Lithia Motors, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter results report. Lithia operated 209 locations, representing 33 brands in 22 states, at year-end. It sells new and used vehicles, finance and insurance products, and service, body and parts.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $13.124 billion | $12.673 billion | +3.6% |
| Gross profit | $2.226 billion | $1.954 billion | +13.9% |
| Operating income | $697.1 million | $495.0 million | +40.8% |
| Net income | $470.3 million | $271.5 million | +73.2% |
| Diluted earnings per share | $19.53 | $11.60 | +68.4% |
| Gross margin | 17.0% | 15.4% | +160 basis points |
| Operating margin | 5.3% | 3.9% | +140 basis points |
- Revenue mix and profitability: New vehicle retail revenue was $6.774 billion, down 0.4%; used vehicle retail was $3.998 billion, up 13.4%; finance and insurance was $579.8 million, up 11.8%; and service, body and parts was $1.349 billion, up 1.8%. Finance and insurance and service, body and parts together generated approximately 58% of gross profit.
- Cash flow: Operating activities provided $542.2 million, compared with $524.5 million in 2019. Investing activities used $1.606 billion, including $1.503 billion for acquisitions and $167.8 million in capital expenditures. Financing activities provided $1.140 billion. Year-end cash was $160.2 million.
- Liquidity: Management reported $1.397 billion in immediately available funds: $160.2 million cash and $1.237 billion available on credit facilities. It also cited approximately $471 million of potential liquidity from unfinanced real estate.
- Debt: Total debt was $3.928 billion, including $1.797 billion in floor-plan debt; long-term debt was $2.149 billion before debt issuance costs and current maturities. Debt to total capital, excluding floor-plan notes payable, was 44.5%, versus 50.0% a year earlier. The filing says 49% of total debt was variable rate. The company met its credit-facility covenants at year-end.
Material changes and drivers
- Growth reflected acquisitions and organic gains in used vehicles, finance and insurance, and service, body and parts. Lithia acquired 30 stores and divested five in 2020; acquired stores contributed $866.1 million of revenue after acquisition dates.
- Same-store revenue declined 4.8%, while same-store gross profit increased 4.4%. Same-store new vehicle unit sales fell 14.0%; used vehicle unit sales rose 1.0%. Higher selling prices and gross profit per vehicle helped offset lower new vehicle volume.
- Gross profit per retail unit increased 26.1% for new vehicles and 12.9% for used vehicles. Management attributed improved new-vehicle unit economics partly to pent-up demand, reduced inventory after production interruptions, and manufacturer incentives.
- Reported net income included a $43.4 million unrealized gain on Lithia’s Shift investment, recorded in other income. The company’s non-GAAP adjusted net income was $438.1 million, compared with reported net income of $470.3 million; these measures are not directly comparable without considering the filing’s adjustments.
- SG&A rose 4.0% to $1.428 billion, but declined to 64.2% of gross profit from 70.3%. Floor-plan interest expense fell to $34.4 million from $72.8 million, while other interest expense increased to $73.1 million from $60.6 million.
Outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management said unusually high vehicle gross profit per unit was expected to return to more normalized levels in 2021. It cited an industry analyst estimate of approximately 16 million U.S. new-vehicle sales for 2021.
- Management’s strategy emphasizes acquisitions, operational performance, digital commerce and its Driveway e-commerce platform, launched in July 2020. Its capital allocation targets are 65% acquisitions, 25% capital expenditures and 10% shareholder returns; these are targets, not guarantees.
- COVID-19 restrictions sharply affected sales in late March and early April 2020, with some locations experiencing few or no sales. Results improved as restrictions eased, but the duration and future effects of the pandemic remained uncertain.
- Key risks include vehicle demand and margin cyclicality, vehicle and parts supply constraints, manufacturer incentives and franchise terms, competition from online retailers, consumer access to auto financing, acquisitions and integration, cybersecurity and data privacy, regulation and litigation, and environmental or self-insurance liabilities.
- Interest-rate exposure is material: $2.0 billion of variable-rate debt was outstanding at year-end. The filing estimates a 10% rate increase would increase annual interest expense by approximately $2.1 million, net of tax, based on year-end balances.
- Unusual items included $7.9 million of non-cash goodwill and franchise-value impairments, a $43.4 million unrealized investment gain, and the October 2020 issuance of $550 million of 4.375% senior notes due 2031 and a public stock offering that generated approximately $777.6 million net proceeds before offering expenses.
Important facts for investors to verify
- How much of earnings growth is repeatable after separating the Shift investment gain, acquisition effects, and unusually strong vehicle gross profit per unit.
- Whether used-vehicle, finance and insurance, and service performance can offset weaker same-store new-vehicle volume and pandemic-related service declines.
- Acquisition returns and integration progress, including the preliminary purchase-price allocations for 2020 acquisitions and the acquired stores excluded from the year-end internal-control assessment.
- Debt, liquidity and covenant headroom as acquisition spending continues, particularly given variable-rate exposure and secured borrowing arrangements.
- Whether Driveway and other digital investments produce sustainable customer growth and earnings, and whether management’s expectation of normalized vehicle margins in 2021 proves accurate.