LITHIA MOTORS INC (LAD) FY 2024 MD&A

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 #140 on the Fortune 500 in 2024. As of February 24, 2025, we offered 52 brands of new vehicles and all brands of used vehicles in 460 stores in the United States, the United Kingdom, and Canada and online at nearly 400 websites. We offer a wide range of products and services including new and used vehicles, F&I products, and vehicle repair and maintenance aftersales.

Financial Performance

We experienced growth of revenue in all major business lines in 2024 compared to 2023, primarily driven by increases in volume related to acquisitions, complemented by organic growth in new vehicles, and aftersales. Acquisition volume contributed to growth of our total company gross profit, offset by a decrease in new vehicle gross profit. 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.

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 options to customers

buying and leasing retail vehicles from our Vehicle Operations segment, as well as leasing vehicles from our fleet management division.

Vehicle Operations

(1)Includes the sales and gross profit related to new, used retail, used wholesale and F&I 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 2023 would be included in same store operating data beginning in December 2024, 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.

(1)Includes the sales and gross profit related to new, used retail, used wholesale and F&I and unit sales for new and used retail

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 aftersales.

2024 vs. 2023

New vehicle revenue grew 15.8%, resulting from a 17.8% increase in unit sales due to our accelerated growth through strategic acquisitions, offset by a 1.6% decrease in average selling prices. Same store new vehicle revenue was primarily impacted by a 2.3% increase in unit sales, offset by a decrease in average selling prices of 0.5%.

New vehicle gross profit declined 11.8%, primarily due to a 25.1% decrease in average gross profit per unit, partially offset by a 17.8% increase in unit sales driven by acquisitions. On a same store basis, gross profit per new vehicle decreased 26.4%, continuing to normalize to pre-pandemic levels.

2023 vs. 2022

New vehicle revenue grew 17.5%, resulting from a 15.7% increase in unit sales due to acquisitions, complemented by a 1.6% increase in average selling prices. Same store new vehicle revenue was primarily impacted by a 3.4% increase in unit sales, complemented by an increase in average selling prices of 2.0%.

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 24.1%.

Used Vehicles

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: CPO vehicles; core vehicles, which are late-model vehicles with lower mileage; and value autos, which are vehicles with over 80,000 miles. We continue to focus on procuring vehicles across the full spectrum of the addressable used vehicle market to provide customers with a wide selection meeting all levels of affordability, driving increased used vehicle unit volumes. 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 F&I products and aftersales.

2024 vs. 2023

Used vehicle revenues increased 17.7%, due to increased volume from acquisitions, offset by decreased volume at our seasoned stores. On a same store basis, used vehicle revenues decreased 8.0%, due to a 4.1% decrease in average selling price per retail unit and a 4.0% decrease in unit volume. The same store revenue decrease was driven by a decrease in our CPO vehicle category of 10.0% and a decrease in our core vehicles of 8.3%, partially offset by an increase in our value autos of 1.4%. The decrease in our CPO vehicle category includes an 8.0% decrease in volume and a 2.2% decrease in average selling price per vehicle. The decrease in our core vehicle category includes a 5.8% decrease in volume and a 2.7% decrease in average selling price per vehicle.

Used vehicle gross profits increased 1.0%, due to an increase in unit volume of 26.4%, offset by a 20.1% decrease in average gross profit per unit. On a same store basis, used vehicle gross profit decreased 9.8%, led by a decrease in our CPO vehicles of 24.5% and decrease in our core vehicles of 5.4%, partially offset by an increase in our value auto category of 4.4%. The decrease in our CPO vehicle category was driven by a decrease in gross profit per unit of 18.0% to $2,138, and a decrease in unit volume of 8.0%. Gross profit per unit in our core vehicle category, which accounted for 55.3% of our used vehicle unit sales, increased 0.4% to $1,975. The increase in same store gross profit in our value auto category was driven by an increase in unit volume of 8.6%, offset by a 3.9% decrease in gross profit per unit to $2,331.

2023 vs. 2022

Used vehicle revenues increased 1.5%, due to increased volume from acquisitions, offset by decreased volume at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle revenues decreased 10.7%, due to a 5.5% decrease in average selling price per retail unit and 5.5% decrease in unit volume.

Used vehicle gross profits decreased 12.6%, due to a 16.4% decrease in average gross profit per unit, partially offset by a 4.5% increase in units sold. On a same store basis, used vehicle gross profit decreased 23.0%, led by a decrease in average gross profit per unit of 18.6%.

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.

2024 vs. 2023

F&I revenue increased 6.0%, primarily due to increased volume related to acquisitions. On a same store basis, F&I revenue decreased 4.6%, to $2,011 per unit. This decrease was driven by a decline in service contract penetration rates and lower finance reserve paid per unit from third-party lenders as a result of the higher interest rate environment.

2023 vs. 2022

F&I revenue increased 4.0%, primarily due to increased volume related to acquisitions. On a same store basis, F&I revenue decreased 3.6%, to $2,152 per unit.

Aftersales

We provide automotive repair and maintenance services for customers for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our aftersales operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from aftersales 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 aftersales 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.

2024 vs. 2023

Our aftersales revenue growth was driven by increases in warranty and customer pay service work, primarily due to our strategic acquisition growth. On a same store basis, aftersales revenue increased 2.9%, primarily driven by an increase in warranty revenue of 14.0% and customer pay of 1.8%. Performance in body shop saw a decrease of

2.8%. Same store aftersales gross profit increased 4.7%. Our gross margins continue to increase as our mix has shifted towards customer pay and warranty, which has higher margins than other service work.

2023 vs. 2022

Aftersales revenue grew in all areas, primarily due to acquisition growth. On a same store basis, aftersales revenue and gross profit increased 5.8% and 7.9%, respectively.

Financing Operations

In the United States, Financing Operations is a captive lender, originating loans only from our stores and Driveway. In Canada, Financing Operations originates loans and leases from both our Canadian stores and third-party dealerships. In the United Kingdom, Financing Operations is related to our fleet funding and management division. These product offerings add diversity to the business model and provide 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 finance receivable. Actual return of the finance receivables 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 finance receivables 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, third-party asset funding, and internal capital to fund finance receivables originated by our Financing Operations. Financing Operations income reflects the interest, fee, and lease income generated by the portfolio of finance receivables less the interest expense associated with the debt utilized to fund the lending, including internal capital, a provision for estimated losses, depreciation on vehicles leased via operating leases, and directly-related expenses.

Total interest margin reflects the spread between interest and fee charges to consumers and our funding costs. Changes in consumer rates 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. Changes in the provision for 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 finance receivables.

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 19 – Segments for additional information on Financing Operations income and Note 5 – Finance Receivables of Notes to Consolidated Financial Statements for information on finance receivables, including credit quality.

Selected Financing Operations Financial Information

(1)Percent of total average managed finance receivables.

DFC Portfolio Information(1)

(1)Excludes Canadian and U.K. portfolios

(2)Units financed as a percentage of total U.S. 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 of Notes to Consolidated Financial Statements.

(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 income increased from 2023 to 2024 primarily due to increased contract rates on new originations and decreased funding costs as a percentage of average managed receivables, which increased net interest margin from 2.8% in 2023 to 4.2% in 2024, along with decreased provision expense as a percentage of average managed receivables. Given the increased seasoning of the portfolio and as origination levels were flat, there was less of a negative impact to results due to the upfront recognition of loss provisions on new receivables.

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, were relatively consistent with the prior year.

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

2024 vs. 2023

SG&A increased 14.0%, or $460.4 million, primarily due to increased personnel and other costs resulting from our growth through acquisitions. Other expenses in 2024 included acquisition expenses of $10.0 million and $6.1 million of storm related insurance charges. We also recognized a gain on the disposal of stores of $8.2 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 66.0% from 62.2% in the prior year.

2023 vs. 2022

SG&A increased 8.2%, or $250.7 million, primarily due to increased personnel costs and other costs which resulted from our growth through acquisitions. Other expenses in 2023 included acquisition expenses of $27.2 million, one-time contract buyouts of $14.3 million, and $5.4 million of storm related insurance charges, offset by a $31.2 million net gain on disposal of stores.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit increased across all categories to 61.9% from 59.5% in the prior year. We also recognized a gain on the disposal of stores of $31.2 million.

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

(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 and used vehicles. The interest rates on these floor plan notes payable commitments vary by lender and are variable rates.

2024 vs. 2023

Floor plan interest expense increased $127.9 million, primarily due to higher interest rates and increases in vehicle inventory levels from acquisitions. Floor plan interest expense increased 41.5% due to higher interest rates, 38.9% due to acquisition volume, and 4.4% due to increases in inventory at existing locations.

2023 vs. 2022

Floor plan interest expense increased $112.1 million, primarily due to higher interest rates, increases in vehicle inventory levels from acquisitions as well as existing locations recovering from prior year inventory shortages.

Floor plan assistance is provided by manufacturers to support store financing of vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of 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 vehicle sales relative to stocking levels.

The following table details the carrying costs for vehicle inventory and include vehicle floor plan interest net of floor plan assistance earned:

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.

Acquisition activity contributed to the increases in depreciation and amortization in 2024 compared to 2023 and in 2023 compared to 2022. We acquired approximately $409.5 million and $260.5 million of depreciable property as part of our 2024 and 2023 acquisitions, respectively. Capital expenditures totaled $351.4 million and $230.2 million, respectively, in 2024 and 2023. 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:

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

2024 vs. 2023

Our operating margin decreased 110 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 and storm related insurance charges, offset by a net disposal gain on disposal of stores, our operating margin decreased 110 basis points.

2023 vs. 2022

Our operating margin decreased 140 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 acquisition expenses, one-time contract buyouts, and storm insurance charges, offset by a net disposal gain on disposal of stores, our operating margin decreased 120 basis points.

Non-Operating Expenses

Other Interest Expense

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

2024 vs. 2023

The increase in other interest expense was due to higher interest rates and increased borrowings on our credit facilities. See also Note 10 – Credit Facilities and Long-Term Debt of Notes to Consolidated Financial Statements for additional information.

2023 vs. 2022

The increase in other interest expense was due to higher interest rates and increased borrowings on our credit facilities.

Other Income (Expense), Net

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

2024 vs. 2023

Other income (expense), net increased $17.3 million in 2024 compared to 2023, primarily as a result of increases in equity method investment income and insurance proceeds, partially offset by foreign currency translation losses and reduced interest income from foreign currency deposit accounts.

2023 vs. 2022

Other income (expense), net increased $65.2 million in 2023 compared to 2022, primarily as a result of a reduction in equity method investment losses, foreign currency translation gains, and interest income from foreign currency deposit accounts.

Income Tax Provision

Our effective income tax rate was as follows:

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

Our effective income tax rate was 23.8% for 2024 compared to 25.7% for 2023. Our effective income tax rate was positively affected by an increase in general business credits and a reduction in valuation allowance.

Adjusting for non-deductible acquisition costs and the benefit of transferable federal tax credits during 2024, our effective income tax rate excluding non-core items is 24.7%, a decrease of 60 basis points compared to the effective income tax rate excluding non-core items for 2023.

Our effective income tax rate in 2023 was positively affected by a reduction in the current and deferred state tax rate, due to changing state mix, and a reduction in valuation allowance. The decrease in tax rate was offset by non-deductible acquisition costs recorded during the period.

Global Implementation of Pillar Two

We are subject to corporation tax on profits in the United States, the United Kingdom, and Canada. 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 U.K.’s Finance (No. 2) Bill 2023 was enacted, which represents the United Kingdom’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 tax impact of the Pillar Two regime based on available guidance and determined these rules do not have a material 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 concerning financial performance. These measures should not be considered an alternative to GAAP measures.

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

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 35% to 45% investment in acquisitions, 25% investment in capital expenditures, innovation, and diversification, and 30% to 40% 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:

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

Operating Activities

Cash provided by operating activities increased $897.5 million in 2024 compared to 2023, primarily as a result of maturation of our financing receivables portfolio and a decrease in inventory levels at our seasoned stores, partially offset by net changes in floor plan notes payable and reduced net income.

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:

Inventories are one of the most significant components of our cash flow from operations. As of December 31, 2024, our new vehicle days’ supply was 59 days, or nine days higher than our days’ supply as of December 31, 2023. Our days’ supply of used vehicles was 53 days, which was eleven days higher than our days’ supply as of December 31, 2023. We calculate days’ supply of inventory on-ground inventory unit levels and a 30-day total units sales volume, both at the end of each reporting period. 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 $1.9 billion and $1.3 billion, respectively, for 2024 and 2023. 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:

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:

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:

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:

Borrowing and Repayment Activity

During 2024, we raised net proceeds of $408.2 million through the issuance of debt, and had net borrowings of $346.8 million 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 and non-recourse notes payable, was 48.4% at December 31, 2024 compared to 47.1% at December 31, 2023.

Equity Transactions

During 2024, we repurchased 1,229,503 shares at a weighted average price of $283.02 under our current share repurchase authorization, with $469.0 million remaining.

During 2024, we paid dividends on our common stock as follows:

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

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:

(1)As of December 31, 2024, we had a $2.8 billion new vehicle floor plan commitment as part of our USB credit facility, and a $1.1 billion 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 fluctuate monthly.

(3)Available credit is based on the borrowing base amount effective as of November 30, 2024. This amount is reduced by $25.0 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 10 – 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 10 – 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 9 – 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 9 – 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 U.S. GAAP 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.

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, U.K. Vehicle Operations, and U.S. and Canada Financing Operations. We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2024, 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, 2024, we had $2.1 billion of goodwill on our balance sheet associated with our reporting units. The annual goodwill impairment analysis resulted in no indications of impairment in 2024, 2023, or 2022.

We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual legal entity basis. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2024, 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 entity’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, 2024, we had $2.6 billion of franchise value on our balance sheet. No individual entity accounted for more than 3% of our total franchise value as of December 31, 2024. The annual franchise value impairment analysis, which we perform as of October 1 each year, resulted in no indications of impairment in 2024, 2023, or 2022.

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 20% of our total franchise value as of December 31, 2024.

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 business combinations using the acquisition 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 17 – Acquisitions of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.