# LITHIA MOTORS INC (LAD) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from LITHIA MOTORS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1023128/000102312823000053/lad-20221231.htm
Accession: 0001023128-23-000053
Filing date: 2023-02-24
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/LAD/
All MD&A years: /company/LAD/mda/
Previous year: /company/LAD/mda/fy2021/ (FY 2021)
Next year: /company/LAD/mda/fy2023/ (FY 2023)

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.

[[GREPCENT_TABLE]]
[["","","","20"]]
[[/GREPCENT_TABLE]]

Overview

We are one of the largest automotive retailers in the United States and were ranked #158 on the Fortune 500 in 2022. As of February 24, 2023, we offered 48 brands of new vehicles and all brands of used vehicles in 296 stores in North America and online at over 300 websites. We offer a wide range of products and services including new and used vehicles, finance and insurance products and vehicle repair and maintenance.

[[GREPCENT_TABLE]]
[["","","","21"]]
[[/GREPCENT_TABLE]]

Financial Performance

We experienced growth of revenue and gross profit in all major business lines in 2022 compared to 2021, primarily driven by increases in volume related to acquisitions, complimented by organic growth in used vehicles, finance and insurance and service, body and parts sales. On a same store basis, new and used vehicle retail revenues and gross profits experienced growth primarily driven by increases in average selling prices per retail unit.

Liquidity

As of December 31, 2022, we had available liquidity of $1.6 billion, which was comprised of $168.1 million in cash and $1.4 billion availability on our credit facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $0.5 billion. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.

Segments

In the fourth quarter of 2022, we reevaluated our reporting segments based on our development and long-term strategy. The Company has experienced rapid growth in size as well as new expansion into synergistic business lines, transforming the way the business is managed. Considering the Company’s growth, evolution of its business model, and change in Company structure during 2022, management reevaluated its reporting segments and determined the operating segments (and reportable segments) as of December 31, 2022 are Vehicle Operations and Financing Operations. Based on this evaluation, we reclassified Financing Operations Income for the comparative periods from the “Corporate and Other” category to conform to current year presentation and consolidated our Domestic, Import, and Luxury segments into a new Vehicle Operations segment.

[[GREPCENT_TABLE]]
[["","","","22"]]
[[/GREPCENT_TABLE]]

Vehicle Operations and Other Non-Reportable Segments

[[GREPCENT_TABLE]]
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[[/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 2021 would be included in same store operating data beginning in December 2022, 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.

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[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","","","2021 vs. 2020"],["($ in millions, except per vehicle data)","","2022","","2021","","Change","","%","","2021","","2020","","Change","","%"],["Revenues"],["New vehicle retail","","$","10,129.1","","","$","10,729.8","","","$","(600.7)","","","(5.6)","%","","$","7,159.1","","","$","6,282.4","","","$","876.7","","","14.0","%"],["Used vehicle retail","","7,886.6","","","6,997.9","","","888.7","","","12.7","","","5,246.8","","","3,735.3","","","1,511.5","","","40.5"],["Finance and insurance","","1,027.2","","","1,010.7","","","16.5","","","1.6","","","697.3","","","540.5","","","156.8","","","29.0"],["Service, body and parts","","2,232.9","","","2,032.9","","","200.0","","","9.8","","","1,403.6","","","1,260.2","","","143.4","","","11.4"],["Total revenues","","22,649.1","","","21,941.2","","","707.9","","","3.2","","","15,216.9","","","12,216.2","","","3,000.7","","","24.6"],["Gross profit"],["New vehicle retail","","$","1,231.4","","","$","1,175.9","","","$","55.5","","","4.7","%","","$","781.2","","","$","430.7","","","$","350.5","","","81.4","%"],["Used vehicle retail","","674.7","","","798.0","","","(123.3)","","","(15.5)","","","618.1","","","421.2","","","196.9","","","46.7"],["Finance and insurance","","1,027.2","","","1,010.7","","","16.5","","","1.6","","","697.3","","","540.5","","","156.8","","","29.0"],["Service, body and parts","","1,205.3","","","1,069.9","","","135.4","","","12.7","","","756.3","","","669.2","","","87.1","","","13.0"],["Total gross profit","","4,125.2","","","4,105.4","","","19.8","","","0.5","","","2,879.6","","","2,082.0","","","797.6","","","38.3"],["Gross profit margins"],["New vehicle retail","","12.2","%","","11.0","%","","120 bp","","","","10.9","%","","6.9","%","","400 bp"],["Used vehicle retail","","8.6","","","11.4","","","-280 bp","","","","11.8","","","11.3","","","50 bp"],["Finance and insurance","","100.0","","","100.0","","","\u2014 bp","","","","100.0","","","100.0","","","\u2014 bp"],["Service, body and parts","","54.0","","","52.6","","","140 bp","","","","53.9","","","53.1","","","80 bp"],["Total gross profit margin","","18.2","","","18.7","","","-50 bp","","","","18.9","","","17.0","","","190 bp"],["Retail units sold"],["New vehicle retail","","210,558","","","248,821","","","(38,263)","","","(15.4)","%","","163,680","","","157,933","","","5,747","","","3.6","%"],["Used vehicle retail","","261,857","","","264,305","","","(2,448)","","","(0.9)","","","198,121","","","169,953","","","28,168","","","16.6"],["Average selling price per retail unit"],["New vehicle retail","","$","48,106","","","$","43,123","","","$","4,983","","","11.6","%","","$","43,738","","","$","39,779","","","$","3,959","","","10.0","%"],["Used vehicle retail","","30,118","","","26,477","","","3,641","","","13.8","","","26,483","","","21,978","","","4,505","","","20.5"],["Average gross profit per retail unit"],["New vehicle retail","","$","5,848","","","$","4,726","","","$","1,122","","","23.7","%","","$","4,773","","","$","2,727","","","$","2,046","","","75.0","%"],["Used vehicle retail","","2,576","","","3,019","","","(443)","","","(14.7)","","","3,120","","","2,479","","","641","","","25.9"],["Finance and insurance","","2,174","","","1,970","","","204","","","10.4","","","1,927","","","1,648","","","279","","","16.9"],["Total vehicle (1)","","6,159","","","5,900","","","259","","","4.4","","","5,854","","","4,280","","","1,574","","","36.8"]]
[[/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]]
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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.

2022 vs. 2021

New vehicle revenue and gross profit grew 15.2% and 29.6%, respectively. This improvement resulted from an increase in average selling prices and unit sales due to our accelerated growth through strategic acquisitions.

Same store new vehicle revenue was primarily impacted by a 15.4% decline in unit volume, partially offset by an increase in average selling prices of 11.6%. As the national new vehicle market plateaus, our stores focus on improving gross profit per new vehicle sold. On a same store basis, gross profit per new vehicle increased 23.7%. Our recently acquired stores are also focused on improving gross profit per new vehicle as total company gross profit per unit increased 24.5%.

Market demand remained high throughout 2022, with inventory levels recovering in the second half of 2022 from prior year shortages of available new vehicles for sale, resulting from certain component shortages in the manufacturers’ supply chains. This imbalance continued to result in higher than normal average selling prices and gross profits per unit. Supply improvements have varied by manufacturer, and are expected to continue to improve in 2023.

2021 vs. 2020

New vehicle revenues and gross profit grew 65.3% and 164.3%, respectively. These improvements resulted from our accelerated growth through strategic acquisitions and strong recovery from the impact of the COVID-19 pandemic, driving new vehicle unit sales up 52.3%.

The increase in same store new vehicle revenues was driven by an increase in unit volume of 3.6% and an increase in average selling prices of 10.0%. On a same store basis, gross profit per new vehicle increased 75.0%.

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 2022, our stores sold an average of 91 used vehicles per store per month. This compares to 92 used vehicles per store per month in 2021 and 78 in 2020. Used vehicle operations are generally an opportunity area for recently acquired and opened locations. As we acquired 32 and 78 locations in 2022 and 2021, respectively, this decrease in 2022 was due to the volume of stores recently acquired still being integrated into our existing operational strategies.

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Used vehicle demand remains high, due in part to the lower levels of new vehicle inventory available for sale. This demand resulted in higher than normal average selling prices in 2022.

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 12.7%, due to a 13.8% increase in average selling price per retail unit, partially offset by a 0.9% decrease in unit volume. The revenue increase in 2022 was driven by an increase in our core vehicles of 15.8% and supported by increases in value auto and CPO vehicle categories of 10.8% and 6.1%, respectively. The increase in our core vehicle category includes a 0.2% increase in volume, complimented by a 15.6% increase in average selling price per vehicle.

Used vehicle gross profits decreased 0.2%, due to an 11.8% decrease in average gross profit per unit. On a same store basis, used vehicle gross profit decreased 15.5%, led by a decrease in our core vehicles of 22.3% with additional declines in our value autos and CPO vehicle categories of 5.3% and 8.2%, respectively. The decrease in our core vehicle category was driven by a decrease in gross profit per unit, while unit volume remained relatively flat. Gross profit per unit in our core vehicle category, which accounted for 61.5% of our used vehicle unit sales, decreased 22.4% to $2,124. The decrease in same store gross profit in our value auto category was driven by a 7.4% decrease in gross profit per unit to $2,732. Our CPO category experienced a decrease in unit sales of 6.7% and a decrease in gross profit per unit of 1.6% to $3,808.

2021 vs. 2020

Used vehicle revenues increased 81.5%, driven by 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 40.5%, due to a 16.6% increase in unit volume and a 20.5% increase in average selling price per retail unit.

Used vehicle gross profits increased 85.4%, due to increased gross profit per unit of 23.3% and increased unit volume of 50.4%. On a same store basis, used vehicle gross profit increased 46.7%, due to an increase in average gross profit per unit of 25.9% and increased unit volume.

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.

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 1.6%, to $2,174 per unit, driven by a 330 basis point increase in service contract penetration rates to 53.6%.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

2021 vs. 2020

Finance and insurance revenue increased 81.3%, primarily due to increased volume related to acquisitions and strong recovery from the impact of the COVID-19 pandemic. On a same store basis, finance and insurance revenue increased 29.0%, to $1,927 per unit.

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 from 2015 to 2019, 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.

2022 vs. 2021

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 9.8%, primarily driven by an increase in customer pay of 10.3%. Performance in parts wholesale and body shop also saw increases of 18.3% and 10.8%. Same store service, body and parts gross profit increased 12.7%. Our gross margins continue to increase as our mix has shifted towards customer pay, which has higher margins than other service work.

2021 vs. 2020

Service, body and parts revenue grew in all areas, primarily due to acquisition growth and strong recovery from the impact of the COVID-19 pandemic. On a same store basis, service, body and parts revenue and gross profit increased 11.4% and 13.0%, respectively.

Financing Operations

Financing Operations offers loans and leases to consumers across the full credit spectrum for both new and used vehicles through two entities, DFC and Pfaff Leasing. DFC is a captive lender, originating loans only from stores in the United States and Driveway. Pfaff Leasing originates loans and leases from both our Canadian stores and third-party dealerships. Our stores do not exclusively finance vehicles through DFC or Pfaff Leasing, rather originations are earned on a competitive basis with other lenders. We target growing penetration to 15% of retail units by 2025.

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. During 2022, actions taken 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 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 DFC and Pfaff Leasing’s portfolio of auto loan and lease receivables less the interest expense associated with the debt utilized to fund the lending, a provision for estimated loan and lease losses, depreciation on vehicles leased via operating leases and directly-related expenses.

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[[/GREPCENT_TABLE]]

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 in interest rates, which affect Financing Operations’ funding costs, or other competitive pressures on consumer rates, could result in compression 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 and economic factors on our outlook for net losses expected to occur over the remaining contractual life of the loans and leases receivable.

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

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[[/GREPCENT_TABLE]]

(1)Percent of total average managed finance receivables.

DFC Portfolio Information(1)

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

(1)Excludes Pfaff Leasing 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.

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

(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 income declined from 2021 to 2022 primarily due to the growth of the DFC portfolio. DFC penetration rates increased from 4.0% of retail units sold in 2021 to 10.2% in 2022. Upfront recognition of loan and lease loss provisions recorded on new originations outpaced the incremental interest income contributed by these loans and leases. Additionally, funding costs increased at a faster pace than we were able to pass along to consumers through higher contract rates. These factors decreased net interest margin from 8.2% in 2021 to 5.3% in 2022.

The increase in net credit losses and past due accounts receivable was primarily driven by prior year delinquencies being abnormally low due to the impacts of governmental stimulus associated with the COVID-19 pandemic.

The decline in the average recovery rate was driven by used vehicle price depreciation and the impact of a change in repossession strategy and the transition to new vendors in the fourth quarter of 2022.

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]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Personnel","","$","2,086.3","","","$","1,737.9","","","$","348.4","","","20.0","%","","$","979.7","","","$","758.2","","","77.4","%"],["Advertising","","253.6","","","162.2","","","91.4","","","56.4","","","97.4","","","64.8","","","66.5"],["Rent","","72.6","","","54.0","","","18.6","","","34.4","","","41.2","","","12.8","","","31.1"],["Facility costs","","150.3","","","116.8","","","33.5","","","28.7","","","81.0","","","35.8","","","44.2"],["Gain on sale of assets","","(66.0)","","","(2.3)","","","(63.7)","","","NM","","(18.2)","","","15.9","","","NM"],["Other","","547.3","","","412.2","","","135.1","","","32.8","","","256.8","","","155.4","","","60.5"],["Total SG&A","","$","3,044.1","","","$","2,480.8","","","$","563.3","","","22.7","%","","$","1,437.9","","","$","1,042.9","","","72.5","%"]]
[[/GREPCENT_TABLE]]

NM - Not meaningful

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["As a % of gross profit","","2022","","2021","","Change","","2020","","Change"],["Personnel","","40.5","%","","40.8","%","","(30)","bps","","44.0","%","","(320)","bps"],["Advertising","","4.9","","","3.8","","","110","","","4.4","","","(60)"],["Rent","","1.4","","","1.3","","","10","","","1.9","","","(60)"],["Facility costs","","2.9","","","2.7","","","20","","","3.6","","","(90)"],["Gain on sale of assets","","(1.3)","","","(0.1)","","","(120)","","","(0.8)","","","70"],["Other","","10.7","","","9.7","","","100","","","11.5","","","(180)"],["Total SG&A","","59.1","%","","58.2","%","","90","bps","","64.6","%","","(640)","bps"]]
[[/GREPCENT_TABLE]]

2022 vs. 2021

SG&A increased 22.7%, or $0.6 billion, primarily due to increased personnel costs resulting 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. We also recognized a gain on the sale of stores of $66.0 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 61.5% from 57.5% in the prior year.

2021 vs. 2020

SG&A increased 72.5%, or $1.0 billion, primarily due to increased personnel costs which resulted from our growth through acquisitions. Other expenses in 2021 included acquisition expenses of $20.2 million and $5.8 million of storm related insurance charges.

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

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit decreased across all categories to 58.9% from 64.2% in the prior year.

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Personnel","","$","2,086.3","","","$","1,737.9","","","$","348.4","","","20.0","%","","$","979.7","","","$","758.2","","","77.4","%"],["Advertising","","253.6","","","162.2","","","91.4","","","56.4","","","97.4","","","64.8","","","66.5"],["Rent","","72.6","","","54.0","","","18.6","","","34.4","","","41.2","","","12.8","","","31.1"],["Facility costs","","150.3","","","116.8","","","33.5","","","28.7","","","81.0","","","35.8","","","44.2"],["Adjusted gain on sale of assets (1)","","\u2014","","","(2.3)","","","2.3","","","NM","","(1.6)","","","(0.7)","","","NM"],["Adjusted other (1)","","527.4","","","386.2","","","141.2","","","36.6","","","247.7","","","138.5","","","55.9"],["Total adjusted SG&A (1)","","$","3,090.2","","","$","2,454.8","","","$","635.4","","","25.9","%","","$","1,445.4","","","$","1,009.4","","","69.8","%"]]
[[/GREPCENT_TABLE]]

NM - Not meaningful

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["As a % of gross profit","","2022","","2021","","Change","","2020","","Change"],["Personnel","","40.5","%","","40.8","%","","(30)","bps","","44.0","%","","(320)","bps"],["Advertising","","4.9","","","3.8","","","110","","","4.4","","","(60)"],["Rent","","1.4","","","1.3","","","10","","","1.9","","","(60)"],["Facility costs","","2.9","","","2.7","","","20","","","3.6","","","(90)"],["Adjusted gain on sale of assets (1)","","\u2014","","","(0.1)","","","10","","","(0.1)","","","\u2014"],["Adjusted other (1)","","10.3","","","9.1","","","120","","","11.2","","","(210)"],["Total adjusted SG&A (1)","","60.0","%","","57.6","%","","240","bps","","65.0","%","","(740)","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.

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 interest expense increased 59.1% for pre-existing locations and 29.7% related to acquisition volume. Increases in interest rates were offset by the proceeds from the termination of our zero-cost interest rate collar. See Note 11 – Derivative Financial Instruments for more information.

2021 vs. 2020

Floor plan interest expense decreased $12.1 million, primarily due to new vehicle inventory shortages and increasing consumer demand.

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.

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

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,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Floor plan interest expense (new vehicles)","","$","38.8","","","$","22.3","","","$","16.5","","","74.0","%","","$","34.4","","","$","(12.1)","","","(35.2)","%"],["Floor plan assistance (included as an offset to cost of sales)","","(130.6)","","","(120.1)","","","(10.5)","","","8.7","","","(72.8)","","","(47.3)","","","65.0"],["Net new vehicle carrying costs (benefit)","","$","(91.8)","","","$","(97.8)","","","$","6.0","","","(6.1)","%","","$","(38.4)","","","$","(59.4)","","","154.7"]]
[[/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,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Depreciation and amortization","","$","163.2","","","$","124.8","","","$","38.4","","","30.8","%","","$","92.3","","","$","32.5","","","35.2","%"]]
[[/GREPCENT_TABLE]]

Acquisition activity contributed to the increases in depreciation and amortization in 2022 compared to 2021 and in 2021 compared to 2020. We acquired approximately $236.9 million and $559.8 million of depreciable property as part of our 2022 and 2021 acquisitions, respectively. Capital expenditures totaled $303.1 million and $260.4 million, respectively, in 2022 and 2021. 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,"],["","","2022","","","","","2021","","","","","2020"],["Operating margin","","6.9","%","","","","","7.3","%","","","","","5.3","%"],["Operating margin adjusted for non-core charges (1)","","6.7","","","","","","7.4","","","","","","5.3"]]
[[/GREPCENT_TABLE]]

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

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 related insurance charges and acquisition expenses, offset by a net disposal gain on sale of stores, our operating margin decreased 70 basis points.

2021 vs. 2020

Our operating margin increased 200 basis points compared to the prior year, driven by a decrease in SG&A as a percentage of gross profit and increased total gross margin. Adjusting for non-core charges, including storm insurance charges, acquisition expenses, and asset impairments, our operating margin increased 210 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)","","2022","","2021","","2020"],["Franchise value","","$","\u2014","","","$","1.9","","","$","4.4"],["Goodwill","","\u2014","","","\u2014","","","3.5"],["Total asset impairments","","$","\u2014","","","$","1.9","","","$","7.9"]]
[[/GREPCENT_TABLE]]

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

Goodwill and franchise value for our reporting units 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 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.

In the second quarter of 2020, there were indications of a triggering event at certain reporting units. We tested the franchise value and goodwill for these locations. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded non-cash impairment charges of $4.4 million and $3.5 million, which was equal to the difference between the fair value and the carrying value for franchise value and goodwill, respectively. One of these locations was subsequently sold in the fourth quarter of 2020, with the remainder sold in 2021.

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,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Mortgage interest","","$","25.9","","","$","24.9","","","$","1.0","","","4.0","%","","$","26.2","","","$","(1.3)","","","(5.0)","%"],["Other interest","","105.8","","","80.5","","","25.3","","","31.4","","","47.0","","","$","33.5","","","71.3"],["Capitalized interest","","(2.6)","","","(2.0)","","","(0.6)","","","30.0","","","(1.6)","","","(0.4)","","","25.0"],["Total other interest expense","","$","129.1","","","$","103.4","","","$","25.7","","","24.9","%","","$","71.6","","","$","31.8","","","44.4","%"]]
[[/GREPCENT_TABLE]]

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. See also Note 9 – Credit Facilities and Long-Term Debt of Notes to Consolidated Financial Statements for additional information.

2021 vs. 2020

The increase in other interest expense was due to the issuances of $800 million in aggregate principal amount of 3.875% senior notes due 2029 in May 2021 and $550 million in aggregate principal amount of 4.375% senior notes due 2031 in October 2020. These increases were offset by the payoff of our $300 million in aggregate principal amount of 5.250% senior notes in August 2021.

Other (Expense) Income, Net

Other (expense) income, 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)","","2022","","2021","","Change","","%","","2020","","Change","","%"],["Other (expense) income, net","","$","(43.2)","","","$","(52.0)","","","$","8.8","","","NM","","$","61.8","","","$","(113.8)","","","NM"]]
[[/GREPCENT_TABLE]]

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

2022 vs. 2021

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

2021 vs. 2020

The decrease in other (expense) income, net was primarily due to a $66.4 million unrealized investment loss related to our investment in Shift Technologies, Inc compared to a $43.8 million unrealized gain in the prior year. In 2021, we also recognized a $10.3 million loss on the early redemption of our $300 million principal amount 5.250% senior notes originally due 2025.

Income Tax Provision

Our effective income tax rate was as follows:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","2021","","2020"],["Effective income tax rate","","27.1","%","","28.4","%","","27.5","%"],["Effective income tax rate excluding non-core items (1)","","26.4","","","26.8","","","27.6"]]
[[/GREPCENT_TABLE]]

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

Our effective income tax rate was 27.1% for 2022 compared to 28.4% for 2021. Our 2022 effective income tax rate was negatively affected by a valuation allowance recorded for certain deferred tax assets not expected to be realized. The valuation allowance impact to the 2022 effective income tax rate was less than the impact to the 2021 effective income tax rate. Our effective income tax rate was positively affected by a reduction in the current and deferred state tax rate due to legislative updates and changing state mix.

Excluding the valuation allowance recorded during 2022, our effective income tax rate excluding non-core items for 2022 would have been 26.4%, a decrease of 40 basis points compared to the effective income tax rate excluding non-core items for 2021.

Our effective income tax rate in 2021 was also 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 stock 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.

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

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2020"],["($ in millions, except per share amounts)","","As reported","","Net disposal gain on sale of stores","","Asset impairment","","Investment gain","","Insurance reserves","","Acquisition expenses","","","","Tax attribute","","Adjusted"],["Asset impairment","","$","7.9","","","$","\u2014","","","$","(7.9)","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","","","$","\u2014","","","$","\u2014"],["Selling, general and administrative","","1,437.9","","","16.6","","","\u2014","","","\u2014","","","(6.1)","","","(3.0)","","","","","\u2014","","","1,445.4"],["Operating income (loss)","","692.7","","","(16.6)","","","7.9","","","\u2014","","","6.1","","","3.0","","","","","\u2014","","","693.1"],["Other income (expense), net","","61.8","","","\u2014","","","\u2014","","","(43.8)","","","\u2014","","","\u2014","","","","","\u2014","","","18.0"],["Income before income taxes","","$","648.5","","","$","(16.6)","","","$","7.9","","","$","(43.8)","","","$","6.1","","","$","3.0","","","","","$","\u2014","","","$","605.1"],["Income tax (provision) benefit","","(178.2)","","","4.6","","","(2.3)","","","12.1","","","(1.6)","","","(0.8)","","","","","(0.8)","","","(167.0)"],["Net income attributable to Lithia Motors, Inc.","","$","470.3","","","$","(12.0)","","","$","5.6","","","$","(31.7)","","","$","4.5","","","$","2.2","","","","","$","(0.8)","","","$","438.1"],["Diluted earnings per share attributable to Lithia Motors, Inc.","","$","19.53","","","$","(0.50)","","","$","0.23","","","$","(1.32)","","","$","0.19","","","$","0.09","","","","","$","(0.03)","","","$","18.19"],["Diluted share count","","24.1"]]
[[/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)","","2022","","2021","","Change","","% Change"],["Cash","","$","168.1","","","$","153.0","","","$","15.1","","","9.9","%"],["Available credit on the credit facilities","","1,419.4","","","1,234.7","","","184.7","","","15.0","%"],["Total current available funds","","$","1,587.5","","","$","1,387.7","","","$","199.8","","","14.4","%"]]
[[/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)","","2022","","2021","","2020"],["Net cash (used in) provided by operating activities","","$","(610.1)","","","$","1,797.2","","","$","544.6"],["Net cash used in investing activities","","(1,329.8)","","","(2,890.4)","","","(1,605.8)"],["Net cash provided by financing activities","","2,035.9","","","1,106.7","","","1,139.8"]]
[[/GREPCENT_TABLE]]

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

Operating Activities

Cash provided by operating activities decreased $2.4 billion in 2022 compared to 2021, primarily as a result of growth in inventory levels compared to the prior year, growth in our financing receivables as we increase our auto loan portfolio, and growth in our business through acquisitions, partially offset by improved profitability.

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,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","2020","","Change"],["Net cash provided by operating activities \u2013 as reported","","$","(610.1)","","","1,797.2","","","$","(2,407.3)","","","$","544.6","","","$","1,252.6"],["Add (less): Net borrowings (repayments) on floor plan notes payable: non-trade","","737.9","","","(685.3)","","","1,423.2","","","(20.6)","","","(664.7)"],["Add: Temporary pay down of outstanding borrowings on floor plan notes payable: non-trade","","\u2014","","","\u2014","","","\u2014","","","113.4","","","(113.4)"],["Less: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory","","(116.5)","","","(355.5)","","","239.0","","","(255.0)","","","(100.5)"],["Adjust: Financing receivables activity","","1,363.0","","","640.8","","","722.2","","","114.1","","","526.7"],["Net cash provided by operating activities \u2013 adjusted","","$","1,374.3","","","$","1,397.2","","","$","(22.9)","","","$","496.5","","","$","900.7"]]
[[/GREPCENT_TABLE]]

Inventories are one of the most significant component of our cash flow from operations. As of December 31, 2022, our new vehicle days’ supply was 47 days, or 23 days higher than our days’ supply as of December 31, 2021. Our days’ supply of used vehicles was 55 days, which was six days lower than our days’ supply as of December 31, 2021. 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 $2.9 billion, respectively, for 2022 and 2021. Cash flows from investing activities relate primarily to capital expenditures, acquisition and divestiture activity and sales of property and equipment.

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

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","2020","","Change"],["Capital expenditures","","$","(303.1)","","","$","(260.4)","","","$","(42.7)","","","$","(167.8)","","","$","(92.6)"],["Cash paid for acquisitions, net of cash acquired","","(1,243.6)","","","(2,699.3)","","","1,455.7","","","(1,503.3)","","","(1,196.0)"],["Proceeds from sales of stores","","212.1","","","76.3","","","135.8","","","57.5","","","18.8"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","36"]]
[[/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)","","2022","","2021","","2020"],["Number of stores acquired","","31","","","77","","","30"],["Number of stores opened","","1","","","1","","","\u2014"],["Cash paid for acquisitions, net of cash acquired","","$","(1,243.6)","","","$","(2,699.3)","","","$","(1,503.3)"],["Add: Borrowings on floor plan notes payable: non-trade associated with acquired new vehicle inventory","","116.5","","","355.5","","","255.0"],["Cash paid for acquisitions, net of cash acquired \u2013 adjusted","","$","(1,127.1)","","","$","(2,343.8)","","","$","(1,248.3)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","","37"]]
[[/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)","","2022","","2021","","2020"],["Cash provided by (used in) financing activities, as reported","","$","2,035.9","","","1,106.7","","","$","1,139.8"],["Add (less): Net (borrowings) repayments on floor plan notes payable: non-trade","","(737.9)","","","685.3","","","20.6"],["Less: Net borrowings on non-recourse notes payable","","(104.6)","","","(317.6)","","","\u2014"],["Cash provided by financing activities, as adjusted","","$","1,193.4","","","$","1,474.4","","","$","1,160.4"]]
[[/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,"],["","","","","","","2022 vs. 2021","","","","2021 vs. 2020"],["($ in millions)","","2022","","2021","","Change","","2020","","Change"],["Net borrowings (repayments) on lines of credit","","$","2,023.8","","","$","325.4","","","$","1,698.4","","","$","(110.0)","","","$","435.4"],["Principal payments on long-term debt and finance lease liabilities, other","","(171.7)","","","(486.5)","","","314.8","","","(6.3)","","","(480.2)"],["Proceeds from the issuance of long-term debt","","113.3","","","817.4","","","(704.1)","","","606.5","","","210.9"],["Proceeds from the issuance of common stock","","36.1","","","1,136.2","","","(1,100.1)","","","790.4","","","345.8"],["Payment of debt issuance costs","","(11.8)","","","(14.7)","","","2.9","","","(10.8)","","","(3.9)"],["Repurchases of common stock","","(688.3)","","","(230.7)","","","(457.6)","","","(50.6)","","","(180.1)"],["Dividends paid","","(45.2)","","","(38.8)","","","(6.4)","","","(29.1)","","","(9.7)"]]
[[/GREPCENT_TABLE]]

Borrowing and Repayment Activity

During 2022, we raised net proceeds of $113.3 million through the issuance of debt, and had net borrowings of $2.0 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 49.5% at December 31, 2022 compared to 40.0% at December 31, 2021.

Equity Transactions

In November 2022, our Board of Directors authorized the repurchase of up to $450 million of our common stock. This new authorization is in addition to the amount previously authorized by the Board for repurchase. As of December 31, 2022, we had $501.4 million available for repurchase under the program. The authority to repurchase does not have an expiration date.

During 2022, we paid dividends on our common stock as follows:

[[GREPCENT_TABLE]]
[["Dividend paid:","","Dividend amount per share","","Total amount of dividend (in millions)"],["March 2022","","$","0.35","","","$","10.3"],["May 2022","","0.42","","","11.9"],["August 2022","","0.42","","","11.6"],["November 2022","","0.42","","","11.4"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","","38"]]
[[/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, 2022","","Remaining Available as of December 31, 2022"],["Floor plan notes payable: non-trade","","$","1,489.4","","","$","\u2014","","(1)"],["Floor plan notes payable","","627.2","","","\u2014"],["Used and service loaner vehicle inventory financing commitments","","877.2","","","17.9","","(2)"],["Revolving lines of credit","","927.6","","","1,286.2","","(2),(3)"],["Warehouse facilities","","930.0","","","115.3","","(2)"],["Non-recourse notes payable","","422.2","","","\u2014"],["Real estate mortgages","","580.1","","","\u2014"],["Finance lease obligations","","56.4","","","\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"],["Other debt","","16.6","","","\u2014"],["Unamortized debt issuance costs","","(29.1)","","","\u2014","","(4)"],["Total debt","","$","7,647.6","","","$","1,419.4"]]
[[/GREPCENT_TABLE]]

(1)As of December 31, 2022, we had a $1.4 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, 2022. This amount is reduced by $38.8 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]]
[["","","","39"]]
[[/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 are individual retail automotive stores. We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2022, 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, 2022, we had $1.5 billion of goodwill on our balance sheet associated with 265 locations. No location accounted for more than 1.8% of our total goodwill as of December 31, 2022. The annual goodwill impairment analysis resulted in no indications of impairment in 2022, 2021 or 2020. During the second quarter of 2020, there was an indication of a triggering event at certain locations. As a result, we identified certain locations where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $3.5 million.

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 2022, 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, 2022, we had $1.9 billion of franchise value on our balance sheet associated with 265 locations. No individual location accounted for more than 3.6% of our total franchise value as of December 31, 2022. The annual franchise value impairment analysis, which we perform as of October 1 each year, resulted in no indications of impairment in 2022, 2021, or 2020. 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. During the second quarter of 2020, there was an indication of a triggering event at certain locations. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $4.4 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 2.7% of our total franchise value and goodwill as of December 31, 2022.

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

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

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.