What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-02 · 368 added, 242 removed, 444 unchanged (58% of the section changed)

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We are one of the largest automotive retailers in the United States.

As of December 31, 2019 we owned and operated 107 new vehicle franchises ( 88 dealership locations), representing 31 brands of automobiles, and 25 collision centers, in 17 metropolitan markets, within ten states.

As of December 31, 2020 we owned and operated 112 new vehicle franchises (91 dealership locations), representing 31 brands of automobiles, 25 collision centers, and one auto auction in 16 metropolitan markets, within nine states.

Our stores offer an extensive range of automotive products and services, including new and used vehicles;

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We evaluate the results of our new and used vehicle sales based on unit volumes and gross profit per vehicle sold, our parts and service operations based on aggregate gross profit, and our F&I business based on F&I gross profit per vehicle sold.

Our continued organic growth is dependent upon the execution of our balanced automotive retailing and service business strategy, the continued strength of our brand mix, and the production and allocation of desirable vehicles from the automobile manufacturers whose brands we sell.

Our vehicle sales have historically fluctuated with product availability as well as local and national economic conditions, including consumer confidence, availability of consumer credit, fuel prices, and employment levels.

Additionally, our ability to sell certain new and used vehicles can be negatively impacted by a number of factors, some of which are outside of our control and may include manufacturer imposed stop-sales or open safety recalls, primarily due to, but not limited to, vehicle safety concerns or a vehicle's failure to meet environmental related requirements.

Further, governmental actions, such as changes in, or the imposition of, tariffs or trade restrictions on imported goods, may adversely affect vehicle sales and depress demand.

However, we believe that the impact on our business of any future negative trends in new vehicle sales would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure, and (iii) our diversified brand and geographic mix.

The seasonally adjusted annual rate ("SAAR") of new vehicle sales in the U.S.

during 2019 was 17.0 million compared to 17.3 million in 2018 .

The automotive retail business continues to benefit from the availability of credit to consumers, strong consumer confidence and historically low unemployment levels.

Demand for new vehicles is generally highest during the second, third, and fourth quarters of each year and, accordingly, we expect our revenues to generally be higher during these periods.

We typically experience higher sales of luxury vehicles in the fourth quarter, which have higher average selling prices and gross profit per vehicle retailed.

Revenues and operating results may be impacted significantly from quarter-to-quarter by changing economic conditions, vehicle manufacturer incentive programs, adverse weather events, or other developments outside our control.

Our gross profit margin varies with our revenue mix.

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We evaluate commissions paid to salespeople as a percentage of retail vehicle gross profit, advertising expense on a per vehicle retailed ("PVR") basis, and all other SG&A expenses in the aggregate as a percentage of total gross profit.

We had total available liquidity of $472.9 million as of December 31, 2019 , which consisted of cash and cash equivalents of $3.5 million , $132.1 million of funds in our floor plan offset accounts, $190.0 million of availability under our new vehicle floor plan facility that is able to be convert to our revolving credit facility, $47.3 million of availability under our revolving credit facility, and $100.0 million of availability under our used vehicle revolving floor plan facility.

For further discussion of our liquidity, please refer to "Liquidity and Capital Resources" below.

Our vehicle sales may also be impacted by manufacturer imposed stop-sales or open safety recalls.

In addition, our ability to sell certain new and used vehicles can be negatively impacted by a number of factors, some of which are outside of our control.

As a result of the COVID-19 global pandemic, certain vehicle manufacturers have needed to slow or temporarily halt assembly lines for the safety of their workers.

Manufacturers have also been hampered by the lack of availability of parts and key components from suppliers such as semi-conductor chips, which has also caused disruption to production.

We cannot predict with any certainty how long the automotive retail industry will continue to be subject to these production slowdowns or when normalized production will resume at these manufacturers.

Further, governmental actions, such as travel restrictions imposed in response to national emergencies or the imposition of tariffs or trade restrictions on imported goods may adversely affect vehicle sales and depress demand.

Although we cannot adequately predict the ongoing impact of COVID-19 on our business, we continue to believe that any future negative trends in new vehicle sales caused by lack of inventory availability would be partially mitigated by (i) the expected relative stability of our parts and service operations over the long-term, (ii) the variable nature of significant components of our cost structure, and (iii) our diversified brand and geographic mix.

Park Place Acquisition

On December 11, 2019, the Company entered into (1) an Asset Purchase Agreement (the "2019 Asset Purchase Agreement") with certain members of the Park Place Dealership family of entities, Park Place Mid-Cities, Ltd., a Texas limited partnership, and the identified principal (collectively, "Park Place") and (2) a Real Estate Purchase Agreement (the "Real Estate Purchase Agreement" and, together with the 2019 Asset Purchase Agreement, the "Transaction Agreements") with certain members of the Park Place Dealership family of entities to acquire substantially all of the assets of, and certain real property related to, the Park Place business.

The 2019 Asset Purchase Agreement included the purchase of 19 franchises (3 Mercedes-Benz, 3 Sprinter, 2 Lexus, 2 Jaguar, 2 Land Rover, 1 Porsche, and 1 Volvo and 5 ultra luxury brands including 1 Bentley, 1 Rolls Royce, 1 McLaren, 1 Maserati and 1 Karma), two collision centers and an auto auction.

On March 24, 2020, Asbury delivered notice to the sellers terminating the Transaction Agreements pursuant to the terms thereof in exchange for the

payment of $10.0 million of liquidated damages.

Please refer to Liquidity and Capital Resources for additional details regarding the impact on financing transactions.

As a result of the Company's efforts to mitigate the financial impact of the COVID-19 global pandemic, along with a strong May and June 2020 performance, the Company reengaged on the Park Place Dealership group acquisition under more favorable pricing and more flexible financing terms, including limiting the purchase of luxury dealership franchises to those most aligned with the Company's core strategic business.

On July 6, 2020, the Company entered into an Asset Purchase Agreement (the "Revised Asset Purchase Agreement") with Park Place to acquire substantially all of the assets of, and lease the real property related to, 12 new vehicle dealership franchises (3 Mercedes-Benz, 3 Sprinter, 2 Lexus, 1 Jaguar, 1 Land Rover, 1 Porsche, and 1 Volvo), two collision centers and an auto auction comprising the Park Place Dealership group (collectively, the "Revised Transaction") for a purchase price of $889.9 million.

The Revised Transaction was completed on August 24, 2020.

The purchase price was financed through a combination of cash, floor plan facilities and seller financing.

Impact of COVID-19 on Our Business

In response to the economic downturn to our business experienced as a result of the COVID-19 global pandemic, in early April 2020 management took various actions in an attempt to mitigate the financial impact.

These actions included the furlough of employees, reduced store hours, and the suspension of the Company's 401(k) match.

In addition, the Company implemented temporary reductions in pay for all employees and the Company’s directors also agreed to waive portions of their annual cash retainers.

We continued to evaluate these actions throughout the second quarter of the 2020 fiscal year and made the difficult decision to permanently reduce the workforce by approximately 1,300 employees to help align our expense structure with the current business environment.

By the end of July 2020 we had reinstated full pay to all employees impacted by the temporary reductions and the Company's 401(k) match for eligible employees.

We continue to monitor and respond as necessary to the Company’s operational needs during the ongoing outbreak of the COVID-19 global pandemic and the resulting economic uncertainty.

The gradual rebound to our business we began to experience in May and June, continued through the third and fourth quarters of 2020.

The seasonally adjusted annual rate ("SAAR") of new vehicle sales in the U.S.

during 2020 was 14.6 million compared to 17.1 million in 2019.

On a same-store basis, all of our revenue streams declined from the prior year with the exception of used vehicle wholesale revenue.

Despite this decline in revenue, we experienced a significant increase in our new and used gross profit margins in 2020 when compared to 2019, as new vehicle supply disruptions as a result of the COVID-19 global pandemic reduced the availability of new vehicle inventory, which eventually drove up demand for used vehicles.

Our parts and service business also showed signs of a recovery and by year-end was approaching pre-pandemic levels.

We continue to monitor and manage our cash flows and have enacted cost saving measures to respond to the uncertain environment.

The Company has significantly reduced its marketing expenses, deferred certain capital expenditures, and managed other controllable expenses.

The flexibility of our cost structure has resulted in profitability throughout the COVID-19 pandemic, with profitability in the second half of 2020 exceeding that of the prior year period.

At this time, we cannot predict the duration or scope, and future effects, of the impacts from the pandemic.

Vaccines are currently being administered with the objective of having the country return to some sense of normalcy by the second half of 2021.

However, vaccine availability, distribution, efficacy to new strains of the virus and the public's willingness to get vaccinated all remain challenges, which could lengthen the duration of the impacts of the pandemic.

We continue to manage the business as appropriate in order to preserve our financial flexibility during this challenging time.

During the first quarter of 2020, we recorded a $23.0 million non-cash impairment charge related to our intangible manufacturer franchise rights.

If the COVID-19 pandemic continues, future outbreaks in the markets in which we operate may cause changes in customer behaviors, including a potential reduction in traffic at our dealerships and could result in additional impairment charges.

The uncertainties in the global economy may negatively impact our suppliers and other business partners, which may interrupt our supply chain and require other changes to our operations.

These and other factors may adversely impact our financial condition, liquidity and cash flow.

We cannot accurately predict the amount and timing of any additional impairment charge at this time, however, any such impairment charge could have an adverse effect on our results of operations and stockholders’ equity.

Our top priority continues to be the safety and protection of our customers, team members and their families.

We have modified certain business practices to conform to government restrictions and are taking precautionary measures as directed by government and regulatory authorities.

Following the CDC’s recommendation, we are providing face masks to employees and guests as required.

Additionally, we increased the frequency of dealership cleanings, implemented the use of plastic seat and steering wheel covers when performing service on guest vehicles, performed thorough cleaning and sanitizing of loaner vehicles after each use, and secured extra supplies of hand sanitizer, alcohol wipes, gloves and disinfectants for both employee

and guest use at our dealerships.

Many of our stores are also offering complimentary pick-up and delivery services to our customers, and we continue to offer online purchasing of new and used vehicles with delivery to the customer.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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Goodwill represents the excess cost of an acquired business over the fair market value of its identifiable assets and liabilities.

We have determined that, based on how we integrate acquisitions into our business, how the components of our business share resources and interact with one another, and how we review the results of our operations, that we have several geographic market-based operating segments.

We have determined that the dealerships in each of our operating segments are components that are aggregated into several geographic market-based reporting units for the purpose of testing goodwill for impairment, as they (i) have similar economic characteristics, (ii) offer similar products and services (all of our franchised dealerships offer new and used vehicles, parts and service, and arrange for third-party vehicle financing and the sale of insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our dealerships distribute products and services through dealership facilities that market to customers in similar ways) and (v) operate under similar regulatory environments.

Our only significant identifiable intangible assets, other than goodwill, are our rights under franchise agreements with manufacturers, which are recorded at an individual franchise level.

We have determined, based on how we integrate acquisitions into our business, how the components of our business share resources and interact with one another, and how we review the results of our operations, that we have several geographic market-based operating segments.

We have determined the dealerships in each of our operating segments are components that are aggregated into several geographic market-based reporting units for the purpose of testing goodwill for impairment, as they (i) have similar economic characteristics, (ii) offer similar products and services (all of our franchised dealerships offer new and used vehicles, parts and service, and arrange for third-party vehicle financing and the sale of insurance products), (iii) have similar customers, (iv) have similar distribution and marketing practices (all of our dealerships distribute products and services through dealership facilities that market to customers in similar ways) and (v) operate under similar regulatory environments.

Our only other significant identifiable intangible assets are our rights under franchise agreements with manufacturers, which are recorded at an individual franchise level.

The fair value of our manufacturer franchise rights are determined at the acquisition date, by discounting the projected cash flows specific to each franchise.

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Furthermore, to the extent that any agreements evidencing our manufacturer franchise rights would expire, we expect that we would be able to renew those agreements in the ordinary course of business.

We performed quantitative impairment tests as of October 1, 2019, and identified six dealerships with franchise rights carrying values that exceeded their fair values, and as a result, recorded non-cash impairment charges of $7.1 million .

As a result of the COVID-19 pandemic, we performed quantitative impairment tests as of March 31, 2020, and identified eleven dealerships with franchise rights carrying values that exceeded their fair values, and as a result, recorded non-cash impairment charges of $23.0 million.

No additional franchise right impairments were identified in 2020.

We do not amortize goodwill and other intangible assets that are deemed to have indefinite lives.

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The reserve is established based on historical operating results and the termination provisions of the applicable contracts and is evaluated on a product-by-product basis.

Our F&I cash chargebacks for the years ended December 31, 2019 , 2018 , and 2017 were $40.6 million, $37.5 million, and $34.0 million, respectively.

Our F&I cash chargebacks for the year ended December 31, 2020, 2019, and 2018 were $38.0 million, $40.6 million, and $37.5 million, respectively.

Our chargeback reserves were $47.3 million and $48.2 million as of December 31, 2020 and December 31, 2019, respectively.

Total chargebacks as a percentage of F&I commissions for the years ended December 31, 2019 , 2018 , and 2017 , were 13%, 13%, and 12%, respectively.

A 100 basis point change in our estimated reserve rate for future chargebacks, would change our finance and insurance chargeback reserve by approximately $3.4 million as of December 31, 2019 .

Total chargebacks as a percentage of F&I commissions for the year ended December 31, 2020, 2019, and 2018, were 12%, 13%, and 13%, respectively.

A 100 basis point change in our estimated reserve rate for future

chargebacks, would change our finance and insurance chargeback reserve by approximately $3.2 million as of December 31, 2020.

Insurance Reserves—

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We had $17.9 million and $17.0 million of insurance reserves for incurred and expected employee medical, workers' compensation, property, and general liability claims, net of anticipated insurance recoveries, as of December 31, 2020 and December 31, 2019, respectively.

Expenses associated with employee medical, workers compensation, property, and general liability claims, including premiums for insurance coverage, for the years ended December 31, 2019 , 2018 , and 2017 , totaled $33.3 million, $29.9 million, and $27.9 million, respectively.

Expenses associated with employee medical, workers' compensation, property, and general liability claims, including premiums for insurance coverage, for the year ended December 31, 2020, 2019, and 2018, totaled $37.9 million, $33.3 million, and $29.9 million, respectively.

RESULTS OF OPERATIONS

The Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions, except per share data)

New vehicle $ 3,767.4 $ 3,863.3 $ (95.9) (2) %

Used vehicle 2,169.5 2,131.6 37.9 2 %

Parts and service 889.8 899.4 (9.6) (1) %

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GROSS PROFIT:

New vehicle 218.5 159.5 59.0 37 %

Used vehicle 156.6 134.1 22.5 17 %

Parts and service 543.2 559.3 (16.1) (3) %

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Depreciation and amortization 38.5 36.2 2.3 6 %

Franchise rights impairment

Other operating expenses (income), net

Franchise rights impairment 23.0 7.1 15.9 NM

Other operating expenses, net 9.2 0.8 8.4 NM

INCOME FROM OPERATIONS 370.8 325.0 45.8 14 %

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Other interest expense, net 56.7 54.9 1.8 3 %

Swap interest expense

Gain on divestitures

Loss on extinguishment of long-term debt, net 20.6 — 20.6 — %

Gain on dealership divestitures, net (62.3) (11.7) (50.6) NM

Total other expenses, net 32.7 81.1 (48.4) (60) %

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Income tax expense 83.7 59.5 24.2 41 %

NET INCOME $ 254.4 $ 184.4 $ 70.0 38 %

Net income per common share—Diluted $ 13.18 $ 9.55 $ 3.63 38 %

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NM — Not Meaningful

For the Year Ended December 31,

REVENUE MIX PERCENTAGES:

New vehicles 52.8 % 53.6 %

Used retail vehicles 27.0 % 26.9 %

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GROSS PROFIT MIX PERCENTAGES:

New vehicles 17.9 % 13.6 %

Used retail vehicles 11.9 % 11.5 %

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SG&A EXPENSES AS A PERCENTAGE OF GROSS PROFIT 63.9 % 68.4 %

Total revenue during 2019 increase d by $335.9 million ( 5% ) compared to 2018 , due to a $74.6 million ( 2% ) increase in new vehicle revenue, a $159.2 million ( 8% ) increase in used vehicle revenue, a $78.4 million ( 10% ) increase in parts and service revenue and a $23.7 million ( 8% ) increase in F&I revenue.

The $65.9 million ( 6% ) increase in gross profit during 2019 was the result of a $4.4 million ( 3% ) increase in used vehicle gross profit, a $23.7 million ( 8% ) increase in F&I gross profit and a $43.5 million ( 8% ) increase in parts and service gross profit, partially offset by a $5.7 million ( 3% ) decrease in new vehicle gross profit.

Our total gross profit margin increase d 20 basis points from 16.0% in 2018 to 16.2% in 2019 .

Income from operations during 2019 increase d by $14.1 million ( 5% ) compared to 2018 , primarily due to a $65.9 million ( 6% ) increase in gross profit, partially offset by a $44.0 million ( 6% ) increase in selling, general, and administrative expenses, a $3.4 million increase in franchise rights impairment, a $2.5 million ( 7% ) increase in depreciation and amortization expenses, and a $1.9 million increase in other operating expenses (income), net.

Total other expenses (income), net decrease d by $5.0 million in 2019 , primarily due to an $11.7 million increase in gain on divestitures and a $0.5 million decrease in swap interest expense in 2019 , partially offset by a $5.4 million increase in floor plan interest expense, and a $1.8 million increase in other interest expense, net.

As a result, income before income taxes increase d by $19.1 million ( 8% ) to $243.9 million in 2019 .

The $2.7 million ( 5% ) increase in income tax expense was primarily attributable to the 8% increase in income before taxes, partially offset by a 3% decrease associated with a lower effective tax rate.

Overall, net income increase d by $16.4 million ( 10% ) from $168.0 million in 2018 to $184.4 million in 2019 .

On January 1, 2019, we adopted ASC 842, utilizing the optional transition relief method, which allowed for the effective date of the new leases standard as the date of initial application.

Our prior period comparative information has not been adjusted and continues to be reported under accounting standards in effect for those periods.

The adoption of this accounting standard had a minimal impact on the financial results of the Company for the twelve months ended December 31, 2019 .

For additional information related to the impacts from the adoption of this update, please refer to Note 18 "Leases" within the accompanying Consolidated Financial Statements.

On January 1, 2019, the Company adopted ASU 2017-12.

This update aligns the recognition and presentation, which are to be applied prospectively, of the effects of the hedging instrument and the hedged item in the financial statements.

As a result of the adoption of this update, the Company's swap interest expense is now presented within other interest expense, net.

Please refer to Note 14 "Financial Instruments and Fair Value" within the accompanying Consolidated Financial Statements for additional details regarding the Company's interest rate swap agreements.

Total revenue during 2020 decreased by $78.5 million (1%) compared to 2019, due to a $95.9 million (2%) decrease in new vehicle revenue, a $9.6 million (1%) decrease in parts and service revenue and a $10.9 million (3%) decrease in F&I revenue, partially offset by a $37.9 million (2%) increase in used vehicle revenue.

The $54.5 million (5%) increase in gross profit during 2020 was the result of a $59.0 million (37%) increase in new vehicle gross profit, a $22.5 million (17%) increase in used vehicle gross profit, partially offset by a $16.1 million (3%) decrease in parts and service gross profit and a $10.9 million (3%) decrease in F&I gross profit.

Our total gross profit margin increased 100 basis points from 16.2% in 2019 to 17.2% in 2020.

Income from operations during 2020 increased by $45.8 million (14%) compared to 2019, primarily due to a $54.5 million (5%) increase in gross profit and a $17.9 million (2%) decrease in selling, general, and administrative expenses partially offset by a $15.9 million increase in franchise rights impairment, an $8.4 million increase in other operating expenses, net and a $2.3 million (6%) increase in depreciation and amortization expenses.

Total other expenses, net decreased by $48.4 million (60)% in 2020, primarily due to a $50.6 million increase in gain on dealership divestitures and a $20.2 million decrease in floor plan interest expense, partially offset by a $20.6 million loss on extinguishment of debt and a $1.8 million increase in other interest expense, net.

As a result, income before income taxes increased by $94.2 million (39%) to $338.1 million in 2020.

The $24.2 million (41%) increase in income tax expense was primarily attributable to the 39% increase in income before taxes and a 40 basis point increase in the 2020 effective tax rate.

Overall, net income increased by $70.0 million (38%) from $184.4 million in 2019 to $254.4 million in 2020.

We assess the organic growth of our revenue and gross profit on a same store basis.

We believe that our assessment on a same store basis represents an important indicator of comparative financial performance and provides relevant information to assess our performance.

As such, for the following discussion, same store amounts consist of information from dealerships for

identical months in each comparative period, commencing with the first month we owned the dealership.

As such, for the following discussion, same store amounts consist of information from dealerships for identical months in each comparative period, commencing with the first month we owned the dealership.

Additionally, amounts related to divested dealerships are excluded from each comparative period.

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions, except for per vehicle data)

Luxury $ 1,450.1 $ 1,318.7 $ 131.4 10 %

Import 1,550.6 1,742.4 (191.8) (11) %

Domestic 766.7 802.2 (35.5) (4) %

Total new vehicle revenue $ 3,767.4 $ 3,863.3 $ (95.9) (2) %

Gross profit:

Luxury $ 113.7 $ 83.3 $ 30.4 36 %

Import 59.7 42.1 17.6 42 %

Domestic 45.1 34.1 11.0 32 %

Total new vehicle gross profit $ 218.5 $ 159.5 $ 59.0 37 %

New vehicle units:

Luxury 25,259 23,988 1,271 5 %

Import 52,201 61,420 (9,219) (15) %

Domestic 17,705 19,835 (2,130) (11) %

Total new vehicle units 95,165 105,243 (10,078) (10) %

Luxury $ 1,126.3 $ 1,271.2 $ (144.9) (11) %

Import 1,472.7 1,602.5 (129.8) (8) %

Domestic 648.1 690.5 (42.4) (6) %

Total new vehicle revenue $ 3,247.1 $ 3,564.2 $ (317.1) (9) %

Gross profit:

Luxury $ 81.8 $ 80.1 $ 1.7 2 %

Import 56.3 39.1 17.2 44 %

Domestic 37.8 28.8 9.0 31 %

Total new vehicle gross profit $ 175.9 $ 148.0 $ 27.9 19 %

New vehicle units:

Luxury 20,009 23,085 (3,076) (13) %

Import 49,744 56,707 (6,963) (12) %

Domestic 15,156 17,205 (2,049) (12) %

Total new vehicle units 84,909 96,997 (12,088) (12) %

New Vehicle Metrics—

For the Year Ended December 31,

For the Year Ended December 31, Increase

Revenue per new vehicle sold $ 39,588 $ 36,708 $ 2,880 8 %

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New vehicle gross margin 5.8 % 4.2 % 1.6 %

New vehicle revenue increase d by $74.6 million ( 2% ), as a result of a 2% increase in revenue per new vehicle sold, Same store new vehicle revenue decrease d by $60.8 million ( 2% ) as a result of a 3% decrease in new vehicle units sold, partially offset by an increase in revenue per new vehicle sold.

The 3% decrease in same store unit sales volume was driven by a 3% and 13% decrease in import and domestic units, respectively, partially offset by a 4% increase in luxury units.

Same store new vehicle gross profit in 2019 decrease d by $12.4 million ( 8% ), as a result of a 4% decrease in gross profit per new vehicle sold, and a 3% decrease in unit volumes.

Same store new vehicle gross margin decrease d 30 basis points to 4.1% in 2019 , as a result of margin pressure across our brand offerings, but particularly our import brands, which decreased 50 basis points from 2.9% in 2018 to 2.4% in 2019.

New vehicle revenue decreased by $95.9 million (2%), as a result of a 10% decrease in new vehicle unit sales partially offset by an 8% increase in revenue per new vehicle sold.

Same store new vehicle revenue decreased by $317.1 million (9%) as a result of a 12% decrease in new vehicle units sold, partially offset by a 4% increase in revenue per new vehicle sold.

Same store new vehicle gross profit in 2020 increased by $27.9 million (19%), as a result of a 36% increase in gross profit per new vehicle sold partially offset by a 12% decrease in unit volumes.

Same store new vehicle gross margin increased 120 basis points to 5.4% in 2020, primarily as a result of a supply shortage for much of 2020 caused by manufacturers reducing or halting production due to the COVID-19 pandemic.

We finished 2020 with a 40 day supply of new vehicle inventory which is below our target of 70 to 75 days primarily as a result of production challenges caused by the COVID-19 pandemic.

Used Vehicle—

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions, except for per vehicle data)

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Used vehicle retail gross profit $ 145.3 $ 133.1 $ 12.2 9 %

Used vehicle wholesale gross profit

Used vehicle wholesale gross profit 11.3 1.0 10.3 NM

Used vehicle gross profit $ 156.6 $ 134.1 $ 22.5 17 %

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Used vehicle retail gross profit $ 127.4 $ 124.1 $ 3.3 3 %

Used vehicle wholesale gross profit

Used vehicle wholesale gross profit 9.1 1.6 7.5 NM

Used vehicle gross profit $ 136.5 $ 125.7 $ 10.8 9 %

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Used Vehicle Metrics—

For the Year Ended December 31,

For the Year Ended December 31, Increase

Revenue per used vehicle retailed $ 23,964 $ 21,910 $ 2,054 9 %

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Used vehicle retail gross margin 7.6 % 7.0 % 0.6 %

Used vehicle revenue increase d by $159.2 million ( 8% ), due to a $158.0 million ( 9% ) increase in used retail revenue and $1.2 million ( 1% ) increase in used vehicle wholesale revenue.

Same store used vehicle revenue increase d by $91.7 million ( 5% ) due to a $93.2 million ( 5% ) increase in used vehicle retail revenue, partially offset by a $1.5 million ( 1% ) decrease in used vehicle wholesale revenues.

In 2019 , total Company and same store used vehicle retail gross profit margins decrease d 30 and 40 basis points to 6.9% and 6.8% , respectively.

We primarily attribute the decreases in used vehicle retail gross profit margin to the Company's efforts to grow our sales volume, which benefits our reconditioning and preparation business and finance and insurance, net, as well increased competition and price transparency within the used vehicle marketplace.

Used vehicle revenue increased by $37.9 million (2%), due to a $49.2 million (26%) increase in used vehicle wholesale revenue partially offset by a $11.3 million (1%) decrease in used retail revenue.

Same store used vehicle revenue decreased by $71.4 million (4%) due to an $86.6 million (5%) decrease in used vehicle retail revenue, partially offset by a $15.2 million (9%) increase in used vehicle wholesale revenues.

In 2020, total Company and same store used vehicle retail gross profit margins increased 60 basis points to 7.5% and 7.6%, respectively.

We primarily attribute the increases in used vehicle retail gross profit margin to increased demand for used vehicles as a result of new vehicle inventory shortages caused by the COVID-19 pandemic.

We believe that our used vehicle inventory continues to be well-aligned with current consumer demand, with approximately 31 days of supply as of December 31, 2020.

Parts and Service—

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions)

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Parts and service gross profit:

Customer pay $ 310.6 $ 317.3 $ (6.7) (2) %

Warranty 92.8 88.8 4.0 5 %

Wholesale parts 22.1 23.8 (1.7) (7) %

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Parts and service gross profit:

Customer pay $ 269.5 $ 298.7 $ (29.2) (10) %

Warranty 76.7 83.4 (6.7) (8) %

Wholesale parts 19.7 21.8 (2.1) (10) %

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* Reconditioning and preparation represents the gross profit earned by our parts and service departments for internal work performed and is included as a reduction of Parts and service cost of sales within the accompanying Consolidated Statements of Income upon the sale of the vehicle.

The $78.4 million ( 10% ) increase in parts and service revenue was due to a $48.0 million (9%) increase in customer pay revenue, a $21.6 million (15%) increase in warranty revenue, and an $8.8 million (7%) increase in wholesale parts revenue.

Same store parts and service revenue increase d $56.1 million ( 7% ) from $810.9 million in 2018 to $867.0 million in 2019 .

The increase in same store parts and service revenue was due to a $32.7 million (6%) increase in customer pay revenue, a $16.4 million (11%) increase in warranty revenue, and a $7.0 million (6%) increase in wholesale parts revenue.

Parts and service gross profit, excluding reconditioning and preparation, increase d by $38.3 million ( 10% ) to $429.9 million and same store gross profit, excluding reconditioning and preparation, increase d by $27.0 million ( 7% ) to $414.2 million .

The $27.0 million increase in same store gross profit, excluding reconditioning and preparation, is primarily due to a $16.8 million ( 6% ) increase in customer pay gross profit, a $9.3 million ( 12% ) increase in warranty gross profit, and a $0.9 million ( 4.0% ) increase in wholesale parts gross profit.

We attribute the increase in same store gross profit to our continued strategic focus on customer retention as well as additional warranty work.

The $9.6 million (1%) decrease in parts and service revenue was primarily due to a $11.2 million decrease in wholesale parts revenue and a $0.3 million decrease in customer pay revenue partially offset by a $1.9 million increase in warranty revenue.

The wholesale parts business was negatively affected by the COVID-19 pandemic which significantly reduced demand as a result of fewer miles being driven.

Same store parts and service revenue decreased $64.6 million (8%) from $840.0 million in 2019 to $775.4 million in 2020.

The decrease in same store parts and service revenue was due to a $33.9 million (7%) decrease in customer pay revenue, a $13.6 million (9%) decrease in warranty revenue, and a $11.1 million (9%) decrease in wholesale parts revenue.

Parts and service gross profit, excluding reconditioning and preparation, decreased by $4.4 million (1%) to $425.5 million and same store gross profit, excluding reconditioning and preparation, decreased by $38.0 million (9%) to $365.9 million.

The $38.0 million decrease in same store gross profit, excluding reconditioning and preparation, is primarily due to a $29.2 million (10%) decrease in customer pay gross profit, a $6.7 million (8%) decrease in warranty gross profit, and a $2.1 million (10%) decrease in wholesale parts gross profit.

The COVID-19 global pandemic negatively impacted our parts and service business for most of 2020 as a result of people driving fewer miles and therefore requiring less vehicle maintenance.

In addition, fewer accidents on the roadways negatively impacted our collision repair business.

Finance and Insurance, net—

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions, except for per vehicle data)

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Finance and insurance, net per vehicle sold $ 1,775 $ 1,645 $ 130 8 %

F&I revenue, net increase d by $23.7 million ( 8% ) in 2019 when compared to 2018 primarily as a result of a 5% increase in F&I per vehicle retailed and a 3% increase in new and used retail unit sales.

On a same store basis F&I revenue, net increase d by $15.3 million ( 5% ) in 2019 when compared to 2018 primarily as a result of a 6% increase in F&I per vehicle retailed.

We continued to benefit from a favorable consumer lending environment, which allowed more of our customers to take advantage of a broader array of F&I products and our continued focus on improving the F&I results at our lower-performing stores through our F&I training programs.

F&I revenue, net decreased by $10.9 million (3%) in 2020 when compared to 2019 primarily as a result of a 9% decrease in new and used retail unit sales partially offset by a 7% increase in F&I per vehicle retailed.

On a same store basis F&I revenue, net decreased by $12.9 million (4%) in 2020 when compared to 2019 primarily as a result of a 11% decrease in new and used retail unit sales partially offset by a 8% increase in F&I per vehicle retailed.

During 2020 we continued to benefit from a favorable consumer lending environment, which allowed more of our customers to take advantage of a broader array of F&I products and our continued focus on improving the F&I results at our lower-performing stores through our F&I training programs.

Selling, General, and Administrative Expense—

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Decrease) % of Gross

Profit Increase (Decrease)

2020 % of Gross

Profit 2019 % of Gross

(Dollars in millions)

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Outside services 82.9 6.8 % 85.1 7.3 % (2.2) (0.5) %

Advertising 25.5 2.1 % 34.4 2.9 % (8.9) (0.8) %

Rent 32.2 2.6 % 27.1 2.3 % 5.1 0.3 %

Utilities 15.8 1.3 % 16.4 1.4 % (0.6) (0.1) %

Insurance 16.7 1.4 % 14.5 1.2 % 2.2 0.2 %

Other 88.3 7.2 % 103.5 8.9 % (15.2) (1.7) %

Selling, general, and administrative expense $ 781.9 63.9 % $ 799.8 68.4 % $ (17.9) (4.5) %

Gross profit $ 1,223.4 $ 1,168.9

Personnel costs $ 339.4 31.9 % $ 359.5 33.0 % $ (20.1) (1.1) %

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Outside services 74.0 7.0 % 78.7 7.2 % (4.7) (0.2) %

Advertising 19.8 1.9 % 30.6 2.8 % (10.8) (0.9) %

Rent 31.7 3.0 % 26.8 2.5 % 4.9 0.5 %

Utilities 13.9 1.3 % 15.2 1.4 % (1.3) (0.1) %

Insurance 13.7 1.3 % 12.4 1.1 % 1.3 0.2 %

Other 80.0 7.5 % 98.9 9.2 % (18.9) (1.7) %

Selling, general, and administrative expense $ 692.3 65.2 % $ 746.9 68.6 % $ (54.6) (3.4) %

Gross profit $ 1,062.6 $ 1,088.3

SG&A expense as a percentage of gross profit decreased 450 basis points from 68.4% in 2019 to 63.9% in 2020.

Same store SG&A expense as a percentage of gross profit remained at 68.4% in both 2018 and 2019 .

Same store SG&A expense as a percentage of gross profit decreased 340 basis points from 68.6% in 2019 to 65.2% in 2020.

The decrease in SG&A as a percentage of gross profit is the result of broad cost cutting measures implemented as a result of the COVID-19 global pandemic and higher gross profits on new and used vehicle sales triggered by new vehicle inventory shortages caused by pandemic related production disruptions.

In addition to personnel cost savings realized as a result of headcount reductions, our cost cutting measures significantly reduced controllable expenses, such as advertising and travel.

We were also able to generate savings by adjusting our loaner vehicle fleet to accommodate the COVID-19 triggered service volume downturn.

We anticipate our SG&A expense as a percentage of gross profit to gradually increase as new vehicle inventory levels begin to normalize in 2021.

Depreciation and Amortization Expense —

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We assessed our manufacturer franchise rights for impairment by comparing the present value of cash flows attributable to each franchise right to its carrying value.

As a result of our impairment testing, we recognized a $7.1 million pretax non-cash charge related to six dealerships for the year ended December 31, 2019 and a $3.7 million charge related to three dealerships for the year ended December 31, 2018.

As a result of our impairment testing performed as of March 31, 2020, we recognized

a $23.0 million pretax non-cash charge related to eleven dealerships during the year ended December 31, 2020 and a $7.1 million charge as a result of our annual impairment test related to six dealerships during the year ended December 31, 2019.

Other Operating Expenses (Income), net —

Other operating expenses (income), net includes gains and losses from the sale of property and equipment, income derived from lease arrangements, and other non-core operating items.

During the twelve months ended December 31, 2020, the Company recorded other operating expense, net of $9.2 million, which included $12.9 million related to the Park Place acquisition, $0.7 million real estate related impairment partially offset by a $2.1 million gain related to legal settlements and a $0.3 million gain related to the sale of vacant real estate.

During the twelve months ended December 31, 2019, the Company recorded expense of $0.8 million, net, which included a $2.6 million pre-tax loss related to the write-off of fixed assets, partially offset by $1.8 million, net of other non-core operating income.

The $1.1 million in other operating income, net for 2018 , is primarily due to a $0.7 million gain resulting from legal settlements and $0.4 million of other non-core operating income.

Floor Plan Interest Expense —

Floor plan interest increase d by $5.4 million ( 17% ) to $37.9 million during 2019 compared to $32.5 million during 2018 , as a result of an increase in LIBOR from which our floor plan interest rate is calculated and increased floor plan borrowings from higher inventory levels during 2019 .

Floor plan interest decreased by $20.2 million (53%) to $17.7 million during 2020 compared to $37.9 million during 2019, as a result of a decrease in the LIBOR rate on which our floor plan interest rate is calculated as well as generally lower new vehicle inventory levels during 2020 as a result of pandemic related production issues.

Income Tax Expense —

The $2.7 million ( 5% ) increase in income tax expense was the result of a $19.1 million ( 8% ) increase in income before income taxes, partially offset by a decrease as a result of a lower effective tax rate and an excess tax benefit related to the vesting of share-based awards.

Our effective tax decreased from 25.3% in 2018 to 24.4% in 2019 .

The decrease in our effective tax rate was primarily due to a reduced state rate attributed to lower apportionment in certain jurisdictions and statutory rate reductions in states in which the Company has significant activity.

We expect our effective tax rate to be between 24.5% and 25.5% for 2020.

The $24.2 million (41%) increase in income tax expense was the result of a $94.2 million (39%) increase in income before income taxes.

Our effective tax rate increased 40 basis points from 24.4% in 2019 to 24.8% in 2020.

The increase in our effective tax rate was primarily due to an increased state rate attributed to higher apportionment in certain jurisdictions in states in which the Company has significant activity.

We expect our effective tax rate to be around 25% in 2021.

Refer to Note 15 "Income Taxes" for additional information regarding income taxes.

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The Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018

For the Year Ended December 31,

For the Year Ended December 31, Increase

(Dollars in millions, except per share data)

New vehicle $ 3,863.3 $ 3,788.7 $ 74.6 2 %

Used vehicle 2,131.6 1,972.4 159.2 8 %

Parts and service 899.4 821.0 78.4 10 %

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GROSS PROFIT:

New vehicle 159.5 165.2 (5.7) (3) %

Used vehicle 134.1 129.7 4.4 3 %

Parts and service 559.3 515.8 43.5 8 %

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Franchise rights impairment 7.1 3.7 3.4 92 %

Other operating (income) expenses, net

Other operating expenses (income), net 0.8 (1.1) 1.9 (173) %

INCOME FROM OPERATIONS 325.0 310.9 14.1 5 %

OTHER EXPENSES:

OTHER EXPENSES (INCOME):

Floor plan interest expense 37.9 32.5 5.4 17 %

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Swap interest expense — 0.5 (0.5) (100) %

Gain on dealership divestitures, net (11.7) — (11.7) —

Total other expenses, net 81.1 86.1 (5.0) (6) %

1 unchanged sentence

Income tax expense 59.5 56.8 2.7 5 %

NET INCOME $ 184.4 $ 168.0 $ 16.4 10 %

Net income per common share—Diluted $ 9.55 $ 8.28 $ 1.27 15 %

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REVENUE MIX PERCENTAGES:

New vehicles 53.6 % 55.1 %

Used retail vehicles 26.9 % 25.9 %

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GROSS PROFIT MIX PERCENTAGES:

New vehicles 13.6 % 15.0 %

Used retail vehicles 11.5 % 11.5 %

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The $65.9 million (6%) increase in gross profit during 2019 was the result of a $4.4 million (3%) increase in used vehicle gross profit, a $23.7 million (8%) increase in F&I gross profit and a $43.5 million (8%) increase in parts and service gross profit, partially offset by a $5.7 million (3%) decrease in new vehicle gross profit.

Our total gross profit margin decreased 40 basis points from 16.4% in 2017 to 16.0% in 2018 , primarily due to margin pressure in our new vehicle and used vehicle business lines.

Income from operations during 2018 increased by $23.2 million ( 8% ) compared to 2017 , primarily due to a $47.1 million increase in gross profit and a $2.4 million decrease in other operating (income) expense, net, partially offset by a $26.1 million increase in selling, general and administrative expenses and a $1.6 million ( 5% ) increase in depreciation and amortization expense.

Total other expenses, net increased by $7.5 million in 2018 , primarily due to a $9.8 million increase in floor plan interest expense in 2018 , partially offset by a $1.5 million decrease in swap interest expense and a $0.8 million decrease in other interest expense, net.

Our total gross profit margin increased 20 basis points from 16.0% in 2018 to 16.2% in 2019.

Income from operations during 2019 increased by $14.1 million (5%) compared to 2018, primarily due to a $65.9 million (6%) increase in gross profit, partially offset by a $44.0 million (6%) increase in selling, general, and administrative expenses, a $3.4 million increase in franchise rights impairment, a $2.5 million (7%) increase in depreciation and amortization expenses, and a $1.9 million increase in other operating expenses (income), net.

Total other expenses (income), net decreased by $5.0 million in 2019, primarily due to an $11.7 million increase in gain on divestitures and a $0.5 million decrease in swap interest expense in 2019, partially offset by a $5.4 million increase in floor plan interest expense and a $1.8 million increase in other interest expense, net.

As a result, income before income taxes increased by $19.1 million (8%) to $243.9 million in 2019.

The $13.2 million ( 19% ) decrease in income tax expense was primarily attributable to the decrease in our effective tax rate from 33.5% in 2017 to 25.3% for 2018.

The $2.7 million (5%) increase in income tax expense was primarily attributable to the 8% increase in income before taxes, partially offset by a 3% decrease associated with a lower effective tax rate.

Overall, net income increased by $16.4 million (10%) from $168.0 million in 2018 to $184.4 million in 2019.

On January 1, 2018, we adopted ASC 606 using the modified retrospective method for all revenue contracts not completed as of that date and recognized a cumulative effect adjustment to retained earnings.

Our prior period comparative information has not been adjusted and continues to be reported under accounting standards in effect for that period.

The net impact of adopting ASC 606 for the year ended December 31, 2018 was a decrease to net income of $0.1 million.

For additional information related to the adoption effects of this new revenue recognition standard, please refer to Note 2 "Revenue Recognition" within the accompanying Consolidated Financial Statements.

On January 1, 2019, we adopted ASC 842, utilizing the optional transition relief method, which allowed for the effective date of the new leases standard as the date of initial application.

Our prior period comparative information has not been adjusted and continues to be reported under accounting standards in effect for those periods.

The adoption of this accounting standard had a minimal impact on the financial results of the Company for the twelve months ended December 31, 2020.