Lithia Motors, Inc. (NYSE: LAD) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Lithia operated 296 locations representing 48 brands in the U.S. and Canada, selling new and used vehicles and providing finance, insurance, repair and maintenance services.
Financial performance
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Total revenue | $28.19 billion | $22.83 billion | +23.5% |
| Gross profit | $5.15 billion | $4.26 billion | +21.0% |
| Operating income | $1.94 billion | $1.66 billion | +16.8% |
| Net income attributable to Lithia | $1.25 billion | $1.06 billion | +18.0% |
| Diluted EPS | $44.17 | $36.54 | +20.9% |
| Operating margin | 6.9% | 7.3% | −40 bps |
| Total gross margin | 18.3% | 18.7% | −40 bps |
Revenue and gross profit growth primarily reflected acquisitions, alongside organic growth in used vehicles, finance and insurance, and service. New-vehicle supply constraints supported elevated selling prices and new-vehicle gross profit per unit; used-vehicle gross profit per unit fell.
- Vehicle operations: Revenue was $28.19 billion and gross profit was $5.15 billion. New-vehicle retail revenue rose 15.2%, with gross profit per retail unit up 24.5% to $5,816. Used-vehicle retail revenue rose 29.9%, but gross profit per unit declined 11.8% to $2,648. Service, body and parts revenue increased 29.7%.
- Financing operations: Reported a $4.0 million loss, versus $11.0 million income in 2021. Interest margin declined to 5.3% from 8.2%, as funding costs rose and provisions on new loans grew. DFC originated $1.93 billion of net loans; its penetration rate increased to 10.2% from 4.0%. Net credit losses were 3.0% of average managed receivables, up from 1.7%.
- Expenses and unusual items: SG&A was $3.04 billion, up 22.7%, and 59.1% of gross profit versus 58.2%. The company recorded a $66.0 million net gain on store sales, $15.0 million in acquisition expenses and $4.9 million in storm-related insurance charges. Other expense included a $39.2 million unrealized loss on its Shift investment and a $16.8 million foreign-currency translation loss.
Cash flow, liquidity and debt
- Reported operating cash flow was negative $610.1 million, compared with positive $1.80 billion in 2021. Management attributed the decline largely to increased inventory, growth in finance receivables and acquisitions. Its adjusted non-GAAP operating cash flow measure was $1.37 billion, versus $1.40 billion.
- Investing cash outflow was $1.33 billion, including $303.1 million of capital expenditures and $1.24 billion of cash paid for acquisitions, net of cash acquired. Financing cash inflow was $2.04 billion.
- Year-end available liquidity was approximately $1.59 billion: $168.1 million cash and $1.42 billion available on credit facilities. The company also cited approximately $0.5 billion of potential liquidity from unfinanced real estate. Cash and restricted cash on the balance sheet totaled $246.7 million; the filing’s cash-flow statement reports $271.5 million including additional restricted reserve-account cash.
- Total debt was $7.65 billion, including floor-plan notes payable. Debt to total capital, excluding floor-plan notes, was 49.5%, compared with 40.0% in 2021. The company reported 65% of total debt was variable-rate; it estimated a 10% rate increase would raise annual after-tax interest expense by about $15.1 million based on year-end balances.
- During 2022, Lithia borrowed a net $2.0 billion on lines of credit, repurchased $688.3 million of common stock and paid $45.2 million in dividends. Year-end repurchase authorization remaining was $501.4 million.
Material changes, outlook and risks
- Lithia acquired 31 stores, opened one and divested 13 during 2022. It reported approximately $1.1 billion of adjusted acquisition cash investment, net of floor-plan financing, and anticipated nearly $3.5 billion in annualized revenue from the acquisitions.
- In the fourth quarter, the company changed its segment reporting to Vehicle Operations and Financing Operations and reclassified comparative information. The 2022 internal-control assessment excluded the 31 acquired stores, representing about 5% of consolidated assets and revenue; management and the auditor concluded controls were effective for the assessed scope.
- The company did not provide formal 2023 earnings guidance in the supplied filing text. Management said new-vehicle supply was expected to continue improving in 2023. The filing cites an industry analyst estimate of approximately 14 million U.S. new-vehicle sales in 2023; this is not company guidance.
- Key exposures include vehicle-sales cyclicality, inflation and higher interest rates, changes in vehicle affordability and inventory supply, competition and online retail disruption, manufacturer and franchise risks, acquisition integration, and regulatory, environmental and cybersecurity matters. Variable-rate debt and potential DFC credit losses are notable financial risks. The company reported numerous ordinary-course legal proceedings but did not expect their resolution to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill and franchise value totaled approximately $1.46 billion and $1.86 billion, respectively; the 2022 annual impairment assessment identified no impairment. These valuations depend on management estimates and future performance assumptions.
Investor verification priorities
- Reconcile reported negative operating cash flow with the company’s adjusted non-GAAP cash-flow measure, and assess inventory and finance-receivable funding needs.
- Track whether new-vehicle availability and margins normalize, and whether used-vehicle gross profit per unit stabilizes.
- Review DFC portfolio delinquency, net losses, recoveries, reserves and funding costs as the loan book expands.
- Assess leverage, variable-rate exposure, credit-facility availability and covenant headroom alongside acquisition and shareholder-return spending.
- Monitor acquired-store integration, returns on acquisition investment, and future goodwill or franchise-value impairment indicators.