automotive retail, service and financing businesses through 344 locations and 47 brands in the U.S., U.K. and Canada. It reported two segments: Vehicle Operations and Financing Operations. The company’s strategy emphasizes acquisitions, omnichannel retail, service growth and expansion of its captive lender, Driveway Finance Corporation (DFC).
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Revenue | $31.04 billion, up 10.1% | $28.19 billion |
| Gross profit | $5.23 billion, up 1.5%; 16.8% margin | $5.15 billion; 18.3% margin |
| Operating income / margin | $1.69 billion / 5.5% | $1.94 billion / 6.9% |
| Net income attributable to Lithia | $1.00 billion | $1.25 billion |
| Diluted EPS | $36.29 | $44.17 |
| Cash flow from operations, GAAP | $(472.4) million | $(610.1) million |
| Capital expenditures | $230.2 million | $303.1 million |
| Cash and available credit | $825.0 million cash; $870.4 million available credit | $168.1 million cash; $1.42 billion available credit |
| Total debt, as presented in the filing | $10.90 billion | Not stated in the cited debt summary |
Cash and available credit totaled approximately $1.70 billion at year-end; management also cited approximately $0.4 billion of potential liquidity from unfinanced real estate. The balance sheet reports $941.4 million of cash and restricted cash, which differs from the $825.0 million cash figure used in the liquidity table. Debt to total capital, excluding floor-plan notes payable, was 47.1%, versus 49.5% in 2022. About 63% of total debt was variable-rate. Reported financing cash flows were $2.41 billion, while investing cash flows were $(1.27) billion.
Material changes versus 2022
- Revenue growth was driven mainly by acquisitions, with 56 stores acquired and eight divested during 2023. Acquisitions added $2.62 billion of revenue after their respective closing dates; the company estimated nearly $3.8 billion of annualized revenue from the 2023 acquisitions.
- Vehicle margins normalized: new-vehicle average gross profit per retail unit fell 23.7% to $4,438, and used-vehicle average gross profit per unit fell 16.4% to $2,215. Same-store total gross profit declined 9.3%.
- Service, body and parts remained comparatively strong: same-store revenue rose 5.5% and gross profit rose 7.7%.
- SG&A increased 8.2% to $3.29 billion and rose to 63.0% of gross profit from 59.1%. Floor-plan interest expense increased $112.1 million; other interest expense increased $72.1 million.
- DFC reported a $45.9 million loss, versus a $4.0 million loss in 2022. Its interest margin narrowed to 3.5% from 5.3%, and provision for loan and lease losses rose to $98.8 million from $44.4 million.
- DFC’s managed receivables grew to $3.18 billion at year-end. Net credit losses were 2.3% of average managed receivables, down from 3.0% in 2022; the average recovery rate fell to 49.8% from 59.3%.
Outlook, risks and unusual items
- Management said it believed funding sources were sufficient for business requirements over the next 12 months and longer term. The filing does not provide a company-specific earnings or revenue forecast. Management’s longer-term strategy includes the 2025 Plan, but the supplied text does not give its targets.
- Management cited margin normalization, higher interest expense and increased SG&A as contributors to lower net income. It reported stabilizing and improving DFC interest margins in recent quarters after raising customer contract rates while seeking to maintain credit quality.
- Major risks include vehicle affordability and demand, interest rates and inflation, inventory and manufacturer supply, competition and online-sales models, franchise renewals, acquisition integration, debt covenants and refinancing, and DFC credit losses and funding access. Cybersecurity, privacy, regulatory and environmental exposures are also discussed.
- 2023 non-core items included $27.2 million of acquisition expenses, $5.4 million of storm-related insurance charges and a $31.2 million net disposal gain on store sales. The company reported no goodwill or franchise-value impairment charges in 2023.
- Year-end goodwill was $1.93 billion and franchise value was $2.40 billion; both depend on estimates and future operating assumptions. The auditor identified franchise-value impairment assessment as a critical audit matter, while issuing unqualified opinions on the financial statements and internal controls.
- Management and the auditor excluded the 56 stores acquired in 2023 from the internal-control assessment; those stores represented 11% of consolidated assets and 8% of revenue. Management otherwise concluded internal controls were effective.
- Subsequent to year-end, Lithia acquired Pendragon’s U.K. motor and vehicle-management businesses on January 31, 2024, for a preliminary purchase price of approximately £430 million. It also issued $329.4 million of non-recourse notes in February 2024.
Key facts investors should verify
- Whether vehicle gross profit per unit continues to normalize and whether same-store sales and margins stabilize.
- Whether acquisitions deliver expected annualized revenue, returns and cost integration, including completion of preliminary purchase-price allocations.
- DFC’s net interest margin, delinquency trends, recoveries, credit-loss allowance and ability to fund portfolio growth.
- Debt maturity, variable-rate exposure, covenant headroom and available borrowing capacity; the filing reports $6.9 billion of variable-rate debt outstanding.
- The difference between reported cash, restricted cash and cash used in the company’s liquidity summary, and the sustainability of GAAP operating cash flow.
- The assumptions underlying goodwill and franchise-value carrying amounts, and the integration and control environment for acquired stores.