WASHINGTON, D. C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ] Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $2,236,488,000$10,385,788,000 computed by reference to the last sales price ($94.23)343.64) as reported by the New York Stock Exchange for the Registrant’s Class A commonCommon stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2017)2021).
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 20182022 Annual Meeting of Shareholders.
LITHIA MOTORS, INC.
Certain statements in this Annual Report, including in the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” constitute forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as “project”,“project,” “outlook,” “target”,“target,” “may,” “will,” “would,” “should,” “seek,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “likely,” “goal,” “strategy,” “future,” “maintain,” and “continue” or the negative of these terms or other comparable terms. Examples of forward-looking statements in this Form 10-K include, among others, statements we make regarding:
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| | | | | |
State | | Number of Stores | | Percent of 2017 Revenue |
| California | | 42 | | 24.6 | % |
| Oregon | | 26 | | 15.1 |
|
| New Jersey | | 11 | | 12.3 |
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| Texas | | 16 | | 11.0 |
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| New York | | 11 | | 6.8 |
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| Montana | | 11 | | 5.4 |
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| Washington | | 6 | | 4.5 |
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| Alaska | | 9 | | 3.9 |
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| Pennsylvania | | 8 | | 2.7 |
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| Nevada | | 4 | | 2.6 |
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| Idaho | | 4 | | 2.6 |
|
| Hawaii | | 5 | | 2.4 |
|
| Iowa | | 7 | | 2.3 |
|
| North Dakota | | 3 | | 1.1 |
|
| Vermont | | 2 | | 0.8 |
|
| New Mexico | | 2 | | 0.7 |
|
| Massachusetts | | 1 | | 0.6 |
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| Wyoming | | 1 | | 0.6 |
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| Total | | 169 | | 100.0 | % |
Business StrategyLithia and Operations
We offer customers convenient personalized service combined withDriveway (LAD) offers a wide array of products and services fulfilling the large company advantages of selection, competitive pricingentire vehicle ownership lifecycle including new and broad access to financingused vehicles, finance and warranties.insurance products and automotive repair and maintenance. We strive for diversification in our products, services, brands and geographic locations to manage market risk and to maintain profitability. We have developed a centralized support structure to reduce store level administrative functions. This allows store personnel to focus on providing a positive customer experience. With our performance management strategy, standardized information systems and centrally and regionally-performed administrative functions, we seek to gain economies of scale from our dealership network.
We offer a variety of luxury, import and domestic new vehicle brands and models, reducing our dependence on any one manufacturer, and ourreduce susceptibility to changing consumer preferences. Encompassing economypreferences, manage market risk and luxury cars, sport utility vehicles (SUVs), crossovers, minivansmaintain profitability. Our diversification, along with our operating structure, provides a resilient and trucks,nimble business model.
LAD’s omni-channel strategy pragmatically disrupts the industry by leveraging our experienced teams, vast owned inventories, technology and physical network. We continue to lead the industry’s consolidation and, combined with Driveway’s e-commerce in-home experiences and Driveway Finance Corporation’s growing auto loan portfolio, further accelerates our massive profit and capital engine. Together, these endeavors create a unique and compelling high-growth strategy that provides transportation solutions wherever, whenever and however consumers desire.
Founded in 1946 and incorporated in Oregon in 1968, we believecompleted our brand mix is well-suited to what customers demandinitial public offering in the markets we serve. Our new vehicle unit mix of 56% import, 32% domestic and 12% luxury compares to the national market mix of 48%, 44% and 8%, respectively, for the year ended December 31, 2017.1996.
Our mission statement is “Growth Powered by People." Business Strategy
We seek to expandprovide customers a seamless, blended online and physical retail experience with broad selection and access to specialized expertise and knowledge. Our physical network enables us to provide convenient touch points for customers and provide services throughout the vehicle life cycle. We seek to increase market share and optimize profitability by focusing on the consumer experience and applying proprietary performance measurement systems fueled by data science. Our Driveway and GreenCars brands provide convenient, simple, and transparent platforms that serve as our e-commerce home solutions and allow us to deliver differentiated, proprietary digital experiences. Complimenting our in-store experiences, Driveway and GreenCars provide consumers more choices while further leveraging our network of people, inventory and locations and capturing additional earnings.
Our long-term strategy to create value for our customers, employees and shareholders includes the following elements:
Driving operational excellence, innovation and diversification
LAD builds magnetic brand loyalty in our 278 stores and with Driveway, our e-commerce home delivery experience, and GreenCars, our electric vehicle learning resource and marketplace. Operational excellence is achieved by focusing the business through acquiringon convenient and transparent consumer experiences supported by proprietary data science to improve market share, consumer loyalty, and profitability. By promoting an entrepreneurial model with our in-store experiences, we build strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we develop high-performing teams and foster manufacturer relationships.
In response to evolving consumer preferences, we invest in modernization that supports and expands our core business. These digital strategies combine our experienced, knowledgeable workforce with our owned inventory and physical network of stores, with strong brands which meet our investment metrics.enabling us to be agile and adapt to consumer preferences and market specific conditions. Additionally, we focus on unlocking the potentialsystematically explore transformative adjacencies, which are identified to be synergistic and complementary to our existing business such as Driveway Finance Corporation, our captive auto loan portfolio.
Our investments in modernization are well under way and are taking hold with our teams as they provide digital shopping experiences including finance, contactless test drives and home delivery or curbside pickup for vehicle purchases. Our people and these solutions power our national brands, overlaying our physical footprint in a way that we believe attracts a larger population of digital consumers seeking transparent, empowered, flexible and simple buying and servicing experiences.
Our performance-based culture is geared toward an incentive-based compensation structure for a majority of our existing stores by designing agile approaches tailoredpersonnel. We develop pay plans that are measured based upon various factors such as customer satisfaction, profitability and individual performance metrics. These plans serve to reward team members for the local marketcreating customer loyalty, achieving store potential, developing high-performing talent, meeting and identifying operational opportunities withexceeding manufacturer requirements and living our performance management reporting.core values.
Operations are structured to promote an entrepreneurial environment at the dealership level. Each store’s general manager and department managers, with assistance from regional and corporate management, are responsible for developing successful retail plans in their local markets. They are responsible for driving dealership operations, personnel development, manufacturer relationships, store culture and financial performance.
We have centralized many administrative functions to drive efficiencies and streamline store-level operations. Accounts payable, accounts receivable, credit and collections, accounting and taxes, payroll and benefits, information technology, legal, human resources, personnel development, treasury, cash management, advertising and marketing are all centralized at our corporate headquarters or regional accounting processing centers. The reduction of administrative functions at our stores allows our local managers to focus on customer-facing opportunities to increase revenues and gross profit. Our operations are supported by ourregional and corporate
management, as well as dedicated training and personnel development program,programs which sharesallow us to share best practices across our dealership network and seeks to develop management talent.
Growth through acquisition and network optimization
Our acquisition growth strategy has been successful both financially and culturally. Our disciplined approach focuses on acquiring new vehicle franchises, which operate in markets ranging from mid-sized regional markets to metropolitan markets. Acquisition of these businesses increases our proximity to consumers throughout the United States. While we target annual after tax return of more than 15% for our acquisitions, we have averaged over a 25% return by the third year of ownership due to a disciplined approach focusing on accretive, cash flow positive targets at reasonable valuations. In addition to being financially accretive, acquisitions aim to drive network growth that improves our ability to serve customers through vast selection, greater density and access to customers and ability to leverage national branding and advertising.
As we focus on expanding our physical network of stores, one of the criteria we evaluate is a valuation multiple between 3x to 7x of investment in intangibles to estimated annualized adjusted EBITDA, with various factors including location, ability to expand our network and talent considered in determining value. We also target an investment in intangibles as a percentage of annualized revenues in the range of 15% to 30%.
During 2017,2021, we focused on achieving our mission through acquisitions and through organic growth within our existing stores.
We purchased 18acquired 77 stores, and opened one new store, during 2017.and divested nine stores. We invested $349.4 million,$2.3 billion, net of floor plan debt, to acquire these stores and we expect these acquisitions to add over $1.7nearly $7.0 billion in expected annual revenues. Additionally, these acquisitions allow us to maintain an appropriate franchise mix and leverage our cost structure. We focus on successfully integrating acquired stores to achieve targeted returns.
We also organically grewregularly optimize and balance our existing stores in 2017 by:network through strategic divestitures to ensure continued high performance. We believe our disciplined approach provides us with attractive acquisition opportunities and expanded coast-to-coast coverage.
increasing revenues in all core business lines;
capturing a greater percentage of overall new vehicle sales in our local markets;
capitalizing on a used vehicle market that is approximately three times larger than the new vehicle market by increasing sales of late model, lower-mileage used vehicles and value autos, which are older, higher mileage vehicles; and
growing our service, body and parts revenues as units in operation increase.
Thoughtful capital allocation
We target SG&A as a percentage of gross profit in the upper 60% range and monitor how efficiently we leverage our cost structure by evaluating throughput. For 2017, our SG&A as a percentage of gross profit was 69.2% compared to 69.1% in 2016. Adjusted for a non-core charge, SG&A as percentage of gross profit was 68.8% and 68.9%, respectively, for 2017 and 2016. As noted above, we acquired eighteen stores and opened one new store in 2017; we acquired fifteen stores and one franchise, and opened one new store in 2016. The increase in SG&A as a percentage of gross profit was due to our recent acquisitions, which tend to have less cost efficient structures until we can fully integrate their operations.
We evaluate how to allocate capital, including returning cash to our investors and investing in our stores. During 2017, we paid $26.5 million in dividends, spent $33.8 million to repurchase 361,000 shares, or 2% of total outstanding shares, and purchased a capped call option of 325,000 shares for $33.4 million. We also invested in our facilities, making $105.4 million in capital expenditures. We continue to manage our liquidity and available cash to preparesupport our long-term plan focused on growth through acquisitions, investments in our national e-commerce home solution, Driveway, and our existing business. Our free cash flow deployment strategy targets an allocation of 65% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification and 10% in shareholder return in the form of dividends and share repurchases. During 2021, we invested in our facilities, utilizing $260.4 million for future acquisition opportunities.capital expenditures, and paid $38.8 million in dividends. As of December 31, 2017,2021, we had $279.8available liquidity of $1.5 billion, which was comprised of $174.8 million in available funds in cash and $1.3 billion availability on our credit facilities with an estimatedand unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional $236.1 million available if we financed our unencumbered owned real estate.liquidity of approximately $1.0 billion.
New VehiclesMarketing
In 2017, we sold 167,146 new vehicles, generating 22.4%One of our gross profitcore values, Earn Customers for Life, defines our market strategy by appealing to our consumers’ desire for affordability, transparency and convenience. We employ national, regional and local brands to connect with consumers with advertising tailored to the year. New vehicle sales have the potentialindividual brand and market. Utilizing data analysis and multi-channel communications, we strive to create incremental future profit opportunities through certain manufacturer incentive programs, resale of used vehicles acquired through trade-in, arranging of third-party financing, vehicle serviceattract and insurance contracts, and future service and repair work.
In 2017, we represented 30 domestic and import brands ranging from economy to luxury cars, SUVs, crossovers, minivans and light trucks.
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| | | | | | | |
Manufacturer | | Percent of 2017 New Vehicle Revenue | | Percent of 2017 New Vehicle Gross Profit | |
| Chrysler, Jeep, Dodge, Ram, Alfa Romeo | | 18.5 | % | | 14.6 | % | |
| Honda, Acura | | 16.4 |
| | 20.0 |
| |
| Toyota | | 15.6 |
| | 15.6 |
| |
| Chevrolet, Cadillac, GMC, Buick | | 10.9 |
| | 9.8 |
| |
| BMW, MINI | | 7.6 |
| | 8.9 |
| |
| Ford, Lincoln | | 8.5 |
| | 7.5 |
| |
| Subaru | | 5.9 |
| | 3.4 |
| |
| Volkswagen, Audi | | 4.8 |
| | 4.9 |
| |
| Nissan | | 3.5 |
| | 4.9 |
| |
| Mercedes, Smart | | 2.9 |
| | 4.2 |
| |
| Hyundai | | 1.9 |
| | 2.4 |
| |
| Lexus | | 1.1 |
| | 1.1 |
| |
| Kia | | 1.2 |
| | 0.8 |
| |
| Mazda | | 0.2 |
| | 0.2 |
| |
| Porsche | | 0.8 |
| | 1.4 |
| |
| Fiat | | 0.1 |
| | 0.2 |
| |
| Volvo | | 0.1 |
| | 0.1 |
| |
| Mitsubishi | | — |
| * | — |
| * |
| Total | | 100.0 | % | | 100.0 | % | |
* Less than 0.1%
We purchase our new car inventory directly from manufacturers, who generally allocate new vehicles to stores based on availability, monthly sales levels and market area demand. Accordingly, we rely on the manufacturers to provide us with vehicles that meet consumer demand at suitable locations, with appropriate quantities and prices. However, if high demand vehicles, or vehicles with certain option configurations are in short supply, we attempt to exchange vehicles with other automotive retailers and between our own stores to accommodate customer demand and to balance inventory.
Used Vehicles
At each new vehicle store, we also sell used vehicles. In 2017, we sold 129,913 retail used vehicles, which generated 18.9% of our gross profit.
Our used vehicle operations give us an opportunity to:
generate sales toretain customers unable or unwilling to purchase a new vehicle;
generate sales of vehicle brands other than the store’s new vehicle franchise(s);
increase vehicle sales by aggressively pursuing customer trade-ins; and
increase finance and insurance revenues and service and parts sales.
We classify our used vehicles in three categories: manufacturer certified pre-owned used vehicles ("CPO"); late model, lower-mileage vehicles ("Core Product") and higher mileage, older vehicles ("Value Autos"). We offer CPO vehicles at most of our franchised dealerships. These vehicles undergo additional reconditioning and receive an extended OEM-provided warranty. Core Product are reconditioned and offer a Lithia certified warranty. Value Autos undergo a safety check and a lesser degree of reconditioning and are offered to customers who desire a less expensive vehicle or a lower monthly payment.
We acquire our used vehicles through customer trade-ins, purchases from non-Lithia stores, independent vehicle wholesalers and private parties, and at closed auctions.
Our near-term goal for used vehicles is to retail an average of 85 units per store per month. As of December 31, 2017, our stores sold an annualized average of 67 retail used units per month. We believe used vehicle sales represent a significant area for organic growth. As new vehicle sales growth rates return to average historical levels and we continue our focus on growing used retail sales, we believe our target is achievable.
Wholesale transactions result from vehicles we have acquired via trade-in from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to inventory age or other factors. As part of our used vehicle strategy, we have concentrated on directing more lower-priced, older vehicles to retail sale rather than wholesale disposal.
Vehicle Financing, Service Contracts and Other Products
As part ofthroughout the vehicle sales process, we assist in arranging customer vehicle financing options as well as offering extended warranties, insurance contracts and vehicle and theft protection products. The sale of these items generated 25.5% of our gross profit in 2017.ownership life cycle.
We believe that arranging vehicle financing is an important part of our ability to sell vehicles and related products and services. Our sales personnel and finance and insurance managers receive training in securing customer financing and possess extensive knowledge of available financing alternatives. We attempt to arrange financing for every vehicle we sell and we offer customers financing onWith a “same day” basis, giving us an advantage, particularly over smaller competitors who do not generate enough sales to attract our breadth of finance sources.
We earn a commission on each finance, service and insurance contract we write and subsequently sell to a third party. We normally arrange financing for customers by selling the contracts to outside sources on a non-recourse basis to avoid the risk of default.
We arranged vehicle financing on 76.0% of the vehicles we sold during 2017. Our presence in multiple markets and changes in technology surrounding the credit application process have allowed us to utilize a larger network of lenders across a broader geographic area. Additionally, we continue to see the availability of consumer credit expand with lenders increasing the loan-to-value amount available to most customers. These shifts afford us the opportunity to sell additional or more comprehensive products, while remaining within a loan-to-value framework acceptable to our lenders.
We also market third-party extended warranty contracts, insurance contracts and vehicle and theft protection products to our customers. These products and services yield higher profit margins than vehicle sales and contribute significantly to our profitability. Extended warranty and service contracts for vehicles provide coverage for certain repairs beyond the duration or scope of the manufacturer’s warranty. We believe the sale of extended warranties, service contracts and vehicle and theft protection products increases our service and parts business by building a customer base for future repair work at our locations.
When customers finance an automobile purchase, we offer them life, accident and disability insurance coverage, as well as guaranteed auto protection coverage that provides protection from loss incurredvast selection represented by the difference in the amount owednation’s largest vehicle inventory for sale online, we employ search engine optimization, search engine marketing, online display, re-targeting, social advertising, traditional media and the amount received under a comprehensive insurance claim. We receive a commissiondirect marketing to reach consumers. Most consumers begin their shopping, buying or selling activity on each policy sold.
We offer a lifetime lube, oilour store websites, Driveway, and filter (“LOF”) service, which, in 2017, was purchased by 25.0% of our totalGreenCars. These 300+ online channels provide customers with simple, transparent ways to manage their vehicle ownership including: search new and used inventories, view current pricing, apply incentives and offers, calculate payments for purchase or lease, apply for financing, buy online, sell their vehicle, buyers. Thisschedule service where customers prepay forappointments, schedule vehicle pick-up and delivery, and provide us feedback about their LOF services, helps us retain customers by building customer loyalty and provides opportunities for selling additional routine maintenance items and generating repeat service business. In 2017, we sold an average of $64 of additional maintenanceexperience. During 2021, our unique visitors increased 39% on each lifetime oil service we performed.a same store basis.
Service, Body and Parts
In 2017, our service, body and parts operations generated 32.5% of our gross profit. These operations are an integral part of establishing customer loyalty and contribute significantly to our overall revenue and profits. We provide parts and service for the new vehicle brands sold by our stores, as well as service and repair most other makes and models.
The service and parts business provides important repeat revenues to our stores, which we seek to grow organically. Customer pay revenues represent sales for vehicle maintenance, service performed on vehicles that have fallen outside the manufacturer warranty period, repairs not covered by a manufacturer warranty, or maintenance and service on other makes and models. We believe increasing our product and service offerings for customers differentiates us from independent repair shops and dealerships with less scale. Our service and parts revenues benefit from the increases we have seen in new vehicle sales over the last few years as there are a greater number of late model vehicles in operation, which tend to visit franchised dealership locations more frequently than older vehicles due to the manufacturer warranty period. Additionally, certain franchises provide routine maintenance, such as oil changes, for two to four years after a vehicle is sold, which provides for future service and parts revenues.
We focus on growing our customer pay business and market our parts and service products by notifying owners when their vehicles are due for periodic service. This encourages preventive maintenance rather than post-breakdown repairs. The number of customers who purchase our lifetime LOF service helps to improve customer loyalty and provides opportunities for repeat parts and service business.
Revenues from the service and parts departments are particularly important during economic downturns, when owners tend to repair their existing vehicles rather than buy new vehicles. This partially mitigates the effects of a drop in new vehicle sales that may occur in a recessionary economic environment.
We believe body shops provide an attractive opportunity to grow our business, and we continue to evaluate potential locations to expand. We currently operate 25 collision repair centers: five in each of Oregon and Texas; three in Pennsylvania; two each in Idaho, New York and Washington; and one each in Alaska, Iowa, Montana, Nevada, Vermont and Wyoming.
Segments
We report three business segments: Domestic, Import and Luxury. For certain financial information by segment, see Notes 1 and 18 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Marketing
We believe that stores with strong local identities and customer loyalty are critical to our success. We want our customers’ experiences to be so satisfying that we earn their business for life. In conjunction with our manufacturer partners, we utilize an owner marketing strategy consisting of database analysis, email, traditional mail and phone contact to anticipate, listen and respond to customer needs.
To increase awareness and traffic at our stores and websites, we use a combination of traditional, digitaland social media to reach potential customers. Total advertising expense, net of manufacturer credits, was $93.3$162.2 million in 2017, $81.42021, $97.4 million in 20162020 and $69.9$111.9 million in 2015.2019. In 2017, 22% of those funds were2021, we spent in traditional media and 78% were spent in87% on digital, social, listings and owner communications, and other media outlets.while 13% was spent on traditional media. In all of our communications, we seek to convey the promise of a positive customer experience, competitive pricing and wide selection. We expect the portion of spending in digital channels to continue to increase as traditional media evolves to online consumption models.
Our manufacturer partners influence a significant portion of our advertising expense. Certain advertising and marketing expenditures are offset by manufacturer cooperative programs, which require us to submit requests for reimbursement to manufacturers for qualifying advertising expenditures. These advertising credits are not tied to specific vehicles and are earned as qualifying expenses are incurred. These reimbursements are recognized as a reduction of advertising expense. Manufacturer cooperative advertising credits were $22.8$35.6 million in 2017, $20.32021, $23.9 million in 20162020 and $19.8$27.9 million in 2015.2019.
Many people now shop online before visiting our stores. We maintain websites for all of our stores and corporate sites (Lithia.com, DCHAuto.com, CarboneCars.com, Baierl.com, and DTLAMotors.com), to generate customer leads for our stores. We also support a corporate site (LithiaMotors.com) which provides our communities, investors, employees and recruits additional information about our company.
Our retail websites enable our customers to:
locate our stores and identify the new vehicle brands sold at each store;
search new and pre-owned vehicle inventory;
view current pricing and specials;
calculate payments for purchase or lease;
obtain a value for their vehicle to trade or sell to us;
submit credit applications;
shop for and order manufacturers’ vehicle parts;
schedule service appointments; and
provide feedback about their experience.
Mobile traffic now accounts for over 60% of our web traffic and all of our sites utilize responsive technology to enhance the mobile and tablet experience. We are working with our stores and manufacturer partners to develop additional tools that enable customers to complete as much of the vehicle buying process online before arriving at our stores: saving them time, improving their experience and increasing our productivity.
We post our inventory on major new and used vehicle listing services (cars.com, autotrader.com, cargurus.com, kbb.com, edmunds.com, craigslist, and hundreds of local webpages) to reach online shoppers. We also employ search engine optimization, search engine marketing, online display and re-targeting as well as video pre-roll to reach more online prospects. We also encourage our stores to dedicate a larger share of their advertising spend to promoting service and repair work as we focus on customer acquisition and the value of customer retention.
Social influence marketing represents a cost-effective method to enhance our corporate reputation, our stores’ reputations, and increase vehicle sales and service. We deploy tools and training to our employees in ways that will help us listen to our customers and create more advocates for Lithia, DCH, Carbone, Baierl, and Downtown LA.
We also encourage our stores to give back to their local communities through financial and non-financial participation in local charities and events. Through Lithia4Kids and DCH's sponsorship of The National Teen Safe Driving Foundation, our initiatives to increase employee volunteerism and community involvement, we focus the impact of our contributions on projects that support opportunities and the safety and development of young people.
Franchise Agreements
Each of our stores operates under a separate agreement (a “Franchise Agreement”)Franchise Agreement with the manufacturer of the new vehicle brand it sells.
Typical automobile Franchise Agreements specify the locations within a designated market area at which the store may sell vehicles and related products and perform approved services. The designation of suchthe market areas and the allocation of new vehicles among stores are at the discretion of the manufacturer. Franchise Agreements do not, however, guarantee exclusivity within a specified territory.
A Franchise Agreement may impose requirements on the store with respect to:
•facilities and equipment;
•inventories of vehicles and parts;
•minimum working capital;
•training of personnel; and
•performance standards for market share and customer satisfaction.
Each manufacturer closely monitors compliance with these requirements and requires each store to submit monthly financial statements. Franchise Agreements also grant a store the right to use and display manufacturers’ trademarks, service marks and designs in the manner approved by each manufacturer.
We have determined the useful life of a Franchise Agreement is indefinite, even though certain Franchise Agreements are renewed after one to six years. In our experience, agreements are routinely renewed without substantial cost and there are legal remedies to help prevent termination. Certain Franchise Agreements have no termination date. In addition, state franchise laws protect franchised automotive retailers. Under certain laws, a manufacturer may not terminate or fail to renew a franchise without good cause or prevent any reasonable changes in the capital structure or financing of a store.
TheOur typical Franchise Agreement provides for early termination or non-renewal by the manufacturer upon:
•a change of management or ownership without manufacturer consent;
•insolvency or bankruptcy of the dealer;
•death or incapacity of the dealer/manager;
•conviction of a dealer/manager or owner of certain crimes;
•misrepresentation of certain sales or inventory information by the store, dealer/manager or owner to the manufacturer;
•failure to adequately operate the store;
•failure to maintain any license, permit or authorization required for the conduct of business;
•poor market share; or
•low customer satisfaction index scores.
Franchise Agreements generally provide for prior written notice before a franchise may be terminated under most circumstances. We also sign master framework agreements with most manufacturers that impose additional requirements. See Item 1A, “Risk1A. Risk Factors.”
Competition
The retail automotive business is highly competitive. Currently, there are approximately 18,000more than 16,500 new vehicle franchise dealers in the United States, many of whomwhich are independent stores managed by individuals, families or small retail groups. We compete primarily with other automotive retailers, both publicly- and privately-held.privately-held and other online automotive retailers such as CarMax, Carvana, Shift and Vroom.
Vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a vehicle brand may operate. In addition, our Franchise Agreements typically limit our ability to acquire multiple dealerships of a given brand within a particular market area. Certain state franchise laws also restrict us from relocating our
dealerships, or establishing new dealerships of a particular brand, within any area that is served by another dealer with the same brand. To the extent that a market has multiple dealers of a particular brand, as certain markets we operate in do, we are subject to significant intra-brand competition.
We are larger and have more financial resources than most private automotive retailers with which we currently compete in the majority of our regional markets. We compete directly with retailers with similar or greater resources in markets such as metropolitan New York,our existing metro and non-metro markets. We also compete based on dealer reputation in the greater Los Angeles area, Seattle, Washington; Spokane, Washington; Anchorage, Alaska; Portland, Oregon and the San Francisco Bay Area, California.various markets. If we enter other new markets, we may face competitors that are larger or have access to greater financial resources.resources or have strong brands. We do not have any cost advantage in purchasing new vehicles from manufacturers. We rely on advertising and merchandising, pricing, our customer guarantees and sales model, our sales expertise, service reputation and the location of our stores to sell new vehicles.
Regulation
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our business. In every state in which we operate, we must obtain various licenses to operate our businesses, including dealer, sales and finance and insurance licenses issued by state regulatory authorities. Numerous laws and regulations govern our business, including those relating to our sales, operations, financing, insurance, advertising and employment practices. These laws and regulations include state franchise laws and regulations, consumer protection laws, privacy laws, escheatment laws, anti-money laundering laws and federal and state wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to numerous federal, state and local laws and regulations. In recent years, there has been an increase in activity related to oversight of consumer lending by the Consumer Financial Protection Bureau ("CFPB")(CFPB), which has broad regulatory powers. The CFPB has supervisory authority over large nonbank auto finance companies, including Driveway Finance Corporation. The CFPB can use this authority to conduct supervisory examinations to ensure compliance with various federal consumer protection laws. The CFPB does not have direct authority over automotive dealers; however, its regulation of larger automotive finance companies and other financial institutions could affect our financing activities. Claims arising out of actual or alleged violations of law may be asserted against us or our stores by individuals, a class of individuals, or governmental entities. These claims may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct store operations and fines.
The vehicles we sell are also subject to rules and regulations of various federal and state regulatory agencies.
Environmental, Health, and Safety Laws and Regulations
Our operations involve the use, handling, storage and contracting for recycling and/or disposal of materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is subject to a complex variety of federal, state and local requirements that regulate the environment and public health and safety.
Most of our stores use above ground storage tanks, and, to a lesser extent, underground storage tanks, primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment, upgrading and removal under the Resource Conservation and Recovery Act and its state law counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other discharges from storage tanks or other sources. In addition, water quality protection programs under the federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and local programs govern certain discharges from our operations. Similarly, certain air emissions from operations, such as auto body painting, may be subject to the federal Clean Air Act and related state and local laws. Health and safety standards promulgated by the Occupational Safety and Health Administration of the United States Department of Labor and related state agencies also apply.
Certain stores may become a party to proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to former recycling, treatment and/or disposal facilities owned and operated by independent businesses. The remediation or clean-up of facilities where the release of a regulated hazardous substance occurred is required under CERCLA and other laws.
We incur certain costs to comply with environmental, health and safety laws and regulations in the ordinary course of our business. We do not anticipate, however, that the costs of such compliance will have a material adverse effect on our business, results of operations, cash flows or financial condition, although such outcome is possible given the nature of our operations and the extensive environmental, public health and safety regulatory framework. We may become aware of minor contamination at certain of our facilities, and we conduct investigations and remediation at properties as needed. In certain cases, the current or prior property owner may conduct the investigation and/or remediation or we have been indemnified by either the current or prior property owner for such contamination. We do not currently expect to incur significant costs for remediation. However, no assurances can be givenwe cannot provide assurance that material environmental commitments or contingencies will not arise in the future, or that they do not already exist but are unknown to us.
EmployeesHuman Capital
OurDriven by our mission statement, is "Growth“Growth Powered by People".People,” we place a high degree of value in each of our team members and their individual professional success. Promoting and hiring the best talent available, defining clear expectations, providing excellent training and rewarding performance helps us build dynamic teams to serve our customers. We cultivate an entrepreneurial, high-performance culture and strive to develop leaders from within and innovate the customer experience.within. We continue to develop tools, training and growth opportunities that accelerate the depth of our talent. One example
As of this isDecember 31, 2021, we employed approximately 21,150 persons on a full-time equivalent basis in our Accelerated Management Program (AMP)North American network of 278 retail locations. Our total workforce was comprised of approximately 18% female employees and approximately 44% of minorities. Our management consisted of approximately 17% females and approximately 35% minorities in leadership positions. In both 2021 and 2020, approximately 95% of our workforce earned above minimum wage.
Some examples of our key programs and initiatives that are focused on attracting, retaining and developing our high performing workforce include:
•AMP program (Accelerate My Potential), which began in 2016. This program2016, is designed to deepen the knowledge of future leaders in all aspects of our business and develop leadership skills to better position participants for a future as a general manager in one of our stores or as a regional leader. This program continues to produce new leaders from within the Company, with a 84% increasestores.
•Lithia Women Lead, which began in 2015, provides an avenue for women in the numberorganization to connect, learn and develop. The program includes events throughout the year that provide women in the organization the opportunity to network, act as role models and inspire one another’s growth.
•Culture Council, which began in 2021, is designed to promote diversity, equality and inclusion (DEI) in our workforce by identifying areas to improve, raising awareness, and integrating DEI elements into how we operate, train and develop our teams. The Culture Council is comprised of management positions filled by internally-developed candidatesa diverse group of executive level and non-executive level members, who work together to have our employees reflect the diversity of our customers, reinforce our mission and culture and enhance employee engagement.
•Talent development promotes employee professional development through various programs including tuition reimbursement programs covering up to 75% of an employee’s undergraduate or graduate tuition costs; Master Automotive Service Excellence (ASE) training and certification and Original Equipment Manufacturer (OEM) training for our technicians; and daily on-the-job training resources through our Learning Center.
We also continue to invest in 2017.and expand the roles and capabilities of our workforce to drive the development and support of our e-commerce and digital technology capabilities. We believe there is a competitive advantage to integrate and develop individuals with these skill sets and they are an integral part of supporting our five year growth plan and launch of Driveway. As our business evolves, we will remain focused on having human capital capabilities, systems and processes in place to support and align with our strategy.
As of December 31, 2017, we employed approximately 12,899 persons on a full-time equivalent basis.
Seasonality and Quarterly Fluctuations
Historically, ourIn a stable environment, the automotive industry has generally experienced higher volumes of vehicle unit sales have been lower duringin the first quartersecond and third quarters of each year due to consumer purchasing patternsbuying trends and the introduction of new vehicle models and, accordingly, we expect our revenues and operating results to generally be higher during these periods. In addition, we generally experience higher volume of luxury vehicles, which have higher average selling prices and gross profit per vehicle, during the holiday season and inclement weather in certainfourth quarter. The timing of our markets. Our franchise diversificationacquisition activity, which varies, and ability to integrate stores into our existing cost controls havestructure has moderated this seasonality. However, if conditions occur that weaken automotive sales, such as severe weather in the geographic areas in which our dealerships operate, war,
high fuel costs, depressed economic conditions including unemployment or weakened consumer confidence or similar adverse conditions, or if our ability to acquire stores changes, our revenues for the year may be disproportionately adversely affected.
Available Information and NYSE Compliance
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). You may inspect and copy our reports, proxy statements, and other information filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains an Internet Web site at http://www.sec.gov where you may access copies of our SEC filings. We also make available free of charge, on our website at www.lithiainvestorrelations.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after they are filed electronically with the SEC. The information found on our website is not part of this Annual Report on Form 10-K. You may also obtain copies of these reports by contacting Investor Relations at 877-331-3084.
Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks described below are not the only ones facing our company. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations.
Risks related to our business
The automotive retail industry is sensitive to changing economic conditions and various other factors. Our business and results of operations are substantially dependent on new vehicle sales levels in the United States and in our particular geographic markets and the level of gross profit margins that we can achieve on our sales of new vehicles, all of which are very difficult to predict.
Our business is heavily dependent on consumer demand and preferences. A downturn in overall levels of consumer spending may materially and adversely affect our revenues and gross profit margins. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the level of discretionary personal income and credit availability. Additionally, other economic factors, such as rising and sustained periods of high crude oil and fuel prices, may impact consumer demand and preferences. As we operate in two countries, across 25 U.S. states and three Canadian Provinces, changes in and the severity of economic conditions may vary by market. Economic conditions may be anemic for an extended period of time, or deteriorate in the future. This would have a material adverse effect on our retail business, particularly sales of new and used automobiles.vehicles.
In addition, our performance is subject to local economic, competitive and other conditions prevailing in our various geographic areas. Our dealerships are currently located in limited markets in 18 states, with sales in the top three states accounting for 52% of our revenue in 2017. Our results of operations, therefore, depend substantially on general economic conditions, consumer spending levels and other factors in those markets and could be materially adversely affected to the extent these markets experience sustained economic downturns regardless of improvements in the U.S. economy overall.
Historically, in times of rapid increase in crude oil and fuel prices, sales of vehicles have dropped, particularly in the short term, as the economy slows, consumer confidence wanes and fuel costs become more prominent to the consumer’s buying decision. In sustained periods of higher fuel costs, consumers who do purchase vehicles tend to prefer smaller, more fuel-efficient vehicles (which typically have lower margins) or hybrid vehicles (which can be in limited supply during these periods). A significant portion of our new vehicle revenue and gross profit is derived from domestic manufacturers. These manufacturers have historically sold a higher percentage of trucks and SUVs than import or luxury brands. They may, therefore, experience a more significant decline in sales in the event that fuel prices increase.
Approximately 17.115.1 million, 17.514.6 million, and 17.417.1 million new vehicles were sold in the United States in 2017, 2016,2021, 2020, and 2015,2019, respectively. Certain industry analysts have predicted that new vehicle sales will decline below 17be approximately 16 million for 2018.2022. If new vehicle production exceeds the rate at which new vehicles are sold, our gross profit per vehicle could be adversely affected by this excess and any resulting changes in manufacturer incentive and marketing programs. See the risk factor “If manufacturers or distributors discontinue or change sales incentives, warranties and other promotional programs, our business, results of operations, financial condition and cash flows may be materially adversely affected” below. Economic conditions and the other factors described above may also materially adversely impact our sales of used vehicles, parts and repair and maintenance services, and automotive finance and insurance products.
The novel coronavirus has had and may continue to have an adverse effect on our business, financial condition, results of operations and cash flows.
The novel coronavirus (COVID-19) pandemic has resulted in governmental authorities implementing measures to reduce the spread of COVID-19, modifications to business practices and other disruptions that have adversely affected workforces, customers, supply chains, consumer sentiment, economies, and financial markets, including in states and regions in which we operate. These disruptions included the substantial slowing of our manufacturers’ production of new cars they supply to us, employees unable to work due to COVID-19 and altered customer engagement. The impact of the COVID-19 pandemic on our business and financial performance will depend on future developments, including the duration, severity and any resurgences of the pandemic, which are uncertain and cannot be predicted. Even after the pandemic has subsided, we may experience adverse effects to our business as a result of its economic impact, including any economic recession or downturn and lasting effects of changes to
business practices and consumer behaviors. Future pandemics or outbreaks could disrupt or have a similar effect on our business, financial condition, results of operations and cash flows.
Natural disasters and adverse weather conditions can disrupt our business.
Our dealerships are in states and regions in the U.S. and Canada in which actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides, wind and/or hail storms) or other extraordinary events have in the past, and may in the future, disrupt our dealership operations and impair the value of our dealership property. A disruption in our operations may adversely impact our business, results of operations, financial condition and cash flows. In addition to business interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of property at dealership locations. The exposure on any single claim under our property and casualty insurance, medical insurance and workers’ compensation insurance varies based upon type of coverage. Our maximum exposure on any single claim is $5.5 million, subject to certain aggregate limit thresholds.
The automotive manufacturing supply chain spans the globe. As such, supply chain disruptions resulting from natural disasters and adverse weather events may affect the flow of inventory or parts to us or our manufacturing partners.
Such disruptions could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Increasing competition among automotive retailers reduces our profit margins on vehicle sales and related businesses. Further, the use of the Internet in the car purchasing process could materially adversely affect us.
Automobile retailing is a highly competitive business. Our competitors include publicly and privately-owned dealerships, of which certain competitors are larger and have greater financial and marketing resources than we have. Many of our competitors sell the same or similar makes of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to the volume of purchases or otherwise.
Our finance and insurance business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition from various financial institutions and others.
The Internet has become a significant part of the sales process in our industry. Customers are using the Internet to compare pricing for vehicles and related finance and insurance services, which may further reduce margins for new and used vehicles and profits for related finance and insurance services. If Internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our business could be materially adversely affected. In addition, other franchise groups have aligned themselves with services offered on the Internet or are investing heavily in the development of their own Internet capabilities, which could materially adversely affect our business, results of operations, financial condition and cash flows.
Our Franchise Agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.
In addition, we may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where we do not have a leading position.
Changes to the automotive industry and consumer views on car ownership could materially adversely affect our business, results of operations, financial condition and cash flows.
The automotive industry is predicted to experience rapid change in the years to come, including increases in ride-sharing services, advances in electric vehicle production and driverless technology. Ride-sharing services such as Uber and Lyft provide consumers with mobility options outside of the traditional car ownership and lease alternatives. Certain manufacturers and states have declared commitments to various electric vehicle and zero emissions goals, such as the state of California’s executive order to require all new cars and passenger trucks sold in the state to be zero-emission vehicles by 2035. The overall impact of these options on the automotive industry is uncertain, and may include lower levels of new vehicle sales. sales or sales through channels that do not include us.
Manufacturers continue to invest in increasing production and quality of AEVs (all-electric vehicles)electric vehicles, including Battery-Electric Vehicles (BEVs), whichHybrid Electric Vehicles, and Plug-in Hybrid Electric Vehicles. BEVs generally require less maintenance than traditional cars and trucks. The effects of AEVsBEVs on the automotive industry are uncertain and may include reduced parts and service revenues, as well as changes in the level of sales of certain F&IFinance and Insurance (F&I) products such as extended warranty and lifetime lube, oil and filter contracts.
Technological advances are also facilitating the development of driverless vehicles. The eventual timing of availability of driverless vehicles is uncertain due to regulatory requirements, technological hurdles, and uncertain consumer acceptance of these technologies. The effect of driverless vehicles on the automotive industry is uncertain and could include changes in the level of new and used vehicle sales, the price of new vehicles, and the role of franchised dealers, any of which could materially and adversely affect our business.
We compete in a dynamic industry, and we may invest significant resources to pursue strategies and develop new offerings that do not prove effective.
The automobile retailing industry is experiencing significant changes as the expectations and behaviors of customers are shifting, and the Internet has become a more significant part of the sales process. We are investing significant resources to drive the development of and support of our e-commerce and digital technology capabilities, including the launch of Driveway, our e-commerce home solution, and Driveway Finance Corporation, our in-house consumer financing business. Changes or additions to offerings may not attract or engage our customers, and may reduce confidence in our brands, expose us to increased market or legal risks, subject us to new laws and regulations, or otherwise harm our business.
Customers may prefer other channels for vehicle sales and related finance and insurance services, because they may offer different or superior platforms, or because customers find those platforms easier to use, faster, or more cost effective than our services. We may not successfully anticipate or keep pace with industry changes, and we may invest considerable financial resources, personnel, or other resources to pursue strategies that do not ultimately prove effective such that our results of operations and financial condition may be harmed.
A decline of available financing in the lending market may adversely affect our vehicle sales volume.
A significant portion of buyers finance their vehicle purchases. One of the primary finance sources used by consumers in connection with the purchase of a new or used vehicle is the manufacturer captive finance company. These captive finance companies rely, to a certain extent, on the public debt markets to provide the capital necessary to support their financing programs. In addition, the captive finance companies will occasionally change their loan underwriting criteria to alter the risk profile of their loan portfolio. In addition, sub-prime lenders have historically provided financing for consumers who, for a variety of reasons, including poor credit histories and lack of down payment, do not have access to more traditional finance sources. If lenders tighten their credit standards or there is a decline in the availability of
credit in the lending market, the ability of consumers to purchase vehicles could be limited, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Adverse conditions affecting one or more key manufacturers may negatively affect our business, results of operations, financial condition and cash flows.
We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. EventsAny event that adversely affectaffects a manufacturer’s ability to timely deliver new vehicles may adversely affect us by reducing our supply of popular new vehicles, leading to lower sales in our stores during those periods than would otherwise occur. For example, the shortage of chip supply and labor disruptions have caused a significant constraint in the supply of new cars. We depend on our manufacturers to deliver high-quality, defect-free vehicles. If manufacturers experiencea manufacturer experiences quality issues, our sales and financial performance may be adversely impacted. In addition, the discontinuance of a particular brand that is profitable to us could negatively impact our revenues and profitability.
Vehicle manufacturers would be adversely affected by economic downturns or recessions, adverse fluctuations in currency exchange rates, significant declines in the sales of their new vehicles, increases in interest rates, declines in their credit ratings, port closures, labor strikes or similar disruptions (including within their major suppliers), supply shortages or rising raw material costs, rising employee benefit costs, adverse publicity that may reduce consumer demand for their products, product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, or other adverse events. These and other risks could materially adversely affect any manufacturer and limit its ability to profitably design, market, produce or distribute new vehicles, which, in turn, could materially adversely affect our business, results of operations, financial condition and cash flows.
We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. We purchase substantially all of our new vehicles from various manufacturers or distributors at the prevailing prices available to all franchised dealers. Our sales volume could be materially adversely impacted by the manufacturers’a manufacturer’s or distributors’distributor’s inability to supply our stores with an adequate supply of vehicles.
In the event of a manufacturer or distributor bankruptcy, we could be held liable for damages related to product liability claims, intellectual property suits or other legal actions. These legal actions are typically directed towards the vehicle manufacturer and it is customary for manufacturers to indemnify us from exposure related to any judgments associated with the claims. However, if damages could not be collected from the manufacturer or distributor, we could be named in lawsuits and judgments could be levied against us.
Many new manufacturers are entering the automotive industry. New companies have raised capital to produce fully electric vehicles or to license battery technology to existing manufacturers. Tesla hasand Rivian have demonstrated the ability to successfully introduce electric vehicles to the marketplace. Foreign manufacturers from China and India are producing significant volumes of new vehicles and are entering the U.S. and selecting partners to distribute their products. Because the automotive market in the U.S. is mature and the overall level of new vehicle sales may not increase in the coming years, the success of new competitors will likely be at the expense of other, established brands. This could have a material adverse impact on our success in the future.
Federal regulations around fuel economy standards and “greenhouse gas” emissions have continued to increase. New requirements may adversely affect any manufacturer’s ability to profitably design, market, produce and distribute vehicles that comply with such regulations. We could be adversely impacted in our ability to market and sell these vehicles at affordable prices and in our ability to finance these inventories. These regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.
If manufacturers or distributors discontinue or change sales incentives, warranties and other promotional programs, our business, results of operations, financial condition and cash flows may be materially adversely affected.
We depend upon the manufacturers and distributors for sales incentives, warranties and other programs that are intended to promote new vehicle sales or supplement dealer income. Manufacturers and distributors routinely make changes to their incentive programs. Key incentive programs include:
•customer rebates;
•dealer incentives on new vehicles;
•special financing rates on certified, pre-owned cars; and
•below-market financing on new vehicles and special leasing terms.
Our financial condition could be materially adversely impacted by a discontinuation or change in our manufacturers’ or distributors’ incentive programs. In addition, certain manufacturers use criteria such as a dealership’s manufacturer-determined customer satisfaction index (“CSI"(CSI score), facility image compliance, employee training, digital marketing and parts purchase programs as factors governing participation in incentive programs. To the extent we do not meet minimum score requirements, we may be precluded from receiving certain incentives, which could materially adversely affect our business, results of operations, financial condition and cash flows.
Franchised automotive retailers perform factory authorized service work and sell original replacement parts on vehicles covered by warranties issued by the automotive manufacturer. For the year ended December 31, 2017,2021, approximately 24%21% of our service, body and parts revenue was for work covered by manufacturer warranties or manufacturer-sponsored maintenance services. To the extent a manufacturer reduces the labor rates or markup of replacement parts for such warranty work, our service, body and parts sales volume could be adversely affected.
The ability of our stores to make new vehicle sales depends in large part upon the franchise agreements with manufacturers and, therefore, any disruption or change in our relationships could impact our business.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most popular vehicles usually produce the highest profit margins and are frequently in short supply. If we cannot obtain sufficient quantities of the most popular models, our profitability may be adversely affected. Sales of less desirable models may reduce our profit margins.
Each of our stores operates pursuant to a Franchise Agreement with each of the respective manufacturers for which it serves as franchisee. Each of our stores may obtain new vehicles from manufacturers, service vehicles, sell new vehicles, and display vehicle manufacturers’ brand only to the extent permitted under these agreements. As a result of the terms of our Franchise Agreements, manufacturers exert significant control over the day-to-day operations at our stores. Such agreements contain provisions for termination or non-renewal for a variety of causes, including service retention, facility compliance, customer satisfaction and sales and financial performance. From time to time, certain of our stores have failed to comply with certain provisions of their franchise agreements,Franchise Agreements, and we cannot ensure that our stores will be able to comply with these provisions in the future.
Our Franchise Agreements expire at various times, and there can be no assurances that we will be able to renew these agreements on a timely basis or on acceptable terms or at all. Actions taken by a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise agreementsFranchise Agreements or otherwise could also have a material adverse effect on our revenues and profitability. If a manufacturer terminates or fails to renew one or more of our significant franchise agreementsFranchise Agreements or a large number of our franchise agreements,Franchise Agreements, such action could have a material adverse effect on our business, results of operations, financial condition and cash flows.
Our Franchise Agreements also specify that, except in certain situations, we cannot operate a franchise by another manufacturer in the same building as the manufacturer’s franchised store. This may require us to build new facilities at a significant cost. Moreover, our manufacturers generally require that the store meet defined image standards. These commitments could require us to make significant capital expenditures.
Our Franchise Agreements do not give us the exclusive right to a given geographic area. Manufacturers may be able to establish new franchises or relocate existing franchises, subject to applicable state franchise laws. The establishment of or relocation of franchises in our markets could have a material adverse effect on the business, financial condition and results of operations of our stores in the market in which the action is taken.
Manufacturer stock ownership requirements
Our indebtedness and restrictions may impairlease obligations could materially adversely affect our financial health, limit our ability to maintainfinance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much of our debt is secured by a substantial portion of our assets. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.
Our indebtedness and lease obligations could have important consequences to us, including the following:
•limitations on our ability to make acquisitions;
•impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or renew franchisegeneral corporate purposes;
•reduced funds available for our operations and other purposes, as a larger portion of our cash flow from operations would be dedicated to the payment of principal and interest on our indebtedness; and
•exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest.
In addition, our loan agreements and our senior note indentures contain covenants that limit our discretion with respect to business matters, including incurring additional debt, granting additional security interests in our assets, acquisition activity, disposing of assets and other business matters. Other covenants are financial in nature, including current ratio, fixed charge coverage and leverage ratio calculations. A breach of any of these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements.
We have granted a security interest in a substantial portion of our assets to certain of our lenders and other secured parties, including those under our $3.8 billion syndicated credit facility. If we default on our obligations under those agreements, the secured parties may be able to foreclose upon their security interests and otherwise be entitled to obtain or issue additional equity.control those assets.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of our Franchise Agreements prohibit transfers of ownership interests of a store or, in some cases,default has occurred, the ownership interests of the store’s indirect parent companies, including the Company. Agreements with various manufacturers, including, among others, Honda/Acura, Hyundai, Mazda, Volkswagen, Mercedes-Benz, Subaru, Toyota, Ford/Lincoln, GM,outstanding indebtedness would likely be immediately due and Nissan, provide that, under certain circumstances,owing.
If these events were to occur, we may losenot be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a franchise and/orresult of this risk, we could be forced to sell onetake actions that we otherwise would not take, or more storesnot take actions that we otherwise might take, in order to comply with these agreements.
In addition, the lenders’ obligations to make loans or their assets if there occurs a prohibited transferother credit accommodations under certain credit agreements is subject to the satisfaction of ownership interests (in some cases not defined or defined ambiguously) or a person or entity acquires an ownership interestcertain conditions precedent including, for example, that our representations and warranties in us above a specified level (ranging from 20% to 50% depending on the particular manufacturer’s restrictionsagreement are true and fallingcorrect in all material respects as low as 5% if another vehicle
manufacturer or distributor is the entity acquiring the ownership interest) without the approval of the manufacturer. Transactions in our stock by our stockholders or prospective stockholders, including transactions in our Class B common stock, are generally outsidedate of the proposed credit extension. If any of our controlrepresentations and warranties in those agreements are not true and correct in all material respects as of the date of a proposed credit extension, or if other conditions precedent are not satisfied, we may result in the terminationnot be able to request new loans or non-renewal of one or more of our franchises, may result in a forced sale of one or more of our stores or their assets at a price below fair market value or may impair our ability to negotiate new franchise agreements for dealerships we desire to acquire in the future,other credit accommodations under those credit facilities, which maycould have a material adverse effectimpact on our business, results of operations, financial condition and cash flows. These restrictions
Additionally, at various times in the future, we will need to refinance portions of our debt. At the time we must refinance, the market for new debt, or our financial condition or asset valuations, might not be favorable. It is possible that financing to replace or renew our debt may also prevent or deter a prospective acquirer from acquiring control of us or otherwisebe unfavorable, which would adversely affect our financial condition and results of operations. In certain cases, we may turn to equity or other alternative financing.
Our floor plan notes payable, credit facilities and a portion of our real estate debt are subject to variable interest rates. As of December 31, 2021, 41% of our total debt was variable rate. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition and cash flows. We may use interest rate derivatives to hedge a portion of our variable rate debt, when appropriate, based upon market conditions. See Note 12, Derivative Financial Instruments, related to current hedge activity.
We may not be able to satisfy our debt obligations upon the occurrence of a change in control under our debt instruments.
Upon the occurrence of a change in control as defined in our credit agreement, the agent under the credit agreement will have the right to declare all outstanding obligations immediately due and payable and to terminate the availability of future advances to us. Upon the occurrence of a change in control, as defined in the indentures governing our senior notes, the holders of our senior notes will have the right to require us to purchase all or any part of such holders’ notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under the credit agreement in the event of a change in control or fundamental change. In the event we were unable to satisfy these obligations, it could have a material adverse impact on our business and our common stock holders. A “change in control” as defined in our credit agreement includes, among other events, the acquisition by any person, or two or more persons acting in concert, in either case other than Lithia Holdings Company, L.L.C., Sid DeBoer or Bryan DeBoer, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of our voting stock on a fully diluted basis.
We may experience greater credit losses in Driveway Finance Corporation’s portfolio of auto loan and lease receivables than anticipated.
We are susceptible to the risk that customers who finance a vehicle purchase or lease a vehicle through a Driveway Finance Corporation auto loan or lease will be unable to repay the loan based on the original terms and that the fair value of the vehicle used as collateral against the loan may not be sufficient to ensure full repayment. Credit and residual value losses are an inherent risk of our auto loan and lease portfolio and could result in a material adverse effect on our results of operations.
We use a variety of assumptions in our estimate of the Driveway Finance Corporation’s portfolio of auto loan receivables and lease receivables and as a result of these assumptions, we prepare an estimate of an allowance for loan losses. Although management will prepare an estimate it believes is appropriate based on the best available information, this allowance may not be a sufficient reserve for loan and lease losses. For example, sudden economic changes such as an economic downturn or a change in consumer spending may result in additional losses incurred that were not estimated in our original allowance. Losses in excess of our allowance for losses could have a material adverse effect on our business and results of operations.
The growth and success of our Driveway Finance Corporation business is dependent upon obtaining sufficient capital to grow our auto loan portfolio.
Changes in the availability or cost of financing to support our auto loan portfolio under Driveway Finance Corporation could adversely affect our results of operations. Our auto loan portfolio is funded through a combination of free cash flows from operations and securitized funding, including asset-backed securitization. Changes in the condition of the asset backed securitization market may result in increased costs to access funds in the market priceor require us to explore new financing options to fund new auto loans. In the event that there is no alternative financing available, we may be forced to pause our auto loan financing business for a period of time. The impact of reducing or pausing our auto loan financing business could result in a material adverse effect on our results of operations.
Risks associated with our international operations may negatively affect our business, results of operations and financial condition.
In the third quarter of 2021, we acquired dealerships located in Canada. While our operations outside of the U.S. currently represent a small portion of our Class A common stockrevenue, we anticipate that our international operations will expand. We face regulatory, operational, political and economic risks and uncertainties with respect to our international operations that may be different from those in the United States. These risks may include, but are not limited to, the following:
•fluctuations in foreign currency translations within our financial statements driven by exchange rate volatility;
•inability to obtain or limitpreserve franchise rights in the foreign countries in which we operate;
•compliance with changing laws and regulations;
•compliance with U.S. Foreign Corrupt Practices Act and other anti-corruption laws;
•wage inflation;
•treatment of revenue from international sources and changes to tax rules, including being subject to foreign tax laws;
•difficulties in managing foreign operations and dealing with different customs, practices and local regulations with which we are less familiar;
•large uncertainties, timing delays and expenses associated with tariffs, labor matters, import or export licenses and other trade barriers; and
•changes in a country’s economic or political conditions, including inflation, recession and interest rate fluctuations, including uncertainties and instability in economic and market conditions caused by the COVID-19 pandemic.
Technology and Cybersecurity Risks
Changes to the retail delivery model and increased e-Commerce and omni-channel competition could adversely affect our abilitybusiness, results of operations, financial condition and cash flows.
The automotive industry is beginning to restructureexperience change and disruption in the retail delivery model, including growing competition in the used vehicle market from companies with a primarily online e-Commerce business model. Competition in this market includes companies such as Carvana, Vroom and Shift. In addition, larger traditional automotive retailers are transforming their models to support omni-channel retail experiences, providing consumers with vehicle purchasing experiences outside of the traditional brick and mortar automotive dealership model.
We continue to develop our debt obligations.own internal technology solutions to further expand the reach of our nationwide network of service and delivery points. We may face increased competition for market share with these other delivery models and omni-channel retailers over time which could materially and adversely affect our results of operations. There can be no assurance that our initiatives will be successful or that the amount we invest in these initiatives will result in our maintaining market share and continued or improved financial performance.
Breaches in our data security systems or in systems used by our vendor partners, including cyber-attacks or unauthorized data distribution by employees or affiliated vendors, or disruptions to access and connectivity of our information systems could impact our operations or result in the loss or misuse of customers’ proprietary information.
Our information technology systems are important to operating our business efficiently. We employ information technology systems, including websites, that allow for the secure handling and processing of customers’ proprietary information. The failure of our information technology systems, and those of our partner software and technology vendors, to perform as we anticipate could disrupt our business and could expose us to a risk of loss or misuse of this information, litigation and potential liability.
Aspects of our operations are subject to privacy, data use and data security regulations, which impact the way we use and handle data. In addition, regulators are proposing and adopting new laws or regulations that could require us to adopt certain cybersecurity and data handling practices. The changing privacy laws (e.g. California Consumer Privacy Act) create new individual privacy rights and impose increased obligations on companies handling personal data. Additionally, the expansion into Canada is subject to additional privacy and security regulations which also impact the way we handle and secure data across borders.
We collect, process, and retain personally identifiable information regarding customers, associates and vendors in the normal course of our business. Our internal and third-party systems are at risk from hackers or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks are growing in number and sophistication thus presenting an ongoing threat to systems, whether internal or external, used to operate the business on a day-to-day basis. We invest in commercially reasonable security technology to protect our data and business processes against many of these risks. We also purchase insurance to mitigate the potential financial impact of many of these risks. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, or degradation of
services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, as well as other operational and financial impacts derived from investigations, litigation, imposition of penalties or other means.
Regulatory Risks
If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise agreements.Franchise Agreements. Additionally, federal bankruptcy law can override protections afforded under state dealer laws.
State and provincial dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Certain U.S. state dealer laws allow dealers to file protests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. If dealer laws are repealed in the states where we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. In Canada, although laws differ by province, provincial law generally provides that both a manufacturer and dealer each has a common law and statutory duty of good faith and fair dealing in performance and enforcement of any Franchise agreement. Disputes are generally handled through the National Automobile Dealer Arbitration Program (NADAP). If a manufacturer wished to terminate a franchise, there is no guaranty that we would win such a dispute.Without the protection of state and provincial dealer laws, it may also be more difficult to renew our franchise agreementsFranchise Agreements upon expiration or on terms acceptable to us.
In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in the future. Manufacturer lobbying efforts (including those of Tesla)and lawsuits may lead to the repeal or revision of these laws. For example, Tesla has received a favorable ruling in certain states allowing direct to consumer sales and service. In addition, many states have recently passed or are introducing legislation to permit direct to consumer auto sales in certain circumstances, allowing additional electric vehicle manufacturers such as Rivian to enter the market. If manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on our business, results of operations, financial condition and cash flows.
The agency model may also have a material impact on our revenues, results of operations and financial condition. Some manufacturers are moving to an agency model in other countries, whereby the consumer places an order directly with the manufacturer and names a preferred delivery dealer. The agency model is being used by manufacturers such as Volkswagen in Germany for all EVs and Daimler in the U.K. and other European regions. If the agency model is implemented in the countries and regions in which we operate for the sale of electric vehicles this could negatively affect our revenues, results of operations and financial condition.
As evidenced by the bankruptcy proceedings of both Chrysler and GM in 2009, state dealer laws do not afford continued protection from manufacturer terminations or non-renewal of franchise agreements.Franchise Agreements. No assurances can be given that a manufacturer will not seek protection under bankruptcy laws, or that, in this event, they will not seek to terminate franchise rights held by us.
Import product restrictions, currency valuations, and foreign trade risks may impair our ability to sell foreign vehicles or parts profitably.
A significant portion of the vehicles we sell are manufactured outside the U.S., and all of the vehicles we sell include parts manufactured outside the U.S. As a result, our operations are subject to customary risks of importing merchandise, including currency fluctuation, import duties, exchange rates, trade restrictions, work stoppages, transportation costs, natural or man-made disasters, and general political and socio-economicsocioeconomic conditions in other countries. The U.S. or the countries from which our products are imported, may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duties or tariffs, which may affect our operations and our ability to purchase imported vehicles and/or parts at reasonable prices. Changes in U.S. trade policies, including the North American Free TradeU.S.-Mexico-Canada Agreement or policies intended to penalize foreign manufacturing or imports, and policies of foreign countries in reaction to those changes, could increase the prices we pay for some of the new vehicles and parts we sell. Any changes that increase the costs of vehicles and parts generally, to the extent passed on to customers, could negatively affect customer demand and our revenues and profitability. If not passed on to our customers, any cost increases will adversely affect our profitability. Any cost increase that
disproportionately applies to manufacturers that sell to us could adversely affect our business compared to other automobile retailers.
Our operations are subject to extensive governmental laws and regulations. If we are found to be in purported violation of or subject to liabilities under any of these laws, or if new laws or regulations are enacted that adversely affect our operations, our business, operating results, and prospects could suffer.
We are subject to federal, state and local laws and regulations in the eighteen states in which we operate, such as those relating to franchising, motor vehicle sales, retail installment sales, leasing, finance and insurance, marketing, licensing, consumer protection, consumer privacy, escheatment, anti-money laundering, environmental, vehicle emissions and fuel economy, and health and safety. In addition, with respect to employment practices, we are subject to various laws and regulations, including complex federal, state and local wage and hour and anti-discrimination laws. New laws and regulations are enacted on an ongoing basis. With the number of stores we operate, the number of personnel we employ
and the large volume of transactions we handle, it is likelypossible that technical mistakes will be made. These regulations affect our profitability and require ongoing training. Current practices in stores may become prohibited. We are responsible for ensuring that continued compliance with laws is maintained. If there are unauthorized activities, the state and federal authorities have the power to impose civil penalties and sanctions, suspend or withdraw dealer licenses or take other actions. These actions could materially impair our activities or our ability to acquire new stores in those states where violations occurred. Further, private causes of action on behalf of individuals or a class of individuals could result in significant damages or injunctive relief.
We may be involved in legal proceedings arising from the conduct of our business, including litigation with customers, employee-related lawsuits, class actions, purported class actions and actions brought by or on behalf of governmental authorities. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealers by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial monetary damages and legal defense costs, injunctive relief, criminal and civil fines and penalties and damage our reputation and sales.
Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with vehicle sales. In recent years, private plaintiffs and state attorneys general in the U.S. have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which was signed into law on July 21, 2010, established the Consumer Financial Protection Bureau (the "CFPB"), a new independent federal agency funded by the U.S. Federal Reserve with broad regulatory powers and limited oversight from the U.S. Congress. Although automotive dealers are generally excluded, the Dodd-Frank Act has led to additional, indirect regulation of automotive dealers, in particular, their sale and marketing of finance and insurance products, through its regulation of automotive finance companies and other financial institutions. In March 2013, the CFPB issued supervisory guidance highlighting its concern that the practice of automotive dealers being compensated for arranging customer financing through discretionary markup of wholesale rates offered by financial institutions (“dealer markup”) results in a significant risk of pricing disparity in violation of The Equal Credit Opportunity Act (the “ECOA”). The CFPB recommended that financial institutions under its jurisdiction take steps to ensure compliance with the ECOA, which may include imposing controls on dealer markup, monitoring and addressing the effects of dealer markup policies, and eliminating dealer discretion to markup buy rates and fairly compensating dealers using a different mechanism that does not result in disparate impact to certain groups of consumers.
Our marketing and disclosure regarding the sale and servicing of vehicles is regulated by federal, state and local agencies including the Federal Trade Commission ("FTC") and state attorneys general. For example, in January 2016, we settled FTC allegations that we did not adequately disclose information about used vehicles with open safety recalls. Under the settlement, we did not make any payments or admit wrong-doing, but we did agree to make specified disclosures on our website and to provide that disclosure to certain customers who had previously purchased a used vehicle from us.
If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.
Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities under federal and state statutes. These federal and state statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and state statutes. In addition, we may be subject
to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.
Breaches in our data security systems or in systems used by our vendor partners, including cyber-attacks or unauthorized data distribution by employees or affiliated vendors, or disruptions to access
Structural and connectivity of our information systems could impact our operations or result in the loss or misuse of customers’ proprietary information.Organizational Risks
Our information technology systems are important to operating our business efficiently. We employ information technology systems, including websites, that allow for the secure handling and processing of customers’ proprietary information. The failure of our information technology systems, and those of our partner software and technology vendors, to perform as we anticipate could disrupt our business and could expose us to a risk of loss or misuse of this information, litigation and potential liability.
We collect, process, and retain personally identifiable information regarding customers, associates and vendors in the normal course of our business. Our internal and third-party systems are under a moderate level of risk from hackers or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks are growing in number and sophistication thus presenting an ongoing threat to systems, whether internal or external, used to operate the business on a day-to-day basis. We invest in reasonable commercial security technology to protect our data and business processes against many of these risks. We also purchase insurance to mitigate the potential financial impact of many of these risks. Despite the security measures we have in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, computer viruses, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information, or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors, as well as other operational and financial impacts derived from investigations, litigation, imposition of penalties or other means.
Our ability to increase revenues and profitability through acquisitions depends on our ability to acquire and successfully integrate additional stores.new vehicle franchises.
General
The U.S. and Canadian automobile industry is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. Accordingly, a principal component of our growth in salesstrategy is to make dealership acquisitions in our existing markets and in new geographic markets. To completeRestrictions by our manufacturers and limitations on our access to capital resources may directly or indirectly limit our ability to acquire additional dealerships. In addition, increased competition for acquisitions, including from other national, regional and local dealership groups, and other strategic and financial buyers, some of which may have greater financial resources than us, could result in fewer acquisition opportunities for us and higher acquisition prices in the acquisition of additional stores, we need to successfully address each of the following challenges.future.
Manufacturers
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a franchised store.store, which typically takes 60 to 90 days. In determining whether to approve an acquisition, a manufacturer considers many factors including our financial condition, ownership structure, the number of such manufacturers’ stores currently owned, ownership of stores in contiguous markets, performance of existing stores, frequency of acquisitions, and our performance with those stores. Obtaining manufacturer approval of acquisitions also takes a significant amount of time, typically 60 to 90 days.financial condition. In the past, manufacturers have not consented to our purchase of franchised stores due to the performance of existing stores. Weand we cannot assure you that manufacturers will approve future acquisitions timely, if at all, which could significantly impair the execution of our acquisition strategy.
Most major manufacturers have now established limitations or guidelines on the:
number of such manufacturers’ stores that may be acquired by a single owner;
number of stores that may be acquired in any market or region;
percentage of market share that may be controlled by one automotive retailer group;
ownership of stores in contiguous markets;
performance requirements for existing stores; and
frequency of acquisitions.
In addition, such manufacturers generally require that no other manufacturers’ brands be sold from the same store location, and many manufacturers have site control agreements in place that limit our ability to change the use of the facility without their approval.
A manufacturer also considers our past performance as measured by the Minimum Sales Responsibility (“MSR”) scores, CSI scores and Sales Satisfaction Index (“SSI”) scores at our existing stores. At any point in time, certain stores may have scores below the manufacturers’ sales zone averages or have achieved sales below the targets manufacturers have set. Our failure to maintain satisfactory scores and to achieve market share performance goals could restrict our ability to complete future store acquisitions.
Acquisition Risks
We will face risks commonly encountered with growth through acquisitions. These risks include, without limitation:
failing to assimilate the operations and personnel of acquired dealerships;
straining our existing systems, procedures, structures and personnel;
failing to achieve predicted sales levels;
incurring significantly higher capital expenditures and operating expenses, which could substantially limit our operating or financial flexibility;
entering new, unfamiliar markets;
encountering undiscovered liabilities and operational difficulties at acquired dealerships;
disrupting our ongoing business;
diverting our management resources;
failing to maintain uniform standards, controls and policies;
impairing relationships with employees, manufacturers and customers as a result of changes in management;
incurring increased expenses for accounting and computer systems, as well as integration difficulties;
failing to obtain a manufacturer’s consent to the acquisition of one or more of its dealership franchises or renew the franchise agreement on terms acceptable to us;
incorrectly valuing entities to be acquired; and
incurring additional facility renovation costs or other expenses required by the manufacturer.
In addition, we may not adequately anticipate all of the demands that growth will impose on our systems, procedures and structures.
Consummation and Competition
We may not be able to complete future acquisitions at acceptable prices and terms or identify suitable candidates. In addition, increased competition in the future for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions will depend upon various factors, including:
the availability of suitable acquisition candidates;
competition with other dealer groups for suitable acquisitions;
the negotiation of acceptable terms with sellers and with manufacturers;
our financial capabilities and ability to obtain financing on acceptable terms;
our stock price;
our ability to maintain required financial covenant levels after the acquisition; and
the availability of skilled employees to manage the acquired businesses.
Operating and Financial Condition
Although we conduct what we believe to be a prudent level of investigation, an unavoidable level of risk remains regarding the actual operating condition of acquired stores and we may not have an accurate understanding of each acquired store’s financial condition and performance. Similarly, most of the dealerships we acquire do not have financial statements audited or prepared in accordance with U.S. generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired businesses. Until we assume control of the business, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired businesses and their earnings potential. These risks may not be adequately mitigated by the indemnification obligations we negotiated with sellers.
Limitations on Our Capital Resources
We make a substantial capital investment when we acquire dealerships. Limitations on our capital resources would restrict our ability to complete new acquisitions or could limit our operating or financial flexibility.
We finance acquisitions activity with cash flows from our operations, borrowings under our credit arrangements, proceeds from our offering of senior notes, proceeds from mortgage financing and the issuance of shares of Class A common stock.Common Stock. The size of our acquisition activity in recent years magnifies risks associated with debt service obligations. These risks include potential lower earnings per share, our inability to pay dividends and potential negative impacts to the debt covenants we negotiated under our credit agreement.
If we fail to meet the covenants in our credit facility or our senior notes indenture, or if some other event occurs that results in a default or an acceleration In addition, issuances of our repayment obligations under our debt instruments, we may not be able to refinance our debt on terms acceptable to us or at all. We may not be able to obtain financing in the future due to the market price of our Class A common stock and overall market conditions. Additionally, a substantial amount of assets of our dealerships are pledged to secure the indebtedness under our credit facility and our other floor plan financing indebtedness. These pledges may limit our ability to borrow from other sources in order to fund our acquisitions.
Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our goodwill and other intangible assets for impairment at least annually, whichequity securities could result in a material, non-cash write-downdilution to existing shareholders.
We face other risks commonly encountered with growth through acquisitions. These risks include, without limitation:
•failing to identify suitable acquisition candidates and negotiate acceptable terms;
•failing to assimilate the operations and personnel of goodwillacquired dealerships;
•straining our existing systems, procedures, structures and personnel, including by disrupting our ongoing business and diverting our management resources;
•failing to achieve expected performance levels;
•incurring significantly higher capital expenditures and operating expenses, including incurring additional facility renovation costs or franchise rightsother expenses required by the manufacturer;
•entering new, unfamiliar markets;
•encountering undiscovered liabilities and operational difficulties at acquired dealerships;
•failing to maintain uniform standards, controls and policies;
•impairing relationships with employees, manufacturers and customers; and
•overvaluing entities to be acquired.
Our failure to address these risks or other problems encountered in connection with our acquisitions could cause us to fail to realize the anticipated benefits of these acquisitions, cause us to incur unanticipated liabilities and otherwise harm our business. Any of these risks, if realized, could materially and adversely affect our business, results of operations, and financial condition.
Goodwill and indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or changes in circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill and our rights under our franchise agreements with vehicle manufacturers. A decrease in our market capitalization or profitability increases the risk of goodwill impairment. Negative or declining cash flows or a decline in actual or planned revenues for our stores increases the risk of franchise rights impairment. An impairment loss could have a material adverse effect on our business, results of operations, financial condition and cash flows. Asresults of December 31, 2017, our balance sheet reflected carrying amounts of $256.3 million in goodwill, and $187.0 million million in franchise value.operations.
We are subject to substantial risk of loss under our various self-insurance programs including property and casualty, open lot vehicle coverage, workers’ compensation and employee medical coverage. Our insurance does not fully cover all of our operational risks, and changes in the cost of insurance or the availability of insurance could materially increase our insurance costs or result in a decrease in our insurance coverage.
We have a significant concentration of our property values at each dealership location, including vehicle and parts inventories and our facilities. Natural disasters and severe weather events (such as hurricanes, earthquakes, fires, floods, landslides and wind or hail storms) or other extraordinary events subject us to property loss and business interruption. Illegal or unethical conduct by employees, customers, vendors and unaffiliated third parties can also impact our business. Other potential liabilities arising out of our operations may involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties in connection with alleged violations of regulatory requirements.
Under our self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims-handling expenses. Costs in excess of these retained risks may be insured under various contracts with third-party insurance carriers. As of December 31, 2017,2021, we had total reserve amounts associated with these programs of $31.2$56.4 million.
The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of our insurance purchasing change. The operation of automobile dealerships is subject to a broad variety of risks. In certain instances, our insurance may not fully cover an insured loss depending on the magnitude and nature of the claim. Accordingly, we cannot assure you that we will not be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows. Additionally, changes in the cost of insurance or the availability of insurance in the future could substantially increase our costs to maintain our current level of coverage or could cause us to reduce our insurance coverage and increase the portion of our risks that we self-insure.
Our indebtedness and lease obligations could materially adversely affect our financial health, limit our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much of our debt is secured by a substantial portion of our assets. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.
Our indebtedness and lease obligations could have important consequences to us, including the following:
limitations on our ability to make acquisitions;
impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes;
reduced funds available for our operations and other purposes, as a larger portion of our cash flow from operations would be dedicated to the payment of principal and interest on our indebtedness; and
exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest.
In addition, our loan agreements and our senior note indenture contain covenants that limit our discretion with respect to business matters, including incurring additional debt, granting additional security interests in our assets, acquisition activity, disposing of assets and other business matters. Other covenants are financial in nature, including current ratio, fixed charge coverage and leverage ratio calculations. A breach of any of these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements.
We have granted in favor of certain of our lenders and other secured parties, including those under our $2.4 billion revolving syndicated credit facility, a security interest in a substantial portion of our assets. If we default on our obligations under those agreements, the secured parties may be able to foreclose upon their security interests and otherwise be entitled to obtain or control those assets.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of default has occurred, the outstanding indebtedness would likely be immediately due and owing.
If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with these agreements.
In addition, the lenders' obligations to make loans or other credit accommodations under certain credit agreements is subject to the satisfaction of certain conditions precedent including, for example, that our representations and warranties in the agreement are true and correct in all material respects as of the date of the proposed credit extension. If any of our representations and warranties in those agreements are not true and correct in all material respects as of the date of a proposed credit extension, or if other conditions precedent are not satisfied, we may not be able to request new loans or other credit accommodations under those credit facilities, which could have a material adverse impact on our business, results of operations, financial condition and cash flows.
Additionally, our real estate debt generally has a five to ten-year term, after which the debt needs to be renewed or replaced. A decline in the appraised value of real estate or a reduction in the loan-to-value lending ratios for new or renewed real estate loans could result in our inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable to us, requiring us to find replacement lenders or to refinance at lower loan amounts.
As of December 31, 2017, 76% of our total debt was variable rate. The majority of our variable rate debt is indexed to the one-month LIBOR rate. The current interest rate environment is at historically low levels, and interest rates will likely increase in the future. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition and cash flows.
We may not be able to satisfy our debt obligations upon the occurrence of a change in control under our debt instruments.
Upon the occurrence of a change in control as defined in our credit agreement, the agent under the credit agreement will have the right to declare all outstanding obligations immediately due and payable and to terminate the availability of future advances to us. Upon the occurrence of a change in control, as defined in our senior notes indenture, the holders of our senior notes will have the right to require us to purchase all or any part of such holders' notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any. There can be no assurance that we would have sufficient resources available to satisfy all of our obligations under the credit agreement in the event of a change in control or fundamental change. In the event we were unable to satisfy these obligations, it could have a material adverse impact on our business and our common stock holders. A "change in control" as defined in our credit agreement includes, among other events, the acquisition by any person, or two or more persons acting in concert, in either case other than Lithia Holdings Company, L.L.C., Sid DeBoer or Bryan DeBoer, of beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the Securities Exchange Act of 1934) of 20% or more of the outstanding shares of our voting stock on a fully diluted basis.
We have a significant relationship with a third-party warranty insurer and administrator. This third-party is the obligor of service warranty policies sold to our customers. Additionally, we have agreements in place that allow for future income based on the claims experience on policies sold to our customers.
We sell service warranty policies to our customers issued by a third-party obligor. We receive additional fee income if actual claims are less than the amounts reserved for anticipated claims and the costs of administration and administrator profit.
A decline in the financial health of the third-party insurer could jeopardize the claims reserves held by the administrator, and prevent us from collecting the experience payments anticipated to be earned in future years. While the amount we receive varies annually, the loss of this income could negatively impact our business, results of operations, financial condition and cash flows. Further, the inability of the insurer to honor service warranty claims would likely result in reputational risk to us and might result in claims to cover any default by the insurer.
The loss of key personnel or the failure to attract additional qualified management personnel could adversely affect our operations and growth.
Our success depends to a significant degree on the efforts and abilities of our senior management. Further, we have identified Bryan B. DeBoer in most of our store franchise agreementsFranchise Agreements as the individual who controls the franchises and upon whose financial resources and management expertise the manufacturers may rely when awarding or approving the transfer of any franchise. If we lose these key personnel, our business may suffer.
In addition, as we expand into new markets and develop our digital e-commerce solutions, we will need to hire additional managers, engineers, data scientists and other employees. The market for qualified employees in the industryautomotive and in the regions in which we operate, particularly for general managers and sales and service personnel,technology-related industries is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managerspersonnel could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, the lack of qualified managers or other employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions.
Significant voting control is currently held by Sidney B. DeBoer, who may have interests different from our other shareholders. Further, all of the 1.0 million shares of our Class B common stock held by Lithia Holding Company, LLC (“Lithia Holding”) are pledged to secure indebtedness of Lithia Holding. The failure to repay the indebtedness could result in the sale of such shares and the loss of this significant voting control.
Sidney B. DeBoer, our Founder and Chairman of the Board, is the sole managing member of Lithia Holdings, which holds all of the outstanding shares of our Class B common stock. A holder of Class B common stock is entitled to ten votes for each share held, while a holder of Class A common stock is entitled to one vote per share held. On most matters, the Class A and Class B common stock vote together as a single class. As of February 23, 2018, Lithia Holding controlled, and Mr. DeBoer had the authority to vote, 29% of the aggregate number of votes eligible to be cast by shareholders for the election of directors and most other shareholder actions. This amount of voting control may make
certain changes in control or transactions more difficult. The interests of Mr. DeBoer may not always coincide with our interests as a company or the interests of other shareholders.
Lithia Holding has pledged 1.0 million shares of our Class B common stock to secure a loan from U.S. Bank National Association. If Lithia Holding is unable to repay the loan, the bank could foreclose on the Class B common stock, which would result in the automatic conversion of such shares to Class A common stock. The market price of our Class A common stock could decline if the bank foreclosed on the pledged stock and subsequently sold such stock in the open market.
Risks related to investing in our Class A commonCommon stock
Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover, which could impair the market price of our Class A commonCommon stock.
We are an Oregon corporation, and certain provisions of Oregon law and our Restated Articles of Incorporation may have anti-takeover effects. These provisions could delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in his or her best interest. These provisions may also affect attempts that might result in a premium over the market price for the shares held by shareholders and may make removal of the incumbent management and directors more difficult, which, under certain circumstances, could reduce the market price of our Class A commonCommon stock.
Our issuance of preferred stock could adversely affect holders of Class A commonCommon stock.
Our Board of Directors is authorized to issue a series of preferred stock without any action on the part of our holders of Class A commonCommon stock. Our Board of Directors also has the power, without shareholder approval, to set the terms of any such series of preferred stock that may be issued, including voting powers, preferences over our Class A commonCommon stock with respect to dividends or if we voluntarily or involuntarily dissolve or distribute our assets, and other terms. If we issue preferred stock in the future that has preference over our Class A commonCommon stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Class A commonCommon stock, the rights of holders of our Class A commonCommon stock or the price of our Class A commonCommon stock could be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. 2. Properties
Our stores and other facilities consist primarily of automobilevehicle showrooms, display lots, service facilities, collision repair and paint shops, supply facilities, automobilevehicle storage lots, parking lots and offices locatedin two countries, across 25 U.S states
and three Canadian provinces in the states listedlocations shown in the map under the caption Overview in section of Item 1.7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. We believe our facilities are currently adequate for our needs and are in good repair. Some of our facilities do not currently meet manufacturer image or size requirements and we are actively working to find a mutually acceptable outcome in terms of timing and overall cost. We own our corporate headquarters in Medford, Oregon, and numerous other properties used in our operations. Certain of our owned properties are mortgaged. As of December 31, 2017,2021, we had outstanding mortgage debt of $470.0$592.9 million. We also lease certain properties, providing future flexibility to relocate our retail stores as demographics, economics, traffic patterns or sales methods change. Most leases provide us the option to renew the lease for one or more lease extension periods. We also hold certain vacant facilities and undeveloped land for future expansion.
Our corporate headquarters is LEED certified and incorporates roof-mounted solar panels to offset energy usage. Two of our stores are also LEED certified, and we have completed solar projects at four others. Our stores also integrate energy-saving practices and materials. This includes practices such as recycling used tires, used engine oil and used oil filters; the use of waste oil heaters and carwash reclaim systems; using biodegradable products in our detail services and interior and exterior LED lighting. We also provide a complimentary, nationwide electric vehicle (EV) charging network, an important aspect in increasing the number of EVs on the road and thereby reducing emissions.
Item 3.Legal Proceedings
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
California Wage and Hour LitigationsIn August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. The plaintiffs also seek attorney fees and costs. The plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.
During the pendency of Holzer, related cases were filed that made substantially similar non-technician claims. In January 2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, and this settlement was approved by the California courts in December 2017. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. We believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.
Item 4.Mine Safety Disclosure
Not applicable.
PART II
| |
Item 5. | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Stock Prices and Dividends
Our Class A commonCommon stock trades on the New York Stock Exchange under the symbol LAD. The following table presents the high and low sale prices for our Class A common stock, as reported on the New York Stock Exchange Composite Tape for each of the quarters in 2016 and 2017:
|
| | | | | | | | |
| 2016 | | High | | Low |
| First quarter | | $ | 105.38 |
| | $ | 72.30 |
|
| Second quarter | | 93.16 |
| | 68.70 |
|
| Third quarter | | 95.67 |
| | 69.36 |
|
| Fourth quarter | | 101.89 |
| | 75.85 |
|
| | | | | |
| 2017 | | | | |
| First quarter | | $ | 105.32 |
| | $ | 83.38 |
|
| Second quarter | | 98.05 |
| | 80.88 |
|
| Third quarter | | 120.48 |
| | 87.90 |
|
| Fourth quarter | | 123.50 |
| | 105.00 |
|
The number of shareholders of record and approximate number of beneficial holders of Class A commonCommon stock as of February 23, 201818, 2022 was 520454 and 32,147,83,001, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, LLC. Sidney B. DeBoer Trust U.T.A.D. January 30, 1997 (the "Trust") is the manager of Lithia Holding Company, L.L.C., and Sidney DeBoer, as the trustee of the Trust, has the authority to vote all of the issued and outstanding shares of our Class B common stock.
Dividends declared on our Class A and Class B common stock during 2015, 2016 and 2017 were as follows:
|
| | | | | | | | |
Quarter declared: | | Dividend amount per share | | Total amount of dividends paid (in thousands) |
| 2015 | | | | |
| First quarter | | $ | 0.16 |
| | $ | 4,216 |
|
| Second quarter | | 0.20 |
| | 5,266 |
|
| Third quarter | | 0.20 |
| | 5,257 |
|
| Fourth quarter | | 0.20 |
| | 5,246 |
|
| 2016 | | | | |
| First quarter | | $ | 0.20 |
| | $ | 5,151 |
|
| Second quarter | | 0.25 |
| | 6,373 |
|
| Third quarter | | 0.25 |
| | 6,299 |
|
| Fourth quarter | | 0.25 |
| | 6,308 |
|
| 2017 | | | | |
| First quarter | | $ | 0.25 |
| | $ | 6,292 |
|
| Second quarter | | 0.27 |
| | 6,760 |
|
| Third quarter | | 0.27 |
| | 6,751 |
|
| Fourth quarter | | 0.27 |
| | 6,741 |
|
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.12.
Recent Sale of Unregistered Securities
On May 1, 2017, we agreed to issue 22,446 shares of Class A common stock to Lee W. Baierl as partial consideration for the purchase of Northland Ford, Inc., an entity we acquired in connection with our acquisition of the Baierl Auto Group. Under the agreement, we issued 4,489 shares to Mr. Baierl on May 1, 2017 and will issue 4,489 additional shares to him on each of January 1, 2018, 2019, and 2020; on January 1, 2021, we will issue to him the final 4,490 shares. The shares were issued to Mr. Baierl, an accredited investor, in a transaction exempt from Section 4(a)(2) of the Securities Act of 1933.
Repurchases of Equity Securities
We made the following repurchases of our common stock during the fourth quarter of 2017:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the full calendar month of | | Total number of shares purchased(2) | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan(1) | | Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands)(1) |
| October | | — | | | $ | — | | | — | | | $ | 187,522 | |
| November | | 249,648 | | | 286.94 | | | 249,614 | | | 865,898 | |
| December | | 507,269 | | | 282.18 | | | 507,269 | | | 722,757 | |
| Total | | 756,917 | | | 283.75 | | | 756,883 | | | 722,757 | |
(1)On November 30, 2021, our Board of Directors approved an additional $750 million repurchase authorization of our common stock. This new authorization is in addition to the amount previously authorized by the Board for repurchase.
(2)34 shares repurchased in the fourth quarter of 2021 were related to tax withholdings on vesting RSUs.
|
| | | | | | | | | | | | | | |
| | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plan(1) | | Maximum dollar value of shares that may yet be purchased under publicly announced plan (in thousands)(1) |
| October | | 19,000 |
| | $ | 116.58 |
| | 19,000 |
| | $ | 162,559 |
|
| November | | 157 |
| | 113.95 |
| | — |
| | 162,559 |
|
| December | | — |
| | — |
| | — |
| | 162,559 |
|
Total(2) | | 19,157 |
| | 116.56 |
| | 19,000 |
| | 162,559 |
|
| | | | | | | | | | | | | | |
| (1) | In February 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. Through December 31, 2017, we have repurchased 1,042,725 shares at an average price of $92.79 per share. This authority to repurchase shares does not have an expiration date. |
Includes 157 shares repurchased in association with tax withholdings on the vesting of RSUs. |
Stock Performance Graph
The following line-graph shows the annual percentage change instock performance graph and table that follow compare the cumulative total returns for the past five yearsstockholder return on an assumed $100 initial investment and reinvestment of dividends, on (a) Lithia Motors, Inc.’s Class A common stock; (b)Common stock with the Russell 2000;cumulative total return of the Standard & Poor’s 500 Stock Index (S&P 500 Index), and (c) an auto peer group index composed of Penske Automotive Group, AutoNation, Sonic Automotive, Group 1 Automotive, and Asbury Automotive Group, and CarMax for the only other comparable publicly traded automobile dealerships in the United States as offive years ended December 31, 2017.2021. The peer group index utilizesindexes utilize the same methods of presentation and assumptions for the total return calculation as does Lithia Motors and the Russell 2000.S&P 500 Index. All companies in the peer group indexindexes are weighted in accordance with their market capitalizations.1
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Base Period | | Indexed Returns for the Year Ended |
| Company/Index | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 |
| Lithia Motors, Inc. | | $100.00 | | | $ | 118.55 | | | $ | 80.65 | | | $ | 156.91 | | | $ | 315.07 | | | $ | 320.87 | |
| S&P 500 Index - Total Return | | 100.00 | | 121.83 | | | 116.49 | | | 153.17 | | | 181.35 | | | 233.41 | |
| Auto Peer Group | | 100.00 | | 98.94 | | | 87.70 | | | 126.55 | | | 150.94 | | | 224.47 | |
1The graph and table assume that $100 was invested on the last day of trading for the calendar year ended December 31, 2016 in Lithia Motors, Inc’s Common stock, the S&P 500 Index, and peer group indexes, and that all dividends were reinvested. The S&P 500 Index was added as a comparison in the 2020 Form 10-K stock performance graph as a broad market index to replace the Russell 2000 Index going forward.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Base Period | | Indexed Returns for the Year Ended |
| Company/Index | | 12/31/2012 | | 12/31/2013 | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 |
| Lithia Motors, Inc. | |
| $100.00 |
| | $ | 186.73 |
| | $ | 235.10 |
| | $ | 291.34 |
| | $ | 267.51 |
| | $ | 317.13 |
|
| Auto Peer Group | | 100.00 |
| | 135.40 |
| | 161.18 |
| | 147.93 |
| | 145.09 |
| | 142.69 |
|
| Russell 2000 | | 100.00 |
| | 138.83 |
| | 145.62 |
| | 139.19 |
| | 168.85 |
| | 193.59 |
|
Item 6.Selected Financial Data
You should read the Selected Financial Data in conjunction with "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and Notes thereto and other financial information contained elsewhere in this Annual Report on Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share amounts) | | Year Ended December 31, |
| Consolidated Statements of Operations Data: | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Revenues: | | | | | | | | | | |
| New vehicle | | $ | 5,763,587 |
| | $ | 4,938,436 |
| | $ | 4,552,301 |
| | $ | 3,077,670 |
| | $ | 2,256,598 |
|
| Used vehicle retail | | 2,544,379 |
| | 2,226,951 |
| | 1,927,016 |
| | 1,362,481 |
| | 1,032,224 |
|
| Used vehicle wholesale | | 277,844 |
| | 276,616 |
| | 261,530 |
| | 195,699 |
| | 158,235 |
|
| Finance and insurance | | 385,863 |
| | 330,922 |
| | 283,018 |
| | 190,381 |
| | 139,007 |
|
| Service, body and parts | | 1,015,773 |
| | 844,505 |
| | 738,990 |
| | 512,124 |
| | 383,483 |
|
| Fleet and other | | 99,064 |
| | 60,727 |
| | 101,397 |
| | 51,971 |
| | 36,202 |
|
| Total revenues | | $ | 10,086,510 |
| | $ | 8,678,157 |
| | $ | 7,864,252 |
| | $ | 5,390,326 |
| | $ | 4,005,749 |
|
| | | | | | | | | | | |
| Gross Profit: | | | | | | | | | | |
| New vehicle | | $ | 339,843 |
| | $ | 289,412 |
| | $ | 280,370 |
| | $ | 198,184 |
| | $ | 151,118 |
|
| Used vehicle retail | | 286,835 |
| | 263,684 |
| | 241,249 |
| | 179,253 |
| | 150,858 |
|
| Used vehicle wholesale | | 4,786 |
| | 4,313 |
| | 4,457 |
| | 3,646 |
| | 2,711 |
|
| Finance and insurance | | 385,863 |
| | 330,922 |
| | 283,018 |
| | 190,381 |
| | 139,007 |
|
| Service, body and parts | | 493,124 |
| | 410,283 |
| | 363,921 |
| | 249,736 |
| | 185,570 |
|
| Fleet and other | | 5,635 |
| | 2,701 |
| | 2,619 |
| | 2,122 |
| | 1,689 |
|
| Total gross profit | | $ | 1,516,086 |
| | $ | 1,301,315 |
| | $ | 1,175,634 |
| | $ | 823,322 |
| | $ | 630,953 |
|
| | | | | | | | | | | |
Operating income (1) (2) | | $ | 408,986 |
| | $ | 338,364 |
| | $ | 302,735 |
| | $ | 231,899 |
| | $ | 183,518 |
|
| | | | | | | | | | | |
Income from continuing operations before income taxes (1) | | $ | 347,069 |
| | $ | 283,523 |
| | $ | 262,704 |
| | $ | 210,495 |
| | $ | 165,788 |
|
| | | | | | | | | | | |
Income from continuing operations (1) | | $ | 245,217 |
| | $ | 197,058 |
| | $ | 182,999 |
| | $ | 135,540 |
| | $ | 105,214 |
|
| | | | | | | | | | | |
| Basic income per share from continuing operations | | $ | 9.78 |
| | $ | 7.76 |
| | $ | 6.96 |
| | $ | 5.19 |
| | $ | 4.08 |
|
| Basic income per share from discontinued operations | | — |
| | — |
| | — |
| | 0.12 |
| | 0.03 |
|
| Basic net income per share | | $ | 9.78 |
| | $ | 7.76 |
| | $ | 6.96 |
| | $ | 5.31 |
| | $ | 4.11 |
|
| Shares used in basic per share | | 25,065 |
| | 25,409 |
| | 26,290 |
| | 26,121 |
| | 25,805 |
|
| | | | | | | | | | | |
| Diluted income per share from continuing operations | | $ | 9.75 |
| | $ | 7.72 |
| | $ | 6.91 |
| | $ | 5.14 |
| | $ | 4.02 |
|
| Diluted income per share from discontinued operations | | — |
| | — |
| | — |
| | 0.12 |
| | 0.03 |
|
| Diluted net income per share | | $ | 9.75 |
| | $ | 7.72 |
| | $ | 6.91 |
| | $ | 5.26 |
| | $ | 4.05 |
|
| Shares used in diluted per share | | 25,145 |
| | 25,521 |
| | 26,490 |
| | 26,382 |
| | 26,191 |
|
| | | | | | | | | | | |
| Cash dividends paid per common share | | $ | 1.06 |
| | $ | 0.95 |
| | $ | 0.76 |
| | $ | 0.61 |
| | $ | 0.39 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | As of December 31, |
| Consolidated Balance Sheets Data: | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Working capital | | $ | 481,801 |
| | $ | 365,200 |
| | $ | 288,040 |
| | $ | 172,909 |
| | $ | 209,038 |
|
| Inventories | | 2,132,744 |
| | 1,772,587 |
| | 1,470,987 |
| | 1,249,659 |
| | 859,019 |
|
| Total assets | | 4,683,066 |
| | 3,844,150 |
| | 3,225,130 |
| | 2,879,093 |
| | 1,723,930 |
|
| Floor plan notes payable | | 1,919,026 |
|
| 1,601,497 |
|
| 1,313,955 |
|
| 1,178,679 |
|
| 713,855 |
|
| Long-term debt, including current maturities | | 1,047,352 |
| | 790,881 |
| | 643,186 |
| | 639,138 |
| | 251,363 |
|
Total stockholders’ equity (2) | | 1,083,218 |
| | 910,776 |
| | 828,164 |
| | 673,105 |
| | 534,722 |
|
| |
(1)
| Includes $14.0 million, $20.1 million, and $1.9 million in non-cash charges related to asset impairments for the years ended 2016, 2015 and 2014, respectively. We did not record any non-cash charges related to asset impairments in 2017 and 2013. See Notes 1, 4 and 17 of Notes to Consolidated Financial Statements for additional information. |
| |
(2)
| Reclassifications of amounts previously reported have been made to the selected financial data to maintain consistency and comparability between periods presented. |
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Item 1. Business,, Item 1A. Risk Factors,,and our Consolidated Financial Statements and Notes thereto.
Overview
We are one of the largest automotive franchisesretailers in the United States and are among the fastest growing companies inwere ranked #231 on the Fortune 500 (#318-2017).in 2021. As of February 23, 2018,18, 2022, we offered 3040 brands of new vehicles and all brands of used vehicles in 171278 stores in the United StatesNorth America and online at over 200300 websites. We selloffer a wide range of products and services including new and used carsvehicles, finance and replacement parts; provide vehicle maintenance, warranty, paint and repair services; arrange related financing; and sell vehicle service contracts, vehicle protectioninsurance products and automotive repair and maintenance.
REGIONAL REACH & DENSITY MAP
During the year ended December 31, 2021, we had net income of $1.1 billion, or $36.54 per diluted share, compared to net income of $470.3 million, or $19.53 per diluted share, during 2020. We experienced growth of revenue and gross profit in all major business lines in 2021 compared to 2020, primarily driven by increases in
volume related to acquisitions, complimented by organic growth in used vehicles, finance and insurance and service, body and parts sales. On a same store basis, new vehicle revenues and gross profits experienced growth primarily driven by increases in average selling price per retail unit. New vehicle unit sales have successfully recovered from the prior year, returning to levels experienced in 2019 in spite of nationwide new inventory shortages.
For the year ended December 31, 2021, new vehicle sales accounted for approximately 49% of our revenue and approximately 29% of our gross profit. Used vehicle retail sales accounted for approximately 32% of our revenue and approximately 19% of our gross profit. Our parts and service and finance and insurance operations accounted for approximately 14% of our revenue and contributed approximately 51% of our gross profit.
As of December 31, 2021, we had available liquidity of $1.5 billion, which was comprised of $174.8 million in cash and $1.3 billion availability on our credit insurance.facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $1.0 billion. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.
Results of Operations
For the year ended December 31, 2021, we reported net income of $1.1 billion, or $36.54 per diluted share. For the years ended December 31, 2020 and 2019, we reported net income of $470.3 million, or $19.53 per diluted share, and $271.5 million, or $11.6 per diluted share, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| ($ in millions, except per vehicle data) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenues | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 11,197.7 | | | $ | 6,773.9 | | | $ | 4,423.8 | | | 65.3 | % | | $ | 6,799.1 | | | $ | (25.2) | | | (0.4) | % |
| Used vehicle retail | | 7,255.3 | | | 3,998.4 | | | 3,256.9 | | | 81.5 | | | 3,527.2 | | | 471.2 | | | 13.4 | |
| Finance and insurance | | 1,051.3 | | | 579.8 | | | 471.5 | | | 81.3 | | | 518.6 | | | 61.2 | | | 11.8 | |
| Service, body and parts | | 2,110.9 | | | 1,348.7 | | | 762.2 | | | 56.5 | | | 1,325.1 | | | 23.6 | | | 1.8 | |
| Total revenues | | 22,831.7 | | | 13,124.3 | | | 9,707.4 | | | 74.0 | | | 12,672.7 | | | 451.6 | | | 3.6 | |
| | | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 1,218.5 | | | $ | 461.0 | | | $ | 757.5 | | | 164.3 | % | | $ | 385.6 | | | $ | 75.4 | | | 19.6 | % |
| Used vehicle retail | | 826.7 | | | 446.0 | | | 380.7 | | | 85.4 | | | 367.5 | | | 78.5 | | | 21.4 | |
| Finance and insurance | | 1,051.3 | | | 579.8 | | | 471.5 | | | 81.3 | | | 518.6 | | | 61.2 | | | 11.8 | |
| Service, body and parts | | 1,110.5 | | | 716.8 | | | 393.7 | | | 54.9 | | | 667.6 | | | 49.2 | | | 7.4 | |
| Total gross profit | | 4,259.0 | | | 2,225.6 | | | 2,033.4 | | | 91.4 | | | 1,953.8 | | | 271.8 | | | 13.9 | |
| | | | | | | | | | | | | | |
| Gross profit margins | | | | | | | | | | | | | | |
| New vehicle retail | | 10.9 | % | | 6.8 | % | | 410 bp | | | | 5.7 | % | | 110 bp | | |
| Used vehicle retail | | 11.4 | | | 11.2 | | | 20 bp | | | | 10.4 | | | 80 bp | | |
| Finance and insurance | | 100.0 | | | 100.0 | | | 0 bp | | | | 100.0 | | | 0 bp | | |
| Service, body and parts | | 52.6 | | | 53.1 | | | -50 bp | | | | 50.4 | | | 270 bp | | |
| Total gross profit margin | | 18.7 | | | 17.0 | | | 170 bp | | | | 15.4 | | | 160 bp | | |
| | | | | | | | | | | | | | |
| Retail units sold | | | | | | | | | | | | | | |
| New vehicle retail | | 260,738 | | | 171,168 | | | 89,570 | | | 52.3 | % | | 180,532 | | | (9,364) | | | (5.2) | % |
| Used vehicle retail | | 275,495 | | | 183,230 | | | 92,265 | | | 50.4 | | | 170,423 | | | 12,807 | | | 7.5 | |
| | | | | | | | | | | | | | |
| Average selling price per retail unit | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 42,946 | | | $ | 39,575 | | | $ | 3,371 | | | 8.5 | % | | $ | 37,661 | | | $ | 1,914 | | | 5.1 | % |
| Used vehicle retail | | 26,336 | | | 21,822 | | | 4,514 | | | 20.7 | | | 20,697 | | | 1,125 | | | 5.4 | |
| | | | | | | | | | | | | | |
| Average gross profit per retail unit | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 4,673 | | | $ | 2,693 | | | $ | 1,980 | | | 73.5 | % | | $ | 2,136 | | | $ | 557 | | | 26.1 | % |
| Used vehicle retail | | 3,001 | | | 2,434 | | | 567 | | | 23.3 | | | 2,156 | | | 278 | | | 12.9 | |
| Finance and insurance | | 1,961 | | | 1,636 | | | 325 | | | 19.9 | | | 1,478 | | | 158 | | | 10.7 | |
Same Store Operating Data
We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow operations in our existing locations. Therefore, we have integrated same store measures into the fragmented naturediscussion below.
Same store measures reflect results for stores that were operating in each comparison period, and only include the months when operations occurred in both periods. For example, a store acquired in November 2020 would be included in same store operating data beginning in December 2021, after its first complete comparable month of operations. The fourth quarter operating results for the automotive dealership sector provides us withsame store comparisons would include results for that store in only the opportunity to achieve growth through consolidation. In 2017, the top ten automotive retailers, as reported by Automotive News, represented approximately 7%period of the stores in the United States. Our dealerships are located across the United States. We seek domestic, import and luxury franchises in cities ranging from mid-sized regional markets to metropolitan markets. We evaluate all brandsDecember for expansion opportunities provided the market is large enough to support adequateboth comparable periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | | | 2020 vs. 2019 |
| ($ in millions, except per vehicle data) | | 2021 | | 2020 | | Change | | % | | 2020 | | 2019 | | Change | | % |
| Revenues | | | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 7,362.0 | | | $ | 6,463.6 | | | $ | 898.4 | | | 13.9 | % | | $ | 5,827.0 | | | $ | 6,424.8 | | | $ | (597.8) | | | (9.3) | % |
| Used vehicle retail | | 5,381.4 | | | 3,843.5 | | | 1,537.9 | | | 40.0 | | | 3,531.0 | | | 3,320.9 | | | 210.1 | | | 6.3 | |
| Finance and insurance | | 716.9 | | | 557.5 | | | 159.4 | | | 28.6 | | | 495.6 | | | 490.5 | | | 5.1 | | | 1.0 | |
| Service, body and parts | | 1,445.6 | | | 1,298.1 | | | 147.5 | | | 11.4 | | | 1,173.8 | | | 1,253.0 | | | (79.2) | | | (6.3) | |
| Total revenues | | 15,635.8 | | | 12,570.2 | | | 3,065.6 | | | 24.4 | | | 11,400.4 | | | 11,962.8 | | | (562.4) | | | (4.7) | |
| | | | | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 803.0 | | | $ | 443.6 | | | $ | 359.4 | | | 81.0 | % | | $ | 405.0 | | | $ | 366.4 | | | $ | 38.6 | | | 10.5 | % |
| Used vehicle retail | | 635.3 | | | 433.6 | | | 201.7 | | | 46.5 | | | 400.6 | | | 351.7 | | | 48.9 | | | 13.9 | |
| Finance and insurance | | 716.9 | | | 557.5 | | | 159.4 | | | 28.6 | | | 495.6 | | | 490.5 | | | 5.1 | | | 1.0 | |
| Service, body and parts | | 779.6 | | | 689.4 | | | 90.2 | | | 13.1 | | | 618.5 | | | 632.1 | | | (13.6) | | | (2.2) | |
| Total gross profit | | 2,961.7 | | | 2,145.6 | | | 816.1 | | | 38.0 | | | 1,940.3 | | | 1,855.8 | | | 84.5 | | | 4.6 | |
| | | | | | | | | | | | | | | | |
| Gross profit margins | | | | | | | | | | | | | | | | |
| New vehicle retail | | 10.9 | % | | 6.9 | % | | 400 bp | | | | 7.0 | % | | 5.7 | % | | 130 bp | | |
| Used vehicle retail | | 11.8 | | | 11.3 | | | 50 bp | | | | 11.3 | | | 10.6 | | | 70 bp | | |
| Finance and insurance | | 100.0 | | | 100.0 | | | — bp | | | | 100.0 | | | 100.0 | | | — bp | | |
| Service, body and parts | | 53.9 | | | 53.1 | | | 80 bp | | | | 52.7 | | | 50.4 | | | 230 bp | | |
| Total gross profit margin | | 18.9 | | | 17.1 | | | 180 bp | | | | 17.0 | | | 15.5 | | | 150 bp | | |
| | | | | | | | | | | | | | | | |
| Retail units sold | | | | | | | | | | | | | | | | |
| New vehicle retail | | 168,927 | | | 162,771 | | | 6,156 | | | 3.8 | % | | 145,686 | | | 169,639 | | | (23,953) | | | (14.1) | % |
| Used vehicle retail | | 203,956 | | | 175,622 | | | 28,334 | | | 16.1 | | | 161,441 | | | 159,295 | | | 2,146 | | | 1.3 | |
| | | | | | | | | | | | | | | | |
| Average selling price per retail unit | | | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 43,581 | | | $ | 39,710 | | | $ | 3,871 | | | 9.7 | % | | $ | 39,997 | | | $ | 37,873 | | | $ | 2,124 | | | 5.6 | % |
| Used vehicle retail | | 26,385 | | | 21,885 | | | 4,500 | | | 20.6 | | | 21,872 | | | 20,847 | | | 1,025 | | | 4.9 | |
| | | | | | | | | | | | | | | | |
| Average gross profit per retail unit | | | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 4,754 | | | $ | 2,725 | | | $ | 2,029 | | | 74.5 | % | | $ | 2,780 | | | $ | 2,160 | | | $ | 620 | | | 28.7 | % |
| Used vehicle retail | | 3,115 | | | 2,469 | | | 646 | | | 26.2 | | | 2,481 | | | 2,208 | | | 273 | | | 12.4 | |
| Finance and insurance | | 1,923 | | | 1,647 | | | 276 | | | 16.8 | | | 1,614 | | | 1,491 | | | 123 | | | 8.2 | |
New Vehicles
Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, providing used vehicle inventory through trade-ins, arranging of third party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work.
During 2021, new vehicle revenues and gross profit grew 65.3% and 164.3%, respectively, compared to justify2020. This improvement resulted from our accelerated growth through strategic acquisitions and strong recovery from the required capital investment. Our acquisition strategyimpact of the COVID-19 pandemic, driving new vehicle unit sales up 52.3% compared to 2020. New vehicle unit sales experienced strong headwinds in 2020, declining 5.2% over the prior year. Despite increasing average sales prices, new vehicle revenues remained relatively flat in 2020 compared to 2019.
While market demand remained high throughout 2021, there continues to be a shortage of available new vehicles for sale driven largely by certain component shortages in the manufacturers’ supply chains. This imbalance has beenresulted in higher than normal average selling prices and gross profits per unit. The reduced levels of new vehicle availability are expected to acquire dealerships at prices that meet our internal investment targets and, throughcontinue into 2022. Throughout 2020, the applicationimpact of the COVID-19 pandemic on each of our centralized operating structure, leverage costsmarkets varied. We experienced initial declines in new vehicle unit sales in the first half of the year and improvethen saw continued incremental improvement each month following, with fourth quarter 2020 same store profitability.new vehicle unit sales nearing 2019 levels.
Same store new vehicle revenue was driven by an increase in unit volume of 3.8% and an increase in average selling prices of 9.7%. As the national new vehicle market plateaus, our stores focus on improving gross profit per new vehicle sold. On a same store basis, gross profit per new vehicle increased 74.5% during 2021 compared to 2020. Our recently acquired stores are also focused on improving gross profit per new vehicle as total company gross profit per unit increased 73.5% during 2021 compared to 2020. Pent-up demand and reduced inventory levels related to short-term production closures combined with increased manufacturer partner incentives contributed to these improvements in gross profit per unit. We believe our disciplined approachthese increases in gross profit per unit will return to normalized levels in 2022.
The same store new vehicle sales decrease in 2020 over 2019 of 9.3% included a decrease in unit sales of 14.1%, offset by an increase of 5.6% in average selling prices.
Used Vehicles
Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned (CPO) vehicles; core vehicles, which are late-model vehicles with lower mileage; and the current economic environment provides usvalue autos, which are vehicles with attractive acquisition opportunities.
over 80,000 miles. We also believe that we can continuehave established a company-wide target of achieving a per store average of 100 used retail units per month. Strategies to improve operations at our existing stores. By promoting entrepreneurial leadership within our general and department managers, we strive for continuous improvement to driveachieve this target include reducing wholesale sales and capture market share inselling the full spectrum of used units, from late model CPO models to vehicles over ten years old. During 2021, our local markets. Our goal is to retailstores sold an average of 8592 used vehicles per store per month. This compares to 78 used vehicles per store per month in 2020 and we believe we can make additional improvements77 in 2019.
Used vehicle demand remains high, due in part to the lower levels of new vehicle inventory available for sale. This demand is resulting in higher than normal average selling prices and gross profits per unit in 2021.
Used vehicle revenues increased 81.5% during 2021 compared to 2020 and 13.4% in 2020 compared to 2019. These increases are due to a combination of increased volume from acquisitions and organic growth in all categories of used vehicle sales at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle revenues increased 40.0% during 2021 and included a 16.1% increase in unit volume and a 20.6% increase in average selling price per retail unit compared to 2020. The revenue increase in 2021 was driven by an increase in our core vehicles of 46.2% and supported by increases in value auto and CPO vehicle categories of 47.3% and 22.4%, respectively. The increase in our core vehicle category includes a 21.5% increase in volume, complimented by a 20.3% increase in average selling price per vehicle.
Used vehicle gross profits increased 85.4% during 2021 compared to 2020 and 21.4% in 2020 compared to 2019. On a same store basis, used vehicle gross profit increased 46.5% in 2021 compared to 2020, led by the performance in our core vehicles of 44.3% and supported by increases in value auto and CPO vehicle categories of 46.3% and 52.8%, respectively. The increase in our core vehicle category was driven by both an increase in volume an increase in gross profit per unit. Gross profit per unit in our core vehicle category, which accounted for 60.0% of
our used vehicle unit sales performancein 2021, increased 18.8%, from $2,501 in 2020 to $2,970 in 2021. The increase in same store gross profit in our value auto category was driven by offering lower-priced valuea 22.9% increase in gross profit per unit from $2,498 in 2020 to $3,071 in 2021. Our CPO category experienced a decrease in volume, with unit sales decreasing 0.4% in 2021 compared to 2020, but saw an increase in gross profit per unit of 53.5%, from $2,360 in 2020 to $3,621 in 2021.
Similar to new vehicles, used vehicle sales volumes were impacted by the COVID-19 pandemic during 2020. Initial declines were similar to new vehicles in the beginning of the year; however, we experienced significant improvements during the rest of 2020.
Used vehicle revenues increased 6.3% in 2020 compared to 2019 on a same store basis due to increases in unit volume and average selling prices of 1.3% and 4.9%, respectively. Same store used vehicle gross profit also increased 13.9% in 2020 compared to 2019.
Our used vehicle operations provide an opportunity to generate sales to customers unable or unwilling to purchase a new vehicle, sell brands other than the store’s new vehicle franchise at each location. franchise(s), access additional used vehicle inventory through trade-ins and increase sales from finance and insurance products and parts and service.
Finance and Insurance
We believe that arranging timely vehicle financing is an important part of providing personal transportation solutions, and we attempt to arrange financing for every vehicle we sell. We also offer related products such as extended warranties, insurance contracts and vehicle and theft protection.
The increases in finance and insurance revenue in 2021 compared to 2020 and in 2020 compared to 2019, were primarily due to increased volume related to acquisitions, combined with expanded product offerings and increasing penetration rates. Third party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. During 2021, finance and insurance sales accounted for 4.6% of total revenues and 24.7% of total gross profits. On a same store basis, finance and insurance sales accounted for 4.6% of total revenues and 24.2% of total gross profits in 2021. Same store finance and insurance revenues increased 28.6% during 2021 compared to 2020 and 1.0% during 2020 compared to 2019. These increases were driven by increases in finance and insurance revenues per retail unit, combined with increases in used vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit increased $276 per unit to $1,923 in 2021 compared to 2020 and $123 per unit to $1,614 in 2020 compared to 2019. The increase in 2021 compared to 2020 was primarily due to increases in volume and increases in service contract and financing penetration rates of 40 basis points and 120 basis points, respectively, from 48.8% to 49.2% and from 74.4% to 75.6%, respectively.
Service, body and parts
We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.
Our service, body and parts revenue grew in all areas in 2021 compared to 2020 and grew in customer pay and warranty work in 2020 compared to 2019, primarily due to acquisitions. With more late-model units in operation, continued increase of vehicles in operation from 2015 to 2019, and a plateauing new vehicle market, we believe the increased number of units in operation will continue to benefit our service, body and parts revenue in the coming years as more late-model vehicles age, necessitating repairs and maintenance. We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts.
On a same store basis, service, body and parts revenue increased 11.4% during 2021, primarily driven by an increase in customer pay of 18.4%. Performance in parts wholesale and body shop also saw increases of 19.8% and 0.5%, respectively, compared to the same period of 2020.
Same store service, body and parts gross profit increased 13.1% during 2021 compared to 2020 and decreased 2.2% during 2020 compared to 2019, primarily as a result of shelter in place policies in effect during the first half of
2020. Our gross margins continue to increase as our mix has shifted towards customer pay, which has higher margins than other service work.
Segments
Certain financial information by segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenues: | | | | | | | | | | | | | | |
| Domestic | | $ | 6,975.3 | | | $ | 4,503.0 | | | $ | 2,472.3 | | | 54.9 | % | | $ | 4,382.4 | | | $ | 120.6 | | | 2.8 | % |
| Import | | 9,690.8 | | | 5,448.8 | | | 4,242.0 | | | 77.9 | | | 5,267.8 | | | 181.0 | | | 3.4 | |
| Luxury | | 6,114.8 | | | 3,152.0 | | | 2,962.8 | | | 94.0 | | | 2,991.9 | | | 160.1 | | | 5.4 | |
| | 22,780.9 | | | 13,103.8 | | | 9,677.1 | | | 73.8 | | | 12,642.1 | | | 461.7 | | | 3.7 | |
| Corporate and other | | 50.8 | | | 20.5 | | | 30.3 | | | NM | | 30.6 | | | (10.1) | | | NM |
| | $ | 22,831.7 | | | $ | 13,124.3 | | | $ | 9,707.4 | | | 74.0 | % | | $ | 12,672.7 | | | $ | 451.6 | | | 3.6 | % |
NM - Not meaningful
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Segment income*: | | | | | | | | | | | | | | |
| Domestic | | $ | 466.4 | | | $ | 230.0 | | | $ | 236.4 | | | 102.8 | % | | $ | 123.4 | | | $ | 106.6 | | | 86.4 | % |
| Import | | 813.4 | | | 249.8 | | | 563.6 | | | 225.6 | | | 153.9 | | | 95.9 | | | 62.3 | |
| Luxury | | 384.6 | | | 98.5 | | | 286.1 | | | 290.5 | | | 57.1 | | | 41.4 | | | 72.5 | |
| Total segment income for reportable segments | | $ | 1,664.4 | | | $ | 578.3 | | | $ | 1,086.1 | | | 187.8 | % | | $ | 334.4 | | | $ | 243.9 | | | 72.9 | % |
*Segment income for each of the segments is a Non-GAAP measure defined as Income from operations provide important repeat businessbefore income taxes, depreciation and amortization, other interest expense and other income, net.
Reconciliation of total segment income for reportable segments to our consolidated income before income taxes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Total segment income for reportable segments | | $ | 1,664.4 | | | $ | 578.3 | | | $ | 1,086.1 | | | 187.8 | % | | $ | 334.4 | | | $ | 243.9 | | | 72.9 | % |
| Corporate and other | | 108.5 | | | 176.7 | | | (68.2) | | | (38.6) | | | 170.2 | | | 6.5 | | | 3.8 | |
| Depreciation and amortization | | (127.3) | | | (92.3) | | | 35.0 | | | 37.9 | | | (82.4) | | | 9.9 | | | 12.0 | |
| Other interest expense | | (108.2) | | | (73.1) | | | 35.1 | | | 48.0 | | | (60.6) | | | 12.5 | | | 20.6 | |
| Other income, net | | (52.6) | | | 58.9 | | | (111.5) | | | NM | | 13.8 | | | 45.1 | | | NM |
| Income before income taxes | | $ | 1,484.8 | | | $ | 648.5 | | | $ | 836.3 | | | 129.0 | % | | $ | 375.4 | | | $ | 273.1 | | | 72.7 | % |
NM - Not meaningful
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Retail new vehicle retail unit sales: | | | | | | | | | | | | | | |
| Domestic | | 64,269 | | | 48,421 | | | 15,848 | | | 32.7 | % | | 53,262 | | | (4,841) | | | (9.1) | % |
| Import | | 146,150 | | | 93,111 | | | 53,039 | | | 57.0 | | | 98,365 | | | (5,254) | | | (5.3) | |
| Luxury | | 50,715 | | | 30,087 | | | 20,628 | | | 68.6 | | | 29,238 | | | 849 | | | 2.9 | |
| | 261,134 | | | 171,619 | | | 89,515 | | | 52.2 | | | 180,865 | | | (9,246) | | | (5.1) | |
| Allocated to management | | (396) | | | (451) | | | 55 | | | 12.2 | | | (333) | | | (118) | | | (35.4) | |
| | 260,738 | | | 171,168 | | | 89,570 | | | 52.3 | % | | 180,532 | | | (9,364) | | | (5.2) | % |
Domestic
A summary of financial information for our Domestic segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenue: | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 3,202.8 | | | $ | 2,235.0 | | | $ | 967.8 | | | 43.3 | % | | $ | 2,287.5 | | | $ | (52.5) | | | (2.3) | % |
| Used vehicle retail | | 2,458.6 | | | 1,461.0 | | | 997.6 | | | 68.3 | | | 1,264.7 | | | 196.3 | | | 15.5 | |
| Used vehicle wholesale | | 285.3 | | | 104.1 | | | 181.2 | | | 174.1 | | | 113.6 | | | (9.5) | | | (8.4) | |
| Finance and insurance | | 295.2 | | | 199.0 | | | 96.2 | | | 48.3 | | | 184.2 | | | 14.8 | | | 8.0 | |
| Service, body and parts | | 626.3 | | | 456.7 | | | 169.6 | | | 37.1 | | | 477.5 | | | (20.8) | | | (4.4) | |
| Fleet and other | | 107.1 | | | 47.2 | | | 59.9 | | | 126.9 | | | 54.9 | | | (7.7) | | | (14.0) | |
| | $ | 6,975.3 | | | $ | 4,503.0 | | | $ | 2,472.3 | | | 54.9 | | | $ | 4,382.4 | | | $ | 120.6 | | | 2.8 | |
| Segment income | | $ | 466.4 | | | $ | 230.0 | | | $ | 236.4 | | | 102.8 | | | $ | 123.4 | | | $ | 106.6 | | | 86.4 | |
| New vehicle retail unit sales | | 64,269 | | | 48,421 | | | 15,848 | | | 32.7 | % | | 53,262 | | | (4,841) | | | (9.1) | % |
Total Revenue in our Domestic segment increased 54.9% in 2021 compared to 2020, driven by increases in all business lines. New vehicle unit sales increased 32.7%, driven by our acquisition activity. Same store units declined 2.7% in 2021 compared to 2020, primarily due to decreases in Chrysler and Ford. However, Domestic segment revenues benefited from improved used vehicle retail sales due to a 38.8% increase in volume and a 21.3% increase in average selling price per vehicle in 2021 compared to 2020. Finance and insurance revenue also contributed to the overall increase in Domestic segment revenue, driven by the increased used vehicle retail volume, combined with a 8.9% increase in finance and insurance income per retail unit sold to $1,923 per unit.
Strong performance in used vehicle retail and finance and insurance revenues in 2020 contributed to the 2.8% increase in revenue over 2019.
Our Domestic segment income increased 102.8% in 2021 compared to 2020 due to gross profit growth of 60.0%, with a decrease in floor plan interest expense of 19.9%, offset by an increase in SG&A of 45.2%. As a percentage of gross profit, SG&A decreased 610 basis points in 2021 compared to 2020.
Our Domestic segment income increased 86.4% in 2020 compared to 2019 due to gross profit growth of 12.1% with declines in SG&A and floor plan interest expense of 0.4% and 42.3%, respectively. As a percentage of gross profit, SG&A decreased 820 basis points in 2020 compared to 2019.
Import
A summary of financial information for our Import segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenue: | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 4,961.1 | | | $ | 2,881.0 | | | $ | 2,080.1 | | | 72.2 | % | | $ | 2,920.8 | | | $ | (39.8) | | | (1.4) | % |
| Used vehicle retail | | 2,915.9 | | | 1,610.4 | | | 1,305.5 | | | 81.1 | | | 1,448.5 | | | 161.9 | | | 11.2 | |
| Used vehicle wholesale | | 369.2 | | | 126.0 | | | 243.2 | | | 193.0 | | | 112.1 | | | 13.9 | | | 12.4 | |
| Finance and insurance | | 559.7 | | | 281.5 | | | 278.2 | | | 98.8 | | | 247.4 | | | 34.1 | | | 13.8 | |
| Service, body and parts | | 836.0 | | | 517.2 | | | 318.8 | | | 61.6 | | | 496.2 | | | 21.0 | | | 4.2 | |
| Fleet and other | | 48.9 | | | 32.7 | | | 16.2 | | | 49.5 | | | 42.8 | | | (10.1) | | | (23.6) | |
| | $ | 9,690.8 | | | $ | 5,448.8 | | | $ | 4,242.0 | | | 77.9 | | | $ | 5,267.8 | | | $ | 181.0 | | | 3.4 | |
| Segment income | | $ | 813.4 | | | $ | 249.8 | | | $ | 563.6 | | | 225.6 | | | $ | 153.9 | | | $ | 95.9 | | | 62.3 | |
| New vehicle retail unit sales | | 146,150 | | | 93,111 | | | 53,039 | | | 57.0 | % | | 98,365 | | | (5,254) | | | (5.3) | % |
Total Revenue in our Import segment increased 77.9% in 2021 compared to 2020, driven by increases in all business lines. New vehicle unit sales in our Import segment increased 57.0%, driven by our acquisition activity and a 5.7% increase on a same store basis. Import segment revenues benefited from improved used vehicle retail sales due to a 51.2% increase in volume and 19.7% increase in average selling price. Finance and insurance revenue also contributed to the overall increase in Import segment revenue, driven by the increased volume combined with a 28.9% increase in finance and insurance income per retail unit sold to $2,010 per unit.
The increase in our Import segment revenue in 2020 compared to 2019 was driven by increases in used vehicle retail, finance and insurance, and service, body and parts. New vehicle unit sales in our Import segment decreased 5.3%. However, Import segment revenues benefited from improved used vehicle retail revenue due to a 6.3% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 13.8% increase in finance and insurance income per retail unit sold to $1,559 per unit, and improved service, body and parts revenues in 2020 compared to 2019.
Our Import segment income increased 225.6% in 2021 compared to 2020 due to gross profit growth of 106.7% with a decrease in floor plan interest expense of 4.1%, offset by an increase in SG&A expense of 68.8%. As a percentage of gross profit, SG&A decreased 1300 basis points in 2021 compared to 2020.
Our Import segment income increased 62.3% in 2020 compared to 2019 due to gross profit growth of 15.2% with only a minimal increase in SG&A expense of 7.0% and a decrease in floor plan interest expense of 28.3%. As a percentage of gross profit, SG&A decreased 550 basis points in 2020 compared to 2019.
Luxury
A summary of financial information for our Luxury segment follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenue: | | | | | | | | | | | | | | |
| New vehicle retail | | $ | 3,038.2 | | | $ | 1,659.4 | | | $ | 1,378.8 | | | 83.1 | % | | $ | 1,588.8 | | | $ | 70.6 | | | 4.4 | % |
| Used vehicle retail | | 1,884.8 | | | 927.9 | | | 956.9 | | | 103.1 | | | 813.3 | | | 114.6 | | | 14.1 | |
| Used vehicle wholesale | | 270.6 | | | 78.2 | | | 192.4 | | | 246.0 | | | 75.3 | | | 2.9 | | | 3.9 | |
| Finance and insurance | | 205.7 | | | 94.7 | | | 111.0 | | | 117.2 | | | 77.1 | | | 17.6 | | | 22.8 | |
| Service, body and parts | | 614.4 | | | 358.7 | | | 255.7 | | | 71.3 | | | 335.3 | | | 23.4 | | | 7.0 | |
| Fleet and other | | 101.1 | | | 33.1 | | | 68.0 | | | 205.4 | | | 102.1 | | | (69.0) | | | (67.6) | |
| | $ | 6,114.8 | | | $ | 3,152.0 | | | $ | 2,962.8 | | | 94.0 | | | $ | 2,991.9 | | | $ | 160.1 | | | 5.4 | |
| Segment income | | $ | 384.6 | | | $ | 98.5 | | | $ | 286.1 | | | 290.5 | | | $ | 57.1 | | | $ | 41.4 | | | 72.5 | |
| New vehicle retail unit sales | | 50,715 | | | 30,087 | | | 20,628 | | | 68.6 | % | | 29,238 | | | 849 | | | 2.9 | % |
The increase in our Luxury segment revenue in 2021 compared to 2020 resulted from increases in all business lines. New vehicle unit sales increased 68.6%, driven by our acquisition activity and an 8.4% increase on a same store basis. Our Luxury segment revenues also benefited from a 72.0% increase in used vehicle unit sales, a 27.5% increase in finance and insurance revenues per retail unit to $1,964 per unit and growth in service, body and parts during 2021 compared to 2020.
Our Luxury segment revenue increased in 2020 compared to 2019 across all major business lines. New vehicle unit sales increased 2.9% over the prior year. Our Luxury segment revenues also benefited from a 9.3% increase in used vehicle unit sales, a 15.9% increase in finance and insurance revenues per retail unit to $1,541 per unit and growth in service, body and parts during 2020 compared to 2019.
Our Luxury segment income increased 290.5% in 2021 compared to 2020. This increase was due to gross profit growth of 115.1% and decreased floor plan interest expense of 2.2%, offset by an increase in SG&A of 74.9%. As a percentage of gross profit, SG&A decreased 1410 basis points in 2021 compared to 2020.
Our Luxury segment income increased 72.5% in 2020 compared to 2019. This increase was due to gross profit growth of 14.2% and decreased floor plan interest expense of 26.6%, offset by an increase in SG&A of 8.0%. As a percentage of gross profit, SG&A decreased 430 basis points in 2020 compared to 2019.
Corporate and Other
Revenue attributable to Corporate and other includes the results of operations of our stand-alone collision centers, offset by certain unallocated reserve and elimination adjustments.
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Revenue, net | | $ | 50.8 | | | $ | 20.5 | | | $ | 30.3 | | | NM | | $ | 30.6 | | | $ | (10.1) | | | NM |
| Segment income | | 108.5 | | | 176.7 | | | (68.2) | | | (38.6) | % | | 170.2 | | | 6.5 | | | 3.8 | % |
NM - not meaningful
The increase in Corporate and other revenues in 2021 compared to 2020 and decrease in 2020 compared to 2019 was primarily affected by our reserve for revenue reversals associated with unwound vehicle sales.
Internal corporate expense allocations are also used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.
The decrease in Corporate and other income in 2021 compared to 2020 was primarily due to unrealized investment losses. The increase in Corporate and other segment income in 2020 compared to 2019 was primarily due increased gains on the divestiture of stores.
See Note 17 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Form 10-K for additional information.
Asset Impairments
Asset impairments recorded as a component of operations consist of the following:
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| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Franchise value | | $ | 1.9 | | | $ | 4.4 | | | $ | 0.4 | |
| Goodwill | | — | | | 3.5 | | | 1.7 | |
| Long-lived assets | | — | | | — | | | 0.5 | |
| Total asset impairments | | $ | 1.9 | | | $ | 7.9 | | | $ | 2.6 | |
Goodwill and franchise value for our reporting units are tested for impairment annually as of October 1 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We continueelected to growperform qualitative franchise value and goodwill impairment tests as of October 1 each year. These non-cash impairment charges are included in the “Corporate and Other” category of our segment information.
During the third quarter of 2021, there was an indication of a triggering event at a certain reporting unit. We tested the goodwill and franchise value for this business through increased marketing efforts, competitive pricing on routine maintenance itemslocation. As a result, we identified it was more likely than not the fair values were less than the carrying amounts, and diverse commodity product offerings. we recorded a non-cash impairment charge of $1.9 million, which was equal to the difference between the fair value and the carrying value for franchise value. This location was subsequently sold in the fourth quarter of 2021.
In 2017,the second quarter of 2020, there were indications of a triggering event at certain reporting units. We tested the franchise value and goodwill for these locations. As a result, we continuedidentified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded non-cash impairment charges of $4.4 million and $3.5 million, which was equal to experience organic growththe difference between the fair value and profitability through increasing market sharethe carrying value for franchise value and maintaininggoodwill, respectively. One of these locations was subsequently sold in the fourth quarter of 2020, with the remainder sold in 2021.
In the first quarter of 2019, we recorded an asset impairment of $0.5 million associated with certain real properties. The long-lived assets were tested for recoverability and were determined to have a lean cost structure, while adding significant revenue to our base through acquisitions.carrying value exceeding their fair value. The impaired long-lived asset was subsequently sold in the second quarter of 2019.
As sales volumea result of our 2019 annual impairment testing, we identified certain reporting units where it was more likely than not the fair value was less than the carrying amount, and recorded non-cash impairment charges of $0.4 million and $1.7 million for franchise value and goodwill, respectively. These locations were subsequently sold in 2020.
See Note 1, Note 4, Note 5, and Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.
Selling, General and Administrative (SG&A)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Personnel | | $ | 1,747.7 | | | $ | 983.7 | | | $ | 764.0 | | | 77.7 | % | | $ | 911.2 | | | $ | 72.5 | | | 8.0 | % |
| Advertising | | 162.2 | | | 97.4 | | | 64.8 | | | 66.5 | | | 111.9 | | | (14.5) | | | (13.0) | |
| Rent | | 54.3 | | | 41.4 | | | 12.9 | | | 31.2 | | | 41.3 | | | 0.1 | | | 0.2 | |
| Facility costs | | 117.0 | | | 81.1 | | | 35.9 | | | 44.3 | | | 77.4 | | | 3.7 | | | 4.8 | |
| Gain on sale of assets | | (2.3) | | | (18.2) | | | 15.9 | | | (87.4) | | | (9.7) | | | (8.5) | | | 87.6 | |
| Other | | 383.0 | | | 242.9 | | | 140.1 | | | 57.7 | | | 241.7 | | | 1.2 | | | 0.5 | |
| Total SG&A | | $ | 2,461.9 | | | $ | 1,428.3 | | | $ | 1,033.6 | | | 72.4 | % | | $ | 1,373.8 | | | $ | 54.5 | | | 4.0 | % |
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| As a % of gross profit | | 2021 | | 2020 | | Change | | 2019 | | Change |
| Personnel | | 41.0 | % | | 44.2 | % | | (320) | bps | | 46.6 | % | | (240) | bps |
| Advertising | | 3.8 | | | 4.4 | | | (60) | | | 5.7 | | | (130) | |
| Rent | | 1.3 | | | 1.9 | | | (60) | | | 2.1 | | | (20) | |
| Facility costs | | 2.7 | | | 3.6 | | | (90) | | | 4.0 | | | (40) | |
| Gain on sale of assets | | (0.1) | | | (0.8) | | | 70 | | | (0.5) | | | (30) | |
| Other | | 9.1 | | | 10.9 | | | (180) | | | 12.4 | | | (150) | |
| Total SG&A | | 57.8 | % | | 64.2 | % | | (640) | bps | | 70.3 | % | | (610) | bps |
SG&A increased 72.4%, or $1.0 billion in 2021 compared to 2020. Overall increases in SG&A were primarily due to increased personnel costs resulting from our growth through acquisitions. Other expenses in 2021 included acquisition expenses of $20.2 million, compared to $3.0 million in 2020 and we$5.8 million of storm related insurance charges, compared to $6.1 million in 2020. Gain on the sale of stores was $16.6 million in 2020 with no net gain leverageor loss recognized in our cost structure, we anticipate targeting2021.
On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 42.5% in 2021 compared to 64.6% in 2020, which included decreases across all categories.
SG&A increased 4.0%, or $54.5 million, in 2020 compared to 2019. Overall increases in SG&A were primarily due to increased personnel costs which resulted from our growth through acquisitions, offset by decreases in advertising spend and gains on sales of assets. Other expenses in 2020 included acquisition expenses of $3.0 million, compared to $2.5 million in 2019 and $6.1 million of storm related insurance charges, compared to $9.5 million in 2019. Gains on the sale of stores were $16.6 million and $9.7 million in 2020 and 2019, respectively.
On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 64.5% in 2020 compared to 70.2% in 2019, which included decreases seen across all categories.
SG&A adjusted for non-core charges was as follows:
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Personnel | | $ | 1,747.7 | | | $ | 983.7 | | | $ | 764.0 | | | 77.7 | % | | $ | 911.2 | | | $ | 72.5 | | | 8.0 | % |
| Advertising | | 162.2 | | | 97.4 | | | 64.8 | | | 66.5 | | | 111.9 | | | (14.5) | | | (13.0) | |
| Rent | | 54.3 | | | 41.4 | | | 12.9 | | | 31.2 | | | 41.3 | | | 0.1 | | | 0.2 | |
| Facility costs | | 117.0 | | | 81.1 | | | 35.9 | | | 44.3 | | | 77.4 | | | 3.7 | | | 4.8 | |
| Adjusted loss (gain) on sale of assets | | (2.3) | | | (1.6) | | | (0.7) | | | 43.8 | | 0.0 | | | (1.6) | | | NM |
| Adjusted other | | 357.0 | | | 233.8 | | | 123.2 | | | 52.7 | | | 229.7 | | | 4.1 | | | 1.8 | |
| Total adjusted SG&A | | $ | 2,435.9 | | | $ | 1,435.8 | | | $ | 1,000.1 | | | 69.7 | % | | $ | 1,371.5 | | | $ | 64.3 | | | 4.7 | % |
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| As a % of gross profit | | 2021 | | 2020 | | Change | | 2019 | | Change |
| Personnel | | 41.0 | % | | 44.2 | % | | (320) | bps | | 46.6 | % | | (240) | bps |
| Advertising | | 3.8 | | | 4.4 | | | (60) | | | 5.7 | | | (130) | |
| Rent | | 1.3 | | | 1.9 | | | (60) | | | 2.1 | | | (20) | |
| Facility costs | | 2.7 | | | 3.6 | | | (90) | | | 4.0 | | | (40) | |
| Adjusted loss (gain) on sale of assets | | (0.1) | | | (0.1) | | | — | | | 0.0 | | | (10) | |
| Adjusted other | | 8.5 | | | 10.5 | | | (200) | | | 11.8 | | | (130) | |
| Total adjusted SG&A | | 57.2 | % | | 64.5 | % | | (730) | bps | | 70.2 | % | | (570) | bps |
See “Non-GAAP Reconciliations” for more details.
Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization related to tradenames.
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Depreciation and amortization | | $ | 127.3 | | | $ | 92.3 | | | $ | 35.0 | | | 37.9 | % | | $ | 82.4 | | | $ | 9.9 | | | 12.0 | % |
Acquisition activity contributed to the increases in depreciation and amortization in 2021 compared to 2020 and in 2020 compared to 2019. We acquired approximately $559.8 million and $241 million of depreciable property as part of our 2021 and 2020 acquisitions, respectively. Capital expenditures totaled $260.4 million and $167.8 million, respectively, in 2021 and 2020. These investments increase the amount of depreciable assets. See the discussion under “Liquidity and Capital Resources” for additional information.
Operating Income
Operating income as a percentage of revenue, or operating margin, was as follows:
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| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Operating margin | | 7.3 | % | | 5.3 | % | | 3.9 | % |
| Operating margin adjusted for non-core charges(1) | | 7.4 | | | 5.3 | | | 3.9 | |
(1)See “Non-GAAP Reconciliations” for additional information.
In 2021, our operating margin increased 200 basis points compared to 2020. In 2021, the increase in our operating margin was driven by a decrease in SG&A as a percentage of gross profit and increased total gross margin. Adjusting for non-core charges, including storm related insurance charges and acquisition expenses, our operating margin increased 210 basis points in 2021 compared to 2020.
In 2020, our operating margin increased 140 basis points compared to 2019. In 2020, the increase in our operating margin was driven by a decrease in SG&A as a percentage of gross profit and increased total gross margin.
Floor Plan Interest Expense and Floor Plan Assistance
Floor plan interest expense decreased $12.1 million in 2021 compared to 2020, primarily due to new vehicle inventory shortages and increasing consumer demand. Floor plan interest expense decreased 52.2% for pre-existing locations, offset by a 7.6% increase related to acquisition volume and a 9.4% increase related to increased interest rates.
Floor plan interest expense decreased $38.4 million in 2020 compared to 2019, primarily due to our ability to pay off our higher interest rate floor plan notes payable with the surplus liquidity generated from our senior note and equity offerings in 2020.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.
The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned:
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Floor plan interest expense (new vehicles) | | $ | 22.3 | | | $ | 34.4 | | | $ | (12.1) | | | (35.2) | % | | $ | 72.8 | | | $ | (38.4) | | | (52.7) | % |
| Floor plan assistance (included as an offset to cost of sales) | | (120.1) | | | (72.8) | | | (47.3) | | | 65.0 | | | (69.0) | | | (3.8) | | | 5.5 | |
| Net new vehicle carrying costs (benefit) | | $ | (97.8) | | | $ | (38.4) | | | $ | (59.4) | | | 154.7 | % | | $ | 3.8 | | | $ | (42.2) | | | NM |
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used and service loaner vehicle inventory financing commitments, our revolving lines of credit, and issued senior notes.
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Mortgage interest | | $ | 24.9 | | | $ | 26.2 | | | $ | (1.3) | | | (5.0) | % | | $ | 27.5 | | | $ | (1.3) | | | (4.7) | % |
| Other interest | | 85.3 | | | 48.5 | | | 36.8 | | | 75.9 | | | 35.4 | | | 13.1 | | | 37.0 | |
| Capitalized interest | | (2.0) | | | (1.6) | | | (0.4) | | | 25.0 | | | (2.3) | | | 0.7 | | | (30.4) | |
| Total other interest expense | | $ | 108.2 | | | $ | 73.1 | | | $ | 35.1 | | | 48.0 | % | | $ | 60.6 | | | $ | 12.5 | | | 20.6 | % |
The increase in other interest expense in 2021 compared to 2020 was due to the issuances of $800 million in aggregate principal amount of 3.875% senior notes due 2029 in May 2021 and $550 million in aggregate principal amount of 4.375% senior notes due 2031 in October 2020. These increases were offset by the payoff of our $300 million in aggregate principal amount of 5.250% senior notes in August 2021. See also Note 6 of Notes to Consolidated Financial Statements for additional information.
The increase in other interest expense in 2020 compared to 2019 was due to the issuances of $400 million in aggregate principal amount of 4.625% senior notes due 2027 in December 2019 and $550 million in aggregate principal amount of 4.375% senior notes due 2031 in October 2020, offset by decreases in our average borrowings on our credit facilities.
Other Income (Expense), Net
Other income (expense), net primarily includes other income associated interest income and other non-recurring transactions.
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| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % | | 2019 | | Change | | % |
| Other income (expense), net | | $ | (52.6) | | | $ | 58.9 | | | $ | (111.5) | | | NM | | $ | 13.8 | | | $ | 45.1 | | | NM |
The decrease in other income (expense), net in 2021 compared to 2020 was primarily due to a $66.4 million unrealized loss related to our investment in Shift Technologies, Inc. compared to a $43.8 million unrealized investment gain in 2020 for the same investment. We also recognized a $10.3 million loss in 2021 on the early redemption of our $300 million principal amount 5.250% senior notes originally due 2025. The increase in other income (expense), net in 2020 compared to 2019 was also due to the same unrealized investment gain in 2020 related to our investment in Shift Technologies, Inc.
Income Tax Provision
Our effective income tax rate was as follows:
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| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Effective income tax rate | | 28.4 | % | | 27.5 | % | | 27.7 | % |
| Effective income tax rate excluding non-core items(1) | | 26.8 | | | 27.6 | | | 27.6 | |
(1)See “Non-GAAP Reconciliations” for more details
Our effective income tax rate was 28.4% for 2021 compared to 27.5% for 2020. Our 2021 effective income tax rate was negatively affected by a valuation allowance established for certain deferred tax assets not expected to be realized. The increase in tax rate was offset by stock awards vesting in the upper 60% range. This metriccurrent period and a reduction in the current and deferred state tax rate due to legislative updates and changing state mix.
Excluding the valuation allowance established during 2021, our effective income tax rate excluding non-core items for 2021 would have been 26.8%, a decrease of 80 basis points compared to the rate for 2020.
Our effective income tax rate in 2020 was positively affected by an increase in pre-tax income, excess tax benefits on stock awards vesting in the current period, and a reduction in non-deductible expenses. Our current state effective tax rate was negatively impacted by the enactment of the Oregon Corporate Activity Tax beginning January 1, 2020, which was partially offset by favorable changes in our state rate due to acquisitions.
Non-GAAP Reconciliations
Non-GAAP measures do not have definitions under GAAP and may be impacteddefined differently by and not comparable to similarly titled measures used by other companies. As a result, we review any non-GAAP financial measures in connection with a review of the most directly comparable measures calculated in accordance with GAAP. We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures. We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations because they exclude items not related to our ongoing core business operations and other non-cash items, and improves the period-to-period comparability of our results from the core business operations. We use these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facility and in communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.
The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations (in millions, except per share amounts):
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| | Year Ended December 31, 2021 |
| (In millions) | | As reported | | | | Asset impairment | | Investment loss | | Insurance reserves | | Acquisition expenses | | Loss on redemption of senior notes | | | | Adjusted |
| Asset impairment | | $ | 1.9 | | | | | $ | (1.9) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | |
| Selling, general and administrative | | 2,461.9 | | | | | — | | | — | | | (5.8) | | | (20.2) | | | — | | | | | 2,435.9 | |
| Operating income | | 1,667.9 | | | | | 1.9 | | | — | | | 5.8 | | | 20.2 | | | — | | | | | 1,695.8 | |
| Other income (expense), net | | (52.6) | | | | | — | | | 66.4 | | | — | | | — | | | 10.3 | | | | | 24.1 | |
| | | | | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 1,484.8 | | | | | $ | 1.9 | | | $ | 66.4 | | | $ | 5.8 | | | $ | 20.2 | | | $ | 10.3 | | | | | $ | 1,589.4 | |
| Income tax (provision) benefit | | (422.1) | | | | | (0.5) | | | 6.6 | | | (1.6) | | | (5.1) | | | (2.7) | | | | | (425.4) | |
| Net income | | 1,062.7 | | | | | 1.4 | | | 73.0 | | | 4.2 | | | 15.1 | | | 7.6 | | | | | 1,164.0 | |
| Net income attributable to non-controlling interest | | (1.7) | | | | | — | | | — | | | — | | | — | | | — | | | | | (1.7) | |
| Net income attributable to redeemable non-controlling interest | | (0.9) | | | | | — | | | — | | | — | | | — | | | — | | | | | (0.9) | |
| Net income attributable to Lithia Motors, Inc. | | $ | 1,060.1 | | | | | $ | 1.4 | | | $ | 73.0 | | | $ | 4.2 | | | $ | 15.1 | | | $ | 7.6 | | | | | $ | 1,161.4 | |
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| Diluted earnings per share attributable to Lithia Motors, Inc. | | $ | 36.54 | | | | | $ | 0.05 | | | $ | 2.52 | | | $ | 0.14 | | | $ | 0.52 | | | $ | 0.26 | | | | | $ | 40.03 | |
| Diluted share count | | 29.0 | | | | | | | | | | | | | | | | | |
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| | Year Ended December 31, 2020 |
| (In millions) | | As
reported | | Net disposal gain on sale of stores | | Asset impairment | | Investment gains | | Insurance reserves | | Acquisition expenses | | | | Tax attribute | | Adjusted |
| Asset impairment | | $ | 7.9 | | | $ | — | | | $ | (7.9) | | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | |
| Selling, general and administrative | | 1,428.3 | | | 16.6 | | | — | | | — | | | (6.1) | | | (3.0) | | | | | — | | | 1,435.8 | |
| Operating income (loss) | | 697.1 | | | (16.6) | | | 7.9 | | | — | | | 6.1 | | | 3.0 | | | | | — | | | 697.5 | |
| Other income (expense), net | | 58.9 | | | — | | | — | | | (43.8) | | | — | | | — | | | | | — | | | 15.1 | |
| | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | 648.5 | | | $ | (16.6) | | | $ | 7.9 | | | $ | (43.8) | | | $ | 6.1 | | | $ | 3.0 | | | | | $ | — | | | $ | 605.1 | |
| Income tax (provision) benefit | | (178.2) | | | 4.6 | | | (2.3) | | | 12.1 | | | (1.6) | | | (0.8) | | | | | (0.8) | | | (167.0) | |
| Net income (loss) | | $ | 470.3 | | | $ | (12.0) | | | $ | 5.6 | | | $ | (31.7) | | | $ | 4.5 | | | $ | 2.2 | | | | | $ | (0.8) | | | $ | 438.1 | |
| | | | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per share attributable to Lithia Motors, Inc. | | $ | 19.53 | | | $ | (0.50) | | | $ | 0.23 | | | $ | (1.32) | | | $ | 0.19 | | | $ | 0.09 | | | | | $ | (0.03) | | | $ | 18.19 | |
| Diluted share count | | 24.1 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| (In millions) | | As
reported | | Net disposal gain on sale of stores | | Asset impairment | | | | Insurance reserves | | Acquisition expenses | | | | | | Adjusted |
| Asset impairment | | $ | 2.6 | | | $ | — | | | $ | (2.6) | | | | | $ | — | | | $ | — | | | | | | | $ | — | |
| Selling, general and administrative | | 1,373.8 | | | 9.7 | | | — | | | | | (9.5) | | | (2.5) | | | | | | | 1,371.5 | |
| Operating income (loss) | | 495.0 | | | (9.7) | | | 2.6 | | | | | 9.5 | | | 2.5 | | | | | | | 499.9 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Income (loss) before income taxes | | $ | 375.4 | | | $ | (9.7) | | | $ | 2.6 | | | | | $ | 9.5 | | | $ | 2.5 | | | | | | | $ | 380.3 | |
| Income tax (provision) benefit | | (103.9) | | | 2.8 | | | (0.7) | | | | | (2.6) | | | (0.7) | | | | | | | (105.1) | |
| Net income (loss) | | $ | 271.5 | | | $ | (6.9) | | | $ | 1.9 | | | | | $ | 6.9 | | | $ | 1.8 | | | | | | | $ | 275.2 | |
| | | | | | | | | | | | | | | | | | |
| Diluted earnings per share attributable to Lithia Motors, Inc. | | $ | 11.60 | | | $ | (0.30) | | | $ | 0.08 | | | | | $ | 0.30 | | | $ | 0.08 | | | | | | | $ | 11.76 | |
| Diluted share count | | 23.4 | | | | | | | | | | | | | | | | | |
Liquidity and Capital Resources
We manage our liquidity and capital resources in the context of our overall business strategy, continually forecasting and managing our cash, working capital balances and capital structure to meet the short-term and long-term obligations of our business while maintaining liquidity and financial flexibility. Our free cash flow deployment strategy targets an allocation of 65% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification and 10% in shareholder return in the form of dividends and share repurchases.
Cash flows from operations and borrowings under our credit facilities are our main sources for liquidity. In addition to the above sources of liquidity, potential sources to fund our business strategy include financing of real estate and proceeds from debt or equity offerings. We evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.
Available Sources
Below is a summary of our immediately available funds:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | | |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | % |
| Cash, restricted cash, and cash equivalents | | $ | 174.8 | | | $ | 162.4 | | | $ | 12.4 | | | 7.6 | % |
| | | | | | | | |
| | | | | | | | |
| Unfinanced new vehicles | | — | | | 113.4 | | | (113.4) | | | NM |
| Available credit on the credit facilities | | 1,344.8 | | | 1,237.1 | | | 107.7 | | | 8.7 | % |
| Total current available funds | | $ | 1,519.6 | | | $ | 1,399.5 | | | $ | 120.1 | | | 8.6 | % |
| | | | | | | | |
| | | | | | | | |
NM - Not meaningful
Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table summarizes our cash flows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 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) | |
Operating Activities
Cash provided by operating activities increased $1.3 billion in 2021 compared to 2020, primarily as a result of improved profitability, lower inventory turns compared to the prior year and growth in our business through acquisitions.
Borrowings from and repayments to our syndicated credit facility related to our new vehicle inventory floor plan financing are presented as financing activities. Additionally, the cash paid for inventory purchased as part of an
acquisition is presented as an investing activity, while the subsequent flooring of the inventory is included in floor plan notes payable cash activities.
To better understand the impact of these items, adjusted net cash provided by operating activities is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | 2019 | | Change |
| Net cash provided by operating activities – as reported | | $ | 1,797.2 | | | 544.6 | | | $ | 1,252.6 | | | $ | 524.5 | | | $ | 20.1 | |
| Less: Net repayments on floor plan notes payable: non-trade | | (685.3) | | | (20.6) | | | (664.7) | | | (54.6) | | | 34.0 | |
| Add: Temporary pay down of outstanding borrowings on floor plan notes payable: non-trade | | — | | | 113.4 | | | (113.4) | | | — | | | 113.4 | |
| Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | (355.5) | | | (255.0) | | | (100.5) | | | (80.0) | | | (175.0) | |
| Net cash provided by operating activities – adjusted | | $ | 756.4 | | | $ | 382.4 | | | $ | 374.0 | | | $ | 389.9 | | | $ | (7.5) | |
Inventories are the most significant component of our cash flow from operations. As of December 31, 2021, our new vehicle days’ supply was 24 days, or 26 days lower than our days’ supply as of December 31, 2020. Our days’ supply of used vehicles was 61 days, which was four days lower than our days’ supply as of December 31, 2020. We calculate days’ supply of inventory based on current inventory levels, including in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
Investing Activities
Net cash used in investing activities totaled $2.9 billion and $1.6 billion, respectively, for 2021 and 2020. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.
Below are highlights of significant activity related to our cash flows from investing activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | 2019 | | Change |
| Capital expenditures | | $ | (260.4) | | | $ | (167.8) | | | $ | (92.6) | | | $ | (124.9) | | | $ | (42.9) | |
| Cash paid for acquisitions, net of cash acquired | | (2,699.3) | | | (1,503.3) | | | (1,196.0) | | | (366.6) | | | (1,136.7) | |
| Cash paid for other investments | | (10.2) | | | (11.2) | | | 1.0 | | | (7.2) | | | (4.0) | |
| Proceeds from sales of stores | | 76.3 | | | 57.5 | | | 18.8 | | | 46.7 | | | 10.8 | |
Capital Expenditures
Below is a summary of our capital expenditure activities:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Post-acquisition capital improvements | | $ | 37.2 | | | $ | 32.5 | | | $ | 33.9 | |
| Facilities for open points | | 14.1 | | | — | | | 5.4 | |
| Purchase of facilities for existing operations | | 21.9 | | | 29.6 | | | 3.1 | |
| Existing facility improvements | | 81.6 | | | 48.7 | | | 50.2 | |
| Maintenance | | 105.6 | | | 57.0 | | | 32.3 | |
| Total capital expenditures | | $ | 260.4 | | | $ | 167.8 | | | $ | 124.9 | |
Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet manufacturer image standards and requirements. We expect that certain facility upgrades and remodels will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.
We expect to use a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer image standards and requirements.
If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completion of the projects, we believe we would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.
Acquisitions
Growth through acquisitions is a key component of our long-term strategy that enables us to increase our network of locations, support maintaining a diverse franchise and geographic mix and improve our ability to serve customers through wider selection and improved proximity. Our disciplined approach focuses on acquiring new vehicle franchises that are accretive and cash flow positive at reasonable valuations.
We are able to subsequently floor new vehicle inventory acquired stores, as theypart of an acquisition; however, the cash generated by these transactions are recorded as borrowings on floor plan notes payable, non-trade. Adjusted net cash paid for acquisitions, as well as certain other acquisition-related information is presented below:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Number of stores acquired | | 77 | | | 30 | | | 9 | |
| Number of stores opened | | 1 | | | — | | | — | |
| Number of franchises added | | — | | | — | | | 1 | |
| | | | | | |
| Cash paid for acquisitions, net of cash acquired | | $ | (2,699.3) | | | $ | (1,503.3) | | | $ | (366.6) | |
| Add: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | 355.5 | | | 255.0 | | | 80.0 | |
| | | | | | |
| Cash paid for acquisitions, net of cash acquired – adjusted | | $ | (2,343.8) | | | $ | (1,248.3) | | | $ | (286.6) | |
We evaluate potential capital investments primarily based on targeted rates of return on assets and return on our net equity investment.
Financing Activities
Net cash provided by financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Cash provided by (used in) financing activities, as reported | | $ | 1,106.7 | | | 1,139.8 | | | $ | (9.1) | |
| Add: Net repayments on floor plan notes payable: non-trade | | 685.3 | | | 20.6 | | | 54.6 | |
| | | | | | |
| Cash provided by financing activities, as adjusted | | $ | 1,792.0 | | | $ | 1,160.4 | | | $ | 45.5 | |
Below are highlights of significant activity related to our cash flows from financing activities, excluding net (repayments) borrowings on floor plan notes payable: non-trade, which are discussed above:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | | | | 2021 vs. 2020 | | | | 2020 vs. 2019 |
| (Dollars in millions) | | 2021 | | 2020 | | Change | | 2019 | | Change |
| Net borrowings (repayments) on lines of credit | | $ | 325.4 | | | $ | (110.0) | | | $ | 435.4 | | | $ | (314.6) | | | $ | 204.6 | |
| Principal payments on long-term debt and finance lease liabilities, other | | (486.5) | | | (6.3) | | | (480.2) | | | (11.0) | | | 4.7 | |
| Proceeds from the issuance of long-term debt | | 1,161.8 | | | 606.5 | | | 555.3 | | | 420.3 | | | 186.2 | |
| Proceeds from the issuance of common stock | | 1,136.2 | | | 790.4 | | | 345.8 | | | 11.0 | | | 779.4 | |
| Payment of debt issuance costs | | (14.7) | | | (10.8) | | | (3.9) | | | (5.8) | | | (5.0) | |
| Repurchases of common stock | | (230.7) | | | (50.6) | | | (180.1) | | | (3.2) | | | (47.4) | |
| Dividends paid | | (38.8) | | | (29.1) | | | (9.7) | | | (27.6) | | | (1.5) | |
| | | | | | | | | | |
Borrowing and Repayment Activity
During 2021, we raised net proceeds of $1.2 billion through the issuance of debt, including the issuance of $800.0 million in aggregate principal amount of 3.875% senior notes due 2029 and $344.4 million through non-recourse notes payable secured by a portion of our Driveway Finance auto loan receivable portfolio. Using these proceeds we repaid $325.4 million, net, on our lines of credit and redeemed our $300 million in aggregate principal amount of 5.250% senior notes at a redemption price equal to 102.625% of the principal amount of the notes plus accrued and unpaid interest thereon. These funds were primarily used for acquisitions, share repurchases and capital expenditures.
Our debt to total capital ratio, excluding floor plan notes payable, was 42.4% at December 31, 2021 compared to 44.5% at December 31, 2020.
Equity Transactions
In May 2021, we completed the public offering of 3,571,428 shares of our Common stock, no par value per share, which included the exercise in full by the underwriters of their option to purchase up to 465,838 additional shares of our Common stock, at the public offering price of $322.00 per share. We received $1.11 billion from the offering, net of the underwriting discount and before deducting the offering expenses of $0.6 million.
In November 2021, our Board of Directors authorized the repurchase of up to $750 million of our Common stock. This new authorization is in addition to the amount previously authorized by the Board for repurchase. As of December 31, 2021, we had $722.8 million available for repurchase under the program. The authority to repurchase does not have an expiration date.
During 2021, we paid dividends on our Common Stock as follows:
| | | | | | | | | | | | | | |
| Dividend paid: | | Dividend amount per share | | Total amount of dividend (in millions) |
| March 2021 | | $ | 0.31 | | | $ | 8.3 | |
| May 2021 | | 0.35 | | | 9.3 | |
| August 2021 | | 0.35 | | | 10.6 | |
| November 2021 | | 0.35 | | | 10.6 | |
We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.
Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt:
| | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Outstanding as of December 31, 2021 | | Remaining Available as of December 31, 2021 | |
| Floor plan notes payable: non-trade | | $ | 835.9 | | | $ | — | | (1) |
| Floor plan notes payable | | 354.2 | | | — | | |
| Used and service loaner vehicle inventory financing commitments | | 500.0 | | | 267.4 | | (2) |
| Revolving lines of credit | | 219.9 | | | 1,077.4 | | (2),(3) |
| Real estate mortgages | | 592.9 | | | — | | |
| Finance lease obligations | | 53.6 | | | — | | |
| Non-recourse notes payable | | 317.6 | | | — | | |
| | | | | |
| 4.625% Senior notes due 2027 | | 400.0 | | | — | | |
| 4.375% Senior notes due 2031 | | 550.0 | | | — | | |
| 3.875% Senior notes due 2029 | | 800.0 | | | — | | |
| Other debt | | 1.9 | | | — | | |
| Unamortized debt issuance costs | | (26.5) | | | — | | (4) |
| Total debt | | $ | 4,599.5 | | | $ | 1,344.8 | | |
(1)As of December 31, 2021, we had a $2.2 billion new vehicle floor plan commitment as part of our credit facility.
(2)The amounts available on the credit facilities are limited based on borrowing base calculations and fluctuates monthly.
(3)Available credit is based on the borrowing base amount effective as of November 30, 2021. This amount is reduced by $33.5 million for outstanding letters of credit.
(4)Debt issuance costs are presented on the balance sheet as a reduction from the carrying amount of the related debt liability. See Note 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Credit Facility
On April 29, 2021, we amended our existing syndicated credit facility (credit facility), comprised of 20 financial institutions, including eight manufacturer-affiliated finance companies, extending the maturity date to April 2026.
This credit facility provides for a total financing commitment of $3.75 billion, which may be further expanded, subject to lender approval and the satisfaction of other conditions, up to a total of $4.25 billion. The initial allocation of the financing commitment is for up to $750 million in used vehicle inventory floorplan financing, up to $750 million in revolving financing for general corporate purposes, including acquisitions and working capital, up to $2.15 billion in new vehicle inventory floorplan financing, and up to $100 million in service loaner vehicle floorplan financing. We have the option to reallocate the commitments under this credit facility, provided that each of the used vehicle floor plan commitment and the aggregate revolving loan commitment may not be fully integratedmore than the 20% of the amount of the aggregate commitment, and the aggregate service loaner vehicle floorplan commitment may not be more than the 3% of the amount of the aggregate commitment. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
Our obligations under our credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts receivable (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
The interest rate on the credit facility varies based on the type of debt, with the rate of one-month LIBOR plus 1.10% for new vehicle floor plan financing, one-month LIBOR plus 1.40% for used vehicle floor plan financing, 1.20% for service loaner floor plan financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.00% to 2.00% depending on our leverage ratio. The annual interest rates associated with our floor plan commitments are as follows:
| | | | | |
| Commitment | Annual Interest Rate at December 31, 2021 |
| New vehicle floor plan | 1.20% |
| Used vehicle floor plan | 1.50% |
| Service loaner floor plan | 1.30% |
| Revolving line of credit | 1.10% |
Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Under our credit facility, we are required to maintain the ratios detailed in the following table:
| | | | | | | | | | | | | | |
Debt Covenant Ratio | |
Requirement | | As of December 31, 2021 |
| Current ratio | | Not less than 1.10 to 1 | | 1.82 to 1 |
| Fixed charge coverage ratio | | Not less than 1.20 to 1 | | 5.53 to 1 |
| Leverage ratio | | Not more than 5.75 to 1 | | 1.48 to 1 |
As of December 31, 2021, we were in compliance with all covenants. We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.
If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which are the termination of the agreement, acceleration of the amounts owed and the seizure and sale of our assets comprising the collateral for the loans. A breach would also trigger cross-defaults under other debt agreements.
Although we refer to the lenders’ obligations to make loans as “commitments,” each lender’s obligations to make any loan or other credit accommodations under the credit facility is subject to the satisfaction of the conditions precedent specified in the credit agreement including, for example, that our representations and warranties in the agreement are true and correct in all material respects as of the date of each credit extension. If we are unable to satisfy the applicable conditions precedent, we may not be able to request new loans or other credit accommodations under our credit facility.
Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for certain new vehicles and vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. As of December 31, 2021, $354.2 million was outstanding on these agreements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.
Other Lines of Credit
Our other lines of credit include commitments of up to $20 million, secured by certain assets from select Chrysler locations, a commitment of $60 million with Ford Motor Credit Company, secured by certain assets from all Ford locations, and $39 million secured by assets at our Canadian stores. These other lines of credit mature in 2022 and have interest rates up to 5.65%. As of December 31, 2021, no amounts were outstanding on these other lines of credit.
On July 14, 2020, we entered into a five-year real estate backed facility with eight financial institutions, including two manufacturer affiliated finance companies, maturing in July 2025. The real-estate backed credit facility currently provides a total financing commitment of up to $238.8 million in working capital financing for general corporate purposes, including acquisitions and working capital, collateralized by real estate and certain other assets owned by us. The interest rate on this credit facility uses one-month LIBOR plus a margin ranging from 2.00%-2.50% based on our cost structure.leverage ratio, or a base rate of 0.75% plus a margin. The facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties by us. Financial covenants include requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, consistent with those under our existing syndicated credit facility with U.S. Bank National Association as administrative agent. As of December 31, 2021, no amounts were outstanding on the real estate backed facility.
On July 31, 2020, we entered into a securitization facility which provides initial commitments for borrowings of up to $300 million and matures in July 2022. As of December 31, 2021, we had $90 million drawn on the securitization facility, which is included as part of “Revolving lines of credit” in the “Summary of Outstanding Balances on Credit Facilities and Long-Term Debt” table above.
On April 12, 2021, we entered into a credit agreement with Ally Bank (Ally Capital in Hawaii, Mississippi, Montana and New Jersey), as lender. The credit agreement matures in April 2023 and provides for a revolving line of credit facility (Ally credit facility) of up to $300.0 million and is secured by real estate owned by us. The Ally credit facility will bear interest at a rate per annum equal to the greater of 3.00% or the prime rate designated by Ally Bank, minus 25 basis points. The Ally credit facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties. Financial covenants, including the requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, are the same as the requirements under our existing syndicated credit facility with U.S. Bank National Association. The covenants restrict us from disposing of assets and granting additional security interests. As of December 31, 2021, no amounts were outstanding on the Ally credit facility.
On August 30, 2021, we entered into a credit agreement with The Bank of Nova Scotia. The credit agreement makes available three primary lines of credit including a working capital revolving credit facility of up to $50 million CAD, up to $300 million CAD floor plan financing for new and used vehicles; and $350 million CAD to provide wholesale lease financing. The credit facilities accrue interest at rates equal to the Lender’s prime lending rate or the Canadian Dollar Offered Rate plus, in each case, a spread, with the spreads ranging from 0.25% per annum to 1.50% per annum. The credit agreement includes various financial and other covenants typical of such agreements. All indebtedness under this agreement is due on demand.
Non-Recourse Notes Payable
Driveway Finance Corporation auto loans receivable are primarily funded through our warehouse facilities and asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loans receivable, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans receivable. We focusdo, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.
In November 2021, we issued $344.4 million in non-recourse notes payable related to the asset-backed term funding transaction.
3.875% Senior Notes due 2029
On May 27, 2021, we issued $800 million in aggregate principal amount of 3.875% notes due 2029 to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on accelerating the integrationnotes from May 27, 2021 and is payable semiannually on June 1 and December 1. We may redeem the notes in whole or in part, on or after June 1, 2024, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but, excluding, the redemption date. Prior to June 1, 2024, we may redeem up to 40% of acquired storesthe aggregate principal amount of the Senior Notes with funds in an aggregate amount up to increase incremental profitability.the net cash proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to June 1, 2024, we may redeem some or all of the notes at a price equal to 100% of the principal amount, plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Below is a summary of outstanding senior notes issued:
| | | | | | | | | | | |
| Description | Maturity Date | Interest Payment Dates | Principal Amount |
| 4.625% Senior notes due 2027 | December 15, 2027 | June 15, December 15 | $400 million |
| 4.375% Senior notes due 2031 | January 15, 2031 | January 15, July 15 | $550 million |
| 3.875% Senior notes due 2029 | June 1, 2029 | June 1, December 1 | $800 million |
On August 1, 2021, we redeemed in full the aggregate $300 million principal amount of our 5.250% senior notes due 2025 at a redemption price equal to 102.625% of the principal amount of the notes plus accrued and unpaid interest thereon.
Real Estate Mortgages, Finance Lease Obligations, and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.8% to 5.3% at December 31, 2021. The mortgages are payable in various installments through June 1, 2038. As of December 31, 2021, we had fixed interest rates on 71.2% of our outstanding mortgage debt.
We have finance lease obligations with some of our leased real estate. Interest rates related to this debt ranged from 1.9% to 8.5% at December 31, 2021. The leases have terms extending through August 2037.
Our other debt includes sellers’ notes. The interest rates associated with our other debt ranged from 5.0% to 10.0% at December 31, 2021. This debt, which totaled $1.9 million at December 31, 2021, is due in various installments through April 2027.
Contractual Obligations
Our cash requirements greater than twelve months from contractual obligations and commitments include:
Debt Obligations and Interest Payments
Refer to Note 6, Credit Facilities and Long-Term Debt, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
Contract Obligations
Refer to Note 7, Commitments and Contingencies, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
Operating and Finance Leases
Refer to Note 11, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.
LIBOR Transition
We are working closely and cooperatively with our lending partners to update LIBOR-based agreements. We expect to transition all of our LIBOR-based agreements to appropriate replacement rates well before the June 30, 2023 LIBOR cessation. We do not anticipate this transition to have any material impact to our financials.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenues and expenses at the date of the financial statements. Certain accounting policies require us to make difficult and subjective judgments on matters that are inherently uncertain. The following accounting policies involve critical accounting estimates because they are particularly dependent on assumptions made by management. While we have made our best estimates based on facts and circumstances available to us at the time, different estimates could have been used in the current period. Changes in the accounting estimates we used are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations.
Our most critical accounting estimates include those related to goodwill and franchise value, long-lived assets, charge-backs for various contracts, lifetime lube, oil and filter contracts, self-insurance programs, revenue, income taxes, equity investments and acquisitions. We also have other key accounting policies for valuation of accounts receivable and expense accruals. However, these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements. We review our estimates, judgments and assumptions periodically and reflect the effects of revisions in the period that they are deemed to be necessary. We believe that these estimates are reasonable. However, actual results could differ materially from these estimates.
Goodwill and Franchise Value
We are required to test our goodwill and franchise value for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. Goodwill is tested for impairment at the reporting unit level. Our reporting units are individual retail automotive stores as this is the level at which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance.
We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2017,2021, we evaluated our goodwill using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying amount, the first step of the two-step goodwill impairment test is performed.we would further evaluate for potential impairment.
As of December 31, 2017,2021, we had $256.3$977.3 million of goodwill on our balance sheet associated with 151201 reporting unitsunits. No reporting unit accounted for more than 2.4%2.2% of our total goodwill as of December 31, 2017.2021. The annual goodwill impairment analysis, which we perform as of October 1 of each year, did not resultresulted in no indications of impairment in 2021 or 2020. In 2019, our annual analyses resulted in an impairment charge of $1.7 million. During the third quarter of 2021, there was an indication of a triggering event at a certain reporting unit. We tested the goodwill for this location, which resulted in no goodwill impairment in 2017, 2016 or 2015.charges recorded. During the second quarter of 2020, there was an indication of a triggering event at certain reporting units. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $3.5 million.
We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2017,2021, we evaluated our indefinite-lived intangible assets using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the individual store'sstore’s franchise value exceeds the carrying amount, the franchise value is not impaired, and the second step is not necessary. If the qualitative assessment determines it is more likely than not that the fair value is less than the carrying amount, then a quantitative valuation of our franchise value is performed and anperformed. An impairment would be recorded.charge is recorded to the extent the fair value is less than the carrying value.
As of December 31, 2017,2021, we had $187.0$799.1 million of franchise value on our balance sheet associated with 151201 stores. No individual store accounted for more than 5%8.4% of our total franchise value as of December 31, 2017. Our impairment testing of2021. The annual franchise value did not indicate anyimpairment analysis, which we perform as of October 1 each year, resulted in no indications of impairment in 2017, 20162021 or 2015.2020. In 2019, our annual analysis resulted in an impairment charge of $0.4 million. During the third quarter of 2021, there were indications of impairment at a certain reporting unit. We tested the franchise value for this location, which resulted in an impairment charge of $1.9 million. During the second quarter of 2020, there was an indication of a triggering event at certain reporting units. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $4.4 million.
We are subject to financial statement risk to the extent that our goodwill or franchise rights become impaired due to decreases in the fair value. A future decline in performance, decreases in projected growth rates or margin assumptions or changes in discount rates could result in a potential impairment, which could have a material adverse impact on our financial position and results of operations. Furthermore, if a manufacturer becomes insolvent, we may be required to record a partial or total impairment on the franchise value and/or goodwill related to that manufacturer. No individual manufacturer accounted for more than 18%4.6% of our total franchise value and goodwill as of December 31, 2017.2021.
See NotesNote 1 and Note 5 of Notes to Consolidated Financial Statements for additional information.
Long-Lived Assets
We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review each asset group for impairment when events or circumstances indicate that their carrying amounts may not be recoverable. We determined an asset group is comprised of the long-lived assets usedincluded in the operations of an individual store.
We determine a triggering event has occurred by reviewing store forecasted and historical financial performance. An asset group is evaluated for recoverability if it has an operating loss in the current year and two of the prior three years. Additionally, we may judgmentally evaluate an asset group if its financial performance indicates it may not support the carrying amount of the long-lived assets. If a store meets these criteria, we estimate the projected undiscounted cash flows for each asset group based on internally developed forecasts. If the undiscounted cash flows are lower than the carrying value of the asset group, we determine the fair value of the asset group based on additional market data, including recent experience in selling similar assets.
We hold certain property for future development or investment purposes. If a triggering event is deemed to have occurred, we evaluate the property for impairment by comparing its estimated fair value based on listing price less costs to sell and other market data, including similar property that is for sale or has been recently sold, to the current carrying value. If the carrying value is more than the estimated fair value, an impairment is recorded.
Although we believe our property and equipment and assets held and used are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets. A future decline in store performance, decrease in projected growth rates or changes in other operating assumptions could result in an impairment of long-lived asset groups, which could have a material adverse impact on our financial position and results of operations.
In 2017 and 2016, we did not record any impairments to long-lived assets; however, in 2015, we recorded $3.6 million of impairment charges associated with certain properties and equipment. As the expected future use of these facilities changed, the long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value.
See Notes 1 and 4 of Notes to ConsolidatedPart II, Item 8. Financial Statements for additional information.
Charge-backs for Various Contracts
We receive commissions from the sale of vehicle service contracts and certain other insurance contracts. The contracts are sold through unrelated third parties, but we may be charged back for a portion of the commissions in the event of early termination of the contracts by customers. We record commissions at the time of sale of the vehicles, net of an estimated liability for future charge-backs. We have established a reserve for estimated future charge-backs based on an analysis of historical charge-backs in conjunction with estimated lives of the applicable contracts. If future cancellations are different than expected, we could have additional expense related to the cancellations in future periods, which could have a material adverse impact on our financial position and results of operations.
As of December 31, 2017, the reserve for future cancellations totaled $52.7 million and is included in accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets. A 10% increase in expected cancellations would result in an additional reserve of $5.3 million.
See Note 7 of Notes to ConsolidatedSupplementary Financial Statements for additional information.
Lifetime Lube, Oil and Filter Contracts
We retain the obligation for lifetime lube, oil and filter service contracts sold to our customers. Payments we receive upon sale of the lifetime oil contracts are deferred and recognized in revenue over the expected life of the service agreement to best match the expected timing of the costs to be incurred to perform the service. We estimate the timing and amount of future costs for claims and cancellations related to our lifetime lube, oil and filter contracts using historical experience rates and estimated future costs. If, in the future, usage and cancellations were different than expected or claims cost increased, we could have additional expenses related these contracts, reducing profitability.
As of December 31, 2017, the deferred revenue related to these self-insured contracts was $127.3 million.
See Note 7 of Notes to Consolidated Financial Statements for additional information.
Self-Insurance Programs
We self-insure a portion of our property and casualty insurance, vehicle open lot coverage, medical insurance and workers’ compensation insurance. We engage third-parties to assist in estimating the loss exposure related to the self-retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss and claims trends associated with these programs. The exposure on any single claim under our property and casualty insurance, medical insurance and workers’ compensation insurance varies based upon type of coverage. Our maximum exposure on any single claim is $5.5 million, subject to certain aggregate limit thresholds. Although we believe we have sufficient insurance, exposure to uninsured or underinsured losses may result in the recognition of additional charges, which could have a material adverse impact on our financial position and results of operations.
As of December 31, 2017, we had liabilities associated with these programs of $31.2 million recorded as a component of accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets.
See Note 7 of Notes to Consolidated Financial Statements for additional information.
Revenue
Revenue is earned from the sale of new and used vehicles, parts and service or from commissions earned on the arrangement of financing or sales of third party contracts and insurance products. We recognize revenue from the sale
of new and used vehicles and the the commissions earned associated with finance and insurance when a contract is signed by the customer, financing has been arranged or collectibility is reasonably assured and the delivery of the vehicle to the customer is made. Parts and service revenues are recognized upon completion and delivery of the parts or service to the customer. In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers,"which amends the accounting guidance related to revenues. We have evaluated the effectData of this amendment to revenue recognition and expect the timing of our revenue recognition to generally remain the same.Annual Report.
See Notes 1 and 19 of Notes to Consolidated Financial Statements for additional information.
Income Taxes
As of December 31, 2017, we had deferred tax assets of $76.3 million, net of valuation allowance of $0.6 million, and deferred tax liabilities of $132.5 million. The principal components of our deferred tax assets are related to allowances and accruals, deferred revenue and cancellation reserves. The principal components of our deferred tax liabilities are related to depreciation on property and equipment, inventories and goodwill. As a result of the tax reform passed in December 2017, we recorded a reduction in the value of our net deferred tax liability of $32.9 million.
We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
Based upon the scheduled reversal of deferred tax liabilities, and our projections of future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of the unreserved deductible differences.
As of December 31, 2017, we had a $0.6 million valuation allowance against our deferred tax assets associated with state net operating losses. Since these amounts are dependent on generating future taxable income, we evaluated the income expectations in the underlying states and determined that it is unlikely these amounts will be fully utilized. If we are unable to meet the projected taxable income levels utilized in our analysis, and depending on the availability of feasible tax planning strategies, we might record an additional valuation allowance on a portion or all of our deferred tax assets in the future.
See Note 13 of Notes to Consolidated Financial Statements for additional information.
Equity-Method Investment Associated with New Markets Tax Credits
In 2016 and 2015, we held an equity investment in a limited liability company managed by U.S. Bancorp Community Development Corporation. This investment generated new market tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities. While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined the appropriate accounting for our ownership portion of the entity was under the equity method of accounting. The equity-method investment generated operating losses on a quarterly basis and, accordingly, we were required to assess the investment for other than temporary impairment on a quarterly basis. We exited this equity-method investment in December 2016.
See Notes 1, 12 and 17 of Notes to Consolidated Financial Statements for additional information.
Acquisitions
We account for acquisitions using the purchase method of accounting which requires recognition of assets acquired and liabilities assumed at fair value as of the date of the acquisition. Determination of the estimated fair value assigned to each assetsasset acquired or liability assumed can materially impact the net income in subsequent periods through depreciation and amortization and potential impairment charges.
The most significant items we generally acquire in a transaction are inventory, long-lived assets, intangible franchise rights and goodwill. The fair value of acquired inventory is based on manufacturer invoice cost and market data. We estimate the fair value of property and equipment based on a market valuation approach. Additionally, we may use a
cost valuation approach to value long-lived assets when a market valuation approach is unavailable. We apply an income approach for the fair value of intangible franchise rights which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow.
See Notes 1 and 14 of Notes to Consolidated Financial Statements for additional information.
Results of Operations
For the year ended December 31, 2017, we reported net income of $245.2 million, or $9.75 per diluted share. For the years ended December 31, 2016 and 2015, we reported net income of $197.1 million, or $7.72 per diluted share, and $183.0 million, or $6.91 per diluted share, respectively.
Key Performance Metrics
Certain key performance metrics for revenue and gross profit were as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | |
| 2017 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
| New vehicle | | $ | 5,763,587 |
| | 57.1 | % | | $ | 339,843 |
| | 5.9 | % | | 22.4 | % |
| Used vehicle retail | | 2,544,379 |
| | 25.2 |
| | 286,835 |
| | 11.3 |
| | 18.9 |
|
| Used vehicle wholesale | | 277,844 |
| | 2.8 |
| | 4,786 |
| | 1.7 |
| | 0.3 |
|
Finance and insurance(1) | | 385,863 |
| | 3.8 |
| | 385,863 |
| | 100.0 |
| | 25.5 |
|
| Service, body and parts | | 1,015,773 |
| | 10.1 |
| | 493,124 |
| | 48.5 |
| | 32.5 |
|
| Fleet and other | | 99,064 |
| | 1.0 |
| | 5,635 |
| | 5.7 |
| | 0.4 |
|
| | | $ | 10,086,510 |
| | 100.0 | % | | $ | 1,516,086 |
| | 15.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | |
| 2016 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
| New vehicle | | $ | 4,938,436 |
| | 56.9 | % | | $ | 289,412 |
| | 5.9 | % | | 22.2 | % |
| Used vehicle retail | | 2,226,951 |
| | 25.7 |
| | 263,684 |
| | 11.8 |
| | 20.3 |
|
| Used vehicle wholesale | | 276,616 |
| | 3.2 |
| | 4,313 |
| | 1.6 |
| | 0.3 |
|
Finance and insurance(1) | | 330,922 |
| | 3.8 |
| | 330,922 |
| | 100.0 |
| | 25.4 |
|
| Service, body and parts | | 844,505 |
| | 9.7 |
| | 410,283 |
| | 48.6 |
| | 31.5 |
|
| Fleet and other | | 60,727 |
| | 0.7 |
| | 2,701 |
| | 4.4 |
| | 0.3 |
|
| | | $ | 8,678,157 |
| | 100.0 | % | | $ | 1,301,315 |
| | 15.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | | | |
| 2015 | | Revenues | | Percent of Total Revenues | | Gross Profit | | Gross Profit Margin | | Percent of Total Gross Profit |
| New vehicle | | $ | 4,552,301 |
| | 57.9 | % | | $ | 280,370 |
| | 6.2 | % | | 23.8 | % |
| Used vehicle retail | | 1,927,016 |
| | 24.5 |
| | 241,249 |
| | 12.5 |
| | 20.5 |
|
| Used vehicle wholesale | | 261,530 |
| | 3.3 |
| | 4,457 |
| | 1.7 |
| | 0.4 |
|
Finance and insurance(1) | | 283,018 |
| | 3.6 |
| | 283,018 |
| | 100.0 |
| | 24.1 |
|
| Service, body and parts | | 738,990 |
| | 9.4 |
| | 363,921 |
| | 49.2 |
| | 31.0 |
|
| Fleet and other | | 101,397 |
| | 1.3 |
| | 2,619 |
| | 2.6 |
| | 0.2 |
|
| | | $ | 7,864,252 |
| | 100.0 | % | | $ | 1,175,634 |
| | 14.9 | % | | 100.0 | % |
| |
(1)
| Commissions reported net of anticipated cancellations. |
Same Store Operating Data
We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow revenues in our existing locations. Therefore, we have integrated same store measures into the discussion below.
Same store measures reflect results for stores that were operating in each comparison period, and only include the months when operations occurred in both periods. For example,a store acquired in November 2016 would be included in same store operating data beginning in December 2017, after its first complete comparable month of operations. The fourth quarter operating results for the same store comparisons would include results for that store in only the period of December for both comparable periods.
New Vehicle Revenue and Gross Profit
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | |
| Reported | | | | | | | | |
| Revenue | | $ | 5,763,587 |
| | $ | 4,938,436 |
| | $ | 825,151 |
| | 16.7 | % |
| Gross profit | | $ | 339,843 |
| | $ | 289,412 |
| | $ | 50,431 |
| | 17.4 |
|
| Gross margin | | 5.9 | % | | 5.9 | % | | — |
| | |
| | | | | | | | | |
| Retail units sold | | 167,146 |
| | 145,772 |
| | 21,374 |
| | 14.7 |
|
| Average selling price per retail unit | | $ | 34,482 |
| | $ | 33,878 |
| | $ | 604 |
| | 1.8 |
|
| Average gross profit per retail unit | | $ | 2,033 |
| | $ | 1,985 |
| | $ | 48 |
| | 2.4 |
|
| | | | | | | | | |
| Same store | | | | | | | | |
| Revenue | | $ | 4,959,751 |
| | $ | 4,898,292 |
| | $ | 61,459 |
| | 1.3 | % |
| Gross profit | | $ | 290,309 |
| | $ | 286,519 |
| | $ | 3,790 |
| | 1.3 |
|
| Gross margin | | 5.9 | % | | 5.8 | % | | 10 | bps | | |
| | | | | | | | | |
| Retail units sold | | 144,308 |
| | 144,728 |
| | (420 | ) | | (0.3 | ) |
| Average selling price per retail unit | | $ | 34,369 |
| | $ | 33,845 |
| | $ | 524 |
| | 1.5 |
|
| Average gross profit per retail unit | | $ | 2,012 |
| | $ | 1,980 |
| | $ | 32 |
| | 1.6 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2016 | | 2015 | | |
| Reported | | | | | | | | |
| Revenue | | $ | 4,938,436 |
| | $ | 4,552,301 |
| | $ | 386,135 |
| | 8.5 | % |
| Gross profit | | $ | 289,412 |
| | $ | 280,370 |
| | $ | 9,042 |
| | 3.2 |
|
| Gross margin | | 5.9 | % | | 6.2 | % | | (30 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 145,772 |
| | 137,486 |
| | 8,286 |
| | 6.0 |
|
| Average selling price per retail unit | | $ | 33,878 |
| | $ | 33,111 |
| | $ | 767 |
| | 2.3 |
|
| Average gross profit per retail unit | | $ | 1,985 |
| | $ | 2,039 |
| | $ | (54 | ) | | (2.6 | ) |
| | | | | | | | | |
| Same store | | | | | | | | |
| Revenue | | $ | 4,670,738 |
| | $ | 4,520,429 |
| | $ | 150,309 |
| | 3.3 | % |
| Gross profit | | $ | 273,207 |
| | $ | 277,724 |
| | $ | (4,517 | ) | | (1.6 | ) |
| Gross margin | | 5.8 | % | | 6.1 | % | | (30 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 137,998 |
| | 136,707 |
| | 1,291 |
| | 0.9 |
|
| Average selling price per retail unit | | $ | 33,846 |
| | $ | 33,067 |
| | $ | 779 |
| | 2.4 |
|
| Average gross profit per retail unit | | $ | 1,980 |
| | $ | 2,032 |
| | $ | (52 | ) | | (2.6 | ) |
| |
(1)
| A basis point is equal to 1/100th of one percent.
|
New vehicle sales increased in 2017 compared to 2016 and in 2016 compared to 2015 primarily driven by acquisitions. In 2017, we acquired 18 stores and opened one store. In 2016, we acquired 15 stores and one franchise and opened one store.
Excluding the impact of acquisitions, on a same store basis, new vehicle sales increased 1.3% and included a 0.3% decrease in unit volume, offset by a 1.5% increase in the average selling price per retail unit in 2017 compared to 2016. New vehicle sales increased 3.3% in 2016 compared to 2015, primarily due to a 0.9% increase in unit volume and a 2.4% increase in average selling price per retail unit. The increases in average selling price are primarily a function of annual increases in manufacturer suggested retail price over the manufacturers' invoice cost of vehicles.
Same store unit sales growth compared to national performance was as follows:
|
| | | | | | | | | | | | |
| | | 2017 compared to 2016 | | National growth in 2017 compared to 2016 | | 2016 compared to 2015 | | National growth in 2016 compared to 2015 |
| Domestic brand same store unit sales growth | | (1.6 | )% | | (3.3 | )% | | (0.7 | )% | | (0.7 | )% |
| Import brand same store unit sales growth | | 2.1 |
| | (1.1 | ) | | 3.1 |
| | 1.2 |
|
| Luxury brand same store unit sales growth | | (7.8 | ) | | 1.2 |
| | (3.7 | ) | | 1.7 |
|
| Overall | | (0.3 | ) | | (1.9 | ) | | 1.0 |
| | 0.4 |
|
National new vehicle sales market growth continues to moderate for all brands. Our domestic brand unit volume outperformed the national average despite an overall decline in 2017, primarily driven by Ford, which had a same store unit sales increase of 2.3% compared to a national decrease of 1.2%, and Chrysler, which had a same store unit sales decrease of 2.2% compared to a national decrease of 8.4%. The outperformance of these brands was offset by General Motors, which had a same store sales unit decrease of 2.7% compared to a national decrease of 1.4%.
Our import brand unit sales growth outperformed the national average during 2017 primarily driven by Toyota, which comprised 18.6% of new vehicle unit sales in 2017 and had a same store unit sales increase of 3.1% compared to a national decrease of 0.6%, Honda, which had a same store unit sales increase of 1.9% compared to a national increase of 0.2%, and Subaru, which had a same store unit sales increase of 7.1% compared to a national increase of 5.3%.
Our luxury brand unit volume decreased 7.8% during 2017 compared to a national average increase of 1.2%, primarily driven by BMW, which had a same store unit decrease of 15.3% compared to a national average decrease of 3.4% and Mercedes, which had a same store decrease of 3.3% compared to a national average decrease of 1.4%.
We seek to grow our new vehicle sales organically by gaining share in the markets we serve. To increase awareness and customer traffic, we use a combination of traditional, digital and social media advertisements to reach customers. We have established a company-wide target of achieving 25% higher sales than the national OEM average. In 2017, our sales were 9% higher than the national OEM average.
New vehicle gross profit increased 17.4% in 2017 compared to 2016, primarily driven by the increase in unit sales gained through dealership acquisitions. On a same store basis, new vehicle gross profit decreased 1.3% in 2017 compared to 2016. The decrease in unit sales on a same store basis, combined with a lower average gross profit per unit, resulted in a same store decline in gross profit.
On a same store basis, the average gross profit per new retail unit decreased $32, or 1.6%, in 2017 compared to 2016. Consumers are increasingly aware of our wholesale cost of vehicles and average transaction prices for new vehicle sales due to the proliferation of third-party providers distributing this information over the Internet. As a result, the average gross profit realized on new vehicle sales has been under pressure for the last several years across the automobile industry. In addition, we have pursued a volume-based strategy because this creates additional used vehicle trade-in opportunities, finance and insurance sales and future service work, which we believe will generate incremental business in future periods that will offset the lower new vehicle gross profit per unit that has occurred as a result of this strategy.
New vehicle gross profit increased 3.2% in 2016 compared to 2015, driven by dealership acquisitions. On a same store basis, gross profit decreased 1.6% in 2016 compared to 2015, primarily due to a greater number of vehicles sold, offset by a decline in the average gross profit per retail vehicle sold.
Used Vehicle Retail Revenue and Gross Profit
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | |
| Reported | | | | | | | | |
| Retail revenue | | $ | 2,544,379 |
| | $ | 2,226,951 |
| | $ | 317,428 |
| | 14.3 | % |
| Retail gross profit | | $ | 286,835 |
| | $ | 263,684 |
| | $ | 23,151 |
| | 8.8 |
|
| Retail gross margin | | 11.3 | % | | 11.8 | % | | (50 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 129,913 |
| | 113,498 |
| | 16,415 |
| | 14.5 |
|
| Average selling price per retail unit | | $ | 19,585 |
| | $ | 19,621 |
| | $ | (36 | ) | | (0.2 | ) |
| Average gross profit per retail unit | | $ | 2,208 |
| | $ | 2,323 |
| | $ | (115 | ) | | (5.0 | ) |
| | | | | | | | | |
| Same store | | | | | | | | |
| Retail revenue | | $ | 2,288,290 |
| | $ | 2,204,795 |
| | $ | 83,495 |
| | 3.8 | % |
| Retail gross profit | | $ | 263,119 |
| | $ | 261,589 |
| | $ | 1,530 |
| | 0.6 |
|
| Retail gross margin | | 11.5 | % | | 11.9 | % | | (40 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 116,359 |
| | 112,387 |
| | 3,972 |
| | 3.5 |
|
| Average selling price per retail unit | | $ | 19,666 |
| | $ | 19,618 |
| | $ | 48 |
| | 0.2 |
|
| Average gross profit per retail unit | | $ | 2,261 |
| | $ | 2,328 |
| | $ | (67 | ) | | (2.9 | ) |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2016 | | 2015 | | |
| Reported | | | | | | | | |
| Retail revenue | | $ | 2,226,951 |
| | $ | 1,927,016 |
| | $ | 299,935 |
| | 15.6 | % |
| Retail gross profit | | $ | 263,684 |
| | $ | 241,249 |
| | $ | 22,435 |
| | 9.3 |
|
| Retail gross margin | | 11.8 | % | | 12.5 | % | | (70 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 113,498 |
| | 99,109 |
| | 14,389 |
| | 14.5 |
|
| Average selling price per retail unit | | $ | 19,621 |
| | $ | 19,443 |
| | $ | 178 |
| | 0.9 |
|
| Average gross profit per retail unit | | $ | 2,323 |
| | $ | 2,434 |
| | $ | (111 | ) | | (4.6 | ) |
| | | | | | | | | |
| Same store | | | | | | | | |
| Retail revenue | | $ | 2,119,831 |
| | $ | 1,909,209 |
| | $ | 210,622 |
| | 11.0 | % |
| Retail gross profit | | $ | 251,484 |
| | $ | 239,444 |
| | $ | 12,040 |
| | 5.0 |
|
| Retail gross margin | | 11.9 | % | | 12.5 | % | | (60 | ) bps | | |
| | | | | | | | | |
| Retail units sold | | 107,519 |
| | 98,235 |
| | 9,284 |
| | 9.5 |
|
| Average selling price per retail unit | | $ | 19,716 |
| | $ | 19,435 |
| | $ | 281 |
| | 1.4 |
|
| Average gross profit per retail unit | | $ | 2,339 |
| | $ | 2,437 |
| | $ | (98 | ) | | (4.0 | ) |
Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer CPO vehicles; Core Vehicles, or late-model vehicles with lower mileage; and Value Autos, or older vehicles with over 80,000 miles. Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade to retail used vehicle sales.
Same store sales of used vehicles increased (decreased) as follows:
|
| | | | | | |
| | | 2017 compared to 2016 |
| 2016 compared to 2015 |
| Manufacturer CPO vehicles | | (2.7 | )% | | 11.1 | % |
| Core vehicles | | 6.2 |
| | 12.2 |
|
| Value autos | | 9.9 |
| | 6.5 |
|
| Overall | | 3.8 |
| | 11.0 |
|
The same store sales increases in 2017 compared to 2016 were primarily driven by increased unit sales in our core and value auto categories of 6.2% and 9.9%, respectively. For core autos, same store increases in units sold were offset by decreases in average selling price and gross profit per unit of 0.1% and 1.0%, respectively. Value autos had an increase in average selling price of 5.4%, offset by a decrease of 2.9% in gross profit per unit. These increases were offset by a decrease in our CPO vehicles in 2017 compared to 2016, mainly related to our import and luxury stores. The same store increases in 2016 compared to 2015 were a result of increases in unit sales and average selling price as our mix shifted toward higher-priced CPO and core vehicles and away from value autos.
On average, in 2017 and 2016, each of our stores sold 67 and 66 retail used vehicle units per month, respectively. We continue to target increasing sales to 85 units per store per month.
Used retail vehicle gross profit increased 8.8% in 2017 compared to 2016, primarily driven by acquisitions. On a same store basis, gross profit increased 0.6% in 2017 compared to 2016, due to increased unit volume and increased average selling price, offset by margin declines. During the year, we began to see a flattening of certified pre-owned vehicle unit sales and a decrease in margins in all three categories due in part to an increase in the number of off-lease vehicles entering the used vehicle market as a result of increased new vehicle leasing since 2010.
Used retail vehicle gross profit dollars increased 9.3% in 2016 compared to 2015 due to acquisitions. On a same store basis, gross profit increased 5.0% in 2016 compared to 2015 due to increased unit volume and increased selling prices, offset by a decline in gross profit per unit.
Used Vehicle Wholesale Revenue and Gross Profit
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | |
| Reported | | | | | | | | |
| Wholesale revenue | | $ | 277,844 |
| | $ | 276,616 |
| | $ | 1,228 |
| | 0.4 | % |
| Wholesale gross profit | | $ | 4,786 |
| | $ | 4,313 |
| | $ | 473 |
| | 11.0 |
|
| Wholesale gross margin | | 1.7 | % | | 1.6 | % | | 10 | bps | | |
| | | | | | | | | |
| Wholesale units sold | | 43,912 |
| | 40,615 |
| | 3,297 |
| | 8.1 |
|
| Average selling price per wholesale unit | | $ | 6,327 |
| | $ | 6,811 |
| | $ | (484 | ) | | (7.1 | ) |
| Average gross profit per retail unit | | $ | 109 |
| | $ | 106 |
| | $ | 3 |
| | 2.8 |
|
| | | | | | | | | |
| Same store | | | | | | | | |
| Wholesale revenue | | $ | 238,474 |
| | $ | 273,679 |
| | $ | (35,205 | ) | | (12.9 | )% |
| Wholesale gross profit | | $ | 4,019 |
| | $ | 4,394 |
| | $ | (375 | ) | | (8.5 | ) |
| Wholesale gross margin | | 1.7 | % | | 1.6 | % | | 10 | bps | | |
| | | | | | | | | |
| Wholesale units sold | | 37,150 |
| | 40,349 |
| | (3,199 | ) | | (7.9 | ) |
| Average selling price per wholesale unit | | $ | 6,419 |
| | $ | 6,783 |
| | $ | (364 | ) | | (5.4 | ) |
| Average gross profit per retail unit | | $ | 108 |
| | $ | 109 |
| | $ | (1 | ) | | (0.9 | ) |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands, except per unit amounts) | | 2016 | | 2015 | | |
| Reported | | | | | | | | |
| Wholesale revenue | | $ | 276,616 |
| | $ | 261,530 |
| | $ | 15,086 |
| | 5.8 | % |
| Wholesale gross profit | | $ | 4,313 |
| | $ | 4,457 |
| | $ | (144 | ) | | (3.2 | ) |
| Wholesale gross margin | | 1.6 | % | | 1.7 | % | | (10 | ) bps | | |
| | | | | | | | | |
| Wholesale units sold | | 40,615 |
| | 38,167 |
| | 2,448 |
| | 6.4 |
|
| Average selling price per wholesale unit | | $ | 6,811 |
| | $ | 6,852 |
| | $ | (41 | ) | | (0.6 | ) |
| Average gross profit per retail unit | | $ | 106 |
| | $ | 117 |
| | $ | (11 | ) | | (9.4 | ) |
| | | | | | | | | |
| Same store | | | | | | | | |
| Wholesale revenue | | $ | 260,809 |
| | $ | 259,772 |
| | $ | 1,037 |
| | 0.4 | % |
| Wholesale gross profit | | $ | 4,171 |
| | $ | 4,606 |
| | $ | (435 | ) | | (9.4 | ) |
| Wholesale gross margin | | 1.6 | % | | 1.8 | % | | (20 | ) bps | | |
| | | | | | | | | |
| Wholesale units sold | | 38,158 |
| | 37,909 |
| | 249 |
| | 0.7 |
|
| Average selling price per wholesale unit | | $ | 6,835 |
| | $ | 6,853 |
| | $ | (18 | ) | | (0.3 | ) |
| Average gross profit per retail unit | | $ | 109 |
| | $ | 122 |
| | $ | (13 | ) | | (10.7 | ) |
Wholesale transactions are vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to inventory age or other factors. Wholesale vehicles are typically sold at or near inventory cost and do not comprise a meaningful component of our gross profit.
Finance and Insurance
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands, except per unit amounts) | | 2017 | | 2016 | | |
| Reported | | | | | | | | |
| Revenue | | $ | 385,863 |
| | $ | 330,922 |
| | $ | 54,941 |
| | 16.6 | % |
| Average finance and insurance per retail unit | | 1,299 |
| | 1,276 |
| | 23 |
| | 1.8 |
|
| | | | | | | | | |
| Same store | | | | | | | | |
| Revenue | | $ | 347,583 |
| | $ | 329,031 |
| | $ | 18,552 |
| | 5.6 | % |
| Average finance and insurance per retail unit | | 1,333 |
| | 1,280 |
| | 53 |
| | 4.1 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands, except per unit amounts) | | 2016 | | 2015 | | |
| Reported | | | | | | | | |
| Revenue | | $ | 330,922 |
| | $ | 283,018 |
| | $ | 47,904 |
| | 16.9 | % |
| Average finance and insurance per retail unit | | 1,276 |
| | 1,196 |
| | 80 |
| | 6.7 |
|
| | | | | | | | | |
| Same store | | | | | | | | |
| Revenue | | $ | 317,015 |
| | $ | 281,351 |
| | $ | 35,664 |
| | 12.7 | % |
| Average finance and insurance per retail unit | | 1,291 |
| | 1,198 |
| | 93 |
| | 7.8 |
|
The increase in finance and insurance revenue in 2017 compared to 2016 was primarily due to acquisitions combined with expanded product offerings. Third-party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. During 2017, we focused on expanding the products available through our primary underwriter to drive additional profitability despite relatively flat penetration rates. Finance and insurance sales in 2016 compared to 2015 increased primarily due to increased volume, complemented by increased finance and insurance penetration rates.
Trends in same store penetration rates for total new and used retail vehicles sold are detailed below:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| Vehicle financing | | 76 | % | | 76 | % | | 77 | % |
| Service contracts | | 44 | % | | 44 | % | | 42 | % |
| Lifetime lube, oil and filter contracts | | 25 | % | | 26 | % | | 25 | % |
In 2017, penetration rates remained relatively consistent with 2016. In 2016, the improved penetration rates associated with service contracts was a main contributor to the increase in finance and insurance revenues. We seek to increase our penetration rates in all categories on the number of vehicles that we sell and to offer a comprehensive suite of products. We target an average F&I per unit retailed of $1,450. We believe improved performance from sales training and revised pay plans will be critical factors in achieving this target.
Service, Body and Parts Revenue and Gross Profit |
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase (Decrease) | | % Increase |
| (Dollars in thousands) | | 2017 | | 2016 | | |
| Reported | | | | | | | | |
| Customer pay | | $ | 547,102 |
| | $ | 462,492 |
| | $ | 84,610 |
| | 18.3 | % |
| Warranty | | 239,834 |
| | 199,049 |
| | 40,785 |
| | 20.5 |
|
| Wholesale parts | | 153,059 |
| | 123,440 |
| | 29,619 |
| | 24.0 |
|
| Body shop | | 75,778 |
| | 59,524 |
| | 16,254 |
| | 27.3 |
|
| Total service, body and parts | | $ | 1,015,773 |
| | $ | 844,505 |
| | $ | 171,268 |
| | 20.3 |
|
| | | | | | | | | |
| Service, body and parts gross profit | | $ | 493,124 |
| | $ | 410,283 |
| | $ | 82,841 |
| | 20.2 | % |
| Service, body and parts gross margin | | 48.5 | % | | 48.6 | % | | (10 | ) bps | | |
| | | | | | | | | |
| Same store | | | | | | | | |
| Customer pay | | $ | 481,796 |
| | $ | 457,782 |
| | $ | 24,014 |
| | 5.2 | % |
| Warranty | | 207,074 |
| | 197,428 |
| | 9,646 |
| | 4.9 |
|
| Wholesale parts | | 126,375 |
| | 122,001 |
| | 4,374 |
| | 3.6 |
|
| Body shop | | 61,977 |
| | 57,791 |
| | 4,186 |
| | 7.2 |
|
| Total service, body and parts | | $ | 877,222 |
| | $ | 835,002 |
| | $ | 42,220 |
| | 5.1 |
|
| | | | | | | | | |
| Service, body and parts gross profit | | $ | 428,169 |
| | $ | 405,661 |
| | $ | 22,508 |
| | 5.5 | % |
| Service, body and parts gross margin | | 48.8 | % | | 48.6 | % | | 20 | bps | | |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase (Decrease) | | % Increase |
| (Dollars in thousands) | | 2016 | | 2015 | | |
| Reported | | | | | | | | |
| Customer pay | | $ | 462,492 |
| | $ | 414,197 |
| | $ | 48,295 |
| | 11.7 | % |
| Warranty | | 199,049 |
| | 165,902 |
| | 33,147 |
| | 20.0 |
|
| Wholesale parts | | 123,440 |
| | 111,557 |
| | 11,883 |
| | 10.7 |
|
| Body shop | | 59,524 |
| | 47,334 |
| | 12,190 |
| | 25.8 |
|
| Total service, body and parts | | $ | 844,505 |
| | $ | 738,990 |
| | $ | 105,515 |
| | 14.3 |
|
| | | | | | | | | |
| Service, body and parts gross profit | | $ | 410,283 |
| | $ | 363,921 |
| | $ | 46,362 |
| | 12.7 | % |
| Service, body and parts gross margin | | 48.6 | % | | 49.2 | % | | (60 | ) bps | | |
| | | | | | | | | |
| Same store | | | | | | | | |
| Customer pay | | $ | 437,650 |
| | $ | 408,740 |
| | $ | 28,910 |
| | 7.1 | % |
| Warranty | | 187,410 |
| | 164,213 |
| | 23,197 |
| | 14.1 |
|
| Wholesale parts | | 112,393 |
| | 110,754 |
| | 1,639 |
| | 1.5 |
|
| Body shop | | 55,099 |
| | 47,334 |
| | 7,765 |
| | 16.4 |
|
| Total service, body and parts | | $ | 792,552 |
| | $ | 731,041 |
| | $ | 61,511 |
| | 8.4 |
|
| | | | | | | | | |
| Service, body and parts gross profit | | $ | 387,091 |
| | $ | 359,834 |
| | $ | 27,257 |
| | 7.6 | % |
| Service, body and parts gross margin | | 48.8 | % | | 49.2 | % | | (40 | ) bps | | |
We provide service, body and parts for the new vehicle brands sold by our stores as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor of our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.
Our service, body and parts sales grew in all areas in 2017 compared to 2016 and in 2016 compared to 2015. The growth in 2017 was primarily due to acquisitions, combined with more late-model units in operation, offset by one less service day during the year. The growth in 2016 was mainly due to more late-model units in operation as new vehicle sales volumes increased annually from 2010 to 2016. We believe this increase in units in operation will continue to benefit our service, body and parts sales in the coming years as more late-model vehicles age, necessitating repairs and maintenance.
We focus on retaining customers by offering competitively priced routine maintenance and through our marketing efforts. We increased our same store customer pay business 5.2% in 2017 compared to 2016 and by 7.1% in 2016 compared to 2015.
Same store warranty sales increased 4.9% in 2017 compared to 2016, primarily due to increases related to Chrysler and Ford of 11.4% and 11.7%, respectively, offset by decreases related to Honda and Toyota of 16.6% and 11.5%, respectively, as warranty work related to recalls was more significant in 2016. Same store warranty sales increased 14.1% in 2016 compared to 2015, primarily due to significant vehicle recalls across multiple manufacturers. Additionally, we saw increases in warranty sales due to the growing number of units in operation. Routine maintenance, such as oil changes, offered by certain brands, including BMW, Toyota and General Motors, for two to four years after a vehicle is sold, provides for future work as consumers return to the franchised dealer for this maintenance item.
Increases (decreases) in same-store warranty work by segment were as follows:
|
| | | | | | |
| | | 2017 compared to 2016 | | 2016 compared to 2015 |
| Domestic | | 9.1 | % | | 10.5 | % |
| Import | | (1.5 | ) | | 28.1 |
|
| Luxury | | 11.0 |
| | (1.1 | ) |
Same store wholesale parts revenue grew 3.6% and 1.5%, respectively, in 2017 compared to 2016 and in 2016 compared to 2015, primarily due to increased parts sales to independent repair shops, competing new vehicle dealers and wholesale accounts.
Same store body shop grew 7.2% and 16.4%, respectively, in 2017 compared to 2016 and in 2016 compared to 2015. These increases were due to increased productivity as we increased capacity and improved work flow. We focus on obtaining direct repair relationships with insurance companies as a strategy to increase business.
Same store service, body and parts gross profit increased 5.5% and 7.6%, respectively, in 2017 compared to 2016 and in 2016 compared to 2015. The growth in gross profit in 2017 compared to 2016 was relatively consistent with revenue growth. Our gross profit growth in 2016 compared to 2015 was relatively consistent with revenue growth, as well with the continued growth in warranty work in 2016 compared to 2015.
Segments
Certain financial information by segment is as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2017 | | 2016 | | |
| Revenues: | | | | | | | | |
| Domestic | | $ | 3,845,830 |
| | $ | 3,381,715 |
| | $ | 464,115 |
| | 13.7 | % |
| Import | | 4,432,760 |
| | 3,764,255 |
| | 668,505 |
| | 17.8 |
|
| Luxury | | 1,810,085 |
| | 1,528,760 |
| | 281,325 |
| | 18.4 |
|
| | | 10,088,675 |
| | 8,674,730 |
| | 1,413,945 |
| | 16.3 |
|
| Corporate and other | | (2,165 | ) | | 3,427 |
| | (5,592 | ) | | (163.2 | ) |
| | | $ | 10,086,510 |
| | $ | 8,678,157 |
| | $ | 1,408,353 |
| | 16.2 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2016 | | 2015 | | |
| Revenues: | | | | | | | | |
| Domestic | | $ | 3,381,715 |
| | $ | 3,038,883 |
| | $ | 342,832 |
| | 11.3 | % |
| Import | | 3,764,255 |
| | 3,330,949 |
| | 433,306 |
| | 13.0 |
|
| Luxury | | 1,528,760 |
| | 1,490,632 |
| | 38,128 |
| | 2.6 |
|
| | | 8,674,730 |
| | 7,860,464 |
| | 814,266 |
| | 10.4 |
|
| Corporate and other | | 3,427 |
| | 3,788 |
| | (361 | ) | | (9.5 | ) |
| | | $ | 8,678,157 |
| | $ | 7,864,252 |
| | $ | 813,905 |
| | 10.3 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2017 | | 2016 | | |
| Segment income*: | | | | | | | | |
| Domestic | | $ | 105,208 |
| | $ | 106,210 |
| | $ | (1,002 | ) | | (0.9 | )% |
| Import | | 117,776 |
| | 110,204 |
| | 7,572 |
| | 6.9 |
|
| Luxury | | 37,022 |
| | 31,467 |
| | 5,555 |
| | 17.7 |
|
| | | 260,006 |
| | 247,881 |
| | 12,125 |
| | 4.9 |
|
| Corporate and other | | 167,366 |
| | 114,321 |
| | 53,045 |
| | 46.4 |
|
| Depreciation and amortization | | (57,722 | ) | | (49,369 | ) | | 8,353 |
| | 16.9 |
|
| Other interest expense | | (34,776 | ) | | (23,207 | ) | | 11,569 |
| | 49.9 |
|
| Other (expense) income, net | | 12,195 |
| | (6,103 | ) | | 18,298 |
| | NM |
|
| Income before income taxes | | $ | 347,069 |
| | $ | 283,523 |
| | $ | 63,546 |
| | 22.4 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2016 | | 2015 | | |
| Segment income*: | | | | | | | | |
| Domestic | | $ | 106,210 |
| | $ | 115,145 |
| | $ | (8,935 | ) | | (7.8 | )% |
| Import | | 110,204 |
| | 98,751 |
| | 11,453 |
| | 11.6 |
|
| Luxury | | 31,467 |
| | 36,391 |
| | (4,924 | ) | | (13.5 | ) |
| | | 247,881 |
| | 250,287 |
| | (2,406 | ) | | (1.0 | ) |
| Corporate and other | | 114,321 |
| | 74,514 |
| | 39,807 |
| | 53.4 |
|
| Depreciation and amortization | | (49,369 | ) | | (41,600 | ) | | 7,769 |
| | 18.7 |
|
| Other interest expense | | (23,207 | ) | | (19,491 | ) | | 3,716 |
| | 19.1 |
|
| Other (expense) income, net | | (6,103 | ) | | (1,006 | ) | | 5,097 |
| | NM |
|
| Income before income taxes | | $ | 283,523 |
| | $ | 262,704 |
| | $ | 20,819 |
| | 7.9 |
|
*Segment income for each reportable segment is defined as Income before income taxes, depreciation and amortization, other interest expense and other (expense) income, net.
NM - Not meaningful
|
| | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| | | 2017 | | 2016 | | |
| Retail new vehicle unit sales: | | | | | | | | |
| Domestic | | 53,288 |
| | 47,707 |
| | 5,581 |
| | 11.7 | % |
| Import | | 94,634 |
| | 80,769 |
| | 13,865 |
| | 17.2 |
|
| Luxury | | 19,597 |
| | 17,591 |
| | 2,006 |
| | 11.4 |
|
| | | 167,519 |
| | 146,067 |
| | 21,452 |
| | 14.7 |
|
| Allocated to management | | (373 | ) | | (295 | ) | | (78 | ) | | (26.4 | ) |
| | | 167,146 |
| | 145,772 |
| | 21,374 |
| | 14.7 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, | | Increase | | % Increase |
| | | 2016 | | 2015 | | |
| Retail new vehicle unit sales: | | | | | | | | |
| Domestic | | 47,707 |
| | 45,080 |
| | 2,627 |
| | 5.8 | % |
| Import | | 80,769 |
| | 75,091 |
| | 5,678 |
| | 7.6 |
|
| Luxury | | 17,591 |
| | 17,556 |
| | 35 |
| | 0.2 |
|
| | | 146,067 |
| | 137,727 |
| | 8,340 |
| | 6.1 |
|
| Allocated to management | | (295 | ) | | (241 | ) | | 54 |
| | 22.4 |
|
| | | 145,772 |
| | 137,486 |
| | 8,286 |
| | 6.0 |
|
Domestic
A summary of financial information for our Domestic segment follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2017 | | 2016 | | |
| Revenue | | $ | 3,845,830 |
| | $ | 3,381,715 |
| | $ | 464,115 |
| | 13.7 | % |
| Segment income | | $ | 105,208 |
| | $ | 106,210 |
| | $ | (1,002 | ) | | (0.9 | ) |
| Retail new vehicle unit sales | | 53,288 |
| | 47,707 |
| | 5,581 |
| | 11.7 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) | | % Increase (Decrease) |
| (Dollars in thousands) | | 2016 | | 2015 | | |
| Revenue | | $ | 3,381,715 |
| | $ | 3,038,883 |
| | $ | 342,832 |
| | 11.3 | % |
| Segment income | | $ | 106,210 |
| | $ | 115,145 |
| | $ | (8,935 | ) | | (7.8 | ) |
| Retail new vehicle unit sales | | 47,707 |
| | 45,080 |
| | 2,627 |
| | 5.8 |
|
Revenues in our Domestic segment increased in all major business lines in 2017 compared to 2016, primarily related to opening one and acquiring five stores during 2017. New vehicle unit sales increased 11.7% overall, but declined 1.6% on a same store basis. Additionally, our Domestic stores increased their used vehicle unit sales, improved finance and insurance income per retail unit and experienced strong growth in service, body and parts revenues. The acquisition of eight stores in 2016 contributed 3.7% of the 11.3% increase.
Our Domestic segment income decreased 0.9% in 2017 compared to 2016. The decrease in segment income was due to gross profit growth of 14.1% offset by a 16.5% increase in SG&A and a 39.5% increase in floor plan interest expense. Our domestic segment experienced increases in all areas of SG&A during 2017. Increases in floor plan interest were primarily driven by increasing rates, compounded by increased volume related to acquisitions, as well as higher inventory levels at existing stores.
The decrease in our Domestic operating results in 2016 compared to 2015 was primarily a result of increased SG&A expenses, which offset an increase in gross profits. The increase in SG&A during 2016 was primarily driven by increased variable costs associated with increased sales volume and the acquisition of eight stores.
Import
A summary of financial information for our Import segment follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | Increase |
| Revenue | | $ | 4,432,760 |
| | $ | 3,764,255 |
| | $ | 668,505 |
| | 17.8 | % |
| Segment income | | $ | 117,776 |
| | $ | 110,204 |
| | $ | 7,572 |
| | 6.9 |
|
| Retail new vehicle unit sales | | 94,634 |
| | 80,769 |
| | 13,865 |
| | 17.2 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2016 | | 2015 | | Increase | | Increase |
| Revenue | | $ | 3,764,255 |
| | $ | 3,330,949 |
| | $ | 433,306 |
| | 13.0 | % |
| Segment income | | $ | 110,204 |
| | $ | 98,751 |
| | $ | 11,453 |
| | 11.6 |
|
| Retail new vehicle unit sales | | 80,769 |
| | 75,091 |
| | 5,678 |
| | 7.6 |
|
The increase in our Import segment revenue in 2017 compared to 2016 resulted from increases in all business lines. On a same store basis, new vehicle unit sales for our Import stores outpaced national performance. Additionally, Import revenues benefited from improved used vehicle sales due to increased volume, increased finance and insurance revenues as a result of increased volume and finance and insurance income per retail unit sold and improved service, body and parts revenues. The acquisition of nine stores contributed 8.3% of the 17.8% increase.
Our segment income increased 6.9% in 2017 compared to 2016 mainly due to the improvements in all revenue categories discussed above and an increase in gross profit, offset by increases in SG&A and floor plan interest expenses. Gross profit for our import segment increased 17.0% in 2017 compared to 2016, in line with our revenues. Our Import segment experienced a 17.8% increase in SG&A, primarily driven by increases in all areas excluding personnel and rent, which remained steady. Floor plan interest expense increased 55.3% during 2017 and was a significant contributor to lower segment income growth compared to 2016. This increase was driven by a combination of increased volume due to the acquisition of nine stores during 2017, increased inventory levels at existing stores and increasing interest rates.
Improvements in our Import operating results in 2016 compared to 2015 were primarily a result of increased revenues in all major business lines and a slight increase in gross margins, while maintaining a consistent SG&A as a percent of gross profit.
Luxury
A summary of financial information for our Luxury segment follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | Increase |
| Revenue | | $ | 1,810,085 |
| | $ | 1,528,760 |
| | $ | 281,325 |
| | 18.4 | % |
| Segment income | | $ | 37,022 |
| | $ | 31,467 |
| | $ | 5,555 |
| | 17.7 |
|
| Retail new vehicle unit sales | | 19,597 |
| | 17,591 |
| | 2,006 |
| | 11.4 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2016 | | 2015 | | (Decrease) | | (Decrease) |
| Revenue | | $ | 1,528,760 |
| | $ | 1,490,632 |
| | $ | 38,128 |
| | 2.6 | % |
| Segment income | | $ | 31,467 |
| | $ | 36,391 |
| | $ | (4,924 | ) | | (13.5 | ) |
| Retail new vehicle unit sales | | 17,591 |
| | 17,556 |
| | 35 |
| | 0.2 |
|
Our Luxury segment revenue increased in 2017 compared to 2016 primarily due to our acquisition of four stores and improvements in finance and insurance and service body and parts revenues. New vehicle unit sales declined 7.8% on a same store basis mainly related to our BMW and Mercedes franchises.
Our Luxury segment income increased 17.7% in 2017 compared to 2016. This increase was due to gross profit growth of 17.6%, offset by an increase in SG&A of 16.0%, primarily related to an increase in advertising expense, and an increase in floor plan interest expense of 43.3%. As a percentage of gross profit, SG&A decreased 109 basis points in 2017 compared to 2016. The 43.3% increase in floor plan interest expense during 2017 was due to a combination of increased volume from acquisitions, increased volume at existing stores and rising interest rates.
Our Luxury segment revenue increased in 2016 compared to 2015 primarily due to our acquisition of one store and improvements in finance and insurance and service body and parts revenues. New vehicle unit sales declined 3.7% on a same store basis mainly related to our BMW, Audi and Mercedes franchises. Our Luxury segment income decreased in 2016 compared to 2015 primarily related to increases in our SG&A and floor plan interest expense that outpaced growth in revenues and gross profits.
See Note 181 and Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 88. Financial Statements and Supplementary Financial Data of this Form 10-K for additional information.Annual Report.
Corporate and Other
Revenue attributable to Corporate and other includes the results of operations of our stand-alone collision center, offset by certain unallocated reserve and elimination adjustments related to vehicle sales.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2017 | | 2016 | | (Decrease) | | (Decrease) |
| Revenue | | $ | (2,165 | ) | | $ | 3,427 |
| | $ | (5,592 | ) | | NM |
|
| Segment income | | $ | 167,366 |
| | $ | 114,321 |
| | $ | 53,045 |
| | 46.4 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2016 | | 2015 | | (Decrease) | | (Decrease) |
| Revenue | | $ | 3,427 |
| | $ | 3,788 |
| | $ | (361 | ) | | (9.5 | )% |
| Segment income | | $ | 114,321 |
| | $ | 74,514 |
| | $ | 39,807 |
| | 53.4 |
|
NM - not meaningful
The decreases in Corporate and other revenues in 2017 compared to 2016 and in 2016 compared to 2015 were primarily related to changes in certain reserves that are not specifically identified with our domestic, import or luxury segment revenue, such as our reserve for revenue reversals associated with unwound vehicle sales and elimination of revenues associated with internal corporate vehicle purchases and leases with our stores. Corporate and other revenues were
affected in 2017 by an increase in internal corporate vehicle purchases and leases with our stores resulting in negative revenues.
These internal corporate expense allocations are also used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.
The increases in Corporate and other segment income in 2017 compared to 2016 and 2016 compared to 2015 were related to increased internal corporate expense allocations and increased store count. Additionally, 2015 included an $18.3 million charge associated with a transition agreement. See Note 15 of Notes to Consolidated Financial Statements for additional information regarding the transition agreement.
Asset Impairment Charges
Asset impairments recorded as a component of operations consist of the following (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Equity-method investment | | $ | — |
| | $ | 13,992 |
| | $ | 16,521 |
|
| Long-lived assets | | — |
| | — |
| | 3,603 |
|
We recorded asset impairments in 2016 and 2015 associated with our equity-method investment in a limited liability company that participated in the NMTC Program. We evaluated this equity-method investment at the end of each reporting period and identified indications of loss resulting from other than temporary declines in value. We exited this equity-method investment in December 2016.
Additionally, in 2015, we recorded asset impairments of $3.6 million associated with certain properties and equipment. As the expected future use of these facilities and equipment changed, the long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value.
See Notes 1, 4, 12 and 17 of Notes to Consolidated Financial Statements for additional information.
Selling, General and Administrative Expense (“SG&A”)
SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | % Increase |
| Personnel | | $ | 695,527 |
| | $ | 597,185 |
| | $ | 98,342 |
| | 16.5 | % |
| Advertising | | 93,312 |
| | 81,363 |
| | 11,949 |
| | 14.7 |
|
| Rent | | 33,399 |
| | 26,785 |
| | 6,614 |
| | 24.7 |
|
| Facility costs | | 55,813 |
| | 43,883 |
| | 11,930 |
| | 27.2 |
|
| Other | | 171,327 |
| | 150,374 |
| | 20,953 |
| | 13.9 |
|
| Total SG&A | | $ | 1,049,378 |
| | $ | 899,590 |
| | $ | 149,788 |
| | 16.7 |
|
|
| | | | | | | | | |
| | Year Ended December 31, | |
Increase |
| As a % of gross profit | | 2017 | | 2016 | | (Decrease) |
| Personnel | | 45.9 | % | | 45.9 | % | | — |
|
| Advertising | | 6.2 |
| | 6.3 |
| | (10 | ) |
| Rent | | 2.2 |
| | 2.1 |
| | 10 |
|
| Facility costs | | 3.7 |
| | 3.4 |
| | 30 |
|
| Other | | 11.2 |
| | 11.4 |
| | (20 | ) |
| Total SG&A | | 69.2 | % | | 69.1 | % | | 10 | bps |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| (Dollars in thousands) | | 2016 | | 2015 | | Increase | | % Increase |
| Personnel | | $ | 597,185 |
| | $ | 556,719 |
| | $ | 40,466 |
| | 7.3 | % |
| Advertising | | 81,363 |
| | 69,935 |
| | 11,428 |
| | 16.3 |
|
| Rent | | 26,785 |
| | 23,817 |
| | 2,968 |
| | 12.5 |
|
| Facility costs | | 43,883 |
| | 39,738 |
| | 4,145 |
| | 10.4 |
|
| Other | | 150,374 |
| | 120,966 |
| | 29,408 |
| | 24.3 |
|
| Total SG&A | | $ | 899,590 |
| | $ | 811,175 |
| | $ | 88,415 |
| | 10.9 |
|
|
| | | | | | | | | |
| | Year Ended December 31, | |
Increase |
| As a % of gross profit | | 2016 | | 2015 | | (Decrease) |
| Personnel | | 45.9 | % | | 47.4 | % | | (150 | ) bps |
| Advertising | | 6.3 |
| | 5.9 |
| | 40 |
|
| Rent | | 2.1 |
| | 2.0 |
| | 10 |
|
| Facility costs | | 3.4 |
| | 3.4 |
| | — |
|
| Other | | 11.4 |
| | 10.3 |
| | 110 |
|
| Total SG&A | | 69.1 | % | | 69.0 | % | | 10 | bps |
SG&A increased $149.8 million in 2017 compared to 2016, primarily due to acquisitions. Additionally, SG&A in 2017 included $5.6 million of storm related insurance charges and $5.7 million in acquisition expenses, offset by a $5.1 million gain on the sale of one of our stores.
SG&A increased $88.4 million in 2016 compared to 2015, primarily driven by increased variable cost associated with increased sales volume and store count. Additionally, SG&A in 2016 included a $3.9 million legal reserve adjustment, offset by a $1.1 million gain associated with the sale of one of our stores.
SG&A adjusted for non-core charges was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | Increase |
| Personnel | | $ | 695,527 |
| | $ | 597,185 |
| | $ | 98,342 |
| | 16.5 | % |
| Advertising | | 93,312 |
| | 81,363 |
| | 11,949 |
| | 14.7 |
|
| Rent | | 33,399 |
| | 26,785 |
| | 6,614 |
| | 24.7 |
|
| Facility costs | | 60,918 |
| | 44,971 |
| | 15,947 |
| | 35.5 |
|
| Other | | 160,091 |
| | 146,437 |
| | 13,654 |
| | 9.3 |
|
| Total SG&A | | $ | 1,043,247 |
| | $ | 896,741 |
| | $ | 146,506 |
| | 16.3 |
|
|
| | | | | | | | | |
| | Year Ended December 31, | |
Increase |
| As a % of gross profit | | 2017 | | 2016 | | (Decrease) |
| Personnel | | 45.9 | % | | 45.9 | % | | — |
|
| Advertising | | 6.2 |
| | 6.3 |
| | (10 | ) |
| Rent | | 2.2 |
| | 2.1 |
| | 10 |
|
| Facility costs | | 4.0 |
| | 3.5 |
| | 50 |
|
| Other | | 10.5 |
| | 11.1 |
| | (60 | ) |
| Total SG&A | | 68.8 | % | | 68.9 | % | | (10 | ) bps |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2016 | | 2015 | | (Decrease) | | (Decrease) |
| Personnel | | $ | 597,185 |
| | $ | 538,423 |
| | $ | 58,762 |
| | 10.9 | % |
| Advertising | | 81,363 |
| | 69,935 |
| | 11,428 |
| | 16.3 |
|
| Rent | | 26,785 |
| | 23,817 |
| | 2,968 |
| | 12.5 |
|
| Facility costs | | 44,971 |
| | 45,656 |
| | (685 | ) | | (1.5 | ) |
| Other | | 146,437 |
| | 120,967 |
| | 25,470 |
| | 21.1 |
|
| Total SG&A | | $ | 896,741 |
| | $ | 798,798 |
| | $ | 97,943 |
| | 12.3 |
|
|
| | | | | | | | | |
| | Year Ended December 31, | |
Increase |
| As a % of gross profit | | 2016 | | 2015 | | (Decrease) |
| Personnel | | 45.9 | % | | 45.8 | % | | 10 | bps |
| Advertising | | 6.3 |
| | 5.9 |
| | 40 |
|
| Rent | | 2.1 |
| | 2.0 |
| | 10 |
|
| Facility costs | | 3.5 |
| | 3.9 |
| | (40 | ) |
| Other | | 11.1 |
| | 10.3 |
| | 80 |
|
| Total SG&A | | 68.9 | % | | 67.9 | % | | 100 | bps |
See “Non-GAAP Reconciliations” for more details.
Depreciation and Amortization
Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization related to tradenames.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | |
% |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | Increase |
| Depreciation and amortization | | $ | 57,722 |
| | $ | 49,369 |
| | $ | 8,353 |
| | 16.9 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | |
% |
| (Dollars in thousands) | | 2016 | | 2015 | | Increase | | Increase |
| Depreciation and amortization | | $ | 49,369 |
| | $ | 41,600 |
| | $ | 7,769 |
| | 18.7 | % |
Acquisition activity contributed to the increases in depreciation and amortization in 2017 compared to 2016 and in 2016 compared to 2015. During 2017, we purchased approximately $105 million in depreciable buildings and improvements as a part of our acquisitions of Baierl Auto Group and Downtown LA Auto Group. During 2016, we purchased approximately $27 million in depreciable buildings and improvements as a part of the acquisition of Carbone Auto Group. Capital expenditures totaled $105.4 million and $100.8 million, respectively, in 2017 and 2016. These investments increase the amount of depreciable assets. See the discussion under Liquidity and Capital Resources for additional information.
Operating Income
Operating income as a percentage of revenue, or operating margin, was as follows:
|
| | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Operating margin | | 4.1% | | 3.9% | | 3.8% |
Operating margin adjusted for non-core charges(1) | | 4.1% | | 4.1% | | 4.3% |
| |
(1)
| See “Non-GAAP Reconciliations” for additional information. |
In 2017, our operating margin improved 20 basis points compared to 2016. Adjusting for non-core charges, including storm related insurance charges and acquisition expenses, our operating margin remained flat compared to 2016 at 4.1%. In 2016, our operating margin was affected by acquisition activity, as well as a legal reserve adjustment. Adjusting for those non-core charges, our operating margin was 4.1% in 2016. Acquired stores generally have a lower operating efficiency than our other stores and negatively impact our operating margin as we integrate them into our cost structure.
In 2015, our operating margin was affected by asset impairments and a charge of $18.3 million associated with a transition agreement. Adjusting for those non-core charges, our operating margin was 4.3%% in 2015.
Floor Plan Interest Expense and Floor Plan Assistance
Floor plan interest expense increased $13.8 million in 2017 compared to 2016, due to an increase in inventory levels related to acquisitions, an increase in existing store levels, and increasing interest rates. Changes in the average outstanding balances on our floor plan facilities increased the expense $5.1 million and changes in the interest rates on our floor plan facilities increased the expense $8.7 million during 2017 compared to 2016.
Floor plan interest expense increased $6.0 million in 2016 compared to 2015, primarily as a result of increases in the average outstanding balances on our floor plan facilities due to an increase in new vehicle inventory levels. Changes in the average outstanding balances on our floor plan facilities increased the expense $4.3 million and changes in the interest rates on our floor plan facilities increased the expense $1.7 million during 2016 compared to 2015.
Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.
The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned:
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2017 | | 2016 | | (Decrease) | | (Decrease) |
| Floor plan interest expense (new vehicles) | | $ | 39,336 |
| | $ | 25,531 |
| | $ | 13,805 |
| | 54.1 | % |
| Floor plan assistance (included as an offset to cost of sales) | | (55,962 | ) | | (46,328 | ) | | 9,634 |
| | 20.8 |
|
| Net new vehicle carrying costs (benefit) | | $ | (16,626 | ) | | $ | (20,797 | ) | | $ | (4,171 | ) | | (20.1 | ) |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2016 | | 2015 | | (Decrease) | | (Decrease) |
| Floor plan interest expense (new vehicles) | | $ | 25,531 |
| | $ | 19,534 |
| | $ | 5,997 |
| | 30.7 | % |
| Floor plan assistance (included as an offset to cost of sales) | | (46,328 | ) | | (41,438 | ) | | 4,890 |
| | 11.8 |
|
| Net new vehicle carrying costs (benefit) | | $ | (20,797 | ) | | $ | (21,904 | ) | | $ | (1,107 | ) | | (5.1 | ) |
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used vehicle inventory financing facility and our revolving line of credit.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % Increase |
| (Dollars in thousands) | | 2017 | | 2016 | | (Decrease) | | (Decrease) |
| Mortgage interest | | $ | 19,054 |
| | $ | 15,102 |
| | $ | 3,952 |
| | 26.2 | % |
| Other interest | | 16,246 |
| | 8,519 |
| | 7,727 |
| | 90.7 |
|
| Capitalized interest | | (524 | ) | | (414 | ) | | 110 |
| | 26.6 |
|
| Total other interest expense | | $ | 34,776 |
| | $ | 23,207 |
| | $ | 11,569 |
| | 49.9 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Increase | | % |
| (Dollars in thousands) | | 2016 | | 2015 | | (Decrease) | | Increase |
| Mortgage interest | | $ | 15,102 |
| | $ | 13,295 |
| | $ | 1,807 |
| | 13.6 | % |
| Other interest | | 8,519 |
| | 6,646 |
| | 1,873 |
| | 28.2 |
|
| Capitalized interest | | (414 | ) | | (450 | ) | | (36 | ) | | (8.0 | ) |
| Total other interest expense | | $ | 23,207 |
| | $ | 19,491 |
| | $ | 3,716 |
| | 19.1 |
|
The increase in other interest expense in 2017 compared to 2016 was primarily due to the issuance of $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 in July 2017 and increases in mortgage borrowings related to acquisitions. See also Note 6 of Notes to Consolidated Financial Statements for additional information.
The increase in other interest expense in 2016 compared to 2015 was primarily due to an increase in other interest related to higher volumes of borrowing on our credit facility and higher mortgage borrowings.
Other (Expense) Income, net
Other (expense) income, net primarily includes other income associated with legal settlements with the OEMs, interest income and the gains and losses related to equity-method investments.
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2017 | | 2016 | | Increase | | Increase |
| Other (expense) income, net | | $ | 12,195 |
| | $ | (6,103 | ) | | $ | 18,298 |
| | NM |
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | % |
| (Dollars in thousands) | | 2016 | | 2015 | | Increase | | Increase |
| Other (expense) income, net | | $ | (6,103 | ) | | $ | (1,006 | ) | | $ | 5,097 |
| | NM |
NM - Not meaningful.
The increase in other (expense) income, net in 2017 compared to 2016 was primarily due to a $9.1 million gain related to legal settlements with OEMs recorded in the first quarter of 2017 compared to $8.3 million in operating losses recorded in 2016 related to our equity-method investment with U.S. Bancorp Community Development Corporation, which we exited in December 2016. Other (expense) income, net, recorded in 2015 was primarily due to operating losses of $6.9 million recognized related to our equity-method investment with U.S. Bancorp Community Development Corporation.
Income Tax Provision
Our effective income tax rate was as follows:
|
| | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Effective income tax rate | | 29.3 | % | | 30.5 | % | | 30.3 | % |
Effective income tax rate excluding tax credits generated through our equity-method investment and other non-core items(1) | | 38.7 | % | | 38.6 | % | | 38.4 | % |
| |
(1)
| See “Non-GAAP Reconciliations” for more details. |
Our effective income tax rate in 2017 was positively impacted by the enactment of tax legislation commonly known as the Tax Cuts and Jobs Act, signed into law on Friday, December 22, 2017, which required a revaluation of all deferred tax assets and deferred tax liabilities as of the date the legislation was signed. Additionally, our effective income tax rate in 2017 was positively impacted by excess tax benefits related to our stock-based compensation as a result of the adoption of new guidance that was applied prospectively beginning in 2017. Partially offsetting these benefits were negative impacts from an increasing presence in states with higher income tax rates. Our effective income tax rates in 2016 and 2015 were positively affected by new markets tax credits that were generated through our equity-method investment with U.S. Bancorp Community Development Corporation.
Excluding the revaluation of deferred tax assets and liabilities as a result of the enactment of new legislation, tax credits generated by our equity-method investment and other non-core tax attributes, our effective income tax rate for 2017 would have been 38.7%, an increase of 10 basis points compared to the rate for 2016.
Non-GAAP Reconciliations
We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations because they exclude adjustments for items not related to our ongoing core business operations and other non-cash adjustments, and improves the period-to-period comparability of our results from the core business operations. We use these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facility and in
communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.
The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations (dollars in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As reported | | Insurance Reserves | | Acquisition expense | | OEM Settlement | | Disposal gain on sale of stores | | Tax reform | | Adjusted |
| Selling, general and administrative | | $ | 1,049,378 |
| | $ | (5,582 | ) | | $ | (5,653 | ) | | $ | — |
| | $ | 5,104 |
| | $ | — |
| | $ | 1,043,247 |
|
| | | | | | | | | | | | | | | |
| Operating income | | 408,986 |
| | 5,582 |
| | 5,653 |
| | — |
| | (5,104 | ) | | — |
| | 415,117 |
|
| | | | | | | | | | | | | | | |
| Other (expense) income, net | | 12,195 |
| | — |
| | — |
| | (9,111 | ) | | — |
| | — |
| | 3,084 |
|
| | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 347,069 |
| | $ | 5,582 |
| | $ | 5,653 |
| | $ | (9,111 | ) | | $ | (5,104 | ) | | $ | — |
| | $ | 344,089 |
|
| Income tax (provision) benefit | | (101,852 | ) | | (2,174 | ) | | (2,202 | ) | | 3,423 |
| | 2,482 |
| | (32,901 | ) | | (133,224 | ) |
| Net income | | $ | 245,217 |
| | $ | 3,408 |
| | $ | 3,451 |
| | $ | (5,688 | ) | | $ | (2,622 | ) | | $ | (32,901 | ) | | $ | 210,865 |
|
| | | | | | | | | | | | | | | |
| Diluted net income per share | | $ | 9.75 |
| | $ | 0.14 |
| | $ | 0.14 |
| | $ | (0.23 | ) | | $ | (0.10 | ) | | $ | (1.31 | ) | | $ | 8.39 |
|
| Diluted share count | | 25,145 |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As reported | | Disposal gain on sale of stores | | Equity-method investment | | Legal Reserve | | Tax attribute | | Adjusted |
| Asset impairments | | $ | 13,992 |
| | $ | — |
| | $ | (13,992 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
| Selling, general and administrative | | 899,590 |
| | 1,087 |
| | — |
| | (3,936 | ) | | — |
| | 896,741 |
|
| | | | | | | | | | | | | |
| Operating income | | 338,364 |
| | (1,087 | ) | | 13,992 |
| | 3,936 |
| | — |
| | 355,205 |
|
| | | | | | | | | | | | | |
| Other (expense) income, net | | (6,103 | ) | | — |
| | 8,262 |
| | — |
| | — |
| | 2,159 |
|
| | | | | | | | | | | | | |
| Income before income taxes | | $ | 283,523 |
| | $ | (1,087 | ) | | $ | 22,254 |
| | $ | 3,936 |
| | $ | — |
| | $ | 308,626 |
|
| Income tax (provision) benefit | | (86,465 | ) | | 426 |
| | (28,530 | ) | | (3,250 | ) | | (1,320 | ) | | (119,139 | ) |
| Net income | | $ | 197,058 |
| | $ | (661 | ) | | $ | (6,276 | ) | | $ | 686 |
| | $ | (1,320 | ) | | $ | 189,487 |
|
| | | | | | | | | | | | | |
| Diluted net income per share | | $ | 7.72 |
| | $ | (0.03 | ) | | $ | (0.25 | ) | | $ | 0.03 |
| | $ | (0.05 | ) | | $ | 7.42 |
|
| Diluted share count | | 25,521 |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| | | As reported | | Disposal gain on sale of stores | | Asset impairment | | Equity-method investment | | Transition Agreement | | Adjusted |
| Asset impairments | | $ | 20,124 |
| | $ | — |
| | $ | (3,603 | ) | | $ | (16,521 | ) | | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
Selling, general and administrative | | 811,175 |
| | 5,919 |
| | — |
| | — |
| | (18,296 | ) | | 798,798 |
|
| | | | | | | | | | | | | |
| Income from operations | | 302,735 |
| | (5,919 | ) | | 3,603 |
| | 16,521 |
| | 18,296 |
| | 335,236 |
|
| | | | | | | | | | | | | |
| Other (expense) income, net | | (1,006 | ) | | — |
| | — |
| | 6,930 |
| | — |
| | 5,924 |
|
| | | | | | | | | | | | | |
| Income before income taxes | | $ | 262,704 |
| | $ | (5,919 | ) | | $ | 3,603 |
| | $ | 23,451 |
| | $ | 18,296 |
| | $ | 302,135 |
|
| Income tax (provision) benefit | | (79,705 | ) | | 2,309 |
| | (1,385 | ) | | (30,832 | ) | | (6,507 | ) | | (116,120 | ) |
| Net income | | $ | 182,999 |
| | $ | (3,610 | ) | | $ | 2,218 |
| | $ | (7,381 | ) | | $ | 11,789 |
| | $ | 186,015 |
|
| | | | | | | | | | | | | |
| Diluted net income per share | | $ | 6.91 |
| | $ | (0.14 | ) | | $ | 0.08 |
| | $ | (0.28 | ) | | $ | 0.45 |
| | $ | 7.02 |
|
| Diluted share count | | 26,490 |
| | | | | | | | | | |
Liquidity and Capital Resources
We manage our liquidity and capital resources to fund our operating, investing and financing activities. We rely primarily on cash flows from operations and borrowings under our credit facilities as the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and fulfill contractual obligations. Remaining funds are used for acquisitions, debt retirement, cash dividends, share repurchases and general business purposes.
Available Sources
Below is a summary of our immediately available funds (in thousands):
|
| | | | | | | | | | | | | | | |
| | As of December 31, | | | | % |
| | | 2017 | | 2016 | | Increase | | Increase |
| Cash and cash equivalents | | $ | 57,253 |
| | $ | 50,282 |
| | $ | 6,971 |
| | 13.9 | % |
| Available credit on the credit facilities | | 222,502 |
| | 138,090 |
| | 84,412 |
| | 61.1 |
|
| Total current available funds | | 279,755 |
|
| 188,372 |
|
| 91,383 |
| | 48.5 |
|
| Estimated funds from unfinanced real estate | | 236,135 |
| | 168,383 |
| | 67,752 |
| | 40.2 |
|
| Total estimated available funds | | $ | 515,890 |
| | $ | 356,755 |
| | $ | 159,135 |
| | 44.6 |
|
Cash flows generated by operating activities and from our credit facility are our most significant sources of liquidity. We also have the ability to raise funds through mortgaging real estate. As of December 31, 2017, our unencumbered owned operating real estate had a book value of $314.8 million. Assuming we can obtain financing on 75% of this value, we estimate we could have obtained additional funds of approximately $236.1 million at December 31, 2017; however, no assurances can be provided that the appraised value of these properties will match or exceed their book values or that this capital source will be available on terms acceptable to us.
In July 2017, we issued $300 million in aggregate principal amount of Senior Notes in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. We used the net proceeds for general corporate purposes, including funding acquisitions, capital expenditures and debt repayment.
In addition to the above sources of liquidity, potential sources include the placement of subordinated debentures or loans, the sale of equity securities and the sale of stores or other assets. We evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.
Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table summarizes our cash flows (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Net cash provided by operating activities | | $ | 148,856 |
| | $ | 90,905 |
| | $ | 79,551 |
|
| Net cash used in investing activities | | (538,198 | ) | | (351,693 | ) | | (169,733 | ) |
| Net cash provided by financing activities | | 396,313 |
| | 266,062 |
| | 105,292 |
|
Operating Activities
Cash provided by operating activities increased $58.0 million in 2017 compared to 2016, primarily as a result of increased profitability and a decrease in trade receivables growth related to the timing of collections, partially offset by an increase in inventories related to increasing volumes at existing locations, compared to the previous year's cash flows.
Borrowings from and repayments to our syndicated lending group related to our new vehicle inventory floor plan financing are presented as financing activities. To better understand the impact of changes in inventory and the associated financing, we also consider our net cash provided by operating activities adjusted to include cash activity associated with our new vehicle credit facility.
Adjusted net cash provided by operating activities is presented below (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase |
| | | 2017 | | 2016 | | (Decrease) |
| Net cash provided by operating activities – as reported | | $ | 148,856 |
| | $ | 90,905 |
| | $ | 57,951 |
|
| Add: Net borrowings on floor plan notes payable: non-trade | | 241,479 |
| | 252,893 |
| | (11,414 | ) |
| Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | (111,017 | ) | | (94,550 | ) | | (16,467 | ) |
| Net cash provided by operating activities – adjusted | | $ | 279,318 |
| | $ | 249,248 |
| | $ | 30,070 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase |
| | | 2016 | | 2015 | | (Decrease) |
| Net cash provided by operating activities – as reported | | $ | 90,905 |
| | $ | 79,551 |
| | $ | 11,354 |
|
| Add: Net borrowings on floor plan notes payable: non-trade | | 252,893 |
| | 136,201 |
| | 116,692 |
|
| Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | (94,550 | ) | | (25,642 | ) | | (68,908 | ) |
| Net cash provided by operating activities – adjusted | | $ | 249,248 |
| | $ | 190,110 |
| | $ | 59,138 |
|
Inventories are the most significant component of our cash flow from operations. As of December 31, 2017, our new vehicle days supply was 69 days, or one day higher than our days supply as of December 31, 2016. Our days supply of used vehicles was 67 days as of December 31, 2017, or eleven days higher than our days supply as of December 31, 2016. We attribute the increase in used vehicle days supply to a combination of an increasing supply of off-lease vehicles and the integration of newly acquired stores, which ended the year with higher days supply than our other stores. We calculate days supply of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.
Investing Activities
Net cash used in investing activities totaled $538.2 million and $351.7 million, respectively, for 2017 and 2016. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.
Below are highlights of significant activity related to our cash flows from investing activities (in thousands): |
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase |
| | | 2017 | | 2016 | | (Decrease) |
| Capital expenditures | | $ | (105,378 | ) | | $ | (100,761 | ) | | $ | (4,617 | ) |
| Cash paid for acquisitions, net of cash acquired | | (460,394 | ) | | (234,700 | ) | | (225,694 | ) |
| Cash paid for other investments | | (8,570 | ) | | (30,280 | ) | | 21,710 |
|
| Proceeds from sales of stores | | 20,943 |
| | 11,837 |
| | 9,106 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase |
| | | 2016 | | 2015 | | (Decrease) |
| Capital expenditures | | $ | (100,761 | ) | | $ | (83,244 | ) | | $ | (17,517 | ) |
| Cash paid for acquisitions, net of cash acquired | | (234,700 | ) | | (71,615 | ) | | (163,085 | ) |
| Cash paid for other investments | | (30,280 | ) | | (28,110 | ) | | (2,170 | ) |
| Proceeds from sales of stores | | 11,837 |
| | 12,966 |
| | (1,129 | ) |
Capital Expenditures
Below is a summary of our capital expenditure activities (in thousands):
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Post-acquisition capital improvements | | $ | 41,193 |
| | $ | 31,489 |
| | $ | 32,802 |
|
| Facilities for open points | | 511 |
| | — |
| | 3,338 |
|
| Purchases of previously leased facilities | | — |
| | 24,016 |
| | 9,946 |
|
| Existing facility improvements | | 29,563 |
| | 24,249 |
| | 20,245 |
|
| Maintenance | | 34,111 |
| | 21,007 |
| | 16,913 |
|
| Total capital expenditures | | $ | 105,378 |
| | $ | 100,761 |
| | $ | 83,244 |
|
Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet manufacturer image standards and requirements. We expect that certain facility upgrades and remodels will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.
We expect to use a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer image standards and requirements.
If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completion of the projects, we believe we would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.
We expect to make expenditures of approximately $131 million in 2018 for capital improvements at recently acquired stores, purchases of land for expansion of existing stores, facility image improvements, purchases of store facilities, purchases of previously leased facilities and replacement of equipment.
Acquisitions
We focus on acquiring stores at opportunistic purchase prices that meet our return thresholds and strategic objectives. We look for acquisitions that diversify our brand and geographic mix as we continue to evaluate our portfolio to minimize exposure to any one manufacturer and achieve financial returns.
We are able to subsequently floor new vehicle inventory acquired as part of an acquisition; however, the cash generated by these transactions are recorded as borrowings on floor plan notes payable, non-trade. Adjusted net cash paid for acquisitions, as well as certain other acquisition-related information is presented below (dollars in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Number of stores acquired | | 18 |
| | 15 |
| | 6 |
|
| Number of stores opened | | 1 |
| | 1 |
| | 1 |
|
| Number of franchises added | | — |
| | 1 |
| | 1 |
|
| | | | | | | |
| Cash paid for acquisitions, net of cash acquired | | $ | (460,394 | ) | | $ | (234,700 | ) | | $ | (71,615 | ) |
| Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory | | 111,017 |
| | 94,550 |
| | 25,642 |
|
| Cash paid for acquisitions, net of cash acquired – adjusted | | $ | (349,377 | ) | | $ | (140,150 | ) | | $ | (45,973 | ) |
We evaluate potential capital investments primarily based on targeted rates of return on assets and return on our net equity investment.
Financing Activities
Net cash provided by financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| Cash provided by financing activities, as reported | | $ | 396,313 |
| | $ | 266,062 |
| | $ | 105,292 |
|
Less: cash provided by borrowings of floor plan notes payable: non-trade | | (241,479 | ) | | (252,893 | ) | | (136,201 | ) |
| Cash provided by (used in) financing activities, as adjusted | | $ | 154,834 |
| | $ | 13,169 |
| | $ | (30,909 | ) |
Below are highlights of significant activity related to our cash flows from financing activities, excluding net borrowings on floor plan notes payable: non-trade, which are discussed above (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) in |
| | | 2017 | | 2016 | | Cash Flow |
| Net borrowings (repayments) on lines of credit | | $ | (81,717 | ) | | $ | 121,261 |
| | $ | (202,978 | ) |
| Principal payments on long-term debt and capital leases, other | | (50,288 | ) | | (27,703 | ) | | (22,585 | ) |
| Proceeds from the issuance of long-term debt | | 395,905 |
| | 66,466 |
| | 329,439 |
|
| Payments of debt issuance costs | | (4,664 | ) | | — |
| | (4,664 | ) |
| Repurchases of common stock | | (33,753 | ) | | (112,939 | ) | | 79,186 |
|
| Dividends paid | | (26,544 | ) | | (24,131 | ) | | (2,413 | ) |
| Other financing activity | | (33,396 | ) | | — |
| | (33,396 | ) |
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | Increase (Decrease) in |
| | | 2016 | | 2015 | | Cash Flow |
| Net borrowings (repayments) on lines of credit | | $ | 121,261 |
| | $ | (36,523 | ) | | $ | 157,784 |
|
| Principal payments on long-term debt, unscheduled | | (27,703 | ) | | (9,189 | ) | | (18,514 | ) |
| Proceeds from the issuance of long-term debt | | 66,466 |
| | 75,675 |
| | (9,209 | ) |
| Repurchases of common stock | | (112,939 | ) | | (31,548 | ) | | (81,391 | ) |
| Dividends paid | | (24,131 | ) | | (19,985 | ) | | (4,146 | ) |
Borrowing and Repayment Activity
During 2017, we raised net proceeds of $395.9 million through the issuance of our Senior Notes and mortgages and borrowed $81.7 million, net, on our lines of credit. These funds were primarily used for acquisitions, share repurchases and capital expenditures.
Our debt to total capital ratio, excluding floor plan notes payable, was 49.2% at December 31, 2017 compared to 46.5% at December 31, 2016. We partially funded our 2017 acquisition activity with additional debt.
Equity Transactions
Under the share repurchase program authorized by our Board of Directors and repurchases associated with stock compensation activity, we repurchased 361,457 shares of our Class A common stock at an average price of $93.38 per share in 2017. As of December 31, 2017, we had $162.6 million available for repurchase under our share repurchase program. The authority to repurchase does not have an expiration date.
In order to lower the average cost of acquiring shares in our ongoing share repurchase program, in December 2017, we entered into a structured repurchase agreement involving the use of capped call options for the purchase of our Class A common stock. We paid a fixed sum upon execution of the agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of the agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium. If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We paid net premiums of $33.4 million in December 2017 to enter this agreement and, as of December 31, 2017, the options were outstanding.
During 2017, we paid dividends on our Class A and Class B Common Stock as follows:
|
| | | | | | | | |
| Dividend paid: | | Dividend amount per share | | Total amount of dividend (in thousands) |
| March 2017 | | $ | 0.25 |
| | $ | 6,292 |
|
| May 2017 | | 0.27 |
| | 6,760 |
|
| August 2017 | | 0.27 |
| | 6,751 |
|
| November 2017 | | 0.27 |
| | 6,741 |
|
We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.
Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt (in thousands):
|
| | | | | | | | | |
| | | Outstanding as of December 31, 2017 | | Remaining Available as of December 31, 2017 | |
| Floor plan notes payable: non-trade | | $ | 1,802,252 |
| | $ | — |
| (1) |
| Floor plan notes payable | | 116,774 |
| | — |
| |
| Used vehicle inventory financing facility | | 177,222 |
| | — |
| (2) |
| Revolving lines of credit | | 94,568 |
| | 222,502 |
| (2),(3) |
| Real estate mortgages | | 469,969 |
| | — |
| |
| 5.25% Senior notes due 2025 | | $ | 300,000 |
| | — |
| |
| Other debt | | 12,512 |
| | — |
| |
| Unamortized debt issuance costs | | (6,919 | ) | | — |
| (4) |
| Total debt | | $ | 2,966,378 |
| | $ | 222,502 |
| |
| |
(1)
| As of December 31, 2017, we had a $1.9 billion new vehicle floor plan commitment as part of our credit facility. |
| |
(2)
| The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly. |
| |
(3)
| Available credit is based on the borrowing base amount effective as of November 30, 2017. This amount is reduced by $9.2 million for outstanding letters of credit. |
| |
(4)
| We adopted an accounting standard update that requires debt issuance costs be presented on the balance sheet as a reduction from the carrying amount of the related debt liability. We adopted the standard retrospectively and have presented all debt issuance costs as a reduction from the carrying amount of the related debt liability for both current and prior periods. See Note 6 of the Notes to Consolidated Financial Statements for additional information. |
Credit Facility
On August 1, 2017, we amended our existing credit facility to increase the total financing commitment to $2.4 billion which matures in August 2022. This syndicated credit facility is comprised of eighteen financial institutions, including seven manufacturer-affiliated finance companies. Under our credit facility we are permitted to allocate up to $1.9 billion in new vehicle inventory floor plan financing and up to a total of $500 million in used vehicle inventory floor plan financing and in revolving financing for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $2.75 billion total availability, subject to lender approval. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
The availability of the revolving line of credit under our syndicated credit facility is determined according to a borrowing base comprised of a portion of certain accounts, receivables, invoices, inventory and equipment. The borrowing base is reduced by the sum of the outstanding aggregate principal balance of new and used vehicle floor plan loans and new and used swing line loans.
Our obligations under our revolving syndicated credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts receivable (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our revolving syndicated credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
We have the ability to deposit up to $50 million in cash in Principal Reduction (PR) accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of December 31, 2017, we had no balances in our PR accounts.
If the outstanding principal balance on our new vehicle inventory floor plan commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving line of credit commitment less the outstanding balance on the line less outstanding letters of credit. The reserve amount decreases the revolving line of credit availability and may be used to repay the new vehicle floor plan commitment balance.
The interest rate on the credit facility varies based on the type of debt, with the rate of one-month LIBOR plus 1.25% for new vehicle floor plan financing, one-month LIBOR plus 1.50% for used vehicle floor plan financing; and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.25% to 2.50%, depending on our leverage ratio. The annual interest rate associated with our new vehicle floor plan commitment was 2.82% at December 31, 2017. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 3.07% and 3.07%, respectively, at December 31, 2017.
Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Under our credit facility, we are required to maintain the ratios detailed in the following table:
|
| | | | |
Debt Covenant Ratio
| |
Requirement
| | As of December 31, 2017 |
Current ratio | | Not less than 1.10 to 1 | | 1.21 to 1 |
Fixed charge coverage ratio | | Not less than 1.20 to 1 | | 2.82 to 1 |
Leverage ratio | | Not more than 5.00 to 1 | | 2.59 to 1 |
As of December 31, 2017, we were in compliance with all covenants. We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.
If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which are the termination of the agreement, acceleration of the amounts owed and the seizure and sale of our assets comprising the collateral for the loans. A breach would also trigger cross-defaults under other debt agreements.
Although we refer to the lenders’ obligations to make loans as “commitments,” each lender’s obligations to make any loan or other credit accommodations under the revolving syndicated credit facility is subject to the satisfaction of the conditions precedent specified in the credit agreement including, for example, that our representations and warranties in the agreement are true and correct in all material respects as of the date of each credit extension. If we are unable to satisfy the applicable conditions precedent, we may not be able to request new loans or other credit accommodations under our revolving syndicated credit facility.
Other Lines of Credit
We have other lines of credit with a total financing commitment of $3.5 million for general corporate purposes, including acquisitions and working capital. Substantially all of these other lines of credit mature in 2019 and have interest rates ranging up to 2.94%. As of December 31, 2017, $0.6 million was outstanding on these other lines of credit.
Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for certain new vehicles and vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. As of December 31, 2017, $116.8 million was outstanding on these agreements at interest rates ranging up to 5.50%. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 3.0% to 5.0% at December 31, 2017. The mortgages are payable in various installments through October 2034. As of December 31, 2017, we had fixed interest rates on 78.9% of our outstanding mortgage debt.
Our other debt includes capital leases and sellers’ notes. Additionally, in 2015, our equity contribution obligations associated with the new markets tax credit equity-method investment were included in other debt. The interest rates associated with our other debt ranged from 3.1%to 8.0% at December 31, 2017. This debt, which totaled $12.5 million at December 31, 2017, is due in various installments through December 2050.
5.25% Senior Notes Due 2025
On July 24, 2017, we issued $300 million in aggregate principal amount of 5.25% Senior Notes due 2025 ("Notes") to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notes from July 24, 2017 and is payable semiannually on February 1 and August 1. The first interest payment is due on February 1, 2018. We may redeem the Notes in whole or in part at any time prior to August 1, 2020 at a price equal to 100% of the principal amount plus a make-whole premium set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices
set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest to the date of purchase.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2017, was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period |
Contractual Obligation | |
Total | | 2018 | | 2019 and 2020 | | 2021 and 2022 | | 2023 and beyond |
Floor plan notes payable: non-trade(1) | | $ | 1,802,252 |
| | $ | 1,802,252 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Floor plan notes payable(1) |
| 116,774 |
|
| 116,774 |
| | — |
| | — |
| | — |
|
Used vehicle inventory financing facility(1) | | 177,222 |
| | — |
| | — |
| | 177,222 |
| | — |
|
Revolving lines of credit(1)(3) | | 94,568 |
| | 111 |
| | 457 |
| | 94,000 |
| | — |
|
Real estate mortgages, including interest(3) | | 571,549 |
| | 36,327 |
| | 119,187 |
| | 128,164 |
| | 287,871 |
|
5.25% Senior Notes Due 2025, including interest (3) | | 426,339 |
| | 16,089 |
| | 31,500 |
| | 31,500 |
| | 347,250 |
|
| Other debt, including capital leases and interest | | 327,909 |
|
| 1,731 |
| | 3,305 |
| | 3,282 |
| | 319,591 |
|
| Charge-backs on various contracts | | 52,744 |
| | 27,352 |
| | 22,495 |
| | 2,856 |
| | 41 |
|
Operating leases(2) | | 408,396 |
| | 38,357 |
| | 67,139 |
| | 59,658 |
| | 243,242 |
|
| Self-insurance programs | | 31,227 |
| | 14,354 |
| | 7,385 |
| | 3,765 |
| | 5,723 |
|
| | | $ | 4,008,980 |
| | $ | 2,053,347 |
| | $ | 251,468 |
| | $ | 500,447 |
| | $ | 1,203,718 |
|
| |
(1)
| Amounts for new vehicle floor plan commitment, floor plan notes payable, the used vehicle inventory financing facility and the revolving lines of credit do not include estimated interest payments. See Notes 1 and 6 in the Notes to Consolidated Financial Statements. |
| |
(2)
| Amounts for operating lease commitments do not include sublease income, and certain operating expenses such as maintenance, insurance and real estate taxes. See Note 7 in the Notes to Consolidated Financial Statements. |
| |
(3)
| Balances exclude net impact of debt issuance costs. See Note 6 in the Notes to Consolidated Financial Statements. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation and Changing Prices
Inflation and changing prices did not have a material impact on our revenues or income from operations in the years ended December 31, 2017, 2016 and 2015.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks relating to market fluctuations in interest rates and equity values. We do not acquire our market risk sensitive instruments for trading purposes.
Variable Rate Debt
Our syndicated credit facility, other floor plan notes payable and certain real estate mortgages are structured as variable rate debt. The interest rates on our variable rate debt are tied to either the one-month LIBOR, 3-month LIBOR, or the prime rate. These debt obligations, therefore, expose us to variability in interest payments due to changes in these rates. Certain floor plan debt is based on open-ended lines of credit tied to each individual store from the various manufacturer finance companies.
Our variable-rate floor plan notes payable, variable rate mortgage notes payable and other credit line borrowings subject us to market risk exposure. As of December 31, 2017,2021, we had $2.3$2.1 billion outstanding under such agreements at a weighted average interest rate of 2.7%1.43% per annum. A 10% increase in interest rates, or 2714.3 basis points, would increase annual interest expense by approximately $4.1$2.2 million, net of tax, based on amounts outstanding as of December 31, 2017.2021.
As of December 31, 2020, we had $2.0 billion outstanding under such agreements at a weighted average interest rate of 1.46% per annum. A 10% increase in interest rates, or 14.6 basis points, would increase annual interest expense by approximately $2.1 million, net of tax, based on amounts outstanding as of December 31, 2020.
Fixed Rate Debt
The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall because we would expect to be able to refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair value but do not impact earnings or cash flows.
As of December 31, 2017,2021, we had $676.9 million$2.5 billion of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between January 12, 2019April 1, 2022 and December 31, 2050.July 1, 2038. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $698.1 million$2.6 billion as of December 31, 2017.2021.
As of December 31, 2020, we had $2.0 billion of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between January 1, 2020 and August 31, 2038. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $2.0 billion as of December 31, 2020.
Foreign Currency Exchange Risk
The functional currency of our Canadian subsidiaries is the CAD. Our exposure to fluctuating exchange rates relates to the effects of translating financial statements of those subsidiaries into our reporting currency, which we do not hedge against based on our investment strategy in these foreign operations. A 10% devaluation in average exchange rates for the CAD to the USD would have resulted in a $32.3 million or 0.1% decrease to our revenues for the year ended December 31, 2021.
We had no subsidiaries with foreign currency for the year ended December 31, 2020.
Equity Price Risk
We are subject to equity price risk with respect to our equity investment in Shift Technologies, Inc. (Shift), which has a readily determinable fair value following Shift going public in a reverse-merger deal with Insurance Acquisition, a special purpose acquisition company, in the fourth quarter of 2020. During the period that we hold this equity investment, unrealized gains and losses will be recorded as the fair market value of this security changes over time. The fair value of this equity security was $40.9 million at December 31, 2021. A hypothetical 10% change in the equity price of this security would result in an approximate change to unrealized gain or loss of $4 million. The selected 10% hypothetical change in the equity price is not intended to reflect a best or worst case scenario, as equity price changes could be smaller or larger due to the nature of equity markets.
The fair value of this equity security was $107.3 million at December 31, 2020. A hypothetical 10% change in the equity price of this security would result in an approximate change to unrealized gain or loss of $11 million.
Risk Management Policies
We assess interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our policy is to manage this risk through amonitoring our mix of fixed rate and variable rate debt. We currently utilize bank debt, structures.mortgage financing, high-yield debt and internally generated cash flows for growth and investment. We monitor our credit ratings and evaluate the benefit and cost of various debt types to manage, and minimize as best as possible, our interest cost.
We maintain risk management controls to monitor interest rate cash flow attributable to both our outstanding and forecasted debt obligations, as well as our offsetting hedge positions. The risk management controls include assessing the impact to future cash flows of changes in interest rates.
Item 8.Financial Statements and Supplementary Financial Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 1515. Exhibits and Financial Statement Schedules of Part IV of this document. Quarterly financial datafor each of the eight quarters in the two-year period ended December 31, 2017 is included following the financial statements and notes thereto.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange CommissionSEC rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2021. In making this assessment, we used the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal controls over financial reporting during the year of the acquisition while integrating the acquired operations. Management’s evaluation of internal control over financial reporting excludes the operations of the eighteenseventy-seven stores acquired in 2017,2021, which represented 11%20% of consolidated total assets as of December 31, 20172021 and 6%18% of totalconsolidated revenues for the year ended December 31, 2017.2021.
Based on our assessment, our management concluded that, as of December 31, 2017,2021, our internal control over financial reporting was effective.
KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2017,2021, which is included in Item 88. Financial Statements and Supplementary Financial Data of this Form 10-K.
Item 9B.Other Information
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance
Information required by this item will be included in our Proxy Statement for our 20182022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.
Item 11.Executive Compensation
Information required by this item will be included in our Proxy Statement for our 20182022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table summarizes equity securities authorized for issuance as of December 31, 2017.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
Plan Category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | |
Weighted average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) (2) |
| Equity compensation plans approved by shareholders | | 466,860 | | | $ | — | | (1) | | 2,292,788 | |
| Equity compensation plans not approved by shareholders | | — | | | — | | | | — | |
| Total | | 466,860 | | | $ | — | | | | 2,292,788 | |
|
| | | | | | | | | |
Plan Category | |
Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | |
Weighted average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) (2) |
| Equity compensation plans approved by shareholders | | 344,804 |
| | $— | (1) | | 1,665,697 |
|
| Equity compensation plans not approved by shareholders | | — |
| | — | | | — |
|
| Total | | 344,804 |
| | $— | | | 1,665,697 |
|
| |
(1)
| There is no exercise price associated with our restricted stock units. |
| |
(2)
| Includes 1,383,827 shares available pursuant to our 2013 Amended and Restated Stock Incentive Plan and 281,870 shares available pursuant to our Employee Stock Purchase Plan. |
(2)Includes 983,435 shares available pursuant to our 2013 Amended and Restated Stock Incentive Plan and 1,309,353 shares available pursuant to our Employee Stock Purchase Plan.
The additional information required by this item will be included in our Proxy Statement for our 20182022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.
Item 13.Certain Relationships and Related Transactions, and Director Independence
Information required by this item will be included in our Proxy Statement for our 20182022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.
Item 14.Principal AccountantAccounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, Portland, OR, Auditor Firm ID: 185.
Information required by this item will be included in our Proxy Statement for our 20182022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedules
Financial Statements and Schedules
The Consolidated Financial Statements, together with the reports thereon of KPMG LLP, Independent Registered Public Accounting Firm, are included on the pages indicated below:
| | | | | |
| |
| Page |
| |
| Page |
| Report of Independent Registered Public Accounting Firm | |
Consolidated Balance Sheets as of December 31, 20172021 and 20162020 | |
Consolidated Statements of Operations for the years ended December 31, 2017, 20162021, 2020 and 20152019 | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 20162021, 2020 and 20152019 | |
Consolidated Statements of Changes in Stockholders’ Equity and Redeemable Non-controlling Interest for the years ended December 31, 2017, 20162021, 2020 and 20152019 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 20162021, 2020 and 20152019 | |
| Notes to Consolidated Financial Statements | |
Selected Quarterly Financial Information (Unaudited) | |
There are no schedules required to be filed herewith.
Item 16.Form 10-K Summary
None.
Exhibit Index
The following exhibits are filed herewith. An asterisk (*) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement.
| | | | | |
| Exhibit | Description |
| |
Exhibit | Description |
| |
| Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014 (incorporated by reference to exhibit 2.1 to the Company’s Form 8-K filed October 3, 2014) |
| |
| First Amendment to Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited effective July 15, 2014 (incorporated by reference to exhibit 2.2 to the Company’s Form 10-Q for the quarter ended June 30, 2014) |
| |
| Second Amendment to Stock Purchase Agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited effective November 13, 2014 (incorporated by reference to exhibit 2.1.2 to the Company’s Form 10-K for the year ended December 31, 2014) |
| |
3.1 | Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 1999) |
| |
| 2013 Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.1 to the Company’s Form 8-K10-Q filed August 26, 2013)July 28, 2021). |
| |
| Second Amended and Restated Bylaws of Lithia Motors, Inc. (incorporated by reference to exhibit 3.2 to the Company’s Form 8-K filed April 25, 2019). |
| |
| Indenture, dated as of July 24, 2017,December 9, 2019, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017December 9, 2019 and filed with the Securities and Exchange Commission on July 24, 2017)December 13, 2019). |
| |
| Form of 5.250%4.625% Senior Notes due 20252027 (included as part of Exhibitexhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017December 9, 2019 and filed with the Securities and Exchange Commission on July 24, 2017)December 13, 2019). |
| |
10.1* | 2009 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement for its 2009 annual meeting of shareholders filed on March 20, 2009) |
| |
|
| |
Exhibit | DescriptionIndenture, dated as of October 9, 2020, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated October 9, 2020 and filed with the Securities and Exchange Commission on October 9, 2020). |
| |
| Amendment 2014-1Form of 4.375% Senior Notes due 2031 (included as part of exhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated October 9, 2020 and filed with the Securities and Exchange Commission on October 9, 2020). |
| |
| Indenture, dated as of May 27, 2021, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to the Lithia Motors, Inc.Company’s Form 8-K filed May 27, 2021). |
| |
| Form of 3.875% senior notes due 2029 (included as part of exhibit 4.1 to the Company’s Form 8-K filed May 27, 2021). |
| |
| Description of the Registrant’s Securities under Section 12 of the Exchange Act of 1934 |
| |
| Amended and Restated 2009 Employee Stock Purchase Plan (incorporated by reference to exhibit 10.1.110.1 to Form 8-K dated April 25, 2019 and filed with the Company’s Form 10-K for the year ended December 31, 2014)Securities and Exchange Commission on April 25, 2019) |
| |
| Lithia Motors, Inc. 2013 Amended and Restated Stock Incentive Plan (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed May 2, 2013) |
| |
| | | | | |
| Exhibit | Description |
| |
| RSU Deferral Plan (incorporated by reference to exhibit 10.3.1 to the Company’s Form 10-K for the year ended December 31, 2011) |
| |
| Amendment to RSU Deferral Plan (incorporated by reference to exhibit 10.2.2 to the Company’s Form 10-K for the year ended December 31, 2014) |
| |
| Restricted Stock Unit (RSU) Deferral Election Form (incorporated by reference to exhibit 10.2.3 to the Company’s Form 10-K for the year ended December 31, 2014) |
| |
| Form of Restricted Stock Unit Agreement (2016(2019 Performance- and Time-Vesting) (for Senior Executives) (incorporated(incorporated by reference to exhibit 10.3.3 to the Company’s Form 10-K for the year ended December 31, 2015)2018) |
| |
| Form of Restricted Stock Unit Agreement (2017(2020 Performance- and Time-Vesting) (for Senior Executives) (incorporated(incorporated by reference to exhibit 10.3.110.3.3 to the Company'sCompany’s Form 10-K for the year ended December 31, 2016)2019) |
| |
| Form of Restricted Stock Unit Agreement (2018(2021 Performance- and Time-Vesting) (for Senior Executives) |
| |
| Form of Restricted Stock Unit Agreement (Time-Vesting) (incorporated(incorporated by reference to exhibit 10.3.210.3.3 to the Company'sCompany’s Form 10-K for the year ended December 31, 2016)2020) |
| |
| Form of Restricted Stock Unit Agreement (Performance- and Time-Vesting) (for Senior Executives) for awards beginning in 2022 |
| |
| Lithia Motors, Inc. 2013 Discretionary Support Services Variable Performance CompensationShort-Term Incentive Plan (incorporated by reference to exhibit 10.210.1 to the Company’s Form 8-K filed May 2, 2013)December 22, 2020). |
| |
| Form of Outside Director Nonqualified Deferred Compensation Agreement (incorporated by reference to exhibit 10.20 to the Company’s Form 10-K for the year ended December 31, 2005) |
| |
| Fourth Amended and Restated Loan Agreement, dated April 29, 2021, among Lithia Motors, Inc., the subsidiaries of Lithia Motors, Inc. listed on the signature pages of the agreement or that thereafter become borrowers thereunder, the lenders party thereto from time to time, and U.S. Bank National Association (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed October 3, 2014)May 4, 2021). |
| |
| First Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.4 to the Company’s Form 10-Q for the quarter ended March 31, 2015) |
| |
| Second Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed December 22, 2015) |
| |
| Third Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.1 to the Company’s Form 10-Q for the quarter ended June 30, 2016) |
| |
| Fourth Amendment to Amended and Restated Loan Agreement (incorporated by reference to exhibit 10.2 to the Company’s Form 10-Q for the quarter ended June 30, 2016) |
| |
| Sixth Amendment to Amended and Restated Loan Agreement dated July 12, 2017. (incorporated by reference to exhibit 10.1 to the Company's Form 10-Q for the quarter ended September 30, 2017) |
| |
| Seventh Amendment to Amended and Restated Loan Agreement dated August 1, 2017 (incorporated by reference to exhibit 10.1 to Form 8-K dated August 1, 2017 and filed with the Securities and Exchange Commission on August 3, 2017) |
| |
| Amended and Restated Split-Dollar Agreement (incorporated by reference to exhibit 10.17 to the Company’s Form 10-K for the year ended December 31, 2012) |
| |
| Form of Indemnity Agreement for each Named Executive Officer (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed May 29, 2009) |
| |
| Form of Indemnity Agreement for each non-management Director (incorporated by reference to exhibit 10.2 to the Company’s Form 8-K filed May 29, 2009) |
| |
| Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan (incorporated by reference to exhibit 10.1 to the Company'sCompany’s Form 10-Q for the quarter ended March 31, 2016) |
| |
|
| |
Exhibit | Description |
| |
| Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award for Sidney DeBoer (incorporated by reference to exhibit 10.22.1 to the Company’s Form 10-K for the year ended December 31, 2010) |
| |
| Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award (incorporated by reference to exhibit 10.22.2 to the Company’s Form 10-K for the year ended December 31, 2010) |
| |
| Amendment to Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan (Executive Management Non-Qualified Deferred Compensation and Supplemental Executive Retirement Plan)(incorporated by reference to exhibit 10.10.3 to the Company’s Form 10-K filed February 21, 2019) |
| |
| Transition Agreement dated September 14, 2015 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed September 17, 2015) |
| |
| Amendment to Transition Agreement dated January 22, 2019 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed January 25, 2019) |
| |
| Class B Conversion Agreement dated January 22, 2019 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by reference to exhibit 10.2 to the Company’s Form 8-K filed January 25, 2019) |
| |
| | | | | |
| Exhibit | Description |
| |
| Director Service Agreement effective January 1, 2016 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by reference to Exhibitexhibit 10.2 to the Company’s Form 8-K filed September 17, 2015) |
| |
| Form of Employment and Change in Control Agreement dated February 4, 2016 between Lithia Motors, Inc. and Bryan DeBoer (incorporated by reference to Exhibitexhibit 10.1 to the Company’s Form 8-K filed February 5, 2016)(1) |
| |
| RatioCredit Agreement, dated July 14, 2020, among Lithia Motors, Inc., the subsidiaries of EarningsLithia Motors Inc. party thereto from time to Combined Fixed Chargestime, the lenders party thereto from time to time, and Wells Fargo Bank, National Association (incorporated by reference to exhibit 10.1 to Form 8-K filed July 16, 2020). |
| |
| Credit Agreement dated April 12, 2021, among Lithia Motors, Inc., Lithia Real Estate, Inc., and Ally Bank (Ally Capital in Hawaii, Mississippi, Montana and New Jersey) (incorporated by reference to exhibit 10.1 to the Company's Form 8-K filed April 15, 2021). |
| |
| Amended and Restated Loan Agreement, dated December 31, 2020, among SCFC Business Services LLC, Driveway Finance Corporation, the lenders party thereto from time to time, and JPMorgan Chase Bank, N.A. (incorporated by reference to exhibit 10.1 to the Company's 8-K filed June 9, 2021). |
| |
| Amendment No. 1 to Amended and Restated Loan Agreement, dated June 4, 2021, among SCFC Business Services LLC, Chariot Funding LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to exhibit 10.2 to the Company's 8-K filed June 9, 2021). |
| |
| Commitment Letter by The Bank of Nova Scotia (incorporated by reference to exhibit 10.1 to the Company's Form 8-K filed September 3, 2021). |
| |
| Subsidiaries of Lithia Motors, Inc. |
| |
| Consent of KPMG LLP, Independent Registered Public Accounting Firm |
| |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. |
| |
| Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
| |
| Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
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| 101.INS | Inline XBRL Instance Document.Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
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| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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| 104 | Cover page formatted as Inline XBRL and contained in Exhibit 101. |
(1)Substantially similar agreements exist between Lithia Motors, Inc. and each of Michael Cavanaugh, Marguerite Celeste, John Criddle, Tom Dobry, Gary Glandon, Scott Hillier, George Hines, Christopher S. Holzshu, Edward Impert, Charles Lietz, Tina Miller, Thomas Naso, Bryan Osterhout, Kelly Porter, Jodi Rasor, Ross Sherman, and David Stork. The “Cash Change in Control Benefits” under the agreements with Michael Cavanaugh, John Criddle, Gary Glandon, Edward Impert, Charles Lietz, Kelly Porter, Jodi Rasor, and Ross Sherman provide for 12 months of base salary rather than 24 months.
(1) | | | | | | | | | | | | | | |
| | Substantially similar agreements exist between Lithia Motors, Inc. and each of Scott Hillier, Christopher S. Holzshu, John F. North III, George Liang, Mark DeBoer, Tom Dobry and Bryan Osterhout. The "Cash Change in Control Benefits" under the agreements with Mr. Mark DeBoer and Mr. Dobry provide for 12 months of base salary rather than 24 months. | 50 | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Date: February 18, 2022 | LITHIA MOTORS, INC. |
| Registrant |
| | |
| |
Date: February 23, 2018By: | LITHIA MOTORS, INC. |
| |
| By /s//s/ Bryan B. DeBoer |
| | Bryan B. DeBoer |
| Director, President and | Chief Executive Officer, President, Director, and Principal Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 23, 2018:
| | | | | | | | |
| /s/ Bryan B. DeBoer | | /s/ Tina Miller |
| Bryan B. DeBoer | | Tina Miller |
| Chief Executive Officer, President, Director, and Principal Executive Officer | | Chief Financial Officer, Senior Vice President, and Principal Accounting Officer |
| | |
Signature | | Title |
| | |
/s/ Bryan B. DeBoer | | Director, President and Chief Executive Officer.
(Principal Executive Officer)
|
Bryan B. DeBoer | |
| | |
/s/ John F. North, III | | Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
|
John F. North, III | |
| | |
| /s/ Sidney B. DeBoer | | Chairman of the Board |
Sidney B. DeBoer | | |
| | |
/s/ Thomas R. Becker | | Director |
Thomas Becker | | |
| | |
| /s/ Susan O. Cain | | Director |
| Sidney B. DeBoer | | Susan O. Cain | | |
| Chairman of the Board and Director | | Director |
| | |
| /s/ Shauna McIntyre | | /s/ Louis P. Miramontes |
| Shauna McIntyre | | Louis P. Miramontes |
| Director | | Director |
| | |
| /s/ Kenneth E. Roberts | | Director |
Kenneth E. Roberts | | |
| | |
| /s/ David J. Robino | | Director |
| Kenneth E. Roberts | | David J. Robino |
| Director | | Director |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lithia Motors, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and redeemable non-controlling interest, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 20172021, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172021 and 2016,2020, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 201818, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the Company’s impairment tests over goodwill and franchise value
As disclosed in Note 1 and Note 5 to the consolidated financial statements, the Company had goodwill and indefinite-lived franchise value intangible assets with a book value of $977.3 million and $799.1 million, respectively, at December 31, 2021. As described in Note 1 to the consolidated financial statements, the Company tested its goodwill and franchise value intangibles assets for impairment using a qualitative assessment as of October 1, 2021. During the third quarter of 2021, the Company identified indications of a triggering event at a certain store. Management tested the goodwill and franchise value for this store and recorded non-cash impairment charges of $0 million and $1.9 million, which were equal to the difference between the fair value and the carrying value for goodwill and franchise value, respectively. The impairment charge for franchise value reduced the carrying value to zero at this store. The qualitative annual
assessment was performed at each individual store level as of October 1, 2021 and the Company determined that no additional impairment existed in 2021.
We identified the assessment of the Company’s qualitative impairment tests over goodwill and franchise value for stores whose current operating results indicate a higher risk of potential impairment as a critical audit matter. The tests included the evaluation of qualitative factors such as future revenue growth and profitability as well as comparable dealership sales, that required especially subjective auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill and franchise value impairment assessment processes, including controls related to the identification and development of relevant qualitative factors. We compared key financial metrics across stores with similar demographics, including historical and future dealership level revenue growth and profitability, and evaluated differences for potential indicators of impairments. We evaluated the Company’s intent and ability to carry out a particular course of action by evaluating the Company’s past history of carrying out its stated intentions. Additionally, we evaluated information about recent comparable dealership sales to identify potential indicators of impairment.
/s/ KPMG LLP
We have served as the Company’s auditor since 1993.
Portland, Oregon
February 23, 201818, 2022
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Lithia Motors, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Lithia Motors, Inc. and subsidiaries’subsidiaries' (the “Company”)Company) internal control over financial reporting as of December 31, 2017,2021, based on criteria established inInternal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172021 and 2016,2020, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and redeemable non-controlling interest, and cash flows for each of the years in the three-year period ended December 31, 2017,2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 23, 201818, 2022 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired 18 dealershipsseventy-seven stores during 2017,2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,2021, all of these acquired stores’ internal control over financial reporting. The total assets of these 18seventy-seven stores represented approximately 11%20% of consolidated total assets as of December 31, 20172021 and approximately 6%18% of consolidated revenues for the year ended December 31, 2017.2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of these 18 dealerships.seventy-seven stores.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Portland, Oregon
February 23, 201818, 2022
|
| | | | | | | | |
| | LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands) |
| |
| | | December 31, |
| | | 2017 | | 2016 |
| | Assets | | | |
| | Current Assets: | | | |
| | Cash and cash equivalents | $ | 57,253 |
| | $ | 50,282 |
|
| | Accounts receivable, net of allowance for doubtful accounts of $7,386 and $5,281 | 521,938 |
| | 417,714 |
|
| | Inventories, net | 2,132,744 |
| | 1,772,587 |
|
| | Other current assets | 70,847 |
| | 46,611 |
|
| | Total Current Assets | 2,782,782 |
| | 2,287,194 |
|
| | | | | |
| | Property and equipment, net of accumulated depreciation of $197,802 and $167,300 | 1,185,169 |
| | 1,006,130 |
|
| | Goodwill | 256,320 |
| | 259,399 |
|
| | Franchise value | 186,977 |
| | 184,268 |
|
| | Other non-current assets | 271,818 |
| | 107,159 |
|
| | Total Assets | $ | 4,683,066 |
| | $ | 3,844,150 |
|
| | | | | |
| | Liabilities and Stockholders' Equity | | | |
| | Current Liabilities: | | | |
| | Floor plan notes payable | $ | 116,774 |
| | $ | 94,602 |
|
| | Floor plan notes payable: non-trade | 1,802,252 |
| | 1,506,895 |
|
| | Current maturities of long-term debt | 18,876 |
| | 20,965 |
|
| | Trade payables | 111,362 |
| | 88,423 |
|
| | Accrued liabilities | 251,717 |
| | 211,109 |
|
| | Total Current Liabilities | 2,300,981 |
| | 1,921,994 |
|
| | | | | |
| | Long-term debt, less current maturities | 1,028,476 |
| | 769,916 |
|
| | Deferred revenue | 103,111 |
| | 81,929 |
|
| | Deferred income taxes | 56,277 |
| | 59,075 |
|
| | Other long-term liabilities | 111,003 |
| | 100,460 |
|
| | Total Liabilities | 3,599,848 |
| | 2,933,374 |
|
| | | | | |
| | Stockholders' Equity: | | | |
| | Preferred stock - no par value; authorized 15,000 shares; none outstanding | — |
| | — |
|
| | Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 23,968 and 23,382 | 149,123 |
| | 165,512 |
|
| | Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 1,000 and 1,762 | 124 |
| | 219 |
|
| | Additional paid-in capital | 11,309 |
| | 41,225 |
|
| | Retained earnings | 922,662 |
| | 703,820 |
|
| | Total Stockholders' Equity | 1,083,218 |
| | 910,776 |
|
| | Total Liabilities and Stockholders' Equity | $ | 4,683,066 |
| | $ | 3,844,150 |
|
| | | | | | | | | | | |
| CONSOLIDATED BALANCE SHEETS |
| December 31, |
| (In millions) | 2021 | | 2020 |
| Assets | | | |
| Current assets: | | | |
| Cash, restricted cash, and cash equivalents | $ | 174.8 | | | $ | 162.5 | |
| Accounts receivable, net of allowance for doubtful accounts of $17.3 and $5.9 | 910.0 | | | 614.0 | |
| Inventories, net | 2,385.5 | | | 2,492.9 | |
| | | |
| Other current assets | 63.0 | | | 70.5 | |
| | | |
| Total current assets | 3,533.3 | | | 3,339.9 | |
| | | |
| Property and equipment, net of accumulated depreciation of $422.6 and $338.0 | 3,052.6 | | | 2,197.5 | |
| Operating lease right-of-use assets | 395.9 | | | 264.0 | |
| Goodwill | 977.3 | | | 593.0 | |
| Franchise value | 799.1 | | | 350.2 | |
| | | |
| Other non-current assets | 2,388.7 | | | 1,157.5 | |
| Total assets | $ | 11,146.9 | | | $ | 7,902.1 | |
| | | |
| Liabilities and equity | | | |
| Current liabilities: | | | |
| Floor plan notes payable | $ | 354.2 | | | $ | 234.2 | |
| Floor plan notes payable: non-trade | 835.9 | | | 1,563.0 | |
| Current maturities of long-term debt | 223.7 | | | 66.0 | |
| Trade payables | 235.4 | | | 158.2 | |
| Accrued liabilities | 753.6 | | | 458.3 | |
| | | |
| | | |
| Total current liabilities | 2,402.8 | | | 2,479.7 | |
| | | |
| Long-term debt, less current maturities | 3,185.7 | | | 2,064.7 | |
| Deferred revenue | 191.2 | | | 155.7 | |
| Deferred income taxes | 191.0 | | | 146.3 | |
| Non-current operating lease liabilities | 361.7 | | | 246.7 | |
| Other long-term liabilities | 151.3 | | | 147.5 | |
| Total liabilities | 6,483.7 | | | 5,240.6 | |
| | | |
| Redeemable non-controlling interest | 34.0 | | | — | |
| | | |
| Equity: | | | |
| Preferred stock - no par value; authorized 15.0 shares; none outstanding | — | | | — | |
| Common stock - no par value; authorized 125.0 shares; issued and outstanding 29.5 and 26.3 | 1,711.6 | | | 788.2 | |
| Class B common stock - no par value; no shares authorized; issued and outstanding none and 0.2 | — | | | — | |
| Additional paid-in capital | 58.3 | | | 41.4 | |
| Accumulated other comprehensive loss | (3.0) | | | (6.3) | |
| Retained earnings | 2,859.5 | | | 1,838.2 | |
| Total stockholders’ equity - Lithia Motors, Inc. | 4,626.4 | | | 2,661.5 | |
| Non-controlling interest | 2.8 | | | — | |
| Total equity | 4,629.2 | | | 2,661.5 | |
| Total liabilities, redeemable non-controlling interest and equity | $ | 11,146.9 | | | $ | 7,902.1 | |
See accompanying notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| | LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts) |
| |
| |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | Revenues: | | | | | |
| | New vehicle | $ | 5,763,587 |
| | $ | 4,938,436 |
| | $ | 4,552,301 |
|
| | Used vehicle retail | 2,544,379 |
| | 2,226,951 |
| | 1,927,016 |
|
| | Used vehicle wholesale | 277,844 |
| | 276,616 |
| | 261,530 |
|
| | Finance and insurance | 385,863 |
| | 330,922 |
| | 283,018 |
|
| | Service, body and parts | 1,015,773 |
| | 844,505 |
| | 738,990 |
|
| | Fleet and other | 99,064 |
| | 60,727 |
| | 101,397 |
|
| | Total revenues | 10,086,510 |
| | 8,678,157 |
| | 7,864,252 |
|
| | Cost of sales: | | | | | |
| | New vehicle | 5,423,744 |
| | 4,649,024 |
| | 4,271,931 |
|
| | Used vehicle retail | 2,257,544 |
| | 1,963,267 |
| | 1,685,767 |
|
| | Used vehicle wholesale | 273,058 |
| | 272,303 |
| | 257,073 |
|
| | Service, body and parts | 522,649 |
| | 434,222 |
| | 375,069 |
|
| | Fleet and other | 93,429 |
| | 58,026 |
| | 98,778 |
|
| | Total cost of sales | 8,570,424 |
| | 7,376,842 |
| | 6,688,618 |
|
| | Gross profit | 1,516,086 |
| | 1,301,315 |
| | 1,175,634 |
|
| | Asset impairments | — |
| | 13,992 |
| | 20,124 |
|
| | Selling, general and administrative | 1,049,378 |
| | 899,590 |
| | 811,175 |
|
| | Depreciation and amortization | 57,722 |
| | 49,369 |
| | 41,600 |
|
| | Operating income | 408,986 |
| | 338,364 |
| | 302,735 |
|
| | Floor plan interest expense | (39,336 | ) | | (25,531 | ) | | (19,534 | ) |
| | Other interest expense | (34,776 | ) | | (23,207 | ) | | (19,491 | ) |
| | Other (expense) income, net | 12,195 |
| | (6,103 | ) | | (1,006 | ) |
| | Income before income taxes | 347,069 |
| | 283,523 |
| | 262,704 |
|
| | Income tax provision | (101,852 | ) | | (86,465 | ) | | (79,705 | ) |
| | Net income | $ | 245,217 |
| | $ | 197,058 |
| | $ | 182,999 |
|
| | | | | | | |
| | Basic net income per share | $ | 9.78 |
| | $ | 7.76 |
| | $ | 6.96 |
|
| | Shares used in basic per share calculations | 25,065 |
| | 25,409 |
| | 26,290 |
|
| | | | | | | |
| | Diluted net income per share | $ | 9.75 |
| | $ | 7.72 |
| | $ | 6.91 |
|
| | Shares used in diluted per share calculations | 25,145 |
| | 25,521 |
| | 26,490 |
|
| | | | | | | |
| | Cash dividends paid per Class A and Class B share | $ | 1.06 |
| | $ | 0.95 |
| | $ | 0.76 |
|
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| Year Ended December 31, |
| (In millions, except per share amounts) | 2021 | | 2020 | | 2019 |
| Revenues: | | | | | |
| New vehicle retail | $ | 11,197.7 | | | $ | 6,773.9 | | | $ | 6,799.1 | |
| Used vehicle retail | 7,255.3 | | | 3,998.4 | | | 3,527.2 | |
| Used vehicle wholesale | 957.1 | | | 308.7 | | | 301.2 | |
| Finance and insurance | 1,051.3 | | | 579.8 | | | 518.6 | |
| Service, body and parts | 2,110.9 | | | 1,348.7 | | | 1,325.1 | |
| Fleet and other | 259.4 | | | 114.8 | | | 201.5 | |
| Total revenues | 22,831.7 | | | 13,124.3 | | | 12,672.7 | |
| Cost of sales: | | | | | |
| New vehicle retail | 9,979.2 | | | 6,313.0 | | | 6,413.5 | |
| Used vehicle retail | 6,428.6 | | | 3,552.4 | | | 3,159.6 | |
| Used vehicle wholesale | 913.7 | | | 296.7 | | | 297.5 | |
| Service, body and parts | 1,000.4 | | | 631.9 | | | 657.5 | |
| Fleet and other | 250.8 | | | 104.7 | | | 190.8 | |
| Total cost of sales | 18,572.7 | | | 10,898.7 | | | 10,718.9 | |
| Gross profit | 4,259.0 | | | 2,225.6 | | | 1,953.8 | |
| Asset impairments | 1.9 | | | 7.9 | | | 2.6 | |
| Selling, general and administrative | 2,461.9 | | | 1,428.3 | | | 1,373.8 | |
| Depreciation and amortization | 127.3 | | | 92.3 | | | 82.4 | |
| Operating income | 1,667.9 | | | 697.1 | | | 495.0 | |
| Floor plan interest expense | (22.3) | | | (34.4) | | | (72.8) | |
| Other interest expense | (108.2) | | | (73.1) | | | (60.6) | |
| Other (expense) income, net | (52.6) | | | 58.9 | | | 13.8 | |
| Income before income taxes | 1,484.8 | | | 648.5 | | | 375.4 | |
| Income tax provision | (422.1) | | | (178.2) | | | (103.9) | |
| Net income | 1,062.7 | | | 470.3 | | | 271.5 | |
| Net income attributable to non-controlling interests | (1.7) | | | — | | | — | |
| Net income attributable to redeemable non-controlling interest | (0.9) | | | — | | | — | |
| Net income attributable to Lithia Motors, Inc. | $ | 1,060.1 | | | $ | 470.3 | | | $ | 271.5 | |
| | | | | |
| Basic earnings per share attributable to Lithia Motors, Inc. | $ | 36.81 | | | $ | 19.74 | | | $ | 11.70 | |
| Shares used in basic per share calculations | 28.8 | | | 23.8 | | | 23.2 | |
| | | | | |
| Diluted earnings per share attributable to Lithia Motors, Inc. | $ | 36.54 | | | $ | 19.53 | | | $ | 11.60 | |
| Shares used in diluted per share calculations | 29.0 | | | 24.1 | | | 23.4 | |
| | | | | |
| Cash dividends paid per share | $ | 1.36 | | | $ | 1.22 | | | $ | 1.19 | |
See accompanying notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| | LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands) |
| |
| |
| | | Year Ended December 31, |
| | | 2017 |
| 2016 |
| 2015 |
| | Net income | $ | 245,217 |
| | $ | 197,058 |
| | $ | 182,999 |
|
| | Other comprehensive income, net of tax: | | | | | |
| | Gain on cash flow hedges, net of tax expense of $0, $175 and $399 | — |
| | 277 |
| | 649 |
|
| | Comprehensive income | $ | 245,217 |
| | $ | 197,335 |
| | $ | 183,648 |
|
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME |
| Year Ended December 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Net income | $ | 1,062.7 | | | $ | 470.3 | | | $ | 271.5 | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Foreign currency translation adjustment | (1.1) | | | — | | | — | |
| Gain (loss) on cash flow hedges, net of tax (provision) benefit of $(1.6), $2.0 and $0.3 | 4.4 | | | (5.6) | | | (0.7) | |
| Total other comprehensive income (loss), net of tax | 3.3 | | | (5.6) | | | (0.7) | |
| Comprehensive income | 1,066.0 | | | 464.7 | | | 270.8 | |
| | | | | |
| Comprehensive income attributable to non-controlling interest | (1.7) | | | — | | | — | |
| Comprehensive income attributable to redeemable non-controlling interest | (0.9) | | | — | | | — | |
| Comprehensive income attributable to Lithia Motors, Inc. | $ | 1,063.4 | | | $ | 464.7 | | | $ | 270.8 | |
See accompanying notes to consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands)
|
| |
| |
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total Stockholders' Equity |
| | | Class A | | Class B | |
| | | Shares | | Amount | | Shares | | Amount | |
| | Balance at December 31, 2014 | 23,671 |
| | $ | 276,058 |
| | 2,562 |
| | $ | 319 |
| | $ | 29,775 |
| | $ | (926 | ) | | $ | 367,879 |
| | $ | 673,105 |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 182,999 |
| | 182,999 |
|
| | Gain on cash flow hedges, net of tax expense of $399 | — |
| | — |
| | — |
| | — |
| | — |
| | 649 |
| | — |
| | 649 |
|
| | Issuance of stock in connection with employee stock plans | 74 |
| | 6,065 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,065 |
|
| | Issuance of restricted stock to employees | 217 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Repurchase of Class A common stock | (306 | ) | | (31,548 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (31,548 | ) |
| | Class B common stock converted to Class A common stock | 20 |
| | 3 |
| | (20 | ) | | (3 | ) | | — |
| | — |
| | — |
| | — |
|
| | Compensation for stock and stock option issuances and excess tax benefits from option exercises | — |
| | 7,832 |
| | — |
| | — |
| | 9,047 |
| | — |
| | — |
| | 16,879 |
|
| | Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (19,985 | ) | | (19,985 | ) |
| | Balance at December 31, 2015 | 23,676 |
| | 258,410 |
| | 2,542 |
| | 316 |
| | 38,822 |
| | (277 | ) | | 530,893 |
| | 828,164 |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 197,058 |
| | 197,058 |
|
| | Gain on cash flow hedges, net of tax expense of $175 | — |
| | — |
| | — |
| | — |
| | — |
| | 277 |
| | — |
| | 277 |
|
| | Issuance of stock in connection with employee stock plans | 93 |
| | 6,932 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,932 |
|
| | Issuance of restricted stock to employees | 241 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Repurchase of Class A common stock | (1,408 | ) | | (112,939 | ) | |
|
| |
|
| | — |
| | — |
| | — |
| | (112,939 | ) |
| | Class B common stock converted to Class A common stock | 780 |
| | 97 |
| | (780 | ) | | (97 | ) | | — |
| | — |
| | — |
| | — |
|
| | Compensation for stock and stock option issuances and excess tax benefits from option exercises | — |
| | 13,012 |
| | — |
| | — |
| | 2,403 |
| | — |
| | — |
| | 15,415 |
|
| | Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24,131 | ) | | (24,131 | ) |
| | Balance at December 31, 2016 | 23,382 |
| | 165,512 |
| | 1,762 |
| | 219 |
| | 41,225 |
| | — |
| | 703,820 |
| | 910,776 |
|
| | Adjustment to adopt ASU 2016-09 | — |
| | — |
| | — |
| | — |
| | (169 | ) | | — |
| | 169 |
| | — |
|
| | Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 245,217 |
| | 245,217 |
|
| | Issuance of stock in connection with employee stock plans | 90 |
| | 7,509 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,509 |
|
| | Issuance of restricted stock to employees | 91 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Repurchase of Class A common stock | (361 | ) | | (33,753 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (33,753 | ) |
| | Class B common stock converted to Class A common stock | 762 |
| | 95 |
| | (762 | ) | | (95 | ) | | — |
| | — |
| | — |
| | — |
|
| | Compensation for stock and stock option issuances and excess tax benefits from option exercises | — |
| | 7,623 |
| | — |
| | — |
| | 3,649 |
| | — |
| | — |
| | 11,272 |
|
| | Option premiums paid | — |
| — |
| — |
| — |
| — |
| | — |
| | (33,396 | ) | | — |
| | — |
| | (33,396 | ) |
| | Dividends paid | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26,544 | ) | | (26,544 | ) |
| | Issuance of stock in connection with acquisitions | 4 |
| | 2,137 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,137 |
|
| | Balance at December 31, 2017 | 23,968 |
| | $ | 149,123 |
| | 1,000 |
| | $ | 124 |
| | $ | 11,309 |
| | $ | — |
| | $ | 922,662 |
| | $ | 1,083,218 |
|
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST |
| Year Ended December 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Total equity, beginning balances | $ | 2,661.5 | | | $ | 1,467.7 | | | $ | 1,197.2 | |
| | | | | |
Common stock1, beginning balances | 788.2 | | | 20.5 | | | — | |
| Compensation for stock and stock option issuances and excess tax benefits from option exercises | 17.8 | | | 11.6 | | | 12.7 | |
| Issuance of stock in connection with employee stock plans | 25.9 | | | 13.3 | | | 11.0 | |
| | | | | |
| Class B common stock converted to class A common stock | — | | | 0.1 | | | — | |
| Repurchase of class A common stock | (230.7) | | | (34.4) | | | (3.2) | |
| Equity issuances, net of issuance costs | 1,110.4 | | | 777.1 | | | — | |
Common stock1, ending balances | 1,711.6 | | | 788.2 | | | 20.5 | |
| | | | | |
Class B common stock1, beginning balances | — | | | 0.1 | | | 0.1 | |
| Class B common stock converted to class A common stock | — | | | (0.1) | | | — | |
Class B common stock1, ending balances | — | | | — | | | 0.1 | |
| | | | | |
| Additional paid-in capital, beginning balances | 41.4 | | | 46.0 | | | 35.0 | |
| Compensation for stock and stock option issuances and excess tax benefits from option exercises | 16.9 | | | 11.6 | | | 3.5 | |
| Option premiums received | — | | | — | | | 7.5 | |
| Repurchase of class A common stock | — | | | (16.2) | | | — | |
| Additional paid-in capital, ending balances | 58.3 | | | 41.4 | | | 46.0 | |
| | | | | |
| Accumulated other comprehensive loss, beginning balances | (6.3) | | | (0.7) | | | — | |
| Foreign currency translation adjustment | (1.1) | | | — | | | — | |
| Gain (loss) on cash flow hedges, net of tax (provision) benefit of $(1.6), $2.0 and $0.3 | 4.4 | | | (5.6) | | | (0.7) | |
| Accumulated other comprehensive loss, ending balances | (3.0) | | | (6.3) | | | (0.7) | |
| | | | | |
| Retained earnings, beginning balances | 1,838.2 | | | 1,401.8 | | | 1,162.1 | |
Adjustment to adopt ASC 326 (2020), ASC 842 (2019) | — | | | (4.8) | | | 0.9 | |
| Net income attributable to Lithia Motors, Inc. | 1,060.1 | | | 470.3 | | | 271.5 | |
| Dividends paid | (38.8) | | | (29.1) | | | (27.6) | |
| Option premiums paid | — | | | — | | | (5.1) | |
| Retained earnings, ending balances | 2,859.5 | | | 1,838.2 | | | 1,401.8 | |
| | | | | |
| Non-controlling interest, beginning balances | — | | | — | | | — | |
| Issuance related to business combinations | 1.1 | | | — | | | — | |
| Net income attributable to non-controlling interest | 1.7 | | | — | | | — | |
| Non-controlling interest, ending balances | 2.8 | | | — | | | — | |
| | | | | |
| Total equity, ending balances | $ | 4,629.2 | | | $ | 2,661.5 | | | $ | 1,467.7 | |
| | | | | |
| Redeemable non-controlling interest, beginning balances | $ | — | | | $ | — | | | $ | — | |
| Acquired redeemable non-controlling interest | 33.1 | | | — | | | — | |
| Net income attributable to redeemable non-controlling interest | 0.9 | | | — | | | — | |
| Redeemable non-controlling interest, ending balances | $ | 34.0 | | | $ | — | | | $ | — | |
1 Prior to June 7, 2021, common stock was classified as Class A common stock. The Class A common stock reclassification as common stock occurred in connection with the elimination of our classified common stock structure following the conversion of all Class B common stock to Class A common stock.
See accompanying notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| | LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands) |
| |
| | | Year Ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | Cash flows from operating activities: | | | | | |
| | Net income | $ | 245,217 |
| | $ | 197,058 |
| | $ | 182,999 |
|
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| | Asset impairments | — |
| | 13,992 |
| | 20,124 |
|
| | Depreciation and amortization | 57,722 |
| | 49,369 |
| | 41,600 |
|
| | Stock-based compensation | 11,272 |
| | 11,047 |
| | 11,871 |
|
| | (Gain) loss on disposal of other assets | (438 | ) | | (4,343 | ) | | 203 |
|
| | Gain from disposal activities | (5,110 | ) | | (1,102 | ) | | (5,919 | ) |
| | Deferred income taxes | (2,798 | ) | | 10,138 |
| | 12,341 |
|
| | (Increase) decrease (net of acquisitions and dispositions): | | | | | |
| | Trade receivables, net | (57,360 | ) | | (105,961 | ) | | (13,047 | ) |
| | Inventories | (193,099 | ) | | (168,847 | ) | | (197,079 | ) |
| | Other assets | (3,120 | ) | | (13,305 | ) | | (31,290 | ) |
| | Increase (decrease) (net of acquisitions and dispositions): | | | | | |
| | Floor plan notes payable | 20,273 |
| | 16,385 |
| | 7,035 |
|
| | Trade payables | 20,008 |
| | 16,449 |
| | 674 |
|
| | Accrued liabilities | 37,227 |
| | 42,852 |
| | 16,273 |
|
| | Other long-term liabilities and deferred revenue | 19,062 |
| | 27,173 |
| | 33,766 |
|
| | Net cash provided by operating activities | 148,856 |
| | 90,905 |
| | 79,551 |
|
| | | | | | | |
| | Cash flows from investing activities: | | | | | |
| | Capital expenditures | (105,378 | ) | | (100,761 | ) | | (83,244 | ) |
| | Proceeds from sales of assets | 15,201 |
| | 2,211 |
| | 270 |
|
| | Cash paid for other investments | (8,570 | ) | | (30,280 | ) | | (28,110 | ) |
| | Cash paid for acquisitions, net of cash acquired | (460,394 | ) | | (234,700 | ) | | (71,615 | ) |
| | Proceeds from sales of stores | 20,943 |
| | 11,837 |
| | 12,966 |
|
| | Net cash used in investing activities | (538,198 | ) | | (351,693 | ) | | (169,733 | ) |
| | | | | | | |
| | Cash flows from financing activities: | | | | | |
| | Borrowings on floor plan notes payable: non-trade, net | 241,479 |
| | 252,893 |
| | 136,201 |
|
| | Borrowings on lines of credit | 1,754,450 |
| | 1,244,343 |
| | 1,261,597 |
|
| | Repayments on lines of credit | (1,836,167 | ) | | (1,123,082 | ) | | (1,298,120 | ) |
| | Principal payments on long-term debt, scheduled | (18,218 | ) | | (16,717 | ) | | (15,404 | ) |
| | Principal payments on long-term debt and capital leases, other | (50,288 | ) | | (27,703 | ) | | (9,189 | ) |
| | Proceeds from issuance of long-term debt | 395,905 |
| | 66,466 |
| | 75,675 |
|
| | Payment of debt issuance costs | (4,664 | ) | | — |
| | — |
|
| | Proceeds from issuance of common stock | 7,509 |
| | 6,932 |
| | 6,065 |
|
| | Repurchase of common stock | (33,753 | ) | | (112,939 | ) | | (31,548 | ) |
| | Dividends paid | (26,544 | ) | | (24,131 | ) | | (19,985 | ) |
| | Other financing activity | (33,396 | ) | | — |
| | — |
|
| | Net cash provided by financing activities | 396,313 |
| | 266,062 |
| | 105,292 |
|
| | Increase in cash and cash equivalents | 6,971 |
| | 5,274 |
| | 15,110 |
|
| | Cash and cash equivalents at beginning of year | 50,282 |
| | 45,008 |
| | 29,898 |
|
| | Cash and cash equivalents at end of year | $ | 57,253 |
| | $ | 50,282 |
| | $ | 45,008 |
|
| | | | | | | |
| | Supplemental disclosure of cash flow information: | | | | | |
| | Cash paid during the period for interest | $ | 68,850 |
| | $ | 49,730 |
| | $ | 41,098 |
|
| | Cash paid during the period for income taxes, net | 127,258 |
| | 57,236 |
| | 86,533 |
|
| | Floor plan debt paid in connection with store disposals | 3,699 |
| | 5,284 |
| | 4,400 |
|
| | | | | | | |
| | Supplemental schedule of non-cash activities: | | | | | |
| | Debt issued in connection with acquisitions | $ | 1,748 |
| | $ | — |
| | $ | 2,160 |
|
| | Non-cash assets transferred in connection with acquisitions | — |
| | 2,637 |
| | — |
|
| | Debt forgiven in connection with acquisitions | — |
| | — |
| | 1,374 |
|
| | Debt assumed in connection with acquisitions | 84,333 |
| | 48,081 |
| | — |
|
| | Acquisition of assets with capital leases | — |
| | 8,916 |
| | — |
|
| | Issuance of Class A common stock in connection with acquisition | 2,137 |
| | — |
| | — |
|
| | | | | | | | | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Year Ended December 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 1,062.7 | | | $ | 470.3 | | | $ | 271.5 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Asset impairments | 1.9 | | | 7.9 | | | 2.6 | |
| Depreciation and amortization | 127.3 | | | 92.4 | | | 82.4 | |
| Stock-based compensation | 34.7 | | | 23.2 | | | 16.2 | |
| Loss on redemption of senior notes | 10.3 | | | — | | | — | |
| Gain on disposal of other assets | (2.5) | | | (1.7) | | | (0.1) | |
| Gain from disposal activities | — | | | (16.6) | | | (9.7) | |
| Unrealized investment loss (gain) | 66.4 | | | (43.4) | | | — | |
| Deferred income taxes | 43.1 | | | 17.2 | | | 40.1 | |
| | | | | |
| Amortization of operating lease right-of-use assets | 39.0 | | | 28.9 | | | 31.6 | |
| (Increase) decrease (net of acquisitions and dispositions): | | | | | |
| Trade receivables, net | (147.1) | | | (113.4) | | | 24.4 | |
| Inventories | 674.6 | | | 228.8 | | | (19.7) | |
| Other assets | (579.8) | | | (101.3) | | | 5.4 | |
| Increase (decrease) (net of acquisitions and dispositions): | | | | | |
| Floor plan notes payable | 116.1 | | | (204.1) | | | 100.7 | |
| Trade payables | 78.4 | | | 28.2 | | | (1.8) | |
| Accrued liabilities | 233.0 | | | 113.1 | | | (7.8) | |
| Other long-term liabilities and deferred revenue | 39.1 | | | 15.1 | | | (11.3) | |
| Net cash provided by operating activities | 1,797.2 | | | 544.6 | | | 524.5 | |
| Cash flows from investing activities: | | | | | |
| Notes receivable issued | — | | | (12.5) | | | (12.5) | |
| Principal payments received on notes receivable | — | | | 25.0 | | | — | |
| Capital expenditures | (260.4) | | | (167.8) | | | (124.9) | |
| Proceeds from sales of assets | 3.3 | | | 6.5 | | | 1.5 | |
| Cash paid for other investments | (10.3) | | | (11.2) | | | (7.2) | |
| Cash paid for acquisitions, net of cash acquired | (2,699.3) | | | (1,503.3) | | | (366.6) | |
| Proceeds from sales of stores | 76.3 | | | 57.5 | | | 46.7 | |
| Net cash used in investing activities | (2,890.4) | | | (1,605.8) | | | (463.0) | |
| Cash flows from financing activities: | | | | | |
| Repayments on floor plan notes payable: non-trade, net | (685.3) | | | (20.6) | | | (54.6) | |
| Borrowings on lines of credit | 2,830.6 | | | 1,825.4 | | | 3,167.0 | |
| Repayments on lines of credit | (2,505.2) | | | (1,935.4) | | | (3,481.6) | |
| Principal payments on long-term debt and finance lease liabilities, scheduled | (59.3) | | | (29.4) | | | (26.0) | |
| Principal payments on long-term debt and finance lease liabilities, other | (486.5) | | | (6.3) | | | (11.0) | |
| Proceeds from issuance of long-term debt | 1,161.8 | | | 606.5 | | | 420.3 | |
| Payment of debt issuance costs | (14.7) | | | (10.8) | | | (5.8) | |
| Proceeds from issuance of common stock | 1,136.2 | | | 790.4 | | | 11.0 | |
| Repurchase of common stock | (230.7) | | | (50.6) | | | (3.2) | |
| | | | | |
| Dividends paid | (38.8) | | | (29.1) | | | (27.6) | |
| Payments of contingent consideration related to acquisitions | (1.4) | | | (0.3) | | | — | |
| | | | | |
| Other financing activities | — | | | — | | | 2.4 | |
| Net cash provided by (used in) financing activities | 1,106.7 | | | 1,139.8 | | | (9.1) | |
| Effect of exchange rate changes on cash, restricted cash, and cash equivalents | 2.5 | | | — | | | — | |
| Increase in cash, restricted cash, and cash equivalents | 16.0 | | | 78.6 | | | 52.4 | |
| Cash, restricted cash, and cash equivalents at beginning of year | 162.5 | | | 84.0 | | | 31.6 | |
| Cash, restricted cash, and cash equivalents at end of year | $ | 178.5 | | | $ | 162.5 | | | $ | 84.0 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying notes to consolidated financial statements.
LITHIA MOTORS, INC. AND SUBSIDIARIES
| | | | | | | | | | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| Year Ended December 31, |
| (In millions) | 2021 | | 2020 | | 2019 |
| Reconciliation of cash, restricted cash, and cash equivalents to the consolidated balance sheets |
| Cash and cash equivalents | $ | 153.0 | | | $ | 160.2 | | | $ | 84.0 | |
| Restricted cash from collections on auto loans receivable | 21.8 | | | 2.3 | | | — | |
| Cash, restricted cash, and cash equivalents | $ | 174.8 | | | $ | 162.5 | | | $ | 84.0 | |
| Restricted cash on deposit in reserve accounts, included in other non-current assets | 3.7 | | | — | | | — | |
| Total cash, restricted cash, and cash equivalents reported in the Consolidated Statements of Cash Flows | $ | 178.5 | | | $ | 162.5 | | | $ | 84.0 | |
| | | | | |
| Supplemental cash flow information: | | | | | |
| Cash paid during the period for interest | $ | 130.1 | | | $ | 107.7 | | | $ | 135.8 | |
| Cash paid during the period for income taxes, net | 369.1 | | | 135.0 | | | 38.4 | |
| Floor plan debt paid in connection with store disposals | 8.7 | | | 38.4 | | | 18.6 | |
| | | | | |
| Non-cash activities: | | | | | |
| Debt issued in connection with acquisitions | $ | 355.6 | | | $ | — | | | $ | 26.4 | |
| | | | | |
| Contingent consideration in connection with acquisitions | 0.9 | | | 14.3 | | | — | |
| Debt assumed in connection with acquisitions | 4.0 | | | — | | | — | |
| | | | | |
| | | | | |
Right-of-use assets obtained in exchange for lease liabilities1 | 171.8 | | | 55.4 | | | 260.3 | |
1Amounts for the twelve months ended December 31, 2019 include the transition adjustment for the adoption of Topic 842.
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)Note 1. Summary of Significant Accounting Policies
Organization and Business
We are one of the largest automotive retailers in the United States and are among the fastest growing companies in the Fortune 500 (#318-2017)(#231-2021) with 171278 stores representing 3040 brands in 18 states.2 countries, across 25 U.S. states and three Canadian provinces. We offer vehicles online and through our nationwide retail network. Our "Growth“Growth Powered by People"People” strategy drives us to innovate and continuously improve the customer experience. Our dealerships are located across the United States. We seek domestic, import and luxury franchises in cities ranging from mid-sized regional markets to metropolitan markets. We evaluate all brands for expansion opportunities provided the market is large enough to support adequate new vehicle sales to justify the required capital investment.
Basis of Presentation
The accompanying Consolidated Financial Statements reflect the results of operations, the financial position and the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Cash, Restricted Cash, and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts without restrictions. Restricted cash consisted of collections of principal, interest and fee payments on auto loans receivable that are restricted for repayment on borrowings on our securitization facility before being unrestricted.
Accounts Receivable
Accounts receivable classifications include the following:
•Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received within five to ten10 days of selling a vehicle.
•Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.
•Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
•Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.
•Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.
ReceivablesInterest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, reaching non-accrual status, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The balance of auto loan receivables is made up primarily of loans secured by the related vehicle. More than 95% of the portfolio is aged less than 60 days past due with less than 5% on non-accrual status. As of December 31, 2021, the allowance for credit losses related to auto loan and lease receivables was $25.0 million and was included in allowance for doubtful accounts represents an estimate ofand other non-current assets. In accordance with Topic 326, the amount of net losses inherent in our portfolio of accounts receivable as of the reporting date. We estimate an allowance for doubtful accountsloan losses is estimated based on our historical write-off experience, current conditions and considerforecasts as well as the value of any underlying assets securing these loans and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote.upon reaching 120 days past due status. The annual activity for charges and subsequent recoveries is immaterial. The remainder of our receivables are due primarily from manufacturer partners and various third-party lenders. The historical losses related to these balances are immaterial.
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets. See Note 2.
Inventories
Inventories are valued at the lower of net realizable value or cost, using the specific identification method for new vehicles, pooled approach for used vehicles, and the lower of cost (first-in, first-out) or market method for parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and
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| | NOTES TO FINANCIAL STATEMENTS | F-11 | |
transportation. Certain acquired inventories are valued using the last-in first-out (LIFO) method. The LIFO reserve associated with this inventory as of December 31, 20172021 and 20162020 was immaterial.
Manufacturers reimburse us for holdbacks, floor plan interest assistance and advertising assistance, which are reflected as a reduction in the carrying value of each vehicle purchased. We recognize advertising assistance, floor plan interest assistance, holdbacks, cash incentives and other rebates received from manufacturers that are tied to specific vehicles as a reduction to cost of sales as the related vehicles are sold.
Parts purchase discounts that we receive from the manufacturer are reflected as a reduction in the carrying value of the parts purchased from the manufacturer and are recognized as a reduction to cost of goods sold as the related inventory is sold. See Note 3.
Property and Equipment
Property and equipment are stated at cost and depreciated over their estimated useful lives on the straight-line basis. Leasehold improvements made at the inception of the lease or during the term of the lease are amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of the lease.
The range of estimated useful lives is as follows:
|
| | | | |
| Buildings and improvements | 5 to 40 years |
| Service equipment | 5 to 15 years |
| Furniture, office equipment, signs and fixtures | 3 to 10 years |
The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant remodels and betterments are capitalized. In addition, interest on borrowings for major capital projects, significant remodels, and betterments areis capitalized. Capitalized interest becomes a part of the cost of the depreciable asset and is depreciated according to the estimated useful lives as previously stated. For the years ended December 31, 2017, 20162021, 2020 and 2015,2019, we recorded capitalized interest of $0.5$2.0 million, $0.4$1.6 million and $0.5$2.3 million, respectively.
When an asset is retired, or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to income from operations.
Leased property meeting certain criteria are recorded as capitalfinance leases. We have capitalfinance leases for certain locations, expiring at various dates through December 31, 2050.August 1, 2037. Our capital leasesfinance lease right-of-use assets are included in property and equipment on our Consolidated Balance Sheets. Amortization of capitalized leasedfinance lease right-of-use assets is computed on a straight-line basis over the term of the lease, unless the lease transfers title or it contains a bargain purchase option, in which case, it is amortized over the asset’s useful life and is included in depreciation expense. CapitalFinance lease obligationsliabilities are recorded as the lesser of the estimated fair market value of the leased property or the net present value of the aggregated future minimum payments and are included in current maturities of long-term debt and long-term debt on our Consolidated Balance Sheets. Interest associated with these obligations is included in other interest expense in the Consolidated Statements of Operations. See Note 7.7 and Note 11.
Long-lived assets held and used by us are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider several factors when evaluating whether there are indications of potential impairment related to our long-lived assets, including store profitability, overall macroeconomic factors and the impact of our strategic management decisions. If recoverability testing is performed, we evaluate assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows associated with the asset, including its disposition. If such assets are considered to be impaired, the amount by which the carrying amount of the assets exceeds the fair value of the assets is recognized as a charge to income from operations. See Note 4.
Goodwill
Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as franchise rights, are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.
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| | NOTES TO FINANCIAL STATEMENTS | F-12 | |
Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying amount of the reporting unit more likely than not exceeds fair value. We have the option to qualitatively or quantitatively assess goodwill for impairment, and we evaluated our goodwill using a qualitative assessment process. Goodwill is tested for impairment at the reporting unit level. Our reporting units are individual stores as this is the level at which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance.
We test our goodwill for impairment on October 1 of each year. In 2017,2021, we evaluated our goodwill using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying amount, the first step of the two-step goodwill impairment test is performed.we would further evaluate for potential impairment. See Note 5.5 and Note 13.
Franchise Value
We enter into agreements (“Franchise Agreements”)(Franchise Agreements) with theour manufacturers. Franchise value represents a right received under Franchise Agreements with manufacturers and is identified on an individual store basis.
We evaluated the useful lives of our Franchise Agreements based on the following factors:
•certain of our Franchise Agreements continue indefinitely by their terms;
•certain of our Franchise Agreements have limited terms, but are routinely renewed without substantial cost to us;
•other than franchise terminations related to the unprecedented reorganizations of Chrysler and General Motors, and allowed by bankruptcy law, we are not aware of manufacturers terminating Franchise Agreements against the wishes of the franchise owners in the ordinary course of business. A manufacturer may pressure a franchise owner to sell a franchise when the owner is in breach of the franchise agreement over an extended period of time;
•state dealership franchise laws typically limit the rights of the manufacturer to terminate or not renew a franchise;
•we are not aware of any legislation or other factors that would materially change the retail automotive franchise system; and
•as evidenced by our acquisition and disposition history, there is an active market for most automotive dealership franchises within the United States. We attribute value to the Franchise Agreements acquired with the dealerships we purchase based on the understanding and industry practice that the Franchise Agreements will be renewed indefinitely by the manufacturer.
Accordingly, we have determined that our Franchise Agreements will continue to contribute to our cash flows indefinitely and, therefore, have indefinite lives.
As an indefinite-lived intangible asset, franchise value is tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying value may exceed fair value. The impairment test for indefinite-lived intangible assets requires the comparison of estimated fair value to carrying value. An impairment charge is recorded to the extent the fair value is less than the carrying value. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. We evaluated our indefinite-lived intangible assets using a qualitative assessment process. We have determined the appropriate unit of accounting for testing franchise value for impairment is each individual store.
We test our franchise value for impairment on October 1 of each year. In 2017,2021, we evaluated our franchise value using a qualitative assessment process. If the qualitative factors discussed above determine that it is more likely than not that the fair value of the individual store'sstore’s franchise value exceeds the carrying amount, the franchise value is not impaired and the second step is not necessary. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying value, then a quantitative valuation of our franchise value is performed and an impairment would be recorded. See Note 5.5 and Note 13.
Equity-Method InvestmentsIn 2016 | | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-13 | |
Financing and 2015, we owned investments in certain partnerships which we accounted for under the equity method. These investments are included asSecuritization Transactions
We maintain a componentrevolving funding program composed of other non-current assets in our Consolidated Balance Sheets. We determineda warehouse facility that we lacked certain characteristicsuse to fund auto loans receivable originated by Driveway Finance Corporation.
We use term securitizations to provide long-term funding for most of the auto loans receivable initially funded through the warehouse facility. In these transactions, a pool of auto loans receivable is sold to a bankruptcy-remote, special purpose entity that, in turn, transfers the receivables to a special purpose securitization trust. The securitization trust issues asset-backed securities, secured or otherwise supported by the transferred receivables, and the proceeds from the sale of the asset-backed securities are used to finance the securitized receivables.
We are required to evaluate term securitization trusts for consolidation. In our capacity as servicer, we have the power to direct the operationsactivities of the businessestrusts that most significantly impact the economic performance of the trusts. In addition, we have the obligation to absorb losses (subject to limitations) and as a result, do not qualifythe rights to receive any returns of the trusts, which could be significant. Accordingly, we are the primary beneficiary of the trusts and are required to consolidate these investments. Activitythem.
We recognize transfers of auto loans receivable into the warehouse facility and asset-backed term funding transactions, including term securitizations (together, “non-recourse funding vehicles”), as secured borrowings, which result in recording the auto loans receivable and the related non-recourse notes payable on our consolidated balance sheets.
These receivables can only be used as collateral to settle obligations of the related non-recourse funding vehicles. The non-recourse funding vehicles and investors have no recourse to our equity-method investments is recognizedassets beyond the related receivables, the amounts on deposit in our Consolidated Statements of Operations as follows:
anreserve accounts and the restricted cash from collections on auto loan receivables. We have not provided financial or other than temporary decline in fair value is reflected as an asset impairment;
our portion of the operating gains and losses is included as a component of other (expense) income, net;
the amortization relatedsupport to the discounted fair valuenon-recourse funding vehicles that was not previously contractually required, and there are no additional arrangements, guarantees or other commitments that could require us to provide financial support to the non-recourse funding vehicles.
See Note 2 and Note 6 for additional information on auto loans receivable and non-recourse notes payable.
Restricted Cash on Deposit in Reserve Accounts
The restricted cash on deposit in reserve accounts is for the benefit of future equity contributions is recognized overholders of non-recourse notes payable, and these funds are not expected to be available to the life ofcompany or its creditors. In the investments as non-cash interest expense; and
tax benefits and credits are reflected as a component of our income tax provision.
Periodically, whenever events or circumstances indicateevent that the carrying amountcash generated by the related receivables in a given period was insufficient to pay the interest, principal and other required payments, the balances on deposit in the reserve accounts would be used to pay those amounts. Restricted cash on deposit in reserve accounts is invested in money market securities and was $3.7 million as of assets may be impaired, we evaluate the equity-method investments for indicationsDecember 31, 2021, with no amounts as of loss resulting from an other than temporary decline. IfDecember 31, 2020 and 2019.
the equity-method investment is determined to be impaired, the amount by which the carrying amount exceeds the fair value of the investment is recognized as a charge to income from operations. See Notes 12 and 17.
Advertising
We expense production and other costs of advertising as incurred as a component of selling, general and administrative expense. Additionally, manufacturer cooperative advertising credits for qualifying, specifically-identified advertising expenditures are recognized as a reduction of advertising expense. Advertising expense and manufacturer cooperative advertising credits were as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Advertising expense, gross | | $ | 197.8 | | | $ | 121.3 | | | $ | 139.8 | |
| Manufacturer cooperative advertising credits | | (35.6) | | | (23.9) | | | (27.9) | |
| Advertising expense, net | | $ | 162.2 | | | $ | 97.4 | | | $ | 111.9 | |
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Advertising expense, gross | | $ | 116,124 |
| | $ | 101,656 |
| | $ | 89,736 |
|
| Manufacturer cooperative advertising credits | | (22,812 | ) | | (20,293 | ) | | (19,801 | ) |
| Advertising expense, net | | $ | 93,312 |
| | $ | 81,363 |
| | $ | 69,935 |
|
Contract Origination Costs
Contract origination commissions paid to our employees directly related to the sale of our self-insured lifetime lube, oil and filter service contracts and auto loan receivable originations are deferred and charged to expense in proportion to the associated revenue to be recognized.
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| | NOTES TO FINANCIAL STATEMENTS | F-14 | |
Legal Costs
We are a party to numerous legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees and potential settlement claims related to various legal proceedings that are estimable and probable. See Note 7.
Stock-Based Compensation
Compensation costs associated with equity instruments exchanged for employee and director services are measured at the grant date, based on the fair value of the award. If there is a performance-based element to the award, the expense is recognized based on the estimated attainment level, estimated time to achieve the attainment level and/or the vesting period. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. The fair value of non-vested stock awards is based on the intrinsic valueclosing price of our common stock on the date of grant. Shares to be issued upon the exerciseWe account for forfeitures of stock options and the vesting of stockstock-based awards will come from newly issued shares.as they occur. See Note 10.
In January 2017, we adopted ASU 2016-09, which simplifies the accounting for several aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. As a result, we recorded the following:
Reclassified $0.2 million as a decrease to additional paid-in capital and an increase to retained earnings upon adoption related to our policy election to record forfeitures as they occur.
All prior periods presented in our Consolidated Statements of Cash Flows have been adjusted for the presentation of excess tax benefits on the cash flow statement. This resulted in a $4.4 million and a $5.0 million reclassification between financing and operating cash flows for the years ended December 31, 2016 and 2015, respectively.
We had $0.3 million of tax-affected state net operating loss carryforwards related to excess tax benefits for which a deferred tax asset had not been recognized. At adoption, this amount was recorded with the offset to retained earnings. Additionally, we do not believe that it is more-likely-than-not that the asset will be utilized and, as a result, a valuation allowance in the same amount was recorded that offset the impact to retained earnings. See Note 13.
Income and Other Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax bases, operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.
When there are situations with uncertainty as to the timing of the deduction, the amount of the deduction, or the validity of the deduction, we adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Positions that meet this criterion are measured using the largest benefit that is more than 50% likely to be realized. Interest and penalties are recorded as income tax provision in the period incurred or accrued when related to an uncertain tax position. See Note 13.14.
We account for all taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use, value-added) on a net (excluded from revenues) basis.
Concentration of Risk and Uncertainties
We purchase substantially all of our new vehicles and inventory from various manufacturers at the prevailing prices charged by auto manufacturers to all franchised dealers. Our overall sales could be impacted by the auto manufacturers’ inability or unwillingness to supply dealerships with an adequate supply of popular models.
We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. In the event that manufacturers are unable to supply the needed level of vehicles, our financial performance may be adversely impacted.
We depend on our manufacturers to deliver high-quality, defect-free vehicles. In the event that manufacturers experience future quality issues, our financial performance may be adversely impacted.
We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an adequate supply of vehicles. We also receive incentives and rebates from our manufacturers, including cash allowances, financing programs, discounts, holdbacks and other incentives. These incentives are recorded as accounts receivable in our Consolidated Balance Sheets until payment is received. Our financial condition could be materially adversely impacted by the manufacturers’ or distributors’ inability to continue to offer these incentives and rebates at substantially similar terms, or to pay our outstanding receivables.
We enter into Franchise Agreements with the manufacturers. The Franchise Agreements generally limit the location of the dealership and provide the auto manufacturer approval rights over changes in dealership management and ownership. The auto manufacturers are also entitled to terminate the Franchise Agreement if the dealership is in
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| | NOTES TO FINANCIAL STATEMENTS | F-15 | |
material breach of the terms. Our ability to expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of additional dealerships. See also “Goodwill” and “Franchise Value” above.
We have a credit facility with a syndicate of 1820 financial institutions, including seven8 manufacturer-affiliated finance companies. Several of these financial institutions also provide vehicle financing for certain new vehicles, vehicles that are designated for use as service loaners and mortgage financing. This credit facility is the primary source of floor plan financing for our new vehicle inventory and also provides used vehicle financing and a revolving line of credit. The term of the facility extends through August 2022.January 2025. At maturity, our financial condition could be materially adversely impacted if lenders are unable to provide credit that has typically been extended to us or with terms unacceptable to us. Our financial condition could be materially adversely impacted if these providers incur losses in the future or undergo funding limitations. See Note 6.
We anticipate continued organic growth and growth through acquisitions. This growth will require additional credit which may be unavailable or with terms unacceptable to us. If these events were to occur, we may not be able to borrow sufficient funds to facilitate our growth.
Financial Instruments, Fair Value and Market Risks
The carrying amounts of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate fair value because of the short-term nature and current market rates of these instruments.
Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 12.
We have variable rate floor plan notes payable, mortgages and other credit line borrowings that subject us to market risk exposure. At December 31, 2017, we had $2.3 billion outstanding in variable rate debt. These borrowings had interest rates ranging from 2.75%to 4.25%per annum. An increase or decrease in the interest rates would affect interest expense for the period accordingly.
The fair value of long-term, fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall because we could refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair value, but do not impact earnings or cash flows. We monitor our fixed interest rate debt regularly, refinancing debt that is materially above market rates if permitted. See Note 12.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods.
Estimates are used in the calculation of certain reserves maintained for charge-backs on estimated cancellations of service contracts; life, accident and disability insurance policies; finance fees from customer financing contracts and uncollectible accounts receivable.
Estimates are also used in our allowance for loan losses, which represents the net credit losses expected over the remaining contractual life of our managed receivables. Because net loss performance can vary substantially over time, estimating net losses requires assumptions about matters that are uncertain. The allowance for loan losses is determined using a net loss timing curve, primarily based on the composition of the portfolio of managed receivables and historical gross loss and recovery trends. Determining the appropriateness of the allowance for loan losses requires management to exercise judgement about matters that are inherently uncertain, including the timing and distribution of net losses that could materially affect the allowance or loan losses and, therefore, net earnings.
We also use estimates in the calculation of various expenses, accruals and reserves, including anticipated losses related to workers’ compensation insurance; anticipated losses related to self-insurance components of our property and casualty and medical insurance; self-insured lifetime lube, oil and filter service contracts; discretionary employee bonuses, the Transition Agreement with Sidney B. DeBoer, our Chairman of the Board; warranties provided on certain products and services; legal reserves and stock-based compensation. We also make certain estimates regarding the assessment of the recoverability of long-lived assets, indefinite-lived intangible assets and deferred tax assets.
We offer a limited warranty on the sale of most retail used vehicles. This warranty is based on mileage and time. We also offer a mileage and time based warranty on parts used in our service repair work and on tire purchases. The cost that may be incurred for these warranties is estimated at the time the related revenue is recorded. A reserve for these warranty liabilities is estimated based on current sales levels, warranty experience rates and estimated costs per claim. The annual activity for reserve increases and claims is immaterial. As of December 31, 20172021 and 2016,2020, the accrued warranty balance was $0.4$0.6 million and $0.4$0.5 million, respectively.
Fair Value of Assets Acquired and Liabilities Assumed
We estimate the fair value of the assets acquired and liabilities assumed in a business combination using various assumptions. The most significant assumptions used relate to determining the fair value of property and equipment and intangible franchise rights.
We estimate the fair value of property and equipment based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under
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| | NOTES TO FINANCIAL STATEMENTS | F-16 | |
this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value.
We estimate the fair value of our franchise rights primarily using the Multi-Period Excess Earnings (“MPEE”)(MPEE) model. The forecasted cash flows used in the MPEE model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and business plans to estimate the future cash flows that each franchise will generate. We have determined that only certain cash flows of the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to their present value equivalent taking into consideration factors such as a risk-free rate, a peer group average beta, an equity risk premium and a small stock risk premium. Additionally, we also may use a market approach to determine the fair value of our franchise rights. These market data points include our acquisition and divestiture experience and third-party broker estimates.
We use a relief-from-royalty method to determine the fair value of a trade name. Future cost savings associated with owning, rather than licensing, a trade name is estimated based on a royalty rate and management’s forecasted sales projections. The discount rate applied to the future cost savings factors an equity market risk premium, small stock risk premium, an average peer group beta, a risk-free interest rate and a premium for forecast risk.
Revenue Recognition
The following describes our major product lines, which represent the disaggregation of our revenues to transactions that are similar in nature, amount, timing, uncertainties and economic factors.
New Retail Vehicle and Used Retail Vehicle Sales
Revenue from the retail sale of a vehicle is recognized at a point in time, as all performance obligations are satisfied when a contract is signed by the customer, financing has been arranged or collectibility is reasonably assuredprobable and the deliverycontrol of the vehicle is transferred to the customer. The transaction price for a retail vehicle sale is specified in the contract with the customer and includes all cash and non-cash consideration. In a retail vehicle sale, customers often trade in their current vehicle. The trade-in is made.measured at its stand-alone selling price in the contract, utilizing various third-party pricing sources. There are no other non-cash forms of consideration related to retail sales. All vehicle rebates are applied to the vehicle purchase price at the time of the sale and are therefore incorporated into the price of the contract at the time of the exchange. We do not allow the return of new or used vehicles, except where mandated by state law.
Service, Body and Parts Sales
Revenue from service, body and parts and servicesales is recognized upon deliverythe transfer of control of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale and are not significant.
We are the obligor on our lifetime oil contracts. Revenue is allocated to these performance obligations and is recognized over time as services are provided to the customer. The amount of revenue recognized is calculated, net of cancellations, using an input method, which most closely depicts performance of the contracts. Our contract liability balances were $239.0 million and $194.1 million as of December 31, 2021, and December 31, 2020, respectively; and we recognized $35.0 million and $31.1 million of revenue in the years ended December 31, 2021, and December 31, 2020, respectively, related to our opening contract liability balances. Our contract liability balance is included in accrued liabilities and deferred revenue.
Finance fees earned for notes placed with financial institutions in connection with customer vehicle financing areand Insurance Sales
Revenue from finance and insurance sales is recognized, net of estimated charge-backs, as finance and insurance revenue upon acceptance ofat the credit by the financial institution and recognitiontime of the sale of the related vehicle.
Insurance income from third party insurance companies for commissions earned on credit life, accident and disability insurance policies sold in connection with the sale of As a vehicle are recognized, net of anticipated cancellations, as finance and insurance revenue upon executionpart of the insurance contractvehicle sale, we seek to arrange financing for customers and recognitionsell a variety of add-ons, such as extended warranty service contracts. These products are inherently attached to the governing vehicle and performance of the sale ofobligation cannot be performed without the vehicle.
Commissions from third party service contracts are recognized, net of anticipated cancellations, as finance and insurance revenue upon sale of the contracts and recognition of theunderlying sale of the vehicle. We also participateact as an agent in future underwriting profit, pursuant to retrospectivethe sale of these contracts as the pricing is set by the third-party provider, and our commission arrangements, which is recognized in income as earned.
Revenuepreset. A portion of the transaction price related to self-insured lifetime lube, oilsales of finance and filter serviceinsurance contracts is deferredconsidered variable consideration and is estimated and recognized based on expected future claims for service. The expected future claims experienceupon the sale of the contract under the new standard. Our contract asset balance was $9.6 million and $8.2 million as of December 31, 2021, and December 31, 2020, respectively; and is evaluated periodically to ensure it remains appropriate given actual claims history.included in trade receivables and other non-current assets.
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| | NOTES TO FINANCIAL STATEMENTS | F-17 | |
Segment Reporting
While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three3 reportable segments based on their economic similarities: Domestic, Import and Luxury.
Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Chrysler, General Motors and Ford. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, Toyota, Subaru, Nissan, Hyundai, Volkswagen, Kia, and Volkswagen.Mazda. Our Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-Benz, Audi, Lexus, Acura, Porsche, Jaguar, Land Rover, Mini, Infiniti, Rolls-Royce, Lamborghini, McLaren, and Lexus.Pagani. The franchises in each segment also sell used vehicles, parts and automotive services, and automotive finance and insurance products.
Corporate and other revenue and income include the results of operations of our stand-alone collision center offset by unallocated corporate overhead expenses, such as corporate personnel costs, and certain unallocated reserve and elimination adjustments. Additionally, certain internal corporate expense allocations increase segment income for Corporate and other while decreasing segment income for the other operating segments. These internal corporate expense allocations are used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters that perform certain dealership functions.
We define our chief operating decision maker (“CODM”)(CODM) to be certain members of our executive management group. Historical and forecasted operational performance is evaluated on a store-by-store basis and on a consolidated basis by the CODM. We derive the operating results of the segments directly from our internal management reporting system. The accounting policies used to derive segment results are substantially the same as those used to determine our consolidated results, exceptedexcept for the internal allocation within Corporate and other discussed above. Our CODM measures the performancedoes not regularly review capital expenditures on a reporting unit level. Performance measurement of each reportable segment by the CODM is based on several metrics, including earnings from operations,
andoperations. The CODM uses these results, in part, to evaluate the performance of, and to allocate resources, mainly with expected inventory and working capital requirements, to each of the reportable segments. See Note 18.17.
(2)Certain immaterial reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements to maintain consistency and comparability between periods presented. We reclassified certain components within cash provided by operating activities and changes in restricted cash within the Consolidated Statements of Cash Flows.
Note 2. Accounts Receivable
Accounts receivable consisted of the following (in thousands):
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Contracts in transit | | $ | 286,578 |
| | $ | 233,506 |
|
| Trade receivables | | 45,895 |
| | 45,193 |
|
| Vehicle receivables | | 60,022 |
| | 43,937 |
|
| Manufacturer receivables | | 96,141 |
| | 76,948 |
|
| Auto loan receivables | | 75,052 |
| | 69,859 |
|
| Other receivables | | 14,634 |
| | 3,857 |
|
| | | 578,322 |
| | 473,300 |
|
| Less: Allowance for doubtful accounts | | (7,386 | ) | | (5,281 | ) |
| Less: Long-term portion of accounts receivable, net | | (48,998 | ) | | (50,305 | ) |
| Total accounts receivable, net | | $ | 521,938 |
| | $ | 417,714 |
|
Accounts receivable classifications include the following:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
| Contracts in transit | | $ | 304.9 | | | $ | 286.8 | |
| Trade receivables | | 125.5 | | | 67.0 | |
| Vehicle receivables | | 106.6 | | | 61.8 | |
| Manufacturer receivables | | 120.5 | | | 118.1 | |
| Auto loan and lease receivables | | 829.2 | | | 175.6 | |
| Other receivables | | 43.2 | | | 11.6 | |
| | 1,529.9 | | | 720.9 | |
| Less: Allowance for doubtful accounts | | (17.3) | | | (5.9) | |
Less: Long-term portion of accounts receivable, net1 | | (602.6) | | | (101.0) | |
| Total accounts receivable, net | | $ | 910.0 | | | $ | 614.0 | |
Contracts in transit are receivables from various lenders for the financing1The long-term portions of vehicles that we have arranged on behalf of the customeraccounts receivable and are typically received within five to ten days of selling a vehicle.
Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.
Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.
Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.
Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.
Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, charge-off or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.
The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries is immaterial.
The long-term portion of accounts receivable waswere included as a component of other non-current assets in the Consolidated Balance Sheets. See Note 1 for additional information on the allowance for credit losses related to auto loan receivables.
(3)Inventories | | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-18 | |
Our auto loan receivables include amounts due from customers related to vehicle sales financed through Driveway Finance Corporation and are presented net of an allowance for estimated loan losses. Lease receivables include amounts related to vehicles leased through Pfaff Leasing and are also presented net of an allowance for estimated losses. The balance of auto loan and lease receivables is made up primarily of loans and leases secured by the related vehicles.
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2021 | | 2020 |
| Total Auto loan and lease receivables | $ | 829.2 | | | $ | 175.6 | |
| Less: Allowance for loan and lease losses | (25.0) | | | (12.9) | |
| Auto loan and lease receivables, net | $ | 804.2 | | | $ | 162.7 | |
Below is a breakdown of the current and long term portions of our auto loan and lease receivables:
| | | | | | | | | | | |
| December 31, |
| (Dollars in millions) | 2021 | | 2020 |
| Current portion of auto loan and lease receivables, net of allowance of $13.6 and $2.1 | $ | 224.5 | | | $ | 78.6 | |
| Long term portion of auto loan and lease receivables, net of allowance of $11.4 and $10.8 | 579.7 | | | 84.1 | |
| Auto loan and lease receivables, net | $ | 804.2 | | | $ | 162.7 | |
Our allowance for loan and lease losses represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowances for credit losses related to auto loan and lease receivables consisted of the following changes during the period:
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2021 | | 2020 |
| Allowance at beginning of period | $ | 12.9 | | | $ | 12.4 | |
| Charge-offs | (16.6) | | | (10.1) | |
| Recoveries | 8.8 | | | 1.5 | |
| Provision expense | 17.4 | | | 9.1 | |
| Allowance at end of period | 22.5 | | | 12.9 | |
| Lease portfolio loss reserve | 2.5 | | | — | |
| Total balance at end of period | $ | 25.0 | | | $ | 12.9 | |
Ending auto loan receivables (principal balances) by FICO score:
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2021 | | 2020 |
<5991 | $ | 83.2 | | | $ | 59.9 | |
| 600-699 | 437.6 | | | 79.3 | |
| 700-774 | 166.8 | | | 25.2 | |
| 775+ | 37.4 | | | 10.3 | |
| Total auto loan receivables | 725.0 | | | 174.7 | |
| Lease portfolio and accrued interest | 104.2 | | | 0.9 | |
| Total auto loan and lease receivables | $ | 829.2 | | | $ | 175.6 | |
1Includes loans that are originated with no FICO score available.
Note 3. Inventories
The components of inventories consisted of the following (in thousands):following:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
| New vehicles | | $ | 812.9 | | | $ | 1,556.6 | |
| Used vehicles | | 1,418.3 | | | 835.9 | |
| Parts and accessories | | 154.3 | | | 100.4 | |
| Total inventories | | $ | 2,385.5 | | | $ | 2,492.9 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| New vehicles | | $ | 1,553,751 |
| | $ | 1,338,110 |
|
| Used vehicles | | 500,011 |
| | 368,067 |
|
| Parts and accessories | | 78,982 |
| | 66,410 |
|
| Total inventories | | $ | 2,132,744 |
| | $ | 1,772,587 |
|
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-19 | |
The new vehicle inventory cost is generally reduced by manufacturer holdbacks and incentives, while the related floor plan notes payable are reflective of the gross cost of the vehicle. As of December 31, 2017 and 2016, the
carrying value of inventory had been reduced by $19.8 million and $18.1 million, respectively, for assistance received from manufacturers as discussed in
Note 1.
(4)4. Property and Equipment
Property and equipment consisted of the following (in thousands):following:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
| Land | | $ | 965.6 | | | $ | 699.3 | |
| Building and improvements | | 1,748.5 | | | 1,149.7 | |
| Service equipment | | 159.9 | | | 123.6 | |
| Furniture, office equipment, signs and fixtures | | 507.3 | | | 512.9 | |
| | 3,381.3 | | | 2,485.5 | |
| Less accumulated depreciation | | (422.6) | | | (338.0) | |
| | 2,958.7 | | | 2,147.5 | |
| Construction in progress | | 93.9 | | | 50.0 | |
| | $ | 3,052.6 | | | $ | 2,197.5 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Land | | $ | 346,680 |
| | $ | 318,832 |
|
| Building and improvements | | 685,516 |
| | 611,798 |
|
| Service equipment | | 94,121 |
| | 80,953 |
|
| Furniture, office equipment, signs and fixtures | | 231,454 |
| | 141,248 |
|
| | | 1,357,771 |
| | 1,152,831 |
|
| Less accumulated depreciation | | (197,802 | ) | | (167,300 | ) |
| | | 1,159,969 |
| | 985,531 |
|
| Construction in progress | | 25,200 |
| | 20,599 |
|
| | | $ | 1,185,169 |
| | $ | 1,006,130 |
|
Long-livedLong-Lived Asset Impairment Charges
In 2015, weWe recorded $3.6 million ofno impairment charges in 2021 and 2020 associated with certain property and equipment. As the expected future useIn 2019, we recorded an impairment charge of these facilities$0.5 million associated with property and equipment changed, theequipment. The long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value. We did not record any impairment charges associated with property and equipment in 2017 or 2016.
(5)Note 5. Goodwill and Franchise Value
The following is a roll-forward of goodwill:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Domestic | | Import | | Luxury | | Consolidated |
| Balance as of December 31, 2019 ¹ | | $ | 171.8 | | | $ | 197.3 | | | $ | 85.5 | | | $ | 454.6 | |
| | | | | | | | |
Additions through acquisitions 2 | | 33.3 | | | 94.3 | | | 17.3 | | | 144.9 | |
| Reductions through divestitures | | (0.1) | | | (0.7) | | | (2.2) | | | (3.0) | |
| Reductions from impairments | | (0.5) | | | (3.0) | | | — | | | (3.5) | |
| Balance as of December 31, 2020 ¹ | | 204.5 | | | 287.9 | | | 100.6 | | | 593.0 | |
| | | | | | | | |
Additions through acquisitions 3 | | 101.0 | | | 188.7 | | | 105.8 | | | 395.5 | |
| Reductions through divestitures | | (1.5) | | | (8.4) | | | (1.3) | | | (11.2) | |
| | | | | | | | |
Balance as of December 31, 20211 | | $ | 304.0 | | | $ | 468.2 | | | $ | 205.1 | | | $ | 977.3 | |
(1)Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008.
(2)Our purchase price allocation for the 2019 acquisitions were finalized in 2020. As a result, we added $144.9 million of goodwill.
(3)Our purchase price allocation for the 2020 acquisitions were finalized in 2021. As a result, we added $395.5 million of goodwill. Our purchase price allocation for the 2021 acquisitions are preliminary and goodwill (in thousands):is not yet allocated to our segments. These amounts are included in other non-current assets until we finalize our purchase accounting. See Note 15.
|
| | | | | | | | | | | | | | | | |
| | | Domestic | | Import | | Luxury | | Consolidated |
| Balance as of December 31, 2015 ¹ | | $ | 97,903 |
| | $ | 84,384 |
| | $ | 30,933 |
| | $ | 213,220 |
|
Additions through acquisitions 2 | | 18,154 |
| | 21,795 |
| | 7,448 |
| | 47,397 |
|
| Reductions through divestitures | | (1,218 | ) | | — |
| | — |
| | (1,218 | ) |
| Balance as of December 31, 2016 ¹ | | 114,839 |
| | 106,179 |
| | 38,381 |
| | 259,399 |
|
Adjustments to purchase price allocations 2,3 | | (817 | ) | | (1,006 | ) | | (391 | ) | | (2,214 | ) |
| Reductions through divestitures | | — |
| | (865 | ) | | — |
| | (865 | ) |
| Balance as of December 31, 2017 ¹ | | $ | 114,022 |
| | $ | 104,308 |
| | $ | 37,990 |
| | $ | 256,320 |
|
| |
(1) | Net of accumulated impairment losses of $299.3 million recorded during the year ended December 31, 2008. |
| |
(2) | Our purchase price allocation for the acquisition of the Carbone Auto Group was finalized in the third quarter of 2017, resulting in a reclassification of $2.2 million from goodwill to franchise value. |
| |
(3) | Our purchase price allocation is preliminary for the acquisition of the Baierl Auto Group, Downtown LA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln, and Crater Lake Mazda and the associated goodwill has not been allocated to each of our segments. See Note 14. |
The following is a roll-forward of franchise value (in thousands):value:
|
| | | | |
| | | Franchise Value |
| Balance as of December 31, 2015 | | $ | 157,699 |
|
| Additions through acquisitions | | 27,087 |
|
| Reductions through divestitures | | (518 | ) |
| Balance as of December 31, 2016 | | 184,268 |
|
Additions through acquisitions 1 | | 495 |
|
Adjustments to purchase price allocations 2 | | 2,214 |
|
| Balance as of December 31, 2017 | | $ | 186,977 |
|
| | | | | | | | |
(1)(Dollars in millions) | Our purchase price allocation is preliminary for the acquisition | Franchise Value |
Balance as of the Baierl Auto Group, Downtown LA Auto Group, Albany Chrysler, Crater Lake Ford Lincoln, and Crater Lake Mazda and the associated franchise value has not been allocated to each of our segments. See Note 14.December 31, 2019 | | $ | 306.7 | |
| | |
(2)Additions through acquisitions1 | Our purchase price allocation for the acquisition | 51.9 | |
| Reductions through divestitures | | (4.0) | |
| Reductions from impairments | | (4.4) | |
Balance as of the Carbone Auto Group was finalized in the third quarterDecember 31, 2020 | | 350.2 | |
| | |
Additions through acquisitions2 | | 459.7 | |
| Reductions through divestitures | | (8.9) | |
| Reductions from impairments | | (1.9) | |
Balance as of 2017, resulting in a reclassification of $2.2 million from goodwill to franchise value.December 31, 2021 | | $ | 799.1 | |
(6)(1)Our purchase price allocation for the 2019 acquisitions were finalized in 2020. As a result, we added $51.9 million of franchise value.
(2)Our purchase price allocation for the 2020 acquisitions were finalized in 2021. As a result, we added $459.7 million of franchise value. Our purchase price allocation for the 2021 acquisitions are preliminary and is not yet allocated to our segments. See Note 15.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-20 | |
Note 6. Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt (in thousands)millions):
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
| Floor plan notes payable: non-trade | | $ | 835.9 | | | $ | 1,563.0 | |
| Floor plan notes payable | | 354.2 | | | 234.2 | |
| Total floor plan debt | | $ | 1,190.1 | | | $ | 1,797.2 | |
| | | | |
| Used and service loaner vehicle inventory financing commitments | | $ | 500.0 | | | $ | — | |
| Revolving lines of credit | | 219.9 | | | 39.0 | |
| Real estate mortgages | | 592.9 | | | 611.5 | |
| Finance lease obligations | | 53.6 | | | 246.4 | |
| Non-recourse notes payable | | 317.6 | | | — | |
| 5.250% Senior notes due 2025 | | — | | | 300.0 | |
| 4.625% Senior notes due 2027 | | 400.0 | | | 400.0 | |
| 4.375% Senior notes due 2031 | | 550.0 | | | 550.0 | |
| 3.875% Senior notes due 2029 | | 800.0 | | | — | |
| Other debt | | 1.9 | | | 2.4 | |
| Total long-term debt outstanding | | 3,435.9 | | | 2,149.3 | |
| Less: unamortized debt issuance costs | | (26.5) | | | (18.6) | |
| Less: current maturities (net of current debt issuance costs) | | (223.7) | | | (66.0) | |
| Long-term debt | | $ | 3,185.7 | | | $ | 2,064.7 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Floor plan notes payable: non-trade | | $ | 1,802,252 |
| | $ | 1,506,895 |
|
| Floor plan notes payable | | 116,774 |
| | 94,602 |
|
| Total floor plan debt | | $ | 1,919,026 |
| | $ | 1,601,497 |
|
| | | | | |
| Used vehicle inventory financing facility | | $ | 177,222 |
| | $ | 211,000 |
|
| Revolving lines of credit | | 94,568 |
| | 142,507 |
|
| Real estate mortgages | | 469,969 |
| | 428,367 |
|
| 5.25% Senior notes due 2025 | | 300,000 |
| | — |
|
| Other debt | | 12,512 |
| | 11,191 |
|
| Total long-term debt outstanding | | 1,054,271 |
| | 793,065 |
|
| Less: unamortized debt issuance costs | | (6,919 | ) | | (2,184 | ) |
| Less: current maturities (net of current debt issuance costs) | | (18,876 | ) | | (20,965 | ) |
| Long-term debt | | $ | 1,028,476 |
| | $ | 769,916 |
|
Credit Facility
On August 1, 2017,April 29, 2021, we amended our existing syndicated credit facility (credit facility), comprised of 20 financial institutions, including 8 manufacturer-affiliated finance companies, extending the maturity date to increase theApril 2026.
This credit facility provides for a total financing commitment to $2.4of $3.75 billion, which matures in August 2022. This syndicated credit facility is comprisedmay be further expanded, subject to lender approval and the satisfaction of 18 financial institutions, including seven manufacturer-affiliated finance companies. Under our credit facility we are permitted to allocate up to $1.9 billion in new vehicle inventory floor plan financing andother conditions, up to a total of $500$4.25 billion. The initial allocation of the financing commitment is for up to $750 million in used vehicle inventory floor planfloorplan financing, andup to $750 million in revolving financing for general corporate purposes, including acquisitions and working capital. Thiscapital, up to $2.15 billion in new vehicle inventory floorplan financing, and up to $100 million in service loaner vehicle floorplan financing. We have the option to reallocate the commitments under this credit facility, provided that each of the used vehicle floor plan commitment and the aggregate revolving loan commitment may not be expanded to $2.75 billion total availability, subject to lender approval.more than the 20% of the amount of the aggregate commitment, and the aggregate service loaner vehicle floorplan commitment may not be more than the 3% of the amount of the aggregate commitment. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.
The availability of the revolving line of credit under our syndicated credit facility is determined according to a borrowing base comprised of a portion of certain accounts, receivables, invoices, inventory and equipment. The borrowing base is reduced by the sum of the outstanding aggregate principal balance of new and used vehicle floor plan loans and new and used swing line loans.
Our obligations under our revolving syndicated credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts receivable (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our revolving syndicated credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
We have the ability to deposit up to $50 million in cash in Principal Reduction (PR) accounts associated with our new vehicle floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with the outstanding principal balance. As of December 31, 2017, we had no balances in our PR accounts.
If the outstanding principal balance on our new vehicle inventory floor plan commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving line of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving line of credit commitment less the outstanding balance on the line less outstanding letters of credit. The reserve amount decreases the revolving line of credit availability and may be used to repay the new vehicle floor plan commitment balance.
The interest rate on the credit facility varies based on the type of debt, with the rate of one-month LIBOR plus 1.25%1.10% for new vehicle floor plan financing, one-month LIBOR plus 1.50%1.40% for used vehicle floor plan financing;financing, 1.20% for service loaner floor plan financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.25%1.00% to 2.50%,2.00% depending on our leverage ratio. The annual interest raterates associated with our new vehicle floor plan commitment was 2.82% at December 31, 2017. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 3.07% at December 31, 2017.commitments are as follows:
| | | | | |
| Commitment | Annual Interest Rate at December 31, 2021 |
| New vehicle floor plan | 1.20% |
| Used vehicle floor plan | 1.50% |
| Service loaner floor plan | 1.30% |
| Revolving line of credit | 1.10% |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-21 | |
Under the terms of our credit facility, we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Under our credit facility, we are required to maintain the ratios detailed in the following table:
|
| | | | | | | | | | | | | |
| Debt Covenant Ratio | | Requirement | | As of December 31, 20172021 |
| Current ratio | | Not less than 1.10 to 1 | | 1.211.82 to 1 |
| Fixed charge coverage ratio | | Not less than 1.20 to 1 | | 2.825.53 to 1 |
| Leverage ratio | | Not more than 5.005.75 to 1 | | 2.591.48 to 1 |
Other Lines of Credit
We haveOur other lines of credit include commitments of up to $80.0 million, secured by certain assets from select Chrysler locations and all Ford locations. These other lines of credit mature in 2022 and have interest rates up to 5.65%. As of December 31, 2021, no amounts were outstanding on these other lines of credit.
On July 14, 2020, we entered into a five-year real estate backed facility with 8 financial institutions, including 2 manufacturer affiliated finance companies, maturing in July 2025. The real-estate backed credit facility currently provides a total financing commitment of $3.5up to $238.8 million in working capital financing for general corporate purposes, including acquisitions and working capital. Substantially allcapital, collateralized by real estate and certain other assets owned by us. The interest rate on this credit facility uses one-month LIBOR plus a margin ranging from 2.00%-2.50% based on our leverage ratio, or a base rate of these other lines0.75% plus a margin. The facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties by us. Financial covenants include requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, consistent with those under our existing syndicated credit mature in 2019 and have interest rates ranging up to 2.94%.facility with U.S. Bank National Association as administrative agent. As of December 31, 2017, $0.6 million was2021, no amounts were outstanding on these otherthe real estate backed facility.
On July 31, 2020, we entered into a securitization facility which provides initial commitments for borrowings of up to $300 million and matures in July 2022. As of December 31, 2021, we had $90 million drawn on the securitization facility, which is included as part of “Revolving lines of credit.credit” in the “Summary of Outstanding Balances on Credit Facilities and Long-Term Debt” table above.
On April 12, 2021, we entered into a credit agreement with Ally Bank (Ally Capital in Hawaii, Mississippi, Montana and New Jersey), as lender. The credit agreement matures in April 2023 and provides for a revolving line of credit facility (Ally credit facility) of up to $300.0 million and is secured by real estate owned by us. The Ally credit facility will bear interest at a rate per annum equal to the greater of 3.00% or the prime rate designated by Ally Bank, minus 25 basis points. The Ally credit facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties. Financial covenants, including the requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, are the same as the requirements under our existing syndicated credit facility with U.S. Bank National Association. The covenants restrict us from disposing of assets and granting additional security interests. As of December 31, 2021, no amounts were outstanding on the Ally credit facility.
On August 30, 2021, we entered into a credit agreement with The Bank of Nova Scotia. The credit agreement makes available 3 primary lines of credit including a working capital revolving credit facility of up to $50 million CAD, up to $300 million CAD floor plan financing for new and used vehicles; and $350 million CAD to provide wholesale lease financing. The credit facilities accrue interest at rates equal to the Lender’s prime lending rate or the Canadian Dollar Offered Rate plus, in each case, a spread, with the spreads ranging from 0.25% per annum to 1.50% per annum. The credit agreement includes various financial and other covenants typical of such agreements. All indebtedness under this agreement is due on demand.
Floor Plan Notes Payable
We have floor plan agreements with manufacturer-affiliated finance companies for certain new vehicles and vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. As of December 31, 2017, $116.82021, $354.2 million was outstanding on these agreements at interest rates ranging up to 5.50%4.75%. Borrowings from and repayments to manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-22 | |
Non-Recourse Notes Payable
Driveway Finance Corporation auto loans receivable are primarily funded through our warehouse facilities and Other Debt
asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loans receivable, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans receivable. We do, however, continue to have mortgagesthe rights associated with our owned real estate. Interest ratesthe interest we retain in these non-recourse funding vehicles.
In November 2021, we issued $344.4 million in non-recourse notes payable related to this debt ranged from 2.8% to 5.0% at December 31, 2017. The mortgages are payable in various installments through October 2034. As of December 31, 2017, we had fixed interest rates on 78.9% of our outstanding mortgage debt.the asset-backed term funding transaction.
Our other debt includes capital leases and sellers’ notes. The interest rates associated with our other debt ranged from 3.1%to 8.0% at December 31, 2017. This debt, which totaled $12.5 million at December 31, 2017, is due in various installments through December 2050.
5.25%3.875% Senior Notes Due 2025due 2029
On July 24, 2017,May 27, 2021, we issued $300$800 million in aggregate principal amount of 5.25% Senior Notes3.875% notes due 2025 ("the Notes")2029 to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the Notesnotes from July 24, 2017May 27, 2021 and is payable semiannually on FebruaryJune 1 and AugustDecember 1. The first interest payment is due on February 1, 2018. We may redeem the Notesnotes in whole or in part, on or after June 1, 2024, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but, excluding, the redemption date. Prior to June 1, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes with funds in an aggregate amount up to the net cash proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to AugustJune 1, 20202024, we may redeem some or all of the notes at a price equal to 100% of the principal amount, plus a make-whole“make-whole” premium, set forth in the Indenture and accrued and unpaid interest. After August 1, 2020, we may redeem some or all of the Notes subject to the redemption prices set forth in the Indenture. If we experience specific kinds of changes of control, as described in the Indenture, we must offer to repurchase the Notes at 101% of their principal amount plus accrued and unpaid interest, if any, to, but excluding, the dateredemption date.
Below is a summary of purchase.outstanding senior notes issued:
| | | | | | | | | | | |
| Description | Maturity Date | Interest Payment Dates | Principal Amount |
| 4.625% Senior notes due 2027 | December 15, 2027 | June 15, December 15 | $400 million |
| 4.375% Senior notes due 2031 | January 15, 2031 | January 15, July 15 | $550 million |
| 3.875% Senior notes due 2029 | June 1, 2029 | June 1, December 1 | $800 million |
On August 1, 2021, we redeemed in full the aggregate $300 million principal amount of our 5.250% senior notes due 2025 at a redemption price equal to 102.625% of the principal amount of the notes plus accrued and unpaid interest thereon. This early redemption resulted in a $10.3 million loss on extinguishment of debt, presented as a component of “Other (expense) income, net” in our Consolidated Statement of Operations for the year ended December 31, 2021.
Real Estate Mortgages, Finance Lease Obligations, and Other Debt
We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.8% to 5.3% at December 31, 2021. The mortgages are payable in various installments through June 1, 2038. As of December 31, 2021, we had fixed interest rates on 71.2% of our outstanding mortgage debt.
We have finance lease obligations with some of our leased real estate. Interest rates related to this debt ranged from 1.9% to 8.5% at December 31, 2021. The leases have terms extending through August 2037.
Our other debt includes sellers’ notes. The interest rates associated with our other debt ranged from 5.0% to 10.0% at December 31, 2021. This debt, which totaled $1.9 million at December 31, 2021, is due in various installments through April 2027.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-23 | |
Future Principal Payments
The schedule of future principal payments associated with real estate mortgages, finance lease liabilities, our 5.25% Senior Notessenior notes and other debt as of December 31, 20172021 was as follows (in thousands):follows:
| | | | | | | | |
| Year Ending December 31, | | (Dollars in millions) |
| 2022 | | $ | 97.6 | |
| 2023 | | 62.8 | |
| 2024 | | 86.0 | |
| 2025 | | 53.5 | |
| 2026 | | 64.7 | |
| Thereafter | | 2,033.8 | |
| Total principal payments | | $ | 2,398.4 | |
This table does not include future payments related to vehicle floor plan, revolving lines of credit, and non-recourse notes payable.
|
| | | | |
| Year Ending December 31, | | |
| 2018 | | $ | 18,948 |
|
| 2019 | | 47,888 |
|
| 2020 | | 40,236 |
|
| 2021 | | 43,291 |
|
| 2022 | | 61,103 |
|
| Thereafter | | 571,014 |
|
| Total principal payments | | $ | 782,480 |
|
(7)Note 7. Commitments and Contingencies
Leases
We lease certain facilities under non-cancelable operating and capital leases. These leases expire at various dates through 2050. Certain lease commitments contain fixed payment increases at predetermined intervals over the life of the lease, while other lease commitments are subject to escalation clauses of an amount equal to the increase in the cost of living based on the “Consumer Price Index - U.S. Cities Average - All Items for all Urban Consumers” published by the U.S. Department of Labor, or a substantially equivalent regional index. Lease expense related to operating leases is recognized on a straight-line basis over the life of the lease.
The minimum lease payments under our operating and capital leases after December 31, 2017 are as follows (in thousands):
|
| | | | |
| Year Ending December 31, | | |
| 2018 | | $ | 38,357 |
|
| 2019 | | 34,587 |
|
| 2020 | | 32,552 |
|
| 2021 | | 30,673 |
|
| 2022 | | 28,985 |
|
| Thereafter | | 243,242 |
|
| Total minimum lease payments | | 408,396 |
|
| Less: sublease rentals | | (8,005 | ) |
| | | $ | 400,391 |
|
Rent expense, net of sublease income, for all operating leases was $33.4 million, $26.8 million, and $23.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. These amounts are included as a component of selling, general and administrative expenses in our Consolidated Statements of Operations.
In connection with dispositions of stores, we occasionally assign or sublet our interests in any real property leases associated with such stores to the purchaser. We often retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform. Additionally, we may remain subject to the terms of any guarantees and have correlating indemnification rights against the assignee or sublessee in the event of non-performance, as well as certain other defenses. We may also be called upon to perform other obligations under these leases, such as environmental remediation of the premises or repairs upon termination of the lease. We currently have no reason to believe that we will be called upon to perform any such services; however, there can be no assurance that any future performance required by us under these leases will not have a material adverse effect on our financial condition or results of operations.
Charge-Backs for Various Contracts
We have recorded a liability of $52.7$96.3 million as of December 31, 20172021 for our estimated contractual obligations related to potential charge-backs for vehicle service contracts, lifetime oil change contracts and other various insurance contracts that are terminated early by the customer. We estimate that the charge-backs will be paid out as follows (in thousands):follows:
| | | | | | | | |
| Year Ending December 31, | | (Dollars in millions) |
| 2022 | | $ | 67.0 | |
| 2023 | | 19.6 | |
| 2024 | | 7.0 | |
| 2025 | | 2.2 | |
| 2026 | | 0.4 | |
| Thereafter | | 0.1 | |
| Total | | $ | 96.3 | |
|
| | | | |
| Year Ending December 31, | | |
| 2018 | | $ | 27,352 |
|
| 2019 | | 16,113 |
|
| 2020 | | 6,382 |
|
| 2021 | | 2,183 |
|
| 2022 | | 673 |
|
| Thereafter | | 41 |
|
| Total | | $ | 52,744 |
|
Lifetime Lube, Oil and Filter Contracts
We retain the obligation for lifetime lube, oil and filter service contracts sold to our customers and assumed the liability of certain existing lifetime lube, oil and filter contracts. These amounts are recorded as deferred revenues.a contract liability. At the time of sale, we defer the full sale price and recognize the revenue based on the rate we expect future costs to be incurred. As of December 31, 2017,2021, we had a deferred revenuecontract liability balance of $127.3$240.5 million associated with these contracts and estimate the deferred revenuecontract liability will be recognized as follows (in thousands):follows:
| | | | | | | | |
| Year Ending December 31, | | (Dollars in millions) |
| 2022 | | $ | 48.2 | |
| 2023 | | 38.8 | |
| 2024 | | 30.7 | |
| 2025 | | 25.3 | |
| 2026 | | 21.4 | |
| Thereafter | | 76.1 | |
| Total | | $ | 240.5 | |
|
| | | | |
| Year Ending December 31, | | |
| 2018 | | $ | 25,212 |
|
| 2019 | | 20,048 |
|
| 2020 | | 15,913 |
|
| 2021 | | 13,292 |
|
| 2022 | | 11,368 |
|
| Thereafter | | 41,424 |
|
| Total | | $ | 127,257 |
|
The current portion of this deferred revenuecontract liability balance is recorded as a componentcomponents of deferred revenue and accrued liabilities in our Consolidated Balance Sheets.
We periodically evaluate the estimated future costs of these assumed contracts and record a charge if future expected claim and cancellation costs exceed the deferred revenuecontract liability to be recognized. As of December 31, 2017,2021, we had a reserve balance of $3.4$2.4 million recorded as a component of accrued liabilities and other long-term liabilities in our Consolidated Balance Sheets. The charges associated with this reserve were recognized in 2011 and earlier.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-24 | |
Self-insurance Programs
We self-insure a portion of our property and casualty insurance, vehicle open lot coverage, medical insurance and workers’ compensation insurance. Third parties are engaged to assist in estimating the loss exposure related to the self-retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss and claims experience to estimate the loss exposure associated with these programs. As of December 31, 20172021 and 2016,2020, we had liabilities associated with these programs of $31.2$56.4 million and $32.8$39.1 million, respectively, recorded as a component of accrued liabilities and other long-term liabilities in our Consolidated Balance Sheets.
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. Although we do not anticipate that the resolution of legal proceedings arising in the normal course of business or the proceedings described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
California Wage
Note 8. Equity and Hour LitigationsRedeemable Non-controlling Interest
In August 2014, Ms. Holzer filed a complaint in the Central District of California (Holzer v. DCH Auto Group (USA) Inc., Case No. BC558869) alleging that her employer, an affiliate of DCH Auto Group (USA) Inc., failed to provide vehicle finance and sales persons, service advisors, and other clerical and hourly workers accurate and complete wage statements; and statutory meal and rest periods. The complaint also alleges that the employer failed to pay these employees for off-the-clock time worked; and wages due at termination. The plaintiffs also seek attorney fees and costs. The plaintiffs (and several other employees in separate actions) are seeking relief under California’s PAGA provisions.
During the pendency of Holzer, related cases were filed that made substantially similar non-technician claims. In January 2017, DCH and all non-technician plaintiffs agreed in principle to settle the representative claims, and this settlement was approved by the California courts in December 2017. DCH Auto Group (USA) Limited must indemnify Lithia Motors, Inc. for losses related to this claim pursuant to the stock purchase agreement between Lithia Motors, Inc. and DCH Auto Group (USA) Limited dated June 14, 2014. We believe the exposure related to this lawsuit, when considered in relation to the terms of the stock purchase agreement, is immaterial to our financial statements.
(8) Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A commonCommon stock are not convertible into any other series or class of our securities. Each share of Class B common stock, however, is freely convertible into one share of Class A common stock at the option of the holder of the Class B common stock. All shares of Class B common stock shall automatically convert to shares of Class A common stock (on a share-for-share basis, subject to adjustment) on the earliest record date for an annual meeting of our stockholders on which the number of shares of Class B common stock outstanding is less than 1% of the total number of shares of common stock outstanding. Shares of Class B common stock may not be transferred to third parties, except for transfers to certain family members and in other limited circumstances.
Holders of Class A commonCommon stock are entitled to one1 vote for each share held of record and holders of Class B common stock are entitled to ten votes for each share held of record. The Class A common stock and Class B commonCommon stock vote together as a single class on all matters submitted to shareholders.
Repurchasesof Class A Common Stock
Repurchases of our Class A Common Stock occurred under repurchase authorizations granted by our Board of Directors and related to shares withheld as part of the vesting of restricted stock units ("RSUs")(RSUs).
In August 2011,On November 30, 2021, our Board of Directors authorized theapproved an additional $750 million repurchase of up to 2 million sharesauthorization of our Class A common stock and, on July 20, 2012, our Board of Directors authorized the repurchase of 1 million additional shares of our Class A common stock. Effective February 29, 2016, our Board of Directors authorized the repurchase of up to $250 million of our Class A common stock. This new authorization replacedis in addition to the existing authorizations, increasingamount previously authorized by the total and establishing a maximum dollar rather than share amount.
Board for repurchase. Share repurchases under our authorizationsauthorization were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Repurchases Occurring in 2021 | | Cumulative Repurchases as of December 31, 2021 |
| | | Shares | | Average Price | | Shares | | Average Price |
| Share repurchase authorization | | 756,883 | | | $ | 283.75 | | | 4,475,931 | | | $ | 117.80 | |
|
| | | | | | | | | | | | | | |
| | | Repurchases Occurring in 2017 | | Cumulative Repurchases as of December 31, 2017 |
| | | Shares | | Average Price | | Shares | | Average Price |
| 2016 Share Repurchase Authorization | | 329,000 |
| | $ | 92.79 |
| | 1,042,725 |
| | $ | 83.86 |
|
As of December 31, 2017,2021, we had $162.6$722.8 million available for repurchases pursuant to our 2016 share repurchase authorization.
In addition, during 2017,2021, we repurchased 32,45754,318 shares at an average price of $99.40$292.98 per share, for a total of $3.2$15.9 million, related to tax withholdings associated with the vesting of RSUs. The repurchase of shares related to tax withholdings associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board of Directors.
The following is a summary of our repurchases in the years ended December 31, 2017, 20162021, 2020 and 2015:2019:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Shares repurchased pursuant to repurchase authorizations | | 756,883 | | | 563,953 | | | — | |
| Total purchase price (in millions) | | $ | 214.8 | | | $ | 46.1 | | | $ | — | |
| Average purchase price per share | | $ | 283.75 | | | $ | 81.71 | | | $ | — | |
| Shares repurchased in association with tax withholdings on the vesting of RSUs | | 54,318 | | | 30,620 | | | 40,356 | |
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Shares repurchased pursuant to repurchase authorizations | | 329,000 |
| | 1,312,848 |
| | 228,737 |
|
| Total purchase price (in thousands) | | $ | 30,527 |
| | $ | 104,370 |
| | $ | 24,676 |
|
| Average purchase price per share | | $ | 92.79 |
| | $ | 79.50 |
| | $ | 107.88 |
|
| Shares repurchased in association with tax withholdings on the vesting of RSUs | | 32,457 |
| | 94,826 |
| | 77,649 |
|
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-25 | |
In December 2017, we entered into a structured repurchase agreement involving the use of capped call options for the purchase of our Class A common stock. We paid a fixed sum upon execution of the agreement in exchange for the right to receive either a pre-determined amount of cash or stock. Upon expiration of the agreement, if the closing market price of our common stock is above the pre-determined price, we will have our initial investment returned with a premium in either cash or shares (at our election). If the closing market price of our common stock is at or below the pre-determined price, we will receive the number of shares specified in the agreement. We paid net premiums of $33.4 million in December 2017 to enter this agreement, which was recorded as a reduction of additional paid-in capital and, as of December 31, 2017, the options were outstanding.
Dividends
We declared and paid dividends on our Class A and Class B Common Stock as follows:
| | | | | | | | | | | | | | |
| Quarter declared | | Dividend amount per share | |
Total amount of dividends paid (in millions) |
| 2019 | | | | |
| First quarter | | $ | 0.29 | | | $ | 6.7 | |
| Second quarter | | 0.30 | | | 7.0 | |
| Third quarter | | 0.30 | | | 7.0 | |
| Fourth quarter | | 0.30 | | | 6.9 | |
| 2020 | | | | |
| First quarter | | $ | 0.30 | | | $ | 7.0 | |
| Second quarter | | 0.30 | | | 6.8 | |
| Third quarter | | 0.31 | | | 7.1 | |
| Fourth quarter | | 0.31 | | | 8.2 | |
| 2021 | | | | |
| First quarter | | $ | 0.31 | | | $ | 8.3 | |
| Second quarter | | 0.35 | | | 9.3 | |
| Third quarter | | 0.35 | | | 10.6 | |
| Fourth quarter | | 0.35 | | | 10.6 | |
Follow-On Public Offering
On May 24, 2021, we completed the public offering of 3,571,428 shares of our common stock, no par value per share, which included the exercise in full by the underwriters of their option to purchase up to 465,838 additional shares of our common stock, at the public offering price of $322.00 per share. We received $1.11 billion from the offering, net of the underwriting discount and before deducting the offering expenses of $0.6 million.
ATM Equity Offering Agreement
On July 24, 2020, we entered into an ATM Equity OfferingSM Sales Agreement with BofA Securities, Inc. and Jefferies LLC acting as sales agents and/or principals and Bank of America, N.A. and Jefferies LLC acting as forward purchasers, pursuant to which we may offer and sell, from time to time through the sales agents, shares of our Common stock, no par value, having an aggregate gross sales price of up to $400.0 million. To date, no sales have been made under the program.
Redeemable Non-controlling Interest
On August 30, 2021, the Company expanded into Canada through a partnership with Toronto-based Pfaff Automotive Partners. As part of the acquisition, the Company was granted the right to purchase (Call Option), and granted Pfaff Automotive a right to sell (Put Option), the remaining interest after a three-year period, with a purchase price based on Pfaff’s pro rata share of assets at the date of exercise of the Call or Put Option, as applicable. As a result of this redemption feature, the Company recorded redeemable non-controlling interest, at its preliminary estimate of acquisition-date fair value, that is classified as mezzanine equity in the accompanying consolidated balance sheets at December 31, 2021. The non-controlling interest is adjusted each reporting period for income (loss) attributable to the non-controlling interest and adjustments in fair value.
|
| | | | | | | | |
| Quarter declared | | Dividend amount per Class A and Class B share | |
Total amount of dividends paid (in thousands) |
| 2015 | | | | |
| First quarter | | $ | 0.16 |
| | $ | 4,216 |
|
| Second quarter | | 0.20 |
| | 5,266 |
|
| Third quarter | | 0.20 |
| | 5,257 |
|
| Fourth quarter | | 0.20 |
| | 5,246 |
|
| 2016 | | | | |
| First quarter | | $ | 0.20 |
| | $ | 5,151 |
|
| Second quarter | | 0.25 |
| | 6,373 |
|
| Third quarter | | 0.25 |
| | 6,299 |
|
| Fourth quarter | | 0.25 |
| | 6,308 |
|
| 2017 | | | | |
| First quarter | | $ | 0.25 |
| | $ | 6,292 |
|
| Second quarter | | 0.27 |
| | 6,760 |
|
| Third quarter | | 0.27 |
| | 6,751 |
|
| Fourth quarter | | 0.27 |
| | 6,741 |
|
Reclassification From Accumulated Other Comprehensive Loss
The reclassification from accumulated other comprehensive loss was as follows (in thousands):
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 | | Affected Line Item in the Consolidated Statement of Operations |
| Loss on cash flow hedges | | $ | — |
| | $ | (219 | ) | | $ | (449 | ) | | Floor plan interest expense |
| Income tax benefits | | — |
| | 85 |
| | 174 |
| | Income tax provision |
| Loss on cash flow hedges, net | | $ | — |
| | $ | (134 | ) | | $ | (275 | ) | | |
See Note 11.
(9)9. 401(k) Profit Sharing, Deferred Compensation and Long-Term Incentive Plans
We have a defined contribution 401(k) plan and trust covering substantially all full-time employees. The annual contribution to the plan is at the discretion of our Board of Directors. Contributions of $5.8$18.8 million, $5.4$9.0 million, and $5.3$9.8 million were recognized for the years ended December 31, 2017, 20162021, 2020 and 2015,2019, respectively. Employees may contribute to the plan if they meet certain eligibility requirements.
We offer a non-qualified deferred compensation and long-term incentivesupplemental executive retirement plan (the “LTIP”“SERP”) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. We may, depending on position, also make discretionary contributions to the LTIP.SERP. These discretionary contributions could
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-26 | |
vest between one andimmediately or over a period of up to seven years based on the employee’s age. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement.
The following is a summary related to our LTIP (in thousands):SERP:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Compensation expense | | $ | 1.4 | | | $ | 1.2 | | | $ | 0.9 | |
| Total discretionary contribution | | $ | 0.9 | | | $ | 0.9 | | | $ | 0.3 | |
| Guaranteed annual return | | 5.00 | % | | 5.00 | % | | 5.00 | % |
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Compensation expense | | $ | 1,059 |
| | $ | 1,081 |
| | $ | 1,812 |
|
| Total discretionary contribution | | $ | 1,730 |
| | $ | 1,785 |
| | $ | 2,249 |
|
| Guaranteed annual return | | 5.00 | % | | 5.25 | % | | 5.25 | % |
As of December 31, 20172021 and 2016,2020, the balance due to participants was $27.9$51.9 million and $23.5$43.3 million, respectively, and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.
(10)
Note 10. Stock-Based Compensation
2009 Employee Stock Purchase Plan
The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) allows for the issuance of 1,500,0003.0 million shares of our Class A commonCommon stock. The 2009 ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Compensation Committee of the Board of Directors.
Eligible employees are entitled to defer up to 10% of their base pay for the purchase of stock, up to $25,000 of fair market value of our Class A commonCommon stock annually. The purchase price is equal to 85% of the fair market value at the end of the purchase period.
Following is information regarding our 2009 ESPP:
| | | | | | | | |
| Year Ended December 31, | | 2021 |
| Shares purchased pursuant to 2009 ESPP | | 103,374 | |
| Weighted average per share price of shares purchased | | $ | 286.61 | |
| Weighted average per share discount from market value for shares purchased | | $ | 50.58 | |
| | |
| As of December 31, | | 2021 |
| Shares available for purchase pursuant to 2009 ESPP | | 1,309,353 | |
|
| | | | |
| Year Ended December 31, | | 2017 |
| Shares purchased pursuant to 2009 ESPP | | 90,881 |
|
| Weighted average per share price of shares purchased | | $ | 86.13 |
|
| Weighted average per share discount from market value for shares purchased | | $ | 15.20 |
|
| | | |
| As of December 31, | | 2017 |
| Shares available for purchase pursuant to 2009 ESPP | | 281,870 |
|
Compensation expense related to our 2009 ESPP is calculated based on the 15% discount from the per share market price on the date of grant.
2013 Stock Incentive Plan
Our 2013 Stock Incentive Plan, as amended, (the “2013 Plan”) allows for the grant of a total of 3.8 million shares in the form of stock appreciation rights, qualified stock options, nonqualified stock options, restricted share awards and shares of restricted stock unit awards (RSUs) to our officers, key employees, directors and consultants. The 2013 Plan is administered by the Compensation Committee of the Board of Directors and permits accelerated vesting of outstanding awards upon the occurrence of certain changes in control. As of December 31, 2017, 1,383,8272021, 983,435 shares of Class A commonCommon stock were available for future grants. As of December 31, 2017,2021, there were no stock appreciation rights, qualified stock options, nonqualified stock options or shares of restricted stockshare awards outstanding.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-27 | |
Restricted Stock Units (“RSUs”)Unit Awards
RSU grants vest over a period of time up to four years from the date of grant. RSU activity was as follows:
| | | | | | | | | | | |
| RSUs | | Weighted average per share price, grant date fair value |
| Balance, December 31, 2020 | 519,612 | | | $ | 100.78 | |
| Granted | 127,666 | | | 312.83 | |
| Vested | (141,857) | | | 107.50 | |
| Forfeited | (38,561) | | | 188.99 | |
| Balance, December 31, 2021 | 466,860 | | | 159.85 | |
|
| | | | | | |
| | RSUs | | Weighted average grant date fair value |
| Balance, December 31, 2016 | 298,984 |
| | $ | 80.37 |
|
| Granted | 162,356 |
| | 99.24 |
|
| Vested | (90,215 | ) | | 69.61 |
|
| Forfeited | (26,321 | ) | | 83.86 |
|
| Balance, December 31, 2017 | 344,804 |
| | 91.81 |
|
We granted 52,05633,665 time-vesting RSUs to members of our Board of Directors and employees in 2017.2021. Each grant entitles the holder to receive shares of our Class A commonCommon stock upon vesting. A portion of the RSUs vest over four years, beginning on the second anniversary of the grant date, for employees and vests quarterly for our Board of Directors, over their service period.
Certain key employees were granted 110,30094,001 performance and time-vesting RSUs in 2017.2021. Of these, 83,51074,187 shares were earned based on attaining various target levels of operational performance. Based on the levels of performance achieved in 2017,2021, a weighted average attainment level of 57.2%79.0% for these RSUs was met. These RSUs will vest over four years from the grant date.
Stock-Based Compensation
As of December 31, 2017,2021, unrecognized stock-based compensation related to outstanding, but unvested RSUs was $12.5$21.9 million, which will be recognized over the remaining weighted average vesting period of 2.12.7 years.
Certain information regarding our stock-based compensation was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021 | | 2020 | | 2019 |
| Per share intrinsic value of non-vested stock granted | | $ | 312.83 | | | $ | 130.89 | | | $ | 75.73 | |
| Weighted average per share discount for compensation expense recognized under the 2009 ESPP | | 50.58 | | | 22.97 | | | 17.83 | |
| | | | | | |
| Fair value of non-vested stock that vested during the period (in millions) | | 107.5 | | 108.5 | | 92.0 |
| Stock-based compensation recognized in Consolidated Statements of Operations, as a component of selling, general and administrative expense (in millions) | | 34.7 | | 23.2 | | 16.2 |
| Tax benefit recognized in Consolidated Statements of Operations (in millions) | | 11.9 | | 3.7 | | 2.7 |
| Cash received from options exercised and shares purchased under all share-based arrangements (in millions) | | 29.6 | | 14.8 | | 11.3 |
| Tax deduction realized related to stock options exercised (in millions) | | 41.8 | | 13.6 | | 9.8 |
Note 11. Leases
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Per share intrinsic value of non-vested stock granted | | $ | 99.24 |
| | $ | 82.90 |
| | $ | 88.74 |
|
| Weighted average per share discount for compensation expense recognized under the 2009 ESPP | | 15.20 |
| | 13.00 |
| | 15.89 |
|
| Total intrinsic value of stock options exercised (in millions) | | — |
| | — |
| | 0.5 |
|
| Fair value of non-vested stock that vested during the period (in millions) | | 69.6 | | 47.5 |
| | 19.3 |
|
| Stock-based compensation recognized in Consolidated Statements of Operations, as a component of selling, general and administrative expense (in millions) | | 11.3 | | 11.0 |
| | 11.9 |
|
| Tax benefit recognized in Consolidated Statements of Operations (in millions) | | 3.5 | | 3.8 |
| | 4.2 |
|
| Cash received from options exercised and shares purchased under all share-based arrangements (in millions) | | 7.8 | | 7.0 |
| | 6.5 |
|
| Tax deduction realized related to stock options exercised (in millions) | | 9.0 | | 8.9 |
| | 7.6 |
|
Lease Accounting
We lease certain dealerships, office space, land and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. We have elected not to bifurcate lease and non-lease components related to leases of real property. (11)Derivative Financial Instruments
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 25 or more years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
From time to time, we have entered into interest rate swaps to fix a portion
Certain of our interest expense. Welease agreements include rental payments based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not enter into derivative instruments forcontain any purpose other thanmaterial residual value guarantees or material restrictive covenants.
We rent or sublease certain real estate to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments. Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive loss is recognized in income immediately.third parties.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-28 | |
The effecttable below presents the lease-related liabilities and finance lease ROU assets recorded on the Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| (Dollars in millions) | | December 31, 2021 | | December 31, 2020 |
| Operating lease liabilities: | | | | |
| Current portion included in accrued liabilities | | $ | 49.0 | | | $ | 30.8 | |
| Noncurrent operating lease liabilities | | 361.7 | | | 246.7 | |
| Total operating lease liabilities | | 410.7 | | | 277.5 | |
| Finance lease liabilities: | | | | |
| Current portion included in current maturities of long-term debt | | 16.3 | | | 6.0 | |
| Long-term portion of lease liabilities in long-term debt | | 37.3 | | | 240.4 | |
| Total finance lease liabilities | | 53.6 | | | 246.4 | |
| Total lease liabilities | | $ | 464.3 | | | $ | 523.9 | |
| Finance lease right-of-use assets: | | | | |
Total finance lease right-of-use assets 1 | | $ | 58.7 | | | $ | 253.9 | |
| Weighted-average remaining lease term: | | | | |
| Operating leases | | 8 years | | 5 years |
| Finance leases | | 11 years | | 12 years |
| Weighted-average discount rate: | | | | |
| Operating leases | | 4.12 | % | | 4.69 | % |
| Finance leases | | 2.42 | % | | 4.12 | % |
1 Finance lease right-of-use assets included in property and equipment, net of derivative instrumentsaccumulated depreciation.
The components of lease costs, which were included in selling, general and administrative in our Consolidated Statements of Operations, were as follows:
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
Operating lease cost 1 | | $ | 53.1 | | | $ | 41.6 | |
Variable lease cost 2 | | 3.5 | | | 3.1 | |
| Amortization of finance lease right-of-use assets | | 5.9 | | | 4.5 | |
| Interest on finance lease liabilities | | 4.2 | | | 3.4 | |
| Sublease income | | (6.4) | | | (4.9) | |
| Total lease costs | | $ | 60.3 | | | $ | 47.7 | |
1 Includes short-term and month-to-month lease costs, which are immaterial.
2 Variable lease cost generally includes reimbursement for actual costs incurred by our lessors for common area maintenance, property taxes and insurance on leased real estate.
Rent expense, net of sublease income, for all operating leases was $41.3 million for the year ended December 31, 2019. This amount is included as follows (in thousands):a component of selling, general and administrative expenses in our Consolidated Statements of Operations.
As of December 31, 2021, the maturities of our operating and finance lease liabilities were as follows:
| | | | | | | | | | | | | | |
| (Dollars in millions) | | Operating Lease Liabilities | | Finance Lease Liabilities |
| Year Ending December 31, | | | | |
| 2021 | | $ | 60.5 | | | $ | 18.3 | |
| 2022 | | 54.1 | | 3.6 |
| 2023 | | 47.8 | | 9.2 |
| 2024 | | 44.7 | | 2.9 |
| 2025 | | 40.6 | | 2.9 |
| Thereafter | | 256.1 | | 29.9 |
| Total minimum lease payments | | 503.8 | | 66.8 |
| Less: | | | | |
| Present value adjustment | | (93.1) | | | (13.2) | |
| Total lease liabilities | | $ | 410.7 | | | $ | 53.6 | |
|
| | | | | | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships | | Amount of gain recognized in Accumulated OCI (effective portion) | | Location of loss reclassified from Accumulated OCI into Income (effective portion) | | Amount of loss reclassified from Accumulated OCI into Income (effective portion) | | Location of loss recognized in Income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of loss recognized in Income on derivative (ineffective portion and amount excluded from effectiveness testing) |
| | | | | | | | | | | |
| Year Ended December 31, 2016 | | | | | | | | | | |
| Interest rate swap contract | | $ | 233 |
| | Floor plan interest expense | | $ | (219 | ) | | Floor plan interest expense | | $ | (352 | ) |
| Year Ended December 31, 2015 | | | | | | | | | | |
| Interest rate swap contract | | $ | 599 |
| | Floor plan interest expense | | $ | (449 | ) | | Floor plan interest expense | | $ | (758 | ) |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-29 | |
Note 12. Derivative Financial Instruments
We didaccount for derivative financial instruments by recording the fair value as either an asset or liability in our Consolidated Balance Sheets and recognize the resulting gains or losses as adjustments to accumulated other comprehensive income (loss). We do not have any activityhold or issue derivative financial instruments for trading or speculative purposes. For derivative instruments that hedge the exposure to variability in expected future cash flows that are designated and qualify as cash flow hedges, the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive loss (AOCI) in stockholders’ equity and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
To hedge the business exposure to rising interest rates on a portion of our variable rate debt, we entered into a five-year, zero-cost interest rate collar, with an aggregate notional amount of $300 million, effective June 1, 2019. This instrument hedges interest rate risk related to a portion of our $1.6 billion of non-trade floor plan notes payable.
The table below presents the liabilities related to the effectzero-cost interest rate collar:
| | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | | Accrued Liabilities | | Other Long-Term Liabilities | | Total |
| Balance as of December 31, 2018 | | $ | — | | | $ | — | | | $ | — | |
| Amounts reclassified from AOCI to floorplan interest expense | | — | | | — | | | — | |
| Loss recorded from interest rate collar | | (0.1) | | | (0.9) | | | (1.0) | |
| Balance as of December 31, 2019 | | (0.1) | | | (0.9) | | | (1.0) | |
| | | | | | |
| Amounts reclassified from AOCI to floorplan interest expense | | 1.8 | | | — | | | 1.8 | |
| Loss recorded from interest rate collar | | (4.3) | | | (5.1) | | | (9.4) | |
| Balance as of December 31, 2020 | | (2.6) | | | (6.0) | | | (8.6) | |
| Amounts reclassified from AOCI to floorplan interest expense | | 2.8 | | | — | | | 2.8 | |
| Loss recorded from interest rate collar | | (2.1) | | | 5.3 | | | 3.2 | |
| Balance as of December 31, 2021 | | $ | (1.9) | | | $ | (0.7) | | | $ | (2.6) | |
As of December 31, 2021, the amount of net losses we expect to reclassify from AOCI into interest expense in earnings within the next twelve months is $1.9 million. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.
We also entered into 4 other, immaterial and offsetting, derivative instrumentsarrangements that do not qualify for hedge accounting. These are related to a securitization facility, effective October 2, 2020 and June 15, 2021. We purchased and sold offsetting interest rate caps, all of which are 5-years long with notional amounts totaling $225 million. As of December 31, 2021, the balance in 2017.all 4 agreements was an offsetting $6.4 million and was located in other current assets and accrued liabilities, respectively.
See Note 13 for information on the fair value of the derivative contracts.
(12)Note 13. Fair Value Measurements
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•Level 1 - quoted prices in active markets for identical securities;
•Level 2 - other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment spreads, credit risk; and
•Level 3 - significant unobservable inputs, including our own assumptions in determining fair value.
We determined the carrying value of cash equivalents, accounts receivable, trade payables, accrued liabilities and short-term borrowings approximate their fair values because of the nature of their terms and current market rates of these instruments. We believe the carrying value of our variable rate debt approximates fair value.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-30 | |
We have investments primarily consisting of our investment in Shift Technologies, Inc. (Shift), a San Francisco-based digital retail company. Shift has a readily determinable fair value following Shift going public in a reverse-merger deal with Insurance Acquisition, a special purpose acquisition company, in the fourth quarter of 2020. We calculated the fair value of this investment using quoted prices for the identical asset (Level 1) and recorded the fair value as part of other non-current assets. An additional component of our investment in Shift consists of shares in escrow subject to release upon certain market conditions being met. The fair value of this component of our investment in Shift is measured using observable Level 2 market expectations at each measurement date and is recorded as part of other non-current assets. For the year ended December 31, 2021, we recognized a $66.4 million unrealized investment loss related to Shift, which was recorded as a component of other (expense) income, net.
We have fixed rate debt primarily consisting of amounts outstanding under our senior notes and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1) and calculated the estimated fair value of the fixed rate real estate mortgages using a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt. As of December 31, 2017,2021, our real estate mortgages and other debt, which includes capital leases,finance lease liabilities, had maturity dates between JanuaryApril 1, 2022 and July 1, 2038.
We have derivative instruments consisting of an interest rate collar and an offsetting set of interest rate caps. The fair value of derivative assets and liabilities are measured using observable Level 2 market expectations at each measurement date and is recorded as other current assets, current liabilities and other long-term liabilities in the Consolidated Balance Sheets. See Note 12 2019for more details regarding our derivative contracts.
We estimate the value of other long-lived assets that are recorded at fair value on a non-recurring basis on a market valuation approach. We use prices and December 31, 2050.other relevant information generated primarily by recent market transactions involving similar or comparable assets, as well as our historical experience in divestitures, acquisitions and real estate transactions. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers’ and brokers’ valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. Because these valuations contain unobservable inputs, we classified the measurement of fair value of long-lived assets as Level 3.
There were no changes to our valuation techniques during the year ended December 31, 2017.2021.
Below are our investments that are measured at fair value (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Investments | | $ | 40.4 | | | $ | 0.5 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2020 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Investments | | $ | 97.9 | | | $ | 9.4 | | | $ | — | |
Below are our derivative assets and liabilities that are measured at fair value (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2021 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Derivative asset | | $ | — | | | $ | 6.4 | | | $ | — | |
| Derivative liability | | $ | — | | | $ | 8.9 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| Fair Value at December 31, 2020 | | Level 1 | | Level 2 | | Level 3 |
| Measured on a recurring basis: | | | | | | |
| Derivative asset | | $ | — | | | $ | 0.5 | | | $ | — | |
| Derivative liability | | $ | — | | | $ | 9.0 | | | $ | — | |
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-31 | |
A summary of the aggregate carrying values, excluding unamortized debt issuance cost, and fair values of our long-term fixed interest rate debt is as follows (in thousands)millions):
| | | | | | | | | | | | | | |
| December 31, | | 2021 | | 2020 |
| | | | |
| Carrying value | | | | |
| 5.250% Senior notes due 2025 | | $ | — | | | $ | 300.0 | |
| 4.625% Senior notes due 2027 | | 400.0 | | | 400.0 | |
| 4.375% Senior notes due 2031 | | 550.0 | | | 550.0 | |
| 3.875% Senior notes due 2029 | | 800.0 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Non-recourse notes payable | | 317.6 | | | — | |
| Real estate mortgages and other debt | | 477.6 | | | 714.8 | |
| | $ | 2,545.2 | | | $ | 1,964.8 | |
| | | | |
| Fair value | | | | |
| 5.250% Senior notes due 2025 | | $ | — | | | $ | 311.6 | |
| 4.625% Senior notes due 2027 | | 420.0 | | | 425.0 | |
| 4.375% Senior notes due 2031 | | 583.0 | | | 589.9 | |
| 3.875% Senior notes due 2029 | | 815.0 | | | — | |
| | | | |
| | | | |
| | | | |
| | | | |
| Non-recourse notes payable | | 316.8 | | | — | |
| Real estate mortgages and other debt | | 488.7 | | | 713.2 | |
| | $ | 2,623.5 | | | $ | 2,039.7 | |
During the third quarter of 2021, we recognized asset impairments of $1.9 million related to the franchise value associated with certain dealership locations indicating carrying values less than fair values. These locations were subsequently sold in the fourth quarter of 2021.
In the second quarter of 2020, we recognized asset impairments of $4.4 million and $3.5 million related to the franchise value and goodwill, respectively, associated with certain dealership locations indicating carrying values less than fair values. Certain of these locations were subsequently sold in the fourth quarter of 2020, with the remainder sold in 2021.
In the first quarter of 2019, we recorded an asset impairment of $0.5 million associated with certain real properties. The long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value. The impaired long-lived asset was subsequently sold in the second quarter of 2019. In the fourth quarter of 2019, we recognized asset impairments of $0.4 million and 1.7 million related to the franchise value and goodwill, respectively, associated with certain dealership locations indicating carrying values less than fair values. These locations were subsequently sold in 2020.
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| | | | | |
| Carrying value | | | | |
| 5.25% Senior Notes due 2025 | | $ | 300,000 |
| | $ | — |
|
| Real Estate Mortgages and Other Debt | | 376,880 |
| | 286,660 |
|
| | | $ | 676,880 |
| | $ | 286,660 |
|
| | | | | |
| Fair value | | | | |
| 5.25% Senior Notes due 2025 | | $ | 312,750 |
| | $ | — |
|
| Real Estate Mortgages and Other Debt | | 385,337 |
| | 293,522 |
|
| | | $ | 698,087 |
| | $ | 293,522 |
|
(13)Note 14. Income Taxes
Income Tax Provision
The income tax provision was as follows (in thousands):follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Current: | | | | | | |
| Federal | | $ | 266.2 | | | $ | 108.9 | | | $ | 40.0 | |
| State | | 111.6 | | | 50.3 | | | 24.0 | |
| Foreign | | 1.2 | | | — | | | — | |
| | 379.0 | | | 159.2 | | | 64.0 | |
| Deferred: | | | | | | |
| Federal | | 38.2 | | | 17.6 | | | 34.7 | |
| State | | 3.8 | | | 1.4 | | | 5.2 | |
| Foreign | | 1.1 | | | — | | | — | |
| | 43.1 | | | 19.0 | | | 39.9 | |
| Total | | $ | 422.1 | | | $ | 178.2 | | | $ | 103.9 | |
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Federal | | $ | 95,128 |
| | $ | 68,088 |
| | $ | 58,408 |
|
| State | | 16,883 |
| | 13,884 |
| | 14,572 |
|
| | | 112,011 |
|
| 81,972 |
|
| 72,980 |
|
| Deferred: | | | | | | |
| Federal | | (14,257 | ) | | 4,893 |
| | 6,046 |
|
| State | | 4,098 |
| | (400 | ) | | 679 |
|
| | | (10,159 | ) | | 4,493 |
| | 6,725 |
|
| Total | | $ | 101,852 |
| | $ | 86,465 |
| | $ | 79,705 |
|
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-32 | |
At December 31, 20172021 and 2016,2020, we had income taxes receivablepayable of $22.5$43.0 million and $2.4$33.1 million, respectively included as a component of other current assetsaccrued liabilities in our Consolidated Balance Sheets.
The reconciliation between amounts computed using the federal income tax rate of 35%21% and our income tax provision is shown in the following tabulation (in thousands):tabulation:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Federal tax provision at statutory rate | | $ | 311.7 | | | $ | 136.2 | | | $ | 78.8 | |
| State taxes, net of federal income tax benefit | | 85.4 | | | 40.4 | | | 23.6 | |
| Non-deductible items | | 4.8 | | | 2.8 | | | 2.6 | |
| Permanent differences related to stock compensation | | (2.6) | | | (0.5) | | | 0.2 | |
| Net change in valuation allowance | | 25.3 | | | 0.5 | | | (0.5) | |
| General business credits | | (2.3) | | | (1.3) | | | (0.9) | |
| Foreign Rate Differential | | 0.5 | | | — | | | — | |
| Other | | (0.7) | | | 0.1 | | | 0.1 | |
| Income tax provision | | $ | 422.1 | | | $ | 178.2 | | | $ | 103.9 | |
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Federal tax provision at statutory rate | | $ | 121,474 |
| | $ | 99,233 |
| | $ | 91,947 |
|
| State taxes, net of federal income tax benefit | | 13,308 |
| | 10,784 |
| | 9,357 |
|
| Equity investment basis difference | | — |
| | 9,470 |
| | 11,048 |
|
| Non-deductible items | | 1,316 |
| | 1,436 |
| | 882 |
|
| Permanent differences related to stock-based compensation | | (822 | ) | | 139 |
| | 156 |
|
| Net change in valuation allowance | | 330 |
| | (5,133 | ) | | (3,303 | ) |
| General business credits | | (934 | ) | | (27,950 | ) | | (29,093 | ) |
| Deferred revaluation for change in statutory tax rate | | (32,901 | ) | | — |
| | — |
|
| Other | | 81 |
| | (1,514 | ) | | (1,289 | ) |
| Income tax provision | | $ | 101,852 |
| | $ | 86,465 |
| | $ | 79,705 |
|
Deferred Taxes
Individually significant components of the deferred tax assets and (liabilities) are presented below (in thousands):below:
| | | | | | | | | | | | | | |
| | December 31, |
| (Dollars in millions) | | 2021 | | 2020 |
| Deferred tax assets: | | | | |
| Deferred revenue and cancellation reserves | | $ | 95.3 | | | $ | 64.2 | |
| Allowances and accruals, including state tax carryforward amounts | | 72.8 | | | 55.6 | |
| Lease liability | | 107.6 | | | 73.4 | |
| Credits and other | | 0.6 | | | 3.4 | |
| Valuation allowance | | (26.4) | | | (1.1) | |
| Total deferred tax assets | | 249.9 | | | 195.5 | |
| | | | |
| Deferred tax liabilities: | | | | |
| Inventories | | (20.1) | | | (44.9) | |
| Goodwill | | (112.3) | | | (76.5) | |
| Property and equipment, principally due to differences in depreciation | | (185.9) | | | (139.0) | |
| Right of use asset | | (103.7) | | | (69.8) | |
| Prepaid expenses and other | | (18.9) | | | (11.6) | |
| Total deferred tax liabilities | | (440.9) | | | (341.8) | |
| Total | | $ | (191.0) | | | $ | (146.3) | |
| | | | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Deferred revenue and cancellation reserves | | $ | 39,397 |
| | $ | 49,332 |
|
| Allowances and accruals, including state NOL carryforward amounts | | 36,314 |
| | 49,074 |
|
| Credits and other | | 1,112 |
| | 1,781 |
|
| Valuation allowance | | (557 | ) | | (227 | ) |
| Total deferred tax assets | | 76,266 |
| | 99,960 |
|
| | | | | |
| Deferred tax liabilities: | | | | |
| Inventories | | (20,926 | ) | | (22,253 | ) |
| Goodwill | | (35,042 | ) | | (41,107 | ) |
| Property and equipment, principally due to differences in depreciation | | (73,399 | ) | | (93,943 | ) |
| Prepaid expenses and other | | (3,176 | ) | | (1,732 | ) |
| Total deferred tax liabilities | | (132,543 | ) | | (159,035 | ) |
| Total | | $ | (56,277 | ) | | $ | (59,075 | ) |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, bonus depreciation that will allow for full expensing of qualified property, reduction of the U.S. federal corporate tax rate, a new limitation on deductible interest expense, and limitations on the deductibility of certain executive compensation.
We remeasured certain federal deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, we are still analyzing certain aspects of the Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. At December 31, 2017, we have not completed our accounting for the tax effects of enactment of the Act; however, in certain cases, we have made a reasonable estimate of the effects on our existing deferred tax balances. The provisional amount recorded related to the remeasurement of our deferred tax balance was $32.9 million, which is included as a component of income tax expense from continuing operations. Included in this amount is an estimated $2 million attributable to full expensing on certain assets and the executive compensation limitation. In all cases, we will continue to make and refine our calculations as additional analysis is completed, further guidance is issued, or new information is made available.
We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.
As of December 31, 2017,2021, we had a $0.6$26.4 million valuation allowance recorded associated with our deferred tax assets. The entireOf the total valuation allowance, is associated with$24.3 million relates to our investment in Shift Technologies Inc. (Shift) and $2.1 million relates to state net operating losses primarily generated in current and previous years. As a result of the significant reduction in value of our investment in Shift during the fourth quarter of 2021 and no readily available capital gains to offset a capital loss when realized, we determined that it is more likely than not that the Shift deferred tax asset will not be realized. The state NOL valuation allowance increased $0.3$1.0 million in the current year primarily as a result of establishing allowances relatedlosses incurred, the benefits of which are not expected to be realized.
to previously off balance sheet NOLs as part of the January 2017 adoption of ASU 2016-09, "Compensation - Stock Compensation - Improvements to Employee Share-Based Payment Accounting." See Note 1 Summary of Significant Accounting Policies for additional information regarding the adoption of ASU 2016-09.
As of December 31, 2017,2021, we had state net operating loss (NOL) carryforward amounts totaling approximately $2.4$3.7 million, tax effected, with expiration dates through 2037.2041. We believe that it is more likely than not that the benefit from certain state NOL carryforward amounts will not be realized. In recognition of this risk, we have
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-33 | |
recorded a valuation allowance of $0.6$2.1 million on the deferred tax assets relating to these state NOL carryforwards. carryforwards as discussed above.
We had $1.0have taken the position that we intend to indefinitely reinvest the earnings of our Canadian subsidiaries to ensure there is sufficient working capital to expand operations in Canada. Accordingly, we have not recorded a deferred tax liability related to foreign withholding taxes on approximately $4.6 million of undistributed earnings of these Canadian subsidiaries as of December 31, 2021. An immaterial amount of tax effected, in state tax credit carryforwards with expiration dates through 2027. We believe it is more likely than not thatwould be payable upon the benefits fromremittance of these state tax credit carryforwards will be realized. undistributed earnings.
Unrecognized Tax Benefits
We had no unrecognized tax benefits recorded as of December 31, 2019. The following is a reconciliation of our unrecognized tax benefits (in thousands):
|
| | | |
| Balance, December 31, 2015 | $ | 1,031 |
|
| Decrease related to tax positions taken - prior year | (1,031 | ) |
| Balance, December 31, 2016 | $ | — |
|
| Decrease related to tax positions taken - prior year | — |
|
| Balance, December 31, 2017 | $ | — |
|
The unrecognized tax benefits recorded were acquired as part of the acquisition of DCH. We recorded a tax indemnification asset related to the unrecognized tax benefit as we determined the amount would be recoverable from the seller. As anticipated, settlements were reached during the year resulting in cash settlements related to the unrecognized tax benefits. As a result, we have no unrecognized tax benefits recorded as offor December 31, 2017.2021 and 2020:
| | | | | |
| (Dollars in millions) | |
| Balance, December 31, 2019 | $ | — | |
| Increase related to tax positions taken - current year | 0.2 | |
| Balance, December 31, 2020 | 0.2 | |
| Increase related to tax positions taken - current year | 0.1 | |
| Balance, December 31, 2021 | $ | 0.3 | |
Open tax years at December 31, 20172021 included the following:
|
| | | | |
| Federal | 20142018 - 20172021 |
20 statesStates (28) | 20132017 - 20172021 |
| Canada | 2021 |
(14)Note 15. Acquisitions
In 2017,2021, we completed the following acquisitions:
•In February 2021, Fields Chrysler Jeep Dodge Ram and Land Rover Orlando in Florida.
On May 1, 2017, we acquired Baierl Auto Group: an eight store platform based in Pennsylvania.
On August 7, 2017, we acquired Downtown LA ("DTLA")•In March 2021, Fink Auto Group a seven store platform basedin Florida.
•In March 2021, Avondale Nissan in Arizona.
•In April 2021, The Suburban Collection in Michigan.
•In April 2021, Planet Honda in New Jersey.
•In May 2021, Superstore Auto Group in Nevada.
•In May 2021, Center BMW and Center Acura in California.
On November 11, 2017, we acquired Albany CJD•In June 2021, Southwest Kia Group in Arizona.
•In June 2021, Herrin-Gear Toyota in Mississippi.
•In June 2021, Michael’s Subaru and Michael’s Toyota in Washington.
•In July 2021, Koby Subaru in Alabama.
•In August 2021, Rock Honda in California.
•In August 2021, Pfaff Automotive Partners in Canada.
•In September 2021, Curry Honda in Georgia.
•In September 2021, Orange Coast Chrysler Dodge Jeep Ram Fiat in Albany, New York.California.
On •In November 15, 2017, we acquired Crater Lake2021, Coral Springs Audi and Fort Lauderdale Audi in Florida.
•In November 2021, Pfaff Harley-Davidson in Canada.
•In December 2021, Elder Ford Lincolnof Tampa in Florida.
•In December 2021, Elder Ford of Troy and Crater Lake MazdaElder Ford of Romeo in Medford, Oregon.
Michigan.
Revenue and operating income contributed by the 20172021 acquisitions subsequent to the date of acquisition were as follows (in thousands):follows:
| | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 |
| Revenue | | $ | 4,130.0 | |
| Operating income | | 211.3 | |
|
| | | | |
| Year Ended December 31, | | 2017 |
| Revenue | | $ | 617,300 |
|
| Operating income | | 9,316 |
|
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-34 | |
In 2016,2020, we completed the following acquisitions:
•In February 2020, Sacramento Lexus and Roseville Lexus in California.
On January 26, 2016, we acquired Riverside•In June 2020, Hank’s Body Shop in Billings, Montana.
•In June 2020, Chrysler Dodge Jeep Ram of Bend and Nissan of Bend in Oregon.
•In July 2020, Subaru in Riverside, California.
On February 1, 2016, we acquired Ira Toyota in Milford, Massachusetts.
On June 23, 2016, we acquired the Helena Buick GMC franchises in Helena, Montana.
On August 1, 2016, we acquiredof Thousand Oaks Ford in Thousand Oaks, California.
On September 12, 2016, we acquired Carbone•In July 2020, BMW of San Francisco in California.
•In August 2020, John Eagle Auto Group: Group,a nine10 store platform in New York and Vermont.Texas.
On•In September 28, 2016, we acquired Greiner Ford Lincoln2020, Knoxville Chrysler Dodge Jeep Ram in Casper, Wyoming.Tennessee.
On•In October 5, 2016, we acquired Woodland Hills Audi in Woodland Hills, California.
On November 16, 2016, we acquired Honolulu2020, Latham Ford in Honolulu, Hawaii.New York.
•In November 2020, 9 stores from Keyes Auto Group: 8 in California and 1 in Arizona.
•In November 2020, Ramsey Subaru and Mazda in Iowa.
•In November 2020, Sterling Motorcars in Virginia.
All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.
The following tables summarize the consideration paid in cash and equity securities for the acquisitions and the preliminary amount of identified assets acquired and liabilities assumed as of the acquisition date:
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2021 | | 2020 |
| Cash paid, net of cash acquired | $ | 2,697.5 | | | $ | 1,503.1 | |
| Contingent consideration | — | | | 4.6 | |
| Preliminary fair value of redeemable non-controlling interest | 33.1 | | | — | |
| | | |
| | | |
| Debt and finance lease obligations | 356.0 | | | 218.9 | |
| Total consideration paid | $ | 3,086.6 | | | $ | 1,726.6 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| (Dollars in millions) | 2021 | | 2020 |
| Trade receivables, net | $ | 1.3 | | | $ | 0.2 | |
| Inventories | 626.2 | | | 358.9 | |
| | | |
| Property and equipment | 767.5 | | | 529.9 | |
| Other assets | 1,726.2 | | | 858.4 | |
| Floor plan notes payable | (4.0) | | | (13.1) | |
| | | |
| Other liabilities | (30.6) | | | (8.5) | |
| 3,086.6 | | | 1,725.8 | |
| Goodwill | — | | | 0.8 | |
| Total net assets acquired and liabilities assumed | $ | 3,086.6 | | | $ | 1,726.6 | |
In 2021, the Company expanded into Canada through a partnership with Toronto-based Pfaff Automotive Partners. As part of the acquisition, the Company was granted the right to purchase (Call Option), and granted Pfaff Automotive a right to sell (Put Option), the remaining interest after a three-year period, with a purchase price based on Pfaff’s pro rata share of assets at the date (in thousands):of exercise of the Call or Put Option, as applicable. As a result of this redemption feature, the Company recorded redeemable non-controlling interest, at its preliminary estimate of acquisition-date fair value, that is classified as mezzanine equity in the accompanying consolidated balance sheets at December 31, 2021.
|
| | | | | | | |
| Consideration paid for the Year Ended December 31, | 2017 | | 2016 |
| Cash paid, net of cash acquired | $ | 460,394 |
| | $ | 234,700 |
|
| Property and equipment transferred | — |
| | 2,637 |
|
| Equity securities issued | 2,137 |
| | — |
|
| Debt issued | 1,748 |
| | — |
|
| | $ | 464,279 |
|
| $ | 237,337 |
|
|
| | | | | | | | |
| Assets acquired and liabilities assumed for the Year Ended December 31, | | 2017 | | 2016 |
| Trade receivables, net | | $ | 46,864 |
| | $ | — |
|
| Inventories | | 189,747 |
| | 148,915 |
|
| Franchise value | | — |
| | 27,087 |
|
| Property and equipment | | 146,835 |
| | 75,345 |
|
| Other assets | | 187,549 |
| | 990 |
|
| Floor plan notes payable | | (72,495 | ) | | (30,134 | ) |
| Debt and capital lease obligations | | (13,727 | ) | | (22,813 | ) |
| Other liabilities | | (20,494 | ) | | (9,450 | ) |
| | | 464,279 |
| | 189,940 |
|
| Goodwill | | — |
| | 47,397 |
|
| | | $ | 464,279 |
| | $ | 237,337 |
|
The purchase price allocationallocations for the Baierl Auto Group, DTLA Auto Group, Albany CJD Fiat, Crater Lake Ford Lincoln and Crater Lake Mazda2021 acquisitions isare preliminary as we have not obtained all of the detailed information to finalize the opening balance sheet related to real estate purchased, leases assumed and the allocation of franchise value to each reporting unit. Management has recorded the purchase price allocations based on the information that is currently available.
We expect substantially all of the goodwill related to acquisitions completed in 2021 to be deductible for federal income tax purposes.
The purchase price allocations for the 2020 acquisitions were finalized in 2021, including amounts posted to contingent consideration, real estate, franchise value, and goodwill, reducing the amounts posted to “Other assets” shown in the table above.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-35 | |
We account for franchise value as an indefinite-lived intangible asset. We recognized $6.0$20.2 million and $1.0$3.0 million, respectively, in acquisition related expenses as a component of selling, general and administrative expenses in the Consolidated Statements of Operations in 20172021 and 2016,2020, respectively.
The following unaudited pro forma summary presents consolidated information as if the acquisitions had occurred on January 1 of the previous year (in thousands, except for per share amounts):year:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions, except for per share amounts) | | 2021 | | 2020 |
| Revenue | | $ | 25,519.8 | | | $ | 19,528.5 | |
| Net income | | 1,123.7 | | | 621.4 | |
| Basic net income per share | | 39.02 | | | 26.08 | |
| Diluted net income per share | | 38.73 | | | 25.80 | |
|
| | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 |
| Revenue | | $ | 10,879,567 |
| | $ | 10,727,906 |
|
| Net income | | 254,966 |
| | 219,756 |
|
| Basic net income per share | | 10.17 |
| | 8.65 |
|
| Diluted net income per share | | 10.14 |
| | 8.61 |
|
These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property, plant and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurringnon-recurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.
(15)
Note 16. Net Income Per Share of Common Stock
We compute net income per share using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding common shares underlying equity awards that are unvested or subject to forfeiture. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the common shares issuable upon the net exercise of stock options and unvested RSUs and is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
Prior to June 7, 2021, our common stock was classified as Class A common stock. The Class A common stock reclassification as common stock occurred pursuant to an amendment and restatement of our Articles of Incorporation in connection with the elimination of our classified common stock structure following the conversion of all Class B common stock to Class A common stock. Prior to the reclassification, except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock were identical. Under our Articles of Incorporation, the Class A and Class B common stock shared equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation that would adversely alter the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B Common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights were identical, the undistributed earnings are allocated on a proportionate basis.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-36 | |
Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (EPS) and diluted EPS (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| (Dollars in millions, except for per share amounts) | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
| Net income from continuing operations applicable to common stockholders | | $ | 1,059.5 | | | $ | 0.6 | | | $ | 460.9 | | | $ | 9.4 | | | $ | 264.5 | | | $ | 7.0 | |
| | | | | | | | | | | | |
| Reallocation of distributed net income due to conversion of class B to class A common shares outstanding | | — | | | — | | | 0.6 | | | — | | | 0.7 | | | — | |
| Conversion of class B common shares into class A common shares | | 0.6 | | | — | | | 8.9 | | | — | | | 6.3 | | | — | |
| | | | | | | | | | | | |
| Net income attributable to Lithia Motors, Inc. and applicable to common stockholders - diluted | | $ | 1,060.1 | | | $ | 0.6 | | | $ | 470.3 | | | $ | 9.4 | | | $ | 271.5 | | | $ | 7.0 | |
| | | | | | | | | | | | |
| Weighted average common shares outstanding – basic | | 28.8 | | | — | | | 23.3 | | | 0.5 | | | 22.6 | | | 0.6 | |
| Conversion of class B common shares into class A common shares | | — | | | — | | | 0.5 | | | — | | | 0.6 | | | — | |
| Effect of employee stock purchases and restricted stock units on weighted average common shares | | 0.2 | | | — | | | 0.3 | | | — | | | 0.2 | | | — | |
| Weighted average common shares outstanding – diluted | | 29.0 | | | — | | | 24.1 | | | 0.5 | | | 23.4 | | | 0.6 | |
| | | | | | | | | | | | |
| Basic earnings per share attributable to Lithia Motors, Inc. | | $ | 36.81 | | | $ | 36.81 | | | $ | 19.74 | | | $ | 19.74 | | | $ | 11.70 | | | $ | 11.70 | |
| Diluted earnings per share attributable to Lithia Motors, Inc. | | $ | 36.54 | | | $ | 36.54 | | | $ | 19.53 | | | $ | 19.53 | | | $ | 11.60 | | | $ | 11.60 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
The effects of antidilutive securities on Class A and Class B common stock were evaluated for the years ended 2021, 2020, and 2019 and were determined to be immaterial.
Note 17. Segments
Certain financial information on a segment basis is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Revenues: | | | | | | |
| Domestic | | $ | 6,975.3 | | | $ | 4,503.0 | | | $ | 4,382.4 | |
| Import | | 9,690.8 | | | 5,448.8 | | | 5,267.8 | |
| Luxury | | 6,114.8 | | | 3,152.0 | | | 2,991.9 | |
| | 22,780.9 | | | 13,103.8 | | | 12,642.1 | |
| Corporate and other | | 50.8 | | | 20.5 | | | 30.6 | |
| | $ | 22,831.7 | | | $ | 13,124.3 | | | $ | 12,672.7 | |
| | | | | | |
| Segment income*: | | | | | | |
| Domestic | | $ | 466.4 | | | $ | 230.0 | | | $ | 123.4 | |
| Import | | 813.4 | | | 249.8 | | | 153.9 | |
| Luxury | | 384.6 | | | 98.5 | | | 57.1 | |
| Total segment income for reportable segments | | $ | 1,664.4 | | | $ | 578.3 | | | $ | 334.4 | |
*Segment income for each of the segments is a Non-GAAP measure defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other income, net.
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-37 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Total segment income for reportable segments | | $ | 1,664.4 | | | $ | 578.3 | | | $ | 334.4 | |
| Corporate and other | | 108.5 | | | 176.7 | | | 170.2 | |
| Depreciation and amortization | | (127.3) | | | (92.3) | | | (82.4) | |
| Other interest expense | | (108.2) | | | (73.1) | | | (60.6) | |
| Other (expense) income, net | | (52.6) | | | 58.9 | | | 13.8 | |
| Income before income taxes | | $ | 1,484.8 | | | $ | 648.5 | | | $ | 375.4 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (Dollars in millions) | | 2021 | | 2020 | | 2019 |
| Floor plan interest expense: | | | | | | |
| Domestic | | $ | 24.7 | | | $ | 30.9 | | | $ | 53.6 | |
| Import | | 30.3 | | | 31.6 | | | 44.1 | |
| Luxury | | 21.7 | | | 22.2 | | | 30.2 | |
| | 76.7 | | | 84.7 | | | 127.9 | |
| Corporate and other | | (54.4) | | | (50.3) | | | (55.1) | |
| | $ | 22.3 | | | $ | 34.4 | | | $ | 72.8 | |
| | | | | | | | | | | | | | | | |
| | December 31, | | |
| (Dollars in millions) | | 2021 | | 2020 | | |
| Total assets: | | | | | | |
| Domestic | | $ | 1,574.7 | | | $ | 1,262.4 | | | |
| Import | | 1,858.1 | | | 1,654.7 | | | |
| Luxury | | 1,407.1 | | | 1,132.4 | | | |
| Corporate and other | | 6,307.0 | | | 3,852.6 | | | |
| | $ | 11,146.9 | | | $ | 7,902.1 | | | |
Note 18. Related Party Transactions
Transition Agreement
In September 2015, we entered into a transition agreement with Sidney B. DeBoer, our Chairman of the Board, which provided him certain benefits until his death. The agreement has an effective date of January 1, 2016 and the initial payment of these benefits began in the third quarter of 2016. On January 22, 2019, we amended the transition agreement to end the annual payments to Mr. DeBoer after 17 years, commencing January 1, 2019, or upon Mr. DeBoer’s death, whichever occurs first.
We recorded a charge of $18.3 million in 2015 as a component of selling, general and administrative expense in our Consolidated Statement of Operations related to the present value of estimated future payments due pursuant to this agreement. We believe that this estimate is reasonable; however, actual cash flows could differ materially. We will periodically evaluate whether significant changes in our assumptions have occurred and record an adjustment if future expected cash flows are significantly different than the reserve recorded. As a result of the amendment to the agreement on January 22, 2019, no change was made to the reserve.
The balance associated with this agreement was $16.8$13.0 million and $17.3$13.9 million as of December 31, 20172021 and 2016,2020, respectively, and was included as a component of accrued liabilities and other long-term liabilities in our Consolidated Balance Sheets.
(16)Net Income Per Share of Class A and Class B Common StockNote 19. Changes in Accounting Policies
We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding unvested common shares subject to repurchase or cancellation. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.
Except with respect to voting and transfer rights, the rights of the holders of our Class A and Class B common stock are identical. Our Restated Articles of Incorporation require that the Class A and Class B common stock must share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the stockholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which would have the effect of adversely altering the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.
Following is a reconciliation of net income and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| (in thousands, except per share data) | | Class A | | Class B | | Class A | | Class B | | Class A | | Class B |
| Net income applicable to common stockholders - basic | | $ | 233,399 |
| | $ | 11,818 |
| | $ | 182,369 |
| | $ | 14,689 |
| | $ | 165,172 |
| | $ | 17,827 |
|
| Reallocation of distributed net income as a result of conversion of dilutive stock options | | 4 |
| | (4 | ) | | 8 |
| | (8 | ) | | 15 |
| | (15 | ) |
| Reallocation of distributed net income due to conversion of Class B to Class A common shares outstanding | | 1,275 |
| | — |
| | 1,791 |
| | — |
| | 1,932 |
| | — |
|
| Conversion of Class B common shares into Class A common shares | | 10,505 |
| | — |
| | 12,833 |
| | — |
| | 15,760 |
| | — |
|
| Effect of dilutive stock options on net income | | 34 |
| | (34 | ) | | 57 |
| | (57 | ) | | 120 |
| | (120 | ) |
| Net income applicable to common stockholders - diluted | | $ | 245,217 |
| | $ | 11,780 |
| | $ | 197,058 |
| | $ | 14,624 |
| | $ | 182,999 |
| | $ | 17,692 |
|
| | | | | | | | | | | | | |
| Weighted average common shares outstanding – basic | | 23,857 |
| | 1,208 |
| | 23,515 |
| | 1,894 |
| | 23,729 |
| | 2,561 |
|
| Conversion of Class B common shares into Class A common shares | | 1,208 |
| | — |
| | 1,894 |
| | — |
| | 2,561 |
| | — |
|
| Effect of employee stock purchases and restricted stock units on weighted average common shares | | 80 |
| | — |
| | 112 |
| | — |
| | 200 |
| | — |
|
| Weighted average common shares outstanding – diluted | | 25,145 |
| | 1,208 |
| | 25,521 |
| | 1,894 |
| | 26,490 |
| | 2,561 |
|
| | | | | | | | | | | | | |
| Net income per common share - basic | | $ | 9.78 |
| | $ | 9.78 |
| | $ | 7.76 |
| | $ | 7.76 |
| | $ | 6.96 |
| | $ | 6.96 |
|
| Net income per common share - diluted | | $ | 9.75 |
| | $ | 9.75 |
| | $ | 7.72 |
| | $ | 7.72 |
| | $ | 6.91 |
| | $ | 6.91 |
|
| | | | | | | | | | | | | |
| Antidilutive Securities | | | | | | | | | | | | |
| Shares issuable pursuant to employee stock purchases not included since they were antidulutive | | 12 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
|
(17) Equity-Method Investments
In October 2014, we acquired a 99.9% membership interest in a limited liability company managed by U.S. Bancorp Community Development Corporation with an initial equity contribution of $4.1 million. We made additional equity contributions to the entity of $22.9 million in 2015 and $22.8 million in 2016. We were obligated to make $49.8 million of total contributions to the entity over a two-year period ended October 2016, all of which had been made as of December 31, 2016.
This investment generated new markets tax credits under the New Markets Tax Credit Program (“NMTC Program”). The NMTC Program was established by Congress in 2000 to spur new or increased investments into operating businesses and real estate projects located in low-income communities.
While U.S. Bancorp Community Development Corporation exercised management control over the limited liability company, due to the economic interest we held in the entity, we determined our ownership portion of the entity was appropriately accounted for using the equity method.
As of December 31, 2017 and 2016 no amounts related to this equity-method investment were recorded in our Consolidated Balance Sheets.
The following amounts related to this equity-method investment were recorded in our Consolidated Statements of Operations (in thousands):
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Asset impairments to write investment down to fair value | | $ | — |
| | $ | 13,992 |
| | $ | 16,521 |
|
| Our portion of the partnership’s operating losses | | — |
| | 8,262 |
| | 6,929 |
|
| Non-cash interest expense related to the amortization of the discounted fair value of future equity contributions | | — |
| | 185 |
| | 674 |
|
| Tax benefits and credits generated | | — |
| | 28,530 |
| | 30,831 |
|
(18) Segments
Certain financial information on a segment basis is as follows (in thousands):
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Revenues: | | | | | | |
| Domestic | | $ | 3,845,830 |
| | $ | 3,381,715 |
| | $ | 3,038,883 |
|
| Import | | 4,432,760 |
| | 3,764,255 |
| | 3,330,949 |
|
| Luxury | | 1,810,085 |
| | 1,528,760 |
| | 1,490,632 |
|
| | | 10,088,675 |
| | 8,674,730 |
| | 7,860,464 |
|
| Corporate and other | | (2,165 | ) | | 3,427 |
| | 3,788 |
|
| | | $ | 10,086,510 |
| | $ | 8,678,157 |
| | $ | 7,864,252 |
|
| | | | | | | |
| Segment income*: | | | | | | |
| Domestic | | $ | 105,208 |
| | $ | 106,210 |
| | $ | 115,145 |
|
| Import | | 117,776 |
| | 110,204 |
| | 98,751 |
|
| Luxury | | 37,022 |
| | 31,467 |
| | 36,391 |
|
| | | 260,006 |
| | 247,881 |
| | 250,287 |
|
| Corporate and other | | 167,366 |
| | 114,321 |
| | 74,514 |
|
| Depreciation and amortization | | (57,722 | ) | | (49,369 | ) | | (41,600 | ) |
| Other interest expense | | (34,776 | ) | | (23,207 | ) | | (19,491 | ) |
| Other (expense) income, net | | 12,195 |
| | (6,103 | ) | | (1,006 | ) |
| Income before income taxes | | $ | 347,069 |
| | $ | 283,523 |
| | $ | 262,704 |
|
*Segment income for each of the segments is defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other (expense) income, net.
|
| | | | | | | | | | | | |
| Year Ended December 31, | | 2017 | | 2016 | | 2015 |
| Floor plan interest expense: | | | | | | |
| Domestic | | $ | 37,196 |
| | $ | 26,445 |
| | $ | 21,061 |
|
| Import | | 29,009 |
| | 18,665 |
| | 14,959 |
|
| Luxury | | 15,756 |
| | 10,999 |
| | 9,096 |
|
| | | 81,961 |
| | 56,109 |
| | 45,116 |
|
| Corporate and other | | (42,625 | ) | | (30,578 | ) | | (25,582 | ) |
| | | $ | 39,336 |
| | $ | 25,531 |
| | $ | 19,534 |
|
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Total assets: | | | | |
| Domestic | | $ | 1,338,232 |
| | $ | 1,225,387 |
|
| Import | | 1,137,934 |
| | 959,355 |
|
| Luxury | | 641,118 |
| | 511,779 |
|
| Corporate and other | | 1,565,782 |
| | 1,147,629 |
|
| | | $ | 4,683,066 |
| | $ | 3,844,150 |
|
(19) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued accounting standards update ("ASU") 2014-09, "Revenue from Contracts with Customers," which amends the accounting guidance related to revenues. This amendment will replace most of the existing revenue recognition guidance when it becomes effective. The new standard, as amended in July 2015, is effective for fiscal years beginning after December 15, 2017 and entities are allowed to adopt the standard as early as annual periods beginning after December 15, 2016, and interim periods therein. The standard permits the use of either the retrospective or cumulative effect transition method.
We have evaluated the effect of this amendment and expect the timing of our revenue recognition to generally remain the same, except as detailed below:
A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration and subject to accelerated recognition under the new standard. Upon adoption, we will recognize an asset associated with future estimated variable consideration and do not believe there will be a significant impact to future revenue recognized.
The guidance provided clarification on how to determine and capitalize direct costs incurred. As a result, we reassessed the method used to capitalize and amortize direct cost associated with the sale of lifetime oil, lube and filter contracts.
Upon adoption, we plan to record a net, after-tax cumulative effect adjustment to retained earnings which will have an immaterial impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases." ASU 2016-02 increases transparencyNo. 2016-13, “Financial Instruments - Credit Losses (Topic 326),” which replaces the existing incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and comparability among organizationsheld-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance and net investments in leases recognized by recognizing lease assets and lease liabilitiesa lessor in accordance with Topic 842 on leases. In addition, Topic 326 made changes to the balance sheet and requires disclosing key information about leasing arrangements. The new standard results in the recording ofaccounting for available-for-sale debt securities. We adopted Topic 326 using a right-of-use asset and a lease liabilitymodified retrospective method for all leases with a term longer than 12 months. ASU 2016-02 is effectivefinancial assets measured at amortized cost. Results for annualreporting periods beginning after December 15, 2018, and interim periods within those annual periods. We intend to adopt this ASU on January 1, 2019. While management is still evaluating2020
| | | | | | | | | | | | | | |
| | NOTES TO FINANCIAL STATEMENTS | F-38 | |
are presented under Topic 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. We recorded a decrease to retained earnings, net of tax, of $4.8 million as of January 1, 2020 for the impactcumulative effect of adopting the provisions of this ASU, we expect that it will have a material impact due to the recognition of right-of-use assets and lease liabilities due to real estate leases. We continue to identify and evaluate if there are other leases impacted.Topic 326. The majority of our real estate leases are classified as operating leases under the current guidance. We expect ASU 2016-02 to impact our consolidated balance sheets primarily due to the recognition of a right-of-use asset and an associated lease liability and our consolidated income statementtransition adjustment is related to updating our allowance for loan loss methodology related to our auto loan receivables. Our methodology incorporates a combination of historical loan loss experience, current conditions and forecasts, as well as the changes in expense recognition.value of any underlying assets securing the receivables.
In August 2016,April 2019, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." ASU 2016-152019-04, “Codification Improvements,” which provides guidance on accounting for eight cash flow classification issues to reduce diversity in practice. The clarification includescredit losses on accrued interest receivable balances and guidance on items such as debt prepayment or debt extinguishment cost, contingent consideration payment made after a business combination, proceeds fromincluding recoveries when estimating the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. We are evaluating the effect this pronouncement will have on our financial disclosures.
allowance. In January 2017,May 2019, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. An entity should perform its annual, or interim, goodwill impairment test by comparing the2019-05, “Targeted Transition Relief,” which allows entities with an option to elect fair value for certain instruments upon adoption of a reporting unit with its carrying amount, and recognize an impairment charge forTopic 326.
The impact of adopting Topic 326 on the amount by which the carrying amount exceeds the reporting unit's fair value, if applicable. The loss recognized should not exceed the total amountaccompanying Consolidated Balance Sheets as of goodwill allocated to the reporting unit. The same impairment test also applies to any reporting unit with a zero or negative carrying amount. An entity still has the option to perform the qualitative assessment
for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2019, on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. We do not expect2020 was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Impact on Consolidated Balance Sheets | | December 31, 2019 | | Adjustments | | January 1, 2020 |
| CECL Adoption: | | | | | | |
| Accounts receivable, net of allowance for doubtful accounts of $7.3 | | $ | 505.0 | | | $ | (0.5) | | | $ | 504.5 | |
| Other non-current assets | | 388.5 | | | (6.0) | | | 382.5 | |
| Total assets | | 6,083.9 | | | (6.5) | | | 6,077.4 | |
| Deferred income taxes | | 131.1 | | | (1.7) | | | 129.4 | |
| Total liabilities | | 4,616.2 | | | (1.7) | | | 4,614.5 | |
| Retained earnings | | 1,401.8 | | | (4.8) | | | 1,397.0 | |
| Total liabilities and stockholders’ equity | | 6,083.9 | | | (6.5) | | | 6,077.4 | |
Note 20. Net Investment in Operating Leases
In the adoptionthird quarter of ASU 2017-04 to have a material effect on our financial position, results of operations or cash flows.
(20) Subsequent Events
Common Stock Dividend
On February 12, 2018, we declared a dividend of $0.27 per share on our Class A and Class B common stock related to our fourth quarter 2017 financial results. The dividend will total approximately $6.8 million and will be paid on March 23, 2018 to shareholders of record on March 9, 2018.
Acquisition
On January 15, 2018,2021, we acquired the inventory, real property, equipment and intangible assets of Ray Laks Honda, in Orchard Park, New York and Ray Laks Acura, in Buffalo, New York. We paid $26.2 million in cash for these acquisitions.
Line of Credit
On February 14, 2018, we entered into a Loan Agreement ("Agreement") with U.S. Bank National Association,leasing portfolio as lender. The Agreement provides for a maximum revolving line of credit in the amount of $150.0 million, with an interest rate of one-month LIBOR plus 1.50%. The line of credit matures in August 2018 or earlier if we renegotiate the termspart of our existing credit facility agreement.acquisition of the Pfaff Automotive Partners consisting of both sales-type financing and operating leases.
LITHIA MOTORS, INC. AND SUBSIDIARIESNet investment in operating leases consists primarily of lease contracts for vehicles with individuals and business entities. Assets subject to operating leases are depreciated using the straight-line method over the term of the lease to reduce the asset to its estimated residual value. Estimated residual values are based on assumptions for used vehicle prices at lease termination and the number of vehicles that are expected to be returned.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Net investment in operating leases was as follows:
The following tables set forth our unaudited quarterly financial data (in thousands, except per share amounts):(1)
|
| | | | | | | | | | | | | | | | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter(2) |
| Revenue | 2017 | $ | 2,236,101 |
| | $ | 2,467,036 |
| | $ | 2,680,342 |
| | $ | 2,703,030 |
|
| | 2016 | 1,982,861 |
| | 2,133,339 |
| | 2,269,967 |
| | 2,291,990 |
|
| | | | | | | | | |
| Gross profit | 2017 | 341,652 |
| | 375,271 |
| | 403,021 |
| | 396,141 |
|
| | 2016 | 307,182 |
| | 322,036 |
| | 337,261 |
| | 334,837 |
|
| | | | | | | | | |
| Operating income | 2017 | 86,141 |
| | 103,950 |
| | 105,952 |
| | 112,942 |
|
| | 2016 | 72,915 |
| | 90,509 |
| | 93,423 |
| | 81,518 |
|
| | | | | | | | | |
| Income before income taxes | 2017 | 81,263 |
| | 87,836 |
| | 86,543 |
| | 91,427 |
|
| | 2016 | 60,021 |
| | 77,303 |
| | 80,077 |
| | 66,122 |
|
| | | | | | | | | |
| Net income | 2017 | 50,727 |
| | 53,200 |
| | 51,886 |
| | 89,404 |
|
| | 2016 | 40,270 |
| | 51,428 |
| | 54,041 |
| | 51,319 |
|
| | | | | | | | | |
| Basic net income per share | 2017 | 2.01 |
| | 2.12 |
| | 2.07 |
| | 3.58 |
|
| | 2016 | 1.56 |
| | 2.02 |
| | 2.15 |
| | 2.04 |
|
| | | | | | | | | |
| Diluted net income per share | 2017 | 2.01 |
| | 2.12 |
| | 2.07 |
| | 3.56 |
|
| | 2016 | 1.55 |
| | 2.01 |
| | 2.15 |
| | 2.03 |
|
| | | | | | | | | |
| | | | | | | | | | | | | | |
| (in millions) | | December 31, 2021 | | December 31, 2020 |
(1)Vehicles, at cost1
| Quarterly data may not add to yearly totals due to rounding. | $ | 66.0 | | | $ | — | |
Accumulated depreciation1 | | (0.9) | | | — | |
| Net investment in operating leases | | $ | 65.1 | | | $ | — | |
1Vehicles, at cost and accumulated depreciation are recorded in other non-current assets, on the Consolidated Balance Sheets.
| | | | | | | | | | | | | | |
| (2) | During the fourth quarter of 2017, we recognized a $32.9 million provisional income tax benefit due to the revaluation of our deferred tax liability as a result of the U.S. tax reform bill enacted in December 2017 and a $4.9 million LIFO benefit, net of tax, primarily related to amounts expensed in the prior three quarters of 2017.
NOTES TO FINANCIAL STATEMENTS | F-39 | |
