# LITHIA MOTORS INC (LAD) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LITHIA MOTORS INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1023128/000102312824000032/lad-20231231.htm
Accession: 0001023128-24-000032
Filing date: 2024-02-23
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/LAD/
All MD&A years: /company/LAD/mda/
Previous year: /company/LAD/mda/fy2022/ (FY 2022)
Next year: /company/LAD/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with Item 1. Business, Item 1A. Risk Factors, and our Consolidated Financial Statements and Notes thereto.

Overview

We are a global automotive retailer ranked #145 on the Fortune 500 in 2023. As of February 23, 2024, we offered 47 brands of new vehicles and all brands of used vehicles in 344 stores in the United States, Canada, and the United Kingdom and online at nearly 360 websites. We offer a wide range of products and services including new and used vehicles, finance and insurance products and vehicle repair and maintenance.

Financial Performance

We experienced growth of revenue and gross profit in all major business lines in 2023 compared to 2022, primarily driven by increases in volume related to acquisitions, complimented by organic growth in new vehicles, and service, body and parts sales. On a same store basis, new and used vehicle retail gross profits experienced declines primarily driven by decreases in gross profit per unit as margins normalize to pre-pandemic levels. Net income decline was primarily driven by this margin normalization, increased interest expense, and increased SG&A as a percentage of gross profit.

[[GREPCENT_TABLE]]
[["","","","23"]]
[[/GREPCENT_TABLE]]

Liquidity

As of December 31, 2023, we had available liquidity of $1.7 billion, which was comprised of $0.8 billion in cash and $0.9 billion availability on our credit facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $0.4 billion. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.

Segments

We operate in two reportable segments: Vehicle Operations and Financing Operations. Our Vehicle Operations segment consists of all aspects of our auto merchandising and service operations, excluding financing provided by our Financing Operations segment. Our Financing Operations segment provides financing to customers buying and leasing retail vehicles from our Vehicle Operations segment.

[[GREPCENT_TABLE]]
[["","","","24"]]
[[/GREPCENT_TABLE]]

Vehicle Operations

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions, except per vehicle data)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Revenues"],["New vehicle retail","","$","15,154.2","","","$","12,894.5","","","$","2,259.7","","","17.5","%","","$","11,197.7","","","$","1,696.8","","","15.2","%"],["Used vehicle retail","","9,570.2","","","9,425.0","","","145.2","","","1.5","","","7,255.3","","","2,169.7","","","29.9"],["Finance and insurance","","1,337.0","","","1,285.4","","","51.6","","","4.0","","","1,051.3","","","234.1","","","22.3"],["Service, body and parts","","3,197.1","","","2,738.8","","","458.3","","","16.7","","","2,110.9","","","627.9","","","29.7"],["Total revenues","","31,042.3","","","28,187.8","","","2,854.5","","","10.1","","","22,831.7","","","5,356.1","","","23.5"],["Gross profit"],["New vehicle retail","","$","1,394.1","","","$","1,579.7","","","$","(185.6)","","","(11.7)","%","","$","1,218.5","","","$","361.2","","","29.6","%"],["Used vehicle retail","","721.4","","","825.4","","","(104.0)","","","(12.6)","","","826.7","","","(1.3)","","","(0.2)"],["Finance and insurance","","1,337.0","","","1,285.4","","","51.6","","","4.0","","","1,051.3","","","234.1","","","22.3"],["Service, body and parts","","1,751.4","","","1,463.1","","","288.3","","","19.7","","","1,110.5","","","352.6","","","31.8"],["Total gross profit","","5,228.9","","","5,152.4","","","76.5","","","1.5","","","4,259.0","","","893.4","","","21.0"],["Gross profit margins"],["New vehicle retail","","9.2","%","","12.3","%","","-310 bp","","","","10.9","%","","140 bp"],["Used vehicle retail","","7.5","","","8.8","","","-130 bp","","","","11.4","","","-260 bp"],["Finance and insurance","","100.0","","","100.0","","","\u2014 bp","","","","100.0","","","\u2014 bp"],["Service, body and parts","","54.8","","","53.4","","","140 bp","","","","52.6","","","80 bp"],["Total gross profit margin","","16.8","","","18.3","","","-150 bp","","","","18.7","","","-40 bp"],["Retail units sold"],["New vehicle retail","","314,116","","","271,596","","","42,520","","","15.7","%","","260,738","","","10,858","","","4.2","%"],["Used vehicle retail","","325,764","","","311,764","","","14,000","","","4.5","","","275,495","","","36,269","","","13.2"],["Average selling price per retail unit"],["New vehicle retail","","$","48,244","","","$","47,477","","","$","767","","","1.6","%","","$","42,946","","","$","4,531","","","10.6","%"],["Used vehicle retail","","29,378","","","30,231","","","(853)","","","(2.8)","","","26,336","","","3,895","","","14.8"],["Average gross profit per retail unit"],["New vehicle retail","","$","4,438","","","$","5,816","","","$","(1,378)","","","(23.7)","%","","$","4,673","","","$","1,143","","","24.5","%"],["Used vehicle retail","","2,215","","","2,648","","","(433)","","","(16.4)","","","3,001","","","(353)","","","(11.8)"],["Finance and insurance","","2,090","","","2,203","","","(113)","","","(5.1)","","","1,960","","","243","","","12.4"],["Total vehicle (1)","","5,367","","","6,300","","","(933)","","","(14.8)","","","5,855","","","445","","","7.6"]]
[[/GREPCENT_TABLE]]

(1)Includes the sales and gross profit related to new, used retail, used wholesale and finance and insurance and unit sales for new and used retail

Same Store Operating Data

We believe that same store comparisons are an important indicator of our financial performance. Same store measures demonstrate our ability to grow operations in our existing locations. Therefore, we have integrated same store measures into the discussion below.

Same store measures reflect results for stores that were operating in each comparison period, and only include the months when operations occurred in both periods. For example, a store acquired in November 2022 would be included in same store operating data beginning in December 2023, after its first complete comparable month of operations. The fourth quarter operating results for the same store comparisons would include results for that store in only the period of December for both comparable periods.

[[GREPCENT_TABLE]]
[["","","","25"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","","","2022 vs. 2021"],["($ in millions, except per vehicle data)","","2023","","2022","","Change","","%","","2022","","2021","","Change","","%"],["Revenues"],["New vehicle retail","","$","13,197.3","","","$","12,562.0","","","$","635.3","","","5.1","%","","$","10,009.9","","","$","10,607.9","","","$","(598.0)","","","(5.6)","%"],["Used vehicle retail","","8,173.4","","","9,182.3","","","(1,008.9)","","","(11.0)","","","7,779.6","","","6,896.3","","","883.3","","","12.8"],["Finance and insurance","","1,205.0","","","1,253.9","","","(48.9)","","","(3.9)","","","1,016.5","","","999.1","","","17.4","","","1.7"],["Service, body and parts","","2,803.1","","","2,657.4","","","145.7","","","5.5","","","2,207.8","","","2,009.0","","","198.8","","","9.9"],["Total revenues","","26,708.4","","","27,454.4","","","(746.0)","","","(2.7)","","","22,378.3","","","21,673.0","","","705.3","","","3.3"],["Gross profit"],["New vehicle retail","","$","1,205.3","","","$","1,541.9","","","$","(336.6)","","","(21.8)","%","","$","1,221.7","","","$","1,163.6","","","$","58.1","","","5.0","%"],["Used vehicle retail","","614.1","","","801.1","","","(187.0)","","","(23.3)","","","663.7","","","784.2","","","(120.5)","","","(15.4)"],["Finance and insurance","","1,205.0","","","1,253.9","","","(48.9)","","","(3.9)","","","1,016.5","","","999.1","","","17.4","","","1.7"],["Service, body and parts","","1,533.5","","","1,424.0","","","109.5","","","7.7","","","1,193.4","","","1,058.0","","","135.4","","","12.8"],["Total gross profit","","4,554.2","","","5,018.8","","","(464.6)","","","(9.3)","","","4,082.0","","","4,055.6","","","26.4","","","0.7"],["Gross profit margins"],["New vehicle retail","","9.1","%","","12.3","%","","-320 bp","","","","12.2","%","","11.0","%","","120 bp"],["Used vehicle retail","","7.5","","","8.7","","","-120 bp","","","","8.5","","","11.4","","","-290 bp"],["Finance and insurance","","100.0","","","100.0","","","\u2014 bp","","","","100.0","","","100.0","","","\u2014 bp"],["Service, body and parts","","54.7","","","53.6","","","110 bp","","","","54.1","","","52.7","","","140 bp"],["Total gross profit margin","","17.1","","","18.3","","","-120 bp","","","","18.2","","","18.7","","","-50 bp"],["Retail units sold"],["New vehicle retail","","272,780","","","264,510","","","8,270","","","3.1","%","","208,185","","","246,186","","","(38,001)","","","(15.4)","%"],["Used vehicle retail","","285,708","","","303,037","","","(17,329)","","","(5.7)","","","257,968","","","259,978","","","(2,010)","","","(0.8)"],["Average selling price per retail unit"],["New vehicle retail","","$","48,381","","","$","47,492","","","$","889","","","1.9","%","","$","48,082","","","$","43,089","","","$","4,993","","","11.6","%"],["Used vehicle retail","","28,607","","","30,301","","","(1,694)","","","(5.6)","","","30,157","","","26,527","","","3,630","","","13.7"],["Average gross profit per retail unit"],["New vehicle retail","","$","4,419","","","$","5,829","","","$","(1,410)","","","(24.2)","%","","$","5,868","","","$","4,726","","","$","1,142","","","24.2","%"],["Used vehicle retail","","2,149","","","2,643","","","(494)","","","(18.7)","","","2,573","","","3,017","","","(444)","","","(14.7)"],["Finance and insurance","","2,158","","","2,209","","","(51)","","","(2.3)","","","2,181","","","1,974","","","207","","","10.5"],["Total vehicle (1)","","5,383","","","6,312","","","(929)","","","(14.7)","","","6,175","","","5,907","","","268","","","4.5"]]
[[/GREPCENT_TABLE]]

(1)Includes the sales and gross profit related to new, used retail, used wholesale and finance and insurance and unit sales for new and used retail

[[GREPCENT_TABLE]]
[["","","","26"]]
[[/GREPCENT_TABLE]]

New Vehicles

Under our business strategy, we believe that our new vehicle sales create incremental profit opportunities through certain manufacturer incentive programs, providing used vehicle inventory through trade-ins, arranging of third-party financing, vehicle service and insurance contracts, future resale of used vehicles acquired through trade-in and parts and service work.

2023 vs. 2022

New vehicle revenue grew 17.5%, resulting from a 15.7% increase in unit sales due to our accelerated growth through strategic acquisitions, complemented by a 1.6% increase in average selling prices. Same store new vehicle revenue was primarily impacted by a 3.1% increase in unit sales, supplemented by an increase in average selling prices of 1.9%. Market demand continued to increase in 2023 off a depressed base last year.

New vehicle gross profit declined 11.7%, primarily due to a 23.7% decrease in average gross profit per unit, partially offset by a 15.7% increase in unit sales driven by acquisitions. On a same store basis, gross profit per new vehicle decreased 24.2%, continuing to normalize to pre-pandemic levels.

2022 vs. 2021

New vehicle revenues and gross profit grew 15.2% and 29.6%, respectively. These improvements resulted from our accelerated growth through acquisitions.

The decrease in same store new vehicle revenues was driven by a decrease in unit volume of 15.4%, partially offset by an increase in average selling prices of 11.6%. Same store gross profit per new vehicle increased 24.2%, driven by demand from prior year shortages of available new vehicles for sale, resulting from certain component shortages in the manufacturers’ supply chains.

Used Vehicles

Our used vehicle operations provide an opportunity to generate sales to customers unable or unwilling to purchase a new vehicle, sell brands other than the store’s new vehicle franchise(s), access additional used vehicle inventory through trade-ins and increase sales from finance and insurance products and parts and service.

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned (CPO) vehicles; core vehicles, which are late-model vehicles with lower mileage; and value autos, which are vehicles with over 80,000 miles. We have established a company-wide target of achieving a per store average of 100 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of used units, from late model CPO vehicles to vehicles over ten years old. During 2023, our stores sold an average of 82 used vehicles per store per month. This compares to 91 used vehicles per store per month in 2022 and 92 in 2021. Used vehicle operations are generally an opportunity area for recently acquired and opened locations. As we acquired 56 and 32 locations in 2023 and 2022, respectively, this decrease in 2023 was due to the volume of stores recently acquired still being integrated into our existing operational strategies as well as the result of supply constraints of new vehicles during the pandemic period impacting late model availability today.

[[GREPCENT_TABLE]]
[["","","","27"]]
[[/GREPCENT_TABLE]]

2023 vs. 2022

Used vehicle revenues increased 1.5%, due to increased volume from acquisitions, offset by decreased volume at our seasoned stores. On a same store basis, used vehicle revenues decreased 11.0%, due to a 5.7% decrease in unit volume and a 5.6% decrease in average selling price per retail unit. The same store revenue decrease in 2023 was driven by a decrease in our core vehicles of 14.9% and decreases in value auto and CPO vehicle categories of 12.4% and 0.7%, respectively. The decrease in our core vehicle category includes a 10.3% decrease in volume and a 5.1% decrease in average selling price per vehicle.

Used vehicle gross profits decreased 12.6%, due to a 16.4% decrease in average gross profit per unit. On a same store basis, used vehicle gross profit decreased 23.3%, led by a decrease in our CPO vehicles of 35.0% with additional declines in our core and value auto vehicle categories of 20.4% and 11.6%, respectively. The decrease in our CPO vehicle category was driven by a decrease in gross profit per unit of 38.2% to $2,321, offset by an increase in unit volume of 5.2%. Gross profit per unit in our core vehicle category, which accounted for 58.2% of our used vehicle unit sales, decreased 11.3% to $1,992. The decrease in same store gross profit in our value auto category was driven by a 8.9% decrease in gross profit per unit to $2,433.

2022 vs. 2021

Used vehicle revenues increased 29.9%, due to a combination of increased volume from acquisitions and organic growth in all categories of used vehicle sales at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle revenues increased 12.8%, due to a 13.7% increase in average selling price per retail unit, partially offset by a 0.8% decrease in unit volume.

Used vehicle gross profits decreased 0.2%, due to an 11.8% decrease in average gross profit per unit, mostly offset by a 13.2% increase in units sold. On a same store basis, used vehicle gross profit decreased 15.4%, led by a decrease in average gross profit per unit of 14.7%.

Third-Party Finance and Insurance

We believe that arranging timely vehicle financing is an important part of providing personal transportation solutions, and we attempt to arrange financing for every vehicle we sell. We also offer related products such as extended warranties, insurance contracts and vehicle and theft protection. Third-party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability.

2023 vs. 2022

Finance and insurance revenue increased 4.0%, primarily due to increased volume related to acquisitions. On a same store basis, finance and insurance revenue decreased 3.9%, to $2,158 per unit. This decrease was driven by lower finance reserve paid per unit from third-party lenders as a result of the higher interest rate environment. We also experienced a partial decrease in the volume of third-party financing as a result of increased penetration rates associated with our Financing Operations and the growth of our captive auto loan and lease portfolio businesses.

2022 vs. 2021

Finance and insurance revenue increased 22.3%, primarily due to increased volume related to acquisitions, combined with expanded product offerings and increasing penetration rates. On a same store basis, finance and insurance revenue increased 1.7%, to $2,181 per unit.

[[GREPCENT_TABLE]]
[["","","","28"]]
[[/GREPCENT_TABLE]]

Service, Body and Parts

We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles. With more late-model units in operation, continued increase of vehicles in operation, and a plateauing new vehicle market, we believe the increased number of units in operation will continue to benefit our service, body and parts revenue in the coming years as more late-model vehicles age, necessitating repairs and maintenance. We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts.

2023 vs. 2022

Our service, body and parts revenue grew in all areas, primarily due to our strategic acquisition growth. On a same store basis, service, body and parts revenue increased 5.5%, primarily driven by an increase in customer pay of 5.2%. Performance in body shop also saw an increase of 8.0%. Same store service, body and parts gross profit increased 7.7%. Our gross margins continue to increase as our mix has shifted towards customer pay, which has higher margins than other service work.

2022 vs. 2021

Service, body and parts revenue grew in all areas, primarily due to acquisition growth. On a same store basis, service, body and parts revenue and gross profit increased 9.9% and 12.8%, respectively.

Financing Operations

In the United States, Financing Operations is a captive lender, originating loans only from stores and Driveway. In Canada, Financing Operations originates loans and leases from both our Canadian stores and third-party dealerships. Our stores do not exclusively finance vehicles through Financing Operations, rather originations are earned on a competitive basis with other lenders.

Financing Operations provides an opportunity to capture additional profits, cash flows, and sales while managing our reliance on third-party finance sources. Management regularly analyzes Financing Operations’ results by assessing profitability, the performance of the finance receivables, including trends in credit losses and delinquencies, and expenses directly related to Financing Operations. This information is used to assess Financing Operations performance and make operating decisions, including resource allocation.

Our proprietary credit model performs a return on investment (ROI) calculation for each application, ensuring that the return obtained is appropriately balanced with the consumer’s credit risk. On a fully discounted basis, we target earnings at least three times the net finance income earned from third party lenders (finance reserve less commissions paid) over the life of the loan. Actual return of the loans may differ based on the changing risk profile of originations, economic conditions, and rates of recovery for charged off vehicles. Actions taken during 2022 to adjust ROI targets in the context of the uncertain macroeconomic environment, along with the acquisition of dealerships whose brands attract relatively more credit-worthy consumers, resulted in loans and leases originated subsequently having higher weighted average credit scores and lower weighted average contract rate and front-end loan-to-values (FE LTV) than prior periods.

We typically use securitizations, warehouse facilities, and internal capital to fund loans and leases originated by our Financing Operations. Financing Operations income reflects the interest, fee, and lease income generated by the portfolio of auto loan and lease receivables less the interest expense associated with the debt utilized to fund the lending, including internal capital, a provision for estimated loan and lease losses, depreciation on vehicles leased via operating leases and directly-related expenses.

Total interest margin reflects the spread between interest, fee, and lease charges to consumers and our funding costs. Changes in the interest margin on new originations affect Financing Operations income over time. Increases or decreases in interest rates, which affect Financing Operations’ funding costs, or other competitive pressures on consumer rates, could result in compression or expansion in the interest margin on new originations. Changes in the provision for loan and lease losses as a percentage of ending managed receivables reflect the effect of changes in loss experience, economic factors, and asset-specific risks on our outlook for net losses expected to occur over the remaining contractual life of the loans and leases receivable.

[[GREPCENT_TABLE]]
[["","","","29"]]
[[/GREPCENT_TABLE]]

Financing Operations income does not include any allocation of corporate overhead costs. Although Financing Operations benefits from certain overhead expenditures, we have not allocated corporate overhead costs to Financing Operations to avoid making subjective allocation decisions. Examples of corporate overhead costs not allocated to Financing Operations include general corporate and data processing expenses.

See Note 18 – Segments for additional information on Financing Operations income and Note 5 – Finance Receivables for information on auto loans receivable, including credit quality.

Selected Financing Operations Financial Information

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

(1)Percent of total average managed finance receivables.

Portfolio Information(1)

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["($ in millions)","2023","","2022","","2021"],["Loan origination information"],["Net loans originated","$","2,118.5","","","$","1,933.9","","","$","703.7"],["Vehicle units financed","70,154","","","59,604","","","21,357"],["Total penetration rate (2)","11.0","%","","10.2","%","","4.0","%"],["Weighted average contract rate","9.6","%","","7.7","%","","8.4","%"],["Weighted average credit score (3)","732","","","718","","","674"],["Weighted average FE LTV (4)","95.5","%","","99.4","%","","104.9","%"],["Weighted average term (in months)","73","","","73","","","73"],["Loan performance information"],["Total ending managed receivables","$","3,177.6","","","$","2,109.4","","","$","724.9"],["Total average managed receivables","$","2,643.5","","","$","1,417.2","","","$","449.8"],["Allowance for loan losses","$","102.2","","","$","65.1","","","$","22.5"],["Allowance for loan losses as a percentage of ending managed receivables","3.2","%","","3.1","%","","3.1","%"],["Net credit losses on managed receivables","62.0","","","42.9","","","7.8"],["Net credit losses as a percentage of total average managed receivables","2.3","%","","3.0","%","","1.7","%"],["Past due accounts as a percentage of ending managed receivables (5)","4.6","%","","5.4","%","","4.9","%"],["Average recovery rate (6)","49.8","%","","59.3","%","","74.9","%"]]
[[/GREPCENT_TABLE]]

(1)Excludes Canadian portfolio

(2)Units financed as a percentage of total new and used vehicle retail units sold.

(3)The credit scores represent FICO scores and reflect only receivables with obligors that have a FICO score at the time of application. For receivables with co-borrowers, the FICO score is the primary borrower’s. FICO scores are not a significant factor in our proprietary credit model, which relies on information from credit bureaus and other application information as discussed in Note 5 – Finance Receivables.

(4)Front-end loan-to-value represents the ratio of the amount financed to the total collateral value, which is measured as the vehicle selling price plus applicable taxes, title and fees.

(5)Past due is defined as loans that have been on the books greater than or equal to 3 months and are 30 or more days delinquent

(6)The average recovery rate represents the average percentage of the outstanding principal balance we receive when a vehicle is repossessed and liquidated, generally at wholesale auctions.

Financing operations loss increased from 2022 to 2023 primarily due to spread compression, decreasing net interest margin from 5.3% in 2022 to 3.5% in 2023. In response to the rapid increase in funding costs in the first half of the year, we have focused on improving net interest margin by passing along higher contract rates to consumers

[[GREPCENT_TABLE]]
[["","","","30"]]
[[/GREPCENT_TABLE]]

while maintaining credit quality, resulting in a stabilization and improvement in the metric in recent quarters. The growth in the portfolio also negatively impacted results due to the upfront recognition of loan and lease loss provisions on new loans outpacing the release of such provisions on more seasoned loans and leases.

The increase in net credit losses was driven by the growth in the portfolio, as net credit losses as a percentage of total averaged managed receivables, along with delinquencies, decreased compared to the prior year, driven by increased credit quality.

The decline in the average recovery rate was driven by used vehicle price depreciation outpacing the amortization of the principal balance on loan principal balances, due to the relatively limited seasoning of the portfolio.

Operating Expenses

Selling, General, and Administrative (SG&A)

SG&A includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

NM - Not meaningful

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["As a % of gross profit","","2023","","2022","","Change","","2021","","Change"],["Personnel","","41.4","%","","40.5","%","","90","bps","","40.8","%","","(30)","bps"],["Advertising","","4.7","","","4.9","","","(20)","","","3.8","","","110"],["Rent","","1.7","","","1.4","","","30","","","1.3","","","10"],["Facility costs","","3.5","","","2.9","","","60","","","2.7","","","20"],["Gain on sale of assets","","(0.7)","","","(1.3)","","","60","","","(0.1)","","","(120)"],["Other","","12.4","","","10.7","","","170","","","9.7","","","100"],["Total SG&A","","63.0","%","","59.1","%","","390","bps","","58.1","%","","100","bps"]]
[[/GREPCENT_TABLE]]

2023 vs. 2022

SG&A increased 8.2%, or $250.7 million, primarily due to increased personnel and other costs resulting from our growth through acquisitions. Other expenses in 2023 included acquisition expenses of $27.2 million and $5.4 million of storm related insurance charges. We also recognized a gain on the sale of stores of $31.2 million.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit increased across all categories to 62.3% from 59.8% in the prior year.

2022 vs. 2021

SG&A increased 22.7%, or $563.3 million, primarily due to increased personnel costs which resulted from our growth through acquisitions. Other expenses in 2022 included acquisition expenses of $15.0 million and $4.9 million of storm related insurance charges.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit increased across all categories to 61.5% from 57.5% in the prior year.

[[GREPCENT_TABLE]]
[["","","","31"]]
[[/GREPCENT_TABLE]]

SG&A adjusted for non-core charges was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Personnel","","$","2,163.1","","","$","2,086.3","","","$","76.8","","","3.7","%","","$","1,737.9","","","$","348.4","","","20.0","%"],["Advertising","","248.2","","","253.6","","","(5.4)","","","(2.1)","","","162.2","","","91.4","","","56.4"],["Rent","","89.3","","","72.6","","","16.7","","","23.0","","","54.0","","","18.6","","","34.4"],["Facility costs","","183.9","","","150.3","","","33.6","","","22.4","","","116.8","","","33.5","","","28.7"],["Adjusted gain on sale of assets (1)","","(2.9)","","","0.0","","","(2.9)","","","NM","","(2.3)","","","2.3","","","NM"],["Adjusted other (1)","","597.5","","","527.4","","","70.1","","","13.3","","","386.2","","","141.2","","","36.6"],["Total adjusted SG&A (1)","","$","3,279.1","","","$","3,090.2","","","$","188.9","","","6.1","%","","$","2,454.8","","","$","635.4","","","25.9","%"]]
[[/GREPCENT_TABLE]]

NM - Not meaningful

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["As a % of gross profit","","2023","","2022","","Change","","2021","","Change"],["Personnel","","41.4","%","","40.5","%","","90","bps","","40.8","%","","(30)","bps"],["Advertising","","4.7","","","4.9","","","(20)","","","3.8","","","110"],["Rent","","1.7","","","1.4","","","30","","","1.3","","","10"],["Facility costs","","3.5","","","2.9","","","60","","","2.7","","","20"],["Adjusted gain on sale of assets (1)","","(0.1)","","","\u2014","","","(10)","","","(0.1)","","","10"],["Adjusted other (1)","","11.5","","","10.3","","","120","","","9.0","","","130"],["Total adjusted SG&A (1)","","62.7","%","","60.0","%","","270","bps","","57.5","%","","250","bps"]]
[[/GREPCENT_TABLE]]

(1)See “Non-GAAP Reconciliations” for more details.

Floor Plan Interest Expense and Floor Plan Assistance

We have floor plan agreements with both manufacturer-affiliated finance companies and as part of our syndicated credit facilities for certain new vehicles and vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by lender and are variable rates.

2023 vs. 2022

Floor plan interest expense increased $112.1 million, primarily due to higher interest rates, increases in new vehicle inventory levels from acquisitions as well as existing locations recovering from prior year inventory shortages. Floor plan interest expense increased 51.3% related to acquisition volume and 49.2% for existing locations.

2022 vs. 2021

Floor plan interest expense increased $16.5 million, primarily due to increases in new vehicle inventory levels at existing locations and growth through acquisitions.

Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.

The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Floor plan interest expense (new vehicles)","","$","150.9","","","$","38.8","","","$","112.1","","","288.9","%","","$","22.3","","","$","16.5","","","74.0","%"],["Floor plan assistance (included as an offset to cost of sales)","","(159.2)","","","(130.6)","","","(28.6)","","","21.9","","","(120.1)","","","(10.5)","","","8.7"],["Net new vehicle carrying costs (benefit)","","$","(8.3)","","","$","(91.8)","","","$","83.5","","","(91.0)","%","","$","(97.8)","","","$","6.0","","","(6.1)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","32"]]
[[/GREPCENT_TABLE]]

Depreciation and Amortization

Depreciation and amortization is comprised of depreciation expense related to buildings, significant remodels or improvements, furniture, tools, equipment and signage and amortization related to non-compete agreements.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Depreciation and amortization","","$","195.8","","","$","163.2","","","$","32.6","","","20.0","%","","$","124.8","","","$","38.4","","","30.8","%"]]
[[/GREPCENT_TABLE]]

Acquisition activity contributed to the increases in depreciation and amortization in 2023 compared to 2022 and in 2022 compared to 2021. We acquired approximately $260.5 million and $236.9 million of depreciable property as part of our 2023 and 2022 acquisitions, respectively. Capital expenditures totaled $230.2 million and $303.1 million, respectively, in 2023 and 2022. These investments increase the amount of depreciable assets. See the discussion under “Liquidity and Capital Resources” for additional information.

Operating Income

Operating income as a percentage of revenue, or operating margin, was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","","","","2022","","","","","2021"],["Operating margin","","5.5","%","","","","","6.9","%","","","","","7.3","%"],["Operating margin adjusted for non-core charges (1)","","5.5","","","","","","6.7","","","","","","7.4"]]
[[/GREPCENT_TABLE]]

(1)See “Non-GAAP Reconciliations” for additional information

2023 vs. 2022

Our operating margin decreased 140 basis points compared to the prior year, driven by a decline in gross profit per new and used unit sold. Adjusting for non-core charges, including acquisition expenses, one-time contract buyouts, and storm related insurance charges, offset by a net disposal gain on sale of stores, our operating margin decreased 120 basis points.

2022 vs. 2021

Our operating margin decreased 40 basis points compared to the prior year, driven by an increase in SG&A as a percentage of gross profit. Adjusting for non-core charges, including storm insurance charges and acquisition expenses, offset by a net disposal gain on sale of stores, our operating margin decreased 70 basis points.

Non-Operating Expenses

Asset Impairments

Asset impairments recorded as a component of operations consist of the following:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["($ in millions)","","2023","","2022","","2021"],["Franchise value","","$","\u2014","","","$","\u2014","","","$","1.9"],["Goodwill","","\u2014","","","\u2014","","","\u2014"],["Total asset impairments","","$","\u2014","","","$","\u2014","","","$","1.9"]]
[[/GREPCENT_TABLE]]

Goodwill and franchise value are tested for impairment annually as of October 1 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We elected to perform qualitative franchise value and goodwill impairment tests as of October 1 each year. These non-cash impairment charges are included in the “Corporate and Other” category of our segment information.

No impairment charges were recorded in 2023 or 2022.

During the third quarter of 2021, there was an indication of a triggering event at a certain reporting unit. We tested the goodwill and franchise value for this location. As a result, we identified it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $1.9 million, which was equal to the difference between the fair value and the carrying value for franchise value. This location was subsequently sold in the fourth quarter of 2021.

[[GREPCENT_TABLE]]
[["","","","33"]]
[[/GREPCENT_TABLE]]

See Note 1 – Summary of Significant Accounting Policies, Note 4 – Property and Equipment, Note 6 – Goodwill and Franchise Value, and Note 14 – Fair Value Measurements of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Other Interest Expense

Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used and service loaner vehicle inventory financing commitments, our revolving lines of credit, and issued senior notes.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Mortgage interest","","$","35.8","","","$","25.9","","","$","9.9","","","38.2","%","","$","24.9","","","$","1.0","","","4.0","%"],["Other interest","","168.0","","","105.8","","","62.2","","","58.8","","","80.5","","","$","25.3","","","31.4"],["Capitalized interest","","(2.6)","","","(2.6)","","","\u2014","","","\u2014","","","(2.0)","","","(0.6)","","","30.0"],["Total other interest expense","","$","201.2","","","$","129.1","","","$","72.1","","","55.8","%","","$","103.4","","","$","25.7","","","24.9","%"]]
[[/GREPCENT_TABLE]]

2023 vs. 2022

The increase in other interest expense was due to higher interest rates and increased borrowings on our credit facilities. See also Note 9 – Credit Facilities and Long-Term Debt of Notes to Consolidated Financial Statements for additional information.

2022 vs. 2021

The increase in other interest expense was due to higher interest rates on our credit facilities and the full year impact of our $800 million in aggregate principal amount of 3.875% senior notes due 2029 issued in May 2021.

Other Income (Expense), Net

Other income (expense), net primarily includes other income associated with investment income and other non-recurring transactions.

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2023","","2022","","Change","","%","","2021","","Change","","%"],["Other income (expense), net","","$","22.0","","","$","(43.2)","","","$","65.2","","","NM","","$","(52.0)","","","$","8.8","","","NM"]]
[[/GREPCENT_TABLE]]

2023 vs. 2022

The improvement in other income (expense), net was primarily due to a $1.7 million investment loss related to equity investments compared to a $39.2 million loss in the prior year. Other notable items included a $5.1 million unrealized gain on foreign currency translations, $4.7 million of interest income from foreign currency deposit accounts, and $2.6 million net pension benefit recognized in 2023.

2022 vs. 2021

The improvement in other income (expense), net was primarily due to a $39.2 million investment loss related to equity investments compared to a $66.4 million loss in the prior year. We also recognized a $16.8 million unrealized loss on foreign currency translations in 2022.

Income Tax Provision

Our effective income tax rate was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2023","","2022","","2021"],["Effective income tax rate","","25.7","%","","27.1","%","","28.4","%"],["Effective income tax rate excluding non-core items (1)","","25.6","","","26.4","","","26.8"]]
[[/GREPCENT_TABLE]]

(1)See “Non-GAAP Reconciliations” for more details

Our effective income tax rate was 25.7% for 2023 compared to 27.1% for 2022. Our effective income tax rate was positively affected by a reduction in the current and deferred state tax rate, due to changing state mix, as well as a reduction in valuation allowance. Our 2023 effective income tax rate was negatively affected by non-deductible acquisition costs recorded during the period.

[[GREPCENT_TABLE]]
[["","","","34"]]
[[/GREPCENT_TABLE]]

Adjusting for non-deductible acquisition costs and valuation allowance activity recorded during 2023, our effective income tax rate excluding non-core items is 25.6%, a decrease of 90 basis points compared to the effective income tax rate excluding non-core items for 2022.

Our effective income tax rate in 2022 was negatively affected by a valuation allowance established for certain deferred tax assets not expected to be realized. The increase in tax rate was offset by share-based awards vesting in the current period and a reduction in the current and deferred state tax rate due to legislative updates and changing state mix.

Global Implementation of Pillar Two

We are subject to corporation tax on profits in the United States, Canada, and the UK. The Organization for Economic Co-operation and Development (OECD) and the G20 Inclusive Framework on Base Erosion and Profit Shifting has developed the Pillar Two global minimum tax regime. The Pillar Two rules provide a coordinated system to ensure that multinational enterprises with revenues above €750 million pay a minimum effective tax rate of 15% on the income arising in each of the jurisdictions in which they operate.

On June 20, 2023, the UK’s Finance (No. 2) Bill 2023 was enacted, which represents the UK’s introduction of a Pillar Two regime, effective for annual reporting periods beginning on or after December 31, 2023. On August 4, 2023, Canada released draft legislation to implement the primary taxing rule in Pillar Two for fiscal periods beginning on or after December 31, 2023.

We analyzed the expected tax impact of the Pillar Two regime based on available guidance and expect these rules to have an immaterial impact on our overall effective tax rate.

Non-GAAP Reconciliations

Non-GAAP measures do not have definitions under GAAP and may be defined differently by and not comparable to similarly titled measures used by other companies. As a result, we review any non-GAAP financial measures in connection with a review of the most directly comparable measures calculated in accordance with GAAP. We caution you not to place undue reliance on such non-GAAP measures, but also to consider them with the most directly comparable GAAP measures. We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations because they exclude items not related to our ongoing core business operations and other non-cash items, and improves the period-to-period comparability of our results from the core business operations. We use these measures in conjunction with GAAP financial measures to assess our business, including our compliance with covenants in our credit facilities and in communications with our Board of Directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.

[[GREPCENT_TABLE]]
[["","","","35"]]
[[/GREPCENT_TABLE]]

The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023"],["($ in millions, except per share amounts)","","As reported","","Net disposal gain on sale of stores","","","","Investment loss","","Insurance reserves","","Acquisition expenses","","Contract buyouts","","","","Adjusted"],["Selling, general and administrative","","$","3,294.8","","","$","31.2","","","","","$","\u2014","","","$","(5.4)","","","$","(27.2)","","","$","(14.3)","","","","","$","3,279.1"],["Operating income (loss)","","1,692.4","","","(31.2)","","","","","\u2014","","","5.4","","","27.2","","","14.3","","","","","1,708.1"],["Other income, net","","22.0","","","\u2014","","","","","1.7","","","\u2014","","","\u2014","","","\u2014","","","","","23.7"],["Income (loss) before income taxes","","$","1,362.3","","","$","(31.2)","","","","","$","1.7","","","$","5.4","","","$","27.2","","","$","14.3","","","","","$","1,379.7"],["Income tax (provision) benefit","","(350.6)","","","8.2","","","","","(4.0)","","","(1.4)","","","(1.0)","","","(3.8)","","","","","(352.6)"],["Net income (loss)","","1,011.7","","","(23.0)","","","","","(2.3)","","","4.0","","","26.2","","","10.5","","","","","1,027.1"],["Net income attributable to non-controlling interest","","(6.5)","","","\u2014","","","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","","","(6.5)"],["Net income attributable to redeemable non-controlling interest","","(4.4)","","","\u2014","","","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","","","(4.4)"],["Net income (loss) attributable to Lithia Motors, Inc.","","$","1,000.8","","","$","(23.0)","","","","","$","(2.3)","","","$","4.0","","","$","26.2","","","$","10.5","","","","","$","1,016.2"],["Diluted earnings (loss) per share attributable to Lithia Motors, Inc.","","$","36.29","","","$","(0.83)","","","","","$","(0.08)","","","$","0.15","","","$","0.95","","","$","0.38","","","","","$","36.86"],["Diluted share count","","27.6"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2022"],["($ in millions, except per share amounts)","","As reported","","Net disposal gain on sale of stores","","","","Investment loss","","Insurance reserves","","Acquisition expenses","","","","","","Adjusted"],["Selling, general and administrative","","3,044.1","","","66.0","","","","","\u2014","","","(4.9)","","","(15.0)","","","","","","","3,090.2"],["Operating income (loss)","","1,941.1","","","(66.0)","","","","","\u2014","","","4.9","","","15.0","","","","","","","1,895.0"],["Other (expense) income, net","","(43.2)","","","\u2014","","","","","39.2","","","\u2014","","","\u2014","","","","","","","(4.0)"],["Income (loss) before income taxes","","$","1,730.0","","","$","(66.0)","","","","","$","39.2","","","$","4.9","","","$","15.0","","","","","","","$","1,723.1"],["Income tax (provision) benefit","","(468.4)","","","19.1","","","","","\u2014","","","(1.3)","","","(4.0)","","","","","","","(454.6)"],["Net income (loss)","","1,261.6","","","$","(46.9)","","","","","39.2","","","3.6","","","11.0","","","","","","","1,268.5"],["Net income attributable to non-controlling interest","","(4.8)","","","\u2014","","","","","\u2014","","","\u2014","","","\u2014","","","","","","","(4.8)"],["Net income attributable to redeemable non-controlling interest","","(5.8)","","","\u2014","","","","","\u2014","","","\u2014","","","\u2014","","","","","","","(5.8)"],["Net income (loss) attributable to Lithia Motors, Inc.","","$","1,251.0","","","$","(46.9)","","","","","$","39.2","","","$","3.6","","","$","11.0","","","","","","","$","1,257.9"],["Diluted earnings (loss) per share attributable to Lithia Motors, Inc.","","$","44.17","","","$","(1.65)","","","","","$","1.38","","","$","0.13","","","$","0.39","","","","","","","$","44.42"],["Diluted share count","","28.3"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","36"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2021"],["($ in millions, except per share amounts)","","As reported","","","","Asset impairment","","Investment loss","","Insurance reserves","","Acquisition expenses","","Loss on redemption of senior notes","","","","Adjusted"],["Asset impairment","","$","1.9","","","","","$","(1.9)","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","","","$","\u2014"],["Selling, general and administrative","","2,480.8","","","","","\u2014","","","\u2014","","","(5.8)","","","(20.2)","","","\u2014","","","","","2,454.8"],["Operating income","","1,662.5","","","","","1.9","","","\u2014","","","5.8","","","20.2","","","\u2014","","","","","1,690.4"],["Other (expense) income, net","","(52.0)","","","","","\u2014","","","66.4","","","\u2014","","","\u2014","","","10.3","","","","","24.7"],["Income before income taxes","","$","1,484.8","","","","","$","1.9","","","$","66.4","","","$","5.8","","","$","20.2","","","$","10.3","","","","","$","1,589.4"],["Income tax (provision) benefit","","(422.1)","","","","","(0.5)","","","6.6","","","(1.6)","","","(5.1)","","","(2.7)","","","","","(425.4)"],["Net income","","$","1,062.7","","","","","$","1.4","","","$","73.0","","","$","4.2","","","$","15.1","","","$","7.6","","","","","$","1,164.0"],["Net income attributable to non-controlling interest","","(1.7)","","","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","","","(1.7)"],["Net income attributable to redeemable non-controlling interest","","(0.9)","","","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","","","(0.9)"],["Net income attributable to Lithia Motors, Inc.","","$","1,060.1","","","","","$","1.4","","","$","73.0","","","$","4.2","","","$","15.1","","","$","7.6","","","","","$","1,161.4"],["Diluted earnings per share attributable to Lithia Motors, Inc.","","$","36.54","","","","","$","0.05","","","$","2.52","","","$","0.14","","","$","0.52","","","$","0.26","","","","","$","40.03"],["Diluted share count","","29.0"]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

We manage our liquidity and capital resources in the context of our overall business strategy, continually forecasting and managing our cash, working capital balances and capital structure to meet the short-term and long-term obligations of our business while maintaining liquidity and financial flexibility. Our free cash flow deployment strategy targets an allocation of 65% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification and 10% in shareholder return in the form of dividends and share repurchases.

We believe we have sufficient sources of funding to meet our business requirements for the next 12 months and in the longer term. Cash flows from operations and borrowings under our credit facilities are our main sources for liquidity. In addition to the above sources of liquidity, potential sources to fund our business strategy include financing of real estate and proceeds from debt or equity offerings. We evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.

Available Sources

Below is a summary of our immediately available funds:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["($ in millions)","","2023","","2022","","Change","","% Change"],["Cash","","$","825.0","","","$","168.1","","","$","656.9","","","390.8","%"],["Available credit on the credit facilities","","870.4","","","1,415.6","","","(545.2)","","","(38.5)","%"],["Total current available funds","","$","1,695.4","","","$","1,583.7","","","$","111.7","","","7.1","%"]]
[[/GREPCENT_TABLE]]

Information about our cash flows, by category, is presented in our Consolidated Statements of Cash Flows. The following table summarizes our cash flows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["($ in millions)","","2023","","2022","","2021"],["Net cash (used in) provided by operating activities","","$","(472.4)","","","$","(610.1)","","","$","1,797.2"],["Net cash used in investing activities","","(1,270.3)","","","(1,329.8)","","","(2,890.4)"],["Net cash provided by financing activities","","2,409.8","","","2,035.9","","","1,106.7"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","37"]]
[[/GREPCENT_TABLE]]

Operating Activities

Cash used in operating activities decreased $137.7 million in 2023 compared to 2022, primarily as a result of maturation of our financing receivables portfolio and an increase in manufacturer floor plan financing related to recovering new vehicle inventory levels, partially offset by reduced net income and an increase in trade receivables.

Borrowings from and repayments to our syndicated credit facilities related to our new vehicle inventory floor plan financing are presented as financing activities. To better understand the impact of changes in inventory, other assets, and the associated financing, we also consider our adjusted net cash provided by operating activities to include borrowings or repayments associated with our new vehicle floor plan commitment and exclude the impact of our financing receivables activity.

To better understand the impact of these items, adjusted net cash provided by operating activities, a non-GAAP measure, is presented below:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","2021","","Change"],["Net cash (used in) provided by operating activities \u2013 as reported","","$","(472.4)","","","(610.1)","","","$","137.7","","","$","1,797.2","","","$","(2,407.3)"],["Add (less): Net borrowings (repayments) on floor plan notes payable: non-trade","","878.7","","","737.9","","","140.8","","","(685.3)","","","1,423.2"],["Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory","","(109.2)","","","(116.5)","","","7.3","","","(355.5)","","","239.0"],["Adjust: Financing receivables activity","","1,045.5","","","1,363.0","","","(317.5)","","","640.8","","","722.2"],["Net cash provided by operating activities \u2013 adjusted","","$","1,342.6","","","$","1,374.3","","","$","(31.7)","","","$","1,397.2","","","$","(22.9)"]]
[[/GREPCENT_TABLE]]

Inventories are one of the most significant component of our cash flow from operations. As of December 31, 2023, our new vehicle days’ supply was 65 days, or 18 days higher than our days’ supply as of December 31, 2022. Our days’ supply of used vehicles was 64 days, which was six days higher than our days’ supply as of December 31, 2022. We calculate days’ supply of inventory based on current inventory levels, including in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.

Investing Activities

Net cash used in investing activities totaled $1.3 billion and $1.3 billion, respectively, for 2023 and 2022. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment. Our surplus of cash as of December 31, 2023, has been made available to fund upcoming acquisition activity.

Below are highlights of significant activity related to our cash flows from investing activities:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","2021","","Change"],["Capital expenditures","","$","(230.2)","","","$","(303.1)","","","$","72.9","","","$","(260.4)","","","$","(42.7)"],["Cash paid for acquisitions, net of cash acquired","","(1,185.1)","","","(1,243.6)","","","58.5","","","(2,699.3)","","","1,455.7"],["Proceeds from sales of stores","","142.9","","","212.1","","","(69.2)","","","76.3","","","135.8"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","38"]]
[[/GREPCENT_TABLE]]

Capital Expenditures

Below is a summary of our capital expenditure activities:

Many manufacturers provide assistance in the form of additional incentives or assistance if facilities meet manufacturer image standards and requirements. We expect that certain facility upgrades and remodels will generate additional manufacturer incentive payments. Also, tax laws allowing accelerated deductions for capital expenditures reduce the overall investment needed and encourage accelerated project timelines.

We expect to use a portion of our future capital expenditures to upgrade facilities that we recently acquired. This additional capital investment is contemplated in our initial evaluation of the investment return metrics applied to each acquisition and is usually associated with manufacturer image standards and requirements.

If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facilities. Upon completion of the projects, we believe we would have the ability to secure long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.

Acquisitions

Growth through acquisitions is a key component of our long-term strategy that enables us to increase our network of locations, support maintaining a diverse franchise and geographic mix and improve our ability to serve customers through wider selection and improved proximity. Our disciplined approach focuses on acquiring new vehicle franchises that are accretive and cash flow positive at reasonable valuations.

We are able to subsequently floor new vehicle inventory acquired as part of an acquisition; however, the cash generated by these transactions are recorded as borrowings on floor plan notes payable, non-trade. Adjusted net cash paid for acquisitions, a non-GAAP measure, as well as certain other acquisition-related information is presented below:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["($ in millions)","","2023","","2022","","2021"],["Number of stores acquired","","56","","","31","","","77"],["Number of stores opened","","\u2014","","","1","","","1"],["Cash paid for acquisitions, net of cash acquired","","$","(1,185.1)","","","$","(1,243.6)","","","$","(2,699.3)"],["Add: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory","","109.2","","","116.5","","","355.5"],["Cash paid for acquisitions, net of cash acquired \u2013 adjusted","","$","(1,075.9)","","","$","(1,127.1)","","","$","(2,343.8)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","39"]]
[[/GREPCENT_TABLE]]

We evaluate potential capital investments primarily based on targeted rates of return on assets and return on our net equity investment.

Financing Activities

Adjusted net cash provided by financing activities, a non-GAAP measure, which is adjusted for borrowings and repayments on floor plan facilities: non-trade and borrowings and repayments associated with our Financing Operations segment was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["($ in millions)","","2023","","2022","","2021"],["Cash provided by financing activities, as reported","","$","2,409.8","","","2,035.9","","","$","1,106.7"],["Add (less): Net (borrowings) repayments on floor plan notes payable: non-trade","","(878.7)","","","(737.9)","","","685.3"],["Less: Net borrowings on non-recourse notes payable","","(1,283.4)","","","(104.6)","","","(317.6)"],["Cash provided by financing activities, as adjusted","","$","247.7","","","$","1,193.4","","","$","1,474.4"]]
[[/GREPCENT_TABLE]]

Below are highlights of significant activity related to our cash flows from financing activities, excluding borrowings and repayments on floor plan notes payable: non-trade and non-recourse notes payable, which are discussed above:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2023 vs. 2022","","","","2022 vs. 2021"],["($ in millions)","","2023","","2022","","Change","","2021","","Change"],["Net borrowings on lines of credit","","$","324.3","","","$","2,023.8","","","$","(1,699.5)","","","$","325.4","","","$","1,698.4"],["Principal payments on long-term debt and finance lease liabilities, other","","(10.6)","","","(171.7)","","","161.1","","","(486.5)","","","314.8"],["Proceeds from the issuance of long-term debt","","79.8","","","113.3","","","(33.5)","","","817.4","","","(704.1)"],["Proceeds from the issuance of common stock","","29.7","","","36.1","","","(6.4)","","","1,136.2","","","(1,100.1)"],["Payment of debt issuance costs","","(16.7)","","","(11.8)","","","(4.9)","","","(14.7)","","","2.9"],["Repurchases of common stock","","(48.9)","","","(688.3)","","","639.4","","","(230.7)","","","(457.6)"],["Dividends paid","","(52.8)","","","(45.2)","","","(7.6)","","","(38.8)","","","(6.4)"]]
[[/GREPCENT_TABLE]]

Borrowing and Repayment Activity

During 2023, we raised net proceeds of $79.8 million through the issuance of debt, and had net borrowings of $0.3 billion on our lines of credit. These funds were primarily used for acquisitions, share repurchases and capital expenditures.

Our debt to total capital ratio, excluding floor plan notes payable, was 47.1% at December 31, 2023 compared to 49.5% at December 31, 2022.

Equity Transactions

During 2023, we repurchased over 142,700 shares at a weighted average price of $240.81 under our current share repurchase authorization, with approximately $467.0 million remaining.

During 2023, we paid dividends on our common stock as follows:

[[GREPCENT_TABLE]]
[["Dividend paid:","","Dividend amount per share","","Total amount of dividend (in millions)"],["March 2023","","$","0.42","","","$","11.5"],["May 2023","","0.50","","","13.8"],["August 2023","","0.50","","","13.8"],["November 2023","","0.50","","","13.7"]]
[[/GREPCENT_TABLE]]

We evaluate performance and make a recommendation to the Board of Directors on dividend payments on a quarterly basis.

[[GREPCENT_TABLE]]
[["","","","40"]]
[[/GREPCENT_TABLE]]

Summary of Outstanding Balances on Credit Facilities and Long-Term Debt

Below is a summary of our outstanding balances on credit facilities and long-term debt:

[[GREPCENT_TABLE]]
[["($ in millions)","","Outstanding as of December 31, 2023","","Remaining Available as of December 31, 2023"],["Floor plan notes payable: non-trade","","$","2,288.5","","","$","\u2014","","(1)"],["Floor plan notes payable","","1,347.0","","","\u2014"],["Used and service loaner vehicle inventory financing commitments","","902.8","","","25.5","","(2)"],["Revolving lines of credit","","1,620.7","","","829.6","","(2),(3)"],["Warehouse facilities","","587.0","","","15.4","","(2)"],["Non-recourse notes payable","","1,705.6","","","\u2014"],["4.625% Senior notes due 2027","","400.0","","","\u2014"],["4.375% Senior notes due 2031","","550.0","","","\u2014"],["3.875% Senior notes due 2029","","800.0","","","\u2014"],["Real estate mortgages, finance lease obligations, and other debt","","730.7","","","\u2014"],["Unamortized debt issuance costs","","(31.8)","","","\u2014","","(4)"],["Total debt","","$","10,900.5","","","$","870.4"]]
[[/GREPCENT_TABLE]]

(1)As of December 31, 2023, we had a $2.1 billion new vehicle floor plan commitment as part of our USB credit facility, and a $500 million CAD wholesale floorplan commitment as part of our BNS credit facility.

(2)The amounts available on the credit facilities are limited based on borrowing base calculations and fluctuates monthly.

(3)Available credit is based on the borrowing base amount effective as of November 30, 2023. This amount is reduced by $37.0 million for outstanding letters of credit.

(4)Debt issuance costs are presented on the balance sheet as a reduction from the carrying amount of the related debt liability. See Note 9 – Credit Facilities and Long-Term Debt of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Contractual Obligations

Our cash requirements greater than twelve months from contractual obligations and commitments include:

Debt Obligations and Interest Payments

Refer to Note 9 – Credit Facilities and Long-Term Debt of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Contract Obligations

Refer to Note 8 – Commitments and Contingencies of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Operating and Finance Leases

Refer to Note 8 – Commitments and Contingencies of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenues and expenses at the date of the financial statements. Certain accounting policies require us to make difficult and subjective judgments on matters that are inherently uncertain. The following accounting policies involve critical accounting estimates because they are particularly dependent on assumptions made by management. While we have made our best estimates based on facts and circumstances available to us at the time, different estimates could have been used in the current period. Changes in the accounting estimates we used are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations.

Our most critical accounting estimates include those related to goodwill and franchise value, and acquisitions. We also have other key accounting policies for valuation of finance receivables and expense accruals. However, these policies either do not meet the definition of critical accounting estimates described above or the policies are not currently material items in our financial statements. We review our estimates, judgments and assumptions periodically and reflect the effects of revisions in the period that they are deemed to be necessary. We believe that these estimates are reasonable. However, actual results could differ materially from these estimates.

[[GREPCENT_TABLE]]
[["","","","41"]]
[[/GREPCENT_TABLE]]

Goodwill and Franchise Value

We are required to test our goodwill and franchise value for impairment at least annually on October 1, or more frequently if conditions indicate that an impairment may have occurred. Our reporting units for goodwill impairment testing are North America Vehicle Operations, United Kingdom Vehicle Operations, and US and Canada Financing Operations. We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2023, we evaluated our goodwill using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired. If the qualitative assessment determines it is more likely than not the fair value is less than the carrying amount, we would further evaluate for potential impairment.

As of December 31, 2023, we had $1.9 billion of goodwill on our balance sheet associated with our reporting units. The annual goodwill impairment analysis resulted in no indications of impairment in 2023, 2022 or 2021.

We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2023, we evaluated our indefinite-lived intangible assets using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the individual store’s franchise value exceeds the carrying amount, the franchise value is not impaired, and the second step is not necessary. If the qualitative assessment determines it is more likely than not that the fair value is less than the carrying amount, then a quantitative valuation of our franchise value is performed. An impairment charge is recorded to the extent the fair value is less than the carrying value.

As of December 31, 2023, we had $2.4 billion of franchise value on our balance sheet associated with 303 locations. No individual location accounted for more than 2.8% of our total franchise value as of December 31, 2023. The annual franchise value impairment analysis, which we perform as of October 1 each year, resulted in no indications of impairment in 2023, 2022, or 2021. During the third quarter of 2021, there were indications of impairment at a certain location. We tested the franchise value for this location, which resulted in an impairment charge of $1.9 million.

We are subject to financial statement risk to the extent that our goodwill or franchise rights become impaired due to decreases in the fair value. A future decline in performance, decreases in projected growth rates or margin assumptions or changes in discount rates could result in a potential impairment, which could have a material adverse impact on our financial position and results of operations. Furthermore, if a manufacturer becomes insolvent, we may be required to record a partial or total impairment on the franchise value and/or goodwill related to that manufacturer. No individual manufacturer accounted for more than 2.1% of our total franchise value and goodwill as of December 31, 2023.

See Note 1 – Summary of Significant Accounting Policies and Note 6 – Goodwill and Franchise Value of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Acquisitions

We account for acquisitions using the purchase method of accounting which requires recognition of assets acquired and liabilities assumed at fair value as of the date of the acquisition. Determination of the estimated fair value assigned to each asset acquired or liability assumed can materially impact the net income in subsequent periods through depreciation and amortization and potential impairment charges.

The most significant items we generally acquire in a transaction are inventory, long-lived assets, intangible franchise rights and goodwill. The fair value of acquired inventory is based on manufacturer invoice cost and market data. We estimate the fair value of property and equipment based on a market valuation approach. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. We apply an income approach for the fair value of intangible franchise rights which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow.

See Note 1 – Summary of Significant Accounting Policies and Note 16 – Acquisitions of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

[[GREPCENT_TABLE]]
[["","","","42"]]
[[/GREPCENT_TABLE]]