AUTONATION, INC. (AN) FY 2021 MD&A

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with Part I, including matters set forth in the “Risk Factors” section of this Form 10-K, and our Consolidated Financial Statements and notes thereto included in Part II, Item 8 of this Form 10-K. This section of this Form 10-K includes discussion of year-to-year comparisons between 2021 and 2020. Discussion of year-to-year comparisons between 2020 and 2019 can be found in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Except to the extent that differences among reportable segments are material to an understanding of our business taken as a whole, we present the discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations on a consolidated basis.

Overview

AutoNation, Inc., through its subsidiaries, is the largest automotive retailer in the United States. As of December 31, 2021, we owned and operated 339 new vehicle franchises from 247 stores located in the United States, predominantly in major metropolitan markets in the Sunbelt region. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 33 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 90% of the new vehicles that we sold in 2021, are manufactured by Toyota (including Lexus), Honda, Ford, General Motors, Stellantis, Mercedes-Benz, BMW, and Volkswagen (including Audi and Porsche). As of December 31, 2021, we also owned and operated 57 AutoNation-branded collision centers, 9 AutoNation USA used vehicle stores, 4 AutoNation-branded automotive auction operations, and 3 parts distribution centers.

We offer a diversified range of automotive products and services, including new vehicles, used vehicles, “parts and service” (also referred to as “After-Sales”), which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive “finance and insurance” products (also referred to as “Customer Financial Services”), which include vehicle service and other protection products, as well as the arranging of financing for vehicle purchases through third-party finance sources.

As of December 31, 2021, we had three reportable segments: Domestic, Import, and Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by General Motors, Ford, and Stellantis. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, Subaru, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-Benz, BMW, Audi, Lexus, and Jaguar Land Rover. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products.

For the year ended December 31, 2021, new vehicle sales accounted for 47% of our total revenue and 24% of our total gross profit. Used vehicle sales accounted for 33% of our total revenue and 14% of our total gross profit. Our parts and service operations, while comprising 14% of our total revenue, contributed 34% of our total gross profit. Our finance and insurance sales, while comprising 5% of our total revenue, contributed 28% of our total gross profit.

Market Conditions

Full-year U.S. industry new vehicle unit sales were 15.1 million in 2021, as compared to 14.6 million in 2020 and 17 million in 2019. During 2021, the demand for vehicles was strong and exceeded supply. While market demand for new and used vehicles remains high primarily due to low interest rates and a consumer desire for personal transportation, there continues to be a shortage of available new vehicles for sale driven largely by certain component shortages and disruptions in the manufacturers’ supply chains. This demand and supply imbalance has resulted in higher levels of profitability for available new and used vehicles. The reduced levels of new vehicle availability is currently expected to continue well into 2022; however, there is still significant uncertainty as to when new vehicle availability will improve, as well as duration and/or degree of the higher levels of profitability being realized during this time.

26

Table of Contents

Results of Operations

We had net income from continuing operations of $1.4 billion and diluted earnings per share of $18.31 in 2021, as compared to net income from continuing operations of $381.8 million and diluted earnings per share of $4.30 in 2020.

Our total gross profit increased 39% during 2021, driven by increases in new vehicle gross profit of 106%, used vehicle gross profit of 50%, finance and insurance gross profit of 31%, and parts and service gross profit of 15%, each as compared to 2020. New and used vehicle gross profit benefited from an increase in unit volume and gross profit per vehicle retailed (“PVR”) resulting from strong demand and historically low new vehicle inventory levels due to certain component shortages in the manufacturers’ supply chains. Finance and insurance gross profit benefited from an increase in finance and insurance gross profit PVR and the increase in vehicle unit volume. Parts and service gross profit benefited primarily from increases in gross profit from customer-pay service and the preparation of vehicles for sale due to increases in repair order volume, which was adversely impacted by the COVID-19 pandemic in the prior year.

SG&A expenses increased largely due to performance-driven increases in compensation expense. With improvements in gross profit and our continued focus on cost control, SG&A expenses as a percentage of gross profit decreased to 58.1% during 2021, from 67.9% in the same period in 2020.

Net income from continuing operations during 2021 and 2020, benefited from after-tax gains of $8.3 million and $97.5 million, respectively, related to sales of a minority equity investment as well as changes in the fair value of other minority equity investments held as of the end of each respective year. During 2021, net income from continuing operations also benefited from after-tax gains related to store/property divestitures, net of asset impairments, of $10.9 million. During 2020, net income from continuing operations was adversely impacted by non-cash after-tax goodwill and franchise rights impairment charges totaling $308.4 million and after-tax charges incurred in connection with the closure of our aftermarket collision parts (“ACP”) business of $27.8 million.

Strategic Initiatives

We plan to expand our AutoNation USA used vehicle stores and are targeting to have over 130 stores by the end of 2026. We are planning 17 new store openings over 2021 and 2022. We anticipate that the initial capital investment for each new store will be approximately $10 million to $12 million on average. The planned expansion may be impacted by a number of variables, including customer adoption, market conditions, availability of used vehicle inventory, and our ability to identify, acquire, and build out suitable locations in a timely manner.

Inventory Management

Our new and used vehicle inventories are stated at the lower of cost or net realizable value in our Consolidated Balance Sheets. We monitor our vehicle inventory levels based on current economic conditions and seasonal sales trends. Our new vehicle inventory units at December 31, 2021 and 2020, were 10,090 and 43,747, respectively. By historical standards, our inventory unit levels were significantly lower at December 31, 2021, driven by strong demand and the component shortages in the manufacturers’ supply chains. Inadequate levels of new vehicle availability could adversely affect our financial results.

We have typically not experienced significant losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We monitor our new vehicle inventory values as compared to net realizable values, and had no new vehicle inventory write-downs at December 31, 2021 or 2020.

We recondition the majority of used vehicles acquired for retail sale in our parts and service departments and capitalize the related costs to the used vehicle inventory. We monitor our used vehicle inventory values as compared to net realizable values. Typically, used vehicles that are not sold on a retail basis are sold at wholesale auctions. Our used vehicle inventory balance was net of cumulative write-downs of $3.6 million at December 31, 2021, and $3.4 million at December 31, 2020.

Parts, accessories, and other inventory are carried at the lower of cost or net realizable value. We estimate the amount of potentially damaged and/or obsolete inventory based upon historical experience, manufacturer return policies, and industry trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $5.8 million at December 31, 2021, and $6.5 million at December 31, 2020.

27

Table of Contents

Critical Accounting Estimates

We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Consolidated Financial Statements. Set forth below are the accounting estimates that we have identified as critical to our business operations and an understanding of our results of operations, based on the high degree of judgment or complexity in their application. See Note 1 of the Notes to Consolidated Financial Statements for a discussion of other significant accounting policies.

Goodwill

Goodwill for our reporting units is tested for impairment annually on April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit exceeds its fair value. We may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit is impaired. When assessing goodwill for impairment, our decision to perform a qualitative assessment for an individual reporting unit is influenced by a number of factors, including the carrying value of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments, macroeconomic conditions, automotive industry and market conditions, and our operating performance.

If we do not perform a qualitative assessment, or if we determine that it is not more likely than not that the fair value of the reporting unit exceeds its carrying amount, we calculate the estimated fair value of the reporting unit using an “income” valuation approach, which discounts projected free cash flows of the reporting unit at a computed weighted average cost of capital as the discount rate. The income valuation approach requires the use of significant estimates and assumptions, which include revenue growth rates and future operating margins used to calculate projected future cash flows, weighted average cost of capital, and future economic and market conditions. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization, including consideration of a control premium based upon our stock price and/or average stock price over a reasonable period as of the measurement date. We base our cash flow forecasts on our knowledge of the automotive industry, our recent performance, our expectations of our future performance, and other assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates. We also make certain judgments and assumptions in allocating shared assets and liabilities to determine the carrying values for each of our reporting units.

Under accounting standards, we chose to make a qualitative evaluation about the likelihood of goodwill impairment for our annual impairment testing as of April 30, 2021, and we determined that it was not more likely than not that the fair values of our reporting units were less than their carrying amounts.

During the first quarter of 2020, in light of the uncertainty surrounding the COVID-19 pandemic and the decrease in our market capitalization as of March 31, 2020, we concluded that a triggering event had occurred potentially indicating that the fair values of our reporting units were less than their carrying values as of March 31, 2020. Therefore, we performed quantitative goodwill impairment tests for each of our reporting units as of March 31, 2020. As a result of these impairment tests, during the three months ended March 31, 2020, we recorded non-cash goodwill impairment charges totaling $318.3 million, of which $257.4 million related to our Premium Luxury reporting unit, $41.6 million related to our Collision Centers reporting unit, and $19.3 million related to our Parts Centers reporting unit. Goodwill associated with our Premium Luxury reporting unit was partially impaired and goodwill associated with our Collision Centers and Parts Centers reporting units was fully impaired. The fair values of our Domestic and Import reporting units substantially exceeded their carrying values. Therefore, the most significant impact of a change in the assumptions used in determining our goodwill impairment as of March 31, 2020, was related to our Premium Luxury reporting unit. As noted above, the goodwill impairment testing process requires the estimated aggregate fair values of our reporting units to be reconciled with our market capitalization, including consideration of a control premium, based upon our stock price and/or average stock price over a reasonable period as of the measurement date. The COVID-19 pandemic had a significant adverse impact on the U.S. stock market during the first quarter of 2020, and our closing stock price declined significantly as of March 31, 2020.

28

Table of Contents

As a result, as of March 31, 2020, our market capitalization and, therefore, the estimated fair values of our reporting units, significantly decreased. As a measure of sensitivity, a 50 basis point increase in the discount rate would have resulted in an increase to the goodwill impairment charge of approximately $100 million. This result and discussion is not intended to address all potential outcomes that could have resulted if different assumptions had been used in determining our 2020 goodwill impairment given the number of assumptions used in determining the impairment and the degree of sensitivity to changes in such assumptions in the determination of the fair value of the Company and its assets and liabilities.

As of December 31, 2021, we have $228.7 million of goodwill related to the Domestic reporting unit, $517.9 million related to the Import reporting unit, $484.1 million related to the Premium Luxury reporting unit, and $4.6 million related to the Collision Centers reporting unit.

Other Intangible Assets

Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We may first perform a qualitative assessment to determine whether it is more likely than not that a franchise right asset is impaired. The quantitative impairment test for franchise rights requires the comparison of the franchise rights’ estimated fair value to carrying value by store. Fair values of rights under franchise agreements are estimated using unobservable (Level 3) inputs by discounting expected future cash flows of the store. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic projections, and other marketplace data we believe to be reasonable.

We elected to perform quantitative tests for our annual franchise rights impairment testing as of April 30, 2021, and no impairment charges resulted from these quantitative tests.

During the first quarter of 2020, we concluded that, as a result of the impacts from the COVID-19 pandemic, a triggering event had occurred that indicated the fair values of our franchise rights may have been less than their carrying values as of March 31, 2020. We performed quantitative impairment tests as of March 31, 2020, and as a result, we identified eight stores with franchise rights carrying values that exceeded their estimated fair values, and we recorded non-cash franchise rights impairment charges of $57.5 million during the first quarter of 2020. For our April 30, 2020 annual impairment test, we elected to perform quantitative franchise rights impairment tests, and no additional impairment charges resulted from these quantitative tests. We identified seven stores that, while they each had franchise rights fair value in excess of or equal to carrying value, had lower relative performance compared to our total store population. The remainder of our stores had franchise rights with calculated fair values that substantially exceeded their carrying values.

If the fair value of each of our franchise rights had been determined to be a hypothetical 10% lower as of the valuation date of April 30, 2021, no impairment would have resulted. If the fair value of each of our franchise rights had been determined to be a hypothetical 10% lower as of the valuation date of April 30, 2020, the resulting incremental charge would have been less than $1 million. The effect of a hypothetical 10% decrease in fair value estimates is not intended to provide a sensitivity analysis of every potential outcome.

29

Table of Contents

Reported Operating Data

30

Table of Contents

31

Table of Contents

Same Store Operating Data

We have presented below our operating results on a same store basis to reflect our internal performance. The “Same Store” amounts presented below include the results of our stores for the identical months in each period presented in the comparison, commencing with the first full month in which the store was owned by us. Results from divested stores are excluded from both current and prior periods. Therefore, the amounts presented in the year 2020 column that is being compared to the year 2021 column may differ from the amounts presented in the year 2020 column that is being compared to the year 2019 column. We believe the presentation of this information provides a meaningful comparison of period-over-period results of our operations.

32

Table of Contents

33

Table of Contents

New Vehicle

The following discussion of new vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $92.6 million, $18.0 million, and $120.0 million in new vehicle revenue and $11.3 million, $0.9 million, and $1.8 million in new vehicle gross profit for 2021, 2020, and 2019, respectively, is related to acquisition and divestiture activity, as well as new add-point openings, as applicable in a given year.

2021 compared to 2020

Same store new vehicle revenue increased during 2021, as compared to 2020, due to increases in same store revenue PVR and same store unit volume. Same store unit volume in the prior year was significantly adversely impacted by the COVID-19 pandemic, particularly during the last two weeks of March 2020 through April 2020. Same store unit volume in the current year benefited from an increase in customer demand, partially offset by historically low inventory levels due to manufacturer supply shortages.

Same store revenue PVR and gross profit PVR both increased during 2021, as compared to 2020, primarily due to strong demand and reduced availability of new vehicle inventory.

34

Table of Contents

Net New Vehicle Inventory Carrying Benefit (Cost)

The following table details net new vehicle inventory carrying benefit (cost), consisting of new vehicle floorplan interest expense net of floorplan assistance earned (amounts received from manufacturers specifically to support store financing of new vehicle inventory). Floorplan assistance is accounted for as a component of new vehicle gross profit in accordance with GAAP.

2021 compared to 2020

The net new vehicle inventory carrying benefit increased during 2021, as compared to the same period in 2020, due to a decrease in floorplan interest expense and an increase in floorplan assistance. Floorplan interest expense decreased due to lower average floorplan balances and lower average interest rates. Floorplan interest rates are variable and, therefore, increase and decrease with changes in the underlying benchmark interest rates. Floorplan assistance increased due to increases in unit volume and the average floorplan assistance rate per unit.

35

Table of Contents

Used Vehicle

The following discussion of used vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $97.2 million, $10.6 million, and $63.7 million in retail used vehicle revenue and $7.6 million, $0.8 million, and $2.3 million in retail used vehicle gross profit for 2021, 2020, and 2019, respectively, is related to acquisition and divestiture activity, as well as the opening of new add-points and AutoNation USA stores, as applicable in a given year.

2021 compared to 2020

Same store retail used vehicle revenue increased during 2021, as compared to 2020, due to increases in same store revenue PVR and same store unit volume. Same store unit volume in the prior year was significantly adversely impacted by the COVID-19 pandemic, particularly during the last two weeks of March 2020 through April 2020. Market demand for used vehicles in the current year continued to increase due in part to decreased availability of new vehicles.

Same store revenue PVR and gross profit PVR both increased during 2021, as compared to 2020, primarily due to increased demand for used vehicles and reduced availability of new vehicle inventory. In addition, same store gross profit PVR benefited from a shift in mix to trade-ins and used vehicles acquired through our “We’ll Buy Your Car” program, which both have relatively higher average gross profit PVR.

36

Table of Contents

Parts & Service

Parts and service revenue is primarily derived from vehicle repairs paid directly by customers or via reimbursement from manufacturers and others under warranty programs, as well as from wholesale parts sales, collision services, and the preparation of vehicles for sale.

The following discussion of parts and service is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $71.6 million, $108.3 million, and $115.1 million in parts and service revenue and $31.3 million, $12.2 million, and $38.2 million in parts and service gross profit for 2021, 2020, and 2019, respectively, is related to acquisition and divestiture activity, the closure of our ACP business, and the opening of new add-points and AutoNation USA stores, as applicable in a given year.

2021 compared to 2020

During 2021, same store parts and service gross profit increased compared to the same period in 2020, primarily due to increases in gross profit associated with customer-pay service of $91.6 million, the preparation of vehicles for sale of $51.9 million, and wholesale parts sales of $26.9 million, partially offset by a decrease in gross profit associated with warranty service of $23.1 million.

Gross profit associated with customer-pay service and the preparation of vehicles for sale both benefited from an increase in repair order volume compared to the prior year, which was adversely impacted by the COVID-19 pandemic, as well as higher value repair orders. Gross profit associated with preparation of vehicles for sale also benefited from improved margin performance. Gross profit associated with wholesale parts sales benefited from an increase in volume. Gross profit associated with manufacturer warranty service was adversely impacted by a decrease in repair order volume, partially driven by a decline in units in our primary service base as a result of lower new vehicle unit sales in the current and prior year.

37

Table of Contents

Finance and Insurance

Revenue on finance and insurance products represents commissions earned by us for the placement of: (i) loans and leases with financial institutions in connection with customer vehicle purchases financed, (ii) vehicle service contracts with third-party providers, and (iii) other vehicle protection products with third-party providers. We sell these products on a commission basis, and we also participate in the future underwriting profit on certain products pursuant to retrospective commission arrangements with the issuers of those products.

The following discussion of finance and insurance results is on a same store basis. The difference between reported amounts and same store amounts in finance and insurance revenue and gross profit in the above tables of $10.0 million, $1.9 million, and $10.4 million for 2021, 2020, and 2019, respectively, is related to acquisition and divestiture activity, as well as the opening of new add-points and AutoNation USA stores, as applicable in a given year.

2021 compared to 2020

Same store finance and insurance revenue and gross profit increased during 2021, as compared to 2020, due to increases in finance and insurance gross profit PVR and vehicle unit volume. The increase in finance and insurance gross profit PVR was primarily due to higher realized margins on vehicle service contracts and an increase in product penetration. Finance and insurance gross profit PVR also benefited from increases in gross profit per transaction associated with arranging customer financing and amounts financed per transaction.

38

Table of Contents

Segment Results

In the following table of financial data, revenue and segment income of our reportable segments are reconciled to consolidated revenue and consolidated operating income, respectively.

39

Table of Contents

Domestic

The Domestic segment operating results included the following:

2021 compared to 2020

Domestic revenue increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle revenue PVR and used vehicle unit volume, partially offset by a decrease in new vehicle unit volume resulting from historically low new vehicle inventory levels due to manufacturer supply shortages. New and used vehicle revenue PVR and used vehicle unit volume benefited from an increase in customer demand and reduced availability of new vehicle inventory. New and used vehicle unit volume in the prior year was significantly adversely impacted by the COVID-19 pandemic, particularly during the last two weeks of March 2020 through April 2020.

Domestic segment income increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle gross profit, which both benefited from increased demand and reduced availability of new vehicle inventory, and an increase in finance and insurance gross profit, which benefited from an increase in finance and insurance gross profit PVR and higher used vehicle unit volume. Increases to Domestic segment income were partially offset by an increase in performance-driven SG&A expenses.

40

Table of Contents

Import

The Import segment operating results included the following:

2021 compared to 2020

Import revenue increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle revenue PVR and new and used vehicle unit volume. Vehicle revenue PVR benefited from an increase in customer demand and historically low new vehicle inventory levels due to manufacturer supply shortages. Unit volume also benefited from the increase in customer demand, partially offset by the reduced availability of new vehicle inventory. Additionally, unit volume in the prior year was significantly adversely impacted by the COVID-19 pandemic, particularly during the last two weeks of March 2020 through April 2020.

Import segment income increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle gross profit, which both benefited from increased demand and reduced availability of new vehicle inventory, and an increase in finance and insurance gross profit, which benefited from an increase in finance and insurance gross profit PVR and higher unit volume. Increases to Import segment income were partially offset by an increase in performance-driven SG&A expenses.

41

Table of Contents

Premium Luxury

The Premium Luxury segment operating results included the following:

2021 compared to 2020

Premium Luxury revenue increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle unit volume and new and used vehicle revenue PVR. Unit volume benefited from an increase in customer demand, partially offset by historically low new vehicle inventory levels due to manufacturer supply shortages. Additionally, unit volume in the prior year was significantly adversely impacted by the COVID-19 pandemic, particularly during the last two weeks of March 2020 through April 2020. Vehicle revenue PVR benefited from the increase in customer demand and the reduced availability of new vehicle inventory.

Premium Luxury segment income increased during 2021, as compared to 2020, primarily due to increases in new and used vehicle gross profit, which both benefited from increased demand and reduced availability of new vehicle inventory, and an increase in finance and insurance gross profit, which benefited from higher unit volume and an increase in finance and insurance gross profit PVR. Premium Luxury segment income also benefited from an increase in parts and service gross profit associated with customer-pay service and the preparation of vehicles for sale. Increases to Premium Luxury segment income were partially offset by an increase in performance-driven SG&A expenses.

42

Table of Contents

Corporate and other

Corporate and other results included the following:

“Corporate and other” is comprised of our other businesses, including collision centers, auction operations, AutoNation USA used vehicle stores, and parts distribution centers, all of which generate revenues but do not meet the quantitative thresholds for reportable segments, as well as unallocated corporate overhead expenses and other income items.

As of December 31, 2021, we had 57 AutoNation-branded collision centers, 9 AutoNation USA stores, 4 AutoNation-branded automotive auction operations, and 3 parts distribution centers that service our wholesale parts sales markets for the sale of original equipment manufacturer parts. We plan to expand our AutoNation USA used vehicle stores and are targeting to have over 130 stores by the end of 2026. We are planning 17 new store openings over 2021 and 2022. The planned expansion may be impacted by a number of variables, including customer adoption, market conditions, availability of used vehicle inventory, and our ability to identify, acquire, and build out suitable locations in a timely manner.

In the third quarter of 2020, we determined to close our aftermarket collision parts (“ACP”) business by the end of 2020. In connection with the closing of the ACP business, we incurred total pre-tax charges of $36.7 million in 2020. The charges are comprised of inventory valuation adjustments, contract termination charges, accelerated depreciation and amortization, asset impairment charges, involuntary termination benefits, and other associated closing costs. See Note 17 of the Notes to Consolidated Financial Statements for additional information.

During 2020, we recorded non-cash goodwill impairment charges totaling $318.3 million, of which $257.4 million related to our Premium Luxury reporting unit, $41.6 million related to our Collision Centers reporting unit, and $19.3 million related to our Parts Centers reporting unit. We also recorded non-cash franchise rights impairment charges of $57.5 million. The non-cash goodwill impairments and franchise rights impairments are reflected as Goodwill Impairment and Franchise Rights Impairment, respectively, in the accompanying Consolidated Statements of Income. During 2020, we recorded non-cash long-lived asset impairment charges associated with our ACP business of $11.0 million, of which $5.1 million is included in the ACP closing charges described above, and non-cash intangible asset impairment charges associated with our collision centers and ACP business of $2.4 million.

43

Table of Contents

Selling, General, and Administrative Expenses

Our SG&A expenses consist primarily of compensation, including store and corporate salaries, commissions, and incentive-based compensation, as well as advertising (net of reimbursement-based manufacturer advertising rebates), and store and corporate overhead expenses, which include occupancy costs, legal, accounting, and professional services, and general corporate expenses. The following table presents the major components of our SG&A.

2021 compared to 2020

SG&A expenses increased in 2021, as compared to 2020, primarily due to a performance-driven increase in compensation expense. Additionally, gross advertising expenses increased $11.8 million, partially offset by an increase in advertising reimbursements from manufacturers of $3.2 million. As a percentage of total gross profit, SG&A expenses decreased to 58.1% during 2021, from 67.9% in 2020, primarily due to improvements in gross profit PVR and effective cost management.

Goodwill Impairment

During the first quarter of 2020, due to the impact of the COVID-19 pandemic on our results and the decrease in our stock price and market capitalization as of March 31, 2020, we recorded non-cash goodwill impairment charges of $318.3 million. See Note 19 of the Notes to Consolidated Financial Statements for more information.

Franchise Rights Impairment

During the first quarter of 2020, we recorded non-cash franchise rights impairment charges of $57.5 million to reduce the carrying values of certain franchise rights to their estimated fair values. See Note 19 of the Notes to Consolidated Financial Statements for more information.

Other (Income) Expense, Net (Operating)

During 2021, we recognized a gain of $5.2 million related to a legal settlement and net gains of $17.6 million related to business/property divestitures, partially offset by asset impairments of $3.2 million.

During 2020, we recognized $3.2 million related to contract termination charges and $5.1 million related to long-lived asset impairment charges in connection with the closure of our ACP business, as well as other asset impairment charges of $9.6 million. These charges were partially offset by net gains of $7.8 million related to store/property divestitures and $4.7 million related to legal settlements.

44

Table of Contents

Non-Operating Income (Expenses)

Floorplan Interest Expense

Floorplan interest expense was $25.7 million in 2021 and $63.8 million in 2020. The decrease in floorplan interest expense of $38.1 million in 2021, as compared to 2020, was the result of lower average vehicle floorplan balances and lower average interest rates. Floorplan interest rates are variable and therefore increase and decrease with changes in the underlying benchmark interest rates.

Other Interest Expense

Other interest expense of $93.0 million in 2021 was relatively flat compared to $93.7 million in 2020.

Other Income, Net (included in Non-Operating Income)

During 2021 and 2020, we recognized net gains of $12.7 million and $12.3 million, respectively, related to increases in the cash surrender value of corporate-owned life insurance (“COLI”) held in a Rabbi Trust for deferred compensation plan participants as a result of changes in market performance of the underlying investments. Gains and losses related to the COLI are substantially offset by corresponding increases and decreases, respectively, in the deferred compensation obligations, which are reflected in SG&A expenses.

During 2021, we sold the remaining shares of one of our minority equity investments and recorded a realized gain of $7.5 million. Additionally, as a result of changes in the fair values of the underlying securities of our other minority equity investments, we recorded an unrealized gain of $3.4 million during 2021. During 2020, we recorded a gain of $131.5 million related to one of our minority equity investments, of which $63.4 million was realized based on the shares sold during 2020 and $68.1 million was unrealized based on changes in the fair value of the shares still held as of December 31, 2020. See Note 19 of the Notes to Consolidated Financial Statements for more information.

Income Tax Provision

Income taxes are provided based upon our anticipated underlying annual blended federal and state income tax rates, adjusted, as necessary, for any discrete tax matters occurring during the period. As we operate in various states, our effective tax rate is also dependent upon our geographic revenue mix.

Our effective income tax rate was 24.1% in 2021 and 30.6% in 2020. The tax rate for 2020 reflects the fact that a significant portion of the goodwill impairment charges taken in the first quarter of 2020 was not deductible for income tax purposes. See Note 12 of the Notes to Consolidated Financial Statements for more information.

Discontinued Operations

Discontinued operations are related to stores that were sold or terminated prior to January 1, 2014. Results from discontinued operations, net of income taxes, were primarily related to carrying costs for real estate we have not yet sold associated with stores that were closed prior to January 1, 2014, and other adjustments related to disposed operations.

Liquidity and Capital Resources

We manage our liquidity to ensure access to sufficient funding at acceptable costs to fund our ongoing operating requirements and future capital expenditures while continuing to meet our financial obligations. We believe that our cash and cash equivalents, funds generated through operations, and amounts available under our revolving credit facility, commercial paper program, and secured used vehicle floorplan facilities will be sufficient to fund our working capital requirements, service our debt, pay our tax obligations and commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future.

45

Table of Contents

Available Liquidity Resources

We had the following sources of liquidity available for the years ended December 31, 2021 and 2020:

(1)    At December 31, 2021, we had $39.7 million of letters of credit outstanding. In addition, we use the revolving credit facility under our credit agreement as a liquidity backstop for borrowings under the commercial paper program. We had $340.0 million commercial paper notes outstanding at December 31, 2021. See Note 9 of the Notes to Consolidated Financial Statements for additional information.

(2)    Based on the eligible used vehicle inventory that could have been pledged as collateral. See Note 5 of the Notes to Consolidated Financial Statements for additional information.

In January 2021, we repaid the outstanding $300.0 million of 3.35% Senior Notes through utilization of available funds.

In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of our performance relating to insurance matters. At December 31, 2021, surety bonds, letters of credit, and cash deposits totaled $104.8 million, including the $39.7 million of letters of credit issued under our revolving credit facility. We do not currently provide cash collateral for outstanding letters of credit.

Capital Allocation

Our capital allocation strategy is focused on growing long-term value per share. We invest capital in our business to maintain and upgrade our existing facilities and to build new facilities for existing franchises and new AutoNation USA used vehicle stores, as well as for other strategic and technology initiatives. We also deploy capital opportunistically to complete acquisitions or investments, build facilities for newly awarded franchises, and/or repurchase our common stock and/or debt. Our capital allocation decisions will be based on factors such as the expected rate of return on our investment, the market price of our common stock versus our view of its intrinsic value, the market price of our debt, the potential impact on our capital structure, our ability to complete acquisitions that meet our market and vehicle brand criteria and return on investment threshold, and limitations set forth in our debt agreements.

Share Repurchases

Our Board of Directors from time to time authorizes the repurchase of shares of our common stock up to a certain monetary limit. A summary of shares repurchased under our share repurchase program authorized by our Board of Directors follows:

The decision to repurchase shares at any given point in time is based on such factors as the market price of our common stock versus our view of its intrinsic value, the potential impact on our capital structure (including compliance with our maximum leverage ratio and other financial covenants in our debt agreements as well as our available liquidity), and the expected return on competing uses of capital such as acquisitions or investments, capital investments in our current businesses, or repurchases of our debt.

As of February 15, 2022 and December 31, 2021, $776.3 million and $894.6 million, respectively, remained available under our stock repurchase limit most recently authorized by our Board of Directors.

46

Table of Contents

Capital Expenditures

The following table sets forth information regarding our capital expenditures over the past three years:

At December 31, 2021, we owned approximately 80% of our new vehicle franchise store locations with a net book value of $2.3 billion, as well as other properties associated with our collision centers, AutoNation USA used vehicle stores, parts distribution centers, auction operations, and other excess properties with a net book value of $587.9 million. None of these properties are mortgaged or encumbered.

Acquisitions and Divestitures

The following table sets forth information regarding cash used in business acquisitions, net of cash acquired, and cash received from business divestitures, net of cash relinquished, over the past three years:

During 2021, we purchased 20 stores and 4 collision centers. We did not purchase any stores during 2020.

During 2021, we divested 3 stores and 18 collision centers. During 2020, we divested 1 store and 2 collision centers, and terminated 1 franchise.

We plan to expand our AutoNation USA used vehicle stores and are targeting to have over 130 stores by the end of 2026. We are planning 17 new store openings over 2021 and 2022. We anticipate that the initial capital investment for each new store will be approximately $10 million to $12 million on average. The planned expansion may be impacted by a number of variables, including customer adoption, market conditions, availability of used vehicle inventory, and our ability to identify, acquire, and build out suitable locations in a timely manner.

47

Table of Contents

Long-Term Debt

The following table sets forth our non-vehicle long-term debt as of December 31, 2021 and 2020: