Autonation, Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K.

Overview

AutoNation, Inc., through its subsidiaries, is one of the largest automotive retailers in the United States. As of March 31, 2024, we owned and operated 347 new vehicle franchises from 251 stores located in the United States, predominantly in major metropolitan markets in the Sunbelt region. Our stores, which we believe include some of the most recognizable and well known in our key markets, sell 32 different new vehicle brands. The core brands of new vehicles that we sell, representing approximately 88% of the new vehicles that we sold during the three months ended March 31, 2024, are manufactured by Toyota (including Lexus), Honda, Ford, General Motors, BMW, Mercedes-Benz, Stellantis, and Volkswagen (including Audi and Porsche). As of March 31, 2024, we also owned and operated 52 AutoNation-branded collision centers, 23 AutoNation USA used vehicle stores, 4 AutoNation-branded automotive auction operations, 3 parts distribution centers, a mobile automotive repair and maintenance business, and an auto finance company.

We offer a diversified range of automotive products and services, including new vehicles, used vehicles, “parts and service” (also referred to as “After-Sales”), which includes automotive repair and maintenance services as well as wholesale parts and collision businesses, and automotive “finance and insurance” products (also referred to as “Customer Financial Services”), which include vehicle service and other protection products, as well as the arranging of financing for vehicle purchases through third-party finance sources. We also offer indirect financing through our captive finance company on vehicles we sell. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, leveraging the AutoNation retail brand and advertising, implementing standardized processes, and increasing productivity across all of our stores.

At March 31, 2024, we had three reportable segments: (1) Domestic, (2) Import, and (3) Premium Luxury. Our Domestic segment is comprised of retail automotive franchises that sell new vehicles manufactured by Ford, General Motors, and Stellantis. Our Import segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Toyota, Honda, Hyundai, Subaru, and Nissan. Our Premium Luxury segment is comprised of retail automotive franchises that sell new vehicles manufactured primarily by Mercedes-Benz, BMW, Lexus, Audi, and Jaguar Land Rover. The franchises in each segment also sell used vehicles, parts and automotive repair and maintenance services, and automotive finance and insurance products.

For the three months ended March 31, 2024, new vehicle sales accounted for 46% of our total revenue and 16% of our total gross profit. Used vehicle sales accounted for 31% of our total revenue and 9% of our total gross profit. Our parts and service operations, while comprising 18% of our total revenue, contributed 46% of our total gross profit. Our finance and insurance sales, while comprising 5% of our total revenue, contributed 28% of our total gross profit.

Market Conditions

In the first quarter of 2024, U.S. industry retail new vehicle unit sales increased approximately 5% as compared to the first quarter of 2023. Although still below historical levels, new vehicle inventory levels continued to increase during the first quarter of 2024 due to higher levels of manufacturer vehicle production. The increasing supply and availability of new vehicle inventory, which varies by make and model, has resulted in moderation of new vehicle unit profitability, which we expect will continue throughout 2024. Additionally, the increased availability of new vehicles and an increase in manufacturer new vehicle incentives, including low-interest financing and customer rebates, has adversely impacted market demand for used vehicles, particularly for higher-priced, nearly new vehicle inventory, and stabilization of used vehicle value trends, as compared to the prior year period, has resulted in moderation of used vehicle unit profitability.

Results of Operations

During the three months ended March 31, 2024, we had net income of $190.1 million and diluted earnings per share of $4.49, as compared to net income of $288.7 million and diluted earnings per share of $6.07 during the same period in 2023.

Our total gross profit decreased 6.9% during the first quarter of 2024 compared to the first quarter of 2023, driven by decreases in new vehicle gross profit of 31.7% and used vehicle gross profit of 27.8%, each as compared to the first quarter of

2023. New vehicle gross profit was adversely impacted by a decrease in gross profit per vehicle retailed (“PVR”) resulting from increasing supply and availability of new vehicle inventory, which has resulted in moderation of pricing and margins. Used vehicle gross profit was adversely impacted by a decrease in gross profit PVR primarily due to stabilization of used vehicle value trends, as compared to the prior year period, as well as certain actions we took in the beginning of the first quarter of 2024 to better align used vehicle inventory with market demand and achieve a more optimal inventory supply. The decreases in gross profit were partially offset by an increase in parts and service gross profit of 8.7%, as compared to the first quarter of 2023. Parts and service results benefited primarily from increases in gross profit from the preparation of vehicles for sale, warranty service, and customer-pay service. Floorplan interest expense increased due to higher average floorplan balances and higher average interest rates.

Inventory Management

Our new and used vehicle inventories are stated at the lower of cost or net realizable value in our Unaudited Condensed Consolidated Balance Sheets. We monitor our vehicle inventory levels based on current economic conditions and seasonal sales trends.

Our new vehicle inventory units at March 31, 2024 and 2023, were 38,185 and 21,176, respectively. We have typically not experienced significant losses on the sale of new vehicle inventory, in part due to incentives provided by manufacturers to promote sales of new vehicles and our inventory management practices. We monitor our new vehicle inventory values as compared to net realizable values. We had no new vehicle inventory write-downs at March 31, 2024 and December 31, 2023.

We recondition the majority of used vehicles acquired for retail sale in our parts and service departments and capitalize the related costs to the used vehicle inventory. We monitor our used vehicle inventory values as compared to net realizable values. Typically, used vehicles that are not sold on a retail basis are sold at wholesale auctions. Our used vehicle inventory balance was net of cumulative write-downs of $6.5 million at March 31, 2024, and $12.2 million at December 31, 2023.

Parts, accessories, and other inventory are carried at the lower of cost or net realizable value. We estimate the amount of potentially damaged and/or excess and obsolete inventory based upon historical experience, manufacturer return policies, and industry trends. Our parts, accessories, and other inventory balance was net of cumulative write-downs of $7.9 million at March 31, 2024, and $7.8 million at December 31, 2023.

Critical Accounting Estimates

We prepare our Unaudited Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (“GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. We evaluate our estimates on an ongoing basis, and we base our estimates on historical experience and various other assumptions we believe to be reasonable. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our Unaudited Condensed Consolidated Financial Statements. For additional discussion of our critical accounting estimates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K.

Goodwill

Goodwill for our reporting units is tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that the carrying value of a reporting unit exceeds its fair value. We are scheduled to complete our annual goodwill impairment test as of April 30, 2024.

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

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

As of March 31, 2024, we have $225.0 million of goodwill related to the Domestic reporting unit, $524.1 million related to the Import reporting unit, $482.1 million related to the Premium Luxury reporting unit, $140.5 million related to the Mobile Service reporting unit, $78.4 million related to the AutoNation Finance reporting unit, and $4.6 million related to the Collision Centers reporting unit.

Other Intangible Assets

Our principal identifiable intangible assets are individual store rights under franchise agreements with vehicle manufacturers, which have indefinite lives and are tested for impairment annually as of April 30 or more frequently when events or changes in circumstances indicate that impairment may have occurred. We are scheduled to complete our annual impairment test of our franchise rights as of April 30, 2024.

We may first perform a qualitative assessment to determine whether it is more likely than not that a franchise right asset is impaired. The quantitative impairment test for franchise rights requires the comparison of the franchise rights’ estimated fair value to carrying value by store. Fair values of rights under franchise agreements are estimated using unobservable (Level 3) inputs by discounting expected future cash flows of the store. The forecasted cash flows contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, working capital requirements, capital expenditures, and cost of capital, for which we utilize certain market participant-based assumptions, using third-party industry projections, economic projections, and other marketplace data we believe to be reasonable.

Reported Operating Data

Historical operating results include the results of acquired businesses from the date of acquisition.

($ in millions, except per vehicle data)

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28

Same Store Operating Data

We have presented below our operating results on a same store basis to reflect our internal performance. The “Same Store” amounts presented below include the results of our stores for the identical months in each period presented in the comparison, commencing with the first full month in which the store was owned by us. Results from divested stores are excluded from both current and prior periods. Therefore, the amounts presented in the 2023 column may differ from the same store amounts presented for 2023 in the prior year. We believe the presentation of this information provides a meaningful comparison of period-over-period results of our operations.

($ in millions, except per vehicle data)

29

30

New Vehicle

($ in millions, except per vehicle data)

The following discussion of new vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $42.1 million and $4.4 million in new vehicle revenue and $1.5 million and $0.2 million in new vehicle gross profit for the three months ended March 31, 2024 and 2023, respectively, is related to acquisition and divestiture activity.

First Quarter 2024 compared to First Quarter 2023

Same store new vehicle revenue increased during the three months ended March 31, 2024, as compared to the same period in 2023, due to an increase in same store unit volume, partially offset by a decrease in same store revenue PVR. Same store unit volume benefited from increasing supply of new vehicle inventory, particularly for Import manufacturers, an increase in manufacturer incentives, including low-interest financing and rebates, and sustained consumer demand.

Same store new vehicle revenue and gross profit PVR decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to increasing supply and availability of new vehicle inventory and sustained consumer demand, which has resulted in moderation of pricing and margins, as well as a shift in mix towards Import vehicles that have relatively lower average selling prices and gross profit PVR.

New Vehicle Inventory Carrying Benefit (Expense)

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

($ in millions)

First Quarter 2024 compared to First Quarter 2023

During the three months ended March 31, 2024, we had a net new vehicle inventory carrying expense of $14.7 million compared to a net new vehicle inventory carrying benefit of $3.9 million for the same period in 2023.

Floorplan interest rates are variable and, therefore, increase and decrease with changes in the underlying benchmark interest rates. Up until the third quarter of 2023, since the first quarter of 2020, when the Federal Reserve cut interest rates to near 0%, we had a net new vehicle inventory carrying benefit. Additionally, over this same period, our average floorplan balances were significantly lower than historical standards due to manufacturers’ new vehicle inventory supply constraints. With the increases in new vehicle inventory supply and interest rates, floorplan interest expense has increased, resulting in a net new vehicle inventory carrying expense for the three months ended March 31, 2024. If interest rates remain at their current levels or continue to increase without a corresponding increase in floorplan assistance or a decrease in average new vehicle inventory levels, we would expect that we will continue to incur a net new vehicle inventory carrying expense.

Used Vehicle

($ in millions, except per vehicle data)

The following discussion of used vehicle results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $70.3 million and $7.0 million in total used vehicle revenue and $2.8 million and $0.2 million in total used vehicle gross profit for the three months ended March 31, 2024 and 2023, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores.

First Quarter 2024 compared to First Quarter 2023

Same store retail used vehicle revenue decreased during the three months ended March 31, 2024, as compared to the same period in 2023, due to a decrease in same store revenue PVR and a decrease in same store unit volume. The decrease in same store unit volume, particularly for mid- to higher-priced used vehicles, is due in part to the shift in mix from used vehicles to new vehicles. In addition, used vehicle unit volume was adversely impacted by lower availability of lower-priced used vehicles.

Same store used vehicle revenue and gross profit PVR decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to stabilization of used vehicle value trends, as compared to the prior year period, and a shift in mix towards lower-priced entry-level vehicles, which have lower average selling prices and gross profit PVR. In the beginning of the first quarter, we took certain actions to better align used vehicle inventory with market demand and achieve a more optimal inventory supply. These actions adversely impacted used vehicle gross profit PVR for the first quarter 2024, with sequential monthly improvement within the quarter, resulting in an increase in gross profit PVR from the fourth quarter of 2023.

Parts and Service

($ in millions)

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

The following discussion of parts and service results is on a same store basis. The difference between reported amounts and same store amounts in the above tables of $16.5 million and $4.0 million in parts and service revenue and $8.5 million and $2.1 million in parts and service gross profit for the three months ended March 31, 2024 and 2023, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores.

First Quarter 2024 compared to First Quarter 2023

During the three months ended March 31, 2024, same store parts and service revenue increased compared to the same period in 2023, primarily due to increases in revenue associated with the preparation of vehicles for sale of $33.9 million, warranty service of $19.6 million, and customer-pay service of $18.2 million.

During the three months ended March 31, 2024, same store parts and service gross profit increased compared to the same period in 2023, primarily due to increases in gross profit associated with the preparation of vehicles for sale of $17.0 million, warranty service of $14.4 million, and customer-pay service of $7.7 million. Revenue and gross profit associated with the preparation of vehicles for sale benefited from an increase in vehicle unit volume and higher value repair orders. Warranty service revenue and gross profit benefited from higher value repair orders and improved parts and labor rates, partially offset by a decrease in repair order volume. Customer-pay service revenue and gross profit benefited from higher value repair orders.

Finance and Insurance

($ in millions, except per vehicle data)

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

As we continue to grow our AutoNation Finance business and increase our finance penetration rates associated with vehicles sold through our stores, we expect that income related to arranging customer financing will shift to AutoNation Finance and that the resulting decrease in finance and insurance gross profit will be offset by greater profitability generated by our AutoNation Finance business. Interest income on financing provided through AutoNation Finance is recognized over the contractual term of the related loans. See “Corporate and Other” for additional information related to AutoNation Finance.

The following discussion of finance and insurance results is on a same store basis. The difference between reported amounts and same store amounts in finance and insurance revenue and gross profit in the above tables of $8.6 million and $0.6 million for the three months ended March 31, 2024 and 2023, respectively, is related to acquisition and divestiture activity, as well as the opening of AutoNation USA stores.

First Quarter 2024 compared to First Quarter 2023

Same store finance and insurance revenue and gross profit decreased slightly during the three months ended March 31, 2024, as compared to the same period in 2023, due to decreases in finance and insurance gross profit PVR and used vehicle unit volume, partially offset by an increase in new vehicle unit volume. The decrease in finance and insurance gross profit PVR was primarily due to an increase in retail vehicle sales financed through our captive auto finance company. In addition, finance and insurance gross profit PVR was adversely impacted by a decrease in amount financed per transaction and a decrease in gross profit per transaction associated with arranging customer financing through third-party finance sources primarily due to the higher interest rate environment. The decreases in finance and insurance gross profit PVR were partially offset by an increase in product penetration.

Segment Results

In the following table of financial data, revenue and segment income of our reportable segments are reconciled to consolidated revenue and consolidated operating income, respectively. The following discussions of segment results are on a reported basis.

($ in millions)

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Domestic

The Domestic segment operating results included the following:

($ in millions)

First Quarter 2024 compared to First Quarter 2023

Domestic revenue decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to a decrease in used vehicle revenue. Used vehicle revenue was adversely impacted by a decrease in used vehicle unit volume due in part to a shift in mix from used vehicles to new vehicles, and lower availability of lower-priced used vehicles. In addition, used vehicle revenue PVR decreased primarily due to a shift in mix towards lower-priced entry-level vehicles.

Domestic segment income decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to decreases in new and used vehicle gross profit PVR. New vehicle gross profit PVR was adversely impacted by continued moderation of margins resulting from the increasing supply of new vehicle inventory. Used vehicle gross profit PVR was adversely impacted by stabilization of used vehicle value trends, as well as certain actions we took in the beginning of the first quarter of 2024 to better align used vehicle inventory with market demand and achieve a more optimal inventory supply. Domestic segment income was also adversely impacted by an increase in floorplan interest expense. Decreases in segment income were partially offset by an increase in parts and service gross profit associated with warranty service and customer-pay service.

Import

The Import segment operating results included the following:

($ in millions)

First Quarter 2024 compared to First Quarter 2023

Import revenue increased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to an increase in new vehicle unit volume due to the increasing supply of new vehicle inventory and sustained consumer demand. Import revenue also benefited from the acquisitions we completed in 2023.

Import segment income decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to decreases in new and used vehicle gross profit PVR. New vehicle gross profit PVR was adversely impacted by continued moderation of pricing and margins resulting from the increasing supply of new vehicle inventory. Used vehicle gross profit PVR was adversely impacted by stabilization of used vehicle value trends, as well as certain actions we took in the beginning of the first quarter of 2024 to better align used vehicle inventory with market demand and achieve a more optimal inventory supply. Import segment income was also adversely impacted by an increase in SG&A expenses, largely driven by the acquisitions we completed in 2023. Decreases in segment income were partially offset by an increase in parts and service gross profit associated with the preparation of vehicles for sale.

Premium Luxury

The Premium Luxury segment operating results included the following:

($ in millions)

First Quarter 2024 compared to First Quarter 2023

Premium Luxury revenue decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to decreases in new vehicle unit volume and new vehicle revenue PVR. New vehicle unit volume was adversely impacted by lower availability of higher demand vehicle models in certain markets. New vehicle revenue PVR was adversely impacted by continued moderation of pricing resulting from the increasing supply of new vehicle inventory. Decreases in Premium Luxury revenue from vehicle sales were partially offset by an increase in parts and service revenue associated with customer-pay service and the preparation of vehicles for sale.

Premium Luxury segment income decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to decreases in new and used vehicle gross profit. New vehicle gross profit PVR was adversely impacted by continued moderation of margins resulting from the increasing supply of new vehicle inventory. Used vehicle gross profit PVR was adversely impacted by stabilization of used vehicle value trends, as well as certain actions we took in the beginning of the first quarter of 2024 to better align used vehicle inventory with market demand and achieve a more optimal inventory supply. Decreases in Premium Luxury segment income from vehicle sales were partially offset by increases in parts and service gross profit associated with customer-pay service and warranty service.

Corporate and other

Corporate and other results included the following:

($ in millions)

“Corporate and other” is comprised of our non-franchised businesses, all of which do not meet the quantitative thresholds for reportable segments, as well as unallocated corporate overhead expenses and other income items. As of March 31, 2024, we had 52 AutoNation-branded collision centers, 23 AutoNation USA stores, 4 AutoNation-branded automotive auction operations, 3 parts distribution centers, a mobile automotive repair and maintenance business, referred to as AutoNation Mobile Service, and an auto finance company, referred to as AutoNation Finance.

Revenue from “Corporate and other” increased for the three months ended March 31, 2024, as compared to the same periods in 2023, primarily due to newly opened AutoNation USA stores and increases in revenue from parts distribution centers and automotive auction operations.

The loss from “Corporate and other” decreased for the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to increases in gross profit from automotive auction operations and collision centers, improved operating results for our auto finance company, and a decrease in costs associated with our self-insurance programs due to favorable claims experience. The decreases in loss from “Corporate and other” were partially offset by expenditures associated with newly opened AutoNation USA stores and an increase in advertising expenses to support our new non-franchised businesses.

AutoNation USA Stores

During the three months ended March 31, 2024, we opened 4 AutoNation USA used vehicle stores and currently have over 20 stores under development. These stores play an integral part of both our long-term growth plans and the achievement of scale, scope, and density in markets to better serve and meet the needs of customers. A number of variables may impact the implementation of our expansion plans, including customer adoption, market conditions, availability of used vehicle inventory, availability and cost of building supplies and materials, and our ability to identify, acquire, and build out suitable locations in a timely manner.

AutoNation Mobile Service

AutoNation Mobile Service, our mobile solution for automotive repair and maintenance services, provides customers the convenience of services and repairs at their home, workplace, or on-site for fleet vehicles. Revenue and gross profit from this business are included within “parts and service.”

AutoNation Finance

AutoNation Finance, our captive auto finance company, provides indirect financing to qualified retail customers on vehicles we sell. This business provides us an opportunity to extend our relationship with the customer beyond the vehicle sale and participate in the customer’s entire vehicle ownership cycle. As a result, we are able to diversify our revenues and create a low-volatility earnings stream, generate additional profits, cash flows, and sales, and increase customer retention. AutoNation Finance operating results include the interest and fee income generated by auto loans receivable less the interest expense associated with the debt issued to fund these receivables, a provision for estimated credit losses on the auto loans receivable originated or acquired, and direct expenses. Interest income on auto loans receivable is recognized over the contractual term of the related loans.

In September 2023, we discontinued acquiring installment contracts from third-party independent dealers. We plan to continue to increase finance penetration rates for retail vehicle sales through our stores, which we expect will favorably impact the operating results of our auto finance business over time. AutoNation Finance results are included in Other Expense, Net in our Unaudited Condensed Consolidated Statements of Income. See Notes 5 and 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on auto loans receivable, the related allowance for credit losses, and the related debt of our auto finance company.

Selling, General, and Administrative Expenses

Our Selling, General, and Administrative (“SG&A”) expenses consist primarily of compensation, including store and corporate salaries, commissions, and incentive-based compensation, as well as advertising (net of reimbursement-based manufacturer advertising rebates), and store and corporate overhead expenses, which include occupancy costs, outside service costs, information technology expenses, transportation-related costs for parts and service customers, legal, accounting, and professional services, and general corporate expenses. The following table presents the major components of our SG&A expenses.

($ in millions)

First Quarter 2024 compared to First Quarter 2023

SG&A expenses increased slightly during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to acquisitions and newly opened stores, an increase in advertising expenses to support our used vehicle internal sourcing strategy and growth in our new non-franchised businesses, and an increase in transportation-related costs for parts and service customers. These increases in SG&A expenses were partially offset by a decrease in performance-driven compensation expense. As a percentage of total gross profit, SG&A expenses increased to 66.2% during the three months ended March 31, 2024, from 60.8% in the same period in 2023, due to the moderation of gross profit and increases in SG&A expenses as described above.

Other Expense, Net (Operating)

Other Expense, Net includes the gains associated with property divestitures and asset impairments, among other items and the results of our captive auto finance company, including net interest margin, the provision for expected credit losses, and direct expenses. See “Segment Results - Corporate and other” above and Notes 5 and 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information about our auto finance company.

Non-Operating Income (Expense)

Floorplan Interest Expense

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

First Quarter 2024 compared to First Quarter 2023

Floorplan interest expense was $49.4 million for the three months ended March 31, 2024, compared to $27.1 million for the same period in 2023. The increase in floorplan interest expense of $22.3 million was the result of higher average vehicle floorplan balances and higher average interest rates.

Interest Expense

First Quarter 2024 compared to First Quarter 2023

Interest expense includes the interest related to non-vehicle long-term debt and finance lease obligations. Other interest expense was $44.6 million for the three months ended March 31, 2024, compared to $41.1 million for the same period in 2023. The increase in interest expense of $3.5 million was driven by higher average interest rates and higher average debt balances.

Other Income, Net

We recognized a net gain of $7.3 million and $4.7 million for the three months ended March 31, 2024 and 2023, respectively, related to changes in the cash surrender value of corporate-owned life insurance (“COLI”) for deferred compensation plan participants as a result of changes in market performance of the underlying investments. Gains and losses related to the COLI are substantially offset by corresponding increases and decreases, respectively, in the deferred compensation obligations, which are reflected in SG&A expenses.

We recorded unrealized losses of $0.4 million and $1.1 million for the three months ended March 31, 2024 and 2023, respectively, related to the change in fair value of the underlying securities of our minority equity investments. During the period that we hold our minority equity investments, unrealized gains and losses will be recorded as the fair market values of securities with readily determinable fair values change over time, or as observable price changes are identified for securities without readily determinable fair values. See Note 13 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.

Income Tax Provision

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

Our effective income tax rate was 25.0% for the three months ended March 31, 2024, and 24.3% for the three months ended March 31, 2023.

Discontinued Operations

Results from discontinued operations, net of income taxes, for the three months ended March 31, 2023, were primarily related to a gain on the sale of real estate in the first quarter of 2023 associated with a store that was closed prior to January 1, 2014. Upon the sale of this real estate, we have no remaining discontinued operations.

Liquidity and Capital Resources

We manage our liquidity to ensure access to sufficient funding at acceptable costs to fund our ongoing operating requirements and future capital expenditures while continuing to meet our financial obligations. We believe that our cash and cash equivalents, funds generated through operations, and amounts available under our revolving credit facility, commercial paper program, and secured used vehicle floorplan facilities will be sufficient to fund our working capital requirements, service our debt, pay our tax obligations and commitments and contingencies, and meet any seasonal operating requirements for the foreseeable future. Depending on market conditions, we may from time to time issue debt, including in private or public offerings, to augment our liquidity, to reduce our cost of capital, or for general corporate purposes.

Available Liquidity Resources

We had the following sources of liquidity available:

(In millions)

(1) At March 31, 2024, we had $0.8 million of letters of credit outstanding. In addition, we use the revolving credit facility under our credit agreement as a liquidity backstop for borrowings under our commercial paper program. We had $285.0 million of commercial paper notes outstanding at March 31, 2024. See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.

(2) Based on the eligible used vehicle inventory that could have been pledged as collateral. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information.

In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of our performance primarily relating to insurance matters. At March 31, 2024, surety bonds, letters of credit, and cash deposits totaled $119.3 million, of which $0.8 million were letters of credit. We do not currently provide cash collateral for outstanding letters of credit.

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

Capital Allocation

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

Share Repurchases

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

(In millions, except per share data)

In April 2024, our Board of Directors authorized the repurchase of up to an additional $1.0 billion of common stock. From April 1, 2024, through April 24, 2024, we repurchased 1.4 million shares of common stock for an aggregate purchase price of $211.3 million (average purchase price per share of $155.74). As of April 24, 2024, $1.1 billion remained available for share repurchases under the program.

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

Capital Expenditures

The following table sets forth information regarding our capital expenditures:

(In millions)

At March 31, 2024, we owned approximately 79% of our new vehicle franchise store locations with a net book value of $2.4 billion, as well as other properties associated with our collision centers, AutoNation USA used vehicle stores, parts distribution centers, auction operations, and other excess properties with a net book value of $718.0 million. None of these properties are mortgaged or encumbered.

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

Acquisitions and Divestitures

We did not purchase or divest any stores during the three months ended March 31, 2024. During the three months ended March 31, 2023, we acquired RepairSmith, a mobile solution for automotive repair and maintenance, which we renamed AutoNation Mobile Service, and we also purchased one store. We did not divest any stores during the three months ended March 31, 2023.

(In millions)

We regularly review our store portfolio and may acquire or divest stores to optimize our operations and footprint. We typically utilize proceeds related to asset sales, including business and real estate divestitures, to fund our capital investments and strategic initiatives or for other general corporate purposes.

Debt

The following table sets forth our non-vehicle long-term debt, as of March 31, 2024, and December 31, 2023.

Our 3.5% Senior Notes due 2024 will mature on November 15, 2024, and were, therefore, reclassified to current during the fourth quarter of 2023.

We had commercial paper notes outstanding of $285.0 million at March 31, 2024, and $440.0 million at December 31, 2023.

We had non-recourse debt under our warehouse facilities of $303.5 million at March 31, 2024, and $209.4 million at December 31, 2023, and non-recourse debt under term securitizations of consolidated variable interest entities (“VIEs”) of $42.8 million at March 31, 2024, and $50.5 million at December 31, 2023.

A downgrade in our credit ratings could negatively impact the interest rate payable on our 3.5% Senior Notes, 4.5% Senior Notes, 3.8% Senior Notes, and 4.75% Senior Notes and could negatively impact our ability to issue, or the interest rates for, commercial paper notes. Additionally, an increase in our leverage ratio could negatively impact the interest rates charged for borrowings under our revolving credit facility.

See Note 8 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our non-vehicle long-term debt, commercial paper, and non-recourse debt.

Restrictions and Covenants

Our amended and restated credit agreement and the indentures for our senior unsecured notes contain customary covenants that place restrictions on us, including our ability to incur additional or guarantee other indebtedness, to create liens or other encumbrances, to engage in sale and leaseback transactions, to sell (or otherwise dispose of) assets, and to merge or consolidate with other entities. Our failure to comply with the covenants contained in our amended and restated credit agreement and the indentures for our senior unsecured notes could result in the acceleration of other indebtedness of AutoNation.

Under our amended and restated credit agreement, we are required to remain in compliance with a maximum leverage ratio and a minimum interest coverage ratio. The leverage ratio is a contractually defined amount principally reflecting non-vehicle debt divided by a measure of earnings. The interest coverage ratio is a contractually defined amount reflecting a measure of earnings divided by certain interest expense principally associated with vehicle floorplan payable and non-vehicle debt. The specific terms of the leverage and interest coverage ratios can be found in our amended and restated credit agreement, which is filed with our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023.

As of March 31, 2024, we were in compliance with the covenants under our credit agreement and the indentures for our senior unsecured notes. At March 31, 2024, our leverage and interest coverage ratios were as follows:

Vehicle Floorplan Payable

The components of vehicle floorplan payable are as follows:

(In millions)

Vehicle floorplan facilities are due on demand, but in the case of new vehicle inventories, are generally paid within several business days after the related vehicles are sold. Vehicle floorplan facilities are primarily collateralized by vehicle inventories and related receivables. See Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements for more information on our vehicle floorplan payable.

Cash Flows

The following table summarizes the changes in our cash provided by (used in) operating, investing, and financing activities:

(In millions)

Cash Flows from Operating Activities

Our primary sources of operating cash flows result from the sale of vehicles, finance and insurance products, and parts and automotive repair and maintenance services, proceeds from vehicle floorplan payable-trade, and collections on auto loans receivable for vehicles sold through our stores. Our primary uses of cash from operating activities are repayments of vehicle floorplan payable-trade, purchases of inventory, personnel-related expenditures, originations of loans receivable for vehicles sold through our stores, and payments related to taxes and leased properties.

Net cash provided by operating activities decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to an increase in originations of loans receivable for vehicles sold through our stores and a decrease in earnings, partially offset by a decrease in working capital requirements.

Cash Flows from Investing Activities

Net cash flows from investing activities consist primarily of cash used in capital additions and activity from business acquisitions, business divestitures, property dispositions, originations of and collections on auto loans receivable acquired through third-party dealers, and other transactions. In September 2023, we discontinued acquiring installment contracts from third-party dealers.

We will make facility and infrastructure upgrades and improvements from time to time as we identify projects that are required to maintain our current business or that we expect to provide us with acceptable rates of return.

Net cash used in investing activities decreased during the three months ended March 31, 2024, as compared to the same period in 2023, primarily due to a decrease in cash used in acquisitions and a decrease in originations of loans receivable acquired through third-party dealers.

Cash Flows from Financing Activities

Net cash flows from financing activities primarily include repurchases of common stock, debt activity, and changes in vehicle floorplan payable-non-trade.

Cash flows from financing activities include changes in commercial paper notes outstanding totaling net payments of $155.0 million and net proceeds of $235.0 million during the three months ended March 31, 2024 and 2023, respectively, and changes in vehicle floorplan payable-non-trade totaling net payments of $93.5 million and $67.3 million during the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, we repurchased 0.2 million shares of common stock for an aggregate purchase price of $38.7 million (average purchase price per share of $158.40), excluding the excise tax imposed under the Inflation Reduction Act. During the three months ended March 31, 2023, we repurchased 2.4 million shares of common stock for an aggregate purchase price of $305.0 million (average purchase price per share of $126.37), excluding the excise tax imposed under the Inflation Reduction Act.

During the three months ended March 31, 2024, we borrowed $214.0 million and repaid $127.7 million under our non-recourse debt facilities. During the three months ended March 31, 2023, we borrowed $39.3 million and repaid $80.5 million under our non-recourse debt facilities.

Forward-Looking Statements

Our business, financial condition, results of operations, cash flows, and prospects, and the prevailing market price and performance of our common stock may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding our strategic acquisitions, initiatives, partnerships, or investments, including AutoNation USA, AutoNation Finance, and AutoNation Mobile Service; statements regarding our investments in digital and online capabilities and mobility solutions; our expectations for the future performance of our business and the automotive retail industry; as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf that describe our objectives, goals, or plans constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact, including statements that describe our objectives, plans or goals are, or may be deemed to be, forward-looking statements. Words such as “anticipate,” “expect,” “intend,” “goal,” “target,” “project,” “plan,” “believe,” “continue,” “may,” “will,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements reflect our current expectations concerning future results and events, and they involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these statements. These forward-looking statements speak only as of the date of this report, and we undertake no obligation to revise or update these statements to reflect subsequent events or circumstances. The risks, uncertainties, and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following:

• The automotive retail industry is sensitive to changing economic conditions and various other factors, including, but not limited to, unemployment levels, consumer confidence, fuel prices, interest rates, and tariffs. Our business and results of operations are substantially dependent on new and used vehicle sales levels in the United States and in our particular geographic markets, as well as the gross profit margins that we can achieve on our sales of vehicles, all of which are very difficult to predict.
• Our new vehicle sales are impacted by the incentive, marketing, and other programs of vehicle manufacturers.
• We are dependent upon the success and continued financial viability of the vehicle manufacturers and distributors with which we hold franchises. In addition, we rely on various third-party suppliers for key products and services.
• We are subject to restrictions imposed by, and significant influence from, vehicle manufacturers that may adversely impact our business, financial condition, results of operations, cash flows, and prospects, including our ability to acquire additional stores.
• We are investing significantly in various strategic initiatives, including the planned expansion of our AutoNation USA stores, our AutoNation Finance business, and our AutoNation Mobile Service business, and if they are not successful, we will have incurred significant expenses without the benefit of improved financial results.
• If we are not able to maintain and enhance our retail brands and reputation or to attract consumers to our own digital channels, or if events occur that damage our retail brands, reputation, or sales channels, our business and financial results may be harmed.
• We are subject to various risks associated with originating and servicing auto finance loans through indirect lending to customers, any of which could have an adverse effect on our business.
• New laws, regulations, or governmental policies in response to climate change, including fuel economy and greenhouse gas emission standards, or changes to existing standards, could adversely impact our business, results of operations, financial condition, cash flow, and prospects.
• We are subject to numerous legal and administrative proceedings, which, if the outcomes are adverse to us, could materially adversely affect our business, results of operations, financial condition, cash flows, and prospects.
• Our operations are subject to extensive governmental laws and regulations. If we are found to be in purported violation of or subject to liabilities under any of these laws or regulations, or if new laws or regulations are enacted that adversely affect our operations, our business, operating results, and prospects could suffer.
• A failure of our information systems or any security breach or unauthorized disclosure of confidential information could have a material adverse effect on our business.
• Our debt agreements contain certain financial ratios and other restrictions on our ability to conduct our business, and our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our debt service obligations.
• We are subject to interest rate risk in connection with our vehicle floorplan payables, revolving credit facility, commercial paper program, and warehouse facilities that could have a material adverse effect on our profitability.
• Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our goodwill and other intangible assets for impairment at least annually, which could result in a material, non-cash write-down of goodwill or franchise rights and could have a material adverse impact on our results of operations and shareholders’ equity.
• Our minority equity investments with readily determinable fair values are required to be measured at fair value each reporting period, which could adversely impact our results of operations and financial condition. The carrying value of our minority equity investment that does not have a readily determinable fair value is required to be adjusted for observable price changes or impairments, both of which could adversely impact our results of operations and financial condition.
• Our largest stockholders, as a result of their ownership stakes in us, may have the ability to exert substantial influence over actions to be taken or approved by our stockholders. In addition, future share repurchases and fluctuations in the levels of ownership of our largest stockholders could impact the volume of trading, liquidity, and market price of our common stock.
• Natural disasters and adverse weather events, including the effects of climate change, can disrupt our business.

Please refer to our most recent Annual Report on Form 10-K for additional discussion of the foregoing risks. These forward-looking statements speak only as of the date of this report, and we undertake no obligation to update any forward-looking statements to reflect subsequent events or circumstances.

Additional Information

Investors and others should note that we announce material financial information using our company website (www.autonation.com (http://www.autonation.com)), our investor relations website (investors.autonation.com), SEC filings, press releases, public conference calls, and webcasts. Information about AutoNation, its business, and its results of operations may also be announced by posts on AutoNation’s X feed (www.x.com/autonation (http://www.x.com/autonation)).

The information that we post on our websites and social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested in AutoNation to review the information that we post on those websites and social media channels. Our social media channels may be updated from time to time on our investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Quarterly Report on Form 10-Q.

Interest Rate Risk

We have market risk exposure on various instruments that are based on variable interest rates. Interest rate derivatives may be used to hedge a portion of our variable rate debt, when appropriate, based on market conditions.

We had $3.3 billion of variable rate vehicle floorplan payable at March 31, 2024, and $3.4 billion at December 31, 2023. Based on these amounts, a 100 basis point change in interest rates would result in an approximate change to our annual floorplan interest expense of $32.7 million at March 31, 2024, and $33.8 million at December 31, 2023. Our exposure to changes in interest rates with respect to total vehicle floorplan payable is partially mitigated by manufacturers’ floorplan assistance, which in some cases is based on variable interest rates.

We had $285.0 million of commercial paper notes outstanding at March 31, 2024, and $440.0 million at December 31, 2023. Based on the amount outstanding, a 100 basis point change in interest rates would result in an approximate change to our annual interest expense of $2.9 million at March 31, 2024, and $4.4 million at December 31, 2023.

Our fixed rate senior unsecured notes totaled $3.2 billion and had a fair value of $3.0 billion as of March 31, 2024, and totaled $3.2 billion and had a fair value of $3.0 billion as of December 31, 2023.

As of March 31, 2024, all auto loans receivable outstanding were fixed-rate installment contracts. Financing for these receivables was achieved primarily through both variable- and fixed-rate non-recourse debt. Non-recourse debt includes warehouse facilities and asset-backed term securitizations. Borrowings under the warehouse facilities are variable-rate debt and are secured by the related auto loans receivable. Certain auto loans receivable were funded through term securitizations, which issued notes payable that accrue interest at fixed rates, and are also secured by the related auto loans receivable.

Equity Price Risk

We are subject to equity price risk with respect to minority equity investments. Certain of our equity investments have readily determinable fair values. During the period that we hold these equity investments, unrealized gains and losses will be recorded as the fair market value of the securities change over time. The fair value of these equity investments was $22.8 million at March 31, 2024, and December 31, 2023. A hypothetical 10% change in the equity prices of these securities with readily determinable fair values would result in an approximate change to gain or loss of $2.3 million at March 31, 2024, and December 31, 2023. We also have a minority equity investment without a readily determinable fair value. This equity investment is measured using a measurement alternative as permitted by accounting standards and was initially recorded at cost, to be subsequently adjusted for observable price changes. During the period that we hold this investment, unrealized gains and losses may be recorded if we identify observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The carrying amount of our equity investment without a readily determinable fair value was $56.7 million at March 31, 2024, and December 31, 2023. A hypothetical 10% observable price change for this equity investment would result in an approximate change to gain or loss of $5.7 million at March 31, 2024, and December 31, 2023. The selected 10% hypothetical change in equity prices is not intended to reflect a best or worst case scenario, as equity price changes could be smaller or larger due to the nature of equity markets.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition, or future results.