UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
LITHIA MOTORS INC
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of
incorporation or organization)
001-14733
(Commission File Number)
93-0572810
(I.R.S. Employer Identification No.)
150 N. Bartlett Street
Medford
(Address of principal executive offices)
Oregon
97501
(Zip Code)
(541) 776-6401
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock without par value
Trading Symbol(s)
LAD
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No ☐
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,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
X
☐
Accelerated filer
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $2,659,094,000 computed by reference to the last sales price
($118.78) as reported by the New York Stock Exchange for the Registrant’s Class A common stock, as of the last business day of the Registrant’s most recently completed second fiscal quarter (June
30, 2019).
As of February 21, 2020, there were 22,724,919 shares of the registrant’s Class A common stock outstanding and 600,000 shares of the registrant’s Class B common stock outstanding.
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2020 Annual Meeting of Shareholders.
Documents Incorporated by Reference
LITHIA MOTORS, INC.
2019 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
PART IV
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Item 1. Business
PART I
Forward-Looking Statements
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”, "outlook,” "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:
• Future market conditions and industry trends, including anticipated national new car sales levels;
• Expected operating results, such as improved store performance; continued improvement of selling, general and administrative expenses ("SG&A”) as a percentage of
gross profit and all projections;
• Anticipated integration, success and growth of acquired stores;
• Anticipated ability to capture additional market share;
• Anticipated ability to find accretive acquisitions;
• Expected revenues from acquired stores;
• Anticipated synergies, ability to monetize our investment in Shift and digital innovation;
• Anticipated additions of dealership locations to our portfolio in the future;
• Anticipated availability of liquidity from our cash, availability on our credit facility and unfinanced operating real estate;
• Anticipated use of proceeds from our financings;
• Anticipated levels of capital expenditures in the future; and
• Our strategies for customer retention, growth, market position, financial results and risk management.
Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of
which are outside of our control. Forward-looking statements are not guarantees of future performance, and our actual results of operations, financial condition and liquidity
and development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements in this Annual Report.
Therefore, you should not rely on any of these forward-looking statements. The risks and uncertainties that could cause actual results to differ materially from estimated or
projected results include, without limitation, the factors as discussed in Part I, Item 1A. Risk Factors, and in Part II, Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations, and, from time to time, in our other filings we make with the Securities and Exchange Commission (SEC).
Any forward-looking statement made by us in this Annual Report is based only on information currently available to us and speaks only as of the date on which it is made.
Except as required by law, we undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as
a result of new information, future developments or otherwise.
Overview
Lithia Motors, Inc. is one of the largest providers of personal transportation solutions in the United States, and was ranked #265 on the Fortune 500 in 2019. As of
December 31, 2019, we operated 188 stores representing 30 brands in 20 states. We are a growth company powered by people and innovation. By purchasing and building
strong businesses that have yet to realize their potential, we generate significant cash flows while maintaining low leverage. We achieve operational excellence by refocusing
the business on the consumer experience and by utilizing proprietary performance measurements to increase market share and profitability. Lithia’s unique growth model
invests to expand its nationwide network and to fund innovations that create personal transportation solutions wherever, whenever and however consumers desire.
We offer a wide range of products and services including new and used vehicles, finance and insurance products and automotive repair and maintenance. We strive for
diversification in our products, services, brands and geographic locations to reduce dependence on any one manufacturer, reduce susceptibility to changing consumer
preferences, manage market risk and maintain profitability.
Founded in 1946 and incorporated in Oregon in 1968, we completed our initial public offering in 1996.
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The following table sets forth information about stores that were part of our operations as of December 31, 2019:
State
Number of Stores
Percent of 2019 Revenue
California
New Jersey
Oregon
Texas
New York
Pennsylvania
Montana
Washington
Alaska
Idaho
Nevada
Iowa
Hawaii
North Dakota
Wyoming
Vermont
Massachusetts
Florida
New Mexico
West Virginia
Total
41
16
27
15
17
12
10
6
9
5
4
7
5
3
1
3
0
3
1
3
188
24.8%
16.5
13.0
9.4
7.5
5.0
4.4
3.7
3.6
2.5
2.4
1.9
1.9
0.9
0.6
0.5
0.4
0.4
0.3
0.3
100.0%
Business Strategy
Our culture and core values guide us in serving our customers, developing our people, reaching our potential and growing our Company.
Our stores create a welcoming and highly-responsive environment to proactively engage customers wherever, whenever and however they desire. We strive to create simple,
customer-centered experiences that provide affordability, transparency and convenience throughout the ownership life cycle.
We build long-term value for our customers, employees and shareholders through the following strategies:
Driving operational excellence, innovation and diversification
We remain focused on improving performance through increasing market share and profitability at each of our locations. By promoting an entrepreneurial model, we build
strong businesses responsive to each of our local markets. Utilizing performance-based action plans, we strive to increase market share, drive operational performance, develop
high-performing teams and foster manufacturer relationships.
In response to evolving consumer preferences, we pragmatically 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, enabling us to be agile and adapt to consumer preferences and market
specific conditions. During 2019, in the Pittsburgh market, we activated a convenient sell-from-home customer experience powered by our proprietary technology. This is part
of our multi-faceted expansion of digital conveniences and expands upon buy-from-home technology launched earlier this year.
Our performance-based culture is geared toward an incentive-based compensation structure for a majority of our personnel. 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 creating customer loyalty,
achieving store potential, developing
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high-performing talent, meeting and exceeding manufacturer requirements and living our core values. This approach also allows us to mitigate fluctuations in vehicle sales and
general economic conditions.
We have centralized many administrative functions to drive efficiencies and streamline store-level operations. 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 regional and corporate management, as
well as dedicated training and personnel development programs which allow us to share best practices across our network and develop management talent.
Growth through acquisition and network optimization
We target increasing our physical network of stores through acquisitions to strategically grow our presence and create density in our network, providing convenience for our
customers. Our value-based acquisition strategy targets underperforming stores with strong franchises in desirable markets. As we integrate these stores into our existing
network, we focus on increasing profitability through gaining market share, elevating the customer experience and controlling costs. With our performance management
strategy, standardized information systems and centrally- and regionally-performed administrative functions, we seek to gain economies of scale from our network.
We target acquiring 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. During 2019, we acquired nine stores, de-
dualed three stores, and divested five stores. We invested $286.6 million, net of floor plan debt, to acquire these stores and we expect these acquisitions to add over $825
million in annual revenues. Additionally, these acquisitions allow us to maintain a diverse franchise mix and further leverage our cost structure. We focus on successfully
integrating acquired stores to achieve targeted returns. Platform acquisitions may include one or more locations which do not meet our criteria. We regularly optimize and
balance our network through strategic divestitures to ensure continued high performance. We believe our disciplined approach and the current economic environment provide
us with attractive acquisition opportunities and expanded coast to coast coverage.
Thoughtful capital allocation
We constantly evaluate how to allocate capital, including returning cash to our investors and investing in our stores. During 2019, we paid $27.6 million in dividends. We also
invested in our facilities, utilizing $124.9 million for capital expenditures. We continue to manage our liquidity and available cash to prepare for continued growth through
acquisitions, investments in innovation and adjacency opportunities and support for our existing business. As of December 31, 2019, we had $658.5 million in available funds in
cash and availability on our credit facilities.
Marketing
One of our core values is to earn customers for life as we appeal to our consumers’ needs for affordability, transparency and convenience. Working with our teams, we tailor
each store’s marketing strategy to the individual brand and market. We utilize data analysis and multi-channel communications to attract and retain customers throughout the
vehicle ownership life cycle.
We have the nation’s third-largest vehicle inventory for sale online. We employ search engine optimization, search engine marketing, online display, re-targeting, social
advertising and traditional media to reach more auto shoppers. Our stores’ websites provide customers with simple, transparent ways to interact with us, including: search new
and used inventories, view current pricing, discounts and specials, calculate payments for purchase or lease, apply for financing, buy online, schedule service appointments
and provide us feedback about their experience. During 2019, our unique visitors increased 24%. Total advertising expense, net of manufacturer credits, was $111.9 million in
2019, $108.7 million in 2018 and $93.3 million in 2017. In 2019, we spent 82% on digital, social, listings and owner communications while 18% was spent in 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 $27.9 million in 2019, $25.5 million in 2018 and $22.8 million in 2017.
Franchise Agreements
Each of our stores operates under a separate agreement (a "Franchise Agreement”) with the manufacturer of the new vehicle brand it sells.
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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 the 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.
The 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. Risk Factors.
Competition
The retail automotive business is highly competitive. Currently, there are approximately 18,000 stores in the United States, many of which are independent stores managed by
individuals, families or small retail groups. We compete primarily with other automotive retailers, both publicly- and 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 our existing metro and non-metro markets. If we enter other new markets, we may face competitors that are larger or
have access to greater financial resources. 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.
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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”), which has broad regulatory powers. 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 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 given that material environmental commitments or contingencies will not arise in the future, or that they do not already exist but
are unknown to us.
Employees
Our mission statement is "Growth Powered by People.” We cultivate an entrepreneurial, high-performance culture and strive to develop leaders from within. We continue to
develop tools, training and growth opportunities that accelerate the depth of our talent. One example of this is our AMP program (Accelerate My Potential), which began in
2016. This program 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. During 2019, we realized a 40% year-over-year increase in the number of internal management hires compared to 2018.
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As of December 31, 2019, we employed approximately 14,320 persons on a full-time equivalent basis in our nationwide network of 188 retail locations.
Seasonality and Quarterly Fluctuations
In a stable environment, the automotive industry has generally experienced higher volumes of vehicle unit sales in the second and third quarters of each year due to consumer
buying 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 fourth quarter. The timing
of our acquisition activity, which varies, and ability to integrate stores into our existing cost structure 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 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. 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.
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 19 states, with sales in the top three states accounting for 54% of our revenue in 2019. 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 17.1 million, 17.3 million, and 17.2 million new vehicles were sold in the United States in 2019, 2018, and 2017, respectively. Certain industry analysts have
predicted that new vehicle sales will remain at 17 million for 2020. 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
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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.
Natural disasters and adverse weather conditions can disrupt our business.
Our dealerships are in states and regions in the U.S. 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 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.
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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.
The overall impact of these options on the automotive industry is uncertain, and may include lower levels of new vehicle sales. Manufacturers continue to invest in increasing
production and quality of BEVs (battery-electric vehicles), which generally require less maintenance than traditional cars and trucks. The effects of BEVs 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 Finance 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.
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. Any event that adversely affects 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. We depend on our manufacturers to deliver high-quality, defect-free vehicles. If a 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 a manufacturer’s or 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 has demonstrated the ability to successfully introduce electric
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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” 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, 2019, approximately 25% 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 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, 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 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 Agreements or a large number of our
Franchise Agreements, such action could have a material adverse effect on our business, results of operations, financial condition and cash flows.
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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 and restrictions may impair our ability to maintain or renew Franchise Agreements or issue additional equity.
Certain of our Franchise Agreements prohibit transfers of ownership interests of a store or, in some cases, 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, and Nissan, provide that, under certain circumstances, we may lose a franchise and/or be forced to sell one or more stores or their assets if there occurs a
prohibited transfer of ownership interests (in some cases not defined or defined ambiguously) or a person or entity acquires an ownership interest in us above a specified level
(ranging from 20% to 50% depending on the particular manufacturer’s restrictions and falling 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 shareholders or prospective shareholders, including transactions in our
Class B common stock, are generally outside of our control and may result in the termination 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, which may have a material adverse effect on our business, results of operations, financial condition and cash flows. These restrictions may also prevent or deter a
prospective acquirer from acquiring control of us or otherwise adversely affect the market price of our Class A common stock or limit our ability to restructure our debt
obligations.
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, which could result in a material, non-cash write-down of goodwill or franchise rights and could materially 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, and financial condition. As of December 31, 2019, our balance sheet reflected carrying amounts of $454.6 million in goodwill, and $306.7 million in franchise value.
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 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,
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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 $2.8 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 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, 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 be 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, 2019, 67% 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 have significant relationships with various third-party warranty insurers and administrators. These third-parties are 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 various third-party obligors. 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 any 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
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annually, the loss of this income could negatively impact our business, results of operations, financial condition and cash flows. Further, the inability of an 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.
Technology and Cybersecurity Risks
Changes to the retail delivery model and increased digital retailer competition could adversely affect our business, results of operations, financial condition and cash
flows.
The automotive industry is beginning to experience change and disruption in the retail delivery model, including growing competition in the used vehicle market from
companies with a primarily online business model. Competition in this market includes companies such as Carvana, Vroom and Shift. In addition, larger traditional automotive
retailers are also moving in this direction, providing consumers with vehicle purchasing experiences outside of the traditional brick and mortar automotive dealership model.
We have certain collaborative relationships and may develop additional relationships with Shift. We also continue to develop our own internal technology solutions to further
expand the reach of our nationwide network of service and delivery points with options for our customers to interact with us wherever, whenever and however they choose.
We may face increased competition for market share with these other delivery models and digital retailers over time which could materially and adversely affect our results of
operations. There can be no assurance that these initiatives will be successful or that the amount we invest in these initiatives will result in 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.
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.
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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.
Additionally, federal bankruptcy law can override protections afforded under state dealer laws.
State 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 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. Without the protection of state dealer laws, it may also
be more difficult to renew our Franchise 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 and lawsuits may lead to
the repeal or revision of these laws. For example, Tesla recently received a favorable ruling in the state of Michigan allowing direct to consumer sales and service. 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.
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. 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 socioeconomic 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 U.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 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 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 possible 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.
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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.
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Structural and Organizational Risks
Our ability to increase revenues and profitability through acquisitions depends on our ability to acquire and successfully integrate additional stores.
General
The U.S. 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 sales is to make acquisitions in our existing markets and in new geographic markets. To complete the acquisition of additional stores, we need to successfully
address at least each of the following challenges.
Manufacturers
We are required to obtain consent from the applicable manufacturer prior to the acquisition of a franchised store. In determining whether to approve an acquisition, a
manufacturer considers many factors, including our financial condition, ownership structure, the number of stores currently owned and our performance with those stores.
Obtaining manufacturer approval of acquisitions also takes a significant amount of time, typically 60 to 90 days. In the past, manufacturers have not consented to our purchase
of franchised stores due to the performance of existing stores. 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, those 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 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.
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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. 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 the indentures governing our senior notes, or if some other event occurs that results in a default or an acceleration 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.
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, 2019, we had total reserve amounts associated with these programs of $34.4
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,
17
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.
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
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, we will need to hire additional managers and other employees. The market for qualified employees in the industry and in the regions in which we
operate, particularly for general managers and sales and service personnel, 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 managers 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.
Investments in start-up companies may be risky and may negatively affect our business, results of operations, financial condition and cash flows.
We have approximately $66 million of various strategic holdings. A predominant amount of these holdings are with Shift Technologies, Inc. ("Shift”), a San Francisco-based
start-up company. As a start-up company, Shift has a lack of operating history, is not subject to Sarbanes-Oxley regulations and may lack financial controls and procedures
often found at public companies. There can be no guarantees that Shift will achieve profitability, raise sufficient funds for operations or continue to successfully develop their
technology platform. Additionally, start-up companies often face risk from lawsuits and regulations. Our holdings are subject to potential impairments if there are indications of
an other-than-temporary declines in value and our strategic partnership may expose us to additional risk. There is no guarantee that these holdings will meet any relevant
operational, collaborative milestones or otherwise grow or succeed in their businesses. These conditions may adversely affect our business, results of operations, financial
condition and cash flow.
Risks related to investing in our Class A common 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 common 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 common stock.
Our issuance of preferred stock could adversely affect holders of Class A common 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 common 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
common 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 common 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 common stock, the rights of holders of our Class A common stock or the price of our Class A common stock could be
adversely affected.
Item 1B. Unresolved Staff Comments
None.
18
Item 2. Properties
Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities, collision repair and paint shops, supply facilities, automobile storage
lots, parking lots and offices located in the states listed under the caption Overview in Item 1. Business. 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, 2019, we had outstanding mortgage debt of $597.7 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; upgrading to energy efficient LED lighting
and installing electric vehicle charging stations.
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 will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
Item 4. Mine Safety Disclosures
Not applicable.
19
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD.
PART II
The number of shareholders of record and approximate number of beneficial holders of Class A common stock as of February 21, 2020 was 484 and 32,154, respectively. All
shares of Lithia’s Class B common stock are held by Lithia Holding Company, L.L.C. 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.
At the special meeting of shareholders held on January 21, 2019, Sidney B. DeBoer and the Company executed a Class B Conversion Agreement pursuant to which Mr. DeBoer
agreed to cause all of the remaining 1,000,000 shares of our class B common stock to be converted into shares of our class A common stock by December 31, 2025. The Class B
Conversion Agreement will require the conversion of at least 15% of the 1,000,000 Class B shares by the end of every two years, with the first 15% to be converted by
December 31, 2020, a total of 30% by December 31, 2022, a total of 45% by December 31, 2024, and the balance by December 31, 2025. As of December 31, 2019, Lithia Holding
Company, L.L.C., held 600,000 shares of our Class B common stock.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.
Repurchases of Equity Securities
We made the following repurchases of our common stock during the fourth quarter of 2019:
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
November
December
Total
(1) On October 22, 2018, our Board of Directors approved a $250 million repurchase authorization. This authorization does not have an expiration date.
(2) The shares repurchased in the fourth quarter of 2019 were related to tax withholdings on vesting RSUs.
—
136.07
—
136.07
— $
858
—
858
— $
—
—
—
233,603
233,603
233,603
233,603
20
Stock Performance Graph
The following line-graph shows the annual percentage change in the cumulative total returns for the past five years on an assumed $100 initial investment and reinvestment of
dividends, on (a) Lithia Motors, Inc.’s Class A common stock; (b) the Russell 2000; and (c) an auto peer group index composed of Penske Automotive Group, AutoNation,
Sonic Automotive, Group 1 Automotive, and Asbury Automotive Group, the only other comparable publicly traded automobile dealerships in the United States as of
December 31, 2019. The peer group index utilizes the same methods of presentation and assumptions for the total return calculation as does Lithia Motors and the Russell 2000.
All companies in the peer group index are weighted in accordance with their market capitalizations.
Company/Index
Lithia Motors, Inc.
Auto Peer Group
Russell 2000
Base Period
12/31/2014
12/31/2015
Indexed Returns for the Year Ended
12/31/2017
12/31/2018
12/31/2016
$100.00 $
100.00
100.00
123.92 $
91.78
95.59
21
113.79 $
90.02
115.95
134.89 $
88.53
132.94
91.77 $
70.88
118.30
12/31/2019
178.54
105.89
148.49
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 millions, except per share amounts)
Consolidated Statements of Operations Data:
Revenues:
2019
2018
Year Ended December 31,
2017
2016
2015
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Gross Profit:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total gross profit
Operating income (1)
Income from continuing operations before income taxes (1)
Income from continuing operations (1)
Basic net income per share
Shares used in basic per share
Diluted net income per share
Shares used in diluted per share
Cash dividends paid per common share
(In millions)
Consolidated Balance Sheets Data:
Working capital
Inventories
Total assets
Floor plan notes payable
Long-term debt, including current maturities
Total stockholders’ equity
(1)
$
$
$
$
$
$
$
$
$
$
6,799.1 $
3,527.2
301.2
518.6
1,325.1
201.5
12,672.7 $
385.6 $
367.5
3.7
518.6
667.6
10.8
1,953.8 $
6,602.8 $
3,079.0
331.3
454.8
1,222.3
131.2
11,821.4 $
385.1 $
322.9
5.5
454.8
600.7
8.0
1,777.0 $
5,763.6 $
2,544.4
277.8
385.9
1,015.8
99.0
10,086.5 $
339.8 $
286.8
4.8
385.9
493.1
5.7
1,516.1 $
4,938.4 $
2,227.0
276.6
330.9
844.5
60.8
8,678.2 $
289.4 $
263.7
4.3
330.9
410.3
2.7
1,301.3 $
495.0 $
447.0 $
409.0 $
338.4 $
375.4 $
337.5 $
347.1 $
283.5 $
271.5 $
265.7 $
245.2 $
197.1 $
11.70 $
23.2
11.60 $
23.4
10.91 $
24.4
10.86 $
24.5
9.78 $
25.1
9.75 $
25.1
7.76 $
25.4
7.72 $
25.5
1.19 $
1.14 $
1.06 $
0.95 $
4,552.3
1,927.0
261.5
283.0
739.0
101.5
7,864.3
280.4
241.2
4.5
283.0
363.9
2.6
1,175.6
302.7
262.7
183.0
6.96
26.3
6.91
26.5
0.76
2019
2018
As of December 31,
2017
2016
2015
$
501.4 $
497.9 $
481.8 $
365.2 $
2,433.7
6,083.9
2,067.6
1,469.9
1,467.7
2,365.3
5,384.0
2,057.7
1,384.1
1,197.2
2,132.7
4,683.1
1,919.1
1,047.4
1,083.2
1,772.6
3,844.2
1,601.5
790.9
910.8
288.0
1,471.0
3,225.1
1,314.0
643.2
828.2
Includes $2.6 million, $1.3 million, $14.0 million and $20.1 million in non-cash charges related to asset impairments for the years ended 2019, 2018, 2016 and 2015
respectively. We did not record any non-cash charges related to asset impairments in 2017. See Note 1, Note 4 of Notes to Consolidated Financial Statements included in
Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.
22
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 franchises in the United States and were ranked #265 on the Fortune 500 in 2019. As of February 21, 2020, we offered 30 brands of new
vehicles and all brands of used vehicles in 187 stores in the United States and online at over 200 websites. We offer a wide range of products and services including new and
used vehicles, finance and insurance products and automotive repair and maintenance.
During the year ended December 31, 2019, we had net income of $271.5 million, or $11.60 per diluted share, compared to net income of $265.7 million, or $10.86 per diluted share,
during 2018. We experienced growth of revenue and gross profit in all major business lines in 2019 compared to 2018, 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 headwinds with plateauing national new vehicle sales and declining manufacturer incentives. For the year ended December 31, 2019, new vehicle
sales accounted for approximately 54% of our revenue and approximately 20% of our gross profit. Used vehicle retail sales accounted for approximately 28% of our revenue and
approximately 19% of our gross profit. Our parts and service and finance and insurance operations accounted for approximately 15% of our revenue and contributed
approximately 61% of our gross profit.
We had total available liquidity of $658.5 million as of December 31, 2019, which consisted of $84.0 million of cash and cash equivalents and $574.5 million of availability on our
credit facilities. For further discussion of our liquidity, please refer to "Liquidity and Capital Resources” below.
23
Results of Operations
For the year ended December 31, 2019, we reported net income of $271.5 million, or $11.60 per diluted share. For the years ended December 31, 2018 and 2017, we reported net
income of $265.7 million, or $10.86 per diluted share, and $245.2 million, or $9.75 per diluted share, respectively.
($ in millions, except per vehicle data)
Revenues
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Revenues
Gross profit
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Gross Profit
Gross profit margins
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Gross Profit Margin
Retail units sold
New vehicles
Used vehicles
Average selling price per retail unit
New vehicles
Used vehicles
Average gross profit per retail unit
New vehicles
Used vehicles
Finance and insurance
$
$
$
$
2019
2018
Change
%
2017
Change
%
Years Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
6,799.1
3,527.2
518.6
1,325.1
12,672.7
385.6
367.5
518.6
667.6
1,953.8
$
$
6,602.8
3,079.0
454.8
1,222.3
11,821.4
385.1
322.9
454.8
600.7
1,777.0
196.3
448.2
63.8
102.8
851.3
0.5
44.6
63.8
66.9
176.8
3.0 % $
14.6
14.0
8.4
7.2
0.1 % $
13.8
14.0
11.1
9.9
$
$
5,763.6
2,544.4
385.9
1,015.8
10,086.5
339.8
286.8
385.9
493.1
1,516.1
839.2
534.6
68.9
206.5
1,734.9
45.3
36.1
68.9
107.6
260.9
14.6 %
21.0
17.9
20.3
17.2
13.3 %
12.6
17.9
21.8
17.2
5.7%
10.4
100.0
50.4
15.4
5.8%
10.5
100.0
49.1
15.0
-10 bp
-10 bp
0 bp
130 bp
40 bp
5.9%
11.3
100.0
48.5
15.0
-10 bp
-80 bp
0 bp
60 bp
0 bp
180,532
170,423
184,601
151,234
(4,069)
19,189
(2.2)%
12.7
167,146
129,913
17,455
21,321
10.4 %
16.4
$
37,661
20,697
$
35,768
20,359
1,893
338
5.3 % $
1.7
$
34,482
19,585
1,286
774
$
50
21
124
2.4 % $
1.0
9.2
$
2,033
2,208
1,299
53
(73)
55
$
2,136
2,156
1,478
2,086
2,135
1,354
24
3.7 %
4.0
2.6 %
(3.3)
4.2
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 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 2018 would be included in same store operating data beginning in December 2019, 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.
($ in millions, except per
vehicle data)
Revenues
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Revenues
Gross profit
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Gross Profit
Gross profit margins
New vehicle
Used vehicle retail
Finance and insurance
Service, body and parts
Total Gross Profit Margin
Retail units sold
New vehicles
Used vehicles
Years Ended December 31,
2019 vs. 2018
2018 vs. 2017
2019
2018
Change
%
2018
2017
Change
%
$
$
$
$
6,499.2
3,391.5
499.4
1,268.5
12,143.7
368.3
354.5
499.4
640.1
1,876.0
$
$
6,400.9
2,984.0
441.3
1,180.7
11,444.4
373.2
315.3
441.3
582.1
1,725.1
98.3
407.5
58.1
87.8
699.3
(4.9)
39.2
58.1
58.0
150.9
1.5 % $
13.7
13.2
7.4
6.1
(1.3)% $
12.4
13.2
10.0
8.7
5.7%
10.5
100.0
50.5
15.4
5.8%
10.6
100.0
49.3
15.1
-10 bp
-10 bp
0 bp
120 bp
30 bp
(1.8)%
6.7
4.8
3.6
1.3
(4.6)%
3.0
4.8
5.5
2.7
$
$
5,380.4
2,598.9
385.3
1,005.9
9,740.1
306.7
285.4
385.3
497.5
1,486.5
5.7%
11.0
100.0
49.5
15.3
$
$
5,481.6
2,435.1
367.7
970.7
9,618.7
321.5
277.1
367.7
471.7
1,448.1
(101.2)
163.8
17.6
35.2
121.4
(14.8)
8.3
17.6
25.8
38.4
5.9%
11.4
100.0
48.6
15.1
-20 bp
-40 bp
0 bp
90 bp
20 bp
172,224
163,889
178,119
145,992
(5,895)
17,897
(3.3)%
12.3
150,946
128,861
157,865
123,774
(6,919)
5,087
(4.4)%
4.1
Average selling price per retail
unit
New vehicles
Used vehicles
Average gross profit per retail
unit
New vehicles
Used vehicles
Finance and insurance
$
$
$
37,737
20,694
$
35,936
20,439
1,801
255
5.0 % $
1.2
$
35,645
20,168
$
34,723
19,674
922
494
2.7 %
2.5
$
2,138
2,163
1,486
$
2,095
2,160
1,362
43
3
124
25
2.1 % $
0.1
9.1
$
2,032
2,215
1,377
$
2,037
2,239
1,306
(5)
(24)
71
(0.2)%
(1.1)
5.4
New Vehicles
The increase in same store new vehicle revenues for 2019 compared to 2018 was driven by an increase in average selling prices of 5.0%, partially offset by a decrease in unit
volume of 3.3%. 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 2.1% during 2019 compared to 2018. Our recently acquired stores are also focused on improving gross profit per new vehicle as total company gross profit
per unit increased 2.4% during 2019 compared to 2018. Acquisitions during 2019 included nine stores, two of which are in our domestic segment where we have experienced
larger increases in gross profit per unit on a same store basis, including increases of 19.7% for General Motors and 9.0% for Chrysler.
The same store new vehicle sales decrease in 2018 over 2017 of 1.8% included a decrease in volume of 4.4%, partially offset by an increase of 2.7% in average selling prices.
Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, provides 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.
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 value autos, which are vehicles with over 80,000 miles. We increased our company-wide target of achieving a per store
average of 85 used retail units per month to 100 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of
used units, from late model CPO models to vehicles over ten years old. During 2019, our stores sold an average of 77 used vehicles per store per month. This compares to 69
used vehicles per store per month in 2018 and 67 in 2017.
Used vehicle revenues increased 14.6% during 2019 compared to 2018 and 21.0% in 2018 compared to 2017. These increases are due to a combination of increased volume from
acquisitions and organic growth in our core and value auto categories at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle
revenues increased 13.7% during 2019 and included a 12.3% increase in unit volume and a 1.2% increase in average selling price per retail unit compared to 2018. These revenue
increases were driven by increases in our core and value auto categories of 18.1% and 18.0%, respectively, and an increase in CPO vehicle revenues of 3.8%. The increase in
our core vehicle category includes a 17.1% increase in volume, complimented by a 0.9% increase in average selling price per vehicle. The increase in our value auto category is
due to an increase in unit sales of 13.8% and an increase in average selling price per vehicle of 3.7%.
Used vehicle gross profits increased 13.8% during 2019 compared to 2018 and 12.6% in 2018 compared to 2017. On a same store basis, used vehicle gross profit increased
12.4% in 2019 compared to 2018, led by the performance in our core and value auto categories with increases of 14.7% and 20.4%, respectively, complimented by an increase in
our CPO vehicles of 0.7%. The increase in our core vehicle category was primarily driven by an increase in volume. Gross profit per unit in our core vehicle category, which
accounted for 54.8% of our used vehicle unit sales in 2019, decreased 2.1%, from $2,264 in 2018 to $2,217 in 2019. The increase in same store gross profit in our value auto
category was driven by a 13.8% increase in unit sales and a 5.8% increase in gross profit per unit from $2,053 in 2018 to $2,172 in 2019. Our CPO category experienced an
increase in volume and a decline in gross profit per unit during 2019 compared to 2018. Unit sales increased 1.3% and gross profit per unit decreased 0.4%, from $2,036 in 2018
to $2,028 in 2019.
Used vehicle revenues increased 6.7% in 2018 compared to 2017 on a same store basis due to increases in unit volume and average selling prices of 4.1% and 2.5%,
respectively. Our core and value auto categories experienced increased revenues of 12.1% and 14.6%, respectively, in 2018 compared to 2017. These increases were offset by a
decline in same store CPO revenues of 1.5% over the same period. Same store used vehicle gross profit increased 3.0% in 2018 compared to 2017, again led by strong
performance in our core vehicle category, offset by a decline in our CPO category and relatively flat performance in our value auto category.
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(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.
26
The increases in finance and insurance revenue in 2019 compared to 2018 and in 2018 compared to 2017, 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 2019, finance and insurance sales accounted for 4.1% of total revenues and 26.5% of total gross profits. On a same
store basis, finance and insurance sales accounted for 4.1% of total revenues and 26.6% of total gross profits in 2019. Same store finance and insurance revenues increased
13.2% during 2019 compared to 2018 and 4.8% during 2018 compared to 2017. These increases were driven by increases in finance and insurance revenues per retail unit,
combined with increases in used vehicle unit volume, offset by decreases in new vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit
increased $124 per unit to $1,486 in 2019 compared to 2018 and $71 per unit to $1,377 in 2018 compared to 2017. The increase in 2019 compared to 2018 was primarily due to
increases in service contract and financing penetration rates of 170 basis points and 20 basis points, respectively, in 2019 compared to 2018, from 46.3% to 48.0% and from
73.5% to 73.7%, respectively.
We seek to increase our penetration of vehicle financing on the number of vehicles that we sell and to offer a comprehensive suite of products. We target an average F&I per
retail unit of $1,500. We believe improved performance from sales training, continued optimization of product offerings and pricing, and revised compensation plans will be
critical factors in achieving this target.
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 2019 compared to 2018 and in 2018 compared to 2017, primarily due to acquisitions, combined with more late-model
units in operation from 2010 to 2016 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 7.4% during 2019, primarily driven by increases in customer pay and warranty revenues of 6.6% and 12.1%, respectively. Performance in parts wholesale and
body shop also saw increases of 3.9% and 5.5%, respectively, compared to the same period of 2018.
Same store service, body and parts gross profit increased 10.0% during 2019 compared to 2018 and 5.5% during 2018 compared to 2017. This performance was also driven by
increases in customer pay and warranty work. 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:
(Dollars in millions)
Revenues:
Domestic
Import
Luxury
Corporate and other
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
4,382.4 $
5,267.8
2,991.9
12,642.1
30.6
12,672.7 $
4,215.0 $
5,038.1
2,560.3
11,813.4
8.0
11,821.4 $
27
167.4
229.7
431.6
828.7
22.6
851.3
4.0% $
4.6
16.9
7.0
NM
7.2
$
3,845.8 $
4,432.8
1,810.1
10,088.7
(2.2)
10,086.5 $
369.2
605.3
750.2
1,724.7
10.2
1,734.9
9.6%
13.7
41.4
17.1
NM
17.2
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
(Dollars in millions)
Segment income*:
Domestic
Import
Luxury
$
123.4 $
153.9
57.1
334.4
170.2
(82.4)
(60.6)
13.8
375.4 $
97.6 $
116.2
43.9
257.7
202.4
(75.4)
(56.0)
8.8
337.5 $
25.8
37.7
13.2
76.7
(32.2)
7.0
4.6
5.0
37.9
26.4 % $
32.4
30.1
29.8
(15.9)
9.3
8.2
105.2 $
117.8
37.0
260.0
167.4
(57.7)
(34.8)
12.2
347.1 $
(7.6)
(1.6)
6.9
(2.3)
35.0
17.7
21.2
(3.4)
(9.6)
(7.2)%
(1.4)
18.6
(0.9)
20.9
30.7
60.9
Corporate and other
Depreciation and amortization
Other interest expense
Other income, net
Income before income taxes
*Segment income for each reportable segment is defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other
income, net.
NM - Not meaningful
(2.8)
11.2
NM
NM
$
$
Retail new vehicle unit sales:
Domestic
Import
Luxury
Allocated to management
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
53,262
98,365
29,238
180,865
(333)
180,532
55,653
102,454
26,915
185,022
(421)
184,601
(2,391)
(4,089)
2,323
(4,157)
88
(4,069)
(4.3)%
(4.0)
8.6
(2.2)
20.9
(2.2)
53,288
94,634
19,597
167,519
(373)
167,146
2,365
7,820
7,318
17,503
(48)
17,455
4.4 %
8.3
37.3
10.4
(12.9)
10.4
Domestic
A summary of financial information for our Domestic segment follows:
(Dollars in millions)
Revenue:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Segment income
Retail new vehicle unit sales
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
$
2,287.5 $
1,264.7
113.6
184.2
477.5
54.9
4,382.4 $
123.4 $
53,262
2,290.1 $
1,107.4
134.9
166.4
451.4
64.8
4,215.0 $
97.6 $
55,653
(2.6)
157.3
(21.3)
17.8
26.1
(9.9)
167.4
25.8
(2,391)
(0.1)% $
14.2 %
(15.8)%
10.7 %
5.8 %
(15.3)%
4.0 % $
26.4
$
(4.3)
2,153.7 $
987.4
120.5
151.4
395.5
37.3
3,845.8 $
105.2 $
53,288
136.4
120.0
14.4
15.0
55.9
27.5
369.2
(7.6)
2,365
6.3 %
12.2 %
12.0 %
9.9 %
14.1 %
73.7 %
9.6 %
(7.2)
4.4
Revenues in our Domestic segment increased in used vehicle retail; finance and insurance; and service, body and parts in 2019 compared to 2018. New vehicle unit sales
decreased 4.3%, 4.6% on a same store basis, in 2019 compared to 2018, primarily due to decreases in Chrysler and Ford. However, Domestic segment revenues benefited from
improved used vehicle sales due to a 13.1% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 6.3% increase in
finance and insurance income per retail unit sold to $1,636 per unit, and improved service, body and parts revenues.
28
The acquisition of five stores and opening of one store in 2018 and strong performance on a same store basis in used vehicles, finance and insurance and service, body and
parts, contributed to the 9.6% increase in revenue over 2017.
Our Domestic segment income increased 26.4% in 2019 compared to 2018 due to gross profit growth of 8.7% with only minimal increases in SG&A and floor plan interest
expense of 5.8% and 2.2%, respectively. As a percentage of gross profit, SG&A decreased 210 basis points in 2019 compared to 2018.
Our Domestic segment income decreased 7.2% in 2018 compared to 2017 due to an 11.2% increase in SG&A and a 40.9% increase in floor plan interest expense, which was
partially offset by gross profit growth of 9.7%. The increase in floor plan interest was primarily driven by increasing rates, compounded by increased volume related to
acquisitions.
Import
A summary of financial information for our Import segment follows:
(Dollars in millions)
Revenue:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Segment income
Retail new vehicle unit sales
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
$
2,920.8 $
1,448.5
112.1
247.4
496.2
42.8
5,267.8 $
153.9 $
98,365
2,933.1 $
1,283.4
123.4
220.3
453.8
24.1
5,038.1 $
116.2 $
102,454
(12.3)
165.1
(11.3)
27.1
42.4
18.7
229.7
37.7
(4,089)
(0.4)% $
12.9 %
(9.2)%
12.3 %
9.3 %
77.6 %
4.6 % $
$
32.4
(4.0)
2,638.5 $
1,073.6
105.2
186.4
396.2
32.9
4,432.8 $
117.8 $
94,634
294.6
209.8
18.2
33.9
57.6
(8.8)
605.3
(1.6)
7,820
11.2 %
19.5 %
17.3 %
18.2 %
14.5 %
(26.7)%
13.7 %
(1.4)
8.3
Revenues in our Import segment increased in used vehicle retail; finance and insurance; and service, body and parts in 2019 compared to 2018. New vehicle unit sales in our
Import segment decreased 4.0%, 4.7% on a same store basis, primarily related to decreases in Toyota and Honda. However, Import segment revenues benefited from improved
used vehicle sales due to a 10.4% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 10.1% increase in finance
and insurance income per retail unit sold to $1,370 per unit, and improved service, body and parts revenues.
The increase in our Import segment revenue in 2018 compared to 2017 resulted from increases in all major business lines and primarily related to acquiring six stores during
2018. New vehicle unit sales in our Import segment increased 8.3%. Additionally, Import segment revenues benefited from improved used vehicle sales due to a 17.0% increase
in volume, increases in finance and insurance revenues as a result of increased volume combined with a 5.7% increase in finance and insurance income per retail unit sold to
$1,245 per unit, and improved service, body and parts revenues.
Our Import segment income increased 32.4% in 2019 compared to 2018 due to gross profit growth of 10.4% with only minimal increases in SG&A and floor plan interest expense
of 6.5% and 6.1%, respectively. As a percentage of gross profit, SG&A decreased 280 basis points in 2019 compared to 2018.
Our Import segment income decreased 1.4% in 2018 compared to 2017 primarily due to increases in SG&A and floor plan interest expenses that outpaced the increase in gross
profit. Gross profit for our Import segment increased 13.6% in 2018 compared to 2017, in line with our revenues. Our Import segment experienced a 15.4% increase in SG&A,
primarily driven by increases in personnel, rent, and other miscellaneous costs. Floor plan interest expense increased 43.2% during 2018 and was a significant contributor to
lower segment income growth compared to 2017. This increase was driven by a combination of increased volume due to the acquisition of six stores during 2018 and increasing
interest rates.
29
Luxury
A summary of financial information for our Luxury segment follows:
(Dollars in millions)
Revenue:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Segment income
Retail new vehicle unit sales
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
$
1,588.8 $
813.3
75.3
77.1
335.3
102.1
2,991.9 $
57.1 $
29,238
1,397.8 $
688.1
72.9
62.0
298.9
40.6
2,560.3 $
43.9 $
26,915
191.0
125.2
2.4
15.1
36.4
61.5
431.6
13.2
2,323
13.7% $
18.2%
3.3%
24.4%
12.2%
151.5%
16.9% $
30.1
$
8.6
991.5 $
483.1
51.9
40.8
215.0
27.8
1,810.1 $
37.0 $
19,597
406.3
205.0
21.0
21.2
83.9
12.8
750.2
6.9
7,318
41.0%
42.4%
40.5%
52.0%
39.0%
46.0%
41.4%
18.6
37.3
The increase in our Luxury segment revenue in 2019 compared to 2018 resulted from increases in all major business lines. Overall, new vehicle unit sales increased 8.6%, 4.1%
on a same store basis, mainly related to our BMW, Acura, and Mercedes franchises. Our luxury segment revenues also benefited from a 18.7% increase in used vehicle unit
sales, a 9.7% increase in finance and insurance revenues per retail unit to $1,330 per unit and growth in service, body and parts during 2019 compared to 2018.
Our Luxury segment revenue increased in 2018 compared to 2017 primarily due to our acquisition of six stores and improvements in finance and insurance and service, body
and parts revenues. New vehicle unit sales in our Luxury segment increased 37.3%. Additionally, luxury segment revenues also benefited from a 38.4% increase in used vehicle
unit sales, a 10.2% increase in finance and insurance revenues per retail unit to $1,212 per unit and growth in service, body and parts during 2018 compared to 2017.
Our Luxury segment income increased 30.1% in 2019 compared to 2018. This increase was due to gross profit growth of 14.6%, offset by an increase in SG&A of 12.0% and an
increase in floor plan interest expense of 17.9%. As a percentage of gross profit, SG&A decreased 180 basis points in 2019 compared to 2018.
Our Luxury segment income increased 18.6% in 2018 compared to 2017. This increase was due to gross profit growth of 42.2%, offset by an increase in SG&A of 44.9%,
primarily related to acquisition activity, as well as increases in personnel expense, rent and facility expenses and other miscellaneous expense and an increase in floor plan
interest expense of 62.6%. As a percentage of gross profit, SG&A increased 150 basis points in 2018 compared to 2017. The 62.6% increase in floor plan interest expense during
2018 compared to 2017 was due to a combination of increased volume from acquisitions and rising interest rates.
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.
(Dollars in millions)
Revenue, net
Segment income
NM - not meaningful
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
2019
2018
Change
$
$
30.6 $
170.2 $
8.0 $
202.4 $
22.6
(32.2)
%
NM
$
(15.9) $
2017
Change
(2.2) $
167.4 $
10.2
35.0
%
NM
20.9
The increase in Corporate and other revenues in 2019 compared to 2018 was primarily related to a change in the elimination of revenues associated with internal corporate
vehicles purchases and leases with our stores now being specifically identified with our domestic, import and luxury segment revenue, and additionally was affected by our
reserve for revenue reversals associated with unwound vehicle sales. Corporate and other revenues were affected in 2018 by a decrease in internal corporate vehicle purchases
and leases with our stores resulting in positive revenues compared to 2017.
30
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 segment income in 2019 compared to 2018 is primarily due to a decrease in gains on the divestiture of stores and an increase in certain
insurance reserves. The increase in Corporate and other segment income in 2018 compared to 2017 was primarily due to gains on the divestiture of stores of $15.1 million and
the addition of 17 stores, increasing internal corporate expense allocations. These were offset by changes to certain insurance and auto loan related reserves.
See Note 18 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 (in millions):
Franchise value
Goodwill
Long-lived assets
Total asset impairments
2019
Year Ended December 31,
2018
2017
$
$
0.4 $
1.7
0.5
2.6 $
— $
—
1.3
1.3 $
—
—
—
—
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 long-lived asset impaired in the first quarter of 2019 was sold in the second quarter of 2019.
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 elected to perform qualitative franchise value and goodwill impairment tests as of October 1, 2019. As a result of these tests, 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 $1.7 million
and $0.4 million, which was equal to the difference between the fair value and the carrying value for goodwill and franchise value, respectively. The non-cash impairment
charges are included in the "Corporate and Other” category of our segment information.
During 2018, we recorded an asset impairment of $1.3 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.
See Note 1, Note 4 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.
(Dollars in millions)
Personnel
Advertising
Rent
Facility costs
Gain on sale of assets
Other
Total SG&A
2019
2018
Change
%
2017
Change
%
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
$
$
911.2 $
111.9
41.3
77.4
(9.7)
241.7
1,373.8 $
824.8 $
108.7
43.3
72.0
(14.8)
219.3
1,253.3 $
31
86.4
3.2
(2.0)
5.4
5.1
22.4
120.5
10.5 % $
2.9
(4.6)
7.5
(34.5)
10.2
9.6
$
695.5 $
93.3
33.4
61.3
(5.5)
171.4
1,049.4 $
129.3
15.4
9.9
10.7
(9.3)
47.9
203.9
18.6%
16.5
29.6
17.5
169.1
27.9
19.4
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Gain on sale of assets
Other
Total SG&A
2019
2018
46.6 %
5.7 %
2.1 %
4.0 %
(0.5)%
12.4 %
70.3 %
46.4 %
6.1 %
2.4 %
4.1 %
(0.8)%
12.3 %
70.5 %
Year Ended December 31,
2019 vs. 2018
Change
2017
2018 vs. 2017
Change
20 bps
(40)
(30)
(10)
30
10
)
bps
(20
45.9 %
6.2 %
2.2 %
4.0 %
(0.3)%
11.2 %
69.2 %
50 bps
(10)
20
10
(50)
110
130 bps
SG&A increased 9.6%, or $120.5 million in 2019 compared to 2018. Overall increases in SG&A were primarily due to growth through acquisitions, increased losses related to
storm insurance reserve charges, and a decrease in gains on the disposal of stores. Other expenses in 2019 included acquisition expenses of $2.5 million, compared to $4.3
million in 2018 and $9.5 million of storm related insurance charges, compared to $3.2 million in 2018. Gains on the sale of stores were $9.7 million and $15.1 million in 2019 and
2018, respectively.
On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 69.8% in 2019 compared to 70.5% in 2018. Decreases were seen in
advertising, rent, facility costs, and data processing, partially offset by increases in personnel costs.
SG&A increased 19.4%, or $203.9 million, in 2018 compared to 2017. Overall increases in SG&A were primarily due to growth through acquisitions and increased allowance
losses associated with auto loan receivables, offset by decreases in losses related to storm insurance reserve charges and acquisition expenses and an increase in gains on the
disposal of stores. Other expenses in 2018 included acquisition expenses of $4.3 million, compared to $6.0 million in 2017; $3.2 million of storm related insurance charges,
compared to $5.6 million in 2017; and auto loan allowance losses of $4.2 million compared to $1.2 million in 2017. Gains on the sale of stores were $15.1 million and $5.1 million in
2018 and 2017, respectively.
SG&A adjusted for non-core charges was as follows (in millions):
(Dollars in millions)
Personnel
Advertising
Rent
Facility costs
Adjusted loss (gain) on sale of assets
Adjusted Other
Total Adjusted SG&A
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
2019
2018
Change
%
2017
Change
$
$
911.2 $
111.9
41.3
77.4
—
229.7
1,371.5 $
824.8 $
108.7
43.3
72.0
0.5
214.6
1,263.9 $
32
86.4
3.2
(2.0)
5.4
(0.5)
15.1
107.6
10.5 % $
2.9
(4.6)
7.5
(100.0)
7.0
8.5
$
695.5 $
93.3
33.4
61.3
(0.4)
160.1
1,043.2 $
129.3
15.4
9.9
10.7
0.9
54.5
220.7
%
18.6 %
16.5
29.6
17.5
(225.0)
34.0
21.2
As a % of gross profit
Personnel
Advertising
Rent
Facility costs
Adjusted loss (gain) on sale of assets
Adjusted Other
Total Adjusted SG&A
See "Non-GAAP Reconciliations” for more details.
2019
2018
46.6%
5.7%
2.1%
4.0%
—%
11.8%
46.4%
6.1%
2.4%
4.1%
—%
12.1%
70.2%
71.1%
Year Ended December 31,
2019 vs. 2018
Change
20 bps
(40)
(30)
(10)
—
(30)
)
bps
(90
2017
45.9%
6.2%
2.2%
4.0%
0.0%
10.5%
68.8%
2018 vs. 2017
Change
50 bps
(10)
20
10
—
160
230 bps
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.
(Dollars in millions)
Depreciation and amortization
2019
2018
Change
%
2017
Change
%
$
82.4 $
75.4 $
7.0
9.3% $
57.7 $
17.7
30.7%
Acquisition activity contributed to the increases in depreciation and amortization in 2019 compared to 2018 and in 2018 compared to 2017. We purchased approximately $63
million and $108 million of depreciable property as part of our 2019 and 2018 acquisitions, respectively. Capital expenditures totaled $124.9 million and $158.0 million,
respectively, in 2019 and 2018. These investments increase the amount of depreciable assets. See the discussion under "Liquidity and Capital Resources” for additional
information.
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
Operating Income
Operating income as a percentage of revenue, or operating margin, was as follows:
Operating margin
Operating margin adjusted for non-core charges(1)
(1) See "Non-GAAP Reconciliations” for additional information.
Year Ended December 31,
2018
3.8%
3.7%
2017
4.1%
4.1%
2019
3.9%
3.9%
In 2019, our operating margin increased 10 basis points compared to 2018. Adjusting for non-core charges, including storm related insurance charges and acquisition expenses,
our operating margin increased 20 basis points in 2019 compared to 2018. In 2019, the increase in our operating margin was driven by a decrease in SG&A as a percentage of
gross profit and increasing total gross margin.
In 2018, our operating margin decreased 30 basis points compared to 2017. Adjusting for non-core charges, including storm related insurance charges and acquisition
expenses, our operating margin decreased 40 basis points in 2018 compared to 2017. In 2018, the decrease in our operating margin was driven by our SG&A expense outpacing
increases in gross profit. Adjusting for those non-core charges, our operating margin was 3.7% in 2018. 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.
Floor Plan Interest Expense and Floor Plan Assistance
Floor plan interest expense increased $10.5 million in 2019 compared to 2018, primarily due to changes in our interest rates. Changes in the interest rates on our floor plan
facilities increased expense $10.9 million, acquisition volume increased expense $1.4 million, and decreases in average outstanding balances on our floor plan facilities
decreased the expense $1.8 million during 2019 compared to 2018.
Floor plan interest expense increased $23.0 million in 2018 compared to 2017, due to an increase in inventory levels related to acquisitions and increasing interest rates.
Increases in outstanding balances on our floor plan facilities related to acquisitions
33
increased the expense $8.8 million and changes in the interest rates on our floor plan facilities increased the expense $14.2 million during 2018 compared to 2017.
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,
2019 vs. 2018
2018 vs. 2017
(Dollars in millions)
Floor plan interest expense (new vehicles)
Floor plan assistance (included as an offset to cost of sales)
Net new vehicle carrying costs (benefit)
2019
2018
Change
%
2017
Change
%
$
$
72.8 $
(69.0)
3.8 $
62.3 $
(66.9)
(4.6) $
10.5
(2.1)
8.4
16.9 %
3.1
(182.6)% $
39.3 $
(56.0)
(16.7) $
23.0
(10.9)
12.1
58.5 %
19.5
(72.5)%
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.
(Dollars in millions)
Mortgage interest
Other interest
Capitalized interest
Total other interest expense
Year Ended December 31,
2019 vs. 2018
2018 vs. 2017
2019
2018
Change
%
2017
Change
%
$
$
27.5 $
35.4
(2.3)
60.6 $
25.0 $
32.3
(1.3)
56.0 $
2.5
3.1
(1.0)
4.6
10.0% $
9.6
76.9
8.2% $
19.1 $
16.2
(0.5)
34.8 $
5.9
16.1
(0.8)
21.2
30.9%
99.4
160.0
60.9%
The increase in other interest expense in 2019 compared to 2018 was due to increased average borrowings on our credit facility, the issuance of $400 million in aggregate
principal amount of 4.625% Senior Notes due 2027 in December 2019, 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 2018 compared to 2017 was primarily due to the issuance of our $300 million in aggregate principal amount of 5.250% Senior Notes due
2025 in July 2017 and increases in mortgage borrowings related to acquisitions.
Income Tax Provision
Our effective income tax rate was as follows:
Effective income tax rate
Effective income tax rate excluding non-core items(1)
(1) See "Non-GAAP Reconciliations” for more details
Year Ended December 31,
2018
2017
2019
27.7%
27.6%
21.3%
25.6%
29.3%
38.7%
Our effective income tax rate in 2019 was negatively affected by excess tax deficiencies on stock awards vesting in the current period, an increase in non-deductible expenses,
and an increase in the current state effective income tax rate, primarily due to enactment of combined reporting in New Jersey beginning January 1, 2019.
Our effective income tax rate in 2018 was positively affected by the enactment of tax legislation commonly known as the Tax Cuts and Jobs Act (the "Act”), signed into law on
December 22, 2017, which reduced the federal corporate income tax rate to 21.0%. Our effective income tax rate in 2018 benefited from return to provision adjustments to our
income tax receivable and deferred
34
taxes as a result of finalizing calculations supporting our 2017 federal income tax return. These adjustments are the result of tax planning undertaken in 2018 to change certain
established tax accounting methods. Additionally, our effective income tax rate in 2018 was positively affected by excess tax benefits related to our stock-based compensation
and the revaluation of certain acquired deferred tax liabilities. Partially offsetting these benefits was the negative impact from an increasing presence in states with higher
income tax rates, including the impact of New Jersey Assembly Bill 4202.
Our effective income tax rate in 2017 was also positively affected by the Act, as well as by new stock guidance during 2017 that was applied to our stock-based compensation.
Non-GAAP Reconciliations
Non-GAAP measures do not have definitions under GAAP and may be defined 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):
Asset impairments
$
2.6 $
— $
(2.6)
$
— $
— $
—
As reported
Disposal gain on
sale of stores
Asset impairments Insurance reserves
Acquisition
expenses
Adjusted
Year Ended December 31, 2019
Selling, general and administrative
Operating income
Income before income taxes
Income tax (provision) benefit
Net income
Diluted net income per share
Diluted share count
1,373.8
495.0
375.4 $
(103.9)
271.5 $
11.60 $
23.4
$
$
$
9.7
(9.7)
(9.7) $
2.8
(6.9) $
—
2.6
2.6
(0.7)
1.9
$
$
(9.5)
9.5
9.5 $
(2.6)
6.9 $
(2.5)
1,371.5
2.5
499.9
2.5 $
(0.7)
1.8 $
380.3
(105.1)
275.2
(0.30) $
0.08
$
0.30 $
0.08 $
11.76
35
Asset impairments
$
1.3 $
— $
(1.3)
$
— $
— $
— $
—
As
reported
Disposal gain on
sale of stores
Asset impairments Insurance reserves
Acquisition
expenses
Tax attribute
Adjusted
Year Ended December 31, 2018
Selling, general and
administrative
$
1,253.3 $
15.4
— $
(1.5) $
(3.3)
$
— $
1,263.9
Operating income
447.0
(15.4)
1.3
1.5
3.3
—
437.7
Income before income
taxes
Income tax (provision)
benefit
Net income
Diluted net income per
share
Diluted share count
$
$
$
337.5 $
(15.4) $
(71.8)
265.7 $
4.0
(11.4) $
1.3
$
(0.3)
1.0
$
1.5 $
(0.4)
1.1 $
3.3 $
— $
(0.9)
2.4 $
(14.8)
(14.8) $
328.2
(84.2)
244.0
10.86 $
24.5
(0.47) $
0.04
$
0.05 $
0.10 $
(0.60) $
9.98
As
reported
Disposal gain on
sale of stores
Insurance reserves
Year Ended December 31, 2017
Acquisition
expenses
OEM settlement
Tax reform
Adjusted
Selling, general and
administrative
$
1,049.4 $
5.1 $
(5.6) $
(5.7)
$
— $
— $
1,043.2
Operating income
409.0
(5.1)
5.6
5.7
—
—
415.2
Other income (expense),
net
Income before income
taxes
Income tax (provision)
benefit
Net income
Diluted net income per
share
Diluted share count
$
$
$
12.2
—
—
—
(9.1)
—
3.1
347.1 $
(5.1) $
(101.9)
245.2 $
2.5
(2.6) $
5.6 $
(2.2)
3.4 $
5.7 $
(2.2)
3.5 $
(9.1) $
3.4
(5.7) $
— $
344.2
(32.9)
(32.9) $
(133.3)
210.9
9.75 $
25.1
(0.10) $
0.14 $
0.14 $
(0.23) $
(1.31) $
8.39
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.
36
Available Sources
Below is a summary of our immediately available funds (in millions):
Cash and cash equivalents
Available credit on the credit facilities
Total current available funds
As of December 31,
2019
2018
Change
%
$
84.0 $
574.5
658.5
31.6 $
179.6
211.2
52.4
394.9
447.3
165.8%
219.9
211.8
In December 2019, we issued $400.0 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 plan to use 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 our 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 millions):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
2019
Year Ended December 31,
2018
2017
$
499.5 $
(438.0)
(9.1)
519.7 $
(557.1)
11.7
148.9
(538.2)
396.3
Operating Activities
Cash provided by operating activities decreased $20.2 million in 2019 compared to 2018, primarily as a result of slower growth in floor plan notes payable borrowings in the
current year compared to the prior year and an increase in payoffs related to accrued liabilities assumed through acquisitions, offset by a decrease in growth of same store
inventory levels and a decrease in trade receivables growth related to the timing of collections.
In 2019, we entered into a floor plan credit facility with Chrysler Capital. This facility provides floor plan financing for new vehicle inventory at certain Chrysler locations. As
this facility is provided through a manufacturer partner, we classify these changes as an operating activity. During the second quarter of 2019, we reclassified $52.0 million from
financing activities to operating activities as these funds were used to pay off our Chrysler inventory previously floored under our syndicated credit facility new vehicle floor
plan commitment.
Borrowings from and repayments to our syndicated credit facility 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.
37
Adjusted net cash provided by operating activities is presented below (in millions):
(Dollars in millions)
Net cash provided by operating activities – as reported
Add (Less): Net (repayments) borrowings on floor plan notes payable: non-
trade
Less: Borrowings on floor plan notes payable: non-trade associated with
acquired new vehicle inventory
Net cash provided by operating activities – adjusted
2019
2018
Year Ended December 31,
2019 vs. 2018
Change
2017
2018 vs. 2017
Change
$
499.5 $
519.7 $
(20.2) $
148.9 $
(54.6)
(21.9)
(32.7)
241.5
(80.0)
364.9 $
(120.0)
377.8 $
$
40.0
(12.9) $
(111.0)
279.4 $
370.8
(263.4)
(9.0)
98.4
Inventories are the most significant component of our cash flow from operations. As of December 31, 2019, our new vehicle days’ supply was 71 days, or six days lower than
our days’ supply as of December 31, 2018. Our days’ supply of used vehicles was 65 days, or two days lower than our days’ supply as of December 31, 2018. 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 $438.0 million and $557.1 million, respectively, for 2019 and 2018. 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 millions):
(Dollars in millions)
Capital expenditures
Cash paid for acquisitions, net of cash acquired
Cash paid for other investments
Proceeds from sales of stores
Capital Expenditures
Below is a summary of our capital expenditure activities (in millions):
Post-acquisition capital improvements
Facilities for open points
Purchases of previously leased facilities
Existing facility improvements
Maintenance
Total capital expenditures
$
2019
2018
(124.9) $
(366.6)
(7.2)
46.7
(158.0) $
(373.8)
(62.7)
34.3
Year Ended December 31,
2019 vs. 2018
Change
33.1 $
7.2
55.5
12.4
2017
(105.4) $
(460.4)
(8.6)
20.9
2018 vs. 2017
Change
(52.6)
86.6
(54.1)
13.4
41.2
0.5
—
29.6
34.1
105.4
2019
Year Ended December 31,
2018
2017
$
$
33.9 $
5.4
3.1
50.2
32.3
124.9 $
59.0 $
8.4
7.9
53.5
29.2
158.0 $
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.
38
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
We focus on acquiring stores using our value-based strategy at 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 millions):
Number of stores acquired
Number of stores opened
Number of franchises added
2019
Year Ended December 31,
2018
2017
9
—
1
17
1
—
Cash paid for acquisitions, net of cash acquired
Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle
$
(366.6) $
(373.8) $
inventory
Cash paid for acquisitions, net of cash acquired – adjusted
$
80.0
(286.6) $
120.0
(253.8) $
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 (in millions):
18
1
—
(460.4)
111.0
(349.4)
Cash (used in) provided by financing activities, as reported
Add (Less): Net repayments (borrowings) on floor plan notes payable: non-trade
Cash provided by financing activities, as adjusted
2019
Year Ended December 31,
2018
2017
$
$
(9.1)
54.6
45.5
$
$
11.7 $
21.9
33.6 $
396.3
(241.5)
154.8
During 2018 and 2019, we reclassified $214.4 million and $52.0 million, respectively, from financing activities to operating activities related to the payoff of Ford and Chrysler
new vehicle inventories that were previously floored through our syndicated credit facility new vehicle floor plan commitment and are now floored through floor plan credit
facilities with Ford Motor Credit Company and Chrysler Capital, respectively. As these facilities are provided through manufacturer partners, we classify these changes as
operating activities.
39
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 (in millions):
(Dollars in millions)
Net (repayments) borrowings on lines of credit
Principal payments on long-term debt and finance lease liabilities, other
Proceeds from the issuance of long-term debt
Payment of debt issuance costs
Repurchases of common stock
Dividends paid
$
2019
2018
(314.6) $
(11.0)
420.3
(5.8)
(3.2)
(27.6)
191.8 $
(26.1)
62.1
(0.4)
(148.9)
(27.7)
Year Ended December 31,
2019 vs. 2018
Change
2017
2018 vs. 2017
Change
(506.4) $
15.1
358.2
(5.4)
145.7
0.1
(81.7) $
(50.3)
395.9
(4.7)
(33.8)
(26.5)
273.5
24.2
(333.8)
4.3
(115.1)
(1.2)
Borrowing and Repayment Activity
During 2019, we raised net proceeds of $420.3 million through the issuance of $400.0 million in aggregate principal amount of 4.625% Senior Notes due 2027, $20.3 million
through mortgages, and repaid $314.6 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 50.0% at December 31, 2019 compared to 53.6% at December 31, 2018. We partially funded our 2019
acquisition activity with additional debt.
Equity Transactions
Our share repurchase program, authorized by our Board of Directors, allows us to repurchase up to $250 million of our Class A common stock. As of December 31, 2019, we had
$233.6 million available for repurchase under the 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 the second quarter of 2019, 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 of $36.5 million upon execution of the agreement in
exchange for the right to receive either a pre-determined amount of cash or stock. As of December 31, 2019, the capped call options had expired and we received $38.9 million in
cash.
During 2019, we paid dividends on our Class A and Class B Common Stock as follows:
Dividend paid:
March 2019
May 2019
August 2019
November 2019
Dividend amount per share
$
Total amount of dividend (in
millions)
0.29 $
0.30
0.30
0.30
6.7
7.0
7.0
6.9
We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.
40
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 millions):
Outstanding as of
December 31, 2019
Remaining Available as of
December 31, 2019
$
Floor plan notes payable: non-trade
Floor plan notes payable
Used and service loaner vehicle inventory financing commitments
Revolving lines of credit
Real estate mortgages
5.250% Senior notes due 2025
4.625% Senior notes due 2027
Other debt
Unamortized debt issuance costs
Total debt
(1) As of December 31, 2019, we had a $2.1 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, 2018. This amount is reduced by $16.8 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
1,642.4 $
425.2
149.0
—
597.7
300.0
400.0
33.6
(10.4)
3,537.5 $
— (1)
—
239.8 (2)
334.7 (2),(3)
—
—
—
— (4)
574.5
$
Statements included in Part II, Item 8 of this Annual Report.
Credit Facility
Effective December 9, 2019, we amended our syndicated credit facility ("credit facility”) increasing the total financing commitment to $2.8 billion and extended the term to
January 2025. This credit facility is comprised of 19 financial institutions, including seven manufacturer-affiliated finance companies.
We have the option to reallocate the commitments, provided that the used vehicle inventory floor plan financing commitment does not exceed 16.5% of aggregate
commitments, the revolving loan commitment does not exceed 18.75% of aggregate commitments, the service loaner floor plan financing commitment does not exceed $100
million, and the sum of these commitments plus the new vehicle inventory floor plan financing commitment does not exceed the aggregate total financing commitment of $2.8
billion. Additionally, we may request an increase in the aggregate new vehicle floor plan commitment of up to $400 million provided that the aggregate commitment does not
exceed $3.2 billion total availability. 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; 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 rate associated with our new vehicle floor plan commitment was 2.88% at December 31, 2019. The annual interest rate associated with
both our used vehicle inventory financing commitment and our revolving line of credit was 3.18% at December 31, 2019.
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.
41
Under our credit facility, we are required to maintain the ratios detailed in the following table:
Debt Covenant Ratio
Current ratio
Fixed charge coverage ratio
Leverage ratio
Requirement
Not less than 1.10 to 1
Not less than 1.20 to 1
Not more than 5.75 to 1
As of December 31, 2019
1.31 to 1
2.88 to 1
2.62 to 1
As of December 31, 2019, 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.
Other Lines of Credit
During 2019, we entered into a revolving line of credit agreement with Chrysler Capital, a program of Chrysler Group LLC and Santander Consumer USA. The revolving line of
credit includes a commitment of up to $20.0 million, secured by certain assets from select Chrysler locations. The interest rate on this revolving line is equal to the one-month
LIBOR rate plus 1.50%. Along with this new line with Chrysler Capital, we have a revolving line of credit with Ford Motor Credit Company, bringing our other lines of credit to
a total financing commitment of $80.0 million. These other lines of credit mature in 2021 and have interest rates up to 7.33%. As of December 31, 2019, no amounts were
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. As
discussed above in "Operating Activities”, during 2019 we entered a floor plan agreement with Chrysler Capital. This facility provides floor plan financing for new vehicle
inventory at select Chrysler stores. This facility adds to our existing facility with Ford Motor Credit Company. The interest rates on these floor plan notes payable commitments
vary by manufacturer and are variable rates. As of December 31, 2019, $425.2 million was outstanding on these agreements at interest rates ranging up to 6.25%. 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 5.3% at December 31, 2019. The mortgages are payable in
various installments through August 2038. As of December 31, 2019, we had fixed interest rates on 72.5% of our outstanding mortgage debt.
Our other debt includes finance lease liabilities and sellers’ notes. The interest rates associated with our other debt ranged from 2.5% to 8.5% at December 31, 2019. This debt,
which totaled $33.6 million at December 31, 2019, is due in various installments through August 2037.
5.250% Senior Notes Due 2025
On July 24, 2017, we issued $300.0 million in aggregate principal amount of 5.250% Senior Notes due 2025 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. 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.
42
4.625% Senior Notes Due 2027
On December 9, 2019, we issued $400.0 million in aggregate principal amount of 4.625% Senior Notes due 2027 to eligible purchasers in a private placement under Rule 144A
and Regulation S of the Securities Act of 1933. Interest accrues on the Senior Notes from December 9, 2019 and is payable semiannually on June 15 and December 15. We may
redeem the Senior Notes in whole or in part, on or after December 15, 2022, at the redemption prices set forth in the Indenture. Prior to December 15, 2022, we may redeem the
Senior Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium set forth in the Indenture. In addition, prior to
December 15, 2022, we may redeem up to 40% of the Senior Notes from the proceeds of certain equity offerings. Upon certain change of control events (as set forth in the
Indenture), the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes at a purchase price of 101% of their principal amount plus accrued
and unpaid interest, if any, to the date of purchase.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2019, was as follows (in millions):
Payments Due By Period
Contractual Obligation
Total
2020
2021 and 2022
$
Floor plan notes payable: non-trade(1)
Floor plan notes payable(1)
Used and service loaner vehicle inventory financing commitments(1)
Revolving lines of credit(1)(3)
Real estate mortgages, including interest(3)
5.250% Senior Notes Due 2025, including interest (3)
4.625% Senior Notes Due 2027, including interest (3)
Other debt, including finance lease liabilities and interest
1,642.4 $
425.2
149.0
—
745.4
394.6
549.1
761.3
1,642.4 $
425.2
—
—
63.2
15.8
19.6
3.6
— $
—
—
—
152.0
31.5
37.0
7.4
2023 and 2024 2025 and beyond
—
—
149.0
—
364.3
315.8
455.5
743.5
— $
—
—
—
165.9
31.5
37.0
6.8
Charge-backs on various contracts
Operating leases(2)
Self-insurance programs
57.0
414.6
34.4
5,173.0 $
(1) Amounts for new vehicle floor plan commitment, floor plan notes payable, the used and service loaner vehicle inventory financing commitments and the revolving lines of
31.2
40.5
15.1
2,256.6 $
2.6
65.3
4.1
313.2 $
23.2
73.8
11.7
336.6 $
—
235.0
3.5
2,266.6
$
credit do not include estimated interest payments. See Note 1 and Note 6 of 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 of Notes to Consolidated Financial Statements.
(3) Balances exclude net impact of debt issuance costs. See Note 6 of 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, 2019, 2018 and 2017.
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.
43
Our most critical accounting estimates include those related to goodwill and franchise value, income taxes, 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 2019, 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, we would further evaluate for potential impairment.
As of December 31, 2019, we had $454.6 million of goodwill on our balance sheet associated with 179 reporting units. No reporting unit accounted for more than 2.6% of our
total goodwill as of December 31, 2019. The annual goodwill impairment analysis, which we perform as of October 1 of each year, resulted in an impairment of $1.7 million in
2019, and no indications of impairment in 2018 or 2017.
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 2019, 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’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. An impairment charge is recorded to the extent the fair value is less than the carrying value.
As of December 31, 2019, we had $306.7 million of franchise value on our balance sheet associated with 179 stores. No individual store accounted for more than 5.9% of our
total franchise value as of December 31, 2019. Our impairment testing of franchise value resulted in an impairment of $0.4 million in 2019, and no indications of impairment in
2018 or 2017.
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 16.8% of our total franchise value and goodwill as of December 31,
2019.
See Note 1 and Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.
Income Taxes
As of December 31, 2019, we had deferred tax assets of $159.9 million, net of valuation allowance of $0.6 million, and deferred tax liabilities of $291.0 million. The principal
components of our deferred tax assets are related to lease liabilities, allowances and accruals, deferred revenue and cancellation reserves. The principal components of our
deferred tax liabilities are related to depreciation on property and equipment, right of use assets, inventories and goodwill.
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.
44
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, 2019, 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 14 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.
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 assets 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 Note 1 and Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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, 2019,
we had $2.4 billion outstanding under such agreements at a weighted average interest rate of 3.085% per annum. A 10% increase in interest rates, or 30.85 basis points, would
increase annual interest expense by approximately $5.3 million, net of tax, based on amounts outstanding as of December 31, 2019.
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, 2019, we had $1.2 billion of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between September 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 $1.2 billion as of December 31, 2019.
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 monitoring our mix of fixed rate and variable rate debt. We currently utilize bank debt, mortgage financing,
high-yield debt and internally generated
45
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 15. Exhibits and Financial Statement Schedules of Part IV of this document.
Quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2019 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 SEC 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, 2019. 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 nine
stores acquired in 2019, which represented 4% of consolidated total assets as of December 31, 2019 and 2% of consolidated revenues for the year ended December 31, 2019.
Based on our assessment, our management concluded that, as of December 31, 2019, 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, 2019,
which is included in Item 8. Financial Statements and Supplementary Financial Data of this Form 10-K.
Item 9B. Other Information
None.
46
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item will be included in our Proxy Statement for our 2020 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days
of December 31, 2019, is incorporated herein by reference.
Item 11. Executive Compensation
Information required by this item will be included in our Proxy Statement for our 2020 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days
of December 31, 2019, 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, 2019.
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
Equity compensation plans not approved by
shareholders
Total
(1) There is no exercise price associated with our restricted stock units.
(2)
496,682
—
496,682
$—
—
$—
(1)
2,627,165
—
2,627,165
Includes 1,100,660 shares available pursuant to our 2013 Amended and Restated Stock Incentive Plan and 1,526,505 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 2020 Annual Meeting of Shareholders and, upon filing with the SEC within 120
days of December 31, 2019, 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 2020 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days
of December 31, 2019, is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Information required by this item will be included in our Proxy Statement for our 2020 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days
of December 31, 2019, is incorporated herein by reference.
47
Item 15. Exhibits and Financial Statement Schedules
PART IV
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:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
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.
Page
F- 1
F- 5
F- 6
F- 7
F- 8
F- 9
F- 10
F- 36
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
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1*
10.2*
10.2.1*
Restated Articles of Incorporation of Lithia Motors, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Form 10-Q filed July 26, 2019).
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, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated July
24, 2017 and filed with the Securities and Exchange Commission on July 24, 2017).
Form of 5.250% Senior Notes due 2025 (included as part of Exhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated July 24, 2017 and filed with
the Securities and Exchange Commission on July 24, 2017).
Indenture, dated as of December 9, 2019, among Lithia Motors, Inc., the Guarantors and the Trustee (incorporated by reference to exhibit 4.1 to Form 8-K dated
December 9, 2019 and filed with the Securities and Exchange Commission on December 13, 2019).
Form of 4.625% Senior Notes due 2027 (included as part of Exhibit 4.1)(incorporated by reference to exhibit 4.1 to Form 8-K dated December 9, 2019 and filed
with the Securities and Exchange Commission on December 13, 2019).
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 to Form 8-K dated April 25, 2019 and filed with the
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)
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)
48
Exhibit
10.2.2*
10.2.3*
10.3*
10.3.1*
10.3.2*
10.3.3*
10.3.4*
10.4*
10.5*
10.6
10.7*
10.8*
10.9*
10.10*
10.10.1*
10.10.2*
10.10.3*
10.11*
10.11.1*
10.11.2*
10.12*
10.13*
Description
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 (2017 Performance- and Time-Vesting) (for Senior Executives) (incorporated by reference to exhibit 10.3.1 to the
Company’s Form 10-K for the year ended December 31, 2016)
Form of Restricted Stock Unit Agreement (2018 Performance- and Time-Vesting) (for Senior Executives) (incorporated by reference to exhibit 10.3.2 to the
Company’s Form 10-K for the year ended December 31, 2017)
Form of Restricted Stock Unit Agreement (2019 Performance- and Time-Vesting) (for Senior Executives)(incorporated by reference to exhibit 10.3.3 to the
Company’s Form 10-K for the year ended December 31, 2018)
Form of Restricted Stock Unit Agreement (2020 Performance- and Time-Vesting) (for Senior Executives)
Form of Restricted Stock Unit Agreement (Time-Vesting)
Lithia Motors, Inc. 2013 Discretionary Support Services Variable Performance Compensation Plan (incorporated by reference to exhibit 10.2 to the Company’s
Form 8-K filed May 2, 2013)
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)
Third Amended and Restated Loan Agreement, dated December 9, 2019, 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 December 13, 2019)
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’s Form
10-Q for the quarter ended March 31, 2016)
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)
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)
Director Service Agreement effective January 1, 2016 between Lithia Motors, Inc. and Sidney B. DeBoer (incorporated by reference to Exhibit 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
Exhibit 10.1 to the Company’s Form 8-K filed February 5, 2016)(1)
21
Subsidiaries of Lithia Motors, Inc.
49
Exhibit
Description
23
31.1
31.2
32.1
32.2
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.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover page formatted as Inline XBRL and contained in Exhibit 101.
104
(1) Substantially similar agreements exist between Lithia Motors, Inc. and each of Mark DeBoer, Tom Dobry, Scott Hillier, George Hines, Christopher S. Holzshu, Edward
Impert, George Liang, Tina Miller, Bryan Osterhout, Eric Pitt, Jodi Rasor, and David Stork. The "Cash Change in Control Benefits” under the agreements with Mark DeBoer,
Edward Impert, Eric Pitt, Jodi Rasor, and David Stork 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 21, 2020
LITHIA MOTORS, INC.
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 21, 2020:
By /s/ Bryan B. DeBoer
Bryan B. DeBoer
Director, President and Chief Executive Officer
Signature
/s/ Bryan B. DeBoer
Bryan B. DeBoer
/s/ Tina Miller
Tina Miller
/s/ Sidney B. DeBoer
Sidney B. DeBoer
/s/ Shauna McIntyre
Shauna McIntyre
/s/ Susan O. Cain
Susan O. Cain
/s/ Louis P. Miramontes
Louis P. Miramontes
/s/ Kenneth E. Roberts
Kenneth E. Roberts
/s/ David J. Robino
David J. Robino
Title
Director, President and Chief Executive Officer.
(Principal Executive Officer)
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Chairman of the Board
Director
Director
Director
Director
Director
51
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) as of December 31, 2019 and 2018, the related
consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2019, 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), the Company’s internal control over
financial reporting as of December 31, 2019, 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 21, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of
ASC Topic 842 - Leases.
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 judgment. 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 test over goodwill and franchise value
As described 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 $454.6 million and $306.7 million, respectively, at December 31, 2019. As of October 1, 2019, the Company tested its goodwill and franchise value
intangibles assets for impairment using a qualitative assessment. The qualitative assessment was performed at each individual store level and the Company
determined that a $2.1 million impairment was needed in 2019.
F- 1
We identified the Company’s qualitative impairment test over goodwill and franchise value as a critical audit matter. The test included the evaluation of qualitative
factors that required especially subjective auditor judgment for stores whose current operating results indicate a higher risk of potential impairment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill and
franchise value impairment assessment process, 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 selling, general and administrative expenses as a percent of
gross profit, and evaluated differences for potential indicators of impairments. Additionally, we evaluated information about recent dealership sales to identify
potential indicators of impairment.
We have served as the Company’s auditor since 1993.
Portland, Oregon
February 21, 2020
F- 2
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’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
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, 2019, 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), the consolidated balance sheets of the
Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated February
21, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired nine stores during 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2019, all of these acquired stores’ internal control over financial reporting. The total assets of these nine stores represented approximately 4% of
consolidated total assets as of December 31, 2019 and approximately 2% of consolidated revenues for the year ended December 31, 2019. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of these nine 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.
F- 3
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.
Portland, Oregon
February 21, 2020
F- 4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions)
December 31,
2019
2018
Assets
Current Assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $7.3 and $7.2
Inventories, net
Other current assets
Total Current Assets
Property and equipment, net of accumulated depreciation of $284.3 and $240.5
Operating lease right-of-use assets
Goodwill
Franchise value
Other non-current assets
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Floor plan notes payable
Floor plan notes payable: non-trade
Current maturities of long-term debt
Trade payables
Accrued liabilities
Total Current Liabilities
Long-term debt, less current maturities
Deferred revenue
Deferred income taxes
Non-current operating lease liabilities
Other long-term liabilities
Total Liabilities
Stockholders’ Equity:
Preferred stock - no par value; authorized 15.0 shares; none outstanding
Class A common stock - no par value; authorized 100.0 shares; issued and outstanding 22.6 and 22.0
Class B common stock - no par value; authorized 25.0 shares; issued and outstanding 0.6 and 1.0
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements.
F- 5
$
$
$
$
84.0 $
505.0
2,433.7
47.8
3,070.5
1,611.7
251.9
454.6
306.7
388.5
6,083.9 $
425.2 $
1,642.4
39.3
125.3
336.9
2,569.1
1,430.6
137.9
131.1
238.5
109.0
4,616.2
—
20.5
0.1
46.0
(0.7)
1,401.8
1,467.7
6,083.9 $
31.6
529.4
2,365.3
65.1
2,991.4
1,448.0
—
434.9
288.7
221.0
5,384.0
324.4
1,733.3
25.9
126.3
283.6
2,493.5
1,358.2
121.7
91.2
—
122.2
4,186.8
—
—
0.1
35.0
—
1,162.1
1,197.2
5,384.0
Revenues:
New vehicle
Used vehicle retail
Used vehicle wholesale
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle
Used vehicle retail
Used vehicle wholesale
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Asset impairments
Selling, general and administrative
Depreciation and amortization
Operating income
Floor plan interest expense
Other interest expense
Other income, net
Income before income taxes
Income tax provision
Net income
Basic net income per share
Shares used in basic per share calculations
Diluted net income per share
Shares used in diluted per share calculations
Cash dividends paid per Class A and Class B share
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions, except per share amounts)
Year Ended December 31,
2019
2018
2017
$
$
$
$
$
6,799.1 $
3,527.2
301.2
518.6
1,325.1
201.5
12,672.7
6,413.5
3,159.6
297.5
657.5
190.8
10,718.9
1,953.8
2.6
1,373.8
82.4
495.0
(72.8)
(60.6)
13.8
375.4
(103.9)
271.5 $
6,602.8 $
3,079.0
331.3
454.8
1,222.3
131.2
11,821.4
6,217.7
2,756.1
325.8
621.6
123.2
10,044.4
1,777.0
1.3
1,253.3
75.4
447.0
(62.3)
(56.0)
8.8
337.5
(71.8)
265.7 $
11.70 $
10.91 $
23.2
24.4
11.60 $
10.86 $
23.4
24.5
1.19 $
1.14 $
5,763.6
2,544.4
277.8
385.9
1,015.8
99.0
10,086.5
5,423.8
2,257.6
273.0
522.7
93.3
8,570.4
1,516.1
—
1,049.4
57.7
409.0
(39.3)
(34.8)
12.2
347.1
(101.9)
245.2
9.78
25.1
9.75
25.1
1.06
See accompanying notes to consolidated financial statements.
F- 6
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions)
Net income
Other comprehensive loss, net of tax:
Loss on cash flow hedges, net of tax benefit of $0.3, $0 and $0
Comprehensive income
Year Ended December 31,
2019
2018
2017
271.5 $
265.7 $
(0.7)
270.8 $
—
265.7 $
245.2
—
245.2
$
$
See accompanying notes to consolidated financial statements.
F- 7
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
(In millions)
Common Stock
Class A
Class B
Shares
Amount
Shares
Additional Paid-
In Capital
Accumulated Other
Comprehensive Loss
Retained
Earnings
Total
Stockholders’
Equity
Balance at December 31, 2016
Adjustment to adopt ASU 718
Net income
Issuance of stock in connection with
employee stock plans
Issuance of restricted stock to employees
Repurchase of Class A common stock
Class B common stock converted to Class
A common stock
Compensation for stock and stock option
issuances and excess tax benefits from
option exercises
Option premiums paid
Dividends paid
Issuance of stock in connection with
acquisitions
Balance at December 31, 2017
Net income
Issuance of stock in connection with
employee stock plans
Issuance of restricted stock to employees
Repurchase of Class A common stock
Compensation for stock and stock option
issuances and excess tax benefits from
option exercises
Dividends paid
Adjustment to adopt ASC 606
Balance at December 31, 2018
Net income
Loss on cash flow hedges, net of tax
benefit of $0.3
Issuance of stock in connection with
employee stock plans
Issuance of restricted stock to employees
Repurchase of Class A common stock
Class B common stock converted to Class
A common stock
Compensation for stock and stock option
issuances and excess tax benefits from
option exercises
Option premiums received (paid)
Dividends paid
Adjustment to adopt ASC 842
Balance at December 31, 2019
23.3 $
—
—
0.1
0.1
(0.4)
0.8
—
—
—
—
23.9
—
0.1
0.1
(2.1)
—
—
—
22.0
—
—
0.1
0.1
—
0.4
165.6
—
—
7.5
—
(33.8)
1.8 $
—
—
—
—
—
$
Amount
0.2
—
—
—
—
—
0.1
(0.8)
(0.1)
7.6
—
—
2.1
149.1
—
10.1
—
(168.5)
9.3
—
—
—
—
—
11.0
—
(3.2)
—
—
—
—
1.0
—
—
—
—
—
—
—
1.0
—
—
—
—
—
—
(0.4)
—
—
—
—
0.1
—
—
—
—
—
—
—
0.1
—
—
—
—
—
—
—
—
—
—
22.6 $
12.7
—
—
—
20.5
—
—
—
—
0.6 $
—
—
—
—
0.1
$
$
41.2
(0.2)
—
—
—
—
—
3.7
(33.4)
—
—
11.3
—
—
—
19.6
4.1
—
—
35.0
—
—
—
—
—
—
3.5
7.5
—
—
— $
—
—
703.8 $
0.2
245.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(0.7)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(26.5)
—
922.7
265.7
—
—
—
—
(27.7)
1.4
1,162.1
271.5
—
—
—
—
—
—
(5.1)
(27.6)
0.9
1,401.8 $
910.8
—
245.2
7.5
—
(33.8)
—
11.3
(33.4)
(26.5)
2.1
1,083.2
265.7
10.1
—
(148.9)
13.4
(27.7)
1.4
1,197.2
271.5
(0.7)
11.0
—
(3.2)
—
16.2
2.4
(27.6)
0.9
1,467.7
46.0
$
(0.7)
$
See accompanying notes to consolidated financial statements.
F- 8
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Asset impairments
Depreciation and amortization
Stock-based compensation
(Gain) loss on disposal of other assets
Gain from disposal activities
Deferred income taxes
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net
Inventories
Other assets
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable
Trade payables
Accrued liabilities
Other long-term liabilities and deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Notes receivable issued
Capital expenditures
Proceeds from sales of assets
Cash paid for other investments
Cash paid for acquisitions, net of cash acquired
Proceeds from sales of stores
Net cash used in investing activities
Cash flows from financing activities:
(Repayments) borrowings on floor plan notes payable: non-trade, net
Borrowings on lines of credit
Repayments on lines of credit
Principal payments on long-term debt, scheduled
Principal payments on long-term debt and finance lease liabilities, other
Proceeds from issuance of long-term debt
Payment of debt issuance costs
Proceeds from issuance of common stock
Repurchase of common stock
Dividends paid
Payments of contingent consideration related to acquisitions
Other financing activity
Net cash (used in) provided by financing activities
(Increase) decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes, net
Floor plan debt paid in connection with store disposals
Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions
Debt assumed in connection with acquisitions
Issuance of Class A common stock in connection with acquisition
ROU assets obtained in exchange for lease liabilities1
Year Ended December 31,
2019
2018
2017
$
271.5 $
265.7 $
245.2
2.6
82.4
16.2
(0.1)
(9.7)
40.1
24.4
(19.7)
12.0
100.7
(1.8)
(38.0)
18.9
499.5
12.5
(124.9)
1.5
(7.2)
(366.6)
46.7
(438.0)
(54.6)
3,167.0
(3,481.6)
(26.0)
(11.0)
420.3
(5.8)
11.0
(3.2)
(27.6)
—
2.4
(9.1)
52.4
31.6
84.0 $
135.8 $
38.4
18.6
26.4 $
—
—
260.3
1.3
75.4
13.3
0.2
(15.1)
33.0
4.7
(108.9)
(16.0)
196.9
15.1
28.9
25.2
519.7
—
(158.0)
3.1
(62.7)
(373.8)
34.3
(557.1)
(21.9)
2,691.4
(2,499.6)
(26.5)
(26.1)
62.1
(0.4)
10.1
(148.9)
(27.7)
(0.8)
—
11.7
(25.7)
57.3
31.6 $
117.1 $
32.9
33.1
125.1 $
10.8
—
—
—
57.7
11.3
(0.4)
(5.1)
(2.8)
(57.4)
(193.1)
(3.1)
20.3
20.0
37.2
19.1
148.9
—
(105.4)
15.3
(8.6)
(460.4)
20.9
(538.2)
241.5
1,754.5
(1,836.2)
(18.2)
(50.3)
395.9
(4.7)
7.5
(33.8)
(26.5)
—
(33.4)
396.3
7.0
50.3
57.3
68.9
127.3
3.7
1.8
84.3
2.1
—
$
$
$
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.
F- 9
Note 1. Summary of Significant Accounting Policies
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (#265-2019) with 187 stores representing 30
brands in 19 states. We offer vehicles online and through our nationwide retail network. Our "Growth Powered by People” strategy drives us to innovate and continuously
improve the customer experience.
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 and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts without restrictions.
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
• Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and others for commissions earned on service contracts
to 10 days of selling a vehicle.
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.
Receivables are recorded at invoice and do not bear interest until they are 60 days past due. The allowance for doubtful accounts represents an estimate of the amount of net
losses inherent in our portfolio of accounts receivable as of the reporting date. We estimate an allowance for doubtful accounts based on our historical write-off experience and
consider 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. 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 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, 2019 and 2018 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.
F- 10
The range of estimated useful lives is as follows:
Buildings and improvements
Service equipment
Furniture, office equipment, signs and fixtures
5 to 40 years
5 to 15 years
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 are 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, 2019, 2018 and 2017, we recorded capitalized interest of $2.3 million, $1.3 million and $0.5
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 finance leases. We have finance leases for certain locations, expiring at various dates through August 1, 2037. Our
finance lease right-of-use assets are included in property and equipment on our Consolidated Balance Sheets. Amortization of finance 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. Finance lease liabilities 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.
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.
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 2019, 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, we would further evaluate for potential impairment. See Note 5 and Note 13.
Franchise Value
We enter into agreements ("Franchise Agreements”) with our 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;
F- 11
• 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 2019, 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’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 and Note 13.
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 millions):
Year Ended December 31,
Advertising expense, gross
Manufacturer cooperative advertising credits
Advertising expense, net
2019
2018
2017
$
$
139.8 $
(27.9)
111.9 $
134.2 $
(25.5)
108.7 $
116.1
(22.8)
93.3
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 are deferred and charged to
expense in proportion to the associated revenue to be recognized.
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 value on the date of grant. Shares to be issued upon the exercise of stock options and the vesting of stock awards will come
from newly issued shares. See Note 10.
F- 12
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 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
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 19 financial institutions, including seven 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 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.
F- 13
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.
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, 2019 and 2018, the accrued warranty balance was $0.6 million and $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 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”) 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 probable and the control 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 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
F- 14
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 sales is recognized upon the 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 $171.5 million and $149.6 million as of December 31, 2019, and December 31, 2018, respectively; and we recognized $25.9 million and $21.9 million of revenue in the
years ended December 31, 2019, and December 31, 2018, respectively, related to our opening contract liability balances. Our contract liability balance is included in accrued
liabilities and deferred revenue.
Finance and Insurance Sales
Revenue from finance and insurance sales is recognized, net of estimated charge-backs, at the time of the sale of the related vehicle. As a part of the vehicle sale, we seek to
arrange financing for customers and sell a variety of add-ons, such as extended warranty service contracts. These products are inherently attached to the governing vehicle
and performance of the obligation cannot be performed without the underlying sale of the vehicle. We act as an agent in the sale of these contracts as the pricing is set by the
third-party provider, and our commission is preset. A portion of the transaction price related to sales of finance and insurance contracts is considered variable consideration
and is estimated and recognized upon the sale of the contract under the new standard. Our contract asset balance was $8.9 million and $9.2 million as of December 31, 2019, and
December 31, 2018, respectively; and is included in trade receivables and other non-current assets.
Segment Reporting
While we have determined that each individual store is a reporting unit, we have aggregated our reporting units into three 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 Honda, Toyota, Subaru, Nissan and Volkswagen. Our Luxury segment is comprised
of retail automotive franchises that sell new vehicles manufactured primarily by BMW, Mercedes-Benz and Lexus. 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”) 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, excepted for the
internal allocation within Corporate and other discussed above. Our CODM measures the performance of each reportable segment based on several metrics, including earnings
from operations, and uses these results, in part, to evaluate the performance of, and to allocate resources to, each of the reportable segments. See Note 18.
F- 15
Note 2. Accounts Receivable
Accounts receivable consisted of the following (in millions):
December 31,
Contracts in transit
Trade receivables
Vehicle receivables
Manufacturer receivables
Auto loan receivables
Other receivables
Less: Allowance for doubtful accounts
Less: Long-term portion of accounts receivable, net
Total accounts receivable, net
2019
2018
269.7 $
52.8
50.9
112.4
62.2
19.4
567.4
(7.3)
(55.1)
505.0 $
294.0
54.3
51.6
105.5
61.5
6.8
573.7
(7.2)
(37.1)
529.4
$
$
The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.
Note 3. Inventories
The components of inventories consisted of the following (in millions):
December 31,
New vehicles
Used vehicles
Parts and accessories
Total inventories
2019
2018
1,704.1 $
638.1
91.5
2,433.7 $
1,700.1
576.8
88.4
2,365.3
$
$
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.
Note 4. Property and Equipment
Property and equipment consisted of the following (in millions):
December 31,
Land
Building and improvements
Service equipment
Furniture, office equipment, signs and fixtures
Less accumulated depreciation
Construction in progress
2019
2018
473.0 $
948.0
113.3
327.0
1,861.3
(284.3)
1,577.0
34.7
1,611.7 $
419.7
821.6
106.3
283.5
1,631.1
(240.5)
1,390.6
57.4
1,448.0
$
$
Long-lived Asset Impairment Charges
We recorded $0.5 million and $1.3 million of impairment charges associated with certain properties in 2019 and 2018, respectively. 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.
F- 16
Note 5. Goodwill and Franchise Value
The following is a roll-forward of goodwill (in millions):
Balance as of December 31, 2017 ¹
Adjustments to purchase price allocations 2
Reductions through divestitures
Balance as of December 31, 2018 ¹
Adjustments to purchase price allocations 3
Additions through acquisitions 3
Reductions from impairments
Reductions through divestitures
Balance as of December 31, 2019 1
Domestic
Import
Luxury
Consolidated
$
$
114.0 $
51.4
(0.9)
164.5
1.6
6.2
(0.3)
(0.2)
171.8 $
104.3 $
85.8
(1.2)
188.9
1.6
9.0
(1.3)
(0.9)
197.3 $
38.0 $
43.5
—
81.5
1.9
2.2
(0.1)
—
85.5 $
256.3
180.7
(2.1)
434.9
5.1
17.4
(1.7)
(1.1)
454.6
(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 2017 acquisitions of the Baierl Auto Group, the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and the 2018
acquisition of Broadway Ford were finalized in 2018. Also, our purchase price allocation for the 2018 acquisition of Prestige Auto Group was preliminary and was allocated to our segments in 2018.
As a result, we added $180.7 million of goodwill.
(3) Our purchase price allocation for the 2018 acquisitions of the Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added
$22.5 million of goodwill. Our purchase price allocation for the 2019 acquisitions are preliminary and goodwill 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.
The following is a roll-forward of franchise value (in millions):
Balance as of December 31, 2017
Additions through acquisitions
Adjustments to purchase price allocations 1
Balance as of December 31, 2018
Additions through acquisitions 2
Adjustments to purchase price allocations 2
Reductions through divestitures
Reductions from impairments
Balance as of December 31, 2019
Franchise Value
187.0
103.5
(1.8)
288.7
20.9
3.5
(6.0)
(0.4)
306.7
$
$
(1) Our purchase price allocation for the 2017 acquisitions of the Baierl Auto Group, the Downtown LA Auto Group, Crater Lake Ford Lincoln, Crater Lake Mazda, Albany CJD Fiat and the 2018
acquisition of Broadway Ford were finalized in 2018.Also, our purchase price allocation for the 2018 acquisition of Prestige Auto Group was preliminary and was allocated to our segments in 2018.
As a result, we added $103.5 million of franchise value.
(2) Our purchase price allocation for the 2018 acquisitions of the Ray Laks Honda, Ray Laks Acura, Day Auto Group, Prestige Auto Group, and Buhler Ford were finalized in 2019. As a result, we added
$24.4 million of franchise value. Our purchase price allocation for the 2019 acquisitions are preliminary and franchise value 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.
F- 17
Note 6. Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt (in millions):
December 31,
Floor plan notes payable: non-trade
Floor plan notes payable
Total floor plan debt
Used and service loaner vehicle inventory financing commitments
Revolving lines of credit
Real estate mortgages
5.250% Senior notes due 2025
4.625% Senior notes due 2027
Other debt
Total long-term debt outstanding
Less: unamortized debt issuance costs
Less: current maturities (net of current debt issuance costs)
Long-term debt
2019
2018
1,642.4 $
425.2
2,067.6 $
149.0 $
—
597.7
300.0
400.0
33.6
1,480.3
(10.4)
(39.3)
1,430.6 $
1,733.3
324.4
2,057.7
332.0
131.6
592.3
300.0
—
34.2
1,390.1
(6.0)
(25.9)
1,358.2
$
$
$
$
Credit Facility
Effective December 9, 2019, we amended our syndicated credit facility ("credit facility”) increasing the total financing commitment to $2.8 billion and extended the term to
January 2025. Our credit facility is comprised of 19 financial institutions, including seven manufacturer-affiliated finance companies.
We have the option to reallocate the commitments, provided that the used vehicle inventory floor plan financing commitment does not exceed 16.5% of aggregate
commitments, the revolving loan commitment does not exceed 18.75% of aggregate commitments, the service loaner floor plan financing commitment does not exceed $100
million, and the sum of these commitments plus the new vehicle inventory floor plan financing commitment does not exceed the aggregate total financing commitment of $2.8
billion. Additionally, we may request an increase in the aggregate new vehicle floor plan commitment of up to $400 million, provided that the aggregate commitment does not
exceed $3.2 billion. 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 subsidiaries. Under our credit facility, our obligations relating to new vehicle
floor plan loans are secured only be collateral owned by borrowers of new vehicle floor plan loans under the credit facility.
The interest rate on the credit facility, as amended, 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; 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 rate associated with our new vehicle floor plan commitment was 2.88% at December 31, 2019. The annual interest rate
associated with both our used vehicle inventory financing commitment and our revolving line of credit was 3.18% at December 31, 2019.
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
Current ratio
Fixed charge coverage ratio
Leverage ratio
Requirement
Not less than 1.10 to 1
Not less than 1.20 to 1
Not more than 5.75 to 1
F- 18
As of December 31, 2019
1.31 to 1
2.88 to 1
2.62 to 1
Other Lines of Credit
During 2019 we entered into a revolving line of credit agreement with Chrysler Capital, a program of Chrysler Group LLC and Santander Consumer USA. The revolving line of
credit includes a commitment of up to $20.0 million, secured by certain assets from select Chrysler locations. The interest rate on this revolving line is equal to the one-month
LIBOR rate plus 1.50%. Along with this new line with Chrysler Capital, we have a revolving line of credit with Ford Motor Credit Company, bringing our other lines of credit to
a total financing commitment of $80.0 million. These other lines of credit mature in 2021 and have interest rates up to 7.33%. As of December 31, 2019, no amounts were
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. As
discussed above in "Operating Activities” in "Liquidity and Capital Resources”, during 2019 we entered a floor plan agreement with Chrysler Capital. This facility provides
floor plan financing for new vehicle inventory at select Chrysler stores. This facility adds to our existing facility with Ford Motor Credit Company. The interest rates on these
floor plan notes payable commitments vary by manufacturer and are variable rates. As of December 31, 2019, $425.2 million was outstanding on these agreements at interest
rates ranging up to 6.25%. 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 5.3% at December 31, 2019. The mortgages are payable in
various installments through August 1, 2038. As of December 31, 2019, we had fixed interest rates on 72.5% of our outstanding mortgage debt.
Our other debt includes finance lease liabilities and sellers’ notes. The interest rates associated with our other debt ranged from 2.5% to 8.5% at December 31, 2019. This debt,
which totaled $33.6 million at December 31, 2019, is due in various installments through August 2037.
5.250% Senior Notes Due 2025
On July 24, 2017, we issued $300.0 million in aggregate principal amount of 5.250% Senior Notes due 2025 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
was paid 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.
4.625% Senior Notes Due 2027
On December 9, 2019, we issued $400.0 million in aggregate principal amount of 4.625% Senior Notes due 2027 to eligible purchasers in a private placement under Rule 144A
and Regulation S of the Securities Act of 1933. Interest accrues on the Senior Notes from December 9, 2019 and is payable semiannually on June 15 and December 15. We may
redeem the Senior Notes in whole or in part, on or after December 15, 2022, at the redemption prices set forth in the Indenture. Prior to December 15, 2022, we may redeem the
Senior Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium set forth in the Indenture. In addition, prior to
December 15, 2022, we may redeem up to 40% of the Senior Notes from the proceeds of certain equity offerings. Upon certain change of control events (as set forth in the
Indenture), the holders of the Senior Notes may require us to repurchase all or a portion of the Senior Notes at a purchase price of 101% of their principal amount plus accrued
and unpaid interest, if any, to the date of purchase.
F- 19
Future Principal Payments
The schedule of future principal payments associated with real estate mortgages, our Senior Notes and other debt as of December 31, 2019 was as follows (in millions):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total principal payments
Note 7. Commitments and Contingencies
$
$
41.9
49.5
65.8
60.4
77.6
1,036.1
1,331.3
Leases
As described further in Note 21, we adopted Topic 842 as of January 1, 2019, using the modified retrospective approach. This allows adjustment with a cumulative-effect
adjustment as of January 1, 2019. Prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting under Topic 840. See
Note 11 for future minimum operating lease payments after December 31, 2019, as presented under Topic 842.
Charge-Backs for Various Contracts
We have recorded a liability of $57.0 million as of December 31, 2019 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
millions):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
31.2
16.3
6.8
2.2
0.5
—
57.0
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 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, 2019, we had a contract liability balance of $172.0 million associated with these contracts and estimate the contract liability will be recognized as
follows (in millions):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
34.3
27.4
21.9
18.2
15.4
54.8
172.0
The contract liability balance is recorded as components of deferred revenue and accrued liabilities in our Consolidated Balance Sheets.
F- 20
We periodically evaluate the estimated future costs of these assumed contracts and record a charge if future expected claim and cancellation costs exceed the contract liability
to be recognized. As of December 31, 2019, we had a reserve balance of $2.9 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.
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, 2019 and 2018, we had liabilities associated with these programs of $34.4 million
and $39.9 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 will have a material adverse effect on our business, results of operations, financial condition, or cash flows, we cannot predict this with certainty.
Note 8. Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A common 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 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 shareholders 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 common stock are entitled to one 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 common stock vote together as a single class on all matters submitted to shareholders.
At a special meeting of shareholders held on January 21, 2019, Sidney B. DeBoer and the Company executed a Class B Conversion Agreement pursuant to which Mr. DeBoer
agreed to cause all of the remaining 1,000,000 shares of our Class B common stock to be converted into shares of our Class A common stock by December 31, 2025. The Class B
Conversion Agreement will require the conversion of at least 15% of the 1,000,000 Class B shares by the end of every two years, with the first 15% to be converted by
December 31, 2020, a total of 30% by December 31, 2022, a total of 45% by December 31, 2024, and the balance by December 31, 2025. As of December 31, 2019, Lithia Holding
Company, L.L.C., held 600,000 shares of our Class B common stock.
Repurchases of 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”).
On October 22, 2018, our Board of Directors approved a $250 million repurchase authorization. Share repurchases under our authorizations were as follows:
Share Repurchase Authorization
Repurchases Occurring in 2019
Shares
Average Price
Cumulative Repurchases as of December 31,
2019
Shares
Average Price
— $
—
3,155,095 $
84.43
As of December 31, 2019, we had $233.6 million available for repurchases pursuant to our share repurchase authorization.
F- 21
In addition, during 2019, we repurchased 40,356 shares at an average price of $80.39 per share, for a total of $3.2 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, 2019, 2018 and 2017:
Year Ended December 31,
Shares repurchased pursuant to repurchase authorizations
Total purchase price (in millions)
Average purchase price per share
Shares repurchased in association with tax withholdings on the vesting of RSUs
$
$
2019
2018
2017
—
— $
— $
40,356
2,112,370
179.0 $
84.72 $
30,119
329,000
30.5
92.79
32,457
In the second quarter of 2019, 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 of $36.5 million upon execution of the agreement in exchange for the right to receive either a pre-determined amount of cash or stock. As of December 31, 2019,
the capped call options had expired, and we received $38.9 million in cash.
Dividends
We declared and paid dividends on our Class A and Class B Common Stock as follows:
Quarter declared
2017
First quarter
Second quarter
Third quarter
Fourth quarter
2018
First quarter
Second quarter
Third quarter
Fourth quarter
2019
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend amount per
Class A and Class B
share
Total amount of
dividends paid
(in millions)
$
$
$
0.25 $
0.27
0.27
0.27
0.27 $
0.29
0.29
0.29
0.29 $
0.30
0.30
0.30
6.3
6.8
6.7
6.7
6.7
7.2
7.0
6.8
6.7
7.0
7.0
6.9
Note 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 $9.8 million, $5.7 million, and $5.8 million were recognized for the years ended December 31, 2019, 2018 and 2017, respectively. Employees may
contribute to the plan if they meet certain eligibility requirements.
We offer a non-qualified deferred compensation and supplemental executive retirement plan (the "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 SERP. These discretionary contributions could vest
immediately or 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.
F- 22
The following is a summary related to our SERP (in millions):
Year Ended December 31,
Compensation expense
Total discretionary contribution
Guaranteed annual return
2019
2018
2017
$
$
$
$
0.9
0.3
5.00%
$
$
1.3
0.8
5.00%
1.1
1.7
5.00%
As of December 31, 2019 and 2018, the balance due to participants was $37.9 million and $32.9 million, respectively, and was included as a component of other long-term
liabilities in the Consolidated Balance Sheets.
Note 10. Stock-Based Compensation
2009 Employee Stock Purchase Plan
During 2019, we registered an additional 1,500,000 shares to the 2009 Employee Stock Purchase Plan (the "2009 ESPP”), now allowing for the issuance of 3,000,000 shares of our
Class A common 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 common 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,
Shares purchased pursuant to 2009 ESPP
Weighted average per share price of shares purchased
Weighted average per share discount from market value for shares purchased
As of December 31,
Shares available for purchase pursuant to 2009 ESPP
$
$
2019
112,138
101.03
17.83
2019
1,526,505
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 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, 2019, 1,100,660 shares of Class A common stock were available for future grants. As of December 31, 2019, there were no stock appreciation rights,
qualified stock options, nonqualified stock options or restricted share awards outstanding.
F- 23
Restricted Stock 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
Balance, December 31, 2018
Granted
Vested
Forfeited
Balance, December 31, 2019
Weighted average
grant date fair value
99.72
75.73
92.00
87.53
90.00
409,865 $
288,761
(117,873)
(84,071)
496,682
We granted 67,152 time-vesting RSUs to members of our Board of Directors and employees in 2019. Each grant entitles the holder to receive shares of our Class A common
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 221,609 performance and time-vesting RSUs in 2019. Of these, 167,808 shares were earned based on attaining various target levels of
operational performance. Based on the levels of performance achieved in 2019, a weighted average attainment level of 75.7% for these RSUs was met. These RSUs will vest
over four years from the grant date.
Stock-Based Compensation
As of December 31, 2019, unrecognized stock-based compensation related to outstanding, but unvested RSUs was $14.2 million, which will be recognized over the remaining
weighted average vesting period of 2.2 years.
Certain information regarding our stock-based compensation was as follows:
Year Ended December 31,
Per share intrinsic value of non-vested stock granted
Weighted average per share discount for compensation expense recognized under the 2009 ESPP
Fair value of non-vested stock that vested during the period (in millions)
Stock-based compensation recognized in Consolidated Statements of Operations, as a component of
$
selling, general and administrative expense (in millions)
Tax benefit recognized in Consolidated Statements of Operations (in millions)
Cash received from options exercised and shares purchased under all share-based arrangements (in
millions)
Tax deduction realized related to stock options exercised (in millions)
2019
2018
2017
75.73 $
17.83
92.0
16.2
2.7
11.3
9.8
86.84 $
13.10
92.0
13.4
3.5
10.6
9.0
99.24
15.20
69.6
11.3
3.5
7.8
9.0
Note 11. Leases
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.
Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 26 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.
Certain of our lease 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 contain any material residual value guarantees or material restrictive covenants.
F- 24
We rent or sublease certain real estate to third parties.
As described further in "Note 21. Changes in Accounting Policies,” we adopted Topic 842 as of January 1, 2019. Prior period amounts have not been adjusted and continue to
be reported in accordance with our historic accounting under Topic 840.
The table below presents the lease-related liabilities recorded on the balance sheet (in millions):
December 31, 2019
December 31, 2018
Operating lease liabilities:
Current portion included in accrued liabilities
Noncurrent operating lease liabilities
Total operating lease liabilities
Finance lease liabilities:
Current portion included in current maturities of long-term debt
Long-term portion of lease liabilities in long-term debt
Total finance lease liabilities 1
Total lease liabilities
Weighted-average remaining lease term:
Operating leases
Finance leases
Weighted-average discount rate:
$
$
25.2
238.5
263.7
1.1
29.5
30.6
294.3
$
$
13 years
13 years
—
—
—
2.0
28.8
30.8
30.8
Operating leases
Finance leases
5.81%
5.08%
1 Corresponding finance lease right-of-use assets are not material and are included in property and equipment, net of accumulated depreciation.
The components of lease costs, which were included in selling, general and administrative in our Consolidated Statements of Operations, were as follows (in millions):
Operating lease cost 1
Variable lease cost 2
Sublease income
Total lease costs
Year Ended December 31,
2019
$
$
48.5
1.4
(4.6)
45.3
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 $43.3 million and $33.4 million for the years ended December 31, 2018 and 2017, respectively. These amounts
are included as a component of selling, general and administrative expenses in our Consolidated Statements of Operations.
F- 25
As of December 31, 2019, the maturities of our operating lease liabilities were as follows (in millions):
Year Ending December 31,
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less:
Present value adjustment
Operating lease liabilities
Note 12. Derivative Financial Instruments
Operating Leases
$
$
37.7
35.1
33.1
28.2
25.7
210.3
370.1
(106.4)
263.7
We account 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 hold 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.
In the second quarter of 2019, to hedge the business exposure to rising interest rates on a portion of our variable rate debt, we entered into a 5-year, zero-cost interest rate
collar, with an aggregate notional amount of $300 million. This instrument hedges interest rate risk related to a portion of our $1.6 billion of non-trade floor plan notes payable.
The gains and losses from the cash flow hedge are recorded in AOCI and released to interest expense in the same period that the hedged interest expense on the floor plan is
recognized. As of December 31, 2019, we had a loss of $1.0 million recorded associated with the fair value of our derivative instrument, included as a component of accrued
liabilities and other long-term liabilities with the offset in AOCI. As of December 31, 2019, the amount of net losses we expect to reclassify from AOCI into interest expense in
earnings within the next twelve months is immaterial. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives. No
amounts were reclassified from AOCI in the twelve months ended December 31, 2019.
See Note 13 for information on the fair value of the derivative contract. We did not have any activity related to the effect of derivative instruments in 2018 or 2017.
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.
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
F- 26
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, 2019, our real estate
mortgages and other debt, which includes finance lease liabilities, had maturity dates between September 1, 2020 and August 31, 2038.
We have derivative instruments consisting of interest rate collars. The fair value of derivative liabilities is measured using observable Level 2 market expectations at each
measurement date and is recorded as current liabilities and other long-term liabilities in the Consolidated Balance Sheets. See Note 12 for 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 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, 2019.
Below are our derivative liabilities that are measured at fair value (in millions):
Fair Value at December 31, 2019
Measured on a recurring basis:
Derivative contract, net
Level 1
Level 2
Level 3
$
— $
1.0 $
—
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 millions):
December 31,
Carrying value
5.250% Senior Notes due 2025
4.625% Senior Notes due 2027
Real Estate Mortgages and Other Debt
Fair value
5.250% Senior Notes due 2025
4.625% Senior Notes due 2027
Real Estate Mortgages and Other Debt
2019
2018
$
$
$
$
300.0 $
400.0
466.6
1,166.6 $
315.0 $
412.0
468.7
1,195.7 $
300.0
—
445.8
745.8
278.6
—
448.7
727.3
Below are our goodwill and franchise value amounts measured at fair value (in millions):
Fair Value at December 31, 2019
Measured on a non-recurring basis:
Goodwill
Level 1
Level 2
Level 3
$
— $
— $
0.1
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 elected to perform qualitative franchise value and goodwill impairment tests as of October 1, 2019. As a result of these tests, 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 $1.7 million
and $0.4 million, which was equal to the difference between the fair value and the carrying value for goodwill and franchise value,
F- 27
respectively. The non-cash impairment charges are included in "Asset impairments” in the accompanying Consolidated Statements of Operations and are reported in the
"Corporate and Other” category of our segment information.
Note 14. Income Taxes
Income Tax Provision
The income tax provision was as follows (in millions):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2019
2018
2017
$
$
40.0 $
24.0
64.0
34.7
5.2
39.9
103.9 $
30.3 $
11.5
41.8
20.4
9.6
30.0
71.8 $
95.1
16.9
112.0
(14.2)
4.1
(10.1)
101.9
At December 31, 2019 and 2018, we had income taxes payable of $10.1 million and income tax receivable of $17.1 million included as a component of accrued liabilities and other
current assets, respectively, in our Consolidated Balance Sheets.
The reconciliation between amounts computed using the federal income tax rate of 21% in 2019 and 2018, and 35% in 2017 and our income tax provision is shown in the
following tabulation (in millions):
Year Ended December 31,
Federal tax provision at statutory rate
State taxes, net of federal income tax benefit
Non-deductible items
Permanent differences related to stock compensation
Net change in valuation allowance
General business credits
Deferred remeasurement for change in statutory tax rate
Other
Income tax provision
2019
2018
2017
78.8 $
23.6
2.6
0.2
(0.5)
(0.9)
—
0.1
103.9 $
70.9 $
16.1
1.5
(0.1)
0.5
(1.1)
(15.8)
(0.2)
71.8 $
121.5
13.3
1.3
(0.8)
0.3
(0.9)
(32.9)
0.1
101.9
$
$
F- 28
Deferred Taxes
Individually significant components of the deferred tax assets and (liabilities) are presented below (in millions):
December 31,
Deferred tax assets:
Deferred revenue and cancellation reserves
Allowances and accruals, including state tax carryforward amounts
Lease Liability
Credits and other
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Inventories
Goodwill
Property and equipment, principally due to differences in depreciation
Right of Use Asset
Prepaid expenses and other
Total deferred tax liabilities
Total
2019
2018
48.4 $
42.1
69.7
0.3
(0.6)
159.9
(40.0)
(60.7)
(113.6)
(66.6)
(10.1)
(291.0)
(131.1) $
47.2
40.8
—
0.3
(1.1)
87.2
(42.0)
(48.2)
(78.0)
—
(10.2)
(178.4)
(91.2)
$
$
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, 2019, we had a $0.6 million valuation allowance recorded associated with our deferred tax assets. The entire allowance is associated with state net operating
losses generated in previous years. The valuation allowance decreased $0.5 million in the current year as a result of taxable income and the expected realization of these
benefits.
As of December 31, 2019, we had state net operating loss (NOL) carryforward amounts totaling approximately $2.2 million, tax effected, with expiration dates through 2039. 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 recorded a valuation
allowance of $0.6 million on the deferred tax assets relating to these state NOL carryforwards as discussed above. We had $0.2 million, tax effected, in state tax credit
carryforwards with expiration dates through 2029. We believe it is more likely than not that the benefits from these state tax credit carryforwards will be realized.
Unrecognized Tax Benefits
We have no unrecognized tax benefits recorded as of December 31, 2019, 2018 and 2017.
Open tax years at December 31, 2019 included the following:
Federal
21 states
Note 15. Acquisitions
In 2019, we completed the following acquisitions:
• On May 1, 2019, Hamilton Honda in Hamilton Township, New Jersey.
• On May 20, 2019, Ford Lincoln of Morgantown in Morgantown, West Virginia.
• On July 1, 2019, Jaguar Landrover Mission Viejo in Mission Viejo, California.
• On August 19, 2019, Hazleton Honda in Hazle Township, PA.
• On October 7, 2019, Chrysler Dodge Jeep Ram Fiat of Morgantown and Subaru of Morgantown in Morgantown, West Virginia.
F- 29
2016 - 2019
2015 - 2019
• On November 4, 2019, Wesley Chapel Toyota, Wesley Chapel Honda, and Tampa Honda in Florida.
Revenue and operating income contributed by the 2019 acquisitions subsequent to the date of acquisition were as follows (in millions):
Year Ended December 31,
Revenue
Operating income
2019
$
232.3
3.1
In 2018, we completed the following acquisitions:
• On January 15, 2018, Ray Laks Honda in Orchard Park, New York and Ray Laks Acura in Buffalo, New York.
• On February 26, 2018, Day Auto Group, a seven store platform based in Pennsylvania.
• On March 1, 2018, Prestige Auto Group, a six store platform based in New Jersey and New York.
• On April 2, 2018, Broadway Ford in Idaho Falls, Idaho.
• On April 23, 2018, Buhler Ford in Eatontown, New Jersey.
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 (in millions):
Consideration paid for the Year Ended December 31,
Cash paid, net of cash acquired
Debt issued
Assets acquired and liabilities assumed for the Year Ended December 31,
Trade receivables, net
Inventories
Franchise value
Property and equipment
Other assets
Floor plan notes payable
Other liabilities
Goodwill
2019
2018
366.6 $
26.4
393.0
$
2019
2018
— $
105.2
—
124.0
193.1
—
(29.3)
393.0
—
393.0 $
373.8
125.1
498.9
0.7
180.0
29.8
179.7
48.6
(10.8)
(2.3)
425.7
73.2
498.9
$
$
$
$
The purchase price allocations for the 2019 acquisitions are 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 2019 to be deductible for federal income tax purposes.
We account for franchise value as an indefinite-lived intangible asset. We recognized $2.5 million and $4.3 million, respectively, in acquisition related expenses as a component
of selling, general and administrative expenses in the Consolidated Statements of Operations in 2019 and 2018, respectively.
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The following unaudited pro forma summary presents consolidated information as if the acquisitions had occurred on January 1 of the previous year (in millions, except for per
share amounts):
Year Ended December 31,
Revenue
Net income
Basic net income per share
Diluted net income per share
$
2019
2018
13,193.4 $
280.2
12.07
11.98
12,831.9
275.6
11.31
11.26
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 non-recurring pro forma adjustments directly attributable to the acquisitions are
included in the reported pro forma revenues and earnings.
Note 16. 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 $14.8 million and $15.7 million as of December 31, 2019 and 2018, respectively, and was included as a component of accrued
liabilities and other long-term liabilities in our Consolidated Balance Sheets.
Note 17. Net Income Per Share of Class A and Class B Common Stock
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 shareholders. Additionally, Oregon law limits amendments to our Articles of Incorporation that would alter the
rights, powers or preferences of a given class of stock without the approval of 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.
F- 31
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,
2019
2018
2017
Class A
Class B
Class A
Class B
Class A
Class B
(in millions, except per share data)
Net income from continuing operations applicable to common
stockholders
Reallocation of distributed net income due to conversion of Class B
to Class A common shares outstanding
Conversion of Class B common shares into Class A common shares
Net income applicable to common stockholders - diluted
$
$
264.5 $
7.0 $
254.8 $
10.9 $
233.4 $
0.7
6.3
271.5 $
—
—
7.0 $
1.1
9.8
265.7 $
—
—
10.9 $
1.3
10.5
245.2 $
Weighted average common shares outstanding – basic
Conversion of Class B common shares into Class A common shares
Effect of employee stock purchases and restricted stock units on
weighted average common shares
Weighted average common shares outstanding – diluted
22.6
0.6
0.2
23.4
0.6
—
—
0.6
23.4
1.0
0.1
24.5
1.0
—
—
1.0
23.9
1.2
—
25.1
Net income per common share - basic
Net income per common share - diluted
$
$
11.70 $
11.60 $
11.70 $
11.60 $
10.91 $
10.86 $
10.91 $
10.86 $
9.78 $
9.75 $
Antidilutive Securities
Shares issuable pursuant to employee stock purchases not included
since they were antidilutive
—
—
—
—
—
—
F- 32
11.8
—
—
11.8
1.2
—
—
1.2
9.78
9.75
Note 18. Segments
Certain financial information on a segment basis is as follows (in millions):
Year Ended December 31,
Revenues:
Domestic
Import
Luxury
Corporate and other
Segment income*:
Domestic
Import
Luxury
Corporate and other
Depreciation and amortization
Other interest expense
Other income, net
Income before income taxes
2019
2018
2017
4,382.4 $
5,267.8
2,991.9
12,642.1
30.6
12,672.7 $
123.4 $
153.9
57.1
334.4
170.2
(82.4)
(60.6)
13.8
375.4 $
4,215.0 $
5,038.1
2,560.3
11,813.4
8.0
11,821.4 $
97.6 $
116.2
43.9
257.7
202.4
(75.4)
(56.0)
8.8
337.5 $
3,845.8
4,432.8
1,810.1
10,088.7
(2.2)
10,086.5
105.2
117.8
37.0
260.0
167.4
(57.7)
(34.8)
12.2
347.1
$
$
$
$
*Segment income for each of the segments is defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other income,
net.
Year Ended December 31,
Floor plan interest expense:
Domestic
Import
Luxury
Corporate and other
December 31,
Total assets:
Domestic
Import
Luxury
Corporate and other
2019
2018
2017
$
$
53.6 $
44.1
30.2
127.9
(55.1)
72.8 $
52.4 $
41.6
25.6
119.6
(57.3)
62.3 $
37.2
29.0
15.8
82.0
(42.7)
39.3
2019
2018
$
$
1,467.6 $
1,306.5
945.2
2,364.6
6,083.9 $
1,488.0
1,224.2
934.6
1,737.2
5,384.0
Note 19. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments.” This
pronouncement, along with subsequent ASUs issued to clarify provisions of ASU 2016-13, changes the impairment model for most financial assets and will require the use of
an "expected loss” model for instruments measured at amortized cost. Under this model, entities will be required to estimate the lifetime expected credit loss on such
instruments and record an allowance to offset the amortized cost basis of the financial asset, resulting in a net presentation of the amount expected
F- 33
to be collected on the financial asset. In developing the estimate for lifetime expected credit loss, entities must incorporate historical experience, current conditions, and
reasonable and supportable forecasts. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. We
have designed an allowance for loan loss methodology to comply with these new requirements, which will be adopted for our fiscal year beginning January 1, 2020. Based on
information as of December 31, 2019, we expect to record a $5.0 million to $8.0 million increase in the allowance for loan losses on our opening consolidated balance sheet as of
January 1, 2020, with a corresponding net-of-tax adjustment to retained earnings. The final adoption impact may vary depending on the company’s portfolio at the adoption
date, as well as macroeconomic conditions and forecasts at that time. We are finalizing testing of the effectiveness of our new allowance for loan loss methodology, as well as
designing the relevant controls and governance structure.
In January 2017, 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 the fair value of a reporting unit with its carrying amount, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting
unit’s fair value, if applicable. The loss recognized should not exceed the total amount 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 expect the adoption of ASU 2017-04 to have a
material effect on our financial position, results of operations or cash flows.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”. The pronouncement is effective for fiscal years,
and for interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We are currently in the process of evaluating the effects of
this pronouncement on our consolidated financial statements.
Note 20. Investments
As of December 31, 2019, we had $66.1 million in investments in various companies recorded as part of non-current assets on our Consolidated Balance Sheets. A predominant
amount of this investment is with Shift Technologies, Inc., a San Francisco-based digital retail start-up company. We have determined that our investment in Shift does not
meet the criteria for a variable interest entity, and we do not have control or significant influence over Shift.
As of December 31, 2019, there were no identified events or changes in circumstances that would have a significant effect on the value of any of these investments. We did not
record any impairment charges associated with these investments in the years ended December 31, 2019, 2018, or 2017.
Note 21. Changes in Accounting Policies
In 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842),” which requires leases with durations greater than twelve months to be recognized on the balance sheet, as
right-of-use assets with corresponding operating lease liabilities. In July 2018, the FASB issued ASU No. 2018-11, "Targeted Improvements - Leases (Topic 842).” This update
provides an optional transition method that allows entities to elect to apply the standard using the modified retrospective approach at its effective date, versus recasting the
prior periods presented. If elected, an entity would recognize a cumulative-effect adjustment to the opening balance of retained earnings in the year of adoption. We adopted
the new standard as of January 1, 2019 using the transition method that provides for a cumulative-effect adjustment to retained earnings upon adoption. The Consolidated
Financial Statements for the twelve months ended December 31, 2019 are presented under the new standard, while comparative years presented are not adjusted and continue
to be reported in accordance with our historical accounting policy. We elected the package of practical expedients, which permits us to not reassess under the new standard
our prior conclusions about lease identification, lease classification and initial direct costs. We elected the short-term lease recognition exemption for all leases that qualify. We
have both real estate leases and equipment leases that are impacted by the new guidance. Most of our leases do not provide an implicit rate, therefore we use our incremental
borrowing rate at the commencement date in determining the present value of lease payments. Adoption of the new standard resulted in the derecognition of a deferred gain
from prior completed sale-leaseback transactions. This adjustment, net of tax, was recorded as $0.9 million increase in retained earnings. See Note 11.
F- 34
The impact of adopting Topic 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows (in millions):
Impact on Consolidated Balance Sheets
Operating lease right-of-use assets
Total Assets
Operating lease liabilities:
Accrued liabilities
Deferred revenue
Noncurrent operating lease liabilities
Other long-term liabilities
Total Liabilities
Retained earnings
Total Liabilities and Stockholders’ Equity
December 31, 2018
Adjustments
January 1, 2019
— $
5,384.0
283.6
121.7
—
122.2
4,186.8
1,162.1
5,384.0
$
F- 35
259.7 $
259.7
26.6
(1.3)
243.9
(10.3)
258.8
0.9
259.7
259.7
5,643.7
310.2
120.4
243.9
111.9
4,445.6
1,163.0
5,643.7
The following tables set forth our unaudited quarterly financial data (in millions, except per share amounts):(1)
LITHIA MOTORS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
Revenue
Gross profit
Operating income
Income before income taxes
Net income
Basic net income per share
Diluted net income per share
First Quarter
Second Quarter
Third Quarter
$
2,849.7 $
2,659.7
3,221.7 $
3,096.5
3,332.4 $
3,092.0
Fourth Quarter
3,269.0
2,973.2
450.7
408.1
108.6
93.8
77.8
69.8
56.4
52.1
2.43
2.08
2.42
2.07
493.6
460.7
116.9
108.6
85.5
80.8
61.9
60.7
2.65
2.45
2.63
2.44
510.9
466.2
146.8
137.6
117.4
109.0
85.2
93.1
3.67
3.85
3.64
3.84
498.6
441.9
122.8
107.1
94.7
78.0
68.0
59.9
2.92
2.55
2.89
2.54
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
(1) Quarterly data may not add to yearly totals due to rounding.
F- 36
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 4.5
Description of Common Stock
This section describes the general terms and provisions of the shares of our common and preferred stock based on the provisions of our Restated Articles of Incorporation, as
amended (our "Articles”), our Second Amended and Restated Bylaws (our "Bylaws”) and applicable provisions of the Oregon Business Corporation Act ("OBCA”). This
description is not complete and is subject to, and is qualified in its entirety by, reference to our Articles, Bylaws and the OBCA.
Authorized Capital Stock
Our authorized capital stock consists of 100,000,000 shares of Class A common stock, 25,000,000 shares of Class B common stock and 15,000,000 shares of preferred stock,
each with no par value.
Common Stock
Each share of common stock is designated as either Class A common stock or Class B common stock. As of February 21, 2020, there were 22,724,919 shares of Class A
common stock outstanding and 600,000 shares of Class B common stock outstanding. All shares of the outstanding Class B common stock are held by Lithia Holding
Company, L.L.C. ("Lithia Holding”). Sidney B. DeBoer Trust U.T.A.D. January 30, 1997 (the "Trust”) is the manager of Lithia Holding 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.
At the special meeting of shareholders held on January 21, 2019, we entered into a Class B Conversion Agreement with Sidney B. DeBoer, pursuant to which Mr.
DeBoer agreed to cause all of the remaining shares of our Class B common stock to be converted into shares of our Class A common stock by December 31, 2025. The Class B
Conversion Agreement will require the conversion of at least 15% of the original 1,000,000 Class B shares by the end of every two years, with the first 15% to be converted by
December 31, 2020, a total of 30% by December 31, 2022, a total of 45% by December 31, 2024, and the balance by December 31, 2025. As of December 31, 2019, Lithia Holding
held 600,000 shares of our Class B common stock.
Voting
Holders of Class B common stock are entitled to ten votes for each share held, while holders of Class A common stock are entitled to one vote for each share held. The
Class A and Class B common stock vote together as a single class on all matters submitted to a vote of shareholders, including the election of directors. The OBCA, however,
entitles either the Class A or Class B common stock to vote as a separate voting group on any proposed amendment of our Articles requiring shareholder approval if the
proposed amendment would:
• increase or decrease the aggregate number of authorized shares of the class;
• effect an exchange or reclassification of all or part of the shares of the class into shares of another class;
• effect an exchange or reclassification, or create the right of exchange, of all or part of the shares of another class into shares of the class;
• change the designation, rights, preferences or limitations of all or part of the shares of the class;
119914-0004/147098480.2
• change the shares of all or part of the class into a different number of shares of the same class;
• create a new class of shares having rights or preferences with respect to distributions or to dissolution that are prior, superior or substantially equal to the shares of
the class;
• increase the rights, preferences or number of authorized shares of any class that, after giving effect to the amendment, have rights or preferences with respect to
distributions or to dissolution that are prior, superior or substantially equal to the shares of the class;
• limit or deny an existing preemptive right of all or part of the shares of the class; or
• cancel or otherwise affect rights to distributions or dividends that have accumulated but not yet been declared on all or part of the shares of the class.
Shares of the two classes of common stock do not have cumulative voting rights with respect to the election of directors. The absence of cumulative voting could have the
effect of preventing shareholders holding a minority of our shares from obtaining representation on the Board.
Dividends and Other Rights
Subject to the preferences applicable to any preferred stock outstanding at the time, holders of shares of common stock are entitled to dividends if, when and as declared by
the Board of Directors from funds legally available therefor, and are entitled, in the event of liquidation, to share ratably in all assets remaining after payment of liabilities and
preferred stock preferences, if any. Each share of Class A and Class B common stock is treated equally with respect to dividends and distributions.
The OBCA allows an Oregon business corporation to make a distribution, including payment of dividends, only if, after giving effect to the distribution, in the judgment of
the Board of Directors: (a) the corporation would be able to pay its debts as they become due in the usual course of business; and (b) the corporation’s total assets would at
least equal the sum of its total liabilities plus, unless the articles of incorporation permit otherwise, the amount that would be needed if the corporation were to be dissolved at
the time of the distribution to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. From
time to time, our credit facilities may restrict or prohibit the paying of dividends without our lenders’ consent.
No additional shares of Class B common stock may be issued without the prior approval of shareholders holding a majority of Class A common stock, except in conjunction
with stock splits, stock dividends, reclassification and similar transactions and events regarding the Class A common stock that would otherwise have the effect of changing
conversion rights of the Class B common stock relative to the Class A common stock.
Holders of common stock have no preemptive rights nor rights to subscribe for additional securities. Shares of common stock are not redeemable and there are no sinking
fund provisions. Shares of Class A common stock are not convertible into any other series or class of our securities. Subject to adjustments for stock splits, stock dividends,
reclassification and similar transactions and events, each share of Class B common stock is freely convertible into one share of Class A common stock at the option of the
holder. Each share of Class B common stock shall automatically convert to shares of Class A common stock on a share-for-share basis on the earliest record date for an annual
meeting of our shareholders 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. Any purported
transfer of Class B common stock to a person who is not a permitted transferee under our Articles is automatically void.
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- 2 -
Transfer Agent; Listing
The transfer agent and registrar for the Class A common stock is Broadridge, Edgewood, New York. Our outstanding shares of Class A common stock are listed on the New
York Stock Exchange under the symbol "LAD.” Our Class B common stock is not listed on any stock market or exchange.
Preferred Stock
As of February 21, 2020, there were no shares of our preferred stock outstanding. The Board of Directors may, without further action of our shareholders, issue shares of
preferred stock in one or more series and fix the rights and preferences thereof, including the dividend rights, dividend rates, conversion rights, voting rights, rights and terms
of redemption and sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such
series, and increase or decrease the number of shares of any such series (but not below the number of such shares then outstanding). The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be issued in the future. Issuance of preferred stock provides
desirable flexibility in connection with acquisitions, raising capital or other corporate purposes. However, our Board of Directors, without further shareholder approval, can
issue preferred stock with voting and conversion rights that would adversely affect the voting power and other rights of the holders of common stock.
Anti-Takeover Effects
Certain provisions of Oregon law and our Articles, summarized in the following paragraphs, may have anti-takeover effects and could delay, defer or prevent a tender offer
or takeover attempt that a shareholder might consider to be in such shareholder’s best interest, including those 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.
Class B Common Shares
Our Articles provide for Class A and 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, including the election of our
Board of Directors and the approval of any merger. Lithia Holding does not hold any of the outstanding Class A shares, but holds all of the outstanding shares of our Class B
common stock, which control approximately 20.9% of the aggregate number of votes eligible to be cast by shareholders. No additional shares of Class B common stock may be
issued without the prior approval of shareholders holding a majority of Class A common stock, except in conjunction with stock splits, stock dividends, reclassification and
similar transactions and events regarding the Class A common stock that would otherwise have the effect of changing conversion rights of the Class B common stock relative
to the Class A common stock. Therefore, Lithia Holding may be able to influence the outcome of the election of our Board of Directors and corporate actions such as merger or
acquisition proposals. In addition, because Sidney B. DeBoer, our Chairman of the Board, is the trustee of the Trust and has the authority to vote all of the issued and
outstanding shares of Class B common stock, he may have significant influence over the business and operations of our company.
Authorized Shares
Our Articles authorize the issuance of 100,000,000 shares of Class A common stock. The Class A common shares that are authorized but unissued provide our Board of
Directors with flexibility to effect, among other transactions, financings, acquisitions, stock dividends, stock splits and the granting of equity incentive awards. However, these
authorized but unissued shares may also be used by our Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of us.
In addition, our Articles authorize the issuance of "blank check” voting preferred stock, which, although intended primarily as a financing tool and not as a defense against
takeovers, could potentially be used by management to make uninvited attempts to acquire control more difficult by, for example, diluting the ownership interest or voting
power
119914-0004/147098480.2
- 3 -
of shareholders, increasing the consideration necessary to effect an acquisition or selling unissued shares to a friendly third party.
Advance Notice Requirements
Our Bylaws provide advance notice procedures for shareholders seeking to bring business before our annual meeting, or to nominate candidates for election as
directors. Our Bylaws also specify certain requirements regarding the form and content of a shareholder notice. These provisions may preclude our shareholders from bringing
matters before our annual meeting of shareholders or from making nominations for directors at our meetings of shareholders.
Oregon Control Share Act
We are subject to the Oregon Control Share Act, under which a person who acquires voting stock in a transaction which results in such person holding more than 20%, 33
1/3% or 50% of the total voting power cannot vote the shares it acquires in the acquisition unless voting rights are accorded to such control shares by the holders of a majority
of the outstanding voting shares, excluding the control shares held by such person and shares held by our officers and inside directors, and by the holders of a majority of the
outstanding voting shares, including shares held by our officers and inside directors. This vote would be required at the time an acquiring person's holdings exceed 20% of the
total voting power, and again at the time the acquiring person's holdings exceed 33 1/3% and 50%, respectively. An acquiring person may include persons acting as a group. A
transaction in which voting power is acquired solely by receipt of an immediately revocable proxy does not constitute an acquisition covered by the provisions of the OBCA
described here. The acquiring person may, but is not required to, submit to us an "Acquiring Person Statement” setting forth certain information about the acquiring person
and its plans with respect to us. The Acquiring Person Statement may also request that we call a special meeting of shareholders to determine whether the control shares will
be allowed to retain voting rights. If the acquiring person does not request a special meeting of shareholders, the issue of voting rights of control shares will be considered at
the next annual meeting or special meeting of shareholders that is held more than 60 days after the date of the acquisition of control shares. If the acquiring person’s control
shares are accorded voting rights and represent a majority or more of all voting power, shareholders who do not vote in favor of the restoration of such voting rights will have
the right to receive the appraised "fair value” of their shares, which may not be less than the highest price paid per share by the acquiring person for the control shares.
Oregon Business Combination Act
We are also subject to the Oregon Business Combination Act, which generally provides that in the event a person or entity acquires 15% or more of our voting stock, we
and such person or entity, or any affiliated entity, may not engage in the following business combination transactions for a period of three years following the date the person
acquired 15% or more of the voting stock:
• a merger or plan of share exchange;
• any sale, lease, mortgage or other disposition of the assets of the corporation where the assets have an aggregate market value equal to 10% or more of the
aggregate market value of our assets or outstanding capital stock; and
• transactions that result in the issuance of our capital stock to the shareholder that acquired 15% or more of the voting stock.
These restrictions do not apply if:
• the shareholder that acquired 15% or more of the voting stock, as a result of such acquisition, owns at least 85% of our outstanding voting stock disregarding
shares owned by directors who are also officers and certain employee benefit plans;
• our Board of Directors approves the share acquisition or business combination before the shareholder acquired 15% or more of our voting stock; or
119914-0004/147098480.2
- 4 -
• our Board of Directors and the holders of at least two-thirds of our outstanding voting stock, disregarding shares owned by the shareholder that acquired 15% or
more of the voting stock, approve the transaction on or subsequent to the date the shareholder acquires 15% or more of our voting stock.
The Oregon Control Share Act and the Oregon Business Combination Act will have the effect of encouraging any potential acquirer to negotiate with our Board of
Directors and will also discourage potential acquirers unwilling to comply with the provisions of these laws. An Oregon corporation may provide in its articles of incorporation
or bylaws that the laws described above do not apply to its shares. We have not adopted such a provision and do not currently intend to do so. These laws may make us less
attractive for takeover, and thus shareholders may not benefit from a rise in the price of our Class A common stock that a takeover could cause.
119914-0004/147098480.2
- 5 -
LITHIA MOTORS, INC.
RESTRICTED STOCK UNIT AGREEMENT
(2020 Performance- and Time-vesting)
(Senior Executives, 2020 Performance- and Time-vesting)
This Restricted Stock Unit Agreement ("Agreement”) is entered into pursuant to the 2013 Amended and Restated Stock Incentive Plan (the "Plan”)
adopted by the Board of Directors and shareholders of Lithia Motors, Inc., an Oregon corporation (the "Company”), as amended from time to time. Unless
otherwise defined herein, capitalized terms in this Agreement have the meanings given to them in the Plan. Any inconsistency between this Agreement and the
terms and conditions of the Plan will be resolved in favor of the Plan.
"Recipient” [ ]
Number of Restricted Stock Units ("RSUs”) [ ]
"Date of Grant” January 1, 2020
1. GRANT OF RESTRICTED STOCK UNIT AWARD
1.1 The Grant. The Company hereby awards to Recipient, and Recipient hereby accepts, the RSUs specified above on the terms and conditions set
forth in this Agreement and the Plan (the "Award”). Each RSU represents the right to receive one share of Class A Common Stock of the Company (a
"Share”) on an applicable Settlement Date, as defined in Section 1.3 of this Agreement, subject to the terms of this Agreement and the Plan.
1.2 Forfeiture; Vesting; Clawback. The RSUs are subject to forfeiture in accordance with the performance criteria specified in Section 1.2(a) of
this Agreement. Any RSUs not forfeited will vest according to the schedule set forth in Section 1.2(b) of this Agreement. The RSUs, the Shares issued upon
vesting of the RSUs and any proceeds received upon the sale of the Shares are subject to recovery by the Company as specified in Section 1.2(c) of this
Agreement.
(a) Forfeiture.
(i)
The RSUs are subject to forfeiture based on the Company’s 2020 pro forma earnings per share, calculated as specified in Section
1.2(a)(iii) of this Agreement (the "2020 Pro Forma EPS”). The number of RSUs that will be forfeited is determined according to the
highest earnings per share threshold set forth on the table below (each, an "EPS Threshold”) that the 2020 Pro Forma EPS meets or
exceeds. The table below specifies the applicable percentage of RSUs that will be retained (the "Earned RSUs”), subject to
adjustment as provided in Section 1.2(a)(ii), at the specified EPS Threshold. When the Committee certifies the number of Earned
RSUs as provided in Section 1.2(a)(iii), all RSUs that are not Earned RSUs will be forfeited.
(Senior Executives, 2020 Performance- and Time-vesting)
EPS Threshold
$13.90 (highest)
Any amount between $11.90 and $12.60 (inclusive)
$9.60
Any amount between $0.01 and $9.59 (inclusive)
$ 0.00 or negative 2020 Pro Forma EPS (lowest)
Percentage of Earned
RSUs
150.0%
100.0%
75.0%
50.0%
0.0%
(ii) If the 2020 Pro Forma EPS is at least $9.60 and less than $11.90, the percentage of Earned RSUs will be determined on a pro-rata basis
and the number of Earned RSUs will be rounded to the nearest whole RSU. If the 2020 Pro Forma EPS is at least $12.60 and less than $13.90, the percentage
of Earned RSUs will be determined on a pro-rata basis and the number of Earned RSUs will be rounded to the nearest whole RSU. If the 2020 Pro Forma
EPS is positive but less than $9.60, the percentage of Earned RSUs will be 50.0%.
Example 1: If the 2020 Pro Forma EPS is $9.75, the percentage of Earned RSUs would be 75.0% plus an additional percentage calculated
as follows: (a) 25%, multiplied by a fraction, (i) the numerator of which is the amount by which 2020 Pro Forma EPS exceeds $9.60 and
(ii) the denominator of which is $2.30:
25% ($0.15/$2.30) = 1.6%
The resulting percentage of Earned RSUs correlating to an EPS of $9.75 would be 76.6%. If the Award were 1,000 RSUs, the number of
Earned RSUs would be 76.6% of 1,000, or 766 RSUs. The number of forfeited RSUs would be 1,000 minus 766, or 234. The Earned
RSUs would be subject to the vesting according to the schedule specified in Section 1.2(b) of this Agreement.
(iii) The 2020 Pro Forma EPS will be calculated by deducting from the Company’s consolidated diluted income (loss) per share, as set forth
in the audited consolidated statement of income for the Company and its subsidiaries for the 2020 fiscal year, non-operational transactions or disposal activities,
for example:
i. asset impairment and disposal gain;
ii. gains or losses on the sale of real estate or stores;
iii. gains or losses on equity investment;
iv.
v. related income tax adjustments for any of the above.
reserves for real estate leases, Company-owned service contracts (e.g., lifetime oil), and legal matters; and
As soon as practicable, the Director of Internal Audit of the Company shall calculate the 2020 Pro Forma EPS, and shall submit those calculations to the
Committee. At or prior to the regularly scheduled meeting of the Committee held in the first fiscal quarter of 2020, the Committee shall certify in writing (which
may consist of approved minutes of the meeting) the 2020 Pro Forma EPS and the number of Earned RSUs. Unless otherwise required under this Agreement,
no Shares or other amounts shall be delivered or paid unless the Committee certifies the 2020 Pro Forma EPS and the number of Earned RSUs. The
Committee may reduce the amount of the compensation payable upon the attainment of the performance goals based on such factors as it deems appropriate,
including subjective factors.
(b) Vesting. Subject to the continued employment of Recipient with the Company or any Subsidiary, (i) 0% of the Earned RSUs shall vest on the date
that the Committee certifies the number of Earned RSUs and (ii) the remaining Earned RSUs shall vest on the dates set forth in the table below (each, a
"Vesting Date”). The number of Shares to which Recipient is entitled on each Vesting Date shall be rounded up to the nearest whole Share (except for the
last Vesting Date, on which all remaining RSUs shall vest).
(Senior Executives, 2020 Performance- and Time-vesting)
Vesting Date
January 1, 2022
January 1, 2023
January 1, 2024
Vesting of
Award
33%
33%
34%
Example 2: If there are 766 Earned RSUs, and the Committee certifies the number of Earned RSUs on February 1, 2020, the Earned
RSUs would vest and entitle Recipient to receive Shares, subject to continued employment, as follows.
Vesting Date
January 1, 2022
January 1, 2023
January 1, 2024
Vesting of Award
33%
33%
34%
Shares
253
253
260
(c) Clawback. If the Company’s financial statements are restated at any time within three years after the Committee certifies the number of Earned
RSUs under Section 1.2(a)(iii) of this Agreement, the 2020 Pro Forma EPS shall be recalculated (the resulting number, the "Recalculated 2020 Pro Forma
EPS”) based on the restated financial statements. If, based on the Company’s restated financial statements, the Recalculated 2020 Pro Forma EPS is less than
the 2020 Pro Forma EPS that the Committee previously certified, (i) any Earned RSUs subject to vesting shall be adjusted to reflect the number of RSUs that
would have been Earned RSUs based on the Recalculated 2020 Pro Forma EPS and (ii) Recipient shall repay to the Company (1) a number of Shares
calculated by subtracting the number of Shares Recipient should have received based on the Recalculated 2020 Pro Forma EPS from the number of Shares
Recipient received under this Award (the "Excess Shares”) and (2) any dividend paid on the Excess Shares (the "Excess Dividends”). If any Excess
Shares are sold by Recipient before the Company’s demand for repayment (including any Shares withheld for taxes under Section 4 of this Agreement), in lieu
of repaying the Company the Excess Shares that were sold Recipient shall repay to the Company 100% of the proceeds of such sale or sales. The Committee
may, in its sole discretion, reduce the amount to be repaid by Recipient to take into account the tax consequences of such repayment for Recipient. No
additional RSUs shall be deemed Earned RSUs based on Recalculated 2020 Pro Forma EPS.
If any portion of the Excess Shares and Excess Dividends was deferred under the RSU Deferral Plan effective January 1, 2012 (the "Deferral
Plan”), that portion shall be recovered by canceling the amounts so deferred under the Deferral Plan and any dividends or other earnings credited under the
Deferral Plan with respect to such cancelled amounts. The Company may seek direct repayment from Recipient of any Excess Shares, Excess Dividends and
proceeds not so recovered and may, to the extent permitted by applicable law, offset such amounts against any compensation or other amounts owed by the
Company to Recipient. In particular, such amounts may be recovered by offset against the after-tax proceeds of deferred compensation payouts under the
Company’s Deferred Compensation Plan, the Company’s Supplemental Executive Retirement Plan at the times such deferred compensation payouts occur
under the terms of those plans. Amounts that remain unpaid for more than 60 days after demand by
(Senior Executives, 2020 Performance- and Time-vesting)
the Company shall accrue interest at the rate used from time to time for crediting interest under the Deferred Compensation Plan.
1.3 Settlement of Earned RSUs. There is no obligation for the Company to make payments or distributions with respect to RSUs except, subject to
the terms and conditions of this Agreement, the issuance of Shares to settle vested RSUs after the applicable Vesting Date. The Company’s issuance of one
Share for each vested Earned RSU ("Settlement”) may be subject to such conditions, restrictions and contingencies as the Committee shall determine. Unless
receipt of the Shares is validly deferred pursuant to the Deferral Plan, and except as otherwise provided in any Amended Employment and Change in Control
Agreement between the Company and Recipient (as the same may be amended and/or restated from time to time), Earned RSUs shall be settled as soon as
practicable after the applicable Vesting Date (each date of Settlement, a "Settlement Date”), but in no event later than March 15 of the calendar year
following the calendar year in which the Vesting Date occurs. Notwithstanding the foregoing, the payment dates set forth in this Section 1.3 have been
specified for the purpose of complying with the short-term deferral exception under Section 409A of the Internal Revenue Code of 1986 (the "Code”), and to
the extent payments are made during the periods permitted under Code Section 409A (including applicable periods before or after the specified payment dates
set forth in this Section 1.3), the Company shall be deemed to have satisfied its obligations under the Plan and shall be deemed not to be in breach of its
payment obligations hereunder.
1.4 Termination of Recipient’s Employment.
(a) Voluntary or Involuntary Termination. Except as otherwise provided in this Section 1.4, if Recipient’s employment with the Company or any
Subsidiary terminates as a result of a voluntary or involuntary termination, all outstanding unvested RSUs (whether or not determined to be Earned RSUs) shall
immediately be forfeited. Recipient shall not be treated as terminating employment if Recipient is on an approved leave of absence.
(b) Death. If Recipient’s employment with the Company or any Subsidiary terminates as a result of Recipient’s death that occurs on or after January
1, 2021, Earned RSUs shall continue to vest as scheduled in Section 1.2 of this Agreement.
(c) Disability. If Recipient becomes Disabled while employed by the Company or a Subsidiary, Earned RSUs shall continue to vest as scheduled in
Section 1.2 of this Agreement for so long as Recipient remains Disabled.
( d ) Qualified Retirement. If Recipient terminates employment due to a Qualified Retirement that occurs at least one year from the Date of
Grant, RSUs shall continue to vest as scheduled in Section 1.2 of this Agreement. A "Qualified Retirement” means Recipient voluntarily terminates
employment on or after such time as the Recipient’s has attained at least fifty-five (55) years of age and Recipient has completed a minimum of 10 years of
Service.
Notwithstanding anything in this Agreement to the contrary, in no event will any Settlement occur prior to the applicable Vesting and any unsettled RSUs shall
be forfeited without consideration immediately upon the breach of any of the following conditions:
(i) Compliance with non-solicit, non-compete, non-disparagement restrictive covenants and/or any other agreements that were signed while
employed during vesting period.
(Senior Executives, 2020 Performance- and Time-vesting)
(ii) Suspension or Termination of Awards for Misconduct of the Recipient. If at any time (including after receipt of a notice of exercise
or a request for delivery of vested shares) the Committee reasonably believes that a Recipient has committed an act of misconduct as
described in this Section 1.4(d)(ii), the Committee may suspend the Recipient’s right to exercise any Stock Option or SAR or to receive
delivery of vested shares under a Performance Share Award, Restricted Stock Award or Restricted Stock Unit Award pending a
determination of whether an act of misconduct has been committed by such Recipient. For purposes of this Section 1.4(d)(ii), acts of
misconduct shall mean (i) an act of embezzlement, fraud, dishonesty, breach of fiduciary duty, violation of securities laws involving the
Company, any of its Subsidiaries or any entity or person with whom the Company or any of its Subsidiaries does business, (ii) nonpayment of
any obligation to the Company or any Subsidiary, misappropriation or wrongful disclosure of any trade secret of the Company or any
Subsidiary, (iii) engaging in any conduct constituting unfair competition or inducing any entity or person with whom the Company or any of its
Subsidiaries does business to discontinue or materially reduce such business with the Company or its Subsidiaries and (iv) any similar conduct
that materially and adversely impacts or reflects on the Company. A Recipient accused of engaging in any such misconduct shall be provided
the opportunity to explain the Recipient’s conduct in writing. Any determination by the Committee as to whether or not a Recipient did engage
in misconduct within the meaning of this Section 1.4(d)(ii) shall be final, conclusive and binding on the all interested parties. If the Committee
determines that the Recipient did not engage in misconduct, the Company shall immediately give effect to any notice of exercise or request for
delivery of vested shares received prior to or during any period of suspension. The Company shall not have any liability to the Recipient for any
loss which the Recipient may have sustained as a result of any delay in delivering shares as a result of any suspension.
2. REPRESENTATIONS AND COVENANTS OF RECIPIENT
2.1 No Representations by or on Behalf of the Company. Recipient is not relying on any representation, warranty or statement made by the
Company or any agent, employee or officer, director, shareholder or other controlling person of the Company regarding the RSUs or this Agreement.
2.2 Tax Considerations. The Company has advised Recipient to seek Recipient’s own tax and financial advice with regard to the federal and state
tax considerations resulting from Recipient’s receipt of the Award, the vesting of the Award and Recipient’s receipt of the Shares upon Settlement of the
vested portion of the Award. Recipient understands that the Company, to the extent required by law, will report to appropriate taxing authorities the payment to
Recipient of compensation income upon the grant, vesting and/or Settlement of RSUs under the Award and Recipient shall be solely responsible for the
payment of all federal and state taxes resulting from such grant, vesting and/or Settlement.
2.3 Agreement to Enter into Lock-Up Agreement with an Underwriter. Recipient understands and agrees that whenever the Company
undertakes a firmly underwritten public offering of its securities, Recipient will, if requested to do so by the managing underwriter in such offering, enter into an
agreement not to sell or dispose of any securities of the Company owned or controlled by Recipient, including any of the RSUs or the Shares, provided that
such restriction will not extend beyond 12 months from the effective date of the registration statement filed in connection with such offering.
(Senior Executives, 2020 Performance- and Time-vesting)
3. GENERAL RESTRICTIONS OF TRANSFERS OF RSUS
3.1 No Transfers of RSUs. Recipient agrees for himself or herself and his or her executors, administrators and other successors in interest that
none of the RSUs, nor any interest therein, may be voluntarily or involuntarily sold, transferred, assigned, donated, pledged, hypothecated or otherwise disposed
of, gratuitously or for consideration.
3.2 Award Adjustments. The number of RSUs granted under this Award shall, at the discretion of the Committee, be subject to adjustment under
the Plan in the event the outstanding shares of Common Stock are hereafter increased, decreased, changed into or exchanged for a different number or kind of
shares of Common Stock or for other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation,
reclassification, stock split up, combination of shares of Common Stock, or dividend payable in shares of Common Stock or other securities of the Company. If
Recipient receives any additional RSUs pursuant to the Plan, such additional (or other) RSUs shall be deemed granted hereunder and shall be subject to the
same restrictions and obligations on the RSUs as originally granted as imposed by this Agreement.
3.3 Invalid Transfers. Any disposition of the RSUs other than in strict compliance with the provisions of this Agreement shall be void.
4. PAYMENT OF TAX WITHHOLDING AMOUNTS. To the extent the Company is responsible for withholding income taxes, Recipient must pay to
the Company or make adequate provision for the payment of all Tax Withholding. If any RSUs are scheduled to vest during a period in which trading is not
permitted under the Company’s insider trading policy, to satisfy the Tax Withholding requirement, Recipient irrevocably elects to settle the Tax Withholding
obligation by the Company withholding a number of Shares otherwise deliverable upon vesting having a market value sufficient to satisfy the statutory minimum
tax withholding of Recipient. If the Company later determines that additional Tax Withholding was or has become required beyond any amount paid or provided
for by Recipient, Recipient will pay such additional amount to the Company immediately upon demand by the Company. If Recipient fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the Company to Recipient.
5. MISCELLANEOUS PROVISIONS
5.1 Amendment and Modification. Except as otherwise provided by the Plan, this Agreement may be amended, modified and supplemented only
by written agreement of all of the parties hereto.
5.2 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by Recipient
without the prior written consent of the Company.
5.3 Governing Law. To the extent not preempted by federal law, this Agreement and the rights and obligations of the parties hereunder shall be
governed by and construed in accordance with the internal laws of the State of Oregon applicable to the construction and enforcement of contracts wholly
executed in Oregon by residents of Oregon and wholly performed in Oregon. Any action or proceeding brought by any party hereto shall be brought only in a
state or federal court of competent jurisdiction located in the County of Multnomah in the State of Oregon and all parties hereto hereby submit to the in
personal jurisdiction of such court for purposes of any such action or procedure.
(Senior Executives, 2020 Performance- and Time-vesting)
5.4 Arbitration. The parties agree to submit any dispute arising under this Agreement to final, binding, private arbitration in Portland, Oregon. This
includes not only disputes about the meaning or performance of this Agreement, but disputes about its negotiation, drafting or execution. The dispute will be
determined by a single arbitrator in accordance with the then-existing rules of arbitration procedure of Multnomah County, Oregon Circuit Court, except that
there shall be no right of de novo review in Circuit Court and the arbitrator may charge his or her standard arbitration fees rather than the fees prescribed in
the Multnomah County Circuit Court arbitration procedures. The proceeding will be commenced by the filing of a civil complaint in Multnomah County Circuit
Court and a simultaneous request for transfer to arbitration. The parties expressly agree that they may choose an arbitrator who is not on the list provided by
the Multnomah County Circuit Court Arbitration Department, but if they are unable to agree upon the single arbitrator within 10 days of receipt of the
Arbitration Department list, they will ask the Arbitration Department to make the selection for them. The arbitrator will have full authority to determine all
issues, including arbitrability; to award any remedy, including permanent injunctive relief; and to determine any request for costs and expenses in accordance
with Section 5.5 of this Agreement. The arbitrator’s award may be reduced to final judgment in Multnomah County Circuit Court. The complaining party shall
bear the arbitration expenses and may seek their recovery if it prevails. Notwithstanding any other provision of this Agreement, an aggrieved party may seek a
temporary restraining order or preliminary injunction in Multnomah County Circuit Court to preserve the status quo during the arbitration proceeding.
5.5 Attorney Fees. If any suit, action or proceeding is instituted in connection with any controversy arising out of this Agreement or the
enforcement of any right hereunder, the prevailing party will be entitled to recover, in addition to costs, such sums as the court or arbitrator may adjudge
reasonable as attorney fees, including fees on any appeal.
5.6 Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not constitute a part
hereof.
5.7 Entire Agreement. This Agreement and the Plan embody the entire agreement and understanding of the parties hereto in respect of the subject
matter contained herein and supersedes all prior written or oral communications or agreements all of which are merged herein. There are no restrictions,
promises, warranties, covenants or undertakings, other than those expressly set forth or referred to herein.
5.8 No Waiver. No waiver of any provision of this Agreement or any rights or obligations of any party hereunder shall be effective, except pursuant
to a written instrument signed by the party or parties waiving compliance, and any such waiver shall be effective only in the specific instance and for the
specific purpose stated in such writing.
5.9 Severability of Provisions. In the event that any provision hereof is found invalid or unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable according to its terms.
5.10 Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise set forth
herein, this Agreement shall be construed in accordance with the provisions of the Plan and any interpretations, amendments, rules and regulations promulgated
by the Committee from time to time pursuant to the Plan. The Committee shall have the final authority to interpret and construe the Plan and this Agreement
and to make any and all determinations under them, and its decision shall be final, binding and conclusive upon Recipient and his or her legal representative in
respect to any questions arising under the Plan or this Agreement.
(Senior Executives, 2020 Performance- and Time-vesting)
5.11 Notices. All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed duly given if delivered
personally or by courier service, or if mailed by certified mail, return receipt requested, prepaid and addressed to the Company executive offices to the attention
of the Corporate Secretary, or if to Recipient, to the address maintained by the personnel department, or such other address as such party shall have furnished
to the other party in writing.
5.12 Acceptance of Agreement. Unless Recipient notifies the Corporate Secretary in writing within 14 days after the Date of Grant that Recipient
does not wish to accept this Agreement, Recipient will be deemed to have accepted this Agreement and will be bound by the terms of this Agreement and the
Plan.
5.13 No Right of Employment. Nothing contained in the Plan or this Agreement shall be construed as giving Recipient any right to be retained, in
any position, as an employee of the Company or any Subsidiary.
[Remainder of this page left blank intentionally.]
(Senior Executives, 2020 Performance- and Time-vesting)
Recipient and the Company have executed this Agreement effective as of the Date of Grant.
RECIPIENT
Signature
Type or Print Name:
Social Security Number:
COMPANY LITHIA MOTORS, INC.
By:
Name: Chris Holzshu
Title: Executive Vice President
* Please take the time to read and understand this Agreement. If you have any specific questions or do not fully understand any of the
provisions, please contact stockinfo@lithia.com.
LITHIA MOTORS, INC.
RESTRICTED STOCK UNIT AGREEMENT
(2020 Time-vesting)
(Non-executives, 2020 Time-vesting)
This Restricted Stock Unit Agreement ("Agreement”) is entered into pursuant to the 2013 Amended and Restated Stock Incentive Plan (the "Plan”)
adopted by the Board of Directors and Shareholders of Lithia Motors, Inc., an Oregon corporation (the "Company”), as amended from time to time. Unless
otherwise defined herein, capitalized terms in this Agreement have the meanings given to them in the Plan. Any inconsistency between this Agreement and the
terms and conditions of the Plan will be resolved in favor of the Plan.
"Recipient” []
Number of Restricted Stock Units ("RSUs”) []
"Date of Grant” []
1. GRANT OF RESTRICTED STOCK UNIT AWARD
1.1 The Grant. The Company hereby awards to Recipient, and Recipient hereby accepts, the RSUs specified above on the terms and conditions set
forth in this Agreement and the Plan (the "Award”). Each RSU represents the right to receive one share of Class A Common Stock of the Company (a
"Share”) on an applicable Settlement Date, as defined in Section 1.3 of this Agreement, subject to the terms of this Agreement and the Plan.
1.2 Vesting. Subject to the continued employment of Recipient with the Company or any Subsidiary, the RSUs (rounded to the nearest whole RSU)
shall vest on the dates set forth in the table below (each, a "Vesting Date”).
Vesting Date
January 1, 2022
January 1, 2023
January 1, 2024
Vesting of
Award
33%
33%
34%
Vested RSUs
[ ]
[ ]
[ ]
1.3 Settlement of RSUs. There is no obligation for the Company to make payments or distributions with respect to RSUs except for the issuance of
Shares to settle vested RSUs after the applicable Vesting Date. The Company’s issuance of one Share for each vested RSU ("Settlement”) may be subject
to such conditions, restrictions and contingencies as the Committee shall determine. Unless receipt of the Shares is validly deferred pursuant to the RSU
Deferral Plan effective January 1, 2012, RSUs shall be settled as soon as practicable after the applicable Vesting Date (each date of Settlement, a
"Settlement Date”), but in no event later than March 15 of the calendar year following the calendar year in which the Vesting Date occurs. Notwithstanding
the foregoing, the payment dates set forth in this Section 1.3 have been specified for the purpose of complying with the short-term deferral exception under
Section 409A of the Internal Revenue Code of 1986, and to the extent payments are made during the periods permitted under Section 409A (including
applicable periods before or after the specified payment dates set forth in this Section 1.3), the Company shall be deemed to have satisfied its obligations under
the Plan and shall be deemed not to be in breach of its payment obligations hereunder.
(Non-executives, 2020 Time-vesting)
1.4 Termination of Recipient’s Employment.
(a) Voluntary or Involuntary Termination. Except as otherwise provided in this Section 1.4, if Recipient’s employment with the Company or any
Subsidiary terminates as a result of a voluntary or involuntary termination, all outstanding unvested RSUs shall immediately be forfeited. Recipient shall not be
treated as terminating employment if Recipient is on an approved leave of absence.
(b) Death. If Recipient’s employment with the Company or any Subsidiary terminates as a result of Recipient’s death that occurs on or after January
1, 2021, RSUs shall continue to vest as scheduled in Section 1.2 of this Agreement.
(c) Disability. If Recipient becomes Disabled while employed by the Company or a Subsidiary, RSUs shall continue to vest as scheduled in Section
1.2 of this Agreement for so long as Recipient remains Disabled.
( d ) Qualified Retirement. If Recipient terminates employment due to a Qualified Retirement that occurs at least one year from the Date of
Grant, RSUs shall continue to vest as scheduled in Section 1.2 of this Agreement. A "Qualified Retirement” means Recipient voluntarily terminates
employment on or after such time as the Recipient’s has attained at least fifty-five (55) years of age and Recipient has completed a minimum of 10 years of
Service.
Notwithstanding anything in this Agreement to the contrary, in no event will any Settlement occur prior to the applicable Vesting and any unsettled RSUs shall
be forfeited without consideration immediately upon the breach of any of the following conditions:
(i) Compliance with non-solicit, non-compete, non-disparagement restrictive covenants and/or any other agreements that were signed while
employed during vesting period.
(ii) Suspension or Termination of Awards for Misconduct of the Recipient. If at any time (including after receipt of a notice of exercise
or a request for delivery of vested shares) the Committee reasonably believes that a Recipient has committed an act of misconduct as
described in this Section 1.4(d)(ii), the Committee may suspend the Recipient’s right to exercise any Stock Option or SAR or to receive
delivery of vested shares under a Performance Share Award, Restricted Stock Award or Restricted Stock Unit Award pending a
determination of whether an act of misconduct has been committed by such Recipient. For purposes of this Section 1.4(d)(ii), acts of
misconduct shall mean (i) an act of embezzlement, fraud, dishonesty, breach of fiduciary duty, violation of securities laws involving the
Company, any of its Subsidiaries or any entity or person with whom the Company or any of its Subsidiaries does business, (ii) nonpayment of
any obligation to the Company or any Subsidiary, misappropriation or wrongful disclosure of any trade secret of the Company or any
Subsidiary, (iii) engaging in any conduct constituting unfair competition or inducing any entity or person with whom the Company or any of its
Subsidiaries does business to discontinue or materially reduce such business with the Company or its Subsidiaries and (iv) any similar conduct
that materially and adversely impacts or reflects on the Company. A Recipient accused of engaging in any such misconduct shall be provided
the opportunity to explain the Recipient’s conduct in writing. Any determination by the Committee as to whether or not a Recipient did engage
in misconduct within the meaning of this
Section 1.4(d)(ii) shall be final, conclusive and binding on the all interested parties. If the Committee determines that the Recipient did not
engage in misconduct, the Company shall immediately give effect to any notice of exercise or request for delivery of vested shares received
prior to or during any period of suspension. The Company shall not have any liability to the Recipient for any loss which the Recipient may
have sustained as a result of any delay in delivering shares as a result of any suspension.
(Non-executives, 2020 Time-vesting)
2. REPRESENTATIONS AND COVENANTS OF RECIPIENT
2.1 No Representations by or on Behalf of the Company. Recipient is not relying on any representation, warranty or statement made by the
Company or any agent, employee or officer, director, shareholder or other controlling person of the Company regarding the RSUs or this Agreement.
2.2 Tax Considerations. The Company has advised Recipient to seek Recipient’s own tax and financial advice with regard to the federal and state
tax considerations resulting from Recipient’s receipt of the Award and Recipient’s receipt of the Shares upon Settlement of the vested portion of the Award.
Recipient understands that the Company, to the extent required by law, will report to appropriate taxing authorities the payment to Recipient of compensation
income upon the Settlement of RSUs under the Award and Recipient shall be solely responsible for the payment of all federal and state taxes resulting from
such Settlement.
2.3 Agreement to Enter into Lock-Up Agreement with an Underwriter. Recipient understands and agrees that whenever the Company
undertakes a firmly underwritten public offering of its securities, Recipient will, if requested to do so by the managing underwriter in such offering, enter into an
agreement not to sell or dispose of any securities of the Company owned or controlled by Recipient, including any of the RSUs or the Shares, provided that
such restriction will not extend beyond 12 months from the effective date of the registration statement filed in connection with such offering.
3. GENERAL RESTRICTIONS OF TRANSFERS OF UNVESTED RSUS
3.1 No Transfers of Unvested RSUs. Recipient agrees for himself or herself and his or her executors, administrators and other successors in
interest that none of the RSUs, nor any interest therein, may be voluntarily or involuntarily sold, transferred, assigned, donated, pledged, hypothecated or
otherwise disposed of, gratuitously or for consideration prior to their vesting in accordance with this Agreement.
3.2 Award Adjustments. The number of RSUs granted under this Award shall, at the discretion of the Committee, be subject to adjustment under
the Plan in the event the outstanding shares of Common Stock are hereafter increased, decreased, changed into or exchanged for a different number or kind of
shares of Common Stock or for other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation,
reclassification, stock split up, combination of shares of Common Stock, or dividend payable in shares of Common Stock or other securities of the Company. If
Recipient receives any additional RSUs pursuant to the Plan, such additional (or other) RSUs shall be deemed granted hereunder and shall be subject to the
same restrictions and obligations on the RSUs as originally granted as imposed by this Agreement.
3.3 Invalid Transfers. Any disposition of the RSUs other than in strict compliance with the provisions of this Agreement shall be void.
4. PAYMENT OF TAX WITHHOLDING AMOUNTS.
Award Recipient must pay to the Company or make
To the extent the Company is responsible for withholding income taxes, upon the vesting of the
adequate provision for the payment of all Tax Withholding. If any RSUs are scheduled to vest during a period in which trading is not permitted under the
Company’s insider trading policy, to satisfy the Tax Withholding requirement, Recipient irrevocably elects to settle the Tax Withholding obligation by the
Company withholding a number of Shares otherwise deliverable upon vesting having a market value sufficient to satisfy the statutory minimum tax withholding
of Recipient. If the Company later determines that additional Tax Withholding was or has become required beyond any amount paid or provided for by
Recipient, Recipient will pay such additional amount to the Company immediately upon demand by the Company. If Recipient fails to pay the amount
demanded, the Company may withhold that amount from other amounts payable by the Company to Recipient.
(Non-executives, 2020 Time-vesting)
5. MISCELLANEOUS PROVISIONS
5.1 Amendment and Modification. Except as otherwise provided by the Plan, this Agreement may be amended, modified and supplemented only
by written agreement of all of the parties hereto.
5.2 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by Recipient
without the prior written consent of the Company.
5.3 Governing Law. To the extent not preempted by federal law, this Agreement and the rights and obligations of the parties hereunder shall be
governed by and construed in accordance with the internal laws of the State of Oregon applicable to the construction and enforcement of contracts wholly
executed in Oregon by residents of Oregon and wholly performed in Oregon. Any action or proceeding brought by any party hereto shall be brought only in a
state or federal court of competent jurisdiction located in the County of Multnomah in the State of Oregon and all parties hereto hereby submit to the in
personal jurisdiction of such court for purposes of any such action or procedure.
5.4 Arbitration. The parties agree to submit any dispute arising under this Agreement to final, binding, private arbitration in Portland, Oregon. This
includes not only disputes about the meaning or performance of this Agreement, but disputes about its negotiation, drafting, or execution. The dispute will be
determined by a single arbitrator in accordance with the then-existing rules of arbitration procedure of Multnomah County, Oregon Circuit Court, except that
there shall be no right of de novo review in Circuit Court and the arbitrator may charge his or her standard arbitration fees rather than the fees prescribed in
the Multnomah County Circuit Court arbitration procedures. The proceeding will be commenced by the filing of a civil complaint in Multnomah County Circuit
Court and a simultaneous request for transfer to arbitration. The parties expressly agree that they may choose an arbitrator who is not on the list provided by
the Multnomah County Circuit Court Arbitration Department, but if they are unable to agree upon the single arbitrator within ten days of receipt of the
Arbitration Department list, they will ask the Arbitration Department to make the selection for them. The arbitrator will have full authority to determine all
issues, including arbitrability; to award any remedy, including permanent injunctive relief; and to determine any request for costs and expenses in accordance
with Section 5.5 of this Agreement. The arbitrator’s award may be reduced to final judgment in Multnomah County Circuit Court. The complaining party shall
bear the arbitration expenses and may seek their recovery if it prevails. Notwithstanding any other provision of this Agreement, an aggrieved party may seek a
temporary restraining order or preliminary injunction in Multnomah County Circuit Court to preserve the status quo during the arbitration proceeding.
(Non-executives, 2020 Time-vesting)
5.5 Attorney Fees. If any suit, action, or proceeding is instituted in connection with any controversy arising out of this Agreement or the
enforcement of any right hereunder, the prevailing party will be entitled to recover, in addition to costs, such sums as the court or arbitrator may adjudge
reasonable as attorney fees, including fees on any appeal.
5.6 Headings. The headings of the sections and subsections of this Agreement are inserted for convenience only and shall not constitute a part
hereof.
5.7 Entire Agreement. This Agreement and the Plan embody the entire agreement and understanding of the parties hereto in respect of the subject
matter contained herein and supersedes all prior written or oral communications or agreements all of which are merged herein. There are no restrictions,
promises, warranties, covenants, or undertakings, other than those expressly set forth or referred to herein.
5.8 No Waiver. No waiver of any provision of this Agreement or any rights or obligations of any party hereunder shall be effective, except pursuant
to a written instrument signed by the party or parties waiving compliance, and any such waiver shall be effective only in the specific instance and for the
specific purpose stated in such writing.
5.9 Severability of Provisions. In the event that any provision hereof is found invalid or unenforceable pursuant to judicial decree or decision, the
remainder of this Agreement shall remain valid and enforceable according to its terms.
5.10 Incorporation by Reference, Etc. The provisions of the Plan are hereby incorporated herein by reference. Except as otherwise set forth
herein, this Agreement shall be construed in accordance with the provisions of the Plan and any interpretations, amendments, rules and regulations promulgated
by the Committee from time to time pursuant to the Plan. The Committee shall have the final authority to interpret and construe the Plan and this Agreement
and to make any and all determinations under them, and its decision shall be final, binding and conclusive upon Recipient and his or her legal representative in
respect to any questions arising under the Plan or this Agreement.
5.11 Notices. All notices or other communications pursuant to this Agreement shall be in writing and shall be deemed duly given if delivered
personally or by courier service, or if mailed by certified mail, return receipt requested, prepaid and addressed to the Company executive offices to the attention
of the Corporate Secretary, or if to Recipient, to the address maintained by the personnel department, or such other address as such party shall have furnished
to the other party in writing.
5.12 Acceptance of Agreement. Unless Recipient notifies the Corporate Secretary in writing within 14 days after the Date of Grant that Recipient
does not wish to accept this Agreement, Recipient will be deemed to have accepted this Agreement and will be bound by the terms of this Agreement and the
Plan.
5.13 No Right of Employment. Nothing contained in the Plan or this Agreement shall be construed as giving Recipient any right to be retained, in
any position, as an employee of the Company or any Subsidiary.
[Remainder of this page left blank intentionally.]
(Non-executives, 2020 Time-vesting)
Recipient and the Company have executed this Agreement effective as of the Grant Date.
RECIPIENT
Signature
Type or Print Name:
Social Security Number:
COMPANY LITHIA MOTORS, INC.
By:
Name: Chris Holzshu
Title: Executive Vice President
* Please take the time to read and understand this Agreement. If you have any specific questions or do not fully understand any of the
provisions, please contact stockinfo@lithia.com in writing.
(Non-executives, 2019 Time-vesting)
Recipient and the Company have executed this Agreement effective as of the Grant Date.
RECIPIENT
Signature
Type or Print Name:
Social Security Number:
COMPANY LITHIA MOTORS, INC.
By:
Name: Chris Holzshu
Title: Executive Vice President
* Please take the time to read and understand this Agreement. If you have any specific questions or do not fully understand any of the
provisions, please contact stockinfo@lithia.com in writing.
99531438.2 0063724-00008
AMENDMENT NO. 1
TO THE
LITHIA MOTORS, INC.
EXECUTIVE MANAGEMENT NON-QUALIFIED DEFERRED COMPENSATION
AND LONG-TERM INCENTIVE PLAN
EX 10.10.3
WHEREAS, Lithia Motors, Inc. (the "Company”) established and maintains the Lithia Motors, Inc. Executive Management Non-Qualified Deferred
Compensation and Long-Term Incentive Plan, effective February 22, 2011 (the "Plan”); and
WHEREAS, Section 9.1(a) of the Plan grants the Compensation Committee of the Company’s Board (the "Committee”) authority to amend the Plan
for the purpose of clarifying the Plan type; and
WHEREAS, the Compensation Committee desires to amend the Plan, effective September 1, 2018, to change the Plan name.
NOW, THEREFORE, the Plan is hereby amended, in the following respects:
"Lithia Motors, Inc. Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan” is hereby renamed "Lithia Motors, Inc.
Executive Management Non-Qualified Deferred Compensation and Supplemental Executive Retirement Plan” and is replaced in each place it occurs in the
Plan document.
IN WITNESS WHEREOF, the undersigned executed this Amendment No. 1 as of September 1, 2018.
LITHIA MOTORS, INC.
Carla Hegler, Director
Name, Title
SUBSIDIARIES OF LITHIA MOTORS, INC.
(as of December 31, 2019)
EXHIBIT 21
NAME OF ENTITY
STATE OF ORIGIN
ASSUMED BUSINESS NAME(S)
(if different than entity name)
797 Valley Street LLC
Baierl Auto Parts, LLC
Baierl Automotive Corporation
Baierl Chevrolet, Inc.
Baierl Holding, LLC
Cadillac of Portland Lloyd Center, LLC
Camp Automotive, Inc.
Carbone Auto Body, LLC
Cranberry Automotive, Inc.
Dah Chong Hong CA Trading LLC
Dah Chong Hong Trading Corporation
Daron Motors LLC
DCH Bloomfield LLC
New Jersey
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Oregon
Washington
New York
Pennsylvania
Delaware
New Jersey
New Jersey
New Jersey
DCH (Oxnard) Inc.
California
DCH Auto Group (USA) Inc.
Delaware
DCH CA LLC
DCH Calabasas-A, LLC
DCH California Investments LLC
DCH California Motors Inc.
DCH Del Norte, Inc.
DCH DMS NJ, LLC
DCH Essex Inc.
DCH Financial NJ, LLC
DCH Freehold - V, LLC
California
California
California
California
California
New Jersey
New Jersey
New Jersey
New Jersey
Baierl Acura
Baierl Chevrolet
Baierl Chevrolet Cadillac
Cadillac of Portland
Camp Chevrolet
Camp Cadillac
Baierl Toyota
DCH Academy Honda
Academy Honda
DCH Bloomfield BMW
DCH Essex BMW
Essex BMW
BMW of Bloomfield
Parkway BMW
DCH Honda of Oxnard
Honda of Oxnard
Supercraft Auto Body & Paint
DCH Used Car Superstore
DCH Acura of Temecula
DCH Acura Temecula
Audi Calabasas
DCH Toyota of Oxnard
Toyota of Oxnard
DCH Lexus of Oxnard
Lexus of Oxnard
DCH Millburn Audi
DCH Volkswagen of Freehold
DCH Freehold LLC
DCH Holdings LLC
DCH Investments Inc. (New Jersey)
DCH Investments Inc. (New York)
DCH Korean Imports LLC
DCH Mamaroneck LLC
DCH Mission Valley LLC
DCH Monmouth LLC
DCH Montclair LLC
DCH Motors LLC
DCH Nanuet LLC
DCH North America Inc.
DCH NY Motors LLC
DCH Oxnard 1521 Imports Inc.
DCH Riverside-S, Inc.
DCH Simi Valley Inc.
DCH Support Services, LLC
DCH Temecula Imports LLC
DCH Temecula Motors LLC
DCH Thousand Oaks-F, Inc.
DCH TL Holdings LLC
DCH TL NY Holdings LLC
DCH Torrance Imports Inc.
Driveway Motors, LLC
Elizabeth Collision, LLC
Lithia Florida Holding, Inc.
Florida SS, LLC
Freehold Nissan LLC
Fuse Auto Sales, LLC
Hutchins Eugene Nissan, Inc.
Hutchins Imported Motors, Inc.
New Jersey
Delaware
New Jersey
New York
California
Delaware
California
New Jersey
New Jersey
New Jersey
New York
Delaware
Delaware
California
California
California
New Jersey
California
California
California
Delaware
Delaware
California
Delaware
Pennsylvania
Florida
Florida
New Jersey
Oregon
Oregon
Oregon
Freehold Toyota
DCH Freehold Toyota
DCH Freehold Scion
Dah Chong Hong (USA)
DCH Kia of Temecula
DCH Toyota City
DCH Honda of Mission Valley
BMW of Freehold
Montclair Acura
DCH Montclair Acura
Kay Honda
DCH Motors
DCH Kay Honda
DCH Honda of Nanuet
DCH Wappingers Falls Toyota
DCH Wappingers Falls Auto Group
DCH Audi of Oxnard
Audi of Oxnard
DCH Subaru of Riverside
DCH Honda of Temecula
DCH Honda Temecula
DCH Chrysler Jeep Dodge of Temecula
DCH Chrysler Jeep of Temecula
DCH Dodge Temecula
DCH Ford of Thousand Oaks
DCH Toyota of Torrance
Torrance Toyota
Day Collision Center
DCH Freehold Nissan
Freehold Nissan
Lithia Nissan of Eugene
Lithia Toyota of Springfield
LA Motors Holding, LLC
LAD Advertising, Inc.
LAD Carson-N, LLC
LAD Mission Viejo-JLR, Inc.
LAD Mobu, Inc.
LAD-AU, LLC
LAD-MB, LLC
LAD-N, LLC
LAD-P, LLC
LAD-T, LLC
LAD-V, LLC
LBMP, LLC
LFKF, LLC
LGPAC, Inc.
Lithia AcDM, Inc.
Lithia Aircraft, Inc.
Lithia Anchorage-C, LLC
Lithia Anchorage-H, LLC
Lithia Armory Garage, LLC
Lithia Auction & Recon, LLC
Lithia Auto Services, Inc.
Lithia Automotive, Inc.
Lithia BA Holding, Inc.
Lithia Baierl-S, LLC
Lithia BNM, Inc. (non-operating)
Lithia Bryan Texas, Inc.
Lithia Buffalo-A, LLC
Lithia CCTF, Inc.
Lithia CDH, Inc.
Lithia CIMR, Inc.
Lithia CJDO, Inc.
Lithia CJDSA, Inc.
Lithia CJDSF, Inc.
Lithia CM, Inc.
Lithia CO, Inc.
California
Oregon
California
California
Delaware
California
California
California
California
California
California
Oregon
Oregon
Oregon
Iowa
Oregon
Alaska
Alaska
Delaware
Delaware
Oregon
October 10, 1996
South Dakota
Delaware
Pennsylvania
Oregon
Texas
Delaware
Idaho
Montana
California
Texas
Texas
New Mexico
Texas
Texas
LAD Advertising
LAD Printing
The Print Shop at the Commons
The Print Shop
Carson Nissan
Jaguar Land Rover Mission Viejo
Audi Downtown LA
Mercedes-Benz of Downtown LA
Downtown LA Motors
Nissan of Downtown LA
Porsche of Downtown LA
Toyota of Downtown LA
Volkswagen of Downtown LA
BMW Portland
Lithia Ford of Klamath Falls
Lithia’s Grants Pass Auto Center
Xpress Lube
Acura of Johnston
Chevrolet of Wasilla
Armory Chrysler Dodge Jeep Ram Fiat of Albany
Auction & Recon
Lithia Body & Paint
Assured Dealer Services
Baierl Subaru
Lithia Chrysler Jeep Dodge of Bryan College Station
Ray Laks Acura of Buffalo
Chevrolet of Twin Falls
Lithia Chrysler Jeep Dodge of Helena
Lithia Chevrolet of Redding
All American Chrysler Jeep Dodge of Odessa
All American Chrysler Dodge Jeep Fiat of San Angelo
All American Autoplex
Lithia Chrysler Dodge Jeep Fiat of Santa Fe
All American Chevrolet of Midland
All American Chevrolet of Odessa
All American Collision
Lithia Community Development Company, Inc.
Oregon
Lithia Crater Lake-F, Inc.
Lithia Crater Lake-M, Inc.
Lithia CSA, Inc.
Lithia DE, Inc.
Lithia Des Moines-VW, LLC
Lithia DM, Inc.
Lithia DMID, Inc.
Delaware
Delaware
Texas
Oregon
Iowa
Oregon
Texas
Lithia Dodge of Tri-Cities, Inc.
Washington
Lithia Eatontown-F, LLC
Lithia Financial Corporation (previously Lithia
Leasing, Inc. and Lithia Credit, Inc.)
Lithia FLCC, LLC
Lithia FMF, Inc.
Lithia Ford of Boise, Inc.
Lithia Fresno, Inc.
Lithia Hamilton-H, LLC
Lithia Hazleton-H, LLC
Lithia HDM, Inc.
Lithia HGF, Inc.
Lithia HMID, Inc.
Lithia HPI, Inc. (non-operating)
Lithia Idaho Falls-F, Inc.
Lithia Imports of Anchorage, Inc.
Lithia JEF, Inc.
Lithia Klamath, Inc.
Lithia Klamath-T, Inc.
Lithia LBGGF, Inc.
Lithia LHGF, Inc.
Lithia LSGF, Inc.
Lithia MBDM, Inc.
New Jersey
Oregon
Texas
California
Idaho
California
New Jersey
Pennsylvania
Iowa
Montana
Texas
Oregon
Delaware
Alaska
California
Oregon
Oregon
Montana
Montana
Montana
Iowa
Lithia McMurray-C, LLC
Pennsylvania
Crater Lake Ford Lincoln
Crater Lake Mazda
All American Chevrolet of San Angelo
Lithia Chrysler Dodge Jeep Ram Fiat of Eugene
Lithia Volkswagen of Des Moines
Lithia Chrysler, Jeep, Dodge
Lithia Dodge
Xpress Lube
All American Dodge of Midland
All American Chrysler Jeep Dodge of Midland
Lithia Dodge of Tri-Cities
Lithia Chrysler Jeep Dodge of Tri-Cities
DCH Ford of Eatontown
Lithia Leasing
Access Ford Lincoln of Corpus Christy
Lithia Ford of Fresno
Lithia Ford Lincoln of Fresno
Lithia Ford Lincoln of Boise
Lithia Ford of Boise
Auto Credit of Idaho
Lithia Body & Paint of Boise
Lithia Subaru of Fresno
Fresno Mitsubishi
DCH Hamilton Honda
Honda of Ames
Honda of Great Falls
Hyundai of Odessa
Lithia Ford of Idaho Falls
Lithia Body and Paint of Idaho Falls
Lithia Anchorage Auto Body
Lithia-Hyundai of Anchorage
Lithia Hyundai of Fresno
Genesis of Fresno
Lithia Chrysler Jeep Dodge of Klamath Falls
Lithia Toyota of Klamath Falls
Lithia Klamath Falls Auto Center
Lithia Body and Paint of Klamath Falls
Lithia Toyota of Klamath Falls
Lithia Subaru of Great Falls
Mercedes Benz of Des Moines
European Motorcars Des Moines
Lithia Medford HON, Inc.
Lithia Middletown-L, LLC
Lithia MMF, Inc.
Lithia Monroeville-A, LLC
Lithia Monroeville-C, LLC
Lithia Monroeville-F, LLC
Lithia Monroeville-V, LLC
Lithia Moon-S, LLC
Lithia Moon-V, LLC
Lithia Morgantown-CJD, LLC
Lithia Morgantown-F, LLC
Lithia Morgantown-S, LLC
Lithia Motors Support Services, Inc.
Lithia MTLM, Inc.
Lithia NA, Inc.
Lithia NC, Inc.
Lithia ND Acquisition Corp. #1
Lithia ND Acquisition Corp. #3
Lithia ND Acquisition Corp. #4
Lithia NDM, Inc.
Lithia NF, Inc.
Lithia Northeast Real Estate, LLC
Lithia NSA, Inc.
Lithia of Abilene, Inc.
Lithia of Anchorage, Inc.
Lithia of Bend #1, LLC
Lithia of Bend #2, LLC
Lithia of Bennington - 1, LLC
Lithia of Bennington - 2, LLC
Lithia of Bennington - 3, LLC
Lithia of Bennington - 4, LLC
Lithia of Billings II LLC
Lithia of Billings, Inc.
Lithia of Casper, LLC
Lithia of Clear Lake, LLC
Lithia of Concord I, Inc.
Lithia of Concord II, Inc.
Oregon
New York
California
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
Pennsylvania
West Virginia
West Virginia
West Virginia
Oregon
Oregon
Alaska
California
North Dakota
North Dakota
North Dakota
Iowa
California
New Jersey
Texas
Texas
Alaska
Oregon
Oregon
Vermont
Vermont
Vermont
Vermont
Montana
Montana
Wyoming
Texas
California
California
Lithia Honda
DCH Prestige Lexus of Middletown
Lexus of Orange County
Ford of Monroeville
Subaru of Moon Township
Day Apollo Volkswagen
Lithia’s LAD Travel Service
Lithia Toyota
Lithia’s Pre-Owned Outlet
BMW of Anchorage
MINI of Anchorage
Nissan of Clovis
Lithia Ford Lincoln of Grand Forks
Lithia Chrysler Jeep Dodge of Grand Forks
Lithia Toyota of Grand Forks
Lithia Nissan of Fresno
Honda of Abilene
Lithia Chrysler Dodge Jeep Ram Fiat of Anchorage
Lithia Value Autos
Bend Honda
Chevrolet Cadillac of Bend
Lithia Body & Paint of Bend
Carbone Ford of Bennington
Carbone Hyundai of Bennington
Carbone Honda of Bennington
Carbone Toyota of Bennington
Lithia Toyota of Billings
Lithia Chrysler Jeep Dodge of Billings
Greiner Ford Lincoln of Casper
Subaru of Clear Lake
Lithia of Corpus Christi, Inc.
Lithia of Des Moines, Inc.
Lithia of Eureka, Inc.
Lithia of Fairbanks, Inc.
Lithia of Great Falls, Inc.
Lithia of Helena, Inc.
Lithia of Honolulu-A, Inc.
Lithia of Honolulu-BGMCC, LLC
Lithia of Honolulu-F, LLC
Lithia of Honolulu-V, LLC
Lithia of Killeen, LLC
Lithia of Lodi, Inc.
Lithia of Maui-H, LLC
Lithia of Missoula II, LLC
Lithia of Missoula III, Inc.
Lithia of Missoula, Inc.
Lithia of Pocatello, Inc.
Lithia of Portland I, LLC
Lithia of Portland, LLC
Lithia of Robstown, LLC
Lithia of Roseburg, Inc.
Lithia of Santa Rosa, Inc.
Lithia of Seattle, Inc.
Lithia of South Central AK, Inc.
Lithia of Spokane II, Inc.
Lithia of Spokane, Inc.
Lithia of Stockton, Inc.
Lithia of Stockton-V, Inc.
Lithia of TF, Inc.
Lithia of Troy, LLC
Lithia of Utica - 1, LLC
Lithia of Utica - 2, LLC
Lithia of Utica - 3, LLC
Lithia of Utica - 4, LLC
Lithia of Walnut Creek, Inc.
Lithia of Wasilla, LLC
Texas
Iowa
California
Alaska
Montana
Montana
Hawaii
Hawaii
Delaware
Hawaii
Texas
California
Hawaii
Montana
Montana
Montana
Idaho
Oregon
Oregon
Delaware
Oregon
California
Washington
Alaska
Washington
Washington
California
California
Idaho
New York
New York
New York
New York
Delaware
California
Alaska
Lithia Dodge of Corpus Christi
Lithia Chrysler Jeep Dodge of Corpus Christi
BMW of Des Moines
European Motorcars Des Moines
Lithia Body and Paint of Des Moines
Lithia Chrysler Dodge Jeep Ram Fiat of Eureka
Chevrolet Buick GMC of Fairbanks
Lithia Chrysler Jeep Dodge of Great Falls
Chevrolet of Helena
Acura of Honolulu
Honolulu Cadillac
Honolulu Buick GMC
Honolulu Buick GMC Cadillac
Honolulu Ford
Honolulu Volkswagen
All American Chevrolet of Killeen
Lodi Toyota
Island Honda
Lithia Toyota of Missoula
Lithia Ford of Missoula
Lithia Chrysler Jeep Dodge of Missoula
Lithia Auto Center of Missoula
Lithia Hyundai of Pocatello
Lithia Chrysler Jeep Dodge of Pocatello
Lithia Dodge Trucks of Pocatello
Lithia Chrysler Dodge Jeep Ram of Portland
Buick GMC of Beaverton
Chrysler Dodge Jeep Ram of Calallen
Lithia Chrysler Jeep Dodge of Roseburg
Lithia Roseburg Auto Center
Lithia Chrysler Dodge Jeep Ram Fiat of Santa Rosa
BMW Seattle
Chevrolet of South Anchorage
Lithia Chrysler Dodge Jeep Ram of Spokane
Nissan of Stockton
Kia of Stockton
Volkswagen of Stockton
Lithia Chrysler Jeep Dodge of Twin Falls
Carbone Subaru
BMW of Utica
Don’s Ford
Don’s Subaru
Carbone Buick GMC Cadillac of Utica
Carbone Cadillac of Utica
Diablo Subaru of Walnut Creek
Lithia Chrysler Jeep Dodge Ram of Wasilla
Lithia of Yorkville - 1, LLC
Lithia of Yorkville - 2, LLC
Lithia of Yorkville - 3, LLC
Lithia of Yorkville - 4, LLC
Lithia of Yorkville - 5, LLC
Lithia Orchard Park-H, LLC
New York
New York
New York
New York
New York
Delaware
Lithia Paramus-M, LLC
New Jersey
Lithia Pittsburgh-S, LLC
Lithia Ramsey-B, LLC
Lithia Ramsey-L, LLC
Lithia Ramsey-M, LLC
Pennsylvania
New Jersey
New Jersey
New Jersey
Lithia Ramsey-T, LLC
New Jersey
Lithia Real Estate, Inc.
Lithia Reno-CJ, LLC
Lithia Reno-VW, LLC
Lithia Reno Sub-HYUN, Inc.
Lithia Rose-FT, Inc.
Lithia Salmir, Inc.
Lithia Sea P, Inc.
Lithia Seaside, Inc.
Lithia SOC, Inc.
Lithia Spokane-B, LLC
Lithia Spokane-S, LLC
Lithia SSP, LLC
Lithia TA, Inc.
Lithia TO, Inc.
Lithia TR, Inc.
Lithia Uniontown-C, LLC
Lithia VAuDM, Inc.
Lithia VF, Inc.
Lithia Wexford-H, LLC
LLL Sales Co LLC
Oregon
Nevada
Nevada
Nevada
Oregon
Nevada
California
California
Oregon
Washington
Washington
Oregon
Texas
Texas
California
Pennsylvania
Iowa
California
Pennsylvania
California
Carbone Chevrolet Buick Cadillac GMC
Carbone Chevrolet of Utica
Carbone Chrysler Dodge Jeep Ram
Carbone Honda
Carbone Hyundai
Carbone Nissan
Ray Laks Honda of Orchard Park
Ray Laks Honda
Prestige Mercedes-Benz of Paramus
DCH Prestige Mercedes-Benz of Paramus
Mercedes-Benz of Paramus
Subaru of South Hills
Prestige BMW of Ramsey
DCH Prestige BMW of Ramsey
BMW of Ramsey
Prestige Lexus of Ramsey
DCH Prestige Lexus of Ramsey
Prestige MINI of Ramsey
DCH Prestige MINI of Ramsey
MINI of Ramsey
Prestige MINI of Dutchess County
DCH Prestige MINI of Dutchess County
MINI of Wappingers Falls
Prestige Toyota of Ramsey
DCH Prestige Toyota of Ramsey
Lithia Chrysler Jeep of Reno
Lithia Volkswagen of Reno
Lithia Body & Paint
Lithia Ford Lincoln of Roseburg
Assured Dealer Services of Roseburg
Lithia Hyundai of Reno
Porsche Monterey
BMW of Monterey
Lithia Subaru of Oregon City
Lithia Toyota of Abilene
Lithia Toyota of Odessa
Lithia Toyota of Redding
Audi Des Moines
Baierl Honda
DCH Gardena Honda
Gardena Honda
Gardena Honda, a DCH Company
All-Savers Auto Sales & Leasing
LMBB, LLC
LMBP, LLC
LMOP, LLC
LSTAR, LLC
Medford Insurance, LLC
Milford DCH, Inc.
Northland Ford Inc.
PA Real Estate, LLC
PA Support Services, LLC
Paramus Collision, LLC
Oregon
Delaware
Oregon
Oregon
Oregon
Massachusetts
Pennsylvania
Pennsylvania
Pennsylvania
New Jersey
Paramus World Motors LLC
New Jerse
Personalized Marketing, LLC
RFA Holdings, LLC
Sacramento-L, Inc.
Salem-B, LLC
Salem-H, LLC
Salem-V, LLC
Sharlene Realty LLC
Shift Portland, LLC
Southern Cascades Finance Corporation
Tampa-H, LLC
Tustin Motors Inc.
Wesley Chapel-H, LLC
Wesley Chapel-T, LLC
Zelienople Real Estate, L.L.C.
Zelienople Real Estate I, L.P.
Oregon
Oregon
California
Oregon
Oregon
Oregon
New Jersey
Oregon
Oregon
Florida
California
Florida
Florida
Pennsylvania
Pennsylvania
Mercedes-Benz of Beaverton
Mercedes-Benz of Portland
Smart Center of Portland
MINI of Portland
DCH Toyota of Milford
Baierl Ford
Prestige Auto Body
Prestige Collision Center
DCH Paramus Honda
Paramus Honda
Crown Leasing
BMW of Salem
Honda of Salem
Volkswagen of Salem
DCH Brunswick Toyota
Brunswick Toyota
DCH Collision Center
DCH Tustin Acura
Tustin Acura
EXHIBIT 23
The Board of Directors
Lithia Motors, Inc.:
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statement (Nos. 333-190192, 333-43593, 333-69169, 333-156410, 333-39092, 333-61802, 333-106686, 333-116839,
333-116840, 333-135350, 333-161590, 333-168737, 333-231255) on Forms S-8 of Lithia Motors, Inc. of our reports dated February 21, 2020, with respect to the consolidated
balance sheets of Lithia Motors as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity,
and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes, and the effectiveness of internal control over financial reporting
as of December 31, 2019, which reports appear in the December 31, 2019 annual report on Form 10-K of Lithia Motors, Inc.
Our report on the effectiveness of internal control over financial reporting as of December 31, 2019 contains an explanatory paragraph stating that management excluded from
its assessment of the effectiveness of Lithia Motors, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2019 nine acquired stores’ internal
control over financial reporting. The total assets of these nine stores represented approximately 4% of consolidated total assets as of December 31, 2019 and approximately 2%
of consolidated revenues for the year ended December 31, 2019. Our audit of internal control over financial reporting for Lithia Motors, Inc. and subsidiaries also excluded an
evaluation of the internal control over financial reporting of these nine stores.
Portland, Oregon
February 21, 2020
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
I, Bryan B. DeBoer, certify that:
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: February 21, 2020
/s/ Bryan B. DeBoer
Bryan B. DeBoer
President and Chief Executive Officer
Lithia Motors, Inc.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
I, Tina Miller, certify that:
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
1.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: February 21, 2020
/s/ Tina Miller
Tina Miller
Senior Vice President and Chief Financial Officer
Lithia Motors, Inc.
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
EXHIBIT 32.1
In connection with the Annual Report of Lithia Motors, Inc. (the "Company”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange
Commission on the date hereof (the "Report”), I, Bryan B. DeBoer, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Bryan B. DeBoer
Bryan B. DeBoer
President and Chief Executive Officer
Lithia Motors, Inc.
February 21, 2020
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
EXHIBIT 32.2
In connection with the Annual Report of Lithia Motors, Inc. (the "Company”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange
Commission on the date hereof (the "Report”), I, Tina Miller, Senior Vice President and Chief Financial Officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Tina Miller
Tina Miller
Senior Vice President and Chief Financial Officer
Lithia Motors, Inc.
February 21, 2020