Lithia Motors, Inc. (LAD) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Lithia operated 278 locations, representing 40 brands across 25 U.S. states and three Canadian provinces, alongside its Driveway online retail and finance businesses.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $22.83 billion | $13.12 billion | +74.0% |
| Gross profit | $4.26 billion | $2.23 billion | +91.4% |
| Operating income | $1.67 billion | $697.1 million | +139.4% |
| Net income attributable to Lithia | $1.06 billion | $470.3 million | +125.4% |
| Diluted EPS | $36.54 | $19.53 | +87.1% |
| Operating margin | 7.3% | 5.3% | +2.0 percentage points |
| Gross margin | 18.7% | 17.0% | +1.7 percentage points |
New vehicle revenue grew 65.3% and used vehicle retail revenue 81.5%; finance and insurance revenue grew 81.3%, and service, body and parts revenue grew 56.5%. Acquisitions contributed materially to reported growth. Same-store revenue rose 24.4% and same-store gross profit rose 38.0%. New-vehicle gross profit per retail unit increased 73.5% to $4,673, while used-vehicle gross profit per unit increased 23.3% to $3,001.
Finance and insurance plus service, body and parts generated approximately 51% of gross profit, despite accounting for about 14% of revenue. SG&A was $2.46 billion, or 57.8% of gross profit versus 64.2% in 2020. These figures reflect significant operating leverage as gross profit expanded.
Cash flow, liquidity and debt
- Cash provided by operating activities was $1.80 billion, versus $544.6 million in 2020. Management’s adjusted operating cash flow measure, which adjusts for floor-plan financing and acquired inventory, was $756.4 million versus $382.4 million.
- Investing cash outflow was $2.89 billion, including $2.70 billion of acquisition cash payments and $260.4 million of capital expenditures. Financing cash inflow was $1.11 billion.
- Year-end immediately available funds were reported as $1.52 billion: $174.8 million of cash and $1.34 billion available on credit facilities. The company cited approximately $1.0 billion of additional potential liquidity from unfinanced real estate.
- Total debt was $4.60 billion, including $1.19 billion of floor-plan debt. Real estate mortgages were $592.9 million. Debt to total capital, excluding floor-plan notes, was 42.4%, down from 44.5%.
- Approximately 41% of total debt was variable-rate. The company reported compliance with its credit-facility covenants: current ratio 1.82 (minimum 1.10), fixed-charge coverage 5.53 (minimum 1.20), and leverage ratio 1.48 (maximum 5.75).
- Cash dividends paid were $38.8 million. Lithia repurchased approximately $214.8 million of shares under its authorization and ended the year with $722.8 million of authorization remaining.
Material changes versus 2020
- Lithia acquired 77 stores, opened one and divested nine. Acquisitions were funded with substantial cash, debt and equity; acquired stores contributed $4.13 billion of revenue and $211.3 million of operating income after acquisition dates. Management estimated the acquisitions would add nearly $7.0 billion in annualized revenue.
- The company expanded into Canada through its Pfaff Automotive partnership. The acquisition includes a redeemable non-controlling interest and a leasing portfolio.
- New-vehicle inventory was unusually constrained amid strong demand and manufacturer supply-chain shortages. Year-end new-vehicle supply was 24 days, 26 days lower than a year earlier. Higher selling prices and unit margins supported results.
- Other interest expense increased to $108.2 million from $73.1 million, while floor-plan interest expense fell to $22.3 million from $34.4 million. The company issued $800 million of 3.875% notes due 2029 and redeemed $300 million of 5.25% notes due 2025.
Outlook, risks and unusual items
Lithia provided no specific company revenue or earnings guidance in the supplied filing text. Management expected new-vehicle shortages to continue into 2022, while stating that elevated new-vehicle gross profit per unit was expected to return toward normalized levels. The filing cites an industry analyst estimate of approximately 16 million U.S. new-vehicle sales in 2022; this is not company guidance.
- Supply and margin exposure: Results benefited from supply-constrained new vehicles, strong demand and higher selling prices. A change in supply, demand, incentives or used-vehicle values could pressure sales and margins.
- Acquisitions and execution: Growth depends on manufacturer approvals, integration and achieving expected store performance; acquisition spending and debt service increase financial commitments. Purchase-price allocations for 2021 acquisitions remained preliminary.
- Leverage and rates: Variable-rate borrowings expose the company to higher interest expense; debt is secured by substantial assets and subject to financial and restrictive covenants.
- Driveway Finance: The expanding auto-loan and lease portfolio carries credit and residual-value risk and depends on continued access to securitized and other funding.
- Other material risks: COVID-19 and supply-chain disruption, competitive pressure from online retailers and direct-sales models, manufacturer relationships, regulation and litigation, cybersecurity, labor availability, and environmental exposures.
- Unusual items: 2021 included a $66.4 million unrealized loss on the Shift Technologies investment, a $10.3 million loss on early redemption of senior notes, and a $1.9 million non-cash franchise-value impairment. The effective tax rate was 28.4%, affected in part by a valuation allowance on deferred tax assets.
KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded the 77 stores acquired in 2021 from the internal-control assessment; those stores represented approximately 20% of year-end assets and 18% of 2021 revenue.
Most important facts for investors to verify
- How much of 2021’s exceptional vehicle pricing and per-unit gross profit can persist as inventory supply and market conditions normalize.
- Whether recently acquired stores deliver targeted returns and whether preliminary acquisition valuations and integration assumptions change materially.
- Driveway Finance portfolio credit performance, allowance adequacy, residual-value risk and access to securitization funding.
- Debt maturities, variable-rate exposure, liquidity availability and covenant headroom, including the terms and renewal of financing facilities.
- The impact of Shift investment valuation changes and the deferred-tax valuation allowance, as well as the internal-control integration of acquired stores.