LITHIA MOTORS INC

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. INTERIM FINANCIAL STATEMENTS

Basis of Presentation

These condensed Consolidated Financial Statements contain unaudited information as of September 30, 2024, and for the three and nine months ended September 30, 2024 and 2023. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2023 audited Consolidated Financial Statements and the related notes thereto. The financial information as of December 31, 2023, is derived from our Annual Report on Form 10-K filed with the SEC on February 23, 2024. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements to maintain consistency and comparability between periods presented. Within our financing operations income, we disaggregated our “lease income” out of our previously reported “interest, fee, and lease income” to be its own separately presented line item, as well as revised the related “lease depreciation and amortization” to now be reported as “lease costs,” reclassifying amounts previously reported net within “lease income.”

NOTE 2. ACCOUNTS RECEIVABLE

Accounts receivable consisted of the following:

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 AND FLOOR PLAN NOTES PAYABLE

The components of inventories, net, consisted of the following:

Vehicle inventory costs are 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. FINANCE RECEIVABLES

Interest income on finance receivables is recognized based on the contractual terms of each receivable and is accrued until repayment, reaching non-accrual status, charge-off, or repossession. Direct costs associated with originations are capitalized and expensed as an offset to interest income when recognized on the receivables.

The balances of finance receivables are made up of loans and finance leases secured by the related vehicles. More than 98% of the portfolio is aged less than 60 days past due with less than 2% on non-accrual status.

Finance Receivables, net

Finance Receivables by FICO Score

1 Includes legacy portfolio, loans that are originated with no FICO score available, lease receivables, and deferred origination fees.

In accordance with ASC Topic 326, the allowance for finance receivable losses is estimated based on our historical write-off experience, current conditions and forecasts, as well as the value of any underlying assets securing these receivables. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance upon reaching 120 days past due status.

Rollforward of Allowance for Finance Receivable Losses

Our allowance for finance receivable losses represents the net credit losses expected over the remaining contractual life of our managed receivables. The allowances for credit losses related to finance receivables consisted of the following changes during the period:

Charge-off Activity by Year of Origination

1 Includes legacy portfolio, loans that are originated with no FICO score available, and finance lease receivables.

NOTE 5. GOODWILL AND FRANCHISE VALUE

The changes in the carrying amounts of goodwill are as follows:

1 Our purchase price allocation (PPA) for the 2022 acquisitions were finalized in 2023. As a result, we added $285.9 million of goodwill. Preliminary PPA for a portion of our 2023 acquisitions resulted in adding $233.2 million of goodwill. Our PPA for the remaining 2023 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 13 – Acquisitions.

2 Our PPA for a portion of the 2023 acquisitions recognized in 2023 was adjusted and finalized in 2024 upon the completion of our fair value adjustments for assumed contract liabilities, acquired loan portfolio, and contingent consideration, adding $47.6 million of goodwill.

3 Our PPA for the remainder of the 2023 acquisitions were finalized in 2024. As a result, we added $142.7 million of goodwill. Our PPA for the 2024 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 13 – Acquisitions.

The changes in the carrying amounts of franchise value are as follows:

1 Our PPA for the 2022 acquisitions were finalized in 2023. As a result, we added $363.1 million of franchise value. Preliminary PPA for a portion of our 2023 acquisitions resulted in adding $193.4 million of franchise value. Our PPA for the remaining 2023 acquisitions is preliminary and franchise value is not yet allocated to our reporting units. These amounts are included in other non-current assets until we finalize our purchase accounting. See Note 13 – Acquisitions.

2 Our PPA for the remainder of the 2023 acquisitions were finalized in 2024. As a result, we added $172.5 million of franchise value. Our PPA for the 2024 acquisitions are preliminary and franchise value is not yet allocated to our reporting units. These amounts are included in other non-current assets until we finalize our purchase accounting. See Note 13 – Acquisitions.

NOTE 6. INVESTMENTS

Marketable Securities

In 2024, our captive insurance subsidiary began investing cash in excess of current needs in marketable securities. The marketable securities are recorded within other current assets in the Consolidated Balance Sheets and consist of debt securities accounted for as available-for-sale (AFS) and equity securities measured at fair value. Changes in the fair value of equity securities are recognized as a component of other income (expense), net in the Consolidated Statements of Operations and unrealized gains (losses) on AFS debt securities are recorded as a component of other comprehensive income (loss), net of tax until the security is sold. See Note 12 – Fair Value Measurements.

As of September 30, 2024, equity securities recorded within other current assets in the Consolidated Balance Sheets were $2.2 million. Net unrealized gains recognized during the three and nine-months ended September 30, 2024 on equity securities held at the reporting date were $0.1 million and $0.3 million, respectively.

Marketable debt securities accounted for as AFS were as follows:

1 Represents total unrealized gains (losses) for securities with net gains (losses) in accumulated other comprehensive income as of September 30, 2024.

There wereno sales of AFS securities during the three and nine-months ended September 30, 2024.

Equity Method Investments

Our investment in Pinewood Technologies, PLC (PINE.L), U.K. based automotive dealership management system provider, consists of 25.5% common stock voting interests accounted for as an equity method investment. The investment is measured at fair value based on quoted market prices, and all fair market value changes in the investment are recorded as unrealized gains as a component of other income (expense), net in the Consolidated Statements of Operations. The fair value of our investment was $105.4 million as of September 30, 2024. See Note 12 – Fair Value Measurements.

Our investment in Wheels, Inc., automotive fleet management provider, through LMMH consists of 26.5% common stock voting interests accounted for as an equity method investment. The investment is measured at cost plus or minus our share of equity method investee income or loss as a component of other non-current assets in the Consolidated Balance Sheets. The book value of our investment was $208.0 million as of September 30, 2024.

We reported unrealized gains on equity method investments of $0.7 million and $30.5 million for the three and nine months ended September 30, 2024, respectively. Comparatively, we recorded a loss of $0.7 million and gain of $0.1 million in the same periods of 2023, respectively.

NOTE 7. NET INVESTMENT IN OPERATING LEASES

Net investment in operating leases consists primarily of lease contracts for vehicles with individuals and business entities. Assets subject to operating leases are depreciated using the straight-line method over the term of the lease to reduce the asset to its estimated residual value. Estimated residual values are based on assumptions for used vehicle prices at lease termination and the number of vehicles that are expected to be returned.

Net investment in operating leases was as follows:

1 Vehicles, at cost and accumulated depreciation are recorded in other non-current assets on the Consolidated Balance Sheets.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Contract Liabilities

We are the obligor on our lifetime oil and at home valet 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 $402.3 million and $317.0 million as of September 30, 2024, and December 31, 2023, respectively; and we recognized $17.7 million and $54.2 million of revenue in the three and nine months ended September 30, 2024 related to our contract liability balance at December 31, 2023. Our contract liability balance is included in accrued liabilities and deferred revenue.

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 9. DEBT

Credit Facilities

US Bank Syndicated Credit Facility

On February 23, 2024, we amended our existing syndicated credit facility (USB credit facility), comprised of 21 financial institutions, including eight manufacturer-affiliated finance companies, maturing February 23, 2029. The amendment increased the total financing commitment and the amount to which the commitment could be further expanded.

This USB credit facility provides for a total financing commitment of $6.0 billion, which may be further expanded, subject to lender approval and the satisfaction of other conditions, up to a total of $6.5 billion. The allocation of the financing commitment is for up to $2.8 billion in new vehicle inventory floorplan financing, up to $900 million in used vehicle inventory floorplan financing, up to $100 million in service loaner vehicle floorplan financing, and up to $2.2 billion in revolving financing for general corporate purposes, including acquisitions and working capital. We have the option to reallocate the commitments under this USB credit facility, provided that the aggregate revolving loan commitment may not be more than 40% of the amount of the aggregate commitment, and the aggregate service loaner vehicle floorplan commitment may not be more than the 3% of the amount of the aggregate commitment. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.

Our obligations under our USB 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), real property, and our equity interests in certain of our subsidiaries. Under our USB credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by Lithia and its dealerships borrowing under the new vehicle floor plan portion of the USB credit facility.

The interest rate on the USB credit facility varies based on the type of debt, with the rate of one-day SOFR plus a credit spread adjustment of 0.10% plus a margin of 1.10% for new vehicle floor plan financing,1.40% for used vehicle floor plan financing,1.20% for service loaner floor plan financing, and a variable interest rate on the revolving financing ranging from 1.00% to 2.00% depending on our leverage ratio. The annual interest rates associated with our floor plan commitments are as follows:

JPM Warehouse Facility

On August 15, 2024, we amended our securitization facility for our auto loan portfolio (JPM warehouse facility) with JPMorgan Chase Bank, as administrative agent and account bank, providing initial commitments for borrowings of up to $1.0 billion. The JPM warehouse facility matures on November 16, 2026. The interest rate on the JPM warehouse facility varies based on the Daily Simple SOFR rate plus 1.00% to 1.70%.

Mizuho Warehouse Facility

On February 16, 2024, we amended our securitization facility for our auto loan portfolio (Mizuho warehouse facility), with Mizuho Bank Ltd. as administrative agent and account bank, providing initial commitments for borrowings of up to $750 million. The Mizuho warehouse facility matures on July 20, 2026. The interest rate on the Mizuho warehouse facility varies based on the Daily Simple SOFR rate plus 1.20%.

Bank of Nova Scotia Syndicated Credit Facility

On May 14, 2024, we amended our syndicated credit agreement with The Bank of Nova Scotia as agent (BNS credit facility), comprised ofsix financing institutions, includingtwo manufacturer-affiliated finance companies, to extend the maturity date.

The BNS credit facility provides for a total financing commitment of approximately $1.1 billion CAD, including a working capital revolving credit facility of up to $100 million CAD, a wholesale flooring facility for new vehicles up to $500 million CAD, used vehicle flooring facility of up to $100 million CAD, wholesale leasing facility of up to $400 million CAD, and daily rental vehicle facility up to $25 million CAD.

The interest rate on the BNS credit facility varies based on the type of debt, with the daily compound rate of the Canadian Overnight Repo Rate Average (CORRA) plus a margin of 1.00-1.30%. The annual interest rates associated with our floor plan commitments are as follows:

All Canadian facilities other than the wholesale flooring facility, which is a demand facility, mature on March 18, 2027. The credit agreement includes various financial and other covenants typical of such agreements.

Bank of America UK Revolving Credit Facility

On July 9, 2024 we amended our revolving credit facility agreement with BOA. The amendment extended the maturity date to February 22, 2029 and increased the commitment to £100.0 million GBP. The interest rate on the working capital line of credit is measured based on the Sterling Overnight Index Average (SONIA) plus 1.45%.

Non-Recourse Notes Payable

In 2024, we issued $739.0 million in non-recourse notes payable related to asset-backed term funding transactions. Below is a summary of outstanding non-recourse notes payable issued:

NOTE 10. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

Company-Sponsored Defined Benefit Pension Plan

In 2024, we acquired Pendragon PLC’s Fleet Management and UK Motor Divisions in the United Kingdom, which included the assumption of its company-sponsored defined benefit plan applicable to a portion of the salaried present and past employees, closed to future accrual. At the time of acquisition, these balances increased our defined benefit obligations by $465.7 million and increased our fair value of plan assets by $466.4 million.

Net Periodic (Benefit) Cost

Interest cost represents the increase in the projected benefit obligation, which is a discounted amount, due to the passage of time. The expected return on plan assets reflects the computed amount of current-year earnings from the investment of plan assets using an estimated long-term rate of return.

During the nine months ended September 30, 2024, funding of pension plans was $16.6 million. For the remainder of 2024, we estimate approximately $1.2 million of cash contributions.

NOTE 11. EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST

Repurchases of Common Stock

Repurchases of our common stock occurred under a repurchase authorization granted by our Board and related to shares withheld as part of the vesting of RSUs.

On June 4, 2024, our Board approved an additional $350 million repurchase authorization of our common stock. This authorization is in addition to the amount previously authorized by the Board for repurchase. Share repurchases under our authorization were as follows:

1 Price excludes excise taxes imposed under the Inflation Reduction Act of $2.0 million for the nine months ended September 30, 2024.

As of September 30, 2024, we had $560.9 million available for repurchases pursuant to our share repurchase authorizations from our Board in 2024 and prior years.

In addition, during 2024, we repurchased 45,903 shares at an average price of $328.62 per share, for a total of $15.1 million, related to tax withholding associated with the vesting of RSUs. The repurchase of shares related to tax withholding associated with stock awards does not reduce the number of shares available for repurchase as approved by our Board.

Redeemable Non-Controlling Interest

In 2021, we expanded into Canada through a partnership with Toronto-based Pfaff Automotive Partners. As part of the partnership, we were granted the right to purchase (Call Option), and granted Pfaff Automotive a right to sell (Put Option), the remaining ownership interest in the partnership after athree-year period. As a result of this redemption feature, we recorded redeemable NCI that is classified as mezzanine equity in the accompanying Consolidated Balance Sheets.

In August 2024, we completed the acquisition of the remaining 10.1% interest in our redeemable non-controlling interest (NCI), resulting in us now owning 100% of our operations in Canada. Prior to this transaction, the acquired entities were fully consolidated in our financial statements due to our majority ownership; however, this acquisition eliminates the redeemable NCI. The transaction was executed for total consideration of $58.8 million, which included an additional premium of $11.6 million recognized as a component of “Net income attributable to redeemable non-controlling interest” in our Consolidated Statements of Operations.

NOTE 12. 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, finance receivables, 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 measured the carrying value of our equity method investments without a fair value election at cost plus or minus our proportionate share of earnings or losses in the investee.

We have investments consisting of equity securities, available for sale debt securities, and equity method investments with a fair value election. We calculated the estimated fair value of the equity securities, equity method investments, and U.S. Treasury debt securities using quoted market prices (Level 1). The fair value of corporate and municipal debt securities are measured using observable Level 2 market expectations at each measurement date. See Note 6 – Investments.

We have fixed rate debt primarily consisting of amounts outstanding under our senior notes, non-recourse notes payable, and real estate mortgages. We calculated the estimated fair value of the senior notes using quoted prices for the identical liability (Level 1). The fair value of non-recourse notes payable are measured using observable Level 2 market expectations at each measurement date. The calculated estimated fair values of the fixed rate real estate mortgages and finance lease liabilities use a discounted cash flow methodology with estimated current interest rates based on a similar risk profile and duration (Level 2). The fixed cash flows are discounted and summed to compute the fair value of the debt.

We have derivative instruments consisting of an offsetting set of interest rate caps. The fair value of derivative assets and liabilities are measured using observable Level 2 market expectations at each measurement date and is recorded as other current assets, current liabilities and other long-term liabilities in the Consolidated Balance Sheets.

Nonfinancial assets such as goodwill, franchise value, or other long-lived assets are measured and recorded at fair value during a business combination or when there is an indicator of impairment. We evaluate our goodwill and franchise value using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the carrying value exceeds the fair value, we would further evaluate for potential impairment using a quantitative assessment. The quantitative assessment estimates fair values using unobservable (Level 3) inputs by discounting expected future cash flows of the store for franchise value, or reporting unit for goodwill. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, and cost of capital, for which we utilize certain market participant-based assumptions we believe to be reasonable. 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 nine-month period ended September 30, 2024.

Below are our assets and liabilities that are measured at fair value:

1 Excluding unamortized debt issuance costs

NOTE 13. ACQUISITIONS

In the first nine months of 2024, we completed the following acquisitions:

•In January 2024, Pendragon PLC’s Fleet Management and UK Motor Divisions in the United Kingdom.

•In February 2024, Carousel Motor Group in Minnesota and Wisconsin.

•In May 2024, Pine View Hyundai Store in Ontario, Canada.

•In June 2024, Sunrise Chevrolet Buick GMC at Collierville and Sunrise Buick GMC at Wolfchase in Tennessee.

•In September 2024, Duval Honda, Duval Acura and Gainesville Subaru in Florida.

Revenue and operating income contributed by the 2024 acquisitions subsequent to the date of acquisition were as follows (in millions):

In the first nine months of 2023, we completed the following acquisitions:

•In February 2023, Thornhill Acura in Canada.

•In March 2023, Jardine Motors Group UK Limited in the United Kingdom.

•In June 2023, Priority Auto Group in Virginia.

•In June 2023, Wade Ford in Georgia.

•In July 2023, Hill Country Honda in Texas.

•In August 2023, Arden Auto Group in the United Kingdom.

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 for the 2024 acquisitions and the PPA for identified assets acquired and liabilities assumed as of the acquisition date:

The PPA for the 2024 acquisitions are preliminary, as we have not obtained and evaluated all of the detailed information necessary to finalize the opening balance sheet amounts in all respects. We recorded the PPA based upon information that is currently available and recorded unallocated items as a component of other non-current assets in the Consolidated Balance Sheets.

We expect all of the goodwill related to North American acquisitions completed in 2023 and 2024 to be deductible for US federal income tax purposes. Due to local country laws, we do not expect goodwill related to UK acquisitions completed in 2023 and 2024 to be deductible for UK income tax purposes.

In the three and nine-month periods ended September 30, 2024, we recorded $0.2 million and $9.7 million in acquisition-related expenses as a component of selling, general and administrative expense. Comparatively, we recorded $4.8 million and $10.5 million of acquisition-related expenses in the same periods of 2023.

The following unaudited pro forma summary presents consolidated information as if all acquisitions in the three and nine-month periods ended September 30, 2024 and 2023 had occurred on January 1, 2023:

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 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 nonrecurring proforma adjustments directly attributable to the acquisitions are included in the reported proforma revenues and earnings.

NOTE 14. EARNINGS PER SHARE

We calculate basic EPS by dividing net income attributable to Lithia Motors, Inc. by the weighted average number of common shares outstanding for the period, including vested RSU awards. Diluted EPS is calculated by dividing net income attributable to Lithia Motors, Inc. by the weighted average number of shares outstanding, adjusted for the dilutive effect of unvested RSU awards and employee stock purchases.

The following is a reconciliation of net income attributable to Lithia Motors, Inc. and weighted average shares used for our basic EPS and diluted EPS:

The effect of antidilutive securities on common stock was evaluated for the three and nine-month periods ended September 30, 2024 and 2023 and was determined to be immaterial.

NOTE 15. SEGMENTS

We operate intwo reportable segments: Vehicle Operations and Financing Operations. Our Vehicle Operations consists of all aspects of our auto merchandising and aftersales operations, excluding financing provided by our Financing Operations. Our Financing Operations segment provides financing to customers buying and leasing retail vehicles from our Vehicle Operations, as well as leasing vehicles from our fleet management services provider.

All other remaining unallocated corporate overhead expenses and internal charges are reported under “Corporate and Other.” Asset information by segment is not utilized for purposes of assessing performance or allocating resources and, as a result, such information has not been presented.

Certain financial information on a segment basis is as follows:

NOTE 16. RECENT ACCOUNTING PRONOUNCEMENTS

In November 2023, the FASB issued ASU 2023-07 related to improvements to reportable segment disclosures. The amendments in this update require additional disclosure of significant expenses related to our reportable segments, additional segment disclosures on an interim basis, and qualitative disclosures regarding the decision making process for segment resources. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We have adopted this pronouncement and plan to make the necessary updates to our segment disclosures for the year ending December 31, 2024, and, aside from these disclosure changes, we do not expect the amendments to have a material effect on our financial statements.

In December 2023, the FASB issued ASU 2023-09 related to improvements to income tax disclosures. The amendments in this update require enhanced jurisdictional and other disaggregated disclosures for the effective tax rate reconciliation and income taxes paid. The amendments in this update are effective for fiscal years beginning after December 15, 2024. We plan to adopt this pronouncement and make the necessary updates to our disclosures for the year ending December 31, 2025, and, aside from these disclosure changes, we do not expect the amendments to have a material effect on our financial statements.