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Item 7. Management’s Discussion and Analysis

2023-02-16 compared with 2022-02-23 · 153 added, 142 removed, 421 unchanged (41% of the section changed)

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Our operating results reflect the combined performance of each of our interrelated business activities.

Historically, various facets of our business have been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, consumer transportation preferences, discretionary spending levels, availability and affordability of consumer credit, manufacturer incentives, the COVID-19 pandemic, weather patterns, fuel prices and interest rates.

Historically, various facets of our business have been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, consumer transportation preferences, discretionary spending levels, availability and affordability of consumer credit, new vehicle introductions and innovations, manufacturer incentives, the COVID-19 pandemic, weather patterns, fuel prices, inflation and interest rates.

For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers tend to shift their purchases to used vehicles.

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In addition, our ability to expediently adjust our cost structure in response to changes in new vehicle sales volumes also tempers any negative impact of such sales volume changes.

Recent Events

Our manufacturers’ production continued at reduced levels in the Current Year, despite recent production improvements in the latter half of 2022 for some of those manufacturers.

Inventory was constrained in 2022 as a result of sustained global semiconductor and other parts shortages.

The shortage of new vehicles, compared to historical levels, led to sharply higher same store new vehicle sales prices and gross margins.

Used vehicle gross margins declined in the Current Year, driven by volatility from new vehicle shortages and increased interest rates.

Our new vehicle days’ supply of inventory was approximately 24 days at December 31, 2022, as compared to 12 days and 53 days, at December 31, 2021 and 2020, respectively.

Current Year increases of new vehicle days’ supply of inventory were seen for most manufacturers.

The Russia and Ukraine Conflict and other geopolitical conflicts, as well as related international responses, have exacerbated inflationary pressures, including causing increases in the prices for goods and services and global supply chain disruptions, which have resulted and may continue to result in shortages in materials and services.

Such shortages have resulted and may continue to result in inflationary cost increases for labor, fuel, materials and services, and could continue to cause costs to increase as well as result in the scarcity of certain materials.

In particular, the Russia and Ukraine Conflict further impacted the ability of certain OEMs to produce new vehicles and new vehicle parts, which resulted in continued disruptions to the supply of new and used vehicles in 2022.

During the Current Year, the global economy experienced rising inflation and an increase in gasoline and energy prices.

In response to inflationary pressures and macroeconomic conditions, the U.S.

Federal Reserve, along with other central banks, including in the U.K., increased interest rates throughout 2022.

Additionally, U.S.

GDP shrank for two consecutive quarters in the first half of 2022 and increased for the third and fourth quarters of 2022, indicating that there is uncertainty as to whether the U.S.

economy will experience a recession in the near-term.

As a result of rising inflation and higher interest rates, used vehicle pricing has declined in the latter part of 2022.

Any further impact of these macroeconomic developments on our operations cannot be predicted with certainty.

In addition to the macroeconomic issues described above, the U.K.

faces additional political and economic uncertainty as a result of recent leadership changes in the country’s government.

This uncertainty has led to increased foreign currency exchange rate volatility for the country’s currency.

During the Current Year, the GBP to USD foreign currency exchange rate has declined 10.4%, from £1 to $1.35 at December 31, 2021, to £1 to $1.21 at December 31, 2022.

Recent Accounting Pronouncements

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Critical Accounting Policies and Accounting Estimates

The preparation of our financial statements in conformity with GAAP requires management to make certain estimates and assumptions.

The preparation of our financial statements in conformity with U.S.

GAAP requires management to make certain estimates and assumptions.

These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the balance sheet date and the amounts of revenues and expenses recognized during the reporting period.

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reporting units in the fourth quarter of 2022, no quantitative test was deemed necessary.

No goodwill impairments were recorded on any reporting units during the years ended December 31, 2021 and 2020.

No goodwill impairments were recorded on any reporting units during the Current Year and for the year ended December 31, 2021 (the “Prior Year”).

The quantitative goodwill impairment test is dependent on management estimates and assumptions used to determine the fair value of our reporting units.

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Intangible Franchise Rights and Goodwill within our Notes to Consolidated Financial Statements for further discussion of goodwill, including management’s use of estimates and assumptions.

During the year ended December 31, 2021, no impairment was recorded for intangible franchise rights.

During the year ended December 31, 2020, we recorded $20.7 million of impairments of intangible franchise rights.

During the Current Year, impairment charges of $1.3 million were recorded for intangible franchise rights.

In the Prior Year, no impairment was recorded for intangible franchise rights.

As our intangible franchise rights are tested for impairment at the dealership level, any impairments are specific to the performance and outlook of the respective dealership.

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Results of Operations

The “same store” amounts presented below include the results of dealerships and corporate headquarters for the identical months in each period presented in comparison, commencing with the first full month in which the dealership was owned by us and, in the case of dispositions, ending with the last full month it was owned by us.

For example, the results for a dealership acquired on August 15, 2020, will appear in our same store comparison beginning in 2021 for the period September 2021 through December 2021, when comparing to September 2020 through December 2020 results.

If we disposed of a store on August 15, 2020, the results from this store would be excluded from same store results beginning in August 2020 as July 2020 was the last full month the dealership was owned by us.

The “same store” amounts presented below include the results of dealerships and corporate headquarters for the identical months in each comparative period, commencing with the first full month in which we owned the dealership.

Amounts related to divestitures are excluded from each comparative period, ending with the last full month in which we owned the dealership.

Same store results provide a measurement of our ability to grow revenues and profitability of our existing stores and also provide a metric for peer group comparisons.

For these reasons, same store results allows management to manage and monitor the performance of the business and is also useful to investors.

For these reasons, same store results allow management to manage and monitor the performance of the business and is also useful to investors.

We evaluate our results of operations on both an as reported and a constant currency basis.

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We calculate constant currency percentages by converting our current period reported results for entities reporting in currencies other than USD using comparative period exchange rates rather than the actual exchange rates in effect during the respective periods.

The constant currency performance measures should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP.

Additionally, we caution investors not to place undue reliance on non-GAAP measures, but also to consider them with the most directly comparable GAAP measures.

Our management also uses constant currency and adjusted cash flows from operating, investing and financing activities in conjunction with GAAP financial measures to assess our business, including communication with our Board of Directors, investors and industry analysts concerning financial performance.

The constant currency performance measures should not be considered a substitute for, or superior to, the measures of financial performance prepared in accordance with U.S.

Additionally, we caution investors not to place undue reliance on non-GAAP measures, but also to consider them with the most directly comparable U.S.

GAAP measures.

Our management also uses constant currency and adjusted net cash flows from operating, investing and financing activities in conjunction with U.S.

GAAP financial measures to assess our business, including communication with our Board of Directors, investors and industry analysts concerning financial performance.

We disclose these non-GAAP measures and the related reconciliations because we believe investors use these metrics in evaluating longer-term period-over-period performance.

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All computations have been calculated using unrounded amounts for all periods presented.

The following tables summarize our operating results on a reported basis and on a same store basis for the year ended December 31, 2021, as compared to 2020.

The following tables summarize our operating results on a reported basis and on a same store basis for the Current Year, as compared to the Prior Year.

Reported Operating Data — Consolidated

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Net floorplan expense $ (28.7) $ (26.5) $ (2.1) $ (0.7)

(1) Floorplan assistance is included within New vehicle retail Gross profit above and New vehicle retail Cost of sales in our Consolidated Statements of Operations.

(1) Floorplan assistance is included within Gross profit — New vehicle retail sales above and Cost of sales — New vehicle retail sales in our Consolidated Statements of Operations.

Same Store Operating Data — Consolidated

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The difference between as reported amounts and same store amounts is related to acquisition and disposition activity, as well as new add-point openings.

During 2021, our U.S.

dealership operations continued to be impacted by reduced demand caused by the COVID-19 pandemic and the restrictions put in place by local governments to contain the virus.

Total revenues in the U.S.

during the year ended December 31, 2021, increased $2,342.9 million, or 27.6%, as compared to the same period in 2020.

during the Current Year increased $2.6 billion, or 23.8%, as compared to the Prior Year, primarily driven by the acquisition of stores and higher same store revenues.

Total same store revenues in the U.S.

during the year ended December 31, 2021, increased $2,107.5 million, or 25.1%, as compared to the same period in 2020.

We experienced increases across all revenues streams, year-over-year.

New and used vehicle retail same store revenues benefited from a 77.2% increase in sales from our online digital platform, AcceleRide®, during the year ended December 31, 2021, as compared to the same period in 2020.

New vehicle retail same store sales revenues outperformed the prior year as a result of increased demand driving higher prices, coupled with a moderate increase in new vehicle retail units sold.

Supply chain issues, including an ongoing semiconductor shortage and other logistics challenges, persisted throughout 2021 for OEMs, leading to sustained lower vehicle production and deliveries of fewer vehicles to dealerships than customer purchases.

On December 31, 2021, our U.S.

new vehicle inventory supply was 9 days which was 39 days lower than December 31, 2020, days’ supply of 48.

Used vehicle retail same store units and sales revenues, outperformed the prior year as a result of increased demand, driving higher prices.

Used vehicle inventory levels remained healthy in 2021 through sourcing more direct purchases from vehicle owners.

While used vehicle wholesale same store units were down modestly, used vehicle wholesale same store sales revenues outperformed the prior year as a result of increased used vehicle pricing driven by higher demand.

Parts and service same store revenues outperformed the prior year as a result of an increase in our customer pay revenues, wholesale revenues and collision revenues;

partially offset by a decline in our warranty revenues.

We expect warranty revenues to increase as and when new vehicle production and deliveries from OEMs increase.

F&I same store revenues outperformed the prior year as a result of increased same store total retail unit sales, coupled with higher income per contract on finance and other insurance product offerings and higher penetration rates.

These increases were partially offset by an increase in our overall chargeback experience.

during the Current Year increased $486.4 million, or 4.6%, as compared to the Prior Year.

This increase was primarily driven by higher used vehicle retail sales prices, higher parts and service sales and higher F&I PRU, partially offset by fewer new vehicle unit sales and used vehicle wholesale unit sales.

New and used vehicle retail revenues benefited from the sale of approximately 30,500 units from our online digital platform, AcceleRide®, during the Current Year, a 55.5% increase as compared to the Prior Year.

New vehicle retail same store revenues underperformed the Prior Year, driven by a shortage in new vehicle inventory, leading to fewer unit sales.

The shortage of new vehicle inventory, despite recent manufacturers’ production improvements, drove strong pricing, which partially mitigated the revenue impact of lower new vehicle unit sales.

We ended the Current Year with a U.S.

new vehicle inventory supply of 21 days, 12 days higher than the Prior Year.

Used vehicle retail same store revenues outperformed the Prior Year, primarily driven by strong used vehicle retail pricing due to increased demand.

Used vehicle wholesale same store revenues declined due to fewer unit sales from efforts to sell more used vehicles through retail sales rather than the wholesale market as a result of the increased demand and pricing of used vehicle retail sales described above.

Parts and service same store revenues outperformed the Prior Year, primarily driven by increases across all business lines, reflecting increased business activity and increased same store technician headcount through our technician recruiting and retention efforts providing greater capacity to meet increased demand.

F&I, net same store revenues outperformed the Prior Year, primarily driven by higher income per contract on finance, VSCs and other product offerings and improved penetration rates, partially offset by fewer same store new vehicle unit sales.

Total gross profit in the U.S.

during the year ended December 31, 2021, increased $603.5 million, or 40.6%, as compared to the same period in 2020.

during the Current Year increased $492.8 million, or 23.6%, as compared to the Prior Year, primarily driven by the acquisition of stores and higher same store results.

Total same store gross profit in the U.S.

during the year ended December 31, 2021, increased $552.3 million, or 37.6%, as compared to the same period in 2020, driven by increases across all lines of service.

New vehicle retail same store gross profit increased 90.1% driven by a 73.1% increase in new vehicle retail same store gross profit per unit sold, coupled with a 9.8% increase in new vehicle retail same store unit sales.

The increase in new vehicle retail same store gross profit per unit sold reflects higher demand and inventory supply constraints as a result of the global semiconductor chip shortage.

Used vehicle retail same store gross profit increased 69.0%, driven by a 47.1% increase in used vehicle retail same store gross profit per unit sold, coupled with a 14.8% increase in used vehicle retail same store unit sales.

The increase in used vehicle retail same store gross profit per unit sold reflects a combination of higher market prices and strong demand.

Used vehicle wholesale same store gross profit increased as industry supply shortages drove up auction prices as reflected in the Manheim Index.

Parts and service same store gross profit increased 14.7%, primarily driven by the increase in our customer-pay business reflecting increased business activity.

F&I same store gross profit increased 24.1%, driven by increases in revenue discussed above.

Total same store gross margin increased 170 basis points, driven by higher new and used vehicle margins, reflecting vehicle supply constraints.

during the Current Year increased $85.0 million, or 4.2%, as compared to the Prior Year, primarily driven by higher same store gross profit from new vehicle retail sales, parts and service sales and F&I, net, partially offset by downward pressures on used vehicle margins.

New vehicle retail same store gross profit outperformed the Prior Year, driven by an increase in new vehicle retail same store gross profit per unit sold, partially offset by a decrease in same store retail new vehicle unit sales.

The increase in new vehicle retail same store gross profit per unit sold reflects the strong pricing resulting from the shortage of new vehicle inventory discussed above.

Used vehicle retail same store gross profit underperformed the Prior Year, driven by a decrease in used vehicle retail same store gross profit per unit sold.

The decrease was driven by inflationary impacts on used vehicle customers, moving into the latter half of 2022, outpacing the decline in used vehicle acquisition costs over that similar period.

Our used vehicle wholesale same store gross profit underperformed the Prior Year, driven by a decrease in used vehicle wholesale same store gross profit per unit sold, coupled with a decrease in same store wholesale used vehicle unit sales.

The decrease was driven by efforts to sell more used vehicles through retail sales rather than the wholesale market.

Parts and service same store gross profit outperformed the Prior Year, as described above for parts and service revenues.

F&I, net same store gross profit outperformed the Prior Year, as described above for F&I, net same store revenues.

Total same store gross margin decreased 8 basis points, primarily driven by a decrease in same store used vehicle gross margin, for the reasons described above for used vehicle retail and wholesale same store gross profit.

In addition, same store parts and service gross margin declined slightly, largely due to increased labor costs.

This decrease was partially offset by higher same store new vehicle retail sales prices outpacing same store new vehicle costs of sales.

SG&A Expenses

SG&A as a percentage of gross profit declined 36 basis points and increased 118 basis points on an as reported and same store basis, respectively, compared to the Prior Year.

The increase in SG&A as a percentage of gross profit on a same store basis was partially driven by the decline in used vehicle same store gross profit described above as well as the following factors impacting total SG&A.

Total SG&A expenses in the U.S.

during the year ended December 31, 2021, increased $287.9 million, or 30.4%, as compared to the same period in 2020.

Total same store SG&A expenses in the U.S.

during the year ended December 31, 2021, increased $257.7 million, or 27.5%, as compared to the same period in 2020, primarily driven by increased variable commission payments as a result of improvements in sales volume and margins and an increase in other variable expenses associated with the rise in business activity.

Total same store SG&A as a percent of gross profit improved from 63.7% for the year ended December 31, 2020, to 59.1% for the same period of 2021, driven by productivity gains and higher vehicle margins.

during the Current Year increased $281.9 million, or 22.8%, as compared to the Prior Year, primarily driven by the acquisition of stores and higher same store SG&A expenses.

Total same store SG&A expenses in the U.S.

for the year ended December 31, 2021, included $2.8 million in disaster pay and insurance deductible expense associated with the February winter storm in Texas and Hurricane Ida, coupled with $12.9 million in acquisition costs, partially offset by $5.3 million in gains related to favorable legal settlements and $2.1 million in gains from dealership and real estate transactions.

Total same store SG&A expense in the U.S.

for the year ended December 31, 2020, included $10.6 million in expense for an out-of-period adjustment related to stock-based compensation and a $2.7 million gain related to a favorable legal settlement.

during the Current Year increased $75.4 million, or 6.3%, as compared to the Prior Year, primarily driven by increased labor costs and an increase in other variable expenses associated with the rise in certain business activities.

Reported Operating Data — U.K.

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Used vehicle retail sales 63.5 72.5 (9.0) (12.4) % (6.9) (2.9) %

Used vehicle wholesale sales 7.6 2.5 5.1 NM 0.6 NM

Used vehicle wholesale sales (2.6) 7.6 (10.2) (134.4) % 0.3 (138.3) %

Total used 60.9 80.1 (19.2) (24.0) % (6.6) (15.7) %

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Used vehicle retail sales $ 1,624 $ 1,988 $ (364) (18.3) % $ (177) (9.4) %

Used vehicle wholesale sales $ 516 $ 157 $ 359 NM $ 38 NM

Used vehicle wholesale sales $ (217) $ 516 $ (734) (142.1) % $ 25 (146.9) %

Total used $ 1,192 $ 1,565 $ (374) (23.9) % $ (130) (15.6) %

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SG&A as % gross profit 69.6 % 69.0 % 0.6 %

NM — Not Meaningful

Same Store Operating Data — U.K.

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Used vehicle retail sales 58.5 72.4 (13.9) (19.2) % (6.5) (10.1) %

Used vehicle wholesale sales 7.4 2.4 5.0 NM 0.6 NM

Used vehicle wholesale sales (2.4) 7.6 (10.0) (131.2) % 0.3 (134.8) %

Total used 56.1 80.0 (23.9) (29.9) % (6.3) (22.0) %

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Used vehicle retail sales $ 1,629 $ 1,992 $ (363) (18.2) % $ (182) (9.1) %

Used vehicle wholesale sales $ 539 $ 158 $ 381 NM $ 40 NM

Used vehicle wholesale sales $ (213) $ 522 $ (735) (140.9) % $ 24 (145.6) %

Total used $ 1,192 $ 1,569 $ (378) (24.1) % $ (133) (15.6) %

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SG&A as % gross profit 70.1 % 68.4 % 1.6 %

NM — Not Meaningful

Region — Year Ended December 31, 2022 compared to 2021

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At the end of 2020, the U.K.

experienced a surge in COVID-19 cases, which led to a government-mandated closure of all non-essential businesses beginning January 4, 2021.

experienced a surge in COVID-19 cases, which led to a government-mandated closure of all non-essential businesses beginning January 4, 2021 through April 12, 2021.

In mid-April 2021, the COVID-19 restrictions affecting our U.K.

dealership showrooms were lifted, and our dealerships were able to reopen.

In the prior year, beginning March 21, 2020, the government mandated closure of all U.K.

businesses, which remained in effect through May 18, 2020, for service and June 1, 2020, for our showrooms.

Total revenues in the U.K.

during the year ended December 31, 2021, increased $538.8 million, or 25.7%, as compared to the same period in 2020.

during the Current Year increased $159.4 million, or 6.0%, as compared to the Prior Year, primarily driven by the acquisition of stores, partially offset by the negative impact of foreign currency exchange rates.

Total same store revenues in the U.K.

during the year ended December 31, 2021, increased $411.4 million, or 19.8%, as compared to the same period in 2020.

On a constant currency basis, total same store revenues increased 12.0%, driven by increases in used vehicle retail, F&I and parts and service, partially offset by a decline in new vehicle retail and used vehicle wholesale same store revenues.

New vehicle retail same store revenues, on a constant currency basis, underperformed compared to the prior year due to a decrease in new vehicle retail same store unit sales, which was partially offset by an increase in new vehicle retail same store average sales price per unit sold.

The decrease in new vehicle retail same store units sales primarily reflects supply constraints as OEMs struggled to produce new vehicles due to parts shortages, including the global semiconductor chip shortage.

At December 31, 2021, our U.K.

new vehicle inventory supply was 33 days, which was 69 days lower than December 31, 2020 days’ supply of 102.

The increase in the average new vehicle retail same store sales price was driven by both supply shortages and high vehicle demand, which was pent-up over the past years due to Brexit and the COVID-19 pandemic.

Used vehicle retail same store revenues, on a constant currency basis, outperformed compared to the prior year due to increased used vehicle retail same store unit sales, coupled with higher used vehicle retail same store average sales prices, benefited by strong consumer demand and the new vehicle inventory shortages.

Parts and service same store revenues, on a constant currency basis, outperformed the prior year, driven by increases in our customer-pay and wholesale businesses reflecting increased business activity with the reduction of COVID-19 restrictions in 2021.

F&I same store revenues, on a constant currency basis, outperformed the prior year, driven by higher income per contract and improved penetration rates on all of our product offerings, coupled with an increase in used vehicle retail same store unit sales.

during the Current Year decreased $2.8 million, or 0.1%, as compared to the Prior Year, driven by the negative impact of foreign currency exchange rates.

On a constant currency basis, total same store revenues increased 11.6%, driven by outperformances across all revenue streams except used vehicle wholesale sales.

New vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year, primarily driven by increased sales prices.

The shortage of new vehicle inventory, despite recent manufacturers’ production improvements, drove strong pricing.

Supply chain issues, including an ongoing semiconductor and vehicle parts shortage, an d other logistics challenges continued for OEMs, leading to sustained lower vehicle production and deliveries of fewer vehicles to dealerships.

The increase in the new vehicle retail same store average sales price per unit sold was driven by both new vehicle shortages, as described above, and strong vehicle demand, which was pent-up over past years due to Brexit and the COVID-19 pandemic.

We ended the Current Year with a U.K.

new vehicle inventory supply of 36 days, 3 days higher than the Prior Year.

Used vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year, despite a modest decline in retail used vehicle unit sales, as increased demand drove higher prices on a constant currency basis.

Parts and service same store revenues, on a constant currency basis, outperformed the Prior Year, driven by increased business activity across all of our parts and service business lines with the reduction of COVID-19 restrictions compared to the Prior Year.

F&I, net same store revenues, on a constant currency basis, outperformed the Prior Year, driven by improved penetration rates and higher income per contract for finance and VSCs.

Total gross profit in the U.K.

during the year ended December 31, 2021, increased $103.1 million, or 41.5%, as compared to the same period in 2020.

during the Current Year increased $31.7 million, or 9.0%, as compared to the Prior Year, primarily driven by the acquisition of stores and higher same store results.

Total same store gross profit in the U.K.

during the year ended December 31, 2021, increased $86.9 million, or 35.9%, as compared to the same period in 2020.

On a constant currency basis, total same store gross profit increased 27.4% driven by improvements across all service lines.

New vehicle retail same store gross profit on a constant currency basis increased 46.4%, driven by a 64.1% increase in new vehicle retail same store average gross profit per unit sold, partially offset by a 10.8% decline in new vehicle retail same store unit sales.

The increase in new vehicle retail same store gross profit per unit sold reflects both increased demand and supply constraints related to the COVID-19 pandemic and the global semiconductor chip shortage.

Used vehicle retail same store gross profit, on a constant currency basis, improved 52.6% on a 30.4% increase in used vehicle retail same store average gross profit per unit sold, coupled with a 17.0% increase in used vehicle retail same store unit sales.

The increase in used vehicle retail same store average gross profit per unit sold reflects higher demand and new vehicle supply shortages.

Parts and service same store gross profit, on a constant currency basis, increased 12.8%, driven by the increases in our businesses discussed above.

F&I same store gross profit, on a constant currency basis, improved 10.0% as previously discussed.

Total same store gross margin in the U.K.

grew 160 basis points, driven by higher new and used vehicle margins due to increased demand and supply constraints and increased parts and service margins, reflecting improved customer-pay margins and higher internal work as a result of increased used vehicle sales volumes.

during the Current Year increased $10.6 million, or 3.1%, as compared to the Prior Year.

On a constant currency basis, total same store gross profit increased 15.2% driven by improvements in new vehicle retail sales, parts and service sales and F&I, net, partially offset by downward pressures on used vehicle margins.

New vehicle retail same store gross profit, on a constant currency basis, outperformed the Prior Year, due to an increase in new vehicle retail same store gross profit per unit sold, resulting from increased prices as discussed above, coupled with a slight increase in new vehicle retail unit sales.

Used vehicle retail same store gross profit, on a constant currency basis, underperformed the Prior Year, due to a decrease in used vehicle retail same store gross profit per unit sold and a slight decrease in same store retail used vehicle unit sales.

These decreases were driven by inflationary impacts on customers coupled with the ongoing new vehicle supply shortage impacting the supply of used vehicles.

Parts and service same store gross profit, on a constant currency basis, outperformed the Prior Year, driven by the increases in parts and service same store revenues.

F&I, net same store gross profit, on a constant currency basis, outperformed the Prior Year as described above in F&I, net same store revenues.

Total same store gross margin in the U.

increased 42 basis points, driven by improvements in new vehicle retail gross margin due to higher prices from increased customer demand and vehicle supply constraints, described above.

The increase was partially offset by a decrease in same store used vehicle retail gross margin, resulting from inflationary impacts on our used vehicle customers and the ongoing new vehicle supply shortage, and a decrease in parts and service same store margins due to increased labor costs.

SG&A Expenses

SG&A as a percentage of gross profit increased 62 and 165 basis points on an as reported and same store basis, respectively, compared to the Prior Year.

Total SG&A expenses in the U.K.

during the year ended December 31, 2021, increased $51.0 million, or 26.7%, as compared to the same period in 2020.

during the Current Year increased $24.2 million, or 10.0%, as compared to the Prior Year, primarily driven by increases in same store SG&A and the acquisition of stores.

Total same store SG&A expenses in the U.K.

during the year ended December 31, 2021, increased $34.9 million, or 18.6%, as compared to the same period in 2020.

On a constant currency basis, total same store SG&A expenses increased 11.2%, driven by increased business activity as COVID-19 restrictions were lifted early in the second quarter of 2021.

As a percentage of gross profit, total same store SG&A expenses improved from 77.4% for the year ended 2020 to 67.5% for the same period of 2021, driven by productivity gains and higher vehicle margins.

Total same store SG&A expenses in 2021 included $0.6 million in acquisition costs.

Total same store SG&A expenses in 2020 included $1.2 million in severance costs for redundancy due to the COVID-19 pandemic.

during the Current Year increased $13.1 million, or 5.6%, as compared to the Prior Year.

On a constant currency basis, total same store SG&A expenses increased 17.9%.

These increases were primarily driven by higher business activity and acquisition costs compared to the Prior Year, as well as government COVID-19 assistance and the related temporary suspension of city tax in the Prior Year which did not recur in the Current Year.

Consolidated Selected Comparisons — Year Ended December 31, 2022 compared to 2021

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Other interest expense, net $ 77.5 $ 55.8 $ 21.7 38.9 %

Loss on extinguishment of debt $ — $ 13.7 $ (13.7) (100.0) %

Provision for income taxes $ 231.1 $ 175.5 $ 55.6 31.7 %

Depreciation and Amortization Expense

Total depreciation and amortization expense for the year ended December 31, 2021, was higher compared to the same period in 2020, primarily attributable to acquired property and equipment in our U.S.

Depreciation and amortization expense for the Current Year was higher compared to the Prior Year, primarily driven by acquired property and equipment in our U.S.

region, as we continue to strategically add dealership related real estate to our investment portfolio and make improvements to our existing facilities intended to enhance the profitability of our dealerships and the overall customer experience.

Impairment of Assets

No goodwill impairments were recorded during the years ended December 31, 2021, and 2020.

No impairments of intangible franchise rights were recorded during year ended December 31, 2021.

During the year ended December 31, 2020, we recorded franchise rights impairment charges of $11.1 million in the U.K.

region and $9.7 million in the U.S.

No goodwill impairments were recorded during the Current Year and the Prior Year.

During the Current Year, we recorded impairment of franchise rights of $1.3 million for franchise agreements in the U.S.

No impairments of intangible franchise rights were recorded during the Prior Year.

We review long-lived assets including property and equipment and ROU assets for impairment at the lowest level of identifiable cash flows whenever there is evidence that the carrying value of these assets may not be recoverable (i.e., triggering events).

During the year ended December 31, 2021, we recorded property and equipment impairment charges of $1.7 million in the U.S.

During the year ended December 31, 2020, we recorded property and equipment impairment charges of $4.2 million in the U.S.

region and ROU asset impairment charges of $1.8 million in the U.K.

During the Current Year and Prior Year , we recorded property and equipment impairment charges of $0.8 million and $1.7 million in the U.S.

region, respectively.

Intangible Franchise Rights and Goodwill, Note 10.

Property and Equipment, Net and Note 11.

Leases within our Notes to Consolidated Financial Statements for further discussion of our impairments.

Leases within our Notes to Consolidated Financial Statements for further discussion of our assessment for impairments.

Floorplan Interest Expense

Total floorplan interest expense during the year ended December 31, 2021, decreased $11.6 million, or 29.5%, as compared to the same period in 2020.

Our floorplan interest expense fluctuates with changes in our borrowings outstanding and interest rates, which are based on LIBOR, SOFR, U.S.

Our floorplan interest expense fluctuates with changes in our outstanding borrowings and associated interest rates, which are based on SOFR, the U.S.

prime rate or a benchmark rate.

Outstanding borrowings largely fluctuate based on our levels of new and used vehicle inventory.

To mitigate the impact of interest rate fluctuations, we employ an interest rate hedging strategy, whereby we swap variable interest rate exposure on a portion of our borrowings for a fixed interest rate.

The year over year decrease was primarily due to lower floorplan borrowings as a result of lower inventory levels and lower weighted average interest rates mainly due to a decline in LIBOR, partially offset by higher realized expense on our interest rate swaps, as well as a loss on interest rate swaps of $3.4 million resulting from the impact of the de-designation and termination of certain interest rate swaps due to the decline in inventory levels.

For the Current Year, floorplan interest expense decreased $0.4 million, or 1.3%, as compared to the Prior Year, driven primarily by lower realized losses on our interest rate swap portfolio in the Current Year, due to increases in corresponding interest rates and an unrealized loss on interest rate swaps of $3.4 million in the Prior Year which did not recur in the Current Year.

These decreases were partially offset by an increase in floorplan interest expense on new and used vehicles due to the increase in interest rates between periods.

Refer to Note 7 .

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Other Interest Expense, Net

Total other interest expense, net during the year ended December 31, 2021, decreased $6.1 million, or 9.8%, as compared to the same period in 2020.

Other interest expense, net consists of interest charges primarily on our 4.00% Senior Notes, real estate related debt and other debt, partially offset by interest income.

The year over year decrease was primarily attributable to lower interest rates achieved through debt refinancing activities in the prior year.

Loss on Extinguishment of Debt

We experienced no loss on the extinguishment of debt during the year ended December 31, 2021.

During the year ended December 31, 2020, we recognized a $13.7 million loss on the extinguishment of our 5.00% Senior Notes due June 2022 (the “5.00% Senior Notes”) and 5.25% Senior Notes due June 2023 (the “5.25% Senior Notes”).

For the Current Year, other interest expense, net, increased $21.7 million, or 38.9%, as compared to the Prior Year.

The increase in other interest expense, net during the Current Year, was primarily attributable to the additional 4.00% Senior Notes issued in October 2021 and an increase in borrowings used to acquire property in our U.S.

region, primarily related to the Prime Acquisition.

Refer to Note 14.

Debt within our Notes to Consolidated Financial Statements for additional discussion of our debt.

Provision for Income Taxes

Provision for income taxes from continuing operations during the year ended December 31, 2021, increased $91.3 million, or 108.5%, as compared to the same period in 2020.

For the year ended December 31, 2021 and 2020 , we recorded a tax provision from continuing operations of $175.5 million and $84.2 million, respectively.

The year-over-year increase was primarily due to higher pre-tax book income.

The 2021 effective tax rate of 21.9% was lower than the 2020 effective tax rate of 22.1%, primarily as a result of decreased valuation allowances with respect to NOLs in certain U.S.

states and higher excess tax deductions for stock compensation.

We believe that it is more-likely-than-not that our deferred tax assets, net of valuation allowances provided, will be realized, based primarily on the assumption of future taxable income.

We expect our effective tax rate in 2022 will be between approximately 22.5% and 23.5%.

Provision for income taxes from continuing operations during the Current Year increased $55.6 million, or 31.7%, as compared to the Prior Year.

During the Current Year and Prior Year, we recorded a tax provision from continuing operations of $231.1 million and $175.5 million, respectively.

The year-over-year tax expense increase was primarily due to higher pre-tax book income.

The 2022 effective tax rate of 23.5% was higher than the 2021 effective tax rate of 21.9%.

The tax rate increase was primarily due to the increase in nondeductible excess compensation and an increase in state income tax expense due to the mix of domestic earnings, partially offset by state tax benefits from a valuation allowance release on selected state NOLs in the Current Year as compared to the Prior Year.

Additionally, tax benefits from the U.K.

tax rate change in the Prior Year did not recur in the Current Year.

We believe that it is more-likely-than-not that our deferred tax assets, net of valuation allowances provided, will be realized, based primarily on assumptions of our future taxable income, considering future reversals of existing taxable temporary differences.

For further discussion, please see Note 15.

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Liquidity and Capital Resources

Our liquidity and capital resources are primarily derived from cash on hand, cash temporarily invested as a pay down of our Floorplan Line and FMCC Facility levels (see Note 13.

Our liquidity and capital resources are primarily derived from cash on hand, cash temporarily invested as a pay down of our U.S.

Floorplan Line and FMCC Facility levels (see Note 13.

Floorplan Notes Payable in our Notes to Consolidated Financial Statements for additional information), cash from operations, borrowings under our credit facilities, working capital, dealership and real estate acquisition financing and proceeds from debt and equity offerings.

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Floorplan Notes Payable in the Notes to Consolidated Financial Statements).

In accordance with GAAP, we report floorplan financed with lenders affiliated with our vehicle manufacturers (excluding the cash flows from or to manufacturer-affiliated lenders participating in our syndicated lending group) within Cash Flows from Operating Activities in the Consolidated Statements of Cash Flows.

In accordance with U.S.

GAAP, we report floorplan financed with lenders affiliated with our vehicle manufacturers (excluding the cash flows from or to manufacturer-affiliated lenders participating in our syndicated lending group) within Cash Flows from Operating Activities in the Consolidated Statements of Cash Flows.

We report floorplan financed with the Revolving Credit Facility (including the cash flows from or to manufacturer-affiliated lenders participating in the facility) and other credit facilities in the U.K.

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As a result, we use the non-GAAP measure “Adjusted net cash provided by/used in operating activities” and “Adjusted net cash provided by/used in financing activities” to further evaluate our cash flows.

We believe that this classification eliminates excess volatility in our operating cash flows prepared in accordance with GAAP.

In addition, floorplan financing associated with dealership acquisitions and dispositions are classified as investing activity on an adjusted basis to eliminate excess volatility in our operating cash flows prepared in accordance with GAAP.

The following table reconciles cash flows on a GAAP basis to the corresponding adjusted amounts (in millions):

We believe that this classification eliminates excess volatility in our operating cash flows prepared in accordance with U.S.

The following table reconciles cash flows on a U.S.

GAAP basis to the corresponding adjusted amounts (in millions):

Years Ended December 31,

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Change in Floorplan notes payable, excluding floorplan offset (351.2) 373.2

Adjusted net cash provided by (used in) financing activities $ 299.2 $ (357.8)

Adjusted net cash (used in) provided by financing activities $ (418.6) $ 299.2

Sources and Uses of Liquidity from Operating Activities — Year Ended December 31, 2022 compared to 2021

For the year ended December 31, 2021, net cash provided by operating activities increased by $454.2 million, as compared to the same period in 2020.

For the Current Year, net cash provided by operating activities decreased by $673.7 million, as compared to the Prior Year.

On an adjusted basis for the same period, adjusted net cash provided by operating activities increased by $160.3 million.

The increase on an adjusted basis was primarily driven by (i) a $265.6 million increase in total net income;

(ii) a $113.7 million decrease in inventory levels;

(iii) a $94.0 million increase in accounts payable and accrued expenses;

(iii) partially offset by a $161.0 million increase in adjusted net floorplan repayments and a $59.0 million increase in prepaid expenses and other assets.

The increase on an adjusted basis was primarily driven by a $932.2 million increase in adjusted net floorplan borrowings, partially offset by a $811.8 million increase in inventory levels.

Sources and Uses of Liquidity from Investing Activities — Year Ended December 31, 2022 compared to 2021

For the year ended December 31, 2021, net cash used in investing activities increased by $1.2 billion, as compared to the same period in 2020.

On an adjusted basis for the same period, adjusted net cash used in investing activities increased by $1.0 billion, primarily due to an increase in acquisition activities and purchases of property and equipment in 2021.

Refer to Note 3.

Acquisitions in the Notes to Consolidated Financial Statements for more information of acquisitions.

For the Current Year, net cash used in investing activities decreased by $767.1 million, as compared to the Prior Year.

On an adjusted basis for the same period, adjusted net cash used in investing activities decreased by $657.5 million.

The decrease on an adjusted basis was primarily due to a $458.2 million decrease in acquisition activities, coupled with a $119.7 million increase in proceeds from disposition of franchises and property and equipment and $59.4 million net proceeds from the sale of Brazil Discontinued Operations.

Capital Expenditures

Our capital expenditures include costs to extend the useful lives of current facilities, as well as to start or expand operations.

Our capital expenditures include costs to extend the useful lives of current dealership facilities, as well as to start or expand operations.

In general, expenditures relating to the construction or expansion of dealership facilities are driven by dealership acquisition activity, new franchises being granted to us by a manufacturer, significant growth in sales at an existing facility, relocation opportunities or manufacturer imaging programs.

We critically evaluate all planned future capital spending, working closely with our manufacturer partners to maximize the return on our investments.

We forecast our capital expenditures for 2022 will be approximately $134.0 million, excluding expenditures related to real estate purchases and future acquisitions, which could generally be funded from excess cash.

For the Current Year, $155.5 million was used to purchase property and equipment, primarily consisting of $115.5 million in capital expenditures from continuing operations and $39.6 million in purchases of real estate associated with existing dealership operations.

Sources and Uses of Liquidity from Financing Activities — Year Ended December 31, 2022 compared to 2021

For the year ended December 31, 2021, net cash used in financing activities decreased by $594.2 million, as compared to the same period in 2020.

On an adjusted basis for the same period, adjusted net cash provided by financing activities increased by $657.0 million.

The increase on an adjusted basis is primarily driven by net borrowings of debt in 2021 of $629.8 million compared to net repayments of debt in 2020 of $195.4 million;

partially offset by an increase in share repurchases of $130.4 million in 2021, compared to 2020, and $30.0 million higher net repayment of our Floorplan lines (representing the net cash activity in our floorplan offset account).

For the Current Year, net cash used in financing activities decreased by $6.6 million, as compared to the Prior Year.

On an adjusted basis for the same period, adjusted net cash used in financing activities increased by $717.7 million.

The increase on an adjusted basis was primarily driven by Current Year increases in share repurchases of $310.7 million and decreases in net borrowings of debt of $623.7 million, partially offset by increases in net borrowings on our Floorplan lines of $213.8 million (representing the net cash activity in our floorplan offset account).

Credit Facilities, Debt Instruments and Other Financing Arrangements

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(2) The outstanding balance of $315.5 million is related to outstanding letters of credit of $12.2 million and $303.3 million in borrowings.

The borrowings outstanding under the Acquisition Line included $282.0 million of USD borrowings and £35.0 million of GBP borrowings translated at the spot rate on the day borrowed, solely for the purpose of calculating the outstanding and available borrowings under the Acquisition Line in accordance with the Revolving Credit Facility.

The borrowings outstanding under the Acquisition Line included $285.0 million USD borrowings and £15.0 million of GBP borrowings translated at the spot rate on the day borrowed, solely for the purpose of calculating the outstanding and available borrowings under the Acquisition Line in accordance with the Revolving Credit Facility.

The available borrowings may be limited from time to time, based on certain debt covenants.

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Floorplan Notes Payable and Note 14.

Debt in our Notes to Consolidated Financial Statements for further discussion of our debt instruments, credit facilities and other financing arrangements existing as of as of December 31, 2021.

Debt in our Notes to Consolidated Financial Statements for further discussion of our credit facilities, debt instruments and other financing arrangements existing as of December 31, 2022.

Stock Repurchases and Dividends

Our Board of Directors from time to time, authorizes the repurchase of shares of our common stock up to a certain monetary limit.

As of January 1, 2021, we had $168.7 million available under our share repurchase program.

From January 1, 2021, to November 17, 2021, we utilized $84.8 million of the then-available authorized share repurchase program.

On November 17, 2021, our Board of Directors increased the authorization to repurchase shares of our common stock by $116.1 million to $200.0 million.

From November 18, 2021, to December 31, 2021, we utilized $125.7 million of the available share repurchase program, leaving $74.3 million available under our current authorization to repurchase shares of our common stock.

During 2021, 1,103,417 shares were repurchased at an average price of $190.82 per share, for a total of $210.6 million.

During 2021, our Board of Directors approved quarterly cash dividends per share on all shares of our common stock totaling $ 1.33 per share, which resulted in $23.2 million paid to common shareholders and $0.7 million to unvested RSA holders.

Future share repurchases and the payment of any future dividends are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, current economic environment and other factors considered relevant.

From time to time, our Board of Directors authorizes the repurchase of shares of our common stock up to a certain monetary limit.

On November 16, 2022, our Board of Directors increased the share repurchase authorization by $161.0 million to $200.0 million.

During the Current Year, 3,021,023 shares were repurchased at an average price of $172.54 per share, for a total of $521.2 million.

As of December 31, 2022, we had $163.4 million available under our current stock repurchase authorization.

During December 2022, we adopted a Rule 10b5-1 trading plan that was effective from January 3, 2023 to January 23 2023.

Under the plan, we repurchased an additional 76,294 shares subsequent to December 31, 2022 at an average price of $179.42 per share, for a total cost of $13.7 million.

During the Current Year, our Board of Directors approved quarterly cash dividends per share on all shares of our common stock totaling $1.50 per share, which resulted in $23.0 million paid to common shareholders and $0.7 million to unvested RSA holders.

Future share repurchases and the payment of any future dividends are subject to the business judgment of our Board of Directors, taking into consideration our historical and projected results of operations, financial condition, cash flows, capital requirements, covenant compliance, changes in laws and regulations, current economic environment and other factors considered relevant.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis