What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-14 compared with 2023-02-16 · 154 added, 124 removed, 450 unchanged (38% of the section changed)

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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.

On October 7, 2023, Hamas, an internationally designated terrorist organization and ruling party of the Gaza strip in Palestine, launched an attack on Israel.

On October 8, 2023, Israel declared war on Hamas with the armed conflict ongoing as of the date of this filing.

In tandem with such conflict, the Houthi movement, which controls parts of Yemen, has targeted and launched numerous attacks on Israeli, American and international commercial marine vessels in the Red Sea as the ships approach the Suez Canal, resulting in many shipping companies re-routing to avoid the region altogether and worsening existing supply chain issues, including delays in supplier deliveries, extended lead times and increased cost of freight and materials, including certain parts required for EU vehicle production.

It is not known at this time what impact, if any, this war and regional instability will have on the global economy, our operations or the operations of our suppliers.

On September 15, 2023, the United Auto Workers (“UAW”) announced a labor strike at certain facilities of Ford Motor Company, General Motors Company and Stellantis N.V.

(collectively the “Big 3” domestic automakers).

The strike ended at different dates for each of the Big 3 however all ended prior to December 31, 2023.

The strike was limited in its scope and we did not experience a significant impact on our domestic vehicle and parts inventory.

Our manufacturers’ production continued at historically reduced levels in the Current Year, despite recent production improvements over that same period for some of those manufacturers.

Prior to the UAW labor strike, production and related inventory constraints were primarily a result of sustained global semiconductor and other parts shortages, as well as armed conflicts impacting the global supply chain, including the ongoing conflict in Ukraine.

Increased deliveries from all manufacturers in the Current Year drove a higher volume of new units sold and lack of new vehicle availability in prior years also helped maintain elevated new vehicle retail sales prices and margins relative to pre-COVID-19 pandemic levels.

EV inventory has been building over the Current Year for certain brands, outpacing the buildup of non-EV inventory, as EV sales volume has lagged OEM deliveries in recent quarters.

While EV sales continued to increase in 2023, the growth trend has not continued at the pace experienced in the two years prior.

Challenges with EV technologies continue to make headlines within the U.S.

media market, raising concerns around consumer demand and interest in the products.

Our new vehicle days’ supply of inventory was approximately 37 days at December 31, 2023, as compared to 24 and 12, at December 31, 2022 and 2021, respectively.

In the Current Year, we noted increases of new vehicle days’ supply of inventory for most manufacturers.

As new vehicle days’ supply of inventory normalizes, we expect further pressure on sales prices and margins.

On April 12, 2023, the EPA proposed regulations establishing more stringent air emissions limits for light and medium-duty vehicles, which include passenger cars, vans, pickups, sedans and SUVs for model years 2027 through 2032.

The EPA proposes higher emissions stringency each year, beginning with model year 2027.

These proposed standards include new battery durability requirements and changes to certain existing air emissions credit programs.

These regulations could increase or accelerate the adoption of certain emissions reducing technologies, and further market penetration for hybrid, plug-in and battery-EVs.

For example, should the proposed regulations be enacted, the EPA projects that at least 60% of new light-duty passenger vehicles sold in the U.S.

would be battery-electric by 2030.

The EPA also estimates that the regulations, if finalized, would increase costs for auto manufacturers and reduce consumer repair costs for covered vehicles.

The EPA projects the regulations to become final in 2024.

The regulations, as proposed in their current form, may have a significant impact on the future mix of vehicles provided by our manufacturers.

Although the future impact of these regulations on our operations cannot be predicted with certainty, we will continue to monitor and evaluate any proposed or issued regulations.

The global economy continues to experience inflation.

In response to higher than historical average inflationary pressures and challenging macroeconomic conditions, the U.S.

Federal Reserve, along with other central banks, including in the U.K., increased interest rates throughout 2022 and maintained rates at elevated levels throughout 2023.

As a consequence, the cost of financing vehicles for our consumers has increased and created affordability challenges in addition to higher vehicle prices over the past three years.

Continued inflation reducing the disposable income of our customers, volatility in new vehicle availability and higher interest rates increasing the monthly cost of financing vehicles, contributed to used vehicle prices declining in the latter part of 2022 and during the Current Year.

Recent Accounting Pronouncements

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We evaluate goodwill and intangible franchise rights for impairment annually as of October 31, or more frequently if events or circumstances indicate possible impairment has occurred.

Based on the qualitative test performed for the U.S.

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 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.

We have the option of performing a qualitative assessment of impairment to determine whether any further quantitative assessment for impairment is necessary.

The option of whether or not to perform a qualitative assessment is made annually and may vary by reporting unit.

If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required.

In 2023, we elected to perform a quantitative test.

Based on the quantitative goodwill test performed for the U.S.

reporting units in the fourth quarter of 2023, no impairments of goodwill were recorded during the Current Year.

No goodwill impairments were recorded on any reporting units during the year ended December 31, 2022 (the “Prior Year”).

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

Refer to Note 12.

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 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.

During the Current Year, $25.1 million of impairment was recorded for intangible franchise rights.

In the Prior Year, impairment charges of $1.3 million were 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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GAAP measures.

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

Our management also uses constant currency and adjusted 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.

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

Retail new vehicle units sold for 2023 include new vehicle agency units sold under agency arrangements with certain manufacturers in the U.K.

The agency units and related revenues are excluded from the calculation of the average sales price per unit sold for new vehicles due to their net presentation within revenues as only the sales commission is reported in revenues for dealerships operating under an agency arrangement.

The agency units and related net revenues are included in the calculation of gross profit per unit sold.

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.

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Used vehicle retail sales 300.9 313.8 (12.8) (4.1) % 0.1 (4.1) %

Used vehicle wholesale sales — 24.9 (24.9) (100.0) % 0.3 (101.2) %

Used vehicle wholesale sales (3.8) — (3.8) NM — NM

Total used 297.2 313.8 (16.6) (5.3) % — (5.3) %

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Used vehicle retail sales $ 1,604 $ 1,699 $ (95) (5.6) % $ — (5.6) %

Used vehicle wholesale sales $ — $ 630 $ (630) (100.0) % $ 8 (101.3) %

Used vehicle wholesale sales $ (86) $ — $ (86) NM $ (1) NM

Total used $ 1,284 $ 1,415 $ (131) (9.2) % $ — (9.2) %

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(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.

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Same Store Operating Data — Consolidated

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Used vehicle retail sales 285.4 307.6 (22.2) (7.2) % 0.1 (7.2) %

Used vehicle wholesale sales (0.6) 24.6 (25.2) (102.4) % 0.3 (103.6) %

Used vehicle wholesale sales (3.7) 0.2 (4.0) NM — NM

Total used 281.7 307.8 (26.2) (8.5) % — (8.5) %

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Used vehicle retail sales $ 1,596 $ 1,707 $ (111) (6.5) % $ — (6.5) %

Used vehicle wholesale sales $ (20) $ 634 $ (653) (103.1) % $ 9 (104.5) %

Used vehicle wholesale sales $ (89) $ 7 $ (96) NM $ (1) NM

Total used $ 1,279 $ 1,424 $ (146) (10.2) % $ — (10.2) %

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SG&A as % gross profit 64.6 % 61.2 % 3.4 %

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Reported Operating Data — U.S.

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Total revenues in the U.S.

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.

during the Current Year increased $1,387.1 million, or 10.3%, as compared to the Prior Year, driven by higher same store revenues and the acquisition of stores.

Total same store revenues in the U.S.

during the Current Year increased $747.5 million, or 5.7%, 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.

This increase was driven by higher revenues from new vehicle retail, parts and service and used vehicle wholesale, partially offset by lower used vehicle retail and F&I, net.

New and used vehicle retail revenues benefited from the sale of approximately 45,000 units from our online digital platform, AcceleRide®, during the Current Year, a 47.7% 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.

New vehicle retail same store revenues outperformed the Prior Year, driven by strong new vehicle retail pricing coupled with more units sold.

The shortage of new vehicle inventory, compared to pre-COVID-19 pandemic levels, despite recent manufacturers’ production improvements, drove strong pricing.

While new vehicle inventory levels remain depressed compared to pre-COVID-19 pandemic levels, manufacturer vehicle deliveries were higher in the Current Year and as a result, our inventory levels were higher than the Prior Year, providing for the increase in units sold.

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.

new vehicle inventory supply of 36 days, 15 days higher than the Prior Year , but below pre-COVID-19 pandemic levels .

Used vehicle retail same store revenues underperformed the Prior Year, driven by lower pricing , coupl ed with fewer units sold , due to the ongoing new vehicle supply shortage impacting the supply of used vehicles, as well as impacts from inflation reducing the disposable income of our customers and higher interest rates increasing the monthly cost of financing vehicles.

Used vehicle wholesale same store revenues increased primarily due to more wholesale units sold coupled with higher wholesale pricing.

Parts and service same store revenues outperformed the Prior Year, driven by increases across all parts and service 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.

In addition to technician recruitment efforts, we have invested in improving the operations of our U.S.

customer contact center, online scheduling, one-to-one marketing initiatives and by using artificial intelligence.

Customer pay saw the largest increase of the parts and service business lines.

F&I, net same store revenues underperformed the Prior Year, primarily driven by lower used vehicle finance penetration as a result of customers seeking alternative providers of financing in this higher interest rate environment and tighter lending requirements requiring larger down payments.

In addition, used VSC penetration has also declined as a result of vehicle affordability challenges for consumers with higher interest rates.

New vehicle finance and VSC penetration increased in the Current Year, partially offsetting the used vehicle impact.

Total gross profit in the U.S.

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.

during the Current Year increased $27.8 million, or 1.1%, as compared to the Prior Year, driven by the acquisition of stores.

Total same store gross profit in the U.S.

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.

during the Current Year decreased $55.5 million, or 2.2%, as compared to the Prior Year, primarily driven by downward pressures on new vehicle margins and lower F&I PRU.

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

The decrease in new vehicle retail same store gross profit per unit is due to modestly higher production and inventory levels of new vehicles as described 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, coupled with lower same store used vehicle retail units sold.

These decreases were driven by the ongoing new vehicle supply shortage impacting the supply of used vehicles, as well as impacts from inflation reducing the disposable income of our customers and rising interest rates increasing the monthly cost of financing vehicles.

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, partially offset by an increase in same store wholesale used vehicle units sold.

The decrease in used vehicle wholesale same store gross profit per unit sold was driven by higher wholesale vehicle acquisition costs.

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

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

Total same store gross margin decreased 144 basis points, primarily driven by the reasons described above for same store gross profit per unit sold for new vehicle retail, used vehicle retail, used vehicle wholesale and F&I, net.

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.

SG&A as a percentage of gross profit increased 344 basis points and 303 basis points on an as reported and same store basis, respectively, compared to the Prior Year.

Total SG&A expenses in the U.S.

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

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.

during the Current Year increased $41.2 million or 2.7% as compared to the Prior Year, primarily driven by increased activity related to outside services and professional fees, loaner car and related expenses, insurance and taxes, advertising expenses, and rent and facilities expenses, including related taxes, insurance and utilities.

In addition, higher than historical average inflation has contributed to the increase in these same store SG&A expense categories.

These increases were partially offset by lower employee-related costs.

Reported Operating Data — U.K.

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operating results is on an as reported and same store basis.

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

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 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.

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

Retail new vehicle units sold for 2023 include new vehicle agency units.

The agency units and related revenues are excluded from the calculation of the average sales price per unit sold for new vehicles due to their net presentation within revenues.

The agency units and related net revenues are included in the calculation of gross profit per unit sold.

The GBP to USD foreign currency exchange rate has fluctuated from £1 to $1.21 a t December 31, 2022, to £1 to $1.27 at December 31, 2023, or an increase in the value of the GBP of 5.2%.

Total revenues in the U.K.

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.

during the Current Year increased $264.4 million, or 9.5%, as compared to the Prior Year, driven by higher same store results and the acquisition of stores.

Total same store revenues in the U.K.

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.

during the Current Year increased $218.7 million, or 7.9%, as compared to the Prior Year.

On a constant currency basis, total same store revenues increased 7.2%, driven by outperformances across all of our business lines except used vehicle wholesale sales.

New vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year, driven by more units sold, coupled with higher new vehicle retail pricing.

The shortage of new vehicle inventory, compared to pre-COVID-19 pandemic levels, despite recent manufacturers’ production improvements, drove strong pricing.

Vehicle demand was and continues to be pent-up from past years due to the withdrawal of the U.K.

from the EU (“Brexit”) and the COVID-19 pandemic.

In addition, despite the increase in same store new vehicle units sold, we experienced vehicle delivery shortages at various times throughout the Current Year from certain OEMs, limiting our revenue potential.

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.

new vehicle inventory suppl y of 48 days, twelve d ays higher than the Prior Year , but below pre-COVID-19 pandemic levels .

Used vehicle retail same store revenues, on a constant currency basis, outperformed the Prior Year, primarily driven by more units sold, coupled with higher used vehicle retail pricing.

Parts and service same store revenues, on a constant currency basis, outperformed the Prior Year, driven by i ncreases in all business lines, reflecting increased business activity.

W e have invested in improvements to our U.K.

customer contact center, streamlining operations to make scheduling appointments easier for customers, resulting in an increase in parts and service activity driving an increase in revenues as compared to the Prior Year.

F&I, net same store revenues, on a constant currency basis, outperformed the Prior Year, driven by an increase in retail units sold, partially offset by decreases in income per contract for retail finance fees and service contracts.

Total gross profit in the U.K.

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.

during the Current Year increased $27.3 million, or 7.1%, as compared to the Prior Year, driven by higher same store results and the acquisition of stores .

Total same store gross profit in the U.K.

during the Current Year increased $20.0 million, or 5.3%, 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.

On a constant currency basis, total same store gross profit increased 4.5% driven by improvements in new vehicle retail, parts and service and F&I, net gross profit, partially offset by a decline in total used vehicle gross profit.

New vehicle retail same store gross profit, on a constant currency basis, outperformed the Prior Year, due to an increase in new vehicle retail units sold, partially offset by a decrease in new vehicle retail gross profit per unit sold as a result of the increase in vehicle inventory supply as described above generating downward pressure on new vehicle margins.

Used vehicle retail same store gross profit, on a constant currency basis, underperformed the Prior Year, driven by a decrease in used vehicle retail same store gross profit per unit sold, partially offset by an increase in used vehicle retail units sold.

This decrease in gross profit per unit sold was driven by increases in used vehicle acquisition costs, outpacing the increase in used vehicle retail average sales price per unit sold as a result of continued inflationary pressures.

Parts and service same store gross profit, on a constant currency basis, outperformed the Prior Year, driven by increases in parts and service same store revenues, as discussed above, while maintaining gross margin relatively flat compared to the prior year.

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

Total same store gross margin in the U.K.

decreased 32 basis points, primarily driven by lower same store total used gross margin caused by inflationary impacts on our used vehicle customers and higher used vehicle acquisition prices.

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.

SG&A as a percentage of gross profit increased by 450 and 480 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 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.

during the Current Year increased $37.4 million, or 14.0%, as compared to the Prior Year, primarily driven by increases in same store SG&A and the full year impact of prior period acquisitions.

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

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On a constant currency basis, total same store SG&A expenses increased 11.6%.

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.

These increases were primarily driven by increased employee-related expenses and facilities-related expenses as a result of higher activity and continued inflationary pressures, coupled with increased demonstration and loaner car expenses compared to the Prior Year.

The vehicle delivery shortages from certain manufacturers, as discussed above, resulted in higher than anticipated SG&A as a percentage of gross profit given our staffing levels assumed the delivery and sale of these vehicles in the Current Year.

Consolidated Selected Comparisons — Year Ended December 31, 2023 compared to 2022

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Depreciation and amortization expense $ 92.0 $ 88.4 $ 3.7 4.1 %

Asset impairments $ 2.1 $ 1.7 $ 0.4 24.5 %

Asset impairments $ 32.9 $ 2.1 $ 30.7 NM

Floorplan interest expense $ 64.1 $ 27.3 $ 36.8 134.9 %

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Provision for income taxes $ 198.2 $ 231.1 $ (32.9) (14.2) %

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Depreciation and Amortization Expense

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.

Depreciation and amortization expense for the Current Year increased 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 and facilities to our investment portfolio and make improvements to our existing facilities intended to enhance the profitability of our dealerships and improve the overall customer experience.

Impairment of Assets

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.

During the Current Year and Prior Year we recorded impairment of franchise rights of $25.1 million and $1.3 million for franchise agreements in the U.S.

region, respectively.

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

During the Current Year and Prior Year, we recorded total property and equipment and ROU asset impairment charges of $6.8 million and $0.8 million in the U.S.

region, respectively.

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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.

prime rate or other benchmark rates.

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.

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.

For the Current Year, floorplan interest expense increased $36.8 million, or 134.9%, as compared to the Prior Year, driven primarily by an increase in inventories due to improvements in manufacturer production as well as acquisitions, partially offset by realized gains on our interest rate swap portfolio due to increases in corresponding interest rates.

Refer to Note 7 .

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Other Interest Expense, Net

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.

Other interest expense, net consists of interest charges primarily on our $750.0 million 4.00% Senior Notes due August 2028 (“4.00% Senior Notes”), real estate related debt and other debt, partially offset by interest income.

For the Current Year, other interest expense, net, increased $22.3 million, or 28.7%, 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.

The increase in other interest expense, net during the Current Year was primarily attributable to the additional borrowings used to acquire property in our U.S.

The increase in the Current Year was partially offset by the gain on the de-designation of a mortgage interest rate swap of $4.0 million.

Refer to Note 14.

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

Refer to Note 7 .

Financial Instruments and Fair Value Measurements within our Notes to the Consolidated Financial Statements for additional discussion of the de-designation of the mortgage interest rate swap.

Provision for Income Taxes

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

Provision for income taxes from continuing operations during the Current Year decreased $32.9 million, or 14.2%, as compared to the Prior Year.

During the Current Year and Prior Year, we recorded a tax provision from continuing operations of $198.2 million and $231.1 million, respectively.

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

The year-over-year tax expense decrease was primarily due to lower pre-tax book income.

The 2023 effective tax rate of 24.8% was higher than the 2022 effective tax rate of 23.5%.

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.

The tax rate increase was primarily due to taxable gains from asset dispositions and the higher U.K.

statutory tax rate in the Current Year compared to the Prior 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.

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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.

Floorplan Notes Payable in our Notes to the 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.

We anticipate we will generate sufficient cash flows from operations, coupled with cash on hand and available borrowing capacity under our credit facilities, to fund our working capital requirements, service our debt and meet any other recurring operating expenditures.

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Total liquidity $ 795.2

We arrange our new and used vehicle inventory floorplan financing through lenders affiliated with our vehicle manufacturers and our Revolving Credit Facility (as defined in Note 13.

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

We arrange our new and used vehicle inventory floorplan financing through lenders affiliated with our vehicle manufacturers and our Revolving Credit Facility.

In accordance with U.S.

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Refer to Note 13.

Floorplan Notes Payable within our Notes to Consolidated Financial Statements for additional discussion of our Revolving Credit Facility.

Floorplan Notes Payable within our Notes to the Consolidated Financial Statements for additional discussion of our Revolving Credit Facility.

However, we believe that all floorplan financing of inventory purchases in the normal course of business should correspond with the related inventory activity and be classified as an operating activity.

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

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 U.S.

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

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

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CASH FLOWS FROM FINANCING ACTIVITIES:

Net cash used in financing activities:

Net cash provided by (used in) financing activities:

$ 185.2 $ (67.3)

Change in Floorplan notes payable, excluding floorplan offset (547.3) (351.2)

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

Adjusted net cash used in financing activities $ (362.1) $ (418.6)

Sources and Uses of Liquidity from Operating Activities — Year Ended December 31, 2023 compared to 2022

For the Current Year, net cash provided by operating activities decreased by $395.8 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 a $932.2 million increase in adjusted net floorplan borrowings, partially offset by a $811.8 million increase in inventory levels.

On an adjusted basis for the same period, adjusted net cash provided by operating activities decreased by $195.8 million.

The decrease on an adjusted basis was primarily driven by a $285.6 million increase in inventory levels, a $149.9 million decrease in net income, a $32.7 million increase in contracts-in-transit and vehicle receivables and a $27.3 million decrease in accounts payable and accrued expenses, partially offset by a $319.1 million increase in Floorplan notes payable — manufacturer affiliates.

Sources and Uses of Liquidity from Investing Activities — Year Ended December 31, 2023 compared to 2022

For the Current Year, net cash used in investing activities decreased by $118.5 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.

On an adjusted basis for the same period, adjusted net cash used in investing activities decreased by $114.7 million, driven by a $203.6 million decrease in acquisition activity, offset by a $59.4 million decrease in sales proceeds due to the sale of the Brazil Disposal Group in the Prior Year, which did not reoccur in the Current Year and a $30.0 million increase in purchases of property and equipment.

Capital Expenditures

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

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.

For the Current Year, $185.4 million was used to purchase property and equipment.

Sources and Uses of Liquidity from Financing Activities — Year Ended December 31, 2023 compared to 2022

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).

For the Current Year, net cash provided by financing activities increased by $252.5 million, as compared to the Prior Year.

On an adjusted basis for the same period, adjusted net cash used in financing activities decreased by $56.4 million.

The decrease in net cash used in financing activities on an adjusted basis was primarily driven by a decrease of $348.5 million in cash paid for share repurchases from $521.2 million in the Prior Year to $172.8 million in the Current Year, an increase in acquisition line net borrowings of $44.8 million and a decrease in debt issuance costs paid of $4.3 million, offset by net repayments in credit facilities of $239.9 million and net repayments of other debt of $102.5 million.

Credit Facilities, Debt Instruments and Other Financing Arrangements

Our various credit facilities, debt instruments, and other financing arrangements are used to finance the purchase of inventory and real estate, provide acquisition funding, and provide working capital for general corporate purposes.

Our various credit facilities, debt instruments and other financing arrangements are used to finance the purchase of inventory and real estate, acquisitions and working capital for general corporate purposes.

The following table summarizes the commitment of our credit facilities as of December 31, 2023 (in millions):

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300.0 118.1 181.9

GM Financial Facility (4)

84.5 37.9 46.6

credit facilities (5)

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(1) The available balance at December 31, 2023, includes $236.7 million of immediately available funds.

The remaining available balance can be used for inventory financing.

The remaining available balance can be used for vehicle inventory financing.

(2) The outstanding balance of $337.2 million is related to outstanding letters of credit of $12.2 million and $325.0 million in borrowings.

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 borrowings outstanding under the Acquisition Line included $325.0 million USD borrowings.

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

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The remaining available balance can be used for Ford new vehicle inventory financing.

(4) The remaining available balance as of December 31, 2023, can be used for General Motors new and rental vehicle inventory financing.

(5) The outstanding balance excludes $287.8 million of borrowings with manufacturer-affiliates and third-party financial institutions for foreign and rental vehicle financing not associated with any of our U.S.

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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.

On August 2, 2023, our Board of Directors increased the share repurchase authorization to $250.0 million.

During the Current Year, 729,582 shares were repurchased at an average price of $236.78 per share, for a total of $172.8 million.

As of December 31, 2023, we had $143.3 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 $1.80 per share, which resulted in $24.6 million paid to common shareholders and $0.6 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.

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 and predicted 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