AUTONATION, INC. (AN) FY 2023 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 2023 and 2022. Discussion of year-to-year comparisons between 2022 and 2021 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, 2022.

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 one of the largest automotive retailers in the United States. As of December 31, 2023, we owned and operated 349 new vehicle franchises from 252 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 34 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 88% of the new vehicles that we sold in 2023, are manufactured by Toyota (including Lexus), Honda, Ford, General Motors, BMW, Mercedes-Benz, Stellantis, and Volkswagen (including Audi and Porsche). As of December 31, 2023, we also owned and operated 53 AutoNation-branded collision centers, 19 AutoNation USA used vehicle stores, 4 AutoNation-branded automotive auction operations, 3 parts distribution centers, a mobile automotive repair and maintenance business, and an auto finance company.

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. We also offer indirect financing on certain vehicles we sell through our captive finance company.

As of December 31, 2023, 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, Hyundai, 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, 2023, new vehicle sales accounted for 47% of our total revenue and 21% of our total gross profit. Used vehicle sales accounted for 30% of our total revenue and 10% of our total gross profit. Our parts and service operations, while comprising 17% of our total revenue, contributed 42% 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 15.6 million in 2023, as compared to 13.9 million in 2022, and 15.1 million in 2021. Although still below historical levels, new vehicle inventory levels continued to increase during 2023 due to higher levels of manufacturer vehicle production. The increasing supply and availability of new vehicle inventory, which varies by make and model, has resulted in moderation of new vehicle margins, which we expect will continue in 2024. Additionally, the increased availability of new vehicles and an increase in manufacturer new vehicle incentives, including low-interest financing and customer rebates, has adversely impacted market demand for used vehicles, particularly for higher-priced, nearly new vehicle inventory.

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In October 2023, the United Auto Workers (“UAW”) ended its six-week long strike against General Motors (“GM”), Stellantis (the parent company of Chrysler), and Ford after reaching tentative agreements with the manufacturers, which were ultimately ratified by UAW membership in November 2023. We have 32 GM stores, 23 Chrysler stores, and 34 Ford stores in our portfolio. There were no material impacts to our results during 2023.

Results of Operations

We had net income of $1.0 billion and diluted earnings per share of $22.74 in 2023, as compared to net income of $1.4 billion and diluted earnings per share of $24.29 in 2022.

Our total gross profit decreased 3% during 2023, as compared to 2022, driven by decreases in new vehicle gross profit of 22% and used vehicle gross profit of 8%. New vehicle gross profit was adversely impacted by a decrease in gross profit per vehicle retailed (“PVR”) resulting from increasing supply and availability of new vehicle inventory, which has resulted in moderation of pricing and margins. Used vehicle gross profit was adversely impacted by a decrease in used vehicle unit volume due in part to a decrease in market demand for used vehicles, particularly for higher-priced, nearly new vehicle inventory resulting from the increased availability of new vehicles. The decreases in gross profit were partially offset by an increase in parts and service gross profit of 13%, as compared to 2022, due to increases in gross profit from customer-pay service, warranty service, and the preparation of vehicles for sale.

SG&A expenses increased largely due to acquisitions and newly opened stores and expenditures associated with investments in technology and strategic initiatives. Floorplan interest expense increased due to higher average interest rates and higher average floorplan balances. Other interest expense increased due to higher average interest rates and higher average debt balances.

Net income during 2023 was adversely impacted by an after-tax loss of $12.4 million from hailstorms and other natural catastrophes. Net income during 2022 was adversely impacted by the recognition of an initial credit loss expense of $25.8 million (after-tax) associated with the auto loans receivable acquired as part of our acquisition of a captive auto finance company. During 2022, net income benefited from after-tax gains related to business/property divestitures, net of asset impairments, of $11.1 million.

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, 2023 and 2022, were approximately 35,300 and 18,100, respectively. 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. We had no new vehicle inventory write-downs at December 31, 2023 and December 31, 2022.

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 $12.2 million at December 31, 2023, and $7.4 million at December 31, 2022.

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 $7.8 million at December 31, 2023, and $7.4 million at December 31, 2022.

Critical Accounting Estimates

We prepare our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), 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

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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, 2023 and 2022, 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. As of December 31, 2023, we have $234.5 million of goodwill related to the Domestic reporting unit, $526.6 million related to the Import reporting unit, $482.1 million related to the Premium Luxury reporting unit, $139.6 million related to the Mobile Service reporting unit, $78.4 million related to the AutoNation Finance 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, 2023 and 2022, and no impairment charges resulted from these quantitative tests.

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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, 2023, the resulting impairment charge would have been less than $0.5 million. The effect of a hypothetical 10% decrease in fair value estimates is not intended to provide a sensitivity analysis of every potential outcome.

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Reported Operating Data

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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 2022 column that is being compared to the year 2023 column may differ from the amounts presented in the year 2022 column that is being compared to the year 2021 column. We believe the presentation of this information provides a meaningful comparison of period-over-period results of our operations.

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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 $195.3 million, $55.7 million, and $46.8 million in new vehicle revenue and $13.4 million, $4.8 million, and $3.6 million in new vehicle gross profit for 2023, 2022, and 2021, respectively, is related to acquisition and divestiture activity, as applicable in a given year.

2023 compared to 2022

Same store new vehicle revenue increased during 2023, as compared to 2022, due to increases in same store unit volume and same store revenue PVR. Same store unit volume benefited from increasing supply of new vehicle inventory, particularly for Import manufacturers, an increase in manufacturer incentives including low-interest financing and rebates, and sustained consumer demand.

Same store revenue PVR increased during 2023, as compared to 2022, primarily due to increases in manufacturers’ suggested retail prices (“MSRP”), partially offset by a shift in mix toward Import vehicles that have relatively lower average selling prices.

Same store gross profit PVR decreased during 2023, as compared to 2022, primarily due to increasing supply and availability of new vehicle inventory, which when combined with higher average vehicle costs and stable consumer demand, has resulted in moderation of pricing and margins.

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Net New Vehicle Inventory Carrying Benefit (Expense)

The following table details net new vehicle inventory carrying benefit (expense), 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 U.S. GAAP.

2023 compared to 2022

During 2023, we had a net new vehicle inventory carrying expense of $6.3 million compared to a net new vehicle inventory carrying benefit of $73.4 million in 2022.

Floorplan interest rates are variable and, therefore, increase and decrease with changes in the underlying benchmark interest rates. We have had a net new vehicle inventory carrying benefit since 2020 when the Federal Reserve cut interest rates to near 0%. Additionally, over this same period, our average floorplan balances have been significantly lower than historical standards due to manufacturers’ new vehicle inventory supply constraints. With the increases in interest rates and new vehicle inventory supply, floorplan interest expense has increased, resulting in a net new vehicle inventory carrying expense for 2023. Increases to floorplan interest expense were partially offset by an increase in floorplan assistance due to an increase in the average floorplan assistance rate per unit and an increase in unit volume. If interest rates remain at their current levels or continue to increase without a corresponding increase in floorplan assistance or a decrease in average new vehicle inventory levels, we would expect that we will continue to incur a net new vehicle inventory carrying expense.

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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 $253.9 million, $61.3 million, and $34.7 million in retail used vehicle revenue and $16.0 million, $2.2 million, and $2.3 million in retail used vehicle gross profit for 2023, 2022, and 2021, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores, as applicable in a given year.

2023 compared to 2022

Same store retail used vehicle revenue decreased during 2023, as compared to 2022, due to a decrease in same store unit volume and a decrease in same store revenue PVR. The decrease in same store unit volume, particularly for mid- to higher-priced used vehicles, is due in part to the shift in mix from used vehicles to new vehicles as a result of increasing supply of new vehicle inventory, an increase in manufacturer new vehicle incentives including low-interest financing and customer rebates, and moderation of new vehicle pricing. In addition, used vehicle unit volume was adversely impacted by lower availability of lower-priced used vehicles.

Same store revenue PVR decreased during 2023, as compared to 2022, primarily due to a shift in mix towards lower-priced entry-level vehicles.

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Same store gross profit PVR increased slightly during 2023, as compared to 2022, primarily due to a disciplined sourcing and pricing strategy as we focused on efficient internal sourcing of our used vehicle inventory and balancing gross profit PVR and unit volume. The increase in gross profit PVR was partially offset by the shift in mix towards lower-priced entry-level vehicles, which have a lower average gross profit PVR, and continued normalization of used vehicle value trends.

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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 $101.9 million, $27.3 million, and $62.0 million in parts and service revenue and $41.4 million, $17.9 million, and $25.6 million in parts and service gross profit for 2023, 2022, and 2021, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores, as applicable in a given year.

2023 compared to 2022

During 2023, same store parts and service revenue increased compared to the same period in 2022, primarily due to increases in revenue associated with customer-pay service of $157.6 million, the preparation of vehicles for sale of $84.3 million, and warranty service of $67.0 million.

During 2023, same store parts and service gross profit increased compared to the same period in 2022, primarily due to increases in gross profit associated with customer-pay service of $94.0 million, warranty service of $50.3 million, and the preparation of vehicles for sale of $42.6 million. Revenue and gross profit associated with customer-pay service benefited from higher value repair orders. Warranty service revenue and gross profit benefited from higher value repair orders and improved parts and labor rates. Revenue and gross profit associated with the preparation of vehicles for sale benefited from higher value repair orders and an increase in repair order volume.

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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 $33.3 million, $7.1 million, and $3.8 million for 2023, 2022, and 2021, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores, as applicable in a given year.

As we continue to grow our AutoNation Finance business and increase our finance penetration rates associated with vehicles sold through our stores, we expect that income related to arranging customer financing will shift to AutoNation Finance. See “Corporate and Other” for additional information related to AutoNation Finance.

2023 compared to 2022

Same store finance and insurance revenue and gross profit decreased during 2023, as compared to 2022, due to a decrease in used vehicle unit volume, partially offset by increases in new vehicle unit volume and finance and insurance gross profit PVR. The increase in finance and insurance gross profit PVR was primarily due to an increase in product penetration and a shift in mix from used vehicles to new vehicles, which typically generate a higher average finance and insurance gross profit PVR. The increases in finance and insurance gross profit PVR were partially offset by a decrease in gross profit per transaction associated with arranging customer financing and a decrease in finance penetration.

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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.

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Domestic

The Domestic segment operating results included the following:

2023 compared to 2022

Domestic revenue decreased during 2023, as compared to 2022, primarily due to decreases in used vehicle unit volume and used vehicle revenue PVR. The decrease in used vehicle unit volume is due in part to a shift in mix from used vehicles to new vehicles and lower availability of lower-priced used vehicles. The decrease in used vehicle revenue PVR is primarily due to a shift in mix towards lower-priced entry-level vehicles. Decreases in Domestic revenue were partially offset by an increase in new vehicle revenue PVR due to increases in MSRP, an increase in new vehicle unit volume due to increasing supply of new vehicle inventory and sustained consumer demand, and an increase in parts and service revenue associated with customer-pay service and warranty service. Additionally, Domestic revenue benefited from the acquisitions we completed in 2022 and 2023.

Domestic segment income decreased during 2023, as compared to 2022, primarily due to decreases in new vehicle gross profit and finance and insurance gross profit. New vehicle gross profit was adversely impacted by continued moderation of pricing and margins resulting from the increasing supply of new vehicle inventory. Finance and insurance gross profit was adversely impacted by the decrease in used vehicle unit volume. Domestic segment income was also adversely impacted by an increase in floorplan interest expense. Decreases in segment income were partially offset by increases in parts and service gross profit associated with customer-pay service and warranty service.

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Import

The Import segment operating results included the following:

2023 compared to 2022

Import revenue increased during 2023, as compared to 2022, primarily due to an increase in new vehicle unit volume due to the increasing supply of new vehicle inventory and sustained consumer demand, as well as an increase in new vehicle revenue PVR, which benefited from increases in MSRP. Import revenue also benefited from an increase in parts and service revenue associated with customer-pay service and the preparation of vehicles for sale, as well as the acquisitions we completed in 2022 and 2023. Increases in Import revenue were partially offset by decreases in used vehicle unit volume, due in part to a shift in mix from used vehicles to new vehicles and lower availability of lower-priced used vehicles, and used vehicle revenue PVR, primarily due to a shift in mix towards lower-priced entry-level vehicles.

Import segment income decreased during 2023, as compared to 2022, primarily due to decreases in new vehicle gross profit PVR, which was adversely impacted by continued moderation of pricing and margins resulting from the increasing supply of new vehicle inventory. Import segment income was also adversely impacted by an increase in SG&A expenses, largely driven by the acquisitions we completed in 2022 and 2023, and an increase in floorplan interest expense. Decreases in segment income were partially offset by an increase in new vehicle unit volume and an increase in parts and service gross profit associated with customer-pay service and the preparation of vehicles for sale.

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Premium Luxury

The Premium Luxury segment operating results included the following:

2023 compared to 2022

Premium Luxury revenue decreased during 2023, as compared to 2022, primarily due to a decrease in used vehicle unit volume, due in part to a shift in mix from used vehicles to new vehicles and lower availability of lower-priced used vehicles, and a decrease in used vehicle revenue PVR, primarily due to a shift in mix towards lower-priced entry-level vehicles. Decreases in Premium Luxury revenue were partially offset by an increase in new vehicle revenue PVR, which benefited from increases in MSRP, an increase in new vehicle unit volume, primarily due to increasing supply of new vehicle inventory and sustained consumer demand, and an increase in parts and service revenue associated with customer-pay service and warranty service.

Premium Luxury segment income decreased during 2023, as compared to 2022, primarily due to a decrease in new vehicle gross profit PVR, which was adversely impacted by continued moderation of pricing and margins resulting from the increasing supply of new vehicle inventory. Premium Luxury segment income was also adversely impacted by increases in floorplan interest and SG&A expenses. Decreases in Premium Luxury segment income were partially offset by increases in parts and service gross profit associated with customer-pay service and warranty service.

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Corporate and other

Corporate and other results included the following:

“Corporate and other” is comprised of our other businesses, including AutoNation USA used vehicle stores, collision centers, parts distribution centers, auction operations, our mobile automotive repair and maintenance business, and our auto finance company, all of which do not meet the quantitative thresholds for reportable segments, as well as unallocated corporate overhead expenses and other income items.

As of December 31, 2023, we had 53 AutoNation-branded collision centers, 19 AutoNation USA stores, 4 AutoNation-branded automotive auction operations, 3 parts distribution centers, a mobile automotive repair and maintenance business, referred to as AutoNation Mobile Service, and an auto finance company, referred to as AutoNation Finance.

Revenue from “Corporate and other” increased during 2023, as compared to the same period in 2022, primarily due to increases in revenue from AutoNation USA stores, AutoNation Mobile Service, and collision centers.

The loss from “Corporate and other” increased during 2023, as compared to the same period in 2022, primarily due to expenditures associated with acquisitions, newly opened AutoNation USA stores, and investments in technology and strategic initiatives, as well as an increase in deferred compensation obligations as a result of changes in market performance of the underlying investments and an increase in self-insurance losses related to hailstorms and other natural catastrophes. The increases in loss from “Corporate and other” were partially offset by increases in gross profit from collision centers, AutoNation USA stores, and AutoNation Mobile Service. In addition, the loss from “Corporate and other” in 2022 was adversely impacted by recognition of an initial credit loss expense of $34.2 million associated with the auto loans receivable portfolio we acquired as part of the auto finance company acquisition completed in the fourth quarter of 2022.

AutoNation USA Stores

During 2023, we opened six AutoNation USA used vehicle stores and currently have over 20 stores under development. These stores play an integral part of both our long-term growth plans and the achievement of scale, scope, and density in markets to better serve and meet the needs of customers. A number of variables may impact the implementation of our expansion plans, including customer adoption, market conditions, availability of used vehicle inventory, availability and cost of building supplies and materials, and our ability to identify, acquire, and build out suitable locations in a timely manner.

AutoNation Mobile Service

During 2023, we acquired RepairSmith, a mobile solution for automotive repair and maintenance services, which we rebranded to AutoNation Mobile Service. Revenue and gross profit from this business are included within “parts and service.”

AutoNation Finance

AutoNation Finance, our captive auto finance company, provides financing to qualified retail customers on certain vehicles we sell. AutoNation Finance operating results include the interest and fee income generated by auto loans

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receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated credit losses on the auto loans receivable originated or acquired, direct expenses, and gains or losses on the sale of loans receivable. Interest income on auto loans receivable is recognized over the contractual term of the related loans.

In September 2023, we discontinued acquiring installment contracts from third-party independent dealers. We plan to continue to increase finance penetration rates for retail vehicle sales through our stores, which we expect will favorably impact the operating results of our auto finance business over time. AutoNation Finance results are included in “Other (Income) Expense, Net” in our Consolidated Statements of Income. See Notes 5 and 10 of the Notes to Consolidated Financial Statements for more information on auto loans receivable, the related allowance for credit losses, and the related debt of our auto finance company.

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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, outside service costs, information technology expenses, service loaner and rental inventory expenses, legal, accounting, and professional services, and general corporate expenses. The following table presents the major components of our SG&A.

2023 compared to 2022

SG&A expenses increased in 2023, as compared to 2022, primarily due to acquisitions and newly opened stores, expenditures associated with investments in technology and strategic initiatives, an increase in advertising expenses to support our used vehicle internal sourcing strategy, an increase in deferred compensation obligations of $35.8 million as a result of changes in market performance of the underlying investments, and self-insurance losses of $21.5 million related to hailstorms and other natural catastrophes. SG&A expenses also increased due to severance expenses we recognized during the fourth quarter of 2023 of $6.6 million. Increases in SG&A expenses were partially offset by a decrease in performance-driven compensation expense. As a percentage of total gross profit, SG&A expenses increased to 63.4% during 2023, from 57.5% in 2022, primarily due to gross margin pressure and an increase in SG&A expenses related to newly acquired and opened stores, investments in technology and strategic initiatives, an increase in deferred compensation obligations, and hail-related losses.

Other (Income) Expense, Net (Operating)

Other (Income) Expense, Net includes the gains or losses associated with business/property divestitures, legal settlements, and asset impairments, among other items, and the results of our captive auto finance company, including net interest margin, the provision for expected credit losses, direct expenses, and gains or losses on the sale of loans receivable. See “Segment Results - Corporate and other” above and Notes 5 and 10 of the Notes to Consolidated Financial Statements for more information about our auto finance company.

During 2022, we recognized an initial credit loss expense of $34.2 million associated with the acquired loan portfolio of CIG Financial, the auto finance company we acquired in the fourth quarter of 2022. We also recognized a net gain of $16.3 million related to business/property divestitures.

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Non-Operating Income (Expenses)

Floorplan Interest Expense

Floorplan interest rates are variable and, therefore, increase and decrease with changes in the underlying benchmark interest rates.

Floorplan interest expense was $144.7 million in 2023 and $41.4 million in 2022. The increase in floorplan interest expense of $103.3 million in 2023, as compared to 2022, was the result of higher average interest rates and higher average vehicle floorplan balances.

Interest Expense

Interest expense includes the interest related to non-vehicle long-term debt and finance lease obligations. Other interest expense was $181.4 million in 2023 compared to $134.9 million in 2022. The increase in interest expense of $46.5 million was driven by higher average interest rates and higher average debt balances.

Other Income (Loss), Net

During 2023 and 2022, we recognized a net gain of $16.4 million and a net loss of $19.4 million, respectively, related to changes in the cash surrender value of corporate-owned life insurance (“COLI”) 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 2023 and 2022, we recorded a unrealized gain of $5.2 million and $2.9 million, respectively, related to the change in fair value of the underlying securities of our minority equity investments. During the period that we hold our minority equity investments, unrealized gains and losses will be recorded as the fair market values of securities with readily determinable fair values change over time, or as observable price changes are identified for securities without readily determinable fair values. 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 24.4% in 2023 and 24.9% in 2022.

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 a gain on the sale of real estate in the first quarter of 2023 associated with a store that was closed prior to January 1, 2014.

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. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to augment our liquidity, to reduce our cost of capital, or for general corporate purposes.

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Available Liquidity Resources

We had the following sources of liquidity available for the years ended December 31, 2023 and 2022:

(1)    At December 31, 2023, we had $0.8 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 $440.0 million of commercial paper notes outstanding at December 31, 2023. See Note 10 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 6 of the Notes to Consolidated Financial Statements for additional information.

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 primarily relating to insurance matters. At December 31, 2023, surety bonds, letters of credit, and cash deposits totaled $142.2 million, including the $0.8 million of letters of credit issued under our revolving credit facility. We do not currently provide cash collateral for outstanding letters of credit.

In February 2022, we filed an automatic shelf registration statement with the SEC that enables us to offer for sale, from time to time and as the capital markets permit, an unspecified amount of common stock, preferred stock, debt securities, warrants, subscription rights, depositary shares, stock purchase contracts, and units.

On July 18, 2023, we amended and restated our unsecured credit agreement to, among other things, (1) increase the revolving credit facility (the “facility”) commitment from $1.8 billion to $1.9 billion, (2) extend the maturity date of the facility to July 18, 2028, (3) allow for the maximum leverage ratio covenant to increase from 3.75x to 4.25x for four fiscal quarters in the event that we complete a material acquisition, and (4) replace the maximum capitalization ratio covenant with a minimum interest coverage ratio covenant.

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 are 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/or 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:

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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 December 31, 2023, $320.8 million remained available under our stock repurchase limit most recently authorized by our Board of Directors.

Capital Expenditures

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

At December 31, 2023, we owned approximately 79% of our new vehicle franchise store locations with a net book value of $2.4 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 $744.0 million. None of these properties are mortgaged or encumbered.

We continue to expand our AutoNation USA used vehicle stores. The planned expansion may be impacted by a number of variables, including customer adoption, market conditions, availability of used vehicle inventory, availability and cost of building supplies and materials, and our ability to identify, acquire, and build out suitable locations in a timely manner.

Acquisitions and Divestitures

During 2023, we acquired a mobile solution for automotive repair and maintenance, and we also purchased seven stores. During 2022, we acquired an auto finance company, and we also purchased four stores. During 2021, we purchased 20 stores and four collision centers.

We divested one store during 2023. During 2022, we divested three stores and terminated two franchises. During 2021, we divested three stores and 18 collision centers.

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Debt

The following table sets forth our non-vehicle long-term debt as of December 31, 2023 and 2022: